<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 3674 33-0480482
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(949) 450-8700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HENRY T. NICHOLAS, III, PH.D.
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BROADCOM CORPORATION
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(949) 450-8700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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BRUCE R. HALLETT, ESQ. LARRY W. SONSINI, ESQ.
ELLEN S. BANCROFT, ESQ. JAMES N. STRAWBRIDGE, ESQ.
SUE L. COLLINS, ESQ. JOSE F. MACIAS, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
38 TECHNOLOGY DRIVE PROFESSIONAL CORPORATION
IRVINE, CALIFORNIA 92618 650 PAGE MILL ROAD
(949) 790-6300 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
Class A Common Stock,
$.0001 par value............ 3,450,000 $77.00 $265,650,000 $78,367
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</TABLE>
(1) Includes 450,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a). Based on the last sale price of the Class A Common Stock on
September 29, 1998, as reported on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
PROSPECTUS (Subject to Completion)
Issued September 30, 1998
3,000,000 Shares
BROADCOM LOGO
CLASS A COMMON STOCK
------------------------
OF THE 3,000,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 392,500 SHARES
ARE BEING SOLD BY THE COMPANY AND 2,607,500 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY HAS TWO CLASSES OF COMMON STOCK: CLASS A COMMON STOCK AND CLASS B
COMMON STOCK (COLLECTIVELY, THE "COMMON STOCK"). THE SHARES OF COMMON STOCK ARE
SUBSTANTIALLY IDENTICAL EXCEPT THAT THE HOLDERS OF CLASS A COMMON STOCK ARE
ENTITLED TO ONE VOTE PER SHARE, AND THE HOLDERS OF CLASS B COMMON STOCK ARE
ENTITLED TO TEN VOTES PER SHARE, ON MATTERS SUBMITTED TO A VOTE OF THE
SHAREHOLDERS. EACH SHARE OF CLASS B COMMON STOCK IS CONVERTIBLE AT THE OPTION OF
THE HOLDER INTO ONE SHARE OF CLASS A COMMON STOCK, AND GENERALLY WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A COMMON STOCK UPON TRANSFER OF
THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER. SEE "DESCRIPTION OF CAPITAL
STOCK." THE COMPANY'S CLASS A COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "BRCM." ON SEPTEMBER 29, 1998, THE LAST SALE PRICE OF
THE CLASS A COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $77 PER
SHARE. SEE "PRICE RANGE OF THE CLASS A COMMON STOCK."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company and certain Selling Shareholders have granted the Underwriters
an option, exercisable within 30 days from the date hereof, to purchase up
to an aggregate of 450,000 additional Shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions, proceeds
to Company and proceeds to Selling Shareholders will be $ , $
, $ , and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Broadcom Corporation (the "Company" or "Broadcom") is a leading developer
of highly integrated silicon solutions that enable broadband digital data
transmission to the home and within the business enterprise. The Company's
products enable the high-speed transmission of data over existing communications
infrastructures, most of which were not originally intended for digital data
transmission. Using proprietary technologies and advanced design methodologies,
the Company has designed and developed integrated circuits for some of the most
significant broadband communications markets, including the markets for cable
set-top boxes, cable modems, high-speed networking, direct broadcast satellite
and terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing circuits that implement complex communications algorithms, surrounded
by precision high-speed analog-to-digital and digital-to-analog converter
circuits. The Company's products integrate comprehensive systems solutions into
single chips or chip-sets, thereby eliminating costly external components,
reducing board space, simplifying the customer's manufacturing process, lowering
the customer's system costs and enabling higher performance. Customers currently
shipping broadband communications equipment incorporating the Company's products
include 3Com, Bay Networks (a division of Northern Telecom), Cisco Systems,
General Instrument, Motorola and Scientific-Atlanta.
The Company was incorporated in California in August 1991. The Company's
executive offices are located at 16251 Laguna Canyon Road, Irvine, California
92618, and its telephone number is (949) 450-8700.
THE OFFERING
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Class A Common Stock offered............................... 3,000,000 shares, including 392,500 shares by the Company
and 2,607,500 shares by the Selling Shareholders
Common Stock to be outstanding after this offering
Class A Common Stock (one vote per share)................ 7,839,750 shares(1)
Class B Common Stock (ten votes per share)............... 36,270,699 shares(1)
Total.............................................. 44,110,449 shares(1)
Use of proceeds............................................ General corporate purposes, including working capital and
acquisition of capital equipment. See "Use of Proceeds."
Nasdaq National Market symbol.............................. BRCM
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................ $1,138 $3,636 $6,107 $21,370 $36,955 $10,426 $80,512
Gross profit............................................. 1,138 2,929 4,709 13,510 22,029 5,616 46,300
Total operating expense.................................. 1,127 2,690 4,822 9,208 24,267 8,746 23,941
Income (loss) from operations............................ 11 239 (113) 4,302 (2,238) (3,130) 22,359
Net income (loss)........................................ 12 237 4 3,016 (1,173) (1,841) 15,379
Diluted earnings (loss) per share(2)..................... $ .00 $ .01 $ .00 $ .09 $ (.04) $ (.07) $ .35
</TABLE>
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<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET:
Cash and cash equivalents................................... $ 64,711 $ 93,149
Total assets................................................ 148,101 176,539
Total debt.................................................. 134 134
Total shareholders' equity.................................. 128,682 157,120
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
714,550 shares of Class A Common Stock and 7,970,103 shares of Class B
Common Stock issuable upon the exercise of options outstanding as of June
30, 1998 and (ii) 8,038,660 shares of Common Stock available for issuance
under the Company's employee benefit plans. See Notes 9 and 10 of Notes to
Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of diluted earnings (loss) per share.
(3) Adjusted to reflect the sale of 392,500 shares of Class A Common Stock
offered by the Company hereby at the assumed public offering price of $77.00
per share and the application of the net proceeds therefrom. See "Use of
Proceeds."
3
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NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 16
Dividend Policy.......................... 16
Price Range of Class A Common Stock...... 16
Capitalization........................... 17
Selected Financial Data.................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 19
Business................................. 28
</TABLE>
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PAGE
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Management............................... 47
Certain Transactions..................... 57
Principal and Selling Shareholders....... 59
Description of Capital Stock............. 60
Shares Eligible for Future Sale.......... 62
Underwriters............................. 64
Legal Matters............................ 66
Experts.................................. 66
Available Information.................... 66
Glossary of Technical Terms.............. 67
Index to Financial Statements............ F-1
</TABLE>
------------------------
Broadcom(R) and QAMLink(TM) are trademarks of the Company. This Prospectus
also includes trademarks of companies other than the Company.
------------------------
Except as otherwise noted herein, information in this Prospectus assumes
(i) no exercise of outstanding options, of which options to purchase an
aggregate of 714,550 shares of Class A Common Stock and 7,970,103 shares of
Class B Common Stock were outstanding as of June 30, 1998, and (ii) no exercise
of the Underwriters' over-allotment option.
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Class
A Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. The factors that may cause such a difference include, but are not
limited to, those discussed below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Fluctuations in Results of Operations. The Company's quarterly results of
operations have fluctuated significantly in the past and may continue to
fluctuate in the future based on a number of factors, many of which are not in
the Company's control, including, but not limited to, the volume of product
sales and pricing concessions on volume sales; the timing, rescheduling or
cancellation of significant customer orders; the gain or loss of a significant
customer; the timing of customer qualification and industry interoperability
certification of new products; the rate of adoption by customers and end users
of new and emerging technologies in the high-speed data networking, cable
set-top box, cable modem, direct broadcast satellite ("DBS") and terrestrial
digital broadcast, and digital subscriber line ("xDSL") markets; the rate of
adoption and acceptance of new industry standards in the foregoing markets; the
Company's ability to specify, develop, introduce and market new products and
technologies on a timely basis; the qualification, availability and pricing of
competing products and technologies from other vendors; fluctuations in
manufacturing yields and other problems or delays in the fabrication, assembly,
testing or delivery of products; uncertainties associated with international
operations; the Company's ability to retain and hire key executives, technical
personnel and other employees in the numbers and with the capabilities needed to
implement its business and product plans; problems or delays in migrating
product designs to smaller geometry processes and achieving higher levels of
design integration; intellectual property disputes; changes in product and
customer mix; the amount and timing of recognition of development revenue;
general business conditions in the semiconductor industry and the broadband
communications markets; availability of foundry capacity and raw materials; the
quality of the Company's products; the timing of investments in, and the results
of, research and development; the Company's ability to expand and implement its
sales and marketing programs; the level of orders received that can be shipped
in a quarter; the effects on operations and management of facility relocations;
currency fluctuations; and general economic conditions. The Company intends to
continue to increase its operating expenses in 1998 and 1999. Because a large
portion of the Company's operating expense, including rent, salaries and capital
lease expenses, is fixed and difficult to reduce or modify, if total revenue
does not meet the Company's expectations, the effect of any revenue shortfall
will be magnified by the fixed nature of these operating expenses. Based on the
foregoing or other factors, it is possible that in some future periods the
Company's reported or anticipated operating results will fail to meet or exceed
the expectations of analysts or investors. In such event, the price of the
Company's Class A Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Customer Concentration. A relatively small number of customers have
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to General Instrument and 3Com (including sales to their
respective manufacturing subcontractors) accounted for approximately 31.8% and
35.9%, respectively, of total revenue in the six months ended June 30, 1998 and
31.9% and 14.6%, respectively, of total revenue in 1997. Moreover, sales to the
Company's five largest customers (including sales to their respective
manufacturing subcontractors) represented approximately 80.9% and 61.7% of the
Company's total revenue in the six months ended June 30, 1998 and in 1997,
respectively. Accordingly, the Company's future results of operations will
continue to be substantially dependent on the success of its largest customers
and on the Company's success in selling its existing and future products to
those customers in significant quantities. Any reduction or delay in sales of
the Company's products to one or more of these key customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will retain
its largest customers or that it will be able to obtain additional key
customers. The loss of one or more of the Company's largest customers or the
inability of the Company to successfully develop
5
<PAGE> 7
relationships with additional key customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Most of the Company's customers can cease incorporating the Company's
products in their own products with limited notice to the Company and with
little or no penalty. The Company's agreements with its customers typically do
not require minimum purchases. In addition, certain of the Company's customers
offer or may offer products (designed by themselves or third parties) that
compete with those offered by the Company. Many of the Company's customers have
pre-existing relationships with current or potential competitors of the Company,
which may affect such customers' purchasing decisions. In addition, the
Company's longstanding relationship with certain of its larger customers may
affect the purchasing decisions of other potential customers who compete with
these customers. The Company's customers face intense competition from other
manufacturers that do not use the Company's products. Further, some of the
Company's customers have "most favored nation" pricing arrangements which could
materially and adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Customers and Strategic
Relationships."
Rapid Technological Change; Dependence on Emerging Markets and Evolving
Standards. The semiconductor industry and the broadband communications markets
are characterized by rapidly changing technology, frequent new product
introductions and evolving industry standards. Substantially all of the
Company's current product revenue is derived from sales of products for the
high-speed networking, cable set-top box and cable modem markets. These markets
are characterized by intense competition, rapid technological change and short
product life cycles. In particular, the high-speed networking, cable set-top box
and cable modem markets continue to undergo a period of rapid growth and
consolidation. The Company's business, financial condition and results of
operations would be materially and adversely affected in the event of a
significant slowdown in any of these or other broadband communications markets.
The Company's success will depend on the ability of its customers to develop new
products and enhance existing products for the broadband communications markets
and to successfully introduce and promote such products. There can be no
assurance that the broadband communications markets will develop to the extent
or in the timeframes anticipated by the Company. The failure of new markets to
develop as anticipated or the failure of the Company's products in these markets
to gain widespread acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations. Products for
broadband communications applications are generally based on industry standards,
which are continually evolving. The emergence of new industry standards could
render products of the Company or its customers unmarketable or obsolete and may
require the Company to incur substantial unanticipated costs to comply with any
such new standards. Moreover, the Company's past sales and profitability have
resulted, to a significant extent, from its ability to anticipate changes in
technology and industry standards and to develop and introduce new and enhanced
products. The Company's continued ability to adapt to such changes and to
anticipate future standards, and the rate of adoption and acceptance of those
standards, will be a significant factor in maintaining or improving the
Company's competitive position and its prospects for growth. The Company has in
the past invested substantial resources in emerging technologies, such as
100Base-T4 for high-speed networking, for which the market did not ultimately
meet the Company's expectations. There can be no assurance that the Company will
be able to anticipate the evolving standards in the semiconductor industry and,
in particular, the broadband communications markets, or that the Company will be
able to successfully develop and introduce new products into such markets. The
failure of the Company to anticipate technological change and introduce new
products that achieve market acceptance could materially and adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Markets" and "-- Core Technologies."
Dependence on Development of New Products. The Company's future success
will depend upon its ability to develop new silicon solutions for existing and
new markets, introduce such products in a timely and cost-effective manner and
have such products selected for design into new products of leading equipment
manufacturers ("design wins"). The development of these new devices is highly
complex, and from time to time the Company has experienced delays in completing
the development and introduction of new products. Successful product development
and introduction depends on a number of factors, including, among other
6
<PAGE> 8
things, accurate prediction of market requirements and evolving standards;
accurate new product definition; timely completion and introduction of new
product designs; timely qualification and industry interoperability
certification of the Company's products and the products into which the
Company's products will be incorporated; availability of foundry capacity;
achievement of high manufacturing yields; and market acceptance of the Company's
and its customers' products. Furthermore, there can be no assurance that the
Company will be able to introduce new products in a timely and cost-effective
manner or in sufficient quantities to meet customer demand or that such products
will satisfy customer requirements or achieve market acceptance. The Company's
quarterly results have in the past been, and are expected in the future to
continue to be, dependent upon the introduction of a relatively small number of
new products and the timely completion and delivery of those products to
customers. The Company's or its customers' failure to develop and introduce new
products successfully and in a timely manner would materially and adversely
affect the Company's business, financial condition and results of operations.
The Company's new products are generally incorporated into customers' products
or systems at the design stage. Achieving a design win often requires
significant expenditures by the Company without any assurance of success.
Moreover, design wins frequently precede the generation of volume sales, if any,
by six to nine months or more. The value of any design win largely depends upon
the commercial success of the customer's product and on the extent to which the
design of the customer's electronic system accommodates components manufactured
by the Company's competitors. There can be no assurance that the Company will
continue to achieve design wins or that the products for which the Company
achieves design wins will be commercially successful. See
"Business -- Strategy," "-- Products" and "-- Research and Development."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel and on its ability to continue to attract,
retain and motivate qualified personnel, particularly experienced mixed-signal
circuit designers and systems applications engineers. The competition for such
employees is intense, and the Company may not be able to attract as many
qualified new personnel as it was able to employ prior to its initial public
offering. The loss of the services of one or more of the Company's key employees
or the Company's failure to attract, retain and motivate qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. In particular, the loss of the services of
Dr. Henry T. Nicholas, III, the co-founder, President and Chief Executive
Officer of the Company, or Dr. Henry Samueli, the co-founder, Vice President of
Research and Development and Chief Technical Officer of the Company, could
materially and adversely affect the Company. The Company does not have any
employment contracts with its employees. See "Business -- Employees" and
"Management -- Executive Officers, Key Employees and Directors."
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. This
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
television set-top box market with Fujitsu, LSI Logic, Philips Electronics,
Rockwell International and VLSI Technology for communication devices and with
ATI Technologies, C-Cube, LSI Logic, Motorola and STMicroelectronics (formerly
SGS-THOMSON) in the MPEG/graphics segment. The Company expects other major
semiconductor manufacturers to enter the market as the digital broadcast
television and other digital cable television markets become more established. A
number of companies, including Hitachi, Libit Signal Processing, LSI Logic,
Rockwell International, Stanford Telecommunications, Inc. ("STI") and Toshiba
have announced that they are developing and plan to introduce MCNS/DOCSIS
compliant products in 1998, which could result in significant competition in the
cable modem market. In the high-speed networking market, the Company principally
competes with established suppliers including Level One Communications, Lucent
Technologies, National Semiconductor and Texas Instruments. The Company's
principal competitors in the DBS/terrestrial broadcast market include LSI Logic,
Lucent Technologies, Philips Electronics, Rockwell International, Sony,
STMicroelectronics and VLSI Technology. The Company's principal competitors in
the xDSL market include Alcatel, Analog Devices, Globespan, Motorola, Rockwell
International and Texas
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Instruments. The Company also may face competition from suppliers of products
based on new or emerging technologies. Many of the Company's competitors operate
their own fabrication facilities and have longer operating histories and
presence in key markets, greater name recognition, access to larger customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than the Company. As a result, such
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
promotion and sale of their products than the Company. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, existing or new competitors may in the
future develop technologies that more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost.
There can be no assurance that the Company will be able to compete successfully
against current or potential competitors, or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
Management of Growth. The Company has experienced a period of rapid growth,
expanding from 164 employees in June 1997 to 376 employees (including temporary
and contract employees) in June 1998. This expansion has placed, and continues
to place, significant strain on the Company's resources. To accommodate this
growth, the Company will be required to implement a variety of new and upgraded
operational and financial systems, procedures and controls, including the
improvement of its accounting and other internal management systems, all of
which may require substantial management effort. There can be no assurance that
such efforts can be accomplished successfully. The Company's rapid growth and
expansion, as well as its product development and selling, general and
administrative activities, have necessitated the increase in the number of
employees as well as increased responsibilities for the Company's management. To
support its growth, the Company recently entered into a new lease for larger
facilities and is in the process of improving these facilities. These new
facilities will allow all of the Company's Irvine employees and operations to be
centralized on one campus. This relocation of the Company's headquarters and
Irvine operations could result in a temporary disruption of the Company's
operations or a temporary diversion of management attention and resources. From
time to time, the Company engages in other relocations of employees or
operations. If the Company sustains its growth in the future, it will need to
continue to implement and improve its operational, financial and management
information systems and to hire, train, motivate and manage its expanding
employee base. There can be no assurance that the Company's systems, procedures
and controls will be adequate to support the Company's operations. Any
difficulties resulting from relocation of employees or operations or any failure
to improve the Company's operational, financial and management information
systems, or to hire, train, motivate or manage its employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Independent Foundries. The Company does not own or operate a
fabrication facility, and substantially all of its semiconductor device
requirements are currently supplied by two outside foundries, Taiwan
Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and Chartered
Semiconductor Manufacturing ("Chartered") in Singapore. There are significant
risks associated with the Company's reliance on outside foundries, including the
lack of ensured wafer supply; limited control over delivery schedules, quality
assurance and control, manufacturing yields and production costs; and the
unavailability of or delays in obtaining access to key process technologies. In
addition, the manufacture of integrated circuits ("ICs") is a highly complex and
technologically demanding process. Although the Company works closely with its
foundries to minimize the likelihood of reduced manufacturing yields, the
Company's foundries have from time to time experienced lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.
The Company provides its foundries with rolling forecasts of its production
requirements; however, the ability of each foundry to provide semiconductor
devices to the Company is limited by the foundry's available capacity. Although
the Company has entered into contractual commitments to supply specified levels
of products to certain of its customers, the Company does not have a long-term
volume purchase agreement or a guaranteed level of
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production capacity with TSMC or Chartered because the Company believes excess
foundry capacity is currently available. The Company places its orders on a
purchase order basis, and these foundries may allocate capacity to the
production of other companies' products while reducing deliveries to the Company
on short notice. In particular, foundry customers that are larger and better
financed than the Company or that have long-term agreements with the Company's
foundries may cause such foundries to reallocate capacity in a manner adverse to
the Company. In addition, if the Company chooses to use a new foundry, several
months are typically required to complete the qualification process before the
Company can begin shipping products from the new foundry. Although the Company
primarily utilizes two independent foundries, most of the Company's components
are not manufactured at both foundries at any given time. Any inability of one
of the foundries to provide the necessary components could result in significant
delays and could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event either foundry
experiences financial difficulties (whether as a result of the Asian economic
crisis or otherwise) or suffers any damage or destruction to its respective
facilities, or in the event of any other disruption of foundry capacity, the
Company may not be able to qualify alternative manufacturing sources for
existing or new products in a timely manner. Even the Company's current outside
foundries would need to have certain manufacturing processes qualified in the
event of disruption at another foundry, which the Company may not be able to
accomplish in a timely enough manner to prevent an interruption in supply of the
affected products. There can be no assurance that any existing or new foundries
would be able to produce ICs with acceptable manufacturing yields. Furthermore,
there can be no assurance that the Company's foundries will continue to deliver
sufficient quantities of semiconductor devices on a timely basis, will not
experience lower than expected manufacturing yields in the future, or will
continue to have excess capacity, any of which events could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."
Dependence on Third-Party Subcontractors for Assembly and
Test. Substantially all of the Company's products are assembled and tested by
one of two third-party subcontractors, ASAT Ltd. ("ASAT") in Hong Kong and ST
Assembly Test Services ("STATS") in Singapore. The Company does not have
long-term agreements with either of these suppliers and typically procures
services from such suppliers on a per order basis. The availability of assembly
and testing services from these subcontractors could be adversely affected in
the event either subcontractor experiences financial difficulties (whether as a
result of the Asian economic crisis or otherwise) or suffers any damage or
destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. As a result of this reliance on
third-party subcontractors for assembly and testing of its products, the Company
cannot directly control product delivery schedules, which has in the past, and
could in the future, result in product shortages or quality assurance problems
that could increase the costs of manufacture, assembly or testing of the
Company's products. Due to the amount of time normally required to qualify
assemblers and testers, if the Company is required to find alternative
manufacturing assemblers or testers of its components, shipments could be
delayed. Any problems associated with the delivery, quality or cost of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities. Although the Company has no current
understandings or agreements with respect to any material acquisitions, the
Company may make acquisitions of businesses, products or technologies in the
future. However, there can be no assurance that the Company will be able to
locate suitable acquisition opportunities or to consummate any such acquisitions
on terms and conditions acceptable to the Company. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities,
large one-time write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's results of operations or
the price of the Company's Class A Common Stock. Furthermore, acquisitions
entail numerous risks, including difficulties in the assimilation and
integration of operations, personnel, technologies, products and the information
systems of the acquired companies, diversion of management's attention from
other business concerns, risks of entering geographic or business markets in
which the Company has no or limited prior experience and the potential loss of
key employees. Since the Company has not made any material acquisitions in the
past, no assurance can be given as to the ability of the
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<PAGE> 11
Company to successfully integrate any businesses, products, technologies or
personnel that might be acquired in the future, and the failure of the Company
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Strategy."
Risks Associated with Expansion of International Business Activities. The
Company currently procures substantially all of its manufacturing, assembly and
test services from suppliers located outside the United States and may expand
its manufacturing activities abroad. Approximately 13.1% of the Company's total
revenue in the six months ended June 30, 1998 was derived from sales to
independent customers based outside the United States. In 1997, approximately
15.4% of the Company's total revenue was derived from sales to independent
customers based outside of the United States. In addition, the Company often
ships products to its domestic customers' international manufacturing divisions
and subcontractors. Accordingly, the Company is subject to risks inherent in
international operations, which include, but are not limited to, political,
social and economic instability, trade restrictions, the imposition of
governmental controls, exposure to different legal standards (particularly with
respect to intellectual property), burdens of complying with a variety of
foreign laws, import and export license requirements, future import and export
restrictions, unexpected changes in regulatory requirements, foreign technical
standards, changes in tariffs, difficulties in staffing and managing operations,
difficulties in collecting receivables and potentially adverse tax consequences.
In particular, certain Asian countries have recently experienced significant
economic difficulties, including currency devaluation and instability, business
failures and a generally depressed business climate, particularly in the
semiconductor industry. In view of the Company's reliance on Asian foundries and
assemblers, and the Company's expanded international operations, the Asian
economic crisis may have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, certain of the Company's products contain encryption or other
features that are subject to various government export regulations, pursuant to
which the Company has applied for export licenses. If such licenses are not
granted, the Company may be unable to manufacture such products at its foreign
foundries or to ship such products to certain customers located outside the
United States. There can be no assurance that the Company will obtain such
licenses or any licenses applied for in the future or that the failure to obtain
such licenses will not have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, demand for the
Company's products could be adversely affected by seasonality of international
sales and economic conditions in the Company's primary overseas markets. All of
the Company's international sales to date have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in international
markets. There can be no assurance that the risks associated with the Company's
international operations will not materially adversely affect the Company's
business, financial condition and results of operations in the future or require
the Company to modify significantly its current business practices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance on Strategic Relationships. The Company has relied on in the past,
and intends to continue to form in the future, strategic relationships with
certain of its customers who are technology leaders in the Company's target
markets. These relationships often involve the proposed development by the
Company of new products involving significant technological challenges. Since
the proposed product under development may offer potential competitive
advantages to the strategic partner, considerable pressure is frequently placed
on the limited resources of the Company to meet development schedules. While an
essential element of the Company's strategy involves establishing such
relationships, these projects utilize substantial amounts of the Company's
limited resources, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between the Company and its strategic partners. Moreover, there can
be no assurance that customers of the Company will not develop their own
solutions for products currently supplied by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Customers and Strategic Relationships."
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company
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believes that the transition of its products to increasingly smaller geometries
will be important for the Company to remain competitive. The Company has in the
past experienced difficulty in migrating to new manufacturing processes, which
has resulted and could continue to result in reduced yields, delays in product
deliveries and increased expense levels. Moreover, the Company is dependent on
its relationships with its foundries to migrate to smaller geometry processes
successfully. No assurance can be given that the Company's future process
migrations will be achieved without difficulties, delays or increased expenses.
The Company's business, financial condition and results of operations could be
materially and adversely affected if any such transition is substantially
delayed or inefficiently implemented. As smaller geometry processes become more
prevalent, the Company expects to integrate higher levels of customer and
third-party intellectual property into its products. No assurance can be given
that higher levels of integration will not adversely affect the Company's
ability to deliver new integrated products on a timely basis, or at all. See
"Business -- Manufacturing."
Risks Associated with Intellectual Property Protection. The Company's
success and future revenue growth will depend, in part, on its ability to
protect its intellectual property. The Company relies primarily on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect its proprietary technologies and processes. There
can be no assurance that such measures will provide meaningful protection for
the Company's proprietary technologies and processes. The Company has been
issued three United States patents and has filed 13 United States patent
applications. There can be no assurance that any patent will issue as a result
of these applications or future applications or, if issued, that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide meaningful protection to the Company. The failure of any patents
to provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. In connection with its
participation in the development of various industry standards, the Company may
be required to agree to license certain of its patents to other parties,
including its competitors, that develop products based upon the adopted
standards. The Company also generally enters into confidentiality agreements
with its employees and strategic partners, and generally controls access to and
distribution of its documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products, services or technology without
authorization, develop similar technology independently or design around the
Company's patents. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Certain
of the Company's customers have entered into agreements with the Company
pursuant to which such customers have the right to use the Company's proprietary
technology in the event the Company defaults in its contractual obligations,
including product supply obligations, and fails to cure the default within a
specified period of time. Moreover, the Company often incorporates the
intellectual property of its strategic customers into its designs, and the
Company has certain obligations with respect to the non-use and non-disclosure
of such intellectual property. There can be no assurance that the steps taken by
the Company to prevent misappropriation or infringement of the intellectual
property of the Company or its customers will be successful. Moreover,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of proprietary rights of others, including its customers.
Such litigation could result in substantial costs and diversion of management's
efforts and other Company resources and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection of and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement, misappropriation or misuse of other parties' proprietary rights.
The Company has received a letter from counsel for BroadCom, Inc. asserting
rights in the "Broadcom" trademark and demanding that the Company cease and
desist from any further use of the Broadcom name. The Company and BroadCom, Inc.
have exchanged correspondence outlining their respective positions on the
matter. In addition, the Company is currently involved in litigation with STI
concerning the alleged infringement of one of STI's patents by several of the
Company's modem products and with Sarnoff Corporation and Sarnoff Digital
Communications, Inc. (collectively, "Sarnoff") concerning the alleged
misappropriation and misuse of
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certain Sarnoff trade secrets by the Company. There can be no assurance that the
Company will prevail in these actions, or that other actions alleging
infringement by the Company of third-party patents, misappropriation or misuse
by the Company of third-party trade secrets or the invalidity of one or more
patents held by the Company will not be asserted or prosecuted against the
Company, or that any assertions of infringement, misappropriation or misuse or
prosecutions seeking to establish the invalidity of Company-held patents will
not materially and adversely affect the Company's business, financial condition
and results of operations. For example, in a patent or trade secret action, an
injunction could be issued against the Company requiring that the Company
withdraw certain products from the market or necessitating that certain products
offered for sale or under development be redesigned. The Company has also
entered into certain indemnification obligations in favor of its customers and
strategic partners that could be triggered upon an allegation or finding of the
Company's infringement, misappropriation or misuse of other parties' proprietary
rights. Irrespective of the validity or successful assertion of such claims, the
Company would likely incur significant costs and diversion of its management and
personnel resources with respect to the defense of such claims, which could also
have a material adverse effect on the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all. See "Business -- Intellectual Property" and "-- Legal Proceedings."
Lengthy Sales Cycle. The Company's sales cycle involves test and evaluation
of its products by the potential customer and design of the customer's equipment
to incorporate the Company's products. The sales cycle for the test and
evaluation of the Company's products can range from three to six months or more,
and it can take an additional six to nine months or more before a customer
commences volume production of equipment that incorporates the Company's
products. Because of this lengthy sales cycle, the Company may experience a
delay between increasing expenses for research and development, sales and
marketing, and general and administrative efforts, as well as increasing
investments in inventory, and the generation of revenues, if any, from such
expenditures. In addition, the delays inherent in such lengthy sales cycle raise
additional risks of customer decisions to cancel or change product plans, which
could result in the loss of anticipated sales by the Company. Achieving a design
win provides no assurance that such customer will ultimately ship products
incorporating the Company's products. The Company's business, financial
condition and results of operations could be materially adversely affected if a
significant customer curtails, reduces or delays orders during the Company's
sales cycle or chooses not to release products employing the Company's products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
Order and Shipment Uncertainties. The Company's sales are generally made
pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or deferral
of product orders could result in the Company holding excess inventory, which
could have a material adverse effect on the Company's profit margins and
restrict its ability to fund its operations. The Company recognizes revenue upon
shipment of products to the customer. Refusal of customers to accept shipped
products or delays or difficulties in collecting accounts receivable could
result in significant charges against income, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after
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commencement of commercial production, resulting in additional development
costs, loss of, or delays in, market acceptance, diversion of technical and
other resources from the Company's other development efforts, product repair or
replacement costs, claims by the Company's customers or others against the
Company, or the loss of credibility with the Company's current and prospective
customers. Any such event could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Core
Technologies" and "-- Manufacturing."
Cyclicality of the Semiconductor Industry. The Company provides
semiconductor devices to the broadband communications markets. The semiconductor
industry is highly cyclical and subject to rapid technological change and has
been subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production overcapacity. The semiconductor industry also periodically
experiences increased demand and production capacity constraints. As a result,
the Company may experience substantial period-to-period fluctuations in future
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Limited Operating History. The Company was incorporated in August 1991 but
did not begin shipping products until 1994. Accordingly, the Company has a
limited operating history upon which investors may evaluate the Company and its
prospects. The Company's recent revenue growth may not be sustainable and should
not be considered indicative of future revenue growth, if any. There can be no
assurance that the Company will be profitable in any future period. The
Company's prospects must be considered in light of the risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the semiconductor industry and the broadband
communications markets. To address these risks, the Company must, among other
things, successfully increase the scope of its operations, respond to
competitive and technological developments, continue to attract, retain and
motivate qualified personnel and continue to commercialize products
incorporating innovative technologies. There can be no assurance that the
Company will be successful in addressing these risks and challenges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Government Regulation. The Federal Communications
Commission (the "FCC") has broad jurisdiction over each of the Company's target
markets. Although the Company's products are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, much of the equipment into which the Company's products are incorporated
is subject to direct government regulation. Accordingly, the effects of
regulation on the Company's customers or the industries in which they operate
may, in turn, adversely impact the Company's business, financial condition and
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries other than the United States. Changes
in current laws or regulations or the imposition of new laws and regulations in
the United States or elsewhere, could materially and adversely affect the
Company's business, financial condition and results of operations.
Control by Directors, Executive Officers and Their Affiliates. As of June
30, 1998, the Company's directors and executive officers beneficially owned
approximately 54.5% of the outstanding Common Stock and 60.3% of the total
voting control of the Company. In particular, as of June 30, 1998, the two
founders of the Company, Dr. Henry T. Nicholas, III and Dr. Henry Samueli,
beneficially owned an aggregate of approximately 49.5% of the outstanding Common
Stock and 54.8% of the total voting control of the Company. Accordingly, such
persons will have sufficient voting power to control the outcome of matters
(including the election of a majority of the Board of Directors, and any merger,
consolidation or sale of all or substantially all
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<PAGE> 15
of the Company's assets) submitted to the Company's shareholders for approval
and will also have control over the management and affairs of the Company. As a
result of such control, certain transactions may not be possible without the
approval of such shareholders. These transactions include proxy contests,
mergers involving the Company, tender offers, open market purchase programs or
other purchases of Class A Common Stock that could give shareholders of the
Company the opportunity to realize a premium over the then prevailing market
price for their shares of Class A Common Stock. See "Principal and Selling
Shareholders."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond, but there
can be no assurance that such upgrades will be completed on a timely basis or
without incurring substantial costs. The Company has evaluated each of its
products for material year 2000 compliance and believes that each is
substantially year 2000 compliant. However, management believes that it is not
possible to determine whether all of its customers' products that incorporate
the Company's products will be year 2000 compliant because the Company has
little or no control over the design, production and testing of its customers'
products. There can be no assurance, however, that the Company will make any
such changes or that any of the Company's products are or will be year 2000
compliant. The Company relies on its systems, applications and devices in
operating and monitoring all major aspects of its business, including financial
systems (such as general ledger, accounts payable and payroll modules), customer
services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. Although the Company is in the
process of upgrading its software to address the year 2000 issue, there can be
no assurance that such upgrades will be completed on a timely basis at
reasonable costs, or that such upgrades will be able to anticipate all of the
problems triggered by the actual impact of the year 2000. The Company also
relies, directly and indirectly, on external systems of suppliers for the
management and control of fabrication, assembly and testing of substantially all
of the Company's products and of business enterprises such as customers,
suppliers, creditors, financial organizations, and of governmental entities,
both domestic and international, for accurate exchange of data. The Company
could be affected through disruptions in the operation of the enterprises with
which the Company interacts or from general widespread problems or an economic
crisis resulting from noncompliant year 2000 systems. Despite the Company's
efforts to address the year 2000 impact on its internal systems and business
operations, there can be no assurance that such impact will not result in a
material disruption of its business or have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that the aggregate net proceeds from this offering, together with the
net proceeds of the Company's initial public offering and cash generated from
its operations will be sufficient to meet its capital requirements for at least
the next twelve months. Nonetheless, the Company may elect to sell additional
equity securities or obtain additional credit facilities. The Company's future
capital requirements will depend on many factors, including, but not limited to,
the levels at which the Company maintains inventory, the market acceptance of
the Company's products, the levels of promotion and advertising required to
launch such products and attain a competitive position in the marketplace, the
extent to which the Company invests in new technology and improvements to its
existing technology, potential acquisitions, the response of competitors to
products based on the Company's technology and other factors. To the extent the
Company's existing resources and any future earnings are insufficient to fund
the Company's activities, the Company may need to raise additional funds through
public or private financing. No assurance can be given that additional financing
will be available or that if available, any such financing can be obtained on
terms favorable to the Company and its shareholders. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through arrangements with strategic partners or others that
may require the Company to relinquish rights to certain of its technologies or
potential markets. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then existing shareholders of the
Company would be reduced. Such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common
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Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Stock Price Volatility. The trading price of the Company's Class A Common
Stock has been and will likely continue to be subject to wide fluctuations in
response to quarter to quarter variations in results of operations,
announcements of technological innovations or new products by the Company, its
competitors or its customers, general conditions in the semiconductor,
telecommunications and data communications equipment markets, changes in
earnings estimates or investment recommendations by analysts, investor
perceptions and expectations regarding the products, plans and strategic
position of the Company, its competitors and its customers, or other events or
factors. For example, since the Company's initial public offering, the Company's
Class A Common Stock has traded as low as $47.00 and as high as $89.75 per
share. In addition, the public stock markets have experienced extreme price and
trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company's Class A Common Stock.
There can be no assurance that the market price of the Company's Class A Common
Stock will not decline below the offering price.
Potential Effect of Anti-Takeover Provisions. The Company's Articles of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. In addition, the Company has outstanding Class B
Common Stock, which entitles each holder thereof to ten votes per share on all
matters presented for a shareholder vote. The Board of Directors also has the
authority to fix the rights and preferences of shares of the Company's Preferred
Stock and to issue such shares without a shareholder vote. It is possible that
the provisions in the Company's Articles of Incorporation and Bylaws, the
existence of super voting rights held by insiders and the ability of the Board
of Directors to issue Preferred Stock may have the effect of delaying, deferring
or preventing a change of control of the Company without further action by the
shareholders, may discourage bids for the Company's Class A Common Stock at a
premium over the market price of the Class A Common Stock and may adversely
affect the market price of the Class A Common Stock and the voting and other
rights of the holders of Class A Common Stock.
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market after this offering could adversely affect the
market price of the Class A Common Stock. See "Shares Eligible for Future Sale."
Broad Management Discretion in Use of Proceeds. While the Company expects
to use the net proceeds of this offering for general corporate purposes, the
Company has not yet identified specific uses for such net proceeds. Accordingly,
the Company's management will retain broad discretion as to the allocation of
the net proceeds of this offering. There can be no assurance that the proceeds
will be utilized in a manner that the shareholders deem optimal, or that the
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 392,500 shares of
Class A Common Stock offered by the Company hereby, at the assumed public
offering price of $77 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company are
estimated to be $28.4 million ($34.2 million if the Company sells an additional
77,500 shares as a result of the Underwriters' over-allotment option being
exercised in full). The balance of the net proceeds will be used for general
corporate purposes, including working capital and capital purchases such as test
equipment, design tools and leasehold improvements associated with the Company's
planned facilities expansion. Pending such uses, the Company intends to invest
its net proceeds of this offering in investment-grade, interest-bearing
securities. Management of the Company will have broad discretion concerning the
allocation and use of all of the net proceeds of this offering to be received by
the Company. The Company may use a portion of the net proceeds of this offering
for the acquisition of businesses, products and technologies. As of the date of
this Prospectus, the Company has no current understandings or agreements
regarding any material acquisition.
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
capital stock. The Company currently intends to retain future earnings, if any,
for use in its business, and does not anticipate paying any cash dividends in
the foreseeable future.
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "BRCM." The following table sets forth, for the periods
indicated, the high and low sales prices of the Class A Common Stock as reported
by the Nasdaq National Market since the Company's initial public offering in
April 1998. The Company's Class A Common Stock was initially sold to the public
at a price of $24 per share.
<TABLE>
<CAPTION>
HIGH LOW
Year Ending December 31, 1998 ---- ---
<S> <C> <C>
Second Quarter (beginning April 17, 1998)............ $76 5/8 $47
Third Quarter (through September 29, 1998)........... 89 3/4 47
</TABLE>
The last sale price of the Class A Common Stock on September 29, 1998, as
reported by the Nasdaq National Market, was $77 per share. As of September 29,
1998, there were approximately 56 and 350 holders of record of the Company's
Class A Common Stock and Class B Common Stock, respectively.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 on an actual basis, and as adjusted basis to give effect to the sale of
392,500 shares of Class A Common Stock by the Company in this offering at an
assumed public offering price of $77 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion(1)..................... $ 45 $ 45
-------- --------
Shareholders' equity:
Preferred Stock, $.0001 par value; 10,000,000 shares
authorized; no shares issued and outstanding, actual and
as adjusted............................................... -- --
Class A Common Stock, $.0001 par value; 200,000,000 shares
authorized; 4,839,750 shares issued and outstanding,
actual; 7,839,750 shares issued and outstanding, as
adjusted(2)............................................... -- 1
Class B Common Stock, $.0001 par value; 100,000,000 shares
authorized; 38,878,199 shares issued and outstanding,
actual; 36,270,699 shares issued and outstanding, as
adjusted(2)............................................... 4 4
Additional paid-in capital.................................. 120,621 149,058
Notes receivable from employees............................. (3,464) (3,464)
Deferred compensation....................................... (5,956) (5,956)
Retained earnings........................................... 17,477 17,477
-------- --------
Total shareholders' equity.................................. 128,682 157,120
-------- --------
Total capitalization.............................. $128,727 $157,165
======== ========
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
714,550 shares of Class A Common Stock and 7,970,103 shares of Class B
Common Stock issuable upon the exercise of options outstanding as of June
30, 1998 and (ii) 8,038,660 shares of Common Stock available for issuance
under the Company's employee benefit plans.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The balance sheet data as of December 31, 1996 and 1997 and the
statement of operations data for the years ended December 31, 1995, 1996 and
1997 have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statement of operations data for the year ended December
31, 1994 have been derived from audited financial statements of the Company not
included herein. The balance sheet data as of June 30, 1998 and the statement of
operations data for the six months ended June 30, 1997 and 1998 have been
derived from unaudited financial statements included elsewhere in this
Prospectus. The balance sheet data as of December 31, 1993 and the statement of
operations data for the year ended December 31, 1993 have been derived from
unaudited financial statements not included herein. The unaudited financial
statements of the Company were prepared by management of the Company on the same
basis as the audited financial statements included elsewhere herein and, in the
opinion of the Company, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
below. Results for the six month period ended June 30, 1998 are not necessarily
indicative of results that may be expected for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue..................... $ -- $1,554 $4,317 $18,981 $31,668 $ 8,169 $78,493
Development revenue................. 1,138 2,082 1,790 2,389 5,287 2,257 2,019
------ ------ ------ ------- ------- ------- -------
Total revenue......................... 1,138 3,636 6,107 21,370 36,955 10,426 80,512
Cost of revenue....................... -- 707 1,398 7,860 14,926 4,810 34,212
------ ------ ------ ------- ------- ------- -------
Gross profit.......................... 1,138 2,929 4,709 13,510 22,029 5,616 46,300
Operating expense:
Research and development............ 875 1,746 2,687 5,662 16,204 6,205 14,619
Selling, general and
administrative.................... 252 944 2,135 3,546 8,063 2,541 9,322
------ ------ ------ ------- ------- ------- -------
Total operating expense............... 1,127 2,690 4,822 9,208 24,267 8,746 23,941
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations......... 11 239 (113) 4,302 (2,238) (3,130) 22,359
Interest and other income, net........ 12 41 120 213 290 63 1,301
Net loss on sale of investments....... (8) (42) -- -- -- -- --
------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes..... 15 238 7 4,515 (1,948) (3,067) 23,660
Provision (benefit) for income
taxes............................... 3 1 3 1,499 (775) (1,226) 8,281
------ ------ ------ ------- ------- ------- -------
Net income (loss)..................... $ 12 $ 237 $ 4 $ 3,016 $(1,173) $(1,841) $15,379
====== ====== ====== ======= ======= ======= =======
Basic earnings (loss) per share(1).... $ .00 $ .01 $ .00 $ .12 $ (.04) $ (.07) $ .45
====== ====== ====== ======= ======= ======= =======
Diluted earnings (loss) per share
(1)................................. $ .00 $ .01 $ .00 $ .09 $ (.04) $ (.07) $ .35
====== ====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
----- ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 49 $ 100 $1,990 $ 4,657 $22,116 $ 64,711
Working capital................................ (223) 1,958 2,247 5,529 26,262 86,409
Total assets................................... 473 3,144 4,509 14,367 45,244 148,101
Long-term debt, including current portion...... 61 85 49 216 2,693 134
Convertible preferred stock.................... -- 2,161 3,150 6,084 28,617 --
Total shareholders' equity..................... 24 2,474 3,475 9,770 33,392 128,682
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those projected in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors," "Business" and elsewhere
in this Prospectus. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed ICs for some of the most significant broadband communications markets
including cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. From the Company's inception in 1991
through 1994, it was primarily engaged in product development and the
establishment of strategic customer and foundry relationships. During this
period, the Company generated the majority of its total revenue from development
work performed for key customers. The Company began shipping its products in
1994, and subsequently the Company's total revenue has grown predominately
through sales of its semiconductor products. The Company intends to continue to
enter into development contracts with key customers, but expects development
revenue will constitute a decreasing percentage of its total revenue. The
Company also generates a small percentage of its product revenue from sales of
its system level reference designs.
The Company recognizes product revenue at the time of shipment. Provision
is concurrently made for estimated product returns, which have been immaterial
prior to the fourth quarter of 1997. The Company's products typically carry a
one year warranty. In the fourth quarter of 1997, the Company experienced
product returns in excess of $500,000 due to packaging defects. Such defects
were caused by one of the Company's assemblers, which reimbursed the Company for
such expenses.
Development revenue is recognized when earned. Approximately 15.4% and
13.1% of the Company's total revenue in 1997 and in the six months ended June
30, 1998, respectively, were derived from independent customers located outside
of the United States. All of the Company's revenue to date has been denominated
in U.S. dollars. See Note 8 of Notes to Financial Statements.
From time to time, the Company's key customers have placed large orders
causing quarterly revenue to fluctuate significantly, which fluctuations are
likely to continue in the future. For example, in the fourth quarter of 1997,
sales of the Company's networking products increased to approximately $7.6
million from $759,000 in the previous quarter. More than half of this increase
was attributable to sales to a single customer. Sales to the Company's largest
five customers (including sales to their respective manufacturing
subcontractors) accounted for 61.7%, 67.7% and 80.9% of the Company's total
revenue for 1997, 1996 and the six months ended June 30, 1998, respectively. The
Company expects that these five customers will continue to account for a
significant portion of the Company's total revenue for 1998. See "Risk
Factors -- Customer Concentration" and "Business -- Customers and Strategic
Relationships."
Various factors have in the past affected and may continue in the future to
affect the Company's gross margin, including, but not limited to, the Company's
product mix, the position of the Company's products in their respective life
cycles and the mix of the Company's product revenue and development revenue. For
example, newly-introduced products generally have higher average selling prices
and gross margins, both of which typically decline over product life cycles due
to competitive pressures and volume pricing agreements. The Company's gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors. See "-- Quarterly Results of Operations" and "Risk
Factors -- Fluctuations in Results of Operations."
19
<PAGE> 21
The sales cycle for the test and evaluation of the Company's products can
range from three to six months or more, with an additional three to six months
or more before a customer commences volume production of equipment incorporating
the Company's products. Due to such lengthy sales cycles, the Company may
experience a delay between increasing expenses for research and development and
selling, general and administrative efforts, and the generation of corresponding
revenue, if any. Furthermore, in 1998 and 1999, the Company intends to increase
its investment in research and development, selling, general and administrative
functions and inventory as it expands its operations. The Company anticipates
that the rate of new orders may vary significantly from month to month.
Consequently, if anticipated sales and shipments in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
and the Company's operating results for that quarter and, potentially, future
quarters would be materially and adversely affected. "See Risk
Factors -- Fluctuations in Results of Operations" and "-- Lengthy Sales Cycle."
RECENT PRELIMINARY OPERATING RESULTS
On September 30, 1998, the Company announced estimated preliminary results
for the third quarter ending September 30, 1998, subject to final review and
confirmation. For the quarter ending September 30, 1998, the Company expects to
report total revenue of approximately $52.0 million to $52.5 million. The
Company expects to report diluted earnings per share for the quarter of
approximately $.16 to $.17. This information regarding expected revenue and
earnings per share for the three months ending September 30, 1998 constitutes
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual final results for the three
months ending September 30, 1998 could differ materially as a result of a number
of factors, including, but not limited to, accounting adjustments made during
the course of closing the quarter. For a more detailed discussion of factors
that affect the Company's operating results, see "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total net sales for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................................. 70.7% 88.8% 85.7% 78.4% 97.5%
Development revenue.............................. 29.3 11.2 14.3 21.6 2.5
----- ----- ----- ----- -----
Total revenue...................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue.................................... 22.9 36.8 40.4 46.1 42.5
----- ----- ----- ----- -----
Gross profit....................................... 77.1 63.2 59.6 53.9 57.5
Operating expense:
Research and development......................... 44.0 26.5 43.9 59.5 18.1
Selling, general and administrative.............. 35.0 16.6 21.8 24.4 11.6
----- ----- ----- ----- -----
Total operating expense............................ 79.0 43.1 65.7 83.9 29.7
----- ----- ----- ----- -----
Income (loss) from operations...................... (1.9) 20.1 (6.1) (30.0) 27.8
Interest and other income, net..................... 2.0 1.0 .8 .6 1.6
----- ----- ----- ----- -----
Income (loss) before income taxes.................. .1 21.1 (5.3) (29.4) 29.4
Provision (benefit) for income taxes............... -- 7.0 (2.1) (11.7) 10.3
----- ----- ----- ----- -----
Net income (loss).................................. .1% 14.1% (3.2)% (17.7)% 19.1%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total Revenue. Total revenue consists of product revenue generated
principally by sales of the Company's semiconductor products and development
revenue generated under development contracts with the Company's customers.
Total revenue for the six months ended June 30, 1998 was $80.5 million, an
increase of $70.1 million or 672.2% from total revenue of $10.4 million in the
six months ended June 30, 1997. The increase in total revenue was derived mainly
from an increase in volume of shipments of ICs for digital cable set-top boxes
and for the high-speed networking market and, to a lesser extent, for the cable
modem market.
20
<PAGE> 22
Gross Profit. Gross profit represents total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by independent foundries, and costs associated with assembly,
test and quality assurance for those products, as well as costs of personnel and
equipment associated with manufacturing support and contracted development work.
Gross profit for the six months ended June 30, 1998 was $46.3 million or 57.5%
of total revenue, an increase of $40.7 million or 724.4% from gross profit of
$5.6 million or 53.9% of total revenue in the six months ended June 30, 1997.
The increase in gross profit was mainly attributable to the significant increase
in the volume of product shipments. It is expected that gross profit, as a
percentage of total revenue, will decline in future periods as volume-pricing
agreements and competitive pricing strategies continue to take effect. In
addition, the Company's gross margin may be affected by the introduction in the
future of certain lower margin products.
Research and Development Expense. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, as well as related subcontracting costs. Research
and development expense for the six months ended June 30, 1998 was $14.6 million
or 18.1% of total revenue, an increase of $8.4 million or 135.6% from research
and development expense of $6.2 million or 59.5% of total revenue for the six
months ended June 30, 1997. The increase in absolute dollars was primarily due
to the addition of personnel for the development of new products and the
enhancement of existing products. The decline in research and development
expense as a percentage of total revenue reflected a significant increase in
total revenue during the six months ended June 30, 1998. The Company expects
that research and development expense in absolute dollars will continue to
increase for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of personnel-related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for the six months ended June 30, 1998 was $9.3
million or 11.6% of total revenue, an increase of $6.8 million or 266.9% from
$2.5 million or 24.4% of total revenue for the six months ended June 30, 1997.
The increase in absolute dollars reflected higher personnel related costs
resulting from the hiring of sales and marketing personnel, senior management
and administrative personnel, and increased occupancy, legal and other
professional fees, including increased expenses for litigation. The decline in
selling, general and administrative expense as a percentage of total revenue
reflected a significant increase in total revenue during the six months ended
June 30, 1998. The Company expects that selling, general and administrative
expense in absolute dollars will continue to increase in the near term to
support the planned expansion of the Company's operations.
Deferred Compensation. In the six months ended June 30, 1998, the Company
recorded approximately $5.4 million of net deferred compensation in connection
with the grant of employee stock options to purchase an aggregate of 1,298,050
shares of Class B Common Stock in late March 1998 (in addition to approximately
$1.1 million of deferred compensation recorded in 1997). The deferred
compensation represents the difference between the deemed value of the Class B
Common Stock for accounting purposes and the option exercise price of such
options at the date of grant. Such amount has been presented as a reduction of
shareholders' equity and is being amortized ratably to expense over the vesting
period of the applicable options. The Company amortized an aggregate of $503,000
of deferred compensation in the six months ended June 30, 1998. The remaining
balance of total deferred compensation will be amortized at a rate of
approximately $406,000 (pre-tax) per quarter through September 2001 and
approximately $338,000 (pre-tax) for the quarters ending December 31, 2001 and
March 31, 2002.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents and investment balances,
less interest on the Company's long-term debt and capital lease obligations.
Interest and other income, net for the six months ended June 30, 1998 was $1.3
million, compared to $63,000 in the six months ended June 30, 1997. This
increase was principally due to increased cash balances available to invest
resulting from consummation of the Company's initial public offering and sale of
shares to Cisco Systems in April 1998.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 35% and 40% for the
21
<PAGE> 23
six months ended June 30, 1998 and 1997, respectively. The difference between
the Company's effective tax rates and the federal statutory tax rate of 34% was
primarily related to the effect of state income taxes and research and
development tax credits.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Total Revenue. Total revenue for 1997 was $37.0 million, an increase of
$15.6 million or 72.9% from 1996. Total revenue for 1996 was $21.4 million, an
increase of $15.3 million or 249.9% from $6.1 million in 1995. In each year, the
increase was primarily due to the introduction of new products and to a higher
volume of shipments of existing products to manufacturers of cable set-top boxes
and networking customers selling Fast Ethernet hubs and switches. In particular,
the majority of the increase in total revenue in 1997 was derived from sales of
new products, including the Company's Fast Ethernet Quad transceivers for the
high-speed networking market and its QAM receivers for digital cable set-top
boxes.
Gross Profit. Gross profit for 1997 was $22.0 million or 59.6% of total
revenue, an increase of $8.5 million or 63.1% from 1996. Gross profit in 1996
was $13.5 million or 63.2% of total revenue, an increase of $8.8 million or
186.9% from $4.7 million or 77.1% of total revenue in 1995. In each year, the
increase in absolute dollars was largely due to higher total revenue. Gross
margin declined in 1997 from 1996 primarily due to volume pricing concessions
made in 1997 for cable set-top box products. Gross margin declined in 1996 from
1995 largely due to a decline in higher margin development revenue as a
percentage of total revenue in 1996.
Research and Development Expense. Research and development expense for 1997
was $16.2 million or 43.9% of total revenue, an increase of $10.5 million or
186.2% from 1996. Research and development expense for 1996 was $5.7 million or
26.5% of total revenue, an increase of $3.0 million or 110.7% from 1995 expense
of $2.7 million or 44.0% of total revenue in 1995. In each year, the increase in
absolute dollars was primarily due to the addition of personnel for the
development of new products and the enhancement of existing products, as well as
payments to outside consultants where specific resources were needed in the
development process. Research and development expense in absolute dollars
increased at a fairly steady rate for each quarter between 1995 and 1997 after
taking into consideration the $1.2 million or non-recurring engineering expense
paid to General Instrument in the third quarter of 1997 for development support
services with respect to the Company's MPEG development program. Such services
included the engagement of several engineers from General Instrument on a
contract basis and the development of high level descriptions and related
documentation. The decline in research and development expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period.
Selling, General and Administrative Expense. Selling, general and
administrative expense for 1997 was $8.1 million or 21.8% of total revenue, an
increase of $4.5 million or 127.4% from 1996. Selling, general and
administrative expense for 1996 was $3.5 million or 16.6% of total revenue, an
increase of $1.4 million or 66.1% from $2.1 million or 35.0% of total revenue in
1995. In each year, the increase in absolute dollars principally reflected
higher personnel related costs resulting from a net increase in sales and
marketing personnel to address each of the Company's target markets. These
increases were also due in part to the hiring of senior level management and
administrative personnel and increased occupancy, legal and other professional
fees. The decline in selling, general and administrative expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period. As the Company's infrastructure expanded in 1997, selling, general and
administrative expense as a percentage of total revenue increased at a more
rapid rate than total revenue.
Deferred Compensation. In connection with the grant of certain stock
options to employees during 1997, the Company recorded aggregate deferred
compensation of approximately $1.1 million, representing the difference between
the deemed value of the Class B Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. Such amount is
presented as a reduction of shareholders' equity and amortized ratably over the
vesting period of the applicable options. Amortization of deferred compensation
recorded in 1997 was $66,000 (pre-tax).
22
<PAGE> 24
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and short-term investment
balances, less interest on the Company's term loan. Interest and other income,
net for 1997 was $290,000, an increase of $77,000 or 36.2% from 1996. Interest
and other income, net for 1996 was $213,000, an increase of $93,000 or 77.5%
from $120,000 in 1995. In each year, the increase was primarily due to interest
earned on higher levels of short-term investments and cash balances, partially
offset by interest expense incurred on higher average debt balances.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 40%, 33% and 43% for 1997, 1996 and 1995,
respectively. In each year, the difference between the Company's effective tax
rate and the federal statutory tax rate of 34% was primarily related to state
income taxes and research and development tax credits. The Company utilizes the
liability method of accounting for income taxes as set forth in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. See Note 2
of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the eight quarters through June 30, 1998. This information is unaudited
but, in the opinion of the Company's management, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................... $4,590 $6,134 $ 3,959 $ 4,210 $ 8,096 $15,403 $35,225 $43,268
Development revenue................ 1,000 600 1,072 1,185 1,159 1,871 119 1,900
------ ------ ------- ------- ------- ------- ------- -------
Total revenue........................ 5,590 6,734 5,031 5,395 9,255 17,274 35,344 45,168
Cost of revenue...................... 2,215 1,916 2,534 2,276 4,047 6,069 13,832 20,380
------ ------ ------- ------- ------- ------- ------- -------
Gross profit......................... 3,375 4,818 2,497 3,119 5,208 11,205 21,512 24,788
Operating expense:
Research and development........... 1,449 2,309 2,686 3,519 5,503 4,496 5,952 8,667
Selling, general and
administrative................... 1,041 1,110 1,142 1,399 2,670 2,852 3,989 5,333
------ ------ ------- ------- ------- ------- ------- -------
Total operating expense.............. 2,490 3,419 3,828 4,918 8,173 7,348 9,941 14,000
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) from operations........ 885 1,399 (1,331) (1,799) (2,965) 3,857 11,571 10,788
Interest and other income (expense),
net................................ 45 97 60 3 (41) 268 218 1,083
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.... 930 1,496 (1,271) (1,796) (3,006) 4,125 11,789 11,871
Provision (benefit) for income
taxes.............................. 309 497 (508) (718) (1,202) 1,653 4,126 4,155
------ ------ ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 621 $ 999 $ (763) $(1,078) $(1,804) $ 2,472 $ 7,663 $ 7,716
====== ====== ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share
(1)................................ $ .02 $ .04 $ (.03) $ (.04) $ (.07) $ .09 $ .27 $ .19
====== ====== ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share
(1)................................ $ .02 $ .03 $ (.03) $ (.04) $ (.07) $ .06 $ .19 $ .16
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
23
<PAGE> 25
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue...................... 82.1% 91.1% 78.7% 78.0% 87.5% 89.2% 99.7% 95.8%
Development revenue.................. 17.9 8.9 21.3 22.0 12.5 10.8 .3 4.2
----- ----- ----- ----- ----- ----- ----- -----
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue........................ 39.6 28.5 50.4 42.2 43.7 35.1 39.1 45.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........................... 60.4 71.5 49.6 57.8 56.3 64.9 60.9 54.9
Operating expense:
Research and development............. 26.0 34.3 53.4 65.2 59.5 26.0 16.8 19.2
Selling, general and
administrative..................... 18.6 16.4 22.7 25.9 28.8 16.6 11.3 11.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expense................ 44.6 50.7 76.1 91.1 88.3 42.6 28.1 31.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.......... 15.8 20.8 (26.5) (33.3) (32.0) 22.3 32.8 23.9
Interest and other income expense,
net.................................. .8 1.4 1.2 -- (.5) 1.6 .6 2.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes...... 16.6 22.2 (25.3) (33.3) (32.5) 23.9 33.4 26.3
Provision (benefit) for income taxes... 5.5 7.4 (10.1) (13.3) (13.0) 9.6 11.7 9.2
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)...................... 11.1% 14.8% (15.2)% (20.0)% (19.5)% 14.3% 21.7% 17.1%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Total Revenue. Quarterly revenue increased throughout the second half of
1996 as a result of the introduction of new products and higher unit shipments
of the Company's existing products in the cable set-top box, cable modem and
high-speed networking markets and generally reflected higher revenue from
development programs. The Company anticipates that development revenue will
continue to vary from quarter to quarter as contract milestones are met. The
decrease in total revenue from $6.7 million in the fourth quarter of 1996 to
$5.0 million in the first quarter of 1997 was primarily due to a reduction of
unit shipments of 100Base-T4 high-speed networking products and pricing
concessions to a major customer for cable set-top boxes. The increase in total
revenue to $9.3 million in the third quarter of 1997 largely resulted from the
introduction of new products and increased unit shipments of existing cable
set-top box and cable modem products. The increase in total revenue to $17.3
million in the fourth quarter of 1997 was primarily due to the first significant
volume shipments of the Company's 100Base-TX high-speed networking products, as
well as $2.5 million of revenue from a take or pay contract with a significant
customer. The increase in total revenue to $35.3 million in the first quarter of
1998 was primarily the result of the continuation of significant volume
shipments of the Company's networking products. The increase in total revenue to
$45.2 million in the second quarter of 1998 was attributed to increased unit
shipments of existing cable set-top box and cable modem products, offset by a
reduction in unit shipments of networking products.
Gross Profit. As a percentage of total revenue, gross profit increased to
71.5% in fourth quarter 1996 as a result of a favorable product mix and a
significant increase in the volume of product shipments over the previous
quarters, which allowed fixed manufacturing costs to be spread over a larger
product base. In the first quarter of 1997, gross profit decreased to 49.6% of
total revenue as a result of an unfavorable product mix and pricing concessions
to a major customer for cable set-top boxes. Gross profit increased to 64.9% of
total revenue in the fourth quarter of 1997 as a result of volume shipments of
high-speed networking products and a significant increase in the volume of
product shipments generally. During the first and second quarters of 1998, gross
profit decreased to 60.9% and 54.9%, respectively, of total revenue due to
volume-pricing agreements and competitive pricing strategies.
Operating Expense. Research and development expense increased in absolute
dollars through the third quarter of 1997 to facilitate the expansion of
introduction of new products by the Company. Research and development expense in
the third quarter of 1997 included a substantial non-recurring engineering
expense, which consisted of approximately $1.2 million paid to General
Instrument for engineering support related to the development of the Company's
MPEG technology and, as a result, research and development expense in the fourth
quarter of 1997 was lower than in the prior quarter. The increase in research
and development
24
<PAGE> 26
expense in the first and second quarter of 1998 was primarily due to the
addition of personnel for the development of new products and the enhancement of
existing products. Selling, general and administrative expense has also
increased in absolute dollars as the Company has expanded its infrastructure to
accommodate the Company's expanding operations. In the third and fourth quarters
of 1997, the Company also incurred significant legal expenses in conjunction
with pending litigation and the negotiation of large customer contracts. The
increase in selling, general and administrative expense during the first and
second quarter of 1998 reflected higher personnel related costs resulting from
the hiring of sales and marketing personnel, senior management and
administrative personnel, and increased occupancy, legal and other professional
fees, including increased expenses for litigation. See "Business -- Legal
Proceedings."
The Company's quarterly results of operations have fluctuated significantly
in the past and may continue to fluctuate in the future based on a number of
factors, not all of which are in the Company's control. In particular, the
Company's results of operations have fluctuated in the past due to, among other
things, 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 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; and
the amount and timing of recognition of development revenue. The Company's
results of operations may also fluctuate in the future based on a number of
factors, including, but not limited to those listed above, as well as 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 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. As a result of
the foregoing factors, the Company believes period to period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of sales of equity securities and cash generated by operations. At
June 30, 1998, the Company had $86.4 million in working capital and $67.3
million in cash and cash equivalents, and short-term investments. In addition,
at June 30, 1998, the Company had long-term investments of $25.1 million.
The Company's operating activities provided cash of $4.2 million in the six
months ended June 30, 1998, primarily as a result of net income and a growth in
accounts payable, partially offset by increases in accounts receivable and
inventory. The Company's operating activities used cash in the amount of $2.6
million in fiscal 1997, and generated cash in the amount of $3.2 million and
$1.1 million in fiscal 1996 and fiscal 1995, respectively.
Cash used in operating activities in 1997 was primarily attributable to a
net loss, growth in accounts receivable and inventory and a decrease in income
taxes payable, which more than offset growth in accounts payable and the
non-cash impact of depreciation and amortization. Cash provided by operating
activities in fiscal 1996 was primarily attributable to net income and growth in
accounts payable and income taxes payable, partially offset by growth in
accounts receivable. Cash provided by operating activities in 1995 was primarily
attributable to a decrease in accounts receivable, growth in accounts payable,
and the non-cash impact of depreciation and amortization.
The Company's investing activities used cash in the amount of $27.7 million
in the six months ended June 30, 1998, for the purchase of held-to-maturity
investments and $10.7 million for the purchase of capital equipment to support
its expanding operations. The Company's investing activities used cash of $7.1
million in fiscal 1997, $3.7 million in fiscal 1996 and $116,000 in fiscal 1995,
primarily for the purchase of capital equipment.
Cash provided by financing activities was $76.8 million for the six months
ended June 30, 1998, primarily from the aggregate net proceeds of $79.2 million
from the Company's initial public offering and the
25
<PAGE> 27
Company's sale of Class A Common Stock to Cisco Systems described below,
partially offset by the repayment of $2.5 million outstanding under a bank term
loan. Cash provided by financing activities was $27.1 million in 1997, $3.2
million in 1996 and $949,000 in 1995, primarily from the sale of convertible
preferred stock and, in 1997, from the establishment of a revolving credit
facility and term loan.
As of June 30, 1998, the Company had material commitments of $5.4 million
consisting of the purchase of workstation software and hardware. The Company
also plans to spend approximately $17.0 million through the end of 1998 for
additional workstation software and hardware, test equipment, design tools and
leasehold improvements. See Notes 3 and 4 of Notes to Financial Statements.
In April 1998, the Company completed its initial public offering of Class A
Common Stock. Of the 4,025,000 shares of Class A Common Stock offered, the
Company sold 3,120,000 shares, and selling shareholders sold 905,000 shares, at
a price of $24.00 per share. In addition, the Company sold 500,000 shares to
Cisco Systems in a concurrent, non-underwritten registered offering at a price
of $22.32 per share. The Company received net aggregate proceeds from the
initial public offering and the sale of shares to Cisco Systems of approximately
$79.2 million in cash (net of underwriting discounts and commissions and
estimated offering costs). Approximately $2.3 million of the Company's net
proceeds were used to retire all outstanding indebtedness under a term loan in
April 1998.
The Company believes that the net proceeds from this offering, its initial
public offering and sale of shares to Cisco Systems, together with cash
generated from its operations will be sufficient to meet the Company's capital
requirements for at least the next twelve months. Nonetheless, the Company may
elect to sell additional equity securities or to obtain credit facilities. The
Company's future capital requirements may vary materially from those now planned
and will depend on many factors, including, but not limited to, the levels at
which the Company maintains inventory and accounts receivable; the market
acceptance of the Company's products; the levels of promotion and advertising
required to launch such products and attain a competitive position in the
marketplace; volume pricing concessions; the Company's business, product,
capital expenditure and research and development plans and technology roadmap;
capital improvements to new and existing facilities; technological advances; the
response of competitors to the Company's products; and the Company's
relationships with suppliers and customers. In addition, the Company may require
an increase in the level of working capital to accommodate planned growth,
hiring, infrastructure and facility needs, including the Company's recently
executed lease of new facilities to centralize all Irvine employees and
operations on one campus. Additional capital may be required for consummation of
any acquisitions of businesses, products or technologies. To the extent that the
funds generated by this offering, together with existing resources and cash
generated from operations, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financings or increased borrowings. No assurance can be given that
additional financing will be available or that, if available, such financing can
be obtained on terms favorable to the Company and its shareholders.
During the second half of 1998, the Company may use approximately $25.0
million to purchase additional capital equipment to support its expanding
operations, of which the Company has used approximately $13.0 million as of
September 30, 1998. The Company may finance these purchases from the proceeds of
this offering, the proceeds of its initial public offering, cash generated from
its operations, or a combination thereof.
YEAR 2000
The Company is aware of problems associated with computer systems as the
year 2000 approaches. Many existing computer systems and applications, and other
control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. These
problems are expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 Problem."
26
<PAGE> 28
The Company is continuing to assess the impact that the Year 2000 Problem
may have on its operations and has identified the following four key areas of
its business that may be affected:
Products. The Company has evaluated each of its products and believes that
each is substantially year 2000 compliant. However, management believes
that it is not possible to determine whether all of its customers' products
that incorporate the Company's products will be year 2000 compliant because
the Company has little or no control over the design, production and
testing of its customers' products.
Internal Infrastructure. The Year 2000 Problem could affect the systems,
transaction processing computer applications and devices used by the
Company to operate and monitor all major aspects of its business, including
financial systems (such as general ledger, accounts payable and payroll),
customer services, infrastructure, materials requirement planning, master
production scheduling, networks and telecommunications systems. The Company
believes that it has identified substantially all of the major systems,
software applications and related equipment used in connection with its
internal operations that must be modified or upgraded in order to minimize
the possibility of a material disruption to its business. The Company is
currently in the process of modifying and upgrading all affected systems
and expects to complete this process by the end of 1998. Because most of
the software applications used by the Company are recent versions of vendor
supported, commercially available products, the Company has not incurred,
and does not expect in the future to incur, significant costs to upgrade
these applications as year 2000 compliant versions are released by the
respective vendors.
Third-Party Suppliers. The Company relies, directly and indirectly, on
external systems utilized by its suppliers for the management and control
of fabrication, assembly and testing of substantially all of the Company's
products. The Company has sent questionnaires to the two independent
foundries that fabricate substantially all of its semiconductor devices,
TSMC and Chartered, and to the two subcontractors that assemble and test
substantially all of its products, ASAT and STATS, to identify and, to the
extent possible, resolve issues involving the Year 2000 Problem. In
addition, certain of the Company's key employees have scheduled on-site
visits at the facilities of each of these suppliers in late 1998 to
evaluate the systems and remediation efforts employed by each of them. The
Company expects to resolve any significant Year 2000 Problems with its
suppliers; however, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with their systems in a timely
manner. Any failure of these third parties to resolve their Year 2000
Problems in a timely manner could result in the material disruption to the
business of the Company. Any such disruption could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Facility and Laboratory Related Systems. Systems such as heating,
sprinklers, elevators, test equipment and security systems at the Company's
facilities and labs may also be affected by the Year 2000 Problem. The
Company is currently assessing the potential effect of and costs of
remediating the Year 2000 Problem on its facility and lab related systems.
The Company estimates that the total cost to the Company of completing any
required modifications, upgrades or replacements of these systems will not
have a material adverse effect on the Company's business or results of
operations.
The Company presently estimates that the total cost of addressing its year
2000 issues will be approximately $500,000. This estimate was derived utilizing
numerous assumptions, including the assumption that the Company has already
identified its most significant year 2000 issues and that the plans of its third
party suppliers will be fulfilled in a timely manner without cost to the
Company. However, there can be no guarantee that these assumptions are accurate,
and actual results could differ materially from those anticipated.
The Company is currently developing contingency plans to address the year
2000 issues that may pose a significant risk to its on-going operations. Such
plans could include accelerated replacement of affected equipment or software,
temporary use of back-up equipment or software or the implementation of manual
procedures to compensate for system deficiencies. However, there can be no
assurance that any contingency plans implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's results
of operations would not be materially and adversely affected by the delays and
inefficiencies inherent in conducting operations in an alternative manner.
27
<PAGE> 29
BUSINESS
Broadcom is a leading developer of highly integrated silicon solutions that
enable broadband digital data transmission to the home and within the business
enterprise. The Company's products enable the high-speed transmission of data
over existing communications infrastructures, most of which were not originally
intended for digital data transmission. Using proprietary technologies and
advanced design methodologies, the Company has designed and developed ICs for
some of the most significant broadband communications markets, including the
markets for cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing ("DSP") circuits that implement complex communications algorithms,
surrounded by precision high-speed analog-to-digital and digital-to-analog
converter circuits. The Company's products integrate comprehensive systems
solutions into single chips or chip-sets, thereby eliminating costly external
components, reducing board space, simplifying the customer's manufacturing
process, lowering the customer's system costs and enabling higher performance.
Customers currently shipping broadband communications equipment incorporating
the Company's products include 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta.
INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and
consumer demand for high-speed access to multimedia information and
entertainment content, consisting of data, voice and video. This demand is being
driven by the growth of desirable information and entertainment content
accessible via the Internet and cable and data networks. Demand has also been
stimulated by the improved availability and affordability of access devices such
as set-top boxes, PCs and other consumer appliances. Computer processor speeds
over the last decade have increased dramatically and, as a result, significantly
improved the rate at which multimedia data can be processed. However, the rate
at which such data can be transmitted has not kept pace. This disparity has
become known as the "bandwidth gap" and has frustrated users and challenged
solutions providers in a number of markets.
The bandwidth gap has emerged in a variety of commercial and consumer
applications. Businesses are constantly seeking new ways to access and analyze
larger amounts of information to improve the quality of management decisions and
enhance customer and employee communications. Many businesses have deployed
local area networks ("LANs") which are principally based upon 10Base-T Ethernet
technology. The proliferation of LAN usage within corporate networks has
resulted in volumes of electronic traffic that are rapidly outgrowing the
ability of legacy LAN technologies and infrastructures to readily transmit the
traffic and has exacerbated the bandwidth gap for businesses. As such, much of
the installed base of Ethernet ports will require upgrading to higher speeds as
the infrastructure continues to grow.
Individuals are also increasingly using their home PCs to access the
Internet and to telecommute. Consumer online usage is expected to increase
rapidly with the availability and market acceptance of low cost PCs (sub $1,000)
and the increased availability and improving quality of content. In addition,
the increasing number of next generation television set-top boxes, PCs and other
devices that feature integrated Internet access will contribute to the surging
demand for rapid access to information. International Data Corporation ("IDC")
estimates that between 1995 and 1997 the number of devices that had access to
the Internet grew from approximately 15.4 million to 64.4 million and
anticipates that the number of such devices will grow to over 331.3 million by
2001. Similarly, the available content on the Internet is also increasing
rapidly. IDC estimates that the number of web pages for Internet devices to
access grew from approximately 18.1 million in 1995 to approximately 250.5
million in 1997, and is expected to increase to 4.4 billion by 2001. As the
volume of traffic continues to grow, consumers are becoming increasingly
frustrated with the low performance of "last mile" remote access connections
that are typically limited to data rates of only 28.8 kbps to 56 kbps and
require several minutes or hours to download large multimedia intensive files.
28
<PAGE> 30
Business and residential PC users have not been the only ones affected by
the bandwidth gap. Cable television subscribers seeking more entertainment
options including Internet access, and cable service providers seeking higher
revenue services beyond basic cable, have generally been frustrated by the
limited amount of programming that can be provided over the existing cable
infrastructure, as well as the inability of that infrastructure to deliver
interactive multimedia content. With the advent of digital television and
digital compression technologies such as MPEG, the conversion from analog
transmission to digital transmission enables a dramatic increase in the number
of channels available to the subscriber. In late 1996, cable television service
providers began offering expanded services, including digital programming
through new digital set-top boxes as well as high-speed Internet access and
telecommuting through cable modems. Dataquest estimates that approximately 3.2
million digital cable set-top boxes will be shipped worldwide in 1998 and that
approximately 14.3 million will be shipped in 2002. In order to satisfy customer
demand for increased programming and other entertainment options, and to
capitalize on the revenue growth opportunities associated with these expanded
services, service providers will have to deploy a new generation of digital set-
top boxes and headend equipment.
Much of the bandwidth gap is a result of the existing last mile
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper twisted pair wiring, coaxial cable
and wireless communication connections. Copper twisted pair wiring was
originally intended for the transmission of narrowband analog voice while
coaxial cable was intended for delivery of one-way analog video signals. These
analog infrastructures have numerous impairments, including limited spectrum,
noise, dispersion and multipath reflections, which make broadband transmission
(greater than 1.5 Mbps) of digital data very difficult.
Because it is impractical to replace these communications infrastructures
with entirely new infrastructures that are optimized for digital data
transmission, the fundamental challenge for service and equipment providers is
to enable broadband communications over existing infrastructures. These
providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace. The principal segments
that define this marketplace include:
Cable Set-Top Boxes. Cable operators are deploying digital cable set-top
boxes to facilitate high-speed digital communications between a
subscriber's television and the cable network. Cable set-top boxes are
currently able to support downstream (to the subscriber) transmission
speeds of up to 43 Mbps (North American standard) or 56 Mbps (international
standard), and several hundred MPEG-2 compressed digital television
channels to be delivered to the consumer. Additional applications for
digital cable set-top boxes are expected to include Internet access,
interactive television, high definition television ("HDTV") and cable
telephony.
Cable Modems. Cable modems connect PCs to the cable network and have been
designed to achieve downstream transmission speeds of up to 43 Mbps (North
American standard) or 56 Mbps (international standard), and upstream (to
the network) transmission speeds of up to 10 Mbps. These transmission rates
are almost 1,000 times faster than the fastest analog telephone modems (56
kbps downstream and 28.8 kbps upstream) currently available. The high
speeds of cable modems should enable an entirely new generation of
multimedia-rich content over the Internet, make telecommuting a productive
and effective means for work at home and allow cable operators to offer
expanded services such as cable telephony.
High-Speed Networking. As communications bottlenecks have appeared in
corporate LANs, technologies such as Fast Ethernet (100 Mbps) and Gigabit
Ethernet (1,000 Mbps) are being employed to replace older technologies such
as 10Base-T Ethernet (10 Mbps) and Token Ring (16 Mbps). As desktop
connections continue to migrate to Fast Ethernet, the Company believes that
Gigabit Ethernet will emerge as the predominant backbone and server
communications technology, and will eventually migrate to the desktop.
Direct Broadcast Satellite and Terrestrial Digital Broadcast. DBS is the
primary alternative to cable for providing digital television programming
and can be used to transmit information at speeds of up to 90 Mbps. DBS
broadcasts video and audio data from satellites directly to set-top boxes
in the home via
29
<PAGE> 31
dish antennas. Other broadband wireless technologies include (i)
terrestrial digital broadcast television, the upgrade of analog broadcast
television to digital which enables the delivery of HDTV, (ii) Multichannel
Multipoint Distribution Systems ("MMDS"), which use microwave frequencies
(2.5 GHz) to transmit digital video signals over terrestrial digital
broadcast channels to digital set-top boxes, and (iii) Local Multipoint
Distribution Systems ("LMDS"), which use even higher microwave frequencies
(28 to 38 GHz) to transmit video and data to digital set-top boxes over a
shorter distance via a cellular-like network.
Digital Subscriber Lines (xDSL). xDSL represents a family of newer
broadband technologies which use the copper twisted pair wiring in the
existing telephone local loops to deliver transmission speeds ranging from
128 kbps to 52 Mbps depending on the distance between the central office
and the subscriber. These data rates are expected to enable a wide range of
new services including high-speed Internet access and digital television.
The desire by equipment manufacturers and service providers to develop
these markets has created the need for new generations of semiconductor
solutions. Broadband transmission of digital information over existing
infrastructures requires highly integrated mixed-signal semiconductor solutions
to perform critical systems functions such as complex signal processing and
converting digital data to and from analog signals. Broadband communications
equipment requires substantially higher levels of system performance in terms of
both speed and precision that typically cannot be adequately addressed by
traditional IC solutions developed for low speed transmission applications.
Moreover, solutions that are based on multiple discrete analog and digital ICs
generally cannot achieve the cost-effectiveness, performance and reliability
required by the broadband communications markets. These requirements are best
addressed by new generations of highly integrated mixed-signal devices that
combine complex analog and digital functions with high performance DSP circuitry
that can be manufactured in high volumes using cost-effective semiconductor
technologies.
THE BROADCOM SOLUTION
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. Using its proprietary communications algorithms and
protocols, unique DSP architectures, silicon compiler design methodologies and
full-custom, mixed-signal circuit design techniques, the Company has designed
and developed ICs for some of the most significant broadband communications
markets, which include cable set-top boxes, cable modems, high-speed networking,
DBS and terrestrial digital broadcast, and xDSL. The Company's expertise in
communications algorithms and its detailed understanding of transmission media
enable the implementation of complex systems incorporating signal processing
functions such as digital demodulation, adaptive equalization and error
correction in a single device. In addition, the Company's comprehensive
knowledge of advanced communications protocols enables the Company to design
protocol processing ICs that seamlessly interface its mixed-signal transceiver
ICs with higher-level networking layers for communications applications.
Finally, the Company's systems level communications expertise has enabled it to
establish a viable long-term product roadmap that permits its customers to
achieve rapid time-to-market over multiple generations of equipment.
All of the Company's products are implemented in low-cost,
highly-manufacturable CMOS technologies that enable the integration of
comprehensive systems solutions into single-chip ICs, thereby eliminating costly
external components, reducing board space, simplifying the customer's equipment
manufacturing process, lowering customer system costs and enabling higher
performance. The Company's proprietary technology and advanced design
methodologies result in a high likelihood of first pass silicon success,
accelerated time-to-market, and ease of porting to multiple foundries. The
Company's design methodologies also allow it to rapidly and cost-effectively
incorporate proprietary features or intellectual property from its key strategic
customers into products that are exclusive to those customers, thereby enabling
them to differentiate their products. Customers currently shipping broadband
communications equipment that incorporates the Company's products include 3Com,
Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
30
<PAGE> 32
STRATEGY
The Company's objective is to be the leading provider of highly integrated
silicon solutions to the worldwide broadband communications markets. Key
elements of the Company's strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. The Company's
strategy is to identify rapidly growing broadband digital communications
markets and to develop highly integrated silicon solutions for applications
in those markets. The Company's initial products were designed for the
cable set-top box, cable modem and high-speed networking markets, which
require high-performance, feature-rich and highly integrated semiconductor
solutions. The Company has recently leveraged the core technologies it
developed for these markets to design and develop semiconductor solutions
for the DBS and terrestrial digital broadcast, and xDSL markets, which it
believes have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. The
Company has established strategic relationships with key equipment
manufacturers, including 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta, which are market and
technology leaders within the broadband communications markets. While the
Company designs products that can be used by multiple customers, the
Company's proprietary design methodologies allow it to rapidly design
custom features based on either the Company's or its customers'
intellectual property. This capability enables the Company's customers to
improve their time-to-market, differentiate their products and address new
market opportunities. The Company believes that these strategic
relationships are essential to its continued growth and to further
development and acceptance of its technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. The Company
is aggressively building on its technology leadership by investing
substantial development resources in all of its key technology areas. The
Company works closely with leading communications systems companies to
develop new and enhanced algorithms that address next generation broadband
market opportunities. The Company's strategy is to continue to implement
these algorithms in highly integrated, full-custom ICs using DSP
architectures that optimize performance, efficiency and cost. During
product development, the Company leverages its silicon compiler
technologies and proprietary circuit libraries and layouts of high-
performance analog and digital IC building blocks, thereby accelerating
time-to-market for new products. The silicon solutions for each of these
markets benefit from the same underlying core technologies, providing the
Company significant leverage in its ability to address a diverse set of end
user markets with a relatively focused investment in research and
development.
Drive Industry Standards. The Company participates actively in the
formulation of critical standards for the broadband communications markets.
The Company believes such participation provides it with several
significant benefits, including (i) accelerating and expanding the
development of markets for the Company's products by encouraging all market
participants to focus their efforts on developing products compliant with
the standards, and (ii) providing valuable insight and relationships, which
assist the Company in being early to market with products incorporating the
standards. The Company has established strategic relationships with major
networking equipment and cable modem vendors and was a principal
participant in formulating and writing the Multimedia Cable Network Systems
Data Over Cable Services Interface Specifications ("MCNS/DOCSIS") for the
end-to-end delivery of high-speed data services over hybrid fiber coax
("HFC") networks, which facilitate the development of interoperable
networking products, including cable modems. The Company's active
participation in this process enabled it to be the first provider of
transmission and protocol ICs to equipment manufacturers developing
MCNS/DOCSIS compliant products. The Company is also currently participating
in the formulation and evolution of standards for Fast Ethernet, Gigabit
Ethernet and xDSL systems.
Focus on Highly Integrated Solutions. The Company believes its analog
mixed-signal technology and advanced design methodologies enable it to
offer silicon solutions that are more highly integrated than competitive
alternatives. High levels of integration and aggressive product development
roadmaps allow the Company to enhance the value-added benefits of its
products in its customers' systems. Integration, which reduces the total
component count in the system, provides many fundamental benefits for the
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<PAGE> 33
Company's customers, including streamlining their production flow,
improving yields, saving board space, shortening time-to-market, reducing
production costs and improving performance and reliability. These benefits
have often enabled the Company's customers to achieve faster and broader
penetration within their respective markets.
MARKETS
The increased demand for the high-speed delivery of data and video services
is forcing equipment vendors and service providers to race to provide solutions
to close the bandwidth gap. The Company's silicon solutions address the
bandwidth gap in multiple communications markets. While the communication
infrastructures of these markets are very different, the Company has been able
to leverage many of its core technologies across multiple markets in various
product implementations. Many industry analysts project high growth rates for
the markets served by the Company's products even though such markets are at
different phases in their evolution. High-speed networking is an established
market that is currently going through an upgrade; cable and DBS set-top boxes
are, on a global basis, in an early growth phase, and the cable modem and xDSL
markets are emerging.
Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity in
television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide picture quality that is comparable to DBS, cable service providers began
offering digital programming in 1996 through new digital cable set-top boxes.
Paul Kagan Associates, Inc. ("Kagan") estimates that in 1998 only 1.1 million of
the 65 million cable subscribing homes in the United States will install digital
cable set-top boxes. Dataquest estimates that approximately 3.2 million digital
cable set-top boxes will be shipped worldwide in 1998, and that approximately
14.3 million will be shipped in 2002. General Instrument, in particular,
recently announced its agreement to provide leading multiple cable system
operators with an aggregate of 15 million digital cable set-top boxes over the
next three to five years. The Company believes a new generation of digital cable
set-top boxes will be introduced in the near future to facilitate television
Internet access and to support HDTV.
Cable Modems
Cable television operators are upgrading their coaxial cable trunk systems
(backbones) to fiber to create HFC networks. These upgraded networks are able to
support two-way communications, high-speed Internet access and telecommuting
through the use of a cable modem. High-speed Internet access services, including
@Home, RoadRunner and HighwayOne (the predecessor to MediaOne), were introduced
in 1996 in conjunction with several cable system operators. Kagan estimates that
high-speed Internet service was available to 9.5 million homes in 1997 and
predicts that this service will be extended to 51.8 million homes in the United
States by 2002. Forrester Research, Inc. estimates that the number of cable
modems subscribers in the United States will increase from 100,000 in 1997 to
13.6 million by 2001. The cable industry's adoption of the MCNS/DOCSIS
specifications in 1997 for the end-to-end delivery of high-speed data services
is anticipated to enable interoperability between different manufacturers' cable
modems and headend equipment across different cable networks. This
interoperability should facilitate the creation of a retail market for cable
modems.
High-Speed Networking
The high-speed networking equipment market is undergoing a rapid transition
from 10Base-T Ethernet to Fast Ethernet (100Base-T) transceivers, with Gigabit
Ethernet (1000Base-T) anticipated to be introduced in 1998. Dell'Oro Group
estimates that the number of 100Base-T repeater/hub ports sold worldwide is
expected to grow from 5.0 million in 1997 to 49.5 million by 2001, and the
number of switch ports is expected to grow from 5.3 million to 133.7 million
during the same period. Dataquest predicts the number of 100Base-T network
interface cards ("NIC") sold worldwide will grow from 20.0 million units in 1997
to 48.4 million units by 2001. As the networking market transitions to Fast
Ethernet and Gigabit Ethernet, it is anticipated
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<PAGE> 34
that a significant portion of the installed base of 10Base-T repeater/hub ports,
switches and NICs will be upgraded to the faster technologies.
Direct Broadcast Satellite and Terrestrial Digital Broadcast
Due to the ability of DBS to provide television programming where no cable
infrastructure is in place, it is expected that the U.S. market for DBS may
eventually be surpassed by the international market where the cable
infrastructure is generally less extensive. Dataquest estimates that
approximately 6.3 million digital satellite set-top boxes were shipped worldwide
in 1997 and that approximately 22.3 million will be shipped in 2002. Other
wireless offerings such as MMDS and LMDS are currently being tested in limited
deployments. These new networks, which are able to provide programming in areas
that do not have cable, will also require a digital set-top box. Beginning in
1999, the FCC has mandated that the top four affiliated television stations
begin digital broadcasting and has required that all current television
broadcasters and their affiliates return the old analog spectrum by the year
2006 for FCC auction. ABC, CBS and NBC have announced that they will begin
transmitting HDTV before the end of 1998. This conversion to digital
broadcasting will also require new set-top boxes and television receivers.
Digital Subscriber Lines (xDSL)
xDSL is a family of technologies for high-speed data transmission over
existing copper twisted pair wiring in the telephone local loops. Several
Regional Bell Operating Companies ("RBOCs"), including Southwestern Bell, Bell
Atlantic, Bell South and U S West, and several international telephone
companies, including Bell Canada, British Telecom and Deutsche Telekom, have
conducted field trials, deployed or announced plans to conduct trials or deploy
xDSL services in select markets for high-speed Internet access and
telecommuting. Certain Internet service providers are also embracing xDSL
technologies. In January 1998, Compaq, Intel, Microsoft and several RBOCs
announced they would coordinate their efforts to create an interoperable xDSL
standard for 1.5 Mbps transmission. Dataquest estimates that the number of xDSL
lines in North America will increase from 47,800 in 1998 to 3.1 million in 2002.
Asymmetric DSL ("ADSL"), which can provide transmission at speeds of up to 8
Mbps, and Very-high-bit-rate DSL ("VDSL"), which can provide transmission at
speeds of up to 52 Mbps, represent the xDSL technologies that have recently
attracted the most interest from the service providers.
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<PAGE> 35
CUSTOMERS AND STRATEGIC RELATIONSHIPS
The Company sells its products to leading manufacturers of data
communications equipment in each of the Company's target markets. Because the
Company leverages its technology across different markets, certain of the
Company's ICs may be incorporated into equipment used in several different
markets. Equipment manufacturers from which the Company recognized aggregate
revenue of at least $100,000 in 1998 included, among others:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
MARKETS CUSTOMERS
<S> <C>
- ----------------------------------------------------------------------------------------------
Cable Set-Top Boxes General Instrument
Italtel
Scientific-Atlanta
- ----------------------------------------------------------------------------------------------
Cable Modems 3Com
Bay Networks
Cisco Systems
Com21
General Instrument
Hybrid Networks
Intel
Motorola
Samsung
- ----------------------------------------------------------------------------------------------
High-Speed Networking 3Com
Accton Technology
Adaptec
Bay Networks
Cabletron
Cisco Systems
Digital Equipment Corporation
D-Link
Hewlett-Packard
Run Top
Samsung
- ----------------------------------------------------------------------------------------------
DBS and Terrestrial Digital Broadcast Access Media
DIRECTV
Italtel
Samsung
- ----------------------------------------------------------------------------------------------
xDSL Next Level Communications
Nortel
- ----------------------------------------------------------------------------------------------
</TABLE>
As part of its business strategy, the Company periodically establishes
strategic relationships with certain key customers. In September 1997, the
Company entered into a Development, Supply and License Agreement with General
Instrument, pursuant to which the Company agreed to develop ICs for General
Instrument's digital cable set-top boxes and supply such ICs to General
Instrument for four years. Pursuant to this agreement, General Instrument agreed
to purchase from the Company 100% of its requirements for components containing
transmission, communications or video decompression (MPEG) functions for its
digital cable set-top box subscriber products in the first year of this
agreement, subject to the Company's good faith efforts to maintain its
competitive position with respect to such components. The percentage of its
product requirements that General Instrument must purchase from the Company
declines each year over the term of the agreement to 45% of General Instrument's
requirements in 2001. General Instrument also granted the Company a
royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG and
related technology.
34
<PAGE> 36
From time to time, the Company has also entered into development agreements
with 3Com, Cisco Systems, Nortel, Sony, Bay Networks and DirecTV, pursuant to
which the Company has worked closely with these customers to co-develop products
for these customers.
A small number of customers have historically accounted for a substantial
portion of the Company's total revenue. Sales to General Instrument and 3Com
(including sales to their respective manufacturing subcontractors) accounted for
approximately 31.9% and 14.6%, respectively, of the Company's total revenue in
1997. Sales to General Instrument and 3Com (including sales to their respective
manufacturing subcontractors) represented approximately 31.8% and 35.9%,
respectively, of the Company's total revenue in the six months ended June 30,
1998. Sales to the Company's five largest customers represented approximately
61.7% and 71.5% of the Company's total revenue in 1997 and the fourth quarter of
1997, respectively. The loss of any key customer could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Customer Concentration."
PRODUCTS
The Company's five primary product lines encompass: (i) high-speed
communications and MPEG video/audio/graphics devices for the cable television
set-top box market, (ii) high-speed data transmission and media access control
devices for the cable modem market, (iii) 10/100/1000Base-T Ethernet
transceivers and repeater controllers for the high-speed networking market, (iv)
receivers and MPEG video/audio/graphics devices for the DBS and terrestrial
digital broadcast markets, and (v) broadband twisted pair transceivers for the
xDSL market. The Company also develops and sells reference platforms designed
around its IC products that represent application examples for incorporation
into its customers' equipment. By providing these reference platforms, the
Company can assist its customers in achieving easier and faster transitions from
initial prototype designs through final production releases. These reference
platforms significantly enhance the customer's confidence that the Company's
products will meet their market requirements and product introduction schedules.
Cable Set-Top Boxes
The Company offers a suite of silicon solutions for digital cable set-top
boxes and cable headends which encompass the high-speed transmission, reception
and decompression of digital audio and video multimedia signals. These products
are also applicable to the terrestrial digital broadcast markets. The Company's
QAMLink transmission products integrate the core functionality required of
advanced communications transceiver devices including modulators and
demodulators for quadrature amplitude modulation ("QAM") and quadrature phase
shift keying ("QPSK"), adaptive equalization, forward error correction and
high-speed analog-to-digital and digital-to-analog conversion. These products
have been designed to meet both international and North American communications
standards for cable networks. Several of these products also incorporate
additional set-top box functionality such as cable network protocol processing
for entitlement and tiered programming access and input/output device control.
The Company introduced its first single-chip MPEG multimedia device in the
second quarter of 1998 that incorporates all of the processing capabilities
necessary to decode and decompress an MPEG-2 digital television data stream and
subsequently reconstruct an analog studio quality television signal that can be
displayed on a standard television receiver. This IC integrates MPEG-2 video
decompression, Dolby AC3 audio decompression, MPEG-2 transport processing,
on-screen display, analog video reconstruction and other necessary MPEG related
functions required to deliver video and audio to a television. The Company
believes this combination of the Company's transmission and MPEG silicon
solutions and licensed MIPS microprocessor cores will provide all of the
significant silicon functionality of most existing digital cable set-top boxes
with the exception of the security functions and memory.
Cable Modems
The Company has leveraged its core transmission technologies that were
developed for the cable set-top box market and adapted them to the development
of a family of products that enable digital data to be
35
<PAGE> 37
delivered over an HFC cable network at downstream speeds of up to 56 Mbps and
upstream speeds of up to 10 Mbps. These products incorporate similar modulation,
adaptive equalization and error correction technologies as the set-top box
products and thereby achieve robust and reliable transmission, especially in the
noisy and interference prone upstream direction. The cable modem product family
also includes both a headend and a subscriber media access controller ("MAC")
device that controls the upstream and downstream data flow over the HFC network.
In September 1998, the Company introduced the BCM3300, which integrates the
upstream and downstream physical layers with the MCNS/DOCSIS MAC functions. This
device allows cable modems to provide telephony over the cable network using the
Internet Protocol ("IP"). The Company's cable modem products have been designed
to conform to the MCNS/DOCSIS specifications. The combination of the
transmission and MAC ICs provides a complete end-to-end silicon platform for the
Company's customers to build headend systems and subscriber modems. With the
integration of the MIPS microprocessor cores, the Company believes it has all of
the silicon functionality necessary to eventually reduce the cable data modem
into a single chip with the exception of the memory.
The Company's principal products for cable set-top boxes and cable modems
include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM3033 Universal headend QAM modulator First Quarter 1997
- -------------------------------------------------------------------------------------------
BCM3036 Universal QPSK/QAM burst modulator. Fourth Quarter 1996
- -------------------------------------------------------------------------------------------
BCM3037 Universal QPSK/QAM burst modulator for MCNS/DOCSIS Fourth Quarter 1997
applications
- -------------------------------------------------------------------------------------------
BCM3115 Downstream QAM receiver for North American set-top box Fourth Quarter 1995
applications. Includes QPSK control channel receiver.
- -------------------------------------------------------------------------------------------
BCM3116 Downstream QAM receiver for North American set-top box Fourth Quarter 1997
and MCNS/DOCSIS applications.
- -------------------------------------------------------------------------------------------
BCM3118 Downstream QAM receiver for international applications. Fourth Quarter 1996
- -------------------------------------------------------------------------------------------
BCM3120 Universal set-top box transceiver for both North Second Quarter 1998
American and international applications. Includes QAM
receiver, QPSK control channel receiver, peripheral
device interfaces and QPSK/QAM transmitter.
- -------------------------------------------------------------------------------------------
BCM3137 Headend QPSK/QAM burst receiver for MCNS/DOCSIS Second Quarter 1998
applications.
- -------------------------------------------------------------------------------------------
BCM3210 Headend MCNS/DOCSIS MAC for downstream and upstream Second Quarter 1998
traffic flow. Includes data encryption and decryption.
- -------------------------------------------------------------------------------------------
BCM3220 Subscriber MCNS/DOCSIS cable modem MAC for downstream Fourth Quarter 1997
and upstream traffic flow. Includes data encryption and
decryption.
- -------------------------------------------------------------------------------------------
BCM3300 Single chip MCNS/DOCSIS cable modem. Includes receiver, Third Quarter 1998
transmitter and MAC.
- -------------------------------------------------------------------------------------------
BCM3900 Downstream QAM receiver for North American set-top box First Quarter 1997
applications. Includes QPSK control channel receiver and
peripheral device interfaces.
- -------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video Second Quarter 1998
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video
reconstruction and other MPEG related functions for
delivering video and audio to a television.
- -------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 38
High-Speed Networking
The Company's networking products provide the core functionality required
for building Fast Ethernet adapter cards, repeater/hubs and switches which
support both the Ethernet (10Base-T) and Fast Ethernet (100Base-T) standards.
The Company's transceivers, which are the basic elements required for
implementing a high-speed Ethernet port, incorporate the Company's embedded DSP
algorithms combined with high-speed analog-to-digital and digital-to-analog
converters to create highly-integrated mixed-signal solutions. In addition to
the DSP-based architecture, features of the 10/100Base-T transceiver products
include low power and low voltage operation (3.3 Volts) making them suitable for
high port density switches and hubs, as well as PCI2.2 compliant adapter cards
and computer motherboards. The Company also offers a variety of repeater and
switch controller devices, thereby providing a broad suite of Fast Ethernet
products to meet the demands of the adapter card, repeater/hub, switch, network
peripheral and router markets.
The Company's principal networking products include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM5012 100Base-T managed repeater controller. Incorporates Fourth Quarter 1995
13 repeater ports, MAC port, microprocessor port,
and a port for stacking hubs. Interfaces to
external transceivers.
- -------------------------------------------------------------------------------------------
BCM5020 100Base-T network management processor. Second Quarter 1997
Incorporates statistical analysis of network
traffic to enable control of repeating hubs by
network management software.
- -------------------------------------------------------------------------------------------
BCM5100 Single-channel 10/100Base-T4 transceiver. Fourth Quarter 1996
Incorporates a 10Base-T and 100Base-T4 transceiver
for Category 3, 4 and 5 twisted pair cabling.
- -------------------------------------------------------------------------------------------
BCM5201/5202 Single-channel 3.3/5 Volt 10/100Base-TX First Quarter 1998
transceiver. Incorporates a 10Base-T and 100Base-TX
transceiver for Category 5 twisted pair cabling.
- -------------------------------------------------------------------------------------------
BCM5203 Quad 100Base-TX transceiver. Contains four Second Quarter 1997
100Base-TX Fast Ethernet transceivers.
- -------------------------------------------------------------------------------------------
BCM5205 Quad 100Base-TX integrated repeater. Incorporates Second Quarter 1997
four 100Base-TX transceivers, MII port, repeater
controller and repeater management functions.
- -------------------------------------------------------------------------------------------
BCM5208 Quad 10/100Base-T transceiver. Integrates four Third Quarter 1997
10Base-T/ 100Base-TX transceivers. 100Base-FX is
also supported at each port through an external
fiber optic transceiver.
- -------------------------------------------------------------------------------------------
BCM5216 Hex 10/100Base-T transceiver. Integrates six 10 Third Quarter 1998
Base-T/ 100Base-TX transceivers.
- -------------------------------------------------------------------------------------------
BCM5308 Nine port 10/100Base-T switch. Integrates eight Fourth Quarter 1998*
10/100 Base-TX transceivers, nine MACs and
switching fabric.
- -------------------------------------------------------------------------------------------
BCM5903 Single chip 10/100Base-T transceiver with Second Quarter 1998
integrated MAC
- -------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
Direct Broadcast Satellite and Terrestrial Digital Broadcast
The Company's products for the DBS market are designed to meet the needs of
satellite set-top box providers and incorporate the functionality necessary to
receive, demodulate and decode a broadband QPSK signal, including advanced
forward error correction. These products can be programmed to accommodate
satellite standards such as DSS (DIRECTV), DVB (international) and Primestar,
and can operate at any
37
<PAGE> 39
data rate from 2 to 90 Mbps. The Company's MPEG system on a chip (BCM7010) will
employ the MPEG-2 standard, which enables it to be used in either cable set-top
boxes or DBS set-top boxes.
The Company's principal DBS and terrestrial digital broadcast products
include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM4200 QPSK receiver for DSS (DIRECTV) and DVB (international) First Quarter 1997
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -------------------------------------------------------------------------------------------
BCM4201 Universal QPSK receiver for DSS, DVB and Primestar Third Quarter 1998
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video Second Quarter 1998
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- -------------------------------------------------------------------------------------------
</TABLE>
Digital Subscriber Lines (xDSL)
The Company's product for xDSL transmission incorporates the functionality
to enable data to be transmitted and received at high speed over the existing
copper twisted pair wiring in the telephone local loops. The Company believes it
currently offers the industry's only single-chip silicon solution that can be
configured to operate at data rates spanning ISDN (128 kbps) to VDSL (52 Mbps),
thereby accommodating the needs of a wide variety of xDSL market segments in a
single IC. This solution offers network operators the ability to initially
install high-speed ADSL data services on the existing local loop plant and
subsequently offer higher data rates for video related services on an upgraded
plant. The Company has leveraged its mixed-signal and digital signal processing
design expertise developed for cable television and wireless products to develop
the following QAM transceiver product for the xDSL market.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM6010 Scalable xDSL QAM transceiver for twisted-pair Third Quarter 1997
applications. Incorporates ATM Utopia interface and
programmable rate transmitter and receiver. Can
accommodate data rates from 128 kbps to 52 Mbps in either
a symmetric or asymmetric configuration.
- -------------------------------------------------------------------------------------------
</TABLE>
The Company's future success will depend upon its ability to develop new
silicon solutions for existing and new markets, introduce such products in a
timely and cost-effective manner, and achieve design wins. There can be no
assurance that the Company will be able to develop or introduce new products in
a timely and cost-effective manner or in sufficient quantities to meet customer
demand or that such products will satisfy customer requirements or achieve
market acceptance. See "Risk Factors -- Dependence on Development of New
Products."
CORE TECHNOLOGIES
The Company believes that one of its key competitive advantages is its
broad base of core technologies encompassing the complete design space from
systems to silicon. The Company has developed and continues to build on four
primary technology foundations: (i) proprietary communications systems
algorithms and protocols, (ii) advanced DSP hardware architectures, (iii)
silicon compiler design methodologies and advanced cell library development for
both standard cell and full-custom IC design, and (iv) high performance analog
and mixed-signal circuit design using industry standard CMOS processes.
38
<PAGE> 40
Communications Algorithms and Protocols
The Company was an innovator in integrating a high-speed QAM digital
demodulator with adaptive equalization and forward error correction into a
single IC. In addition, the Company has continued to make system advances in the
areas of FEC, QAM and QPSK modulation and demodulation, variable rate
transmitters and receivers, digital clock and carrier recovery techniques and
adaptive equalization algorithms. The Company has also designed and deployed
fully integrated, DSP-based transceiver chips for Fast Ethernet LAN
applications. The Company has developed a compact core transceiver module that
employs high performance 125 MBaud digital equalizers and high-speed
analog-to-digital converters and clock recovery circuits. This core module has
been used in a number of the Company's single channel and quad transceiver
products for Fast Ethernet (100Base-TX) applications including NICs, switches
and repeaters. This DSP transceiver expertise is now being extended and applied
to the development of a Gigabit copper twisted pair transceiver. In addition to
data transmission algorithms, the Company has developed significant expertise in
networking protocols which it has applied to the development of MAC devices for
cable modems and interactive set-top box applications as well as repeaters/hub,
switch and MAC controllers for Fast Ethernet applications. The Company has
introduced the industry's first MCNS/DOCSIS physical layer and MAC ICs for cable
modems.
Digital Signal Processing Hardware Architectures
The Company has developed cost-effective, single-chip broadband
transceivers by mapping complex communications algorithms into low-complexity
DSP hardware architectures. The Company is a technology leader in the area of
low-complexity, high-performance "silicon embedded algorithms" whereby the
communications algorithms are individually implemented in full-custom logic
rather than the conventional approach of running all of the algorithms in
firmware on a single general purpose programmable DSP architecture. This design
approach is combined with silicon compiler based design methodologies which
generate the custom logic functions. This results in ICs that are less complex
and less expensive to manufacture than conventional implementations. One
particular area where the Company has developed leading DSP technology is in
digital adaptive equalization. Equalizers are key components in all of the
Company's transceiver products. The Company believes that the speed and density
of its equalizers help to distinguish its products in the marketplace. The
Company is currently developing a single-chip, mixed-signal adaptive DSP
transceiver for Gigabit Ethernet, which the Company expects will perform in
excess of 100 billion operations per second.
Silicon Compiler Design Methodologies
The Company has developed proprietary silicon compiler technologies that
enable designers to implement ICs using a high level of abstraction yet produce
area-efficient IC layouts and achieve short design cycles. The cells that are
synthesized from this process can be individually optimized for functionality,
performance, topology, electrical characteristics and manufacturing process
portability. The Company has designed compilers for standard cells, arithmetic
processing, memories and analog building blocks. In addition, the Company has
created compilers to manage the implementation of higher level functions such as
digital filters, adaptive equalizers, modulators, demodulators and numerically
controlled oscillators/direct digital frequency synthesizers. The Company
believes that these silicon compiler capabilities accelerate time-to-market by
improving designer productivity and by providing functional blocks that can be
reused in multiple products. In addition, these compiler techniques
significantly reduce errors, thereby frequently resulting in first pass silicon
success. The Company has also developed, and continues to improve and expand its
own proprietary set of circuit and layout libraries for both standard-cell and
full-custom ICs.
Full-Custom Analog and Mixed-Signal Circuit Design
The Company has developed significant analog and mixed-signal circuit
expertise. The Company has achieved a level of circuit performance in standard
CMOS process technologies that is normally associated with more expensive
special purpose silicon fabrication technologies. All of the Company's
high-performance analog building blocks are implemented in the same low-cost
CMOS technologies as the digital IC circuitry. In addition to achieving very
high performance, the Company's analog-to-digital and digital-to-analog
39
<PAGE> 41
converters are among the lowest die area devices in the industry, which makes
them well suited for integration into high volume mixed-signal products. The
Company's 10-bit, 50 Msample/sec analog-to-digital converter received the Best
Paper Award of the 1997 International Solid State Circuits Conference, a
prestigious semiconductor conference. This converter was integrated onto the
same die as the Company's broadband QAM receiver, which the Company believes was
the first such mixed-signal QAM receiver product ever demonstrated (BCM3118).
The Company has also developed very high-speed 125 MHz analog-to-digital
converters for Fast Ethernet transceivers and 200 MHz digital-to-analog
converters for cable modulator applications. All of these data converters were
designed for integration with high-speed digital circuits in conventional CMOS
technologies. The Company has also evaluated experimental IC designs and is in
the development phase of producing other analog functions such as low noise RF
amplifiers, linear high-gain RF amplifiers, RF mixers, frequency synthesizers,
RF phase-locked loops and other building blocks to enable higher levels of
system integration.
RESEARCH AND DEVELOPMENT
The Company has assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline.
As of June 30, 1998, approximately 73% of the Company's 233 research and
development engineers had advanced degrees, including 43 with Ph.D.s. These
engineers are involved in advancing the Company's core technologies, as well as
applying these core technologies to the Company's product development activities
in the areas of broadband communications and digital video technology for cable
set-top boxes, cable modems, high-speed networking, DBS and terrestrial digital
broadcast, and xDSL. The transmission solutions for each of these markets
benefit from the same underlying core technologies, which enables the Company to
leverage its ability to address various broadband communications markets with a
relatively focused investment in research and development.
The Company believes that the achievement of higher levels of integration
and the introduction of new products in its target markets is essential to its
growth. As a result, the Company plans to increase research and development
staffing levels in 1998 and 1999. Research and development expense for 1997,
1996 and 1995 and for the six months ended June 30, 1998 was approximately $16.2
million, $5.7 million, $2.7 million and $14.6 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING
Wafer Fabrication
The Company's products are manufactured in standard CMOS processes, which
permit the Company to engage independent silicon foundries to fabricate its ICs.
By subcontracting its manufacturing requirements, the Company is able to focus
its resources on design and test applications where the Company believes it has
greater competitive advantages and to eliminate the high cost of owning and
operating a semiconductor wafer fabrication facility.
The Company's Operations and Quality Engineering Group closely manages the
interface between manufacturing and design engineering. While the Company's
design methodology typically creates smaller than average die for a given
function, it also generates full-custom IC designs. As a result, the Company is
responsible for the complete functional and parametric performance testing of
its devices, including quality. The Company employs a fully staffed operations
and quality organization similar to a vertically integrated semiconductor
manufacturer. The Company arranges with its foundries to have online
work-in-progress control, making the manufacturing subcontracting process
transparent to the Company's customers.
The Company's key silicon foundries are TSMC in Taiwan and Chartered in
Singapore. While the Company currently uses two independent foundries, few of
the Company's components are manufactured at both foundries at any given time.
Any inability of one of its foundries to provide the necessary capacity or
output could result in significant production delays and could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company currently believes it has adequate
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capacity to support its current sales levels, the Company continues to work with
its existing foundries to obtain more production capacity and it intends to
qualify new foundries to provide additional production capacity. There can be no
assurance that adequate foundry capacity will be available on acceptable terms,
if at all. In the event either foundry experiences financial difficulties
(whether as a result of the Asian economic crisis or otherwise) or suffers any
damage or destruction to its respective facilities, or in the event of any other
disruption of foundry capacity, the Company may not be able to qualify
alternative manufacturing sources for existing or new products in a timely
manner. See "Risk Factors -- Dependence on Independent Foundries."
The Company's devices are currently fabricated using CMOS process
technology with 0.5 micron, triple layer metal and 0.35 micron, quad layer metal
feature sizes. The Company continuously evaluates the benefits, on a product by
product basis, of migrating to a smaller geometry process technology in order to
reduce costs. The Company's experience to date with the migration of products to
smaller geometry processes has been favorable, but there can be no assurance
that future process migration will be achieved without difficulty. Other
companies in the industry have experienced difficulty in effecting transitions
to new manufacturing processes and, consequently, have suffered reduced yields
or delays in product deliveries. The Company believes that the transition of its
products to smaller geometries will be important for the Company to remain
competitive. The Company's business, financial condition and results of
operations could be materially and adversely affected if any such transition is
substantially delayed or inefficiently implemented. See "Risk
Factors -- Transition to Smaller Geometry Process Technologies."
Assembly and Test
Wafer probe testing is performed by one of the foundries or by the
Company's wafer probe test subcontractors. Following completion of the wafer
probe tests, the die are assembled into packages and the finished products are
tested by one of the Company's two subcontractors: ASAT in Hong Kong and STATS
in Singapore. While the Company has not experienced any material disruption in
supply from assembly subcontractors to date, there can be no assurance that
assembly problems will not occur in the future. The availability of assembly and
testing services from these subcontractors could be adversely affected in the
event either subcontractor experiences financial difficulties (whether as a
result of the Asian economic crisis or otherwise) or suffers any damage or
destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. See "Risk Factors -- Dependence on
Third-Party Subcontractors for Assembly and Test."
Quality Assurance
The data communications industry demands high-quality and reliability of
the semiconductors incorporated into their equipment. The Company focuses on
product reliability from the initial stage of the design cycle through each
specific design process, including layout and production test design. In
addition, the Company's designs are subjected to in-depth circuit simulation at
temperature, voltage and processing extremes before being committed to silicon.
The Company prequalifies each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. The Company also participates in
quality and reliability monitoring through each stage of the production cycle by
reviewing electrical and parametric data from its wafer foundry and assembly
subcontractors. The Company closely monitors wafer foundry production to ensure
consistent overall quality, reliability and yield levels. In cases where the
Company purchases wafers on a fixed cost basis, any improvement in yields can
reduce the Company's cost per IC.
As part of its total quality program, the Company plans to apply for ISO
9001 certification, a comprehensive International Standards Organization
specified quality system. The Company's objective is to exceed ISO 9001
requirements, especially in the areas of continuous improvements and customer
satisfaction. All of the Company's principal independent foundries and package
assembly facilities have achieved ISO 9000 certification.
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SALES AND MARKETING
The Company's sales and marketing strategy is to achieve design wins with
technology leaders in each of the Company's targeted broadband communications
markets by, among other things, providing superior field application and
engineering support. The Company markets and sells its products in the United
States through a direct sales force, which has largely been established within
the last year, based out of four regional sales offices located in Irvine and
San Jose, California, Atlanta, Georgia and Garwood, New Jersey. Sales managers
are dedicated to principal customers to promote close cooperation and
communication. The Company also provides its customers with reference platform
designs, which enable its customers to achieve easier and faster transitions
from the initial prototype designs through final production releases and
significantly enhance the customer's confidence that the Company's products will
meet their market requirements and product introduction schedules.
The Company also markets and sells its products internationally through a
direct sales force based out of regional sales offices located in Singapore,
Taiwan, United Kingdom and the Netherlands, as well as through a network of
independent distributors and representatives in France, Israel, Germany, Japan,
Taiwan and Korea. The Company selects these independent entities based on their
ability to provide effective field sales, marketing communications and technical
support to the Company's customers. All international sales to date have been
denominated in U.S. dollars.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. The Company
believes that the principal factors of competition for silicon providers to
these industries are product capabilities, level of integration, reliability,
price, time-to-market, system cost, intellectual property, customer support and
reputation. The Company believes it competes favorably with respect to each of
these factors.
The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial digital broadcast, and xDSL, which
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
set-top box market with Fujitsu, LSI Logic, Philips Electronics, Rockwell
International and VLSI Technology for communication devices and with ATI
Technologies, C-Cube, LSI Logic, Motorola and STMicroelectronics in the
MPEG/graphics segment. The Company expects other major semiconductor
manufacturers to enter the market as digital broadcast television and other
digital cable television markets become more established. A number of companies,
including Hitachi, Libit Signal Processing, LSI Logic, Rockwell International,
STI and Toshiba have announced that they are developing and will introduce
MCNS/DOCSIS compliant products in the future, which could result in significant
competition in the cable modem market. In the high-speed networking market, the
Company principally competes with established suppliers including Level One
Communications, Lucent Technologies, National Semiconductor and Texas
Instruments. The Company's principal competitors in the DBS/terrestrial
broadcast market include LSI Logic, Lucent Technologies, Philips Electronics,
Rockwell International, Sony, STMicroelectronics and VLSI Technology. The
Company's principal competitors in the xDSL market include Alcatel, Analog
Devices, Globespan, Motorola, Rockwell International and Texas Instruments. The
Company also may face competition from suppliers of products based on new or
emerging technologies.
Many of the Company's competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than the Company. As a result, such competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the promotion and sale of their
products than the Company. Current and potential competitors have established or
may establish financial or strategic relationships among themselves or with
existing or potential customers, resellers or other
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third parties. Accordingly, it is possible that new competitors or alliances
among competitors could emerge and rapidly acquire significant market share. In
addition, the Company's competitors may in the future develop technologies that
more effectively address the transmission of digital information through
existing analog infrastructures at a lower cost. There can be no assurance that
the Company will be able to compete successfully against current or potential
competitors, or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company's success and future revenue growth will depend, in part, on
its ability to protect its intellectual property. The Company relies primarily
on patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's intellectual property. The Company has been issued
three United States patents and has filed 13 United States patent applications.
There can be no assurance that any patent will issue as a result of these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented, or that any right granted thereunder would provide
meaningful protection to the Company. The failure of any patents to provide
protection to the Company's technology would make it easier for the Company's
competitors to offer similar products. In connection with its participation in
the development of various industry standards, the Company may be required to
agree to license certain of its patents to other parties, including its
competitors, that develop products based upon the adopted standards. The Company
also generally enters into confidentiality agreements with its employees and
strategic partners, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products, services or technology without authorization, develop
similar technology independently or design around the Company's patents. In
addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. Certain of the Company's
customers have entered into agreements with the Company pursuant to which such
customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its designs, and the Company has certain obligations
with respect to the non-use and non-disclosure of such intellectual property.
There can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the intellectual property rights of the Company or its
customers, to protect the Company's trade secrets or to determine the validity
and scope of proprietary rights of others, including its customers. Such
litigation could result in substantial costs and diversion of the Company's
resources and could have a material adverse affect on the Company's business,
financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement, misappropriation or misuse of other parties' proprietary rights.
The Company has received a letter from counsel for BroadCom, Inc. asserting
rights in the "Broadcom" trademark and demanding that the Company cease and
desist from any further use of the Broadcom name. The Company and Broadcom, Inc.
have exchanged correspondence outlining their respective positions on the
matter. In addition, the Company is currently involved in litigation with STI
concerning the alleged infringement of one of STI's patents by several of the
Company's modem products and with Sarnoff corporation and Sarnoff Digital
Communications, Inc. concerning the alleged misappropriation and misuse of
certain of their trade secrets by the Company. There can be no assurance that
the Company will prevail in these actions, or that other actions alleging
infringement by the Company of third-party patents, misappropriation or misuse
by the Company of third-party trade secrets or invalidity of the patents held by
the Company will not be asserted or prosecuted against the Company, or that any
assertions of infringement, misappropriation or misuse or prosecutions seeking
to establish the invalidity of Company-held patents will not materially and
adversely
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affect the Company's business, financial condition and results of operations.
For example, in a patent or trade secret action, an injunction could be issued
against the Company requiring that the Company withdraw certain products from
the market or necessitating that certain products offered for sale or under
development be redesigned; the Company has also entered into certain
indemnification obligations in favor of its customers and strategic partners
that could be triggered upon an allegation or finding of the Company's
infringement misappropriation or misuse of other parties' proprietary rights.
Irrespective of the validity or successful assertion of such claims, the Company
would likely incur significant costs and diversion of its management and
personnel resources with respect to the defense of such claims, which could also
have a material adverse effect on the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all. See "-- Legal Proceedings."
EMPLOYEES
As of June 30, 1998, the Company had 353 full-time employees and 23
contract employees, including 241 employees engaged in research and development,
45 engaged in sales and marketing, 38 engaged in manufacturing operations and 52
engaged in general administration activities. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.
PROPERTIES
The Company leases three facilities in Irvine, California, which have
approximately 17,000 square feet, 26,300 square feet and 31,700 square feet
pursuant to three leases which expire in July 2000, December 1998 and February
1999, respectively. The Company also leases an additional 1,700 square feet in
Irvine, California on a month-to-month basis. These four facilities comprise the
Company's corporate headquarters and include the Company's administration, sales
and marketing, and research and development departments. In addition to these
facilities, the Company has leased office space, which consists of 152,350
square feet in two adjacent facilities located in Irvine, California, pursuant
to a lease which expires in November 2005, and an additional 15,000 square feet
in the same office complex through March 1999. The Company intends to relocate
all of its Irvine employees and operations to this complex in two stages
commencing in December 1998 and February 1999.
The Company also leases a 16,100 square foot facility in Atlanta, Georgia,
which houses the Company's Residential Broadband Business Unit. This lease
terminates in May 2002. In addition, the Company leases a 11,400 square foot
facility in San Jose, California, which lease expires in September 2000, for the
Company's Digital Video Technology Group. The Company believes its current
facilities, together with its planned expansion, will be adequate through 1999.
LEGAL PROCEEDINGS
In December 1996, Stanford Telecommunications, Inc. filed an action against
the Company in the United States District Court for the Northern District of
California. STI alleges that the Company's BCM3036, BCM3037, BCM3300, BCM93220
and BCM93220B products infringe one of STI's patents (the " '352 Patent"). STI
is seeking an injunction as well as the recovery of monetary damages, including
treble damages for willful infringement. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction
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requiring that the Company withdraw various products from the market,
substantial product redesign expenses (assuming that a non-infringing design is
feasible and economic) and associated time-to-market delays, and indemnification
claims by the Company's customers or strategic partners, each of which events
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets, and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. Those
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff, and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging that it "illegally pirated" Sarnoff's employees. The complaint
seeks to preliminarily and permanently enjoin the Company and the Former
Employees from utilizing any alleged Sarnoff trade secrets, and to restrain the
Former Employees from violating their alleged statutory and contractual duties
of confidentiality to Sarnoff by, for example, precluding them from working for
six months in any capacity relating to certain of the Company's programs. The
Company has asserted and believes that Sarnoff's claims are without merit. The
Company has filed an answer and is vigorously defending itself in this action.
In May 1997, the New Jersey court denied Sarnoff's request for a temporary
restraining order. In June 1998, the New Jersey court denied the Company's
motion for summary judgment. Sarnoff has clarified its claims to some extent by
specifying in greater detail the trade secrets that it alleges the Company and
the Former Employees misappropriated. The Company intends to file new motions
for summary judgment based on recent admissions and other events. In August
1998, the New Jersey court set a new date, September 30, 1998, for the close of
discovery in this case. Trial is scheduled for November 1998.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in February 1996 (which shares would have converted into
78,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and declaratory relief. If Mr. Davis is successful in his
claim, he may be entitled to receive the shares of Class B Common Stock
described above and may be entitled to certain other rights as a holder of
Series D Preferred Stock, including without limitation the right to acquire
certain shares of the Company's Series E Preferred Stock (or the shares of
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Class B Common Stock into which such shares of Series E Preferred Stock would
have converted upon consummation of the initial public offering). This case is
currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief.
The Company is also involved in other non-material legal proceedings,
claims and litigation arising in the ordinary course of business.
The litigation involving intellectual property rights involve complex
questions of fact and law and could require the expenditure of significant costs
and diversion of resources to defend. Although management believes that the
outcome of the Company's outstanding legal proceedings, claims and litigation
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity, the results of litigation are inherently
uncertain, and an adverse outcome in any of the Company's pending litigation is
at least reasonably possible. The Company is unable to make an estimate of the
range of possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying financial statements. Any suit or
proceeding involving the Company or its intellectual property could be costly,
could result in a diversion of management's efforts and other Company resources,
and could restrict the Company from marketing certain of its products without a
license, which license may not be available on acceptable terms, if at all. Any
of these factors could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Intellectual Property"
and "Risk Factors -- Risks Associated with Intellectual Property Protection."
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their ages as of June 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D..... 38 Co-Chairman, President and Chief Executive Officer
Henry Samueli, Ph.D.............. 43 Co-Chairman, Vice President of Research and
Development and Chief Technical Officer
William J. Ruehle................ 56 Vice President and Chief Financial Officer
Timothy M. Lindenfelser.......... 38 Vice President of Marketing
Martin J. Colombatto............. 39 Vice President and General Manager, Networking
Business Unit
Vahid Manian..................... 37 Vice President of Manufacturing Operations
Aurelio E. Fernandez............. 43 Vice President of Worldwide Sales
David A. Dull.................... 49 Vice President of Business Affairs, General
Counsel and Secretary
Nariman Yousefi.................. 36 Director of Engineering, Networking Business Unit
Steve K. Tsubota................. 39 Director of Cable-TV Business Unit
Charles P. Reames, Ph.D.......... 41 Director of Cable and Satellite Systems
Myron S. Eichen(2)............... 69 Director
Alan E. Ross(1)(2)............... 63 Director
Werner F. Wolfen(1).............. 67 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Henry T. Nicholas, III co-founded the Company and has served as its
President, Chief Executive Officer and Co-Chairman since the Company's
inception. From 1988 through 1991, Dr. Nicholas was first a consultant and then
the Director of Microelectronics for PairGain Technologies, Inc. ("PairGain"), a
telecommunications equipment manufacturer, and was the founder of PairGain's
microelectronics organization. Prior to joining PairGain, Dr. Nicholas held
various senior management positions with the Microelectronics Center of TRW,
Inc. ("TRW") between 1982 and 1989. Dr. Nicholas attended the United States Air
Force Academy, and received a B.S., M.S. and Ph.D. in Electrical Engineering
from the University of California, Los Angeles.
Henry Samueli co-founded the Company and has served as its Co-Chairman,
Vice President of Research and Development and Chief Technical Officer since the
Company's inception. Since 1985, Dr. Samueli has also been a professor in the
Electrical Engineering Department at the University of California, Los Angeles,
where he supervises advanced research programs in broadband communications
circuits and has published more than 100 papers on the subject. Dr. Samueli was
the Chief Scientist and one of the founders of PairGain and he consulted for
PairGain from 1988 to 1994. From 1980 until 1985, Dr. Samueli was employed in
various engineering management positions in the Electronics and Technology
Division of TRW. Dr. Samueli received a B.S., M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
William J. Ruehle has served as the Company's Vice President and Chief
Financial Officer since joining the Company in June 1997. Mr. Ruehle was
employed by SynOptics Communications, Inc. as Vice President and Chief Financial
Officer from 1987 until the merger with Wellfleet Communications Incorporated in
1994 that created Bay Networks, Inc. ("Bay Networks"), a networking
communications company. Following the merger, Mr. Ruehle was promoted to
Executive Vice President and served as Chief Financial Officer of Bay Networks
until January 1997. Mr. Ruehle received a B.A. in Economics from Allegheny
College and an M.B.A. from Harvard Business School.
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Timothy M. Lindenfelser has served as the Company's Vice President of
Marketing since joining the Company in February 1994. During the past four years
until December 1997, Mr. Lindenfelser also served as Vice President of Worldwide
Sales. Prior to joining the Company, Mr. Lindenfelser was employed by Brooktree
Corporation, a semiconductor manufacturer, from November 1988 until February
1994, where he was responsible for all marketing and new business development
for the Communications Strategic Business Unit. Mr. Lindenfelser received a
B.S.E.E. from the University of Minnesota and an M.B.A. from the University of
San Diego.
Martin J. Colombatto joined the Company in July 1996 as its Director of
Marketing for Broadband Access, and became the Vice President and General
Manager of the Networking Business Unit in December 1997. Prior to joining the
Company, Mr. Colombatto held various sales positions with LSI Logic Corp., a
semiconductor manufacturer, including Director, North American Sales
Communication Segment, from August 1995 to July 1996; Director, European Sales
Communication and Consumer Segment, from April 1992 to July 1995; and Regional
Sales Manager from August 1987 to June 1992. Mr. Colombatto received a B.S. from
the California Polytechnic University, Pomona.
Vahid Manian joined the Company in January 1996 as its Director of
Operations and became the Vice President of Manufacturing Operations in December
1997. Prior to joining the Company, Mr. Manian served as the Director of
Operations at Silicon Systems, Inc. from November 1983 to January 1996, where he
led the implementation, production ramp and qualification of advanced PRML-read
channel ICs. Mr. Manian received a B.S.E.E. and an M.B.A. from the University of
California, Irvine.
Aurelio E. Fernandez has served as the Vice President of Worldwide Sales
since joining the Company in December 1997. From November 1996 to December 1997,
Mr. Fernandez served as the Senior Vice President of Sales at Exar Corporation,
a semiconductor manufacturer. From November 1994 to November 1996, Mr. Fernandez
served as the Senior Vice President of Sales at ICWorks, Inc., a semiconductor
manufacturer. Prior to that, Mr. Fernandez served in a number of positions, most
recently as Vice President of Telecom Sales, at VLSI Technology, Inc., a
semiconductor manufacturer. Mr. Fernandez received a B.S.E.E. from the
University of Florida and an M.B.A. from Florida Atlantic University.
David A. Dull has served as the Company's Vice President of Business
Affairs and General Counsel since March 1998 and was appointed Secretary in
April 1998. From 1985 until 1998, Mr. Dull was a Partner in the law firm of
Irell & Manella LLP ("Irell & Manella"), where as a business lawyer he
represented a number of public and private companies and individuals in the
entertainment and high technology industries, including the Company. Irell &
Manella has represented and continues to represent the Company in various
transactional and litigation matters. Mr. Dull received a B.A. and a J.D. from
Yale University.
Nariman Yousefi joined the Company in March 1994 as the Director of the
Networking Business Unit. Prior to joining the Company, he served as an
Engineering Manager at Standard Microsystems Corporation, a networking equipment
manufacturer, from 1991 to 1994. From 1988 to 1991, he held various engineering
positions at Western Digital Corporation, a disk drive manufacturer, and from
1984 to 1988 he led mixed-signal chip development at Silicon Systems, a
semiconductor company. Mr. Yousefi received his B.S.E.E. from the University of
California, Davis and an M.S.E.E. from the University of Southern California.
Steve K. Tsubota joined the Company in March 1995 as its Director of the
Cable-TV Business Unit. Prior to joining the Company, Mr. Tsubota served as
Director of Product Marketing of Summit Design, Inc., an Electronic Design
Automation ("EDA") company, from February 1994 to February 1995. From February
1991 to January 1994, he served as the Marketing Manager for the IC Group of
Mentor Graphics Corporation, an EDA company, and from June 1985 to March 1990,
Mr. Tsubota held various marketing, sales and engineering positions at Silicon
Compiler Systems Corporation, an EDA company. Mr. Tsubota received a B.S.E.E.
and M.S.E.E. from the University of California, Los Angeles.
Charles P. Reames joined the Company in June 1993 as its Director of Modem
Technology and most recently as the Director of Cable and Satellite Systems
since October 1995. Prior to joining the Company, Dr. Reames served in various
engineering positions in the Electronics and Technology Division of TRW from
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June 1985 through June 1993. Dr. Reames received a B.S. in Engineering from the
California Institute of Technology and an M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
Myron S. Eichen has served as an advisor to the Board of Directors since
1994. Mr. Eichen has served as a director of the Company since February 1998.
Mr. Eichen is presently a director of Rokenbok Toy Company and has founded and
served as a director for a number of companies including Brooktree Corporation
(now a division of Rockwell International), a semiconductor manufacturer, and
Proxima Corporation, an equipment manufacturer.
Alan E. Ross has been a director of the Company since November 1995. Mr.
Ross is a Board member of several companies in the semiconductor industry,
including World Wide Semiconductor Manufacturing Corporation, Gambit Automated
Design, Inc. (of which he is also the Chief Executive Officer), Artest
Corporation, and ADC Telecommunications, Inc. In addition, Mr. Ross served as
President of Rockwell Semiconductor Systems, Inc. from 1988 to 1996.
Werner F. Wolfen has been a director of the Company since July 1994, when
he joined the Board of Directors as the nominee of a group of investors. Mr.
Wolfen is a Senior Partner of the law firm of Irell & Manella and was
Co-Chairman of the firm's Executive Committee from 1982 to 1992. Irell & Manella
has represented and continues to represent the Company in various transactional
and litigation matters. Mr. Wolfen received a J.D. from the University of
California Boalt Hall School of Law in 1953.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding the Company's
compensation policies and all forms of compensation to be provided to executive
officers and directors of the Company, including, among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1998 Stock
Incentive Plan. The current members of the Compensation Committee are Messrs.
Ross and Eichen.
Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company, including, among other things, the Company's internal audit and
control functions, the results and scope of the annual audit and other services
provided by the Company's independent auditors and the Company's compliance with
legal matters that have a significant impact on the Company's financial reports.
The Audit Committee also consults with the Company's management and the
Company's independent auditors prior to the presentation of financial statements
to shareholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent auditors. The current members of
the Audit Committee are Messrs. Ross and Wolfen.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive cash compensation for their service
as directors. Each new nonemployee Director typically will receive an option to
purchase 40,000 shares of Class A Common Stock upon joining the Board of
Directors. Each incumbent director will be granted an option to purchase an
additional 3,000 shares of Class A Common Stock annually. See
"Management -- Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Ross and Eichen. No interlocking relationship exists between any member
of the Company's Board of Directors or the Compensation Committee and any member
of the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
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EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
None of the Company's executive officers have employment agreements with
the Company. Accordingly, the employment of any such executive officer may be
terminated at any time at the discretion of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1997 all
compensation received for services rendered to the Company in all capacities by
the Company's Chief Executive Officer and the only other executive officer of
the Company whose salary plus bonus exceeded $100,000 in 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY OPTIONS
---------------------------- ------------ ------------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D................................ $165,000(1) 375,000
Co-Chairman, President and Chief Executive Officer
Henry Samueli, Ph.D......................................... 165,000(1) 375,000
Co-Chairman, Vice President of Research and Development
and Chief Technical Officer
</TABLE>
- ---------------
(1) Effective January 1, 1998, the annual salary of each of Dr. Nicholas and Dr.
Samueli was reduced to $110,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZATION
------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN 1997 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D........................ 375,000(2) 7.0% $1.25(3) 06/22/07 $221,494 $630,348
Henry Samueli, Ph.D........... 375,000(2) 7.0 1.25(3) 06/22/07 221,494 630,348
</TABLE>
- ---------------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission (the "Commission") and
do not represent the Company's estimate or projection of the future trading
prices of its Common Stock. There can be no assurance that any of the values
reflected in this table will be achieved. Actual gains, if any, on stock
option exercises are dependent on numerous factors, including the future
performance of the Company, overall conditions and the option holder's
continued employment with the Company throughout the entire vesting period
and option term, which factors are not reflected in this table.
(2) Options were granted on June 23, 1997 under the Company's Amended and
Restated 1994 Stock Option Plan and are immediately exercisable. All of the
shares of Common Stock that are issuable upon exercise of unvested options
are subject to repurchase by the Company. The shares underlying the options
vest and the Company's repurchase right lapses in 48 equal monthly
installments commencing January 1, 1998.
(3) The exercise price was equal to 110% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
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<PAGE> 52
AGGREGATED OPTIONS EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Executive Officers concerning the unexercised options held as of December 31,
1997. No options were exercised during the last fiscal year by any of the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D.......... 375,000 -- $2,531,250 --
Henry Samueli, Ph.D................... 375,000 -- 2,531,250 --
</TABLE>
- ---------------
(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($8.00 per share,
as determined by the Board of Directors) and the exercise price of such
options ($1.25 per share)
EMPLOYEE BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan"), which became
effective on April 8, 1998 (the "Plan Effective Date"), is intended to serve as
the successor equity incentive program to the Company's 1994 Amended and
Restated Stock Option Plan (the "1994 Plan") and the Company's 1998 Special
Stock Option Plan (the "Special Plan"). A total of 15,948,439 shares of Common
Stock have been authorized for issuance under the 1998 Plan. Such share reserve
consists of (i) the number of shares which remain available for issuance under
the 1994 Plan and the Special Plan on the Plan Effective Date, including the
shares subject to outstanding options, and (ii) an additional increase of
3,000,000 shares of Class A Common Stock. To the extent any unvested shares of
Class B Common Stock issued under the 1994 Plan or the Special Plan are
repurchased by the Company after the Plan Effective Date, at the exercise price
paid per share, in connection with a shareholder's termination of service, those
repurchased shares will be added to the reserve of Class A Common Stock
available for issuance under the 1998 Plan. In addition, the number of shares of
Class A Common Stock reserved for issuance under the 1998 Plan will
automatically increase on the first trading day of each calendar year, beginning
in calendar year 1999, by an amount equal to 3% percent of the total number of
shares of Common Stock outstanding on the last trading day of the immediately
preceding calendar year. In no event, however, may any one participant in the
1998 Plan receive option grants, separately exercisable stock appreciation
rights or direct stock issuances for more than 1,500,000 shares of Class A
Common Stock in the aggregate per calendar year.
In April 1998, outstanding options under the 1994 Plan and the Special Plan
were incorporated into the 1998 Plan, and no further option grants may be made
under the 1994 Plan or the Special Plan. The incorporated options will continue
to be governed by their existing terms, unless the Plan Administrator elects to
extend one or more features of the 1998 Plan to those options. Except as
otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option Grant
Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class A Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iii) the Stock Issuance Program under
which such individuals may, at the Plan Administrator's discretion, be issued
shares of Class A Common Stock directly, through the
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<PAGE> 53
purchase of such shares at a price not less than 100% of their fair market value
at the time of issuance or as a bonus tied to the performance of services, (iv)
the Automatic Option Grant Program under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Class A Common Stock at an exercise price equal to 100% of their fair
market value on the grant date and (v) the Director Fee Option Grant Program
which may, in the Plan Administrator's sole discretion, be activated for one or
more calendar years and, if so activated, will allow non-employee Board members
the opportunity to apply a portion of the retainer fee otherwise payable to them
in cash each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Option Committee except with respect to officers and
directors subject to Section 16 of the Securities and Exchange Act of 1934
("Section 16 executives"). The Option Committee as Plan Administrator has
complete discretion to determine which eligible individuals are to receive
option grants or stock issuances under those programs, the time or times when
such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The Compensation Committee administers the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 executives and will
also have the exclusive authority to select the executive officers and other
highly compensated employees who may participate in the Salary Investment Option
Grant Program in the event that program is activated for one or more calendar
years, but neither the Compensation Committee nor the Option Committee nor the
Board will exercise any administrative discretion with respect to the option
grants made under the Salary Investment Option Grant Program or under the
Automatic Option Grant and Director Fee Option Grant Programs for the
non-employee Board members. All grants under those three latter programs will be
made in strict compliance with the express provisions of each such program.
The exercise price for the shares of Class A Common Stock subject to option
grants made under the 1998 Plan may be paid in cash or in shares of Class A
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1994 Plan and the Special Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based on the fair market value per share of Class A
Common Stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Class A Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such shares. Such appreciation distribution may be
made in cash or in shares of Class A Common Stock. None of the incorporated
options from the 1994 Plan or the Special Plan contain any stock appreciation
rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated
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<PAGE> 54
upon similar terms and conditions. The Plan Administrator will also have the
authority to grant options which will immediately vest upon an acquisition of
the Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by successful tender offer for more than 50% of the outstanding
voting stock or a change in the majority of the Board by reason of one or more
contested elections for Board membership), with such vesting to occur either at
the time of such change in control or upon the subsequent termination of the
individual's service within a designated period following such change in
control. The options incorporated from the 1994 Plan and the Special Plan will
immediately vest in full upon an acquisition of the Company by merger or asset
sale, unless those options are assumed by the successor entity.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each director,
executive officer and other highly compensated employee of the Company selected
for participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Class A Common Stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of Class A Common Stock on the
grant date. The option will be exercisable at a price per share equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the amount of salary invested
in that option. The option will vest in a series of twelve successive equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual on the Board at
the Underwriting Date or who first becomes a non-employee Board member at any
time after April 18, 1998 will automatically receive an option grant for 40,000
shares of Class A Common Stock on the date such individual joins the Board,
provided such individual has not been in the prior employ of the Company. In
addition, on the date of each Annual Shareholders Meeting held after the Plan
Effective Date, each non-employee Board member who is to continue to serve as a
non-employee Board member will automatically be granted an option to purchase
3,000 shares of Class A Common Stock, provided such individual has served on the
Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 40,000 share automatic option grant will vest in
a series of four successive equal annual installments upon the individual's
completion of each year of Board service over the four year period measured from
the option grant date. Each annual 3,000 share automatic option grant will vest
upon the individual's completion of one year of Board service measured from the
grant date. However, the shares subject to each automatic grant will immediately
vest in full upon certain changes in control or ownership of the Company or upon
the optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the
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<PAGE> 55
retainer fee applied to the program by two-thirds of the fair market value per
share of Class A Common Stock on the grant date. As a result, the total spread
on the option (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve successive equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Class A Common Stock paid in connection
with the tender offer over (ii) the exercise price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required shareholder approval. The 1998 Plan will terminate on the earliest of
(i) January 31, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
As of June 30, 1998, options to purchase an aggregate of 714,550 shares of
Class A Common Stock were outstanding at a weighted average exercise price per
share of $32.14, and options to purchase an aggregate of 7,970,103 shares of
Class B Common Stock were outstanding at a weighted average exercise price per
share of $5.20.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders in February 1998 and
became effective in April 1998. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Class A Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and a reserve of 750,000 shares of Class A
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period began in April 1998 and will end on the last business day in
April 2000. The next offering period will commence on the first business day in
May 2000, and subsequent offering periods will commence as designated by the
Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than five calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date. Individuals who become eligible employees
after the start date of the offering period may join the Purchase Plan on any
subsequent semi-annual entry date within that offering period.
Payroll deductions may not exceed 15% of total compensation, and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase
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<PAGE> 56
date (the last business day in April and October each year) at a purchase price
per share equal to 85% of the lower of (i) the fair market value of the Class A
Common Stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date. In no event, however,
may any one participant purchase more than 1,500 shares, nor may all
participants in the aggregate purchase more than 150,000 shares on any one
semi-annual purchase date.
Should the fair market value per share of Class A Common Stock on any
purchase date be less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Class A Common Stock on
the participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Class A Common Stock
immediately prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008, (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.
401(k) Profit Sharing Plan
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to
20% of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limit. At the Company's discretion, the Company may make matching
contributions to the 401(k) Plan. To date, the Company has not made any matching
contributions under the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Law concerning contacts
or transactions between the Company and a director, or (vii) under Section 316
of the California Law concerning directors' liability for improper dividends,
loans and guarantees. The limitation of liability does not affect the
availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation by a director of the director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law) through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company may, at its
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<PAGE> 57
discretion, provide indemnification to persons whom the Company is not obligated
to indemnify. The Bylaws also allow the Company to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and
executive officers and provide the maximum indemnification permitted by law.
These agreements, together with the Company's Bylaws and Articles of
Incorporation, may require the Company, among other things, to indemnify these
directors or executive officers (other than for liability resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms. Section 317 of the California Law and the Company's Bylaws make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities (including reimbursement of expense incurred) arising under the
Securities Act. The Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. Moreover, the Company is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification. The Company believes that the foregoing
indemnification provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
The Company currently maintains directors' and officers' liability
insurance.
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CERTAIN TRANSACTIONS
Since January 1, 1995, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the amount
involved exceeded or exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of any class of the Company's voting securities,
or any member of the immediate family of any of the foregoing persons had or
will have a direct or indirect material interest, other than the transactions
described below.
Series D Preferred Stock Financing. In February 1996, the Company issued
and sold an aggregate of 493,839 shares of convertible Series D Preferred Stock
for an aggregate purchase price of $2,963,034 or $6.00 per share. The investors
in such shares included, among others, (1) Werner F. Wolfen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock,
(2) Alan E. Ross, a director of the Company, who purchased 5,000 shares of
convertible Series D Preferred Stock, (3) Myron S. Eichen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock and
(4) a trust controlled by Leon M. Samueli and Barbara Jane Samueli, relatives of
Henry Samueli (the Company's Co-Chairman, Vice President of Research and
Development and Chief Technical Officer), which purchased 30,000 shares of
convertible Series D Preferred Stock. Each share of convertible Series D
Preferred Stock automatically converted into three shares of the Company's Class
B Common Stock upon consummation of the Company's initial public offering.
Series E Preferred Stock Financing. In September 1997, the Company issued
and sold 1,500,000 shares of convertible Series E Preferred Stock to General
Instrument for an aggregate purchase price of $22,725,000 or $15.15 per share
(the "Series E Financing"). Each share of convertible Series E Preferred Stock
automatically converted into 1.5 shares of the Company's Class B Common Stock
upon consummation of the Company's initial public offering. In connection with
the Series E Financing, General Instrument and the Company entered into a
Development, Supply and License Agreement, pursuant to which, among other
things, the Company has agreed to supply to General Instrument, and General
Instrument has agreed to purchase from the Company, a specified percentage of
General Instrument's silicon requirements for its digital cable set-top box
subscriber products. For 1997, the Company's sales to General Instrument (and
its subcontractor) were approximately $11.8 million, or 31.9% of total revenue.
See "Business -- Customers and Strategic Relationships."
Development Agreement with Cisco Systems. Effective September 1996, the
Company entered into a development agreement with Cisco Systems, pursuant to
which the Company granted to Cisco Systems an option to purchase shares of the
Company's Class A Common Stock at the initial public offering price, net of
underwriting discounts and commissions. Cisco Systems exercised this option and
purchased 500,000 shares at a price of $22.32 per share in a non-underwritten
registered offering concurrent with the closing of the Company's initial public
offering. In addition, Cisco Systems has agreed that it will be subject to
certain restrictions following this offering, including (1) a one-year lock-up
period during which the shares purchased by Cisco Systems cannot be transferred,
(2) a restriction on selling more than a certain number of shares per quarter
during the first year following termination of the initial one-year lock-up
period, (3) a notification obligation should Cisco Systems desire to sell more
than a specified number of shares after the one-year lock-up period, (4) a
three-year standstill agreement preventing Cisco Systems from acquiring more
than 10% of the Company's Common Stock, and (5) a seven-year voting agreement
with respect to certain matters, which agreement includes an obligation to vote
its shares in favor of all directors nominated by the Board of Directors of the
Company. Some of these restrictions may terminate early upon certain events,
such as an acquisition of the Company. For 1997, the Company's sales to Cisco
Systems were approximately $2,000,000, or 5.4% of total revenue. See
"Business -- Customers and Strategic Relationships" and "Sale of Shares to Cisco
Systems."
Sale of Common Stock to Irell & Manella. Pursuant to an agreement dated as
of October 31, 1997, the Company issued and sold 225,000 shares of Class B
Common Stock to Irell & Manella for an aggregate purchase price of $1,050,000 or
$4.67 per share. Werner F. Wolfen, a director of the Company, is a Senior
Partner of Irell & Manella.
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<PAGE> 59
Engagement Agreement with Irell & Manella. Irell & Manella has represented
and continues to represent the Company in various legal matters pursuant to an
engagement agreement dated as of January 1, 1997, and amended as of January 1,
1998. Under the engagement agreement, the Company has agreed to pay Irell &
Manella a fixed fee plus costs for the firm's legal services rendered from and
after January 1, 1998 with respect to certain litigation matters. Irell &
Manella has agreed to render legal services to the Company on most other matters
at reduced rates from the firm's standard rates for the two-year period
commencing January 1, 1998. During 1997, the Company paid approximately $1.2
million to Irell & Manella for legal services rendered by that firm.
Officer Promissory Notes. Between March 1995 and December 1997, the Company
entered into full-recourse promissory notes with certain of its officers and
directors to finance the purchase of Class B Common Stock upon exercise of stock
options. See "Management -- Executive Compensation" and "Employee Benefit
Plans -- 1998 Stock Incentive Plan." All of the notes are full-recourse, secured
by the shares purchased and are due and payable upon the earlier of the stated
due date or thirty days (ninety days in the case of Mr. Ruehle) after the
termination of such officer's employment with the Company. In July 1997, in
connection with the exercise of a stock option, William J. Ruehle, the Chief
Financial Officer of the Company, delivered a $467,500 full-recourse promissory
note to the Company. Such note bears interest at 6.5% per annum and is due in
July 2002. The Company has agreed to pay Mr. Ruehle the amount necessary to
compensate him for the interest expense. In December 1997, in connection with
the exercise of a stock option, Aurelio E. Fernandez, Vice President of
Worldwide Sales, delivered a $1,800,000 full-recourse promissory note to the
Company that is due in December 2002. Mr. Fernandez will be deemed to have paid
interest with respect to such note at the applicable federal rate, 6.5% per
annum at December 31, 1997. In addition, in January 1998, Mr. Fernandez
delivered a $130,000 full-recourse promissory note to the Company. Such note
bears interest at 6.5% per annum and is due in January 2002. This loan was made
to Mr. Fernandez to allow him to pay off a similar loan from his prior employer
that became due when he left that company.
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<PAGE> 60
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 30, 1998
regarding beneficial ownership of the Company's Common Stock, as adjusted to
reflect the sale of 3,000,000 shares of Class A Common Stock offered hereby, by
(i) each person (or group of affiliated persons) known by the Company to own
beneficially more than 5% of the Class A Common Stock or the Class B Common
Stock, (ii) each of the Company's directors and Named Executive Officers, (iii)
the Company's directors and executive officers as a group and (iv) all other
Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING
-------------------------------------- OF CLASS A -------------------------------------
NUMBER OF NUMBER OF PERCENT OF COMMON NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL VOTING STOCK CLASS A CLASS B TOTAL VOTING
NAME OF BENEFICIAL OWNERS SHARES SHARES POWER(1) OFFERED(2) SHARES SHARES POWER(1)
------------------------- --------- ---------- ------------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D.(3).... -- 11,000,000(4)(5) 27.7% 450,000 -- 10,550,000 28.2%
Henry Samueli, Ph.D.(3)............. -- 11,000,000(4)(6) 27.7 450,000 -- 10,550,000 28.2
General Instrument Corporation(7)... -- 2,250,000 5.7 -- -- 2,250,000 6.1
Intel Corporation................... -- 1,576,800 3.8 637,500 -- 939,300 2.5
Scientific-Atlanta, Inc............. -- 1,500,000 3.8 340,000 -- 1,160,000 3.1
Werner F. Wolfen.................... -- 590,632(8) 1.4 50,000 -- 540,632 1.5
Cisco Systems(9).................... 500,000 -- * -- 500,000 -- *
Myron S. Eichen..................... -- 385,351(10) * 50,000 -- 335,351 *
Zweig-DiMenna Entities(11).......... 251,200 -- * -- 251,200 -- *
Alan E. Ross........................ -- 145,000(12) * 22,000 -- 123,000 *
Dawson Samberg Capital Management
Inc.(13) ......................... 586,000 -- * -- 586,000 -- *
All executive officers and directors
as a group (10 persons)(14)....... -- 24,453,373 60.5 1,230,000 -- 23,233,373 60.9
All other Selling Shareholders (
persons).......................... -- 400,000 * 400,000 -- -- --
</TABLE>
- ---------------
* Less than one percent.
(1) The number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 4,839,750 shares of Class A Common
Stock and 38,878,199 shares of Class B Common Stock outstanding as of June
30, 1998, and (ii) 7,839,750 shares of Class A Common Stock and 36,270,699
shares of Class B Common Stock outstanding upon consummation of this
offering. Beneficial ownership is determined in accordance with the rules
and regulations of the Commission. Shares of Common Stock subject to
options that are currently exercisable or exercisable within 60 days of
October 14, 1998 are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the number of
shares beneficially owned and the percentage ownership of such person, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, and subject to applicable community property laws,
such persons have sole and voting investment power with respect to all
shares of the Company's Common Stock shown as beneficially owned by them.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 77,500 shares of Class A Common Stock from the
Company and up to an aggregate of 372,500 shares from certain of the
Selling Shareholders.
(3) The address for each of Dr. Nicholas and Dr. Samueli is 16251 Laguna Canyon
Road, Irvine, California 92618. Dr. Nicholas and Dr. Samueli will each sell
50,000 additional shares if the Underwriters' over-allotment option is
exercised in full.
(4) Includes 375,000 shares of Class B Common Stock issuable pursuant to
options that are currently exercisable within 60 days of October 14, 1998.
(5) Includes 10,625,000 shares of Class B Common Stock held by Dr. Nicholas and
his spouse, as trustees of the Nicholas Family Trust.
(6) Includes (i) 900,000 shares of Class B Common Stock owned by HS Management,
L.P., of which Dr. Samueli is the General Partner, (ii) 1,200,000 shares of
Class B Common Stock held by Dr. Samueli, as Trustee for the Lifetime
Benefit Trust for Henry Samueli, (iii) 4,025,000 shares of Class B Common
Stock held by Dr. Samueli and his spouse, as Trustees of the Samueli Family
1995 Trust, and (iv) 4,500,000 shares of Class B Common Stock held by HS
Portfolio L.P., of which Dr. Samueli is the General Partner.
(7) The address for General Instrument Corporation is 2200 Byberry Road,
Hatboro, Pennsylvania 19040.
(8) Includes (i) 18,750 shares of Class B Common Stock held by Mr. Werner as
trustee of the Werner F. Wolfen Annuity Trust B, of which Mr. Werner is a
trustee, (ii) 18,750 shares of Class B Common Stock held by Mr. Wolfen's
spouse as trustee of the Mary G. Wolfen Annuity Trust B, and (iii) 40,000
shares of Class A Common Stock issuable pursuant to options that are
exercisable within 60 days of October 14, 1998. Also includes 45,000 shares
of Class B Common Stock owned by the Estate of Lawrence P. Wolfen, of which
Mr. Wolfen serves as executor, and 300,000 shares of Class B Common Stock
held on behalf of certain current and former partners of Irell & Manella
and Mr. Wolfen's two grandchildren. Mr. Wolfen disclaims beneficial
ownership of all of these shares. Excludes 225,000 shares of Class B Common
Stock issued and sold to Irell & Manella pursuant to an agreement dated
October 31, 1997, of which Mr. Wolfen's participation in the beneficial
ownership therein is less than 5% of such shares. See "Certain
Transactions."
(9) The address for Cisco Systems is 170 West Tasman Drive, San Jose,
California.
(10) Includes 345,351 shares of Class B Common Stock owned by the Eichen Family
Trust, of which Mr. Eichen is a trustee. Also includes 40,000 shares of
Class A Common Stock issuable pursuant to options that are exercisable
within 60 days of October 14, 1998.
(11) The address for the Zweig-DiMenna entities is 900 Third Avenue, New York,
New York 10022. Pursuant to a Schedule 13-G filed with the Commission,
includes (i) 132,800 shares of Class A Common Stock held by Zweig-DiMenna
International Limited, (ii) 54,600 shares of Class A Common Stock held by
Zweig-DiMenna Partners, L.P., (iii) Zweig-DiMenna International Managers,
(iv) 32,500 shares of Class A Common
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<PAGE> 61
Stock held by Zweig-DiMenna Special Opportunities, (v) 8,200 shares of Class A
Common Stock held by Gotham Advisors, Inc., on behalf of a discretionary
account, and (vi) Zwieg-DiMenna Investors, L.P.
(12) Includes 40,000 shares of Class B Common Stock issuable pursuant to options
that are currently exercisable.
(13) The address for Dawson Samberg Capital Management, Inc. is 354 Pequot
Avenue, Southport, CT 06490. Ownership interest presented is based upon a
Schedule 13-G filed with the Commission.
(14) Includes an aggregate of 920,000 shares of Class A Common Stock and 966,875
shares of Class B Common Stock issuable pursuant to options that are
exercisable within 60 days of October 14, 1998.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. The following summary of the capital stock
of the Company and certain provisions of the Company's Articles of Incorporation
and Bylaws does not purport to be complete and is qualified in its entirety by
the provisions of the Articles of Incorporation and Bylaws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The Company is authorized to issue 300,000,000 shares of Common Stock,
$.0001 par value, of which 200,000,000 shares have been designated as Class A
Common Stock and 100,000,000 shares have been designated as Class B Common
Stock. At June 30, 1998, 4,904,750 shares and 38,835,074 shares of Class A
Common Stock and Class B Common Stock, respectively, were outstanding. Such
shares were held of record by approximately 43 holders and 328 holders,
respectively.
Voting Rights. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per share.
Holders of Common Stock will vote together as a single class on all matters
submitted to a vote of shareholders, except (i) as otherwise required by law and
(ii) in the case of a proposed issuance of shares of Class B Common Stock, which
issuance shall require the affirmative vote of the holders of the majority of
the outstanding Class B Common Stock shares voting separately as a class. Under
the Company's Articles of Incorporation and Bylaws, holders of Common Stock will
not have cumulative voting rights after the Company is a "listed corporation"
(as defined in California Corporations Code Section 301.5) and, holders of
shares representing a majority of the voting power of Common Stock can elect all
of the directors. In such event, the holders of the remaining shares will not be
able to elect any directors. The Company anticipates it will qualify as a listed
corporation as of its first annual meeting of the shareholders following this
offering, provided that the Company has at least 800 holders of its equity
securities as of the record date of such meeting.
Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of Directors
out of funds legally available for such purposes, subject to the rights of
preferred shareholders and the terms of any existing or future agreements
between the Company and its debtholders. No dividends may be declared or paid on
any share of any class of Common Stock, unless such dividend, at the same rate
per share, is simultaneously declared or paid on each share of the other class
of Common Stock. In the case of a stock dividend or distribution, holders of
Class A Common Stock are entitled to receive the same percentage dividend or
distribution as holders of Class B Common Stock and vice versa, except that
stock dividends and distributions shall be made in shares of Class A Common
Stock to the holders of Class A Common Stock and in shares of Class B Common
Stock to the holders of Class B Common Stock unless the Company's Board of
Directors determines in its discretion that it is more desirable to distribute
shares of Class A Common Stock with respect to Class B Common Stock. The Company
presently intends to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying cash dividends in
the foreseeable future.
Convertibility. Each share of Class B Common Stock is convertible, at the
option of its holder, into one fully paid and nonassessable share of Class A
Common Stock at any time. The Class A Common Stock is not convertible into Class
B Common Stock. Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock in the event such share shall
be transferred (including, without limitation, by way of sale, assignment,
exchange, gift, bequest, appointment or otherwise) to any person or entity other
than a Permitted Transferee as such term is defined in the Articles of
Incorporation. A Permitted Transferee generally includes the following
transferees, among others: the shareholder's spouse, the lineal descendants or
spouse of such descendants, the trustee of a trust for the benefit of the holder
or a charitable organization, a charitable organization, or certain
corporations, partnerships or other entities owned by the holder.
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<PAGE> 63
Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably with
the holders of Class B Common Stock in all assets available for distributions
after payment in full to creditors and holders of Preferred Stock.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
Common Stock is identical to that to be received by holders of Class B Common
Stock. No class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless the other class of Common Stock concurrently is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. All outstanding shares are, and the shares of
Class A Common Stock offered hereby will be upon issuance, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company has authorized 10,000,000 shares of Preferred Stock, $.0001 par
value per share, which may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such qualities are not
fixed in the Company's Articles of Incorporation, as the Board of Directors
determines. No shares of the Company's Preferred Stock are outstanding. The
rights, preferences, limitations and restrictions of different series of
Preferred Stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The Board of Directors may authorize the
issuance of Preferred Stock with rights senior to the Common Stock with respect
to the payment of dividends and the distribution of assets on liquidation. In
addition, the Board of Directors is authorized to fix the limitations and
restrictions, if any, upon the payment of dividends on Common Stock to be
effective while any shares of Preferred Stock are outstanding. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The Company believes that the Preferred Stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. Having such authorized shares available for issuance will allow the
Company to issue shares of Preferred Stock without the expense and delay of a
special shareholders' meeting. Although the Company's Board of Directors has no
intention at the present time of doing so, it could issue a series of Preferred
Stock, the terms of which, subject to certain limitations imposed by the
securities laws, could impede the completion of a merger, tender offer or other
takeover attempt. The Company's Board of Directors will make any determination
to issue such shares based on its judgment as to the best interests of the
Company and its shareholders at the time of issuance. The Company's Board of
Directors, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of the shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then market price
of such stock.
REGISTRATION RIGHTS
Upon consummation of this offering, the holders of approximately
shares of Common Stock (the "Registrable Securities") will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. In the event that the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other securityholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in such registration, subject to certain marketing and other
limitations. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of these registrations. The
Company may in certain circumstances defer such registrations and the
underwriters have the right, subject to certain limitations, to limit the number
of Registrable Securities included in such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation. Its telephone number is (818) 502-1404.
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Class A Common Stock in the
public market following this offering could adversely affect the market price of
the Company's Class A Common Stock. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and by the following lock-up agreements: (i) in connection with
the Company's initial public offering, the Company's officers, directors and
certain shareholders agreed (the "IPO Lock-Up Agreements") not to sell or
otherwise dispose of any of their shares for 180 days following the date of the
Company's initial public offering without the prior consent of Morgan Stanley &
Co. Incorporated; (ii) in connection with a partial release in August 1998 of
the IPO Lock-Up Agreements of up to 850,000 shares held by certain shareholders,
such shareholders agreed (the "Extended Lock-Up Agreements) to extend their
respective IPO Lock-Up Agreements by an additional 30 days; and (iii) in
connection with this offering, the Company's officers, directors, the Selling
Shareholders [and certain other shareholders] have entered into agreements with
Morgan Stanley & Co. Incorporated (the "Follow-On Lock-Up Agreement") pursuant
to which such holders have agreed not to sell or otherwise dispose of any of
their shares for 90 days following the date of this offering without the prior
consent of Morgan Stanley & Co. Incorporated. However, Morgan Stanley & Co.
Incorporated may, in its sole discretion at any time and without notice, release
all or any portion of the securities subject to the lock-up agreements described
above. Upon completion of this offering, the Company will have outstanding an
aggregate of 44,110,449 shares of Common Stock (based upon shares outstanding at
June 30, 1998), assuming no exercise of the Underwriters' over-allotment option.
Of these shares, 8,260,915 shares (including the 3,000,000 shares registered in
this offering, the 4,025,000 shares sold in the Company's initial public
offering and 1,235,915 shares sold in connection with partial releases from the
IPO Lock-Up Agreements) will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"Affiliates." The remaining 35,349,504 shares of Common Stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Of such shares: (i) shares will become
eligible for sale on October 14, 1998 upon expiration of the IPO Lock-Up
Agreements pursuant to Rule 701 or Rule 144; (ii) shares will become
eligible for sale on November 14, 1996, the expiration date of the Extended
Lock-Up Agreements, pursuant to Rule 701 or Rule 144; (iii)
shares will become eligible for sale on the expiration date of the Follow-On
Lock-Up Agreements; and (iv) the remaining shares will become eligible
for sale pursuant to Rule 701 or Rule 144 on various dates after the expiration
of the Follow-On Lock-Up Agreements. In addition, 500,000 shares of Common Stock
sold to Cisco Systems in April 1998 will be eligible for sale upon expiration of
a one-year holding period, subject to certain contractual restrictions on
transfer. Furthermore, in connection with a partial release from the IPO Lock-Up
Agreement by Morgan Stanley & Co. Incorporated of 600,000 shares of the
Company's Class B Common Stock owned by Scientific-Atlanta commencing October 2,
1998, Scientific-Atlanta has agreed to lock-up an additional 500,000 shares
until a date 180 days after the earlier of (i) the date of this offering or (ii)
October 14, 1998.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Class A Common Stock then outstanding (which will equal approximately
78,397 shares immediately after this offering); or (ii) the average weekly
trading volume of the Class A Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an Affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144;
therefore, unless otherwise restricted, "144(k) shares" may therefore be sold
immediately upon the completion of this offering. In general, under Rule 701 of
the Securities Act as currently in effect, any employee, consultant or advisor
of the Company who purchases shares from the Company pursuant to Rule 701 in
connection with a compensatory stock or option plan or other written agreement
is
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<PAGE> 65
eligible to resell, unless contractually restricted, such shares 90 days after
the effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained in
Rule 144.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
Pursuant to a Registration Rights Agreement among the Company and certain
of its shareholders, holders of shares of Common Stock will be
entitled to certain piggy-back registration rights with respect to such shares.
See "Description of Capital Stock -- Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by Affiliates). During the 180-day period after the date of this
Prospectus, the Company has agreed not to file any registration statement with
respect to the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable into Common Stock, other than a
Registration Statement on Form S-8 covering securities issuable under the 1994
Plan, the Special Plan and the 1998 Plan, without the prior written consent of
Morgan Stanley & Co. Incorporated.
In August 1998, the Company filed a registration statement on Form S-8
under the Securities Act covering shares of Common Stock reserved for issuance
under the 1994 Plan, the Special Plan and the 1998 Plan. See
"Management -- Employee Benefit Plans." Accordingly, shares registered under
such registration statement are, subject to Rule 144 volume limitations
applicable to affiliates of the Company, available for sale in the open market,
unless such shares are subject to vesting restrictions with the Company or the
lock-up agreements described above. As of June 30, 1998, options to purchase
7,970,103 shares of Class B Common Stock and 714,550 shares of Class A Common
Stock were issued and outstanding. See "Management -- Executive Compensation"
and "-- Employee Benefit Plans."
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<PAGE> 66
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, BT
Alex. Brown Incorporated, Credit Suisse First Boston Corporation, Hambrecht &
Quist LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
Representatives (the "Representatives"), have severally agreed to purchase, and
the Company and the Selling Shareholders have agreed to sell to them, severally,
the respective number of shares of Class A Common Stock set forth opposite the
names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
---------
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the Underwriters' over-allotment option described below)
if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Representatives.
The Company and certain Selling Shareholders have granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 450,000 additional shares of Class
A Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the shares of Class A Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Class A Common Stock set
forth next to the names of all the Underwriters in the preceding table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Each of the Company and the directors, executive officers, Selling
Shareholders and certain other shareholders of the Company has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not, during the period ending 90 days after the
date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in
64
<PAGE> 67
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
over-allot in connection with the offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an Underwriter or a dealer for distributing the Class A Common Stock
in the offering, if the syndicate repurchases previously distributed Class A
Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Class A Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, the Class A Common Stock at a price that exceeds
the highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Class A Common Stock during a specified two month prior period or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Class A Common Stock above independent market levels. Underwriters and dealers
are not required to engage in passive market making and may end passive market
making activities at any time.
65
<PAGE> 68
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Brobeck, Phleger & Harrison
LLP, Irvine, California. Brobeck, Phleger & Harrison LLP holds a warrant to
purchase 10,000 shares of Class A Common Stock at an exercise price equal to
$24.00 per share. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements and schedules of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with respect to the Class A Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to the Company and its Common Stock, reference
is made to the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, can be inspected and copied at the
Commission's offices as described above.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, as well as at
the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained at prescribed
rates from the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. Information concerning the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. The Commission maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
66
<PAGE> 69
GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization......... Receiver technique for compensating for
distortions in a transmission media.
ADSL.......................... Asymmetric Digital Subscriber Line.
Twisted-pair modem technology that achieves
data rates up to 8 Mbps downstream to the
subscriber and 1 Mbps upstream to the network
at distances up to 18,000 feet.
Bandwidth..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).
Broadband Communications...... Data transmission at speeds of greater than 1.5
Mbps.
CMOS.......................... Complementary Metal Oxide Semiconductor.
Technology used to manufacture silicon
integrated circuits.
DBS........................... Digital Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.
DSP........................... Digital Signal Processing.
Ethernet (10Base-T)........... Networking protocol widely used in LANs for
connecting devices by means of copper twisted
pair wiring at speeds of 10 Mbps.
Fast Ethernet (100Base-T)..... An extension to the 10Base-T Ethernet network
access method which operates at 100 Mbps.
FEC........................... Forward Error Correction. A receiver technique
for correcting errors in the received data.
GHz........................... GigaHertz. One billion cycles per second.
Gigabit Ethernet
(1000Base-T).................. An extension to the 100Base-T Ethernet network
access method which operates at 1,000 Mbps or
equivalently 1 Gbps.
Headend....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
IC............................ Integrated Circuit.
kbps.......................... Kilobits per second.
LAN........................... Local Area Network. A private data
communications network linking a variety of
data devices such as computers and printers
within an office or home environment.
LMDS.......................... Local Multipoint Distribution System. A
broadband wireless communications network that
uses microwave frequencies around 28 GHz to
transmit video and data to residences over a
cellular-like network at distances under a few
miles.
MAC........................... Media Access Control. Protocol for controlling
the upstream and downstream traffic flow in a
local or wide area network.
Mbps.......................... Megabits per second. Million bits per second.
67
<PAGE> 70
MCNS/DOCSIS................... Multimedia Cable Network System/Data Over Cable
Service Interface Specifications. Industry
specification that defines the technical
equipment for high-speed cable modem and
headend equipment.
MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
MPEG.......................... Moving Picture Experts Group. Industry standard
for compressing and decompressing digital audio
video signals.
NIC........................... Network Interface Card. Plug-in adapter card
enables a computer to connect to a LAN.
QAM........................... Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK.......................... Quadrature Phase Shift Keying. A digital
technique which is widely employed in direct
broadcast satellite transmission systems.
VDSL.......................... Very High Bit-Rate Digital Subscriber Line.
Twisted pair modem technology that achieves
data rates up to 52 Mbps downstream to the
subscriber and 6 Mbps upstream to the network
at distances up to 4,000 feet.
WAN........................... Wide Area Network. A data communications
network, such as the Internet, which links a
variety of data devices over a large
geographical distance.
xDSL.......................... Generic representation of the entire family of
Digital Subscriber Line technology spanning
data rates from 128 kbps to 52 Mbps depending
on the distance between the central office and
subscriber.
68
<PAGE> 71
BROADCOM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1996 and 1997 and June 30,
1998 (Unaudited).......................................... F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Six Months Ended June 30, 1997
and 1998 (Unaudited)...................................... F-4
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1997 and 1998 (Unaudited)........................ F-5
Statements of Cash Flows for the Years Ended December 31,
1994, 1995, 1996 and 1997 and the Six Months Ended June
30, 1998 (Unaudited)...................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying balance sheets of Broadcom Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Broadcom Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 31, 1998
and Note 7, as to which
the date is September 25, 1998
F-2
<PAGE> 73
BROADCOM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,657 $22,116 $ 64,711
Short-term investments.................................... -- -- 2,629
Accounts receivable (net of allowance for doubtful
accounts and sales returns of $147, $721 and $2,892 in
1996, 1997 and 1998)................................... 3,722 9,913 24,226
Inventory................................................. 854 2,705 11,473
Deferred taxes............................................ 519 1,090 1,090
Income taxes receivable................................... -- 433 402
Prepaid expenses.......................................... 227 262 1,252
------- ------- --------
Total current assets.............................. 9,979 36,519 105,783
Property and equipment, net................................. 4,298 8,449 16,305
Long-term investments....................................... -- -- 25,094
Other assets................................................ 90 276 919
------- ------- --------
Total assets...................................... $14,367 $45,244 $148,101
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,140 $ 7,380 $ 15,280
Wages and related benefits................................ 372 846 1,794
Income taxes payable...................................... 1,812 -- --
Accrued liabilities....................................... 57 933 2,211
Current portion of long-term debt......................... 69 1,098 89
------- ------- --------
Total current liabilities......................... 4,450 10,257 19,374
Long-term debt, less current portion........................ 147 1,595 45
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock $.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 2,093,839 in 1996,
3,567,839 in 1997 and none in 1998................... 6,084 28,617 --
Class A Common Stock, $.0001 par value:
Authorized shares--200,000,000.........................
Issued and outstanding shares--none in 1996, 1997 and
4,839,750 in 1998....................................
Class B Common Stock, $.0001 par value:
Authorized shares--100,000,000
Issued and outstanding shares--29,403,768 in 1996,
31,501,560 in 1997 and 38,878,199 in 1998............ 3 3 4
Additional paid-in capital................................ 1,160 7,126 120,621
Notes receivable from employees........................... (748) (3,362) (3,464)
Deferred compensation..................................... -- (1,090) (5,956)
Retained earnings......................................... 3,271 2,098 17,477
------- ------- --------
Total shareholders' equity........................ 9,770 33,392 128,682
------- ------- --------
Total liabilities and shareholders' equity........ $14,367 $45,244 $148,101
======= ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
BROADCOM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue......................... $4,317 $18,981 $31,668 $ 8,169 $78,493
Development revenue..................... 1,790 2,389 5,287 2,257 2,019
------ ------- ------- ------- -------
Total revenue................... 6,107 21,370 36,955 10,426 80,512
Cost of revenue........................... 1,398 7,860 14,926 4,810 34,212
------ ------- ------- ------- -------
Gross profit.............................. 4,709 13,510 22,029 5,616 46,300
Operating expense:
Research and development................ 2,687 5,662 16,204 6,205 14,619
Selling, general and administrative..... 2,135 3,546 8,063 2,541 9,322
------ ------- ------- ------- -------
Total operating expense......... 4,822 9,208 24,267 8,746 23,941
------ ------- ------- ------- -------
Income (loss) from operations............. (113) 4,302 (2,238) (3,130) 22,359
Interest and other income, net............ 120 213 290 63 1,301
------ ------- ------- ------- -------
Income (loss) before income taxes......... 7 4,515 (1,948) (3,067) 23,660
Provision (benefit) for income taxes...... 3 1,499 (775) (1,226) 8,281
------ ------- ------- ------- -------
Net income (loss)......................... $ 4 $ 3,016 $(1,173) $(1,841) $15,379
====== ======= ======= ======= =======
Basic earnings (loss) per share........... $ .00 $ .12 $ (.04) $ (.07) $ .45
====== ======= ======= ======= =======
Diluted earnings (loss) per share......... $ .00 $ .09 $ (.04) $ (.07) $ .35
====== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 75
BROADCOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES COMPENSATION
---------- ------- ---------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 1,100,000 $ 2,161 22,995,000 $2 $ 60 $ -- $ --
Issuance of Preferred Stock, net of
issuance costs of $11............ 500,000 989 -- -- -- -- --
Exercise of stock options.......... -- -- 5,100,000 1 339 (332) --
Net income......................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1995......... 1,600,000 3,150 28,095,000 3 399 (332) --
Issuance of Preferred Stock, net of
issuance costs of $29............ 493,839 2,934 -- -- -- -- --
Exercise of stock options, net of
repurchases...................... -- -- 1,308,768 -- 761 (416) --
Net income......................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1996......... 2,093,839 6,084 29,403,768 3 1,160 (748) --
Issuance of Preferred Stock, net of
issuance costs of $36............ 1,500,000 22,689 -- -- -- -- --
Repurchases of Preferred Stock..... (26,000) (156) -- -- -- -- --
Issuance of Class B Common Stock... -- -- 285,000 -- 1,050 -- --
Exercise of stock options, net of
repurchases...................... -- -- 1,812,792 -- 3,569 (2,614) --
Tax benefit from exercise of stock
options.......................... -- -- -- -- 191 -- --
Deferred compensation related to
grant of stock options........... -- -- -- -- 1,156 -- (1,156)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 66
Net loss........................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1997......... 3,567,839 28,617 31,501,560 3 7,126 (3,362) (1,090)
Conversion of Preferred Stock into
Class B Common Stock (unaudited)... (3,567,839) (28,617) 8,453,517 1 28,616 -- --
Issuance of Class A Common Stock in
initial public offering, net of
offering costs of $1,628
(unaudited)...................... -- -- 3,620,000 -- 79,170 -- --
Exercise of stock options, net of
repurchases (unaudited).......... -- -- 142,872 -- 340 (191) --
Repayment of notes receivable from
employees (unaudited)............ -- -- -- -- -- 89 --
Deferred compensation related to
grant of stock options
(unaudited)...................... -- -- -- -- 5,369 -- (5,369)
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- -- 503
Net income (unaudited)............. -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at June 30, 1998
(unaudited)........................ -- $ -- 43,717,949 $4 $120,621 $(3,464) $(5,956)
========== ======= ========== == ======== ======= =======
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
-------- -------------
<S> <C> <C>
Balance at December 31, 1994......... $ 251 $ 2,474
Issuance of Preferred Stock, net of
issuance costs of $11............ -- 989
Exercise of stock options.......... -- 8
Net income......................... 4 4
------- --------
Balance at December 31, 1995......... 255 3,475
Issuance of Preferred Stock, net of
issuance costs of $29............ -- 2,934
Exercise of stock options, net of
repurchases...................... -- 345
Net income......................... 3,016 3,016
------- --------
Balance at December 31, 1996......... 3,271 9,770
Issuance of Preferred Stock, net of
issuance costs of $36............ -- 22,689
Repurchases of Preferred Stock..... -- (156)
Issuance of Class B Common Stock... -- 1,050
Exercise of stock options, net of
repurchases...................... -- 955
Tax benefit from exercise of stock
options.......................... -- 191
Deferred compensation related to
grant of stock options........... -- --
Amortization of deferred
compensation..................... -- 66
Net loss........................... (1,173) (1,173)
------- --------
Balance at December 31, 1997......... 2,098 33,392
Conversion of Preferred Stock into
Class B Common Stock (unaudited)... -- --
Issuance of Class A Common Stock in
initial public offering, net of
offering costs of $1,628
(unaudited)...................... -- 79,170
Exercise of stock options, net of
repurchases (unaudited).......... -- 149
Repayment of notes receivable from
employees (unaudited)............ -- 89
Deferred compensation related to
grant of stock options
(unaudited)...................... -- --
Amortization of deferred
compensation (unaudited)......... -- 503
Net income (unaudited)............. 15,379 15,379
------- --------
Balance at June 30, 1998
(unaudited)........................ $17,477 $128,682
======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
BROADCOM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 4 $ 3,016 $(1,173) $(1,841) $ 15,379
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization.... 451 897 3,039 1,443 2,841
Amortization of deferred
compensation................... -- -- 66 -- 503
Deferred taxes................... (48) (416) (571) -- --
Change in operating assets and
liabilities:
Accounts receivable............ 547 (2,982) (6,191) (874) (14,313)
Inventory...................... (242) (461) (1,851) 483 (8,768)
Other assets................... (32) (251) (221) (118) (1,633)
Accounts payable............... 443 1,276 5,240 (704) 7,900
Income taxes payable........... (23) 1,835 (2,245) (3,076) 31
Other accrued liabilities...... (43) 285 1,350 3,118 2,226
------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities................ 1,057 3,199 (2,557) (1,569) 4,166
INVESTING ACTIVITIES
Purchases of property and equipment... (1,112) (3,747) (7,132) (2,985) (10,697)
Proceeds from sales of investments
available-for-sale.................. 996 -- -- -- (27,723)
------- ------- ------- ------- --------
Net cash used in investing
activities.......................... (116) (3,747) (7,132) (2,985) (38,420)
FINANCING ACTIVITIES
Proceeds from bank term loan.......... -- -- 3,000 3,000 --
Payments on bank term loan............ -- -- (500) -- (2,500)
Payments on capital lease
obligations......................... (48) (64) (81) (36) (59)
Proceeds from issuance of Preferred
Stock............................... 989 2,934 22,689 -- --
Payments on repurchase of Preferred
Stock............................... -- -- (156) -- --
Net proceeds from initial public
offering of Class A Common Stock.... -- -- -- -- 79,170
Net proceeds from issuance (payments
for repurchase) of Class B Common
Stock............................... 8 345 2,196 (6) 238
------- ------- ------- ------- --------
Net cash provided by financing
activities.......................... 949 3,215 27,148 2,958 76,849
------- ------- ------- ------- --------
Increase in cash and cash
equivalents......................... 1,890 2,667 17,459 (1,596) 42,595
Cash and cash equivalents at beginning
of year............................. 100 1,990 4,657 7,417 22,116
------- ------- ------- ------- --------
Cash and cash equivalents at end of
year................................ $ 1,990 $ 4,657 $22,116 $ 5,821 $ 64,711
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid......................... $ 8 $ 26 $ 191 $ 11 $ 37
======= ======= ======= ======= ========
Income taxes paid..................... $ 125 $ 79 $ 1,850 $ 1,500 $ 8,250
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the transmission of broadband
data over existing communications infrastructures, most of which were not
originally intended for digital data transmission.
In anticipation of an initial public offering of the Company's Class A
Common Stock, in February 1998, the Board of Directors approved the amendment
and restatement of the articles of incorporation to authorize 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. Upon consummation of the initial public
offering, each share of Series A, B, C and D Preferred Stock converted into
three shares of Class B Common Stock, and each share of Series E Preferred Stock
converted into 1.5 shares of Class B Common Stock. Effective with the amendment
of the articles of incorporation, outstanding stock options at December 31, 1997
become exercisable for shares of Class B Common Stock. The shares of Class A and
Class B Common Stock are substantially identical, except that holders of Class A
Common Stock are entitled to one vote for each share held, and holders of Class
B Common Stock are entitled to ten votes for each share held on all matters
submitted to a vote of the shareholders.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1998 and for the six months ended
June 30, 1997 and 1998 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results for the six month period ended
June 30, 1998 are not necessarily indicative of results that may be expected for
the year ending December 31, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, inventory reserves and income tax valuation
allowances.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of three months or less to be
cash equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------
1995 1996 1997 1997 1998
------ ------ -------- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase of equipment through capital
leases.................................. $ 12 $231 $ 58 $ 6 $ --
Notes receivable from employees issued in
connection with exercise of stock
options................................. 332 416 2,614 $191 $461
</TABLE>
F-7
<PAGE> 78
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Provision
is made currently for estimated product returns. Development revenue is
recognized when earned.
INVESTMENTS
The Company accounts for its investments in debt securities under Financial
Accounting Standards Board (FASB) Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Management determines the appropriate
classification of such securities at the time of purchase and reevaluates such
classification as of each balance sheet date. The investments are adjusted for
amortization of premiums and discounts to maturity and such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the specific
identification method and are reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Work in process................................ $ 579 $ 2,315 $ 4,299
Finished goods................................. 1,024 2,076 9,875
------ ------- -------
1,603 4,391 14,174
Less reserve for excess and obsolete
inventory.................................... (749) (1,686) (2,701)
------ ------- -------
$ 854 $ 2,705 $11,473
====== ======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization
have been provided on the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment were comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Office furniture.............................. $ 176 $ 273 $ 644
Computer equipment............................ 5,621 12,563 22,359
Leasehold improvements........................ 145 296 826
------- ------- -------
5,942 13,132 23,829
Less accumulated depreciation and
amortization................................ (1,644) (4,683) (7,524)
------- ------- -------
$ 4,298 $ 8,449 $16,305
======= ======= =======
</TABLE>
F-8
<PAGE> 79
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
Implementation of Statement No. 121 was immaterial to the financial statements
of the Company.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings Per Share, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform with the Statement No. 128 requirements and the accounting rules set
forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998.
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Numerator: Net income (loss)............. $ 4 $ 3,016 $(1,173) $(1,841) $15,379
======= ======= ======= ======= =======
Denominator:
Weighted-average shares outstanding.... 25,618 28,840 30,213 29,483 37,652
Less: nonvested common shares
outstanding......................... (3,888) (3,901) (3,762) (3,553) (3,368)
------- ------- ------- ------- -------
Denominator for basic earnings per common
share.................................. 21,730 24,939 26,451 25,930 34,284
Effect of dilutive securities:
Nonvested common shares................ -- 1,851 -- -- 2,040
Stock options.......................... -- 195 -- -- 4,026
Convertible Preferred Stock............ 4,550 6,158 -- -- 4,226
------- ------- ------- ------- -------
Denominator for diluted earnings per
common share........................... 26,280 33,143 26,451 25,930 44,576
======= ======= ======= ======= =======
Basic earnings (loss) per share........ $ .00 $ .12 $ (.04) $ (.07) $ .45
======= ======= ======= ======= =======
Diluted earnings (loss) per share...... $ .00 $ .09 $ (.04) $ (.07) $ .35
======= ======= ======= ======= =======
</TABLE>
F-9
<PAGE> 80
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The Company
had no reserve for estimated warranty liability at December 31, 1995 and 1996,
and had a reserve of $150,000 at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term and long-term investments, receivables, accounts
payable, and borrowings. The Company believes all of the financial instruments'
recorded values approximate current values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from investments by distributions to shareholders. Statement No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
2. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
A reconciliation of the provision (benefit) for income taxes at the federal
statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income taxes...... $ 2 $1,535 $(662)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit....................... 1 218 40
Benefit of research and development tax credits........... (7) (270) (229)
Other..................................................... 7 16 76
--- ------ -----
Total provision (benefit) for income taxes.................. $ 3 $1,499 $(775)
=== ====== =====
</TABLE>
F-10
<PAGE> 81
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. INCOME TAXES (CONTINUED)
The federal and state income tax provision (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 50 $1,578 $(205)
State.................................................... 1 337 1
---- ------ -----
51 1,915 (204)
Deferred:
Federal.................................................. (48) (409) (631)
State.................................................... -- (7) 60
---- ------ -----
(48) (416) (571)
---- ------ -----
$ 3 $1,499 $(775)
==== ====== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... $ (33) $(54) $ --
Deferred tax assets:
Book depreciation in excess of tax depreciation........... -- -- 60
Research and experimentation tax credit carryforwards..... 164 -- 141
Net operating loss carryforwards.......................... -- -- 5
Reserves and accruals not currently deductible for tax
purposes............................................... 73 447 1,208
State tax, net of federal benefit......................... -- 117 --
Other..................................................... -- 9 9
Valuation allowance....................................... (101) -- (333)
----- ---- ------
Net deferred tax assets..................................... $ 103 $519 $1,090
===== ==== ======
</TABLE>
The reduction in the valuation allowance in 1996 was primarily due to the
utilization of research and experimentation tax credit carryforwards. The
increase in the valuation allowance in 1997 was entirely related to the state
deferred tax assets because of the uncertainty of the effect of anticipated
stock option exercises on future state taxable income. Any future benefits
recognized from any reduction of the valuation allowance will result in a
reduction of income tax expense.
At December 31, 1997, the Company had approximately $91,000 of state net
operating loss carryforwards and $141,000 of state research credit
carryforwards. These state net operating loss carryforwards and research credit
carryforwards will expire in 2002 and 2012, respectively.
F-11
<PAGE> 82
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. LONG-TERM DEBT
In March 1995, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank (SVB) which, as amended in June 1997, provides for a $3.0
million term loan and a $3.0 million revolving credit facility. A $500,000
letter of credit facility is also provided in the agreement provided that
sufficient credit is available under the other two facilities. During 1997, the
full amount of the $3.0 million term loan facility was utilized at an interest
rate of SVB's prime rate as announced from time to time plus .5%. At December
31, 1997, $2.5 million was outstanding under the term loan facility which
matures in June 2000. The borrowing base for the revolving credit facility is
equal to 80% of the Company's eligible accounts receivable from United States
customers. Interest on this facility is equal to SVB's prime rate announced from
time to time. At December 31, 1997, no amounts were outstanding under the
revolving credit or letter of credit facilities, which expired on April 5, 1998.
The Loan and Security Agreement prohibits the payment of cash dividends,
limits the amount of additional indebtedness the Company may incur, and contains
certain minimum net worth, profitability and various other financial ratio
requirements. Substantially all of the Company's assets are collateral under the
loan and security agreement.
The following is a summary of the Company's long-term debt and other loans
at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1996 1997 1998
---- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Silicon Valley Bank term loan collateralized by
substantially all of the Company's assets, payable in
varying monthly installments at a rate of 9.3%....... $ -- $ 2,500 $ --
Capitalized lease obligations payable in varying
monthly installments at rates from 10.4% to 22.3%.... 216 193 134
---- ------- ----
216 2,693 134
Less current portion of long-term debt................. (69) (1,098) (89)
---- ------- ----
$147 $ 1,595 $ 45
==== ======= ====
</TABLE>
Principal payments on long-term debt are as follows: $1,098,000 in 1998;
$1,041,000 in 1999; $537,000 in 2000; $16,000 in 2001; and $1,000 in 2002.
Interest expense for the years ended December 31, 1995, 1996 and 1997 was
$8,000, $26,000 and $171,000, respectively.
4. COMMITMENTS
The Company has entered into operating leases for its computer equipment
and facilities with varying terms and escalation clauses. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more are as follows: $656,000 in 1998; $327,000 in 1999; $244,000 in 2000;
$140,000 in 2001; and $48,000 in 2002.
Rent expense for the years ended December 31, 1995, 1996, and 1997
aggregated $177,000, $325,000 and $739,000, respectively.
The Company had commitments totaling approximately $2.1 million as of
December 31, 1997 for the purchase of test equipment.
F-12
<PAGE> 83
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Preferred Stock consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
<S> <C> <C> <C>
A.............................................. 500,000 500,000 $ 1,000,000
B.............................................. 600,000 600,000 1,200,000
C.............................................. 500,000 500,000 1,000,000
D.............................................. 500,000 467,839 2,807,034
E.............................................. 1,800,000 1,500,000 22,725,000
Undesignated................................... 6,100,000 -- --
---------- --------- -----------
10,000,000 3,567,839 $28,732,034
========== ========= ===========
</TABLE>
Each share of Series A, B, C and D Preferred Stock is convertible into
three shares of Class B Common Stock. Each share of Series E Preferred Stock is
convertible into 1.5 shares of Class B Common Stock. Such shares may be
converted at any time at the option of the holder and automatically convert into
Class B Common Stock in the event of an underwritten public offering of the
Company's Common Stock as long as the value of the Company for purposes of the
public offering is not less than $45,000,000.
Holders of the Company's Series A, B, C, D and E Preferred Stock are
entitled to noncumulative annual dividends of $0.20 per share in preference to
holders of Common Stock when declared by the Board of Directors. No such cash
dividends have been declared since the inception of the Company.
In the event of the liquidation of the Company, holders of Series A, B, C,
D and E Preferred Stock are entitled to receive an amount per share equal to the
original issuance price plus declared and unpaid dividends, prior and in
preference to any distribution of assets to holders of Common Stock.
The holders of Series A, B, C, D and E Preferred Stock have the right to
purchase additional shares of stock in order to maintain their ownership
percentage in the event of certain future sales of stock by the Company.
Holders of Series A, B, C, D and E Preferred Stock are entitled to the same
number of votes per share on any and all matters submitted to a shareholders
vote as the Class B Common Stock into which the Preferred Stock is convertible.
COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company issued
and sold an aggregate of 225,000 shares of Class B Common Stock to Irell &
Manella LLP for an aggregate purchase price of $1,050,000. Werner F. Wolfen, a
director of the Company, is a Senior Partner of Irell & Manella. During 1997,
the Company paid approximately $1.2 million to Irell & Manella for legal
services rendered by that firm. Irell & Manella has represented and continues to
represent the Company in various legal matters.
STOCK OPTIONS
Under the Company's Amended and Restated 1994 Stock Option Plan (the 1994
Plan), the Board of Directors or a Committee consisting of two or more members
of its Board of Directors is authorized to grant options to purchase the
Company's Class B Common Stock to its employees, members of the Board of
Directors, and certain consultants. Incentive options may be granted at an
exercise price equal to or greater
F-13
<PAGE> 84
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
than 100% of the fair market value at the date of grant, and non-qualified
options may be granted at an exercise price equal to or greater than 85% of the
fair market value on the date of grant.
The options are exercisable immediately upon issuance and generally have a
term of ten years. The Company reserves the right to purchase all unvested
shares held by the participant upon the participant's termination at the
original purchase price. Fully vested shares not purchased by the participant
within three months after termination are cancelled and returned to the plan.
The vesting schedule is determined by the Board or the Committee at the time of
issuance. Stock options generally vest at the rate of 25% after one year and
ratably on a monthly basis for three years thereafter. Until the Company's
Common Stock is registered with the Securities and Exchange Commission, the
Company has the right of first refusal to purchase any shares of Common Stock
issued under the 1994 Plan.
At the discretion of the Board or the Committee, the Company may make
secured loans to option holders in amounts up to the exercise price of their
options plus related taxes or permit the option holder to pay the exercise price
in installments over a determined period. During 1995, 1996 and 1997, the
Company loaned $332,000, $416,000 and $2,614,000 to employees for the exercise
of options, respectively. These notes are full-recourse, are secured by the
shares of stock, are interest bearing with rates ranging from 6.0% to 6.5%, are
due between three and five years from the exercise date and must be repaid upon
sale of the underlying shares of stock.
During 1995, 1996 and 1997, the Company's Board of Directors approved an
increase in the number of common shares reserved and available for issuance
under the 1994 Plan by 1,650,000 shares, 4,500,000 shares and 9,600,000 shares,
respectively (or from 3,750,000 shares in 1995 to 19,500,000 shares in 1997).
Activity under the 1994 Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 492,000 3,258,000 $ .07 $ .07
Additional shares reserved.......... 1,650,000 -- -- --
Options granted..................... (1,942,500) 1,942,500 .07 .07
Options canceled.................... 3,000 (3,000) .07 .07
Options exercised................... -- (5,100,000) .07 .07
---------- ---------- -------------- -----
Balance at December 31, 1995.......... 202,500 97,500 .07 .07
Additional shares reserved.......... 4,500,000 -- -- --
Options granted..................... (3,269,250) 3,269,250 .07 - 1.13 .73
Options exercised................... -- (1,314,300) .07 - 1.13 .51
---------- ---------- -------------- -----
Balance at December 31, 1996.......... 1,433,250 2,052,450 .07 - 1.13 .85
Additional shares reserved.......... 9,600,000 -- -- --
Options granted..................... (5,330,400) 5,330,400 1.13 - 8.00 2.52
Options canceled.................... 11,061 (11,061) .50 - 1.13 .79
Options exercised................... -- (1,970,357) .50 - 8.00 1.87
---------- ---------- -------------- -----
Balance at December 31, 1997.......... 5,713,911 5,401,432 $ .07 - $8.00 $2.12
========== ========== ============== =====
</TABLE>
F-14
<PAGE> 85
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .07 to $1.00....... 698,325 8.37 $ .62 698,325 $ .62
$1.13 to $1.25....... 3,089,707 9.28 $1.16 3,089,707 $1.16
$3.00 to $5.00....... 1,376,400 9.83 $4.04 1,376,400 $4.04
$8.00................ 237,000 9.99 $8.00 237,000 $8.00
</TABLE>
Additional information relating to the 1994 Plan is as follows at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase.... 3,888,092 3,900,590 3,572,742
Weighted average repurchase price................ $.07 $.21 $1.05
Unvested options outstanding..................... 90,000 1,997,273 5,385,588
Total reserved Class B Common Stock shares for
stock option plans............................. 300,000 3,485,700 11,115,343
</TABLE>
The Company recorded deferred compensation of $1,156,000 during the year
ended December 31, 1997 for the difference between the exercise price and the
deemed value of certain of the Company's stock options granted under the 1994
Plan. These amounts are being amortized by charges to operations over the
vesting periods of the individual stock options, which are generally four years.
In the year ended December 31, 1997, $66,000 (pre-tax) was amortized to expense.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income (loss)
per share is required by Statement No. 123 for stock-based awards to employees
as if the Company had accounted for such awards using a valuation method
permitted under Statement No. 123.
Stock-based awards to employees under the Plan during the years ended
December 31, 1995, 1996 and 1997 were valued using the minimum value method,
assuming no expected dividends, a weighted-average expected life of 3.5 years
and a weighted-average risk-free interest rate of 6.0%. Should the Company
complete an initial public offering of its common stock, stock-based awards
granted thereafter will be valued using the Black-Scholes option pricing model.
Among other things, the Black-Scholes model considers the expected volatility of
the Company's stock price, determined in accordance with Statement No. 123, in
arriving at an estimated fair value. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes model may differ significantly from assumptions used to
calculate the value of stock-based awards under the minimum value method.
F-15
<PAGE> 86
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average minimum values of options granted to employees during
1995, 1996 and 1997 were $0.01, $0.12 and $0.75, respectively. For pro forma
purposes, the estimated minimum value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying instruments.
The results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Pro forma:
Net income (loss)................................... $ -- $2,947 $(1,755)
Basic earnings (loss) per share..................... $.00 $ .12 $ (.07)
Diluted earnings (loss) per share................... $.00 $ .08 $ (.07)
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment
Plan which was established in 1996, covering substantially all of the Company's
employees, subject to certain eligibility requirements. At its discretion, the
Company may make contributions to the plan. No contributions were made by the
Company in 1996 or 1997.
7. LITIGATION
In December 1996, Stanford Telecommunications, Inc. filed an action against
the Company in the United States District Court for the Northern District of
California. STI alleges that the Company's BCM3036, BCM3037, BCM3300, BCM93220
and BCM93220B products infringe one of STI's patents (the " '352 Patent"). STI
is seeking an injunction as well as the recovery of monetary damages, including
treble damages for willful infringement. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction requiring that the Company withdraw various products
from the market, substantial product redesign expenses (assuming that a
non-infringing design is feasible and economic) and associated time-to-market
delays, and indemnification claims by the Company's customers or strategic
partners, each of which events could have a material adverse effect on the
Company's business, financial condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets, and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. Those
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential,
F-16
<PAGE> 87
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. LITIGATION (CONTINUED)
proprietary information of Sarnoff, and tortious interference with present and
prospective economic advantage, as well as a claim against the Company alleging
that it "illegally pirated" Sarnoff's employees. The complaint seeks to
preliminarily and permanently enjoin the Company and the Former Employees from
utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their alleged statutory and contractual duties of
confidentiality to Sarnoff by, for example, precluding them from working for six
months in any capacity relating to certain of the Company's programs. The
Company has asserted and believes that Sarnoff's claims are without merit. The
Company has filed an answer and is vigorously defending itself in this action.
In May 1997, the New Jersey court denied Sarnoff's request for a temporary
restraining order. In June 1998, the New Jersey court denied the Company's
motion for summary judgment. Sarnoff has clarified its claims to some extent by
specifying in greater detail the trade secrets that it alleges the Company and
the Former Employees misappropriated. The Company intends to file new motions
for summary judgment based on recent admissions and other events. In August
1998, the New Jersey court set a new date, September 30, 1998, for the close of
discovery in this case. Trial is scheduled for November 1998.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The Company and RSSI have executed a
settlement agreement in this action, pursuant to which the Company has agreed
not to hire or extend an offer to any employees from RSSI for 30 days following
the consummation of the Company's initial public offering. While the settlement
agreement requires RSSI to dismiss this action without prejudice, it does not
release any claims that RSSI may assert in the future regarding the actual use
or misappropriation by the Company of trade secrets or other proprietary
information of RSSI.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in February 1996 (which shares would have converted into
78,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
F-17
<PAGE> 88
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. LITIGATION (CONTINUED)
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and declaratory relief. If Mr. Davis is successful in his
claim, he may be entitled to receive the shares of Class B Common Stock
described above and may be entitled to certain other rights as a holder of
Series D Preferred Stock, including without limitation the right to acquire
certain shares of the Company's Series E Preferred Stock (or the shares of Class
B Common Stock into which such shares of Series E Preferred Stock would have
converted upon consummation of the initial public offering). This case is
currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The cases involving intellectual property rights involve complex questions
of fact and law and could require the expenditure of significant costs and
diversion of resources to defend. Although management believes the outcome of
the Company's outstanding legal proceedings, claims and litigation will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity, the results of litigation are inherently uncertain, and
such outcome is at least reasonably possible. The Company is unable to make an
estimate of the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying financial
statements.
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment, broadband communications.
During 1995, 1996 and 1997, the Company had a total of five customers whose
revenue represented a significant portion of total revenue in certain or all
years. Revenue from two of these customers was approximately 13.9% and 10.9% of
total revenue in 1995. Revenue from another customer represented approximately
13.8% in 1995, 28.0% in 1996, and 31.9% in 1997 of total revenue for the
respective year. Revenue from a fourth customer accounted for approximately
16.1% of total revenue in 1996. Revenue from a fifth customer was approximately
15.2% in 1996 and 14.6% in 1997 of total revenue for the respective year.
No other customer represented more than 10% of the Company's annual
revenue.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and amounts provided for doubtful
accounts.
Export revenue to all foreign customers as a percent of total revenue was
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Europe............................................... 10.5% 6.1% 5.2%
Asia................................................. 10.1 2.9 6.7
Other................................................ 1.9 3.5 3.5
---- ---- ----
22.5% 12.5% 15.4%
==== ==== ====
</TABLE>
The Company does not own or operate a fabrication facility, and
substantially all of its semiconductor device requirements are currently
supplied by two outside foundries in Asia. Any sudden demand for an
F-18
<PAGE> 89
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION (CONTINUED)
increased amount of semiconductor devices or sudden reduction or elimination of
any existing source or sources of semiconductor devices could result in a
material delay in the shipment of the Company's products. In addition,
substantially all of the Company's products are assembled and tested by one of
two third-party subcontractors in Asia. The Company does not have long-term
agreements with any of these suppliers. Any problems associated with the
fabrication facilities, and the delivery, quality or cost of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
9. SUBSEQUENT EVENTS
STOCK SPLIT
On February 3, 1998, the Board of Directors approved a 3-for-2 split,
effective March 9, 1998, of the Company's Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect the stock split in the Company's capital structure.
SALE OF SHARES TO CISCO SYSTEMS
On February 3, 1998, Cisco Systems, Inc. (Cisco) exercised its option to
purchase 500,000 shares of Class A Common Stock upon consummation of the
Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco in connection with the Development and License
Agreement entered into between the Company and Cisco and effective in September
1996, as amended on February 3, 1998.
STOCK OPTION PLANS
The 1998 Stock Incentive Plan (the 1998 Plan) was adopted on February 3,
1998 to serve as the successor equity incentive program to the Company's 1994
Plan. A total of 15,980,563 shares of Common Stock have been authorized for
issuance under the 1998 Plan. On the 1998 Plan effective date, outstanding
options under the 1994 Plan and the 1998 Special Stock Option Plan (the Special
Plan), a plan adopted to permit options to be granted with terms permitted by
the 1998 Plan prior to the 1998 Plan becoming effective, will be incorporated
into the 1998 Plan, and no further option grants will be made under the 1994
Plan or the Special Plan.
During the three month period ended March 31, 1998, the Company's Board of
Directors granted stock options to employees under the Company's 1994 Plan and
its Special Plan on an aggregate of 3,009,675 shares of the Company's Class B
Common Stock, of which options on 2,929,675 shares are exercisable at $10 per
share and options on 80,000 shares are exercisable at the initial public
offering price of the Company's Class A Common Stock. In the quarter ended March
31, 1998, the Company will record an additional $6.1 million of deferred
compensation related to 1,518,500 options granted in late March 1998, which
amount is equal to the difference between the exercise price and the deemed
value of such options. This amount will be presented as a reduction of
shareholders' equity and amortized ratably over the vesting period of the
applicable options. As a result, the Company will amortize approximately $17,000
(pre-tax) of deferred compensation in the quarter ended March 31, 1998 and
expects to amortize the remaining balance at the rate of approximately $380,000
(pre-tax) per quarter through March 31, 2002.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the Purchase Plan) was adopted on
February 3, 1998, which allows employees to designate up to 15 percent of their
total compensation to purchase shares of the
F-19
<PAGE> 90
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
Company's Class A Common Stock at 85% of fair market value. 750,000 shares of
Class A Common Stock have been reserved for issuance under the Purchase Plan.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA
Irell & Manella has represented and continues to represent the Company in
various legal matters pursuant to an engagement agreement dated as of January 1,
1997, and amended as of January 1, 1998. Under the engagement agreement, the
Company has agreed to pay Irell & Manella a fixed fee plus costs for the firm's
legal services rendered from and after January 1, 1998 with respect to certain
litigation matters. Irell & Manella has agreed to render legal services to the
Company on most other matters at reduced rates from the firm's standard for the
two-year period commencing January 1, 1998.
10. SUPPLEMENTARY UNAUDITED INFORMATION
INITIAL PUBLIC OFFERING
In April 1998, the Company completed its initial public offering (the
"Offering") of 4,025,000 shares of its Class A Common Stock. Of these shares,
the Company sold 3,120,000 shares (including 355,000 shares issued in connection
with the exercise of the underwriters' over-allotment option), and selling
shareholders sold 905,000 shares (including 170,000 shares in connection with
the exercise of the underwriters' over-allotment option), at a price of $24.00
per share. In addition, the Company sold 500,000 shares of Class A Common Stock
to Cisco Systems, Inc. ("Cisco Systems"), in a concurrent registered offering
that was not underwritten, at a price of $22.32 per share. The Company received
aggregate net proceeds from the Offering and the sale of shares to Cisco Systems
of approximately $79.2 million in cash (net of underwriting discounts and
commissions and estimated offering costs). Upon consummation of the Offering,
all outstanding shares of the Company's Convertible Preferred Stock were
automatically converted into an aggregate of 8,453,517 shares of Class B Common
Stock.
Approximately $2.3 million of the Company's net proceeds were used to
retire all outstanding indebtedness under an SVB term loan in April 1998.
INVESTMENTS
At June 30, 1998, all of the Company's investments were in state, municipal
and county government bonds and were classified as held-to-maturity. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
investments are stated at cost, adjusted for amortization of premiums and
discounts to maturity. A summary of held-to-maturity securities by balance sheet
caption at June 30, 1998, is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents......................... $ 8,104 $-- $ -- $ 8,104
Short-term investments................... 2,629 1 -- 2,630
Long-term investments.................... 25,094 8 (15) 25,087
------- --- ---- -------
Securities classified as
held-to-maturity....................... $35,827 $ 9 $(15) $35,821
======= === ==== =======
</TABLE>
F-20
<PAGE> 91
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
Scheduled maturities of held-to-maturity investments at June 30, 1998 were
as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Debt securities maturing within:
One year............................... $10,733 $10,734
Two years.............................. 18,326 18,320
Three years............................ 6,768 6,767
------- -------
$35,827 $35,821
======= =======
</TABLE>
INCOME TAXES
Income tax expense for the six month periods ended June 30, 1997 and 1998
has been provided at the estimated annualized effective tax rates based on the
estimated income tax liability or asset and change in deferred taxes for the
respective fiscal years.
COMMITMENTS
The Company had commitments totaling approximately $5.4 million as of June
30, 1998 for the purchase of workstation software and hardware. In addition, the
Company has entered into additional facilities lease agreements commencing
November 1998 for approximately $200,000 per month through November 2005.
ISSUANCE OF STOCK OPTIONS
Activity under the 1994 Plan, the Special Plan and the 1998 Plan during the
six month period ended June 30, 1998 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1997..... 5,713,911 5,401,432 $ .07 - $ 8.00 $ 2.12
Additional shares reserved....... 5,000,000 -- -- --
Options granted.................. (3,734,076) 3,734,076 10.00 - 69.88 14.84
Options cancelled................ 305,825 (305,825) 10.00 10.00
Options repurchased.............. 3,000 -- -- --
Options exercised................ -- (145,030) .50 - 10.00 2.56
---------- --------- --------------- ------
Balance at June 30, 1998......... 7,288,660 8,684,653 $ .07 - $69.88 $ 7.42
========== ========= =============== ======
</TABLE>
Included above are stock options granted during the three month period
ended June 30, 1998 to employees under the Company's Special Plan and its 1998
Plan on an aggregate of 724,401 shares of the Company's Class A & B Common Stock
at an average exercise price of $33.40.
F-21
<PAGE> 92
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
The weighted average remaining contractual life and weighted average
exercise price of all options outstanding and of all options exercisable as June
30, 1998 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .07 - $ 1.00 687,075 7.87 $ .61 687,075 $ .61
$ 1.13 - $ 1.25 2,912,358 8.77 $ 1.16 2,912,358 $ 1.16
$ 3.00 - $ 8.00 1,533,945 9.35 $ 4.71 1,533,945 $ 4.71
$10.00 2,690,925 9.70 $10.00 2,690,925 $10.00
$24.00 - $69.88 860,350 9.82 $30.76 -- $ --
</TABLE>
Additional information relating to the 1994 Plan, Special Plan and 1998
Plan is as follows at June 30, 1998: i) nonvested common shares subject to
repurchase amount to 2,852,834 with a weighted average repurchase price of
$1.23, ii) unvested options outstanding total 8,021,883 and iii) total reserved
Class A and Class B Common Stock shares for stock option plans total 15,973,313.
In the six months ended June 30, 1998, the Company amortized an aggregate
of $503,000 of deferred compensation and eliminated approximately $705,000 in
recorded deferred compensation, representing the unamortized balance of deferred
compensation on stock options that were cancelled. The remaining balance of
total deferred compensation will be amortized at a rate of approximately
$406,000 (pre-tax) per quarter through September 2001 and approximately $338,000
(pre-tax) for the quarters ended December 2001 and March 2002.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
The value of the Company's stock-based awards granted to employees prior to
the initial public offering of its common stock in April 1998, was estimated
using the minimum value method, which does not consider stock price volatility.
Stock-based awards granted in 1998 subsequent to the initial public offering
have been valued using the Black-Scholes option pricing model. Among other
things, the Black-Scholes model considers the expected volatility of the
Company's stock price, determined in accordance with Statement No. 123, in
arriving at an option valuation. Estimates and other assumptions necessary to
apply the Black-Scholes model may differ significantly from assumptions used in
calculating the value of options granted prior to the initial public offering
under the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends, a weighted average expected life of
3.5 years, a weighted average risk-free interest rate of 6.0% and no expected
volatility for options granted prior to the initial public offering and an
expected volatility of 0.73 for options granted after the initial public
offering. The fair value of employee stock purchase rights was estimated
assuming no expected dividends, a weighted average expected life of 15 months, a
weighted average risk-free interest rate of 6.0% and an expected volatility of
.73.
The weighted-average fair value of options granted during the six months
ended June 30, 1997 and 1998 was $.34 and $5.68, respectively. The
weighted-average fair value of employee stock purchase rights granted in the six
months ended June 30, 1998 was $11.45. For pro forma purposes, the estimated
value of the Company's stock-based awards to employees is amortized over the
vesting period of the underlying instruments. The results of applying Statement
No. 123 to the Company's stock-based awards to employees would approximate the
following:
F-22
<PAGE> 93
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Pro forma:
Net income (loss)...................................... $(1,935) $13,266
Basic earnings (loss) per share........................ $ (.07) $ .39
Diluted earnings (loss) per share...................... $ (.07) $ .30
</TABLE>
ISSUANCE OF WARRANTS
In April 1998, the Company issued a Class A Common Stock Purchase Warrant
(the "Warrant") to Brobeck, Phleger & Harrison LLP, counsel to the Company, to
purchase up to 10,000 shares of the Company's Class A Common Stock at an
exercise price of $24.00 per share. The Warrant is exercisable from April 30,
1999 to April 30, 2000. The Warrant was issued in a transaction exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933, as
amended.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. For the
three months ended March 31, 1998 and 1997, the Company did not have any
components of comprehensive income as defined in Statement No. 130.
F-23
<PAGE> 94
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
LOGO
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by the Company.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Registration fee............................................ $ 78,367
Nasdaq listing fee.......................................... 17,500
NASD filing fee............................................. 27,065
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous............................................... *
--------
Total............................................. $500,000
========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (1) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interest of the Company or its shareholders or that involve
the absence of good faith on the part of the director, (iii) for any transaction
from which a director derived an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of a serious injury to the Company or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (vi) under
Section 310 of the California Law concerning contacts or transactions between
the Company and a director, or (vii) under Section 316 of the California Law
concerning directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to the Company's shareholders for any
violation by a director of the director's fiduciary duty to the Company or its
shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to indemnify these directors or executive officers (other than for
liability resulting from willful misconduct of a
II-1
<PAGE> 96
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on reasonable terms. Section 317
of the California Law and the Company's Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expense incurred) arising under the
Securities Act.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Company and its
officers and directors, and by the Company of the Underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder, and will automatically
convert upon transfer, except to certain Permitted Transferees as defined in the
Articles of Incorporation. The following is a summary of transactions by the
Registrant since January 1, 1995 involving sales of the Registrant's securities
that were not registered under the Securities Act:
1. In March 1995, the Registrant issued and sold 500,000 shares of
Series C Preferred Stock to Scientific-Atlanta, Inc. at a price per share
of $2.00. Each share of Series C Preferred Stock will convert into three
shares of Class B Common Stock upon consummation of this offering.
2. In February 1996, the Registrant issued and sold an aggregate of
493,839 shares of Series D Preferred Stock to 22 accredited individual
investors and strategic partners at a price per share of $6.00, or an
aggregate purchase price of $2,963,000. Each share of Series D Preferred
Stock will convert into three shares of Class B Common Stock upon
consummation of this offering.
3. In June 1997, the Registrant issued and sold 60,000 shares of Class
B Common Stock to the Regents of the University of New Mexico ("UNM") in
connection with a License Agreement between UNM and the Registrant. The
shares were issued as part of the Registrant's consideration to UNM in
return for a license grant and certain research and development services
rendered to the Registrant. The consideration tendered to the Registrant
was valued at an aggregate of $67,800 or $1.13 per share.
4. In September 1997, the Registrant issued and sold 1,500,000 shares
of Series E Preferred Stock to General Instrument Corporation at a price
per share of $15.15, or an aggregate purchase price of $22,750,000. This
transaction was undertaken in connection with a Development, Supply and
License Agreement between General Instrument and the Registrant. Each share
of Series E Preferred Stock will convert into 1.5 shares of Class B Common
Stock upon consummation of this offering.
5. Pursuant to an agreement dated as of October 31, 1997, the
Registrant issued and sold 225,000 shares of Class B Common Stock to Irell
& Manella LLP at a price per share of $4.67, or an aggregate purchase price
of $1,050,000.
6. Since January 1, 1995, the Registrant has issued non-qualified
stock options under its 1994 Plan and Special Plan to certain eligible
officers, directors, consultants and employees to the purchase an aggregate
of 13,590,325 shares of Class B Common Stock. Such optionees included
consultants who rendered bonafide consulting services to the Registrant,
which services included engineering support, marketing services and
strategic planning and guidance.
II-2
<PAGE> 97
None of the optionees paid any cash consideration for such options. Such
options did not involve a "sale" of securities; and, accordingly, registration
was not required. The following table sets forth the grant date, number of
options, current exercise price and class of optionees for all of such options:
<TABLE>
<CAPTION>
NO. OF EXERCISE
GRANT DATE OPTIONS PRICE CLASS OF OPTIONEES
- -------------------- --------- -------- -------------------------
<S> <C> <C> <C>
03/01/95 to 01/31/96 2,212,500 $ 0.07 Employees and Consultants
03/01/96 to 07/08/96 1,507,500 $ 0.50 Employees and Consultants
07/11/96 to 07/31/96 418,500 $ 1.00 Employees and Consultants
08/06/96 to 08/29/97 3,770,250 $ 1.13 Employees and Consultants
06/23/97 750,000 $ 1.25 Two Officers
09/15/97 to 09/30/97 421,500 $ 3.00 Employees
10/09/97 to 10/31/97 514,200 $ 4.00 Employees
11/03/97 to 11/28/97 485,700 $ 5.00 Employees and a Director
12/01/97 to 12/31/97 462,000 $ 8.00 Employees
01/01/98 to 03/27/98 2,968,175 $10.00 Employees, Consultants
and Officers
</TABLE>
Between March 28, 1998 and March 31, 1998, the Company granted options to
employees to purchase an aggregate of 80,000 shares of Class B Common Stock at
an exercise price per share of $24.00. The sale and issuance of securities set
forth above were deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Rule 701 adopted thereunder. The recipients
of the securities in each of the transactions set forth in above represented
their intention to acquire such securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments used in such
transactions. All recipients received adequate information about the Registrant
at the time of the acquisition of such securities or had access, through
employment or other relationships with the Registrant, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
5.1 Opinion of Brobeck Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement for the Directors of the
Registrant.
10.2* Form of Indemnification Agreement for the Officers of the
Registrant.
10.3* 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.
10.5* 1998 Employee Stock Purchase Plan.
10.6* Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7* Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.8+* Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP.
10.15 Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
11.1* Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1 Power of Attorney (contained on signature page on page
II-3).
</TABLE>
- ---------------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
** To be filed by amendment.
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
(b)FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule
(2) Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE> 99
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 30th day of September, 1998.
BROADCOM CORPORATION
By: /s/ HENRY T. NICHOLAS
------------------------------------
Henry T. Nicholas, III, Ph.D.,
Co-Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Henry T. Nicholas, III and William J. Ruehle, and each of them, his true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, or any related registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HENRY T. NICHOLAS Co-Chairman, President and September 30, 1998
- ----------------------------------------------------- Chief Executive Officer
Henry T. Nicholas, III, Ph.D. (principal executive
officer)
/s/ HENRY SAMUELI Co-Chairman, Vice President September 30, 1998
- ----------------------------------------------------- of Research and Development
Henry Samueli, Ph.D. and Chief Technical Officer
/s/ WILLIAM J. RUEHLE Chief Financial Officer and September 30, 1998
- ----------------------------------------------------- Vice President, Finance
William J. Ruehle (principal financial and
accounting officer)
/s/ MYRON S. EICHEN Director September 30, 1998
- -----------------------------------------------------
Myron S. Eichen
/s/ ALAN ROSS Director September 30, 1998
- -----------------------------------------------------
Alan Ross
/s/ WERNER F. WOLFEN Director September 30, 1998
- -----------------------------------------------------
Werner F. Wolfen
</TABLE>
II-6
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------- ----------- PAGE
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
5.1 Opinion of Brobeck Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement for the Directors of the
Registrant.
10.2* Form of Indemnification Agreement for the Officers of the
Registrant.
10.3* 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.
10.5* 1998 Employee Stock Purchase Plan.
10.6* Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7* Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
10.8+* Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP.
10.15 Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
11.1* Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1 Power of Attorney (contained on signature page on page
II-3).
</TABLE>
- ---------------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
** To be filed by amendment.
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
II-7
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Broadcom Corporation
We have audited the financial statements of Broadcom Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated January 16, 1998,
except for Note 9, as to which the date is March 31, 1998 and Note 7, as to
which the date is September 25, 1998 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 31, 1998
and Note 7, as to which
the date is September 25, 1998
S-1
<PAGE> 103
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $ 50,000 $ 162,000 $ -- $ 50,000 $ 162,000
Reserve for excess and obsolete
inventory........................ -- 55,000 -- -- 55,000
-------- ---------- ---- -------- ----------
Total......................... $ 50,000 $ 217,000 $ -- $ 50,000 $ 217,000
======== ========== ==== ======== ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $162,000 $ 213,000 $ -- $228,000 $ 147,000
Reserve for excess and obsolete
inventory........................ 55,000 1,055,000 -- 361,000 749,000
-------- ---------- ---- -------- ----------
Total......................... $217,000 $1,268,000 $ -- $589,000 $ 896,000
======== ========== ==== ======== ==========
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $147,000 $ 574,000 $ -- $ -- $ 721,000
Reserve for excess and obsolete
inventory........................ 749,000 1,028,000 -- 91,000 1,686,000
-------- ---------- ---- -------- ----------
Total......................... $896,000 $1,602,000 $ -- $ 91,000 $2,407,000
======== ========== ==== ======== ==========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 5.1
BROBECK, PHLEGER & HARRISON LLP
38 Technology Drive
Irvine, California 92618
September 30, 1998
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, California 92618
Re: Broadcom Corporation Registration Statement on Form S-1 for
3,450,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Broadcom Corporation, a California
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 470,000 shares of the Company's Common Stock (the
"Company Shares") and the sale by certain Selling Shareholders of up to
2,980,000 shares of the Company's Common Stock (the "Selling Shareholder
Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Company Shares and the sale of the Selling Shareholder Shares. Based on such
review, we are of the opinion that (i) the Company Shares and Selling
Shareholder Shares have been duly authorized, and (ii) the Company Shares, if,
as and when issued in accordance with the Registration Statement and the related
prospectus (as amended and supplemented through the date of issuance) will be
legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
<PAGE> 2
Broadcom Corporation
Page 2
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.15
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
BETWEEN
THE IRVINE COMPANY
AND
BROADCOM CORPORATION
<PAGE> 2
INDEX TO LEASE
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premises
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
Section 2.4 Landlord's Responsibilities
Section 2.5 Right of First Refusal
Section 2.6 Option to Expand
Section 2.7 Temporary Premises Lease
ARTICLE III. TERM
Section 3.1 General
Section 3.2 Delay in Possession
Section 3.3 Right to Extend the Lease Term
ARTICLE IV. RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
Section 4.4 Special Limitation on HVAC Operating Expenses
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. COMMON AREAS; SERVICES
Section 6.1 Utilities and Services
Section 6.2 Operation and Maintenance of Common Areas
Section 6.3 Use of Common Areas
Section 6.4 Parking
Section 6.5 Changes and Additions by Landlord
Section 6.6. Outdoor Courtyard Area
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Joint Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
(i)
<PAGE> 3
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
ARTICLE XV. END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII. BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
Section 22.7 Communications/Security Equipment
Section 22.8 JAMS Arbitration
Exhibit A-1 Description of Premises
Exhibit A-2 Temporary Premises 2nd Floor of Building C
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit F Form License Agreement
Exhibit G Pre-Commencement Repair Schedule
Exhibit H Entities Excluded from Project Signage
Exhibit X Work Letter
Exhibit Y Project Site Plan
(ii)
<PAGE> 4
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
THIS LEASE is made as of the 7th day of August, 1998, (the
"Effective Date") by and between THE IRVINE COMPANY, a Delaware corporation,
hereafter called "Landlord" and Broadcom Corporation, a California corporation,
hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean
and refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises includes all of one (1) three (3) story building
known as 16215 Alton Parkway which contains approximately 88,903
rentable square feet ("Building A") and all of one (1) two (2) story
building known as 16205 Alton Parkway ("Building B") which floor
contains approximately 63,451 square feet.
2. Project Description: Alton Corporate Center
3. Use of Premises: General office use and any other use which does not
violate applicable laws, rules and regulations or covenants, conditions
and restrictions.
4. Estimated Commencement Date: The Premises shall be delivered in phases
as follows:
Building A: November 15, 1998
Building B: February 1, 1999
Actual Commencement Date: To be determined as provided in Section 3.1.
5. Lease Term: Eighty Four (84) months from the Building A Commencement
Date, plus such additional days as may be required to cause this Lease
to terminate on the final day of the calendar month.
6. Basic Rent: One Hundred Twenty Thousand Nineteen Dollars ($120,019.00)
per month, based on $1.35 per rentable square foot of Building A until
the Commencement Date for Building B. As of Commencement Date for
Building B, the aggregate Basic Rent for the Premises shall be Two
Hundred Five Thousand Six Hundred and Seventy-Eight Dollars (
$205,678.00) based on $1.35 per rentable square foot.
Basic Rent is subject to adjustment as follows:
Commencing on the first day of the thirteenth (13th) month of the Lease
Term, the Basic Rent shall be Two Hundred Thirteen Thousand Two Hundred
Ninety-Six Dollars ($213,296.00) per month, based on $1.40 per rentable
square foot.
Commencing on the first day of the twenty-fifth (25th) month of the
Lease Term, the Basic Rent shall be Two Hundred Twenty Thousand Nine
Hundred Thirteen Dollars ($220,913.00) per month, based on $1.45 per
rentable square foot.
Commencing on the first day of the thirty-seventh (37th) month of the
Lease Term, the Basic Rent shall be Two Hundred Twenty-Eight Thousand
Five Hundred Thirty-One Dollars ($228,531.00) per month, based on $1.50
per rentable square foot.
Commencing on the first day of the forty-ninth (49th) month of the
Lease Term, the Basic Rent shall be Two Hundred Thirty-Six Thousand One
Hundred Forty-Nine Dollars ($236,149.00) per month, based on $1.55 per
rentable square foot.
Commencing on the first day of the sixty-first (61st) month of the
Lease Term, the Basic Rent shall be Two Hundred Forty-Three Thousand
Seven Hundred Sixty-Six Dollars ($243,766.00) per month, based on $1.60
per rentable square foot.
Commencing on the first day of the seventy-third (73rd) month of the
Lease Term, the Basic Rent shall be Two Hundred Fifty-One Thousand
Three Hundred Eighty-Four Dollars ($251,384.00) per month, based on
$1.65 per rentable square foot.
1
<PAGE> 5
7. Guarantor(s): NONE
8. Floor Area of Premises: Approximately 152,354 rentable square feet
based on:
Building A: 88,903
Building B: 63,451
9. Security Deposit: See Section 4.3
10. Broker(s): CB Richard Ellis, Inc.
11. Additional Insureds: Insignia Commercial Group, Inc.
12. Address for Payments and Notices:
<TABLE>
<CAPTION>
LANDLORD TENANT
<S> <C>
Insignia Commercial Group, Inc.
One Technology Drive, Suite F-207 PRIOR TO COMMENCEMENT DATE:
Irvine, CA 92618
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, CA 92618
Attention: Director of Corporate Services
With an additional copy sent to the same address to
the attention of Director of Corporate Services
With a copy of notices to: AFTER COMMENCEMENT DATE:
IRVINE INDUSTRIAL COMPANY Broadcom Corporation
P.O. Box 6370 16215 Alton Parkway
Newport Beach, CA 92658-6370 Irvine, CA
Attn: Vice President, Industrial Attention: Director of Corporate Services
Operations
With an additional copy sent to the same
address but to Chief Financial Officer
and with a copy of notices of default
only to:
Brobeck, Phleger & Harrison 38
Technology Drive Irvine, CA 92618
Attention: Bruce Hallett, Esq.
</TABLE>
13. Tenant's Liability Insurance Requirement: $ 2,000,000.00
14. Vehicle Parking Spaces: 609 spaces within the Common Area of the
Project based on four (4) spaces per 1000 rentable square feet of
Premises area.
15. Estimated Space Plan Approval Date: July 20, 1998.
2
<PAGE> 6
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in EXHIBIT A-1 (the "Premises"), containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions
and including the exterior patio area delineated on Exhibit A-1; provided,
however, that any furniture or equipment placed or maintained on the exterior
patio shall be subject to Landlord's prior written approval that such furniture
complies with Landlord's standards for exterior furnishings. The Premises are to
be located in the buildings identified in Item 1 of the Basic Lease Provisions
(which together with the underlying real property, are collectively referred to
as the "Building"), and is a portion of the project shown in EXHIBIT Y (the
"Project"). Landlord shall have no right to relocate Tenant from the Premises at
any time during the Term of this Lease or any extension.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that, except as
expressly provided in this Lease, neither Landlord nor any representative of
Landlord has made any representation or warranty with respect to the Premises or
the Building or the suitability or fitness of either for any purpose, including
without limitation any representations or warranties regarding zoning or other
land use matters; and that neither Landlord nor any representative of Landlord
has made any representations or warranties regarding (i) what other tenants or
uses may be permitted or intended in the Building and the Project, or (ii) any
exclusivity of use by Tenant with respect to its permitted use of the Premises
as set forth in Item 3 of the Basic Lease Provisions. Tenant further
acknowledges that neither Landlord nor any representative of Landlord has agreed
to undertake any alterations or additions or construct any improvements to the
Premises except as expressly provided in this Lease. The taking of possession or
use of the Premises by Tenant for the conduct of Tenant's business therein (but
not for construction or early entry for fixturization in accordance with the
Work Letter) shall conclusively establish that the Premises and the Building
were in satisfactory condition and in conformity with the provisions of this
Lease in all respects, except for: (i) those matters which Tenant brings to
Landlord's attention on a written punch list delivered to Landlord within thirty
(30) days after the Term of this Lease commences with respect to such portion of
the Premises as provided in Article III below, and (ii) Landlord's other
obligations specifically provided in this Lease, including without limitation,
the responsibilities contained in Section 2.4 hereof. Nothing contained in this
Section shall affect the commencement of the Term or the obligation of Tenant to
pay rent. Landlord shall diligently complete all punch list items of which it is
notified as provided above.
Landlord shall deliver the Premises to Tenant on the Commencement Date
clean and free of debris with all items of Landlord's Work, including without
limitation, the installation of the Tenant Improvements completed in accordance
with the terms of EXHIBIT X. Landlord warrants to Tenant that the roof,
plumbing, fire sprinkler system, lighting, heating, ventilation and air
conditioning systems and electrical systems in the Premises, shall be in good
operating condition on the Commencement Date. In order to cause the Building
systems to be in compliance with the foregoing warranty as of the Commencement
Date, Landlord shall correct the matters listed on Exhibit G (the
"Pre-Commencement Repair Schedule") prior to the Commencement Date at its sole
cost and expense and not as a Project Cost. If a non-compliance with such
warranty exists as of the Commencement Date, Landlord shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Tenant
setting forth the nature and extent of such non-compliance, rectify same at
Landlord's cost and expense. Tenant's acceptance of the Premises shall be
subject to the foregoing and to the provisions of Section 3.2 of the Lease
regarding delivery of possession and completion of Landlord's Work and all
punch-list items.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building and/or the Project as
any part of Tenant's corporate or trade name. Landlord shall have the right to
change the name, address, number or designation of the Building or Project
without liability to Tenant; provided, however, if the address of the Building
and/or the Project is changed by Landlord, Landlord agrees to provide Tenant
with no less than sixty (60) days prior written notice and to reimburse Tenant
for all expenses reasonably incurred by Tenant in conjunction with such address
change (including, without limitation, the cost of changing Tenant's stationery
and of notifying Tenant's clients and customers of Tenant's new address of the
Building and/or the Project), not to exceed Five Thousand Dollars ($5,000.00) in
the aggregate.
SECTION 2.4 LANDLORD'S RESPONSIBILITIES.
(a) Landlord shall correct, repair or replace, at Landlord's sole cost
and expense and not as a Project Cost, any non-compliance of the Building
exterior and the Common Areas with all applicable building permits and codes in
effect as of the Commencement Date, including without limitation, the provisions
of Title III of the Americans With Disabilities Act ("ADA") in effect as of the
Commencement Date. Said costs of compliance shall be Landlord's sole cost and
shall not be part of Project Costs. Landlord shall correct, repair or replace
any non-compliance of the Building exterior and the Common Areas with any
revisions or amendments to the ADA in effect after the Commencement Date,
provided that the amortized cost of such repairs or replacements (amortized over
the useful life thereof using a market cost of funds reasonably determined by
Landlord) shall be included as Project Costs payable by Tenant. All other ADA
compliance issues which pertain to the Premises, including without limitation,
in connection with Tenant's construction of any alterations or other
improvements in the Premises (and any resulting ADA compliance requirements in
the Common Areas), the Tenant Improvements and the operation of Tenant's
business and employment practices in the Premises, shall be the responsibility
of Tenant at its sole cost and expense. Landlord shall, during the initial Lease
Term, correct, repair or replace, at Landlord's sole cost and expense and not as
a Project Cost, any failure of the structural components of the roof,
foundations, footings and load-bearing walls of the Building. The repairs,
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corrections or replacements required of Landlord or of Tenant under the
foregoing provisions of this Section 2.4 shall be made promptly following notice
of non-compliance from any applicable governmental agency.
(b) Landlord warrants to Tenant that the Tenant Improvements to be
completed pursuant to the Work Letter shall be free from defects in workmanship
or materials for a period of twelve (12) months from the Commencement Date.
Landlord shall promptly rectify any non-compliance at its sole cost and expense
after receipt of written notice from Tenant within such time setting forth the
nature and extent of any such non-compliance.
(c) In connection with the completion of the Tenant Improvements pursuant
to the Work Letter, Landlord shall obtain customary warranties and guaranties
from the contractor(s) performing such work and/or the manufacturers of
equipment installed but shall be under no obligation to incur additional expense
in order to obtain or extend such warranties. If after expiration of the initial
twelve (12) months of the Lease Term, Tenant is required to make repairs to any
component of the Premises or any of its systems for which Landlord may have
obtained a warranty, Landlord shall, upon request by Tenant, use its good faith
efforts to pursue its rights under any such warranties for the benefit of
Tenant. Landlord shall be under no obligation to incur any expense in connection
with asserting rights under such warranties or guaranties against either the
contractor or the manufacturer, but shall use reasonable good faith efforts to
enforce such warranties and guaranties for Tenant's benefit.
SECTION 2.5. RIGHT OF FIRST REFUSAL. Provided Tenant is not then in default of
any monetary covenant of this Lease (including, without limitation, the
obligation to pay Basic Rent and/or Tenant's Share of Operating Expenses), or
any material non-monetary covenant, following written notice to Tenant and the
expiration of the applicable cure period, Landlord hereby grants Tenant the
continuing right ("First Right") to lease, during the initial Term of this
Lease, any space which is available for lease in the Project ("First Right
Space") in accordance with and subject to the provisions of this Section 2.5. At
any time after the date of this Lease, but prior to leasing the First Right
Space, or any portion thereof, to any third party, if Landlord has reached a
tentative agreement (which may be a nonbinding, tentative agreement) to lease
any of the First Right Space to a third party, Landlord shall give Tenant
written notice describing the space (the "Designated First Right Space") and the
basic economic terms including but not limited to the Basic Rent, term,
operating expense base, and tenant improvement allowance (collectively, the
"Economic Terms"), tentatively agreed upon for such lease, provided that the
Economic Terms shall exclude brokerage commissions and other Landlord payments
that do not directly inure to such third party's benefit. It is understood that
should Landlord intend to lease other space in addition to the First Right Space
as part of a single transaction, then Landlord's notice shall so provide and all
such space shall collectively be subject to the following provisions. If the
Economic Terms include a proposed lease term which is not conterminous with the
Term remaining under this Lease, Tenant shall have the right to lease such space
upon the terms set forth in the Designated Space Alternative (defined below) but
only for the balance of the Term remaining under this Lease provided such
remaining Term is not less than Thirty Six (36) months. If the Economic Terms
for any Designated First Right Space would not result in a lease which is
coterminous with this Lease, Landlord shall also deliver to Tenant, with such
notice a proposal (the "Designated Space Alternative") which indicates the
revised economic terms Landlord requires to change the term for the Designated
First Right Space to be coterminous with the Term of this Lease. Within ten (10)
business days after receipt of Landlord's notice, Tenant shall give Landlord
written notice ("Tenant's First Right Acceptance Notice") pursuant to which
Tenant shall elect to: (i) lease all, but not less than all, of the Designated
First Right Space upon the Economic Terms provided, however, that if such
Economic Terms would cause the commencement date for such Designated First Right
Space to occur prior to the Commencement Date for Building B, Tenant may delay
the commencement date for such Designated First Right Space to the earlier to
occur of: (a) its occupancy of such space for any purpose other than
construction or installation of furniture, fixtures or equipment; or (b) six (6)
months after the date of Tenant's First Right Acceptance Notice; or (ii) lease
all, but not less than all, of the Designated First Right Space upon the terms
of the Designated Space Alternative commencing on a date which Tenant may
designate provided such date is not more than six (6) months after the date of
Landlord's notice and ending upon the expiration of the Term of this Lease; or
(iii) decline to lease the Designated First Right Space, in which event Landlord
may lease the Designated Space to any third party upon the Economic Terms and
such other terms as it deems appropriate. In the event that Tenant fails to
respond in writing to Landlord's notice within said ten (10) business day
period, Tenant shall be deemed to have elected clause (iii) above. If Tenant
notifies Landlord that it has elected to lease the Designated First Right Space,
then Landlord shall promptly prepare and deliver to Tenant an amendment to this
Lease consistent with the foregoing, and Tenant shall execute and return same to
Landlord within ten (10) business days. Tenant's failure to timely return the
amendment shall entitle Landlord at its option to specifically enforce Tenant's
commitment to lease the Designated First Right Space, to lease such space to a
third party, and/or to pursue any other available legal remedy. In the event
that Landlord shall not enter into a lease for the Designated First Right Space,
or a portion thereof, with a third party within one hundred eighty (180) days
following Landlord's notice described above, then prior to leasing the
Designated First Right Space to any third party thereafter, Landlord shall
repeat the procedures set forth in this Section 2.5. In the event that Landlord
leases the Designated First Right Space, or any portion thereof, to a third
party in accordance with the provisions of this Section 2.5, and during the
initial Term of this Lease the First Right Space, or any portion thereof, shall
again become available for releasing, then prior to Landlord entering into any
such new lease with a third party for the First Right Space, Landlord shall
repeat the procedures specified above in this Section 2.5. Notwithstanding the
foregoing, it is understood that Tenant's First Right shall be subject to any
express contractual rights existing as of the Effective Date of this Lease
including without limitation expansion or extension rights previously granted by
Landlord to AST Research Inc. or any third party tenant now or hereafter
occupying the First Right Space or any portion thereof, and in no event shall
any such First Right Space be deemed available for leasing until the term of the
existing lease shall have been terminated or shall have expired without such
tenant's timely exercise of any preexisting contractual expansion or extension
rights and the
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existing tenant thereof shall have vacated the First Right Space. If any tenant
occupying any portion of the First Right Space does not possess express
contractual expansion or extension rights granted to such tenant prior to the
applicable First Right notice to Tenant (i.e., pre-existing contractual rights),
Landlord must offer such First Right Space to Tenant pursuant to this Section
2.5.
Notwithstanding the foregoing, if Tenant exercises this right of first
refusal or requests to lease available space in the Project (not previously
offered) during the initial six (6) months of the Term (from the Commencement
Date for Building A) the terms and conditions for such space shall be the same
as the original Premises including without limitation the Basic and Additional
Rent and the length of the Lease Term.
Tenant's rights under this Section 2.5 shall belong solely to Broadcom
Corporation, a California corporation, and may not be assigned or transferred
except in connection with the assignment of this Lease to a "Tenant Affiliate"
as hereinafter defined. Any attempted assignment or transfer of such rights
except to a Tenant Affiliate shall be void and of no force or effect.
SECTION 2.6. OPTION TO EXPAND INTO AST SPACE. Subject to the conditions set
forth in this paragraph, Tenant shall have the right to expand the Premises
under this Lease to include all but not less than all of the ground floor of
16225 Alton Parkway ("Building C"), which contains approximately 38,976 rentable
square feet and is currently occupied by AST Research Inc. ("AST") together with
any other space in the Project then being occupied by AST or its successors or
assigns ("AST Space"). Tenant's expansion rights with respect to the AST Space
may be exercised by Tenant delivering a written notice to Landlord (the "AST
Space Expansion Notice") at any time during the Term of this Lease specifying
the date upon which Tenant is prepared to add the AST Space to the Premises
provided that such date shall not be sooner than either: (i) nine (9) months
after of the date of the AST Space Expansion Notice; or (ii) prior to April 1,
2000. The commencement date for the AST Space shall be the earlier to occur of:
(x) Tenant's occupancy of the AST Space for any purpose other than construction
of tenant improvements or installation of furniture, fixtures and equipment; or
(y) ninety (90) days after AST vacates the AST Space. Tenant may not give
Landlord an AST Space Expansion Notice unless each of the following conditions
is satisfied:
(a) Tenant shall not be in default of any monetary covenant of
this Lease (including without limitation the obligation to
pay Basic Rent and/or Tenant's share of Operating Expenses)
or any material non-monetary covenant following written
notice to Tenant and the expiration of the applicable cure
period, at the time the AST Space Expansion Notice is
given;
(b) There shall not be available for lease any other contiguous
block of space in the Project which is greater than 20,000
square feet; and
(c) There shall be a minimum of thirty six (36) months
remaining in the Term of this Lease as of the date the AST
Space would be incorporated into the Premises.
The Basic Rent payable for the AST Space shall be at the fair market
rental, including subsequent adjustments, for comparable office space being
leased by Landlord in the Irvine Spectrum (the "Expansion Space Economic
Terms"). In addition, Tenant shall be obligated to reimburse Landlord for fifty
percent (50%) of the actual reasonable out of pocket costs incurred to relocate
AST and reconnect AST's personal property as required by the terms the existing
AST Lease (the pertinent provisions of which have been provided to Tenant for
review) except as specifically set forth in this paragraph (the "Relocation
Costs"). The AST Lease limits Landlord's obligation to fund the costs of
relocating AST to a maximum of two (2) months of basic rent then payable under
the AST Lease (the "Relocation Cost Cap") except that such limitation does not
apply to tenant improvement expenditures related to the relocation. Landlord
agrees that Relocation Costs shall be subject to the Relocation Cost Cap but the
Relocation Costs shall not include the cost of tenant improvements for AST's
relocation which would fall within the category of Standard Improvements as
defined in the Work Letter of this Lease but Relocation Costs shall include the
costs of tenant improvements which would be Non-Standard Improvements as defined
in the Work Letter of this Lease including without limitation, a computer room
with raised flooring, a fire suppression system, a water detection system and
cabling attendant to those systems which Landlord is required to provide to AST
in its new space. Tenant shall pay the Relocation Costs prior to its occupancy
of the AST Space.
Landlord will provide written notice to Tenant of Landlord's good faith
determination of the Expansion Space Economic Terms and an estimate of the
Relocation Costs not later than fifteen (15) days after the date upon which
Tenant delivers an AST Expansion Space Notice to Landlord (the "Expansion
Costs"). Tenant will have fifteen (15) days ("Tenant's Review Period") after
receipt of Landlord's notice of the Expansion Costs within which to accept the
Expansion Space Economic Terms or to reasonably object thereto in writing. In no
event shall Landlord's estimate of the Relocation Costs be binding on Tenant.
Tenant's failure to object to the Expansion Space Economic Terms submitted by
Landlord in writing within Tenant's Review Period will conclusively be deemed
Tenant's approval and acceptance thereof. If Tenant reasonably objects to the
Expansion Space Economic Terms submitted by Landlord within Tenant's Review
Period, Landlord and Tenant will attempt in good faith to agree upon such
Expansion Space Economic Terms using their best good faith efforts. If Landlord
and Tenant fail to reach agreement on such Expansion Space Economic Terms within
ten (10) days following the expiration of Tenant's Review Period (the "Outside
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Agreement Date"), then either party may elect, by written notice to the other
party given on or before the Outside Agreement Date, cause the fair market
rental, including subsequent adjustments, for the AST Space to be determined by
appraisal as follows.
Within ten (10) days following receipt of such appraisal election, the
parties shall attempt to agree on one (1) appraiser to determine the Expansion
Space Economic Terms. If the parties are unable to agree in that time, then each
party shall designate an appraiser within five (5) days thereafter. Should
either party fail to so designate an appraiser within that time, then the
appraiser designated by the other party shall determine the fair rental value.
Should each of the parties timely designate an appraiser, then the two
appraisers so designated shall appoint a third appraiser who shall, acting
alone, determine the Expansion Space Economic Terms. Any appraiser designated
hereunder shall have an M.A.I. certification with not less than five (5) years
experience in the valuation of commercial office buildings in Orange County,
California.
Within twenty (20) days following the selection of the appraiser, such
appraiser shall determine the fair market rental value, including subsequent
adjustments for the AST Space which shall become the Expansion Space Economic
Terms. In determining such value, the appraiser shall first consider rental
comparables for space owned by Landlord in the Irvine Spectrum area (including,
without limitation, the Project), provided that if such adequate comparables do
not exist, then the appraiser may consider transactions involving similarly
improved space in the Irvine Spectrum area with appropriate adjustments for
differences in location and quality of project. In no event shall the appraiser
attribute factors for market tenant improvement allowances or brokerage
commissions to reduce said fair market rental. Landlord and Tenant shall each
pay for the services of their respective appraisers and shall share equally the
cost of the third appraiser.
Within five (5) days after the determination of the Expansion Space
Economic Terms whether by agreement or by appraisal, Landlord shall prepare an
amendment to this Lease reflecting Tenant's absorption of the AST Space. Tenant
shall execute and return the amendment to Landlord within five (5) days after
its receipt. After the Lease amendment has been fully executed and delivered,
Landlord shall give notice to AST of the relocation date. If Tenant fails to
execute and return the expansion amendment within said time period, Tenant's
exercise of its expansion rights shall be deemed terminated and Tenant shall
have no further rights to the AST Space but shall be obligated to reimburse
Landlord for the reasonable costs incurred by Landlord after receipt of Tenant's
AST Expansion Notice including without limitation fees and charges of space
planners and the appraiser(s). In no event shall Landlord have any liability to
Tenant if AST is unwilling or unable to vacate the AST Space in accordance with
the terms of its lease; provided, however, that Tenant may, at its expense but
with counsel reasonably acceptable to Landlord, cause legal action to be taken
on Landlord's behalf and with Landlord's cooperation to enforce Landlord's
relocation rights under the AST Lease.
Tenant's rights under this Section 2.5 shall belong solely to Broadcom
Corporation, a California corporation and may not be assigned or transferred
except in connection with the assignment of this Lease to a "Tenant Affiliate"
as hereinafter defined. Any attempted assignment or transfer of such rights
except to a Tenant Affiliate shall be void and of no force or effect.
SECTION 2.7. TEMPORARY PREMISES LEASE. Landlord leases to Tenant and Tenant
leases from Landlord a portion of the premises shown on EXHIBIT A-2 located on
the second floor of Building C containing not less than fifteen thousand
(15,000) nor more than thirty thousand (30,000) rentable square feet to be
designated by Tenant and approved by Landlord (the "Temporary Premises") .
Tenant's right to occupy the Temporary Premises (the "Temporary Premises Term")
shall commence on the Effective Date and shall expire not later than midnight on
February 28, 1999. Tenant's use of the Temporary Premises shall be subject to
all terms and conditions of this Lease except that the Basic Rent for the
Temporary Premises shall be a minimum of Eleven Thousand Two Hundred Fifty
Dollars ($11,250.00) based on $0.75 per rentable square foot per month but shall
be determined based on the actual number of rentable square feet of Temporary
Premises occupied by Tenant subject to a minimum Basic Rent on 15,000 square
feet. In addition, Tenant shall pay Operating Expenses monthly with respect to
the Temporary Premise pursuant to Section 4.2 hereof based upon an initial
estimate of $0.27 per rentable square foot per month and a minimum of 15,000
rentable square feet subject to the adjustment for the size of the Temporary
Premises; if more, than the minimum area is used by Tenant. Tenant's obligation
to pay Basic and Additional Rent for the Temporary Premises shall commence on
the earlier of occupancy of any portion thereof for any purpose other than
construction or installation of furniture, fixtures or equipment or August 15,
1998. The Temporary Premises shall be leased to Tenant on an "AS-IS" basis.
Tenant shall surrender the Temporary Premises to Landlord not later than
February 28, 1999 but may do so sooner upon thirty (30) days prior written
notice to Landlord and otherwise in accordance with the provisions of this Lease
regarding surrender of the Premises. During the Temporary Premises Term, Tenant
shall have the nonexclusive use of additional parking stalls based on four (4)
stalls per one thousand (1,000) rentable square feet of Temporary Premises
leased free of charge but subject to the provisions of Section 6.4 of this
Lease. Provisions of this Lease referring to its "Term" or "Commencement Date"
refer to the Premises unless the Temporary Premises are specifically referenced.
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ARTICLE III. TERM
SECTION 3.1. GENERAL. The term of this Lease (the "Term") for the Premises
shall be for the period shown in Item 5 of the Basic Lease Provisions and the
term of the Temporary Premises Lease shall be as set forth in Section 2.7
hereof. Subject to the provisions of Section 3.2 below, the Term with respect to
each portion of the Premises (not including the Temporary Premises) shall
commence ("Commencement Date") on the earlier to occur of: (i) ten (10) business
days following the date that (A) Landlord notifies Tenant that Landlord has
substantially completed the construction of the Tenant Improvements in
accordance with the Work Letter attached as EXHIBIT X hereto, but for minor
"punch list" items identified by Landlord and Tenant in a walk-through of the
Premises prior to the Commencement Date, which items do not preclude or
materially impair Tenant from conducting its business from the Premises, and (B)
Landlord has provided Tenant with all parking required by this Lease in the
Common Area of the Project, and (C) Landlord has obtained and provided Tenant
with a certificate of occupancy or temporary certificate of occupancy for the
Premises from the City of Irvine or (ii) the date Tenant acquires possession or
commences use of such portion of the Premises (excluding the Temporary Premises)
for any purpose other than construction or installation of equipment, furniture,
fixtures or network and telecommunications cabling. Possession of the Premises
shall be tendered to Tenant on the Commencement Date; Within ten (10) days after
the Commencement Date has occurred, the parties shall memorialize on a form
provided by Landlord the actual Commencement Date and the expiration date
("Expiration Date") of this Lease. Tenant's failure to execute that form shall
not affect the validity of Landlord's determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date of either portion of the premises, of either portion of the
premises this Lease shall not be void or voidable nor shall Landlord be liable
to Tenant for any resulting loss or damage. However, Tenant shall not be liable
for any rent and the Commencement Date shall not occur until Landlord delivers
possession of the Premises and the Premises are in fact available for Tenant's
occupancy with any Tenant Improvements that have been approved as per Section
3.1 above and all conditions to the Commencement Date specified in Section 3.1
above having been satisfied, except that if Landlord's failure to so deliver
possession on the Estimated Commencement Date is attributable to any action or
inaction by Tenant (including without limitation any Tenant Delay described in
the Work Letter attached to this Lease), then the Commencement Date shall not be
advanced to the date on which possession of the Premises is tendered to Tenant,
and Landlord shall be entitled to full performance by Tenant (including the
payment of rent) from the date Landlord would have been able to deliver the
Premises to Tenant but for Tenant's Delay(s). If for reasons other than "Tenant
Delays" as defined in the Work Letter attached hereto as EXHIBIT X, the
Commencement Date has not occurred by the date ("Outside Date") that is one (1)
year following the Estimated Commencement Date set forth in Item 4 of the Basic
Lease Provisions, then Tenant shall have the right to terminate this Lease upon
thirty (30) days prior written notice to Landlord delivered at any time
following the Outside Date and prior to Landlord's delivery of the Premises to
Tenant in the condition required under EXHIBIT X, and this Lease shall terminate
thirty (30) days after such notice unless Landlord shall so deliver the Premises
to Tenant within said thirty (30) days.
SECTION 3.3. RIGHT TO EXTEND THE LEASE TERM. Provided that Tenant is not in
default of any monetary covenant of this Lease (including, without limitation,
the obligation to pay Basic Rent and/or Tenant's Share of Operating Expenses) or
any material non-monetary covenant, following written notice and the expiration
of the applicable cure period, either at the time of exercise of the extension
right granted herein or at the time of the commencement of such extension, then
Tenant may extend the Term of this Lease for up to two (2) periods of sixty (60)
months each. Tenant shall exercise its right to extend the Term by and only by
delivering Landlord, not less than six (6) months or more than twelve (12)
months prior to the expiration date of the then current Term, Tenant's
irrevocable written notice of its commitment to extend (the "Commitment
Notice"). The Basic Rent payable under the Lease during any extension of the
Term shall be at the fair market rental, including subsequent adjustments, for
comparable office space being leased by Landlord in the Irvine Spectrum.
Landlord will provide written notice to Tenant of Landlord's good faith
determination of the fair market rental rate not later than thirty (30) days
after the date upon which Tenant timely exercises its extension option. Tenant
will have thirty (30) days ("Tenant's Review Period") after receipt of
Landlord's notice of the fair market rental rate within which to accept such
fair market rental rate or to reasonably object thereto in writing. Tenant's
failure to object to the fair market rental rate submitted by Landlord in
writing within Tenant's Review Period will conclusively be deemed Tenant's
approval and acceptance thereof. If Tenant reasonably objects to the fair market
rental rate submitted by Landlord within Tenant's Review Period, Landlord and
Tenant will attempt in good faith to agree upon such fair market rental rate
using their best good faith efforts. If Landlord and Tenant fail to reach
agreement on such fair market rental rate within fifteen (15) days following the
expiration of Tenant's Review Period (the "Outside Agreement Date"), then either
party may elect, by written notice to the other party, to cause said rental,
including subsequent adjustments, to be determined by appraisal as follows.
Within ten (10) days following receipt of such appraisal election, the
parties shall attempt to agree on an appraiser to determine the fair market
rental. If the parties are unable to agree in that time, then each party shall
designate an appraiser within ten (10) days thereafter. Should either party fail
to so designate an appraiser within that time, then the appraiser designated by
the other party shall determine the fair rental value. Should each of the
parties timely designate an appraiser, then the two appraisers so designated
shall appoint a third appraiser who shall, acting alone, determine the fair
rental value of the Premises. Any appraiser designated hereunder shall have an
M.A.I. certification with not less than five (5) years experience in the
valuation of commercial office buildings in Orange County, California.
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Within thirty (30) days following the selection of the appraiser, such
appraiser shall determine the fair market rental value, including subsequent
adjustments of the Premises. In determining such value, the appraiser shall
consider rental comparables for space in the Irvine Spectrum (including, without
limitation, the Project). In no event shall the appraiser attribute factors for
market tenant improvement allowances or brokerage commissions to reduce said
fair market rental. Landlord and Tenant shall each pay for the services of their
respective appraisers and shall share equally the cost of the third appraiser.
Within twenty (20) days after the determination of the fair market
rental, Landlord shall prepare an amendment to this Lease reflecting the
extended term and rental rate for the extension period, and Tenant shall execute
and return same to Landlord within ten (10) days. Should the fair market rental
not be established by the commencement of the extension period, then Tenant
shall continue paying rent at the rate in effect during the last month of the
initial Term, and a lump sum adjustment shall be made promptly upon the
determination of such new rental.
If Tenant fails to timely comply with any of the provisions of this
Section, Tenant's right to extend the Term shall be extinguished and the Lease
shall automatically terminate as of the expiration date of the Term, without any
extension and without any liability to Landlord. Tenant shall have no other
right to extend the Term beyond the two sixty (60) month extension created by
this Section. Unless agreed to in a writing signed by Landlord and Tenant, any
extension of the Term, whether created by an amendment to this Lease or by a
holdover of the Premises by Tenant, or otherwise, shall be deemed a part of, and
not in addition to, any duly exercised extension period permitted by this
Section.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. Tenant shall pay to Landlord without deduction or
offset (except as otherwise expressly provided in this Lease): (i) Basic Rent
for the Temporary Premises from and after the Commencement Date, for the
Temporary Premises in accordance with Section 2.7 hereof; and (ii) from and
after the Commencement Date for Building A, Basic Rent for the balance of the
Premises in the total amount shown (including subsequent adjustments, if any) in
Item 6 of the Basic Lease Provisions. Any rental adjustment shown in Item 6
shall be deemed to occur on the specified monthly anniversary of the
Commencement Date for Building A, whether or not that date occurs at the end of
a calendar month. Basic Rent for the Temporary Premises and the Premises shall
be due and payable in advance (as prorated for any partial month) on the first
day of each successive calendar month of the Term. No demand, notice or invoice
shall be required for the payment of Basic Rent. An installment of one (1) full
month's Basic Rent for Building A in the amount of One Hundred Twenty Thousand
Nineteen Dollars ($120,019.00) together with one (1) full month's minimum Basic
and additional rent for the minimum Temporary Premises in the amount of Fifteen
Thousand Three Hundred Dollars ($15,300.00) (totaling One Hundred Thirty-Five
Thousand Three Hundred Nineteen Dollars ($135,319.00) shall be delivered to
Landlord concurrently with Tenant's execution of this Lease and shall be applied
against the first due hereunder. In addition, Tenant shall pay one (1) full
month's Basic Rent for Building B in the amount of Eighty-Five Thousand Six
Hundred Fifty-Nine Dollars ($85,659.00) prior to commencement of construction of
Tenant Improvements for Building B which shall be applied against Basic Rent
first due upon the Commencement Date for Building B.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, Tenant's Share
of "Operating Expenses", as defined below, incurred by Landlord in the operation
of any Building which includes a portion of the Premises or the Temporary
Premises and the Project. The term "Tenant's Share" means that portion of an
Operating Expense determined by multiplying the cost of such item by a fraction,
the numerator of which is the floor area of the Premises (or the Temporary
Premises as the case may be) and the denominator of which is the total square
footage of the floor area within all buildings in the Project to which such
Operating Expenses relate, as of the date on which the computation is made. The
rentable square footage of the Project may be adjusted from time to time in the
event new buildings are constructed within or incorporated within the Project.
Tenant may elect to assume responsibility for the operation and maintenance of
any Building comprising a portion of the Premises which is one hundred percent
(100%) leased by Tenant (except that Landlord shall contract directly for and
provide preventive HVAC maintenance, servicing and repair) in which event, the
Operating Expenses for such Building shall be paid directly and completely by
Tenant and such expenses shall not be included within Landlord's determination
of Operating Expenses.
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Tenant's Share of Operating Expenses for the Expense
Recovery Period. Tenant shall pay the estimated amounts to Landlord in equal
monthly installments, in advance, with Basic Rent. If Landlord has not furnished
its written estimate for any Expense Recovery Period by the time set forth
above, Tenant shall continue to pay cost reimbursements at the rates established
for the prior Expense Recovery Period, if any; provided that when the new
estimate is delivered to Tenant, Tenant shall, at the next monthly payment date,
pay any accrued cost reimbursements based upon the new estimate. Notwithstanding
the foregoing, if Landlord is more than three (3) months late in the delivery of
its written estimate for any Expense Recovery Period, Tenant shall have the
right to pay any accrued cost reimbursements in equal installments over a six
(6) month period rather than in one lump sum. For
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purposes hereof, "Expense Recovery Period" shall mean every twelve month period
during the Term (or portion thereof for the first and last lease years)
commencing July 1 and ending June 30.
(c) Within one hundred twenty (120) days after the end of each Expense
Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to the actual Tenant's Share as shown by the annual statement. Any delay or
failure by Landlord in delivering any statement hereunder shall not constitute a
waiver of Landlord's right to require Tenant to pay Tenant's Share of Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within one hundred twenty (120) days
following delivery of Landlord's expense statement, Landlord's determination of
actual Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred except to the extent that a future audit shall determine that a
particular category of expenses has been improperly included as Operating
Expenses.
Landlord agrees that it will maintain complete and accurate
records of all costs, expenses and disbursements paid or incurred by Landlord,
its employees, agents and/or contractors, with respect to the Operating Expenses
in accordance with generally accepted accounting principles, consistently
applied. Such records shall be kept until one (1) year after the termination of
this Lease. Landlord shall provide in reasonable detail the calculation of
Tenant's Share of the Operating Expenses. Provided Tenant is not then in default
of any monetary covenant of this Lease (including, without limitation, the
obligation to pay Basic Rent and/or Tenant's Share of Operating Expenses), or
any material non-monetary covenant, following written notice and the expiration
of the applicable cure period, then Tenant shall have the right to have Tenant's
financial officer or a certified public accountant audit Landlord's Operating
Expenses, subject to the terms and conditions hereof. In no event, however,
shall such auditor be compensated by Tenant on a "contingency" basis, or on any
other basis tied to the results of said audit. Tenant shall give notice to
Landlord of Tenant's intent to audit within one hundred twenty (120) days
following delivery of Landlord's expense statement for each of the Expense
Recovery Periods. Following at least ten (10) business days notice to Landlord,
such audit shall be conducted at a mutually agreeable time during normal
business hours at the office of Landlord or its management agent where the
records are maintained in Orange County, California. Landlord agrees to make
such personnel available to Tenant as is reasonably necessary for Tenant's
employees and agents, to conduct such audit. Landlord shall make such records
available to Tenant's employees and agents, for inspection during normal
business hours. Tenant's employees and agents shall be entitled to make
photostatic copies of such records, provided Tenant bears the expense of such
copying, and further provided that Tenant keeps such copies in a confidential
manner and does not discuss, display or distribute such copies to any other
third party. If Tenant's audit determines that actual Operating Expenses have
been overstated by more than four percent (4%), then subject to Landlord's right
to review and/or contest the audit results, Landlord shall reimburse Tenant for
the reasonable out-of-pocket costs of such audit. Tenant's Basic Rent shall be
appropriately adjusted to reflect any overstatement in Operating Expenses. In
the event of a dispute between Landlord and Tenant regarding the results of such
audit, such dispute shall be submitted to and resolved by JAMS as provided in
Section 22.8 of this Lease.
All of the information obtained by Tenant and/or its auditor in
connection with such audit, as well as any compromise, settlement, or adjustment
reached between Landlord and Tenant as a result thereof, shall be held in strict
confidence and, except as may be required pursuant to litigation and except for
inadvertent disclosures despite Tenant's reasonable efforts to keep the
disclosed information confidential, shall not be disclosed to any third party,
directly or indirectly, by Tenant or its auditor or any of their officers,
agents or employees. Landlord may require Tenant's auditor to execute a separate
confidentiality agreement affirming the foregoing as a condition precedent to
any audit.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Tenant's Share of
Operating Expenses for the Expense Recovery Period in which the Lease
terminates, Tenant shall upon notice pay the entire increase due over the
estimated expenses paid. Conversely, any overpayment made in the event expenses
decrease shall be rebated promptly by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Tenant's Share of Operating Expenses shall be
increased for the month in which such rate(s) or amount(s) becomes effective and
for all succeeding months by an amount equal to Tenant's Share of the increase.
Landlord shall give Tenant written notice of the amount or estimated amount of
the increase, the month in which the increase will become effective, Tenant's
Share thereof and the month for which the payments are due. Tenant shall pay the
increase to Landlord as a part of Tenant's monthly payments of estimated
expenses as provided in paragraph (b) above, commencing with the month in which
effective.
(f) The term "Operating Expenses" shall mean and include all "Project
Costs" (as hereafter defined) and "Property Taxes" (as hereafter defined).
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(g) The term "Project Costs" shall include all reasonable costs and
expenses of operation and maintenance of the Building and the Project, together
with all appurtenant Common Areas (as defined in Section 6.2), and shall include
the following charges by way of illustration but not limitation: water and sewer
charges; insurance premiums or reasonable premium equivalents for the reasonable
cost of administering a self-insurance program should Landlord elect to
self-insure any risk that Landlord is authorized to insure hereunder as provided
in Section 10.2 below; license, permit, and inspection fees; heat; light; power;
air conditioning; janitorial services to any interior Common Areas; supplies;
materials; equipment; tools; the reasonable cost of any environmental,
insurance, tax or other consultant utilized by Landlord in connection with the
Premises and/or Project; establishment of reasonable reserves for replacements
and/or repair of Common Area improvements, equipment and supplies; the cost of
any capital investments, after application of previously established reserves
for such items, to the extent of the amortized cost thereof over the useful life
of such capital investment as reasonably determined by Landlord for each year of
useful life during the Term; subject to the express provisions of this Lease to
the contrary, costs incurred in connection with compliance of any laws or
changes in laws applicable to the Premises or the Project (except for laws or
changes in laws that pertain particularly to Tenant or to Tenant's particular
use of the Premises and/or only to the interior of the Premises which shall be
the sole responsibility of Tenant at its cost), to the extent such laws or
change in laws require expenditures of a "capital" nature (as determined by
generally accepted accounting principles consistently applied), then such
"capital" expenditure shall be amortized (using a market cost of funds as
reasonably determined by Landlord) over the useful life of such asset and only
the amortized cost thereof shall be included in Project Costs during the
remaining Term of the Lease; costs associated with the procurement and
maintenance of an air conditioning, heating and ventilation service agreement;
labor; reasonably allocated wages and salaries, fringe benefits, and payroll
taxes for administrative and other personnel directly applicable to the Premises
and/or Project, including both Landlord's personnel and outside personnel; any
expense incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and 10.2; and a
reasonable overhead/management fee for the professional operation of the
Project. Any such overhead management fee charged to Tenant shall not be in
excess of those being charged for other comparable first-class office projects
in the Irvine Spectrum area. It is understood that Project Costs may include
competitive charges for direct services provided by any subsidiary or division
of Landlord. Notwithstanding any contrary provision herein, Landlord agrees that
Tenant shall have access to and use of after-hours air conditioning services to
the Premises. For any Building not wholly leased to Tenant, Tenant shall pay an
hourly charge based on the reasonable cost incurred by Landlord to supply such
services and in any Building wholly leased to Tenant, Tenant shall pay the cost
for such services directly as contemplated by Section 6.1 hereof.
Notwithstanding the provisions of this Section 4.2 to the
contrary, Operating Expenses shall not include any cost or expense identified as
the responsibility of Landlord and not an Operating Expense or a Project Cost by
the express terms of this Lease, and shall not include any of the following:
(1) Leasing commissions, attorneys' fees, costs,
disbursements and other expenses incurred
by Landlord or its agents in connection with negotiations for leases with
tenants, other occupants or prospective tenants or other occupants of the
Project, and similar costs incurred in connection with disputes with and/or
enforcement of any lease with tenants, other occupants, or prospective tenants
or other occupants of the Project;
(2) "Tenant allowances", "tenant concessions", work letter
payments, and other costs or
expenses (including permit, license and inspection fees) incurred in completing,
fixturing, furnishing, renovating or otherwise improving, decorating or
redecorating space for tenants or other occupants of the Project, or vacant,
leasable space in the Project, including space planning/interior design fees for
same;
(3) Depreciation and other "non-cash" expense items;
(4) Services, items and benefits for which Tenant or any
other tenant or occupant of the
Project specifically reimburses Landlord or for which Tenant or any other tenant
or occupant of the Project pays third persons or services, items or benefits
which are not generally made available to Tenant as an occupant of the Building
or the Project;
(5) Costs or expenses (including fines, penalties and legal
fees) incurred due to the
violation by Landlord of any terms and conditions (other than by Tenant) of this
Lease or of the leases of other tenants in the Project, that would not have
incurred but for such violation by Landlord;
(6) Penalties for late payment of any Operating Expenses by
Landlord, including, without
limitation, with respect to taxes, equipment leases, etc.;
(7) Payments in respect of overhead and/or profit to any
subsidiary or Affiliate
(hereinafter defined) of Landlord, as a result of a non-competitive selection
process for services (other than the management fee) on or to the Project, or
for goods, supplies or other materials, to the extent that the costs of such
services, goods, supplies or materials exceed the costs that would have been
paid if the services, goods, supplies or materials had been provided by parties
unaffiliated with Landlord, of similar skill, competence and experience, on a
competitive basis;
(8) Payments of principal, finance charges or interest on
debt or amortization on any deed of trust or other debt encumbering the Project,
and rental payments (or increases in same) under any ground or underlying lease
or leases encumbering the Project (except to the extent the same may be made to
pay or reimburse, or may be measured by Property Taxes);
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(9) Except for a management fee which is reasonable and
commercially competitive for
similar projects in the Irvine Spectrum area, costs of Landlord's general
overhead and general administrative expenses (individual, partnership or
corporate, as the case may be) and wages, salaries and other compensation and
benefits (as well as adjustments thereto) for all employees and personnel of
Landlord above the level of manager for the Project, which costs would not be
chargeable to Operating Expenses in accordance with generally accepted
accounting principles, consistently applied;
(10) Rentals and other related expenses, if any, incurred
in leasing air conditioning
systems or other equipment ordinarily considered to be of a capital nature,
except equipment which is used in providing janitorial services and which is not
affixed to the Project and equipment which is leased on a temporary basis in
emergency situations;
(11) Advertising and promotional expenses;
(12) Costs or expenses for the acquisition of sculpture,
paintings or other works of art,
but not the reasonable expenses of maintaining, repairing and insuring same;
(13) Costs for which Landlord is compensated through or
reimbursed by insurance;
(14) Contributions to operating expense reserves (including
tax reserves), except for reasonable reserves for the roof of the Building and
as specifically set forth in Section 4.4 hereof;
(15) Contributions to political or charitable
organizations;
(16) Costs incurred in removing the property of former
tenants and/or other occupants of
the Project;
(17) The costs of any "tap fees" or one-time lump sum
sewer, water or other utility
connection fees for the Project;
(18) Costs or fees relating to the defense of Landlord's
title to or interest in the
Building and/or the Project, or any part thereof; and
(19) Any other expense which, under generally accepted
accounting principles, consistently
applied, would not be considered to be a normal maintenance or operating expense
of the Building and/or the Project.
As used herein, the term "Affiliate" shall mean and
refer to any person or entity controlling, controlled by, or under common
control with another such person or entity. "Control", as used herein, shall
mean the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of such controlled person or entity;
the ownership, directly or indirectly, of at least fifty-one percent (51%) of
the voting securities of, or possession of the right to vote, in the ordinary
direction of its affairs, at least fifty-one percent (51%) of the voting
interest in, any person or entity shall be presumed to constitute such control.
In the case of Landlord, the term "Affiliate" shall include any person or entity
controlling or controlled by or under common control with any general partner of
Landlord or any general partner of Landlord's general partner.
(h) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease or to the
Building and/or the Project, and any improvements, fixtures and equipment and
other property of Landlord located in the Building and/or the Project, except
that general net income and franchise taxes imposed against Landlord shall be
excluded; and (iii) all assessments and fees for public improvements, services,
and facilities and impacts thereon, including without limitation arising out of
any Community Facilities Districts, "Mello Roos" districts, similar assessment
districts, and any traffic impact mitigation assessments or fees (except for
assessments or fees under any Community Facilities District(s) formed after the
date of this Lease); (iv) any tax, surcharge or assessment including without
limitation taxes based on the receipt of rent (including gross receipts or sales
taxes applicable to the receipt of rent unless such are required to be paid by
Tenant) which shall be levied in addition to or in lieu of real estate or
personal property taxes, other than taxes covered by Article VIII; and (v) costs
and expenses incurred in contesting the amount or validity of any Property Tax
by appropriate proceedings.
(i) The term "Property Taxes" shall not include personal property
taxes of any kind, which shall instead be governed by the provisions of Article
VIII of this Lease.
(j) If Tenant reasonably believes that the amount of any real property
tax is improper for any reason, Tenant may notify Landlord in writing of
Tenant's desire that such real property taxes be contested or challenged by
Landlord with the applicable taxing authority. Tenant shall indicate the basis
for Tenant's contention that such taxes are improper in Tenant's notice to
Landlord. Upon receipt of any such request from Tenant, Landlord shall promptly
meet with Tenant to discuss whether or not it is appropriate to initiate a
challenge or contest of such taxes or to take no action with respect thereto.
Landlord agrees that if Landlord is pursuing tax contests for other buildings
within the Project, Landlord will also pursue such a contest for the Building if
so requested by Tenant.
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(k) Any assessment of real property taxes shall be deemed imposed in
the maximum number of installments permitted by applicable laws, whether or not
actually paid; provided, however, that if the prevailing practice in other
comparable projects in the vicinity of the Project is to pay such assessments on
an earlier basis, and Landlord pays the same on such basis, such assessments
shall be included in real property taxes as paid by Landlord. In no event,
however, shall Landlord impute any accrued interest (resulting from such
installment payments of real property taxes) in its computation of real property
taxes except as imposed by the taxing authority.
SECTION 4.3. SECURITY DEPOSIT.
(a) Prior to the execution of this Lease, Tenant has delivered to
Landlord copy of its current audited financial statements and Tenant shall
periodically provide copies of such Statements to Landlord pursuant to Section
13.3 of this Lease. Provided Tenant's Statements are delivered to Landlord each
year during the Term and are highlighted to indicated a continuing a balance of
cash and/or cash equivalents greater than Ten Million Dollars ($10,000,000.00)
(the "Cash Equivalent Threshold"), Tenant shall have no obligation to deliver to
Landlord a cash security deposit or prepaid rent. If any time during the Term,
the cash and/or cash equivalents as shown on Tenant's then current Statements,
do not exceed the Cash Equivalent Threshold amount, Tenant shall deposit with
Landlord, within thirty (30) days of Landlord's written request an amount equal
to One Hundred Ten percent (110%) of the sum of following: (i) the scheduled
Basic Rent for the Premises for the last month of the then current term; plus
(ii) one month's estimate of the Operating Expense. If at any time after
delivery of funds to Landlord pursuant to this paragraph, the size of the
Premises is increased, Tenant shall be required to increase the funds on deposit
with Landlord in accordance with the formula outlined above. In lieu of
depositing cash with Landlord, Tenant shall have the option of providing
Landlord with a letter of credit which is acceptable to Landlord in form and
content and is issued by a financial institution reasonably approved by Landlord
which shall have one or more offices in Orange County, California which will
honor a draw upon such letter of credit.
(b) In the event Tenant is required to deposit with Landlord funds
pursuant to subparagraph (a) of this Section, such sum shall be held by Landlord
as security for the full and faithful performance of Tenant's obligations under
this Lease (the "Security Deposit"). Subject to the last sentence of this
Section, the Security Deposit shall be understood and agreed to be the property
of Landlord upon Landlord's receipt thereof, and may be utilized by Landlord in
its discretion towards the payment of all prepaid expenses by Landlord for which
Tenant would be required to reimburse Landlord under this Lease, including
without limitation brokerage commissions and Tenant Improvement costs. Upon any
default by Tenant, including specifically Tenant's failure to pay rent or to
abide by its obligations under Sections 7.1 and 15.3 below, whether or not
Landlord is informed of or has knowledge of the default, the Security Deposit
shall be deemed to be automatically and immediately applied, without waiver of
any rights Landlord may have under this Lease or at law or in equity as a result
of the default, as a setoff for full or partial compensation for that default.
If any portion of the Security Deposit is applied after a default by Tenant,
Tenant shall within five (5) days after written demand by Landlord deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount. Landlord shall not be required to keep this Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
the Security Deposit. If Tenant fully performs its obligations under this Lease,
the Security Deposit shall be returned to Tenant (or, at Landlord's option, to
the last assignee of Tenant's interest in this Lease) after the expiration of
the Term, provided that Landlord may retain the Security Deposit to the extent
and until such time as all amounts due from Tenant in accordance with this Lease
have been determined and paid in full.
SECTION 4.4. SPECIAL LIMITATION ON HVAC OPERATING EXPENSES
Notwithstanding any provision of this Lease to the contrary, Tenant's
obligation to pay Operating Expenses shall be subject to the following:
(a) Preventive maintenance, servicing and repair costs for heating,
ventilating and air conditioning equipment ("HVAC") shall not be included within
Operating Expenses payable by Tenant to the extent that such costs exceed the
amount shown in the budget for the 1998-99 Expense Recovery Period plus five
percent (5%) per year (on a compounded basis) throughout the initial Term of
this Lease. The 1998-99 Expense Recovery Period budget for HVAC preventative
maintenance costs is $.1188 per rentable square foot.
(b) Tenant shall have no obligation during the initial Term of this
Lease to contribute to capital reserves for replacement of rooftop HVAC package
units. In the event Landlord maintains a capital reserve for its rooftop HVAC
package units at the time, Operating Expenses paid by Tenant during any
extension of the Term shall include a reasonable reserve for replacement of
rooftop HVAC units in accordance with the provisions of Section 4.2 herein.
(c) If during the initial Term of this Lease, any rooftop HVAC package
units require replacement, Tenant shall have no obligation to pay any portion of
such replacement cost. If in connection with any such replacement, Landlord is
unable to provide Tenant with HVAC services necessary to provide to the Premises
HVAC services consistent with industry standards for first class office
buildings Landlord shall be obligated its sole cost and expense to obtain
replacement and/or supplemental HVAC services while any such repair or
replacement is underway.
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ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not do or permit
anything to be done in or about the Premises which will in any way unreasonably
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not perform any work or conduct any business whatsoever in the Project
other than inside the Premises. Tenant shall not knowingly do or permit to be
done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building, the Project and/or their contents, and shall
comply with all applicable and reasonable insurance underwriters rules and the
requirements of the Pacific Fire Rating Bureau or any other organization
performing a similar function to the extent such rules and requirements are
provided to Tenant. Subject to the express provisions of this Lease to the
contrary, Tenant shall comply at its expense with all present laws, ordinances,
restrictions, regulations, orders, rules and requirements of all governmental
authorities that pertain particularly to Tenant or its particular use of the
Premises and/or pertain only to the interior of the Premises, including without
limitation all federal and state occupational health and safety requirements,
whether or not Tenant's compliance will necessitate expenditures or interfere
with its use and enjoyment of the Premises. Tenant shall comply at its expense
with all present covenants, conditions, easements or restrictions now affecting
or encumbering the Building and/or Project, and any future covenants,
conditions, easements or restrictions, and any amendments or modifications
thereto which do not materially derogate the rights of Tenant or materially
increase the obligations of Tenant hereunder, including without limitation the
payment by Tenant of any periodic or special dues or assessments charged against
the Premises or Tenant which may be allocated to the Premises or Tenant in
accordance with the provisions thereof. Tenant shall promptly upon demand
reimburse Landlord for any additional insurance premium charged by reason of
Tenant's failure to comply with the provisions of this Section, and shall
indemnify Landlord from any liability and/or expense resulting from Tenant's
noncompliance.
SECTION 5.2. SIGNS. Tenant shall have the right to install and maintain
exterior signs at its sole cost ("Exterior Signage") as set forth in this
Section. Tenant's rights with respect to Exterior Signage within the Project
shall be as follows:
(a) Tenant shall have the exclusive right to all exterior signs on any
Building within the Project which it wholly leases during the Term which as of
the Commencement Date, shall be Building A and Building B. If after the
commencement of the Term the Premises is expanded so that Tenant solely occupies
Building C, Tenant's rights shall extend to such Building as well.
(b) From and after the Commencement Date for Building B and thereafter
provided Tenant leases all of Buildings A and B, Tenant shall be entitled to
exclusive use of the existing monument sign on Alton Parkway.
(c) If at any time during the Term, or any extension thereof Tenant
leases all of each of the three Buildings within the Project, Tenant shall have
the exclusive right to all exterior signs within the Project.
(d) In the event Tenant subleases for the remainder of the Term or
assigns any portion of a Building such that Landlord has a right to recapture
that space pursuant to the provisions of Article IX hereof, Tenant's exclusive
right to exterior signage on such Building shall be converted as of the date of
such transfer to a non-exclusive right and reduced to one exterior Building top
sign which Tenant shall have the right to select provided it continues to be the
Dominant Tenant in such Building. Dominant Tenant means Tenant leases in the
Building in question more space than any other Tenant in such Building.
(e) If after a sublease for the remainder of the Term or an
assignment, Tenant leases less than the entirety of Building A and the entirety
of either Buildings B or C, Tenant's right to use the existing monument sign on
Alton Parkway shall be nonexclusive provided that if such monument sign is
converted by Landlord to a multi-tenant identification sign, Tenant shall have
the right to retain the top position on such monument sign as long as Tenant
continues to be the Dominant Tenant in Building A and the Dominant Tenant in
either Building B or C.
(f) Provided Tenant is not then in default under this Lease, after
expiration of the applicable cure period, and provided Tenant is then leasing
all of Buildings A and B, Landlord shall not enter into any lease for space in
the Project, or consent to any sublease or assignment, which grants to any of
the companies or entities listed on Exhibit H attached hereto any right to
install or maintain exterior signs in the Project.
The size, design, graphics, material, style, color and other physical aspects of
all exterior signs shall be subject to Landlord's written approval prior to
installation (which approval shall not be unreasonably withheld), Landlord's
signage program for the Project, as in effect from time to time and approved by
the City of Irvine ("Signage Criteria"), and any applicable municipal or other
governmental permits and approvals. Tenant acknowledges having received and
reviewed a copy of the current Signage Criteria for the Project. Tenant shall be
responsible for the cost of the Exterior Signage, including the fabrication,
installation, insurance, maintenance and removal thereof. If Tenant fails
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to maintain its Exterior Signage, or if Tenant fails to remove same upon
termination of this Lease and repair any damage caused by such removal, Landlord
may do so at Tenant's expense. Except for the foregoing, or as otherwise
approved in writing by Landlord, in its sole discretion, Tenant shall have no
right to maintain identification signs in any location in, on or about the
Premises, the Building or the Project and shall not place or erect any signs,
displays or other advertising materials that are visible from the exterior of
the Premises.
Tenant's Exterior Signage rights described in this Section 5.2 may be
assigned in connection with an assignment of the Lease, but only if the name
proposed for such Exterior Signage will not materially devalue the Project in
Landlord's sole and absolute discretion.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or knowingly permit any Hazardous Materials
to be brought upon, stored, used, generated, released or disposed of on, under,
from or about the Premises (including without limitation the soil and
groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to utilize within the Premises standard
office products that may contain Hazardous Materials (such as photocopy toner,
"White Out", and the like), provided however, that (i) Tenant shall maintain
such products in their original retail packaging, shall follow all instructions
on such packaging with respect to the storage, use and disposal of such
products, and shall otherwise comply with all applicable laws with respect to
such products, and (ii) all of the other terms and provisions of this Section
5.3 shall apply with respect to Tenant's storage, use and disposal of all such
products. Landlord may, in its sole discretion, place such conditions as
Landlord deems appropriate with respect to any such Hazardous Materials, and may
further require that Tenant demonstrate that any such Hazardous Materials are
necessary or useful to Tenant's business and will be generated, stored, used and
disposed of in a manner that complies with all applicable laws and regulations
pertaining thereto and with good business practices. Tenant understands that
Landlord may utilize an environmental consultant to assist in determining
conditions of approval in connection with the storage, generation, release,
disposal or use of Hazardous Materials by Tenant on or about the Premises,
and/or to conduct periodic inspections of the storage, generation, use, release
and/or disposal of such Hazardous Materials by Tenant on and from the Premises,
and Tenant agrees that any costs reasonably incurred by Landlord in connection
therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder
upon demand; however, Tenant shall have no obligation to reimburse Landlord for
any costs incurred in connection with any environmental consultant retained by
Landlord pursuant to this Section unless Tenant shall be in default under this
Section 5.3 and such costs are covered by Tenant's indemnity contained in this
Section 5.3.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of EXHIBIT B attached
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous
Materials, if any, which were stored, generated, used, released and/or disposed
of on, under or about the Premises for the twelve-month period prior thereto,
and which Tenant desires to store, generate, use, release and/or dispose of on,
under or about the Premises for the succeeding twelve-month period. In addition,
to the extent Tenant is permitted to utilize Hazardous Materials upon the
Premises, Tenant shall promptly provide Landlord with complete and legible
copies of all the following environmental documents relating thereto: reports
filed pursuant to any self-reporting requirements; permit applications, permits,
monitoring reports, workplace exposure and community exposure warnings or
notices and all other reports, disclosures, plans or documents (even those which
may be characterized as confidential) relating to water discharges, air
pollution, waste generation or disposal, and underground storage tanks for
Hazardous Materials; orders, reports, notices, listings and correspondence (even
those which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises and/or the soil or
groundwater thereunder at any time to determine whether Tenant is complying with
the terms of this Section 5.3, and in connection therewith Tenant shall provide
Landlord with full access to all relevant facilities, records and personnel. If
Tenant is not in compliance with any of the provisions of this Section 5.3, or
in the event of a release of any Hazardous Material on, under or about the
Premises caused or permitted by Tenant, its agents, employees, contractors,
licensees or invitees, Landlord and its agents shall have the right, but not the
obligation, without limitation upon any of Landlord's other rights and remedies
under this Lease, to immediately enter upon the Premises without notice and to
discharge Tenant's obligations under this Section 5.3 at Tenant's expense,
including without limitation the taking of emergency or long-term remedial
action. Landlord and its agents shall endeavor to minimize interference with
Tenant's business in connection therewith, but shall not be liable for any such
interference.
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In addition, Landlord, at Tenant's expense, shall have the right, but not the
obligation, to join and participate in any legal proceedings or actions
initiated in connection with any claims arising out of the storage, generation,
use, release and/or disposal by Tenant or its agents, employees, contractors,
licensees or invitees of Hazardous Materials on, under, from or about the
Premises.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises or the Project caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (ii) injury to or any contamination of the Premises or the Project, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises and the Project and any other affected real or personal
property owned by Landlord to the condition existing prior to the introduction
of such Hazardous Materials and to remedy or repair any such injury or
contamination, including without limitation, any cleanup, remediation, removal,
disposal, neutralization or other treatment of any such Hazardous Materials.
Notwithstanding the foregoing, Tenant shall not, without Landlord's prior
written consent, take any remedial action in response to the presence of any
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord or enter into any similar
agreement, consent, decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord (i) imposes an immediate
threat to the health, safety or welfare of any individual or (ii) is of such a
nature that an immediate remedial response is necessary and it is not possible
to obtain Landlord's consent before taking such action. To the fullest extent
permitted by law, Tenant shall indemnify, hold harmless, protect and defend
(with attorneys acceptable to Landlord) Landlord and any successors to all or
any portion of Landlord's interest in the Premises and the Project and any other
real or personal property owned by Landlord from and against any and all
liabilities, losses, damages, diminution in value, judgments, fines, demands,
claims, recoveries, deficiencies, costs and expenses (including without
limitation attorneys' fees, court costs and other professional expenses),
whether foreseeable or unforeseeable, arising directly or indirectly out of the
use, generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Building and the Project and any other real or personal property
owned by Landlord caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, specifically including without limitation
the cost of any required or necessary repair, restoration, cleanup or
detoxification of the Premises, the Building and the Project and any other real
or personal property owned by Landlord, and the preparation of any closure or
other required plans, whether or not such action is required or necessary during
the Term or after the expiration of this Lease. If Landlord at any time
discovers that Tenant or its agents, employees, contractors, licensees or
invitees have caused or knowingly permitted the release of a Hazardous Material
on, under, from or about the Premises or the Project or any other real or
personal property owned by Landlord, Tenant shall, at Landlord's request,
immediately prepare and submit to Landlord a comprehensive plan, subject to
Landlord's reasonable approval, specifying the actions to be taken by Tenant to
return the Premises or the Project or any other real or personal property owned
by Landlord to the condition required under all applicable environmental laws.
Upon Landlord's approval of such cleanup plan, Tenant shall, at its expense, and
without limitation of any rights and remedies of Landlord under this Lease or at
law or in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall expressly
survive the expiration or sooner termination of this Lease.
(f) If the release of any Hazardous Materials on, under, from or about
the Premises or the Project caused by Landlord, its authorized agents or
employees, and not introduced by Tenant, its agents, employees, contractors,
licensees, or invitees results in (i) injury to any person, or (ii) injury to or
any contamination of the Premises or the Project at levels which require
clean-up or remediation under applicable laws, Landlord, at its expense (which
shall not be included in Operating Expenses), shall promptly take all actions
necessary to return the Premises and the Project to the condition existing prior
to the introduction of such Hazardous Materials, or to such condition as is
satisfactory to all governmental agencies asserting jurisdiction, and to remedy
or repair any such injury or contamination, including, without limitation, any
clean-up, remediation, removal, disposal, neutralization or other treatment of
any such Hazardous Materials.
(g) If the release of Hazardous Materials caused by Landlord, its
authorized agents or employees, renders the Premises untenantable in whole or in
part or results in Tenant being required to vacate the Premises in whole or in
part pursuant to an order or requirement of any governmental agency or
authority, then the Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, payable by Tenant hereunder for the period during which
the Premises (or a portion thereof) remain so impaired shall be abated in
proportion to the degree to which Tenant's use of the Premises is impaired and
for the period of such impairment. If the period of such impairment shall exceed
seven (7) months, Tenant shall have the right to terminate this Lease upon
written notice to Landlord given within ten (10) days following the passage of
such seven (7) month period. Tenant's termination of the Lease pursuant to this
Paragraph shall be effective as of the date of such notice.
(h) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Project known
by Landlord to exist as of the date of this Lease, as more particularly
described in EXHIBIT C attached hereto. Tenant shall have no liability or
responsibility with respect to the Hazardous Materials facts described in
EXHIBIT C, nor with respect to any Hazardous Materials which were not caused or
knowingly permitted by Tenant, its agents, employees, contractors, licensees or
invitees. Landlord shall take responsibility, at its sole cost and expense, for
any governmentally-ordered clean-up, remediation, removal, disposal,
neutralization or other treatment of Hazardous Materials conditions described in
this Section 5.3(h). The foregoing
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obligation on the part of Landlord shall include the reasonable costs
(including, without limitation, reasonable attorney's fees) of defending Tenant
(with attorneys reasonably acceptable to Tenant) from and against any legal
action or proceeding instituted by any governmental agency in connection with
such clean-up, remediation, removal, disposal, neutralization or other treatment
of such conditions, provided that Tenant promptly tenders such defense to
Landlord. Tenant agrees to notify its agents, employees, contractors, licensees,
and invitees of any exposure or potential exposure to Hazardous Materials at the
Premises that Landlord brings to Tenant's attention.
(i) The obligations on the part of Landlord contained in Sections
5.3(f) and 5.3(h) above are personal to Landlord and shall not be binding on,
nor inure against any successor in interest to Landlord as of the owner of the
Premises, including without limitation, any lender acquiring the Premises by
foreclosure of its mortgage or deed of trust or deed in lieu of foreclosure.
(j) Except as disclosed in Section 5.3(h) above (and/or as may
otherwise be disclosed to Tenant in writing), Landlord represents that, to the
best of its actual knowledge without duty of inquiry or investigation
whatsoever, there are no Hazardous Materials in or about the Premises which are
in violation of any applicable federal, state or local law, ordinance or
regulation.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon; provided, however, Tenant shall not be obligated to pay directly for
any utilities, water, gas, electricity, sewer, heat, light, power, janitorial
service, landscape maintenance, etc. to the extent such costs are billed to
Tenant as Operating Expenses for the Project. Tenant, at its sole cost, may
select and retain a janitorial service company to clean the Premises at such
times and in a manner consistent with the operation of a first class office
building. If any utilities or services are not separately metered or assessed to
Tenant, Landlord shall make a reasonable determination of Tenant's proportionate
share of the cost of such utilities and services and Tenant shall pay such
amount to Landlord, as an item of additional rent, within ten (10) days after
receipt of Landlord's statement or invoice therefor. Alternatively, Landlord may
elect to include such cost in the definition of Building Costs in which event
Tenant shall pay Tenant's proportionate share of such costs in the manner set
forth in Section 4.2. Landlord shall not be liable for damages or otherwise for
any failure or interruption of any utility or other service furnished to the
Premises, and no such failure or interruption shall be deemed an eviction or
entitle Tenant to terminate this Lease or withhold or abate any rent due
hereunder. Landlord shall at all reasonable times have free access to all
electrical and mechanical installations of Landlord. In exercising Landlord's
right of free access to all mechanical and electrical installations, Landlord
shall not unreasonably interfere with Tenant's use and enjoyment of the
Premises.
Notwithstanding the foregoing, if as a result of the actions of
Landlord, its authorized agents or employees, for more than three (3)
consecutive business days following written notice to Landlord there is no HVAC
or electricity services to all or a portion of the Premises, or such an
interruption of other essential utilities and building services, such as fire
protection or water, so that all or a portion of the Premises cannot be used by
Tenant, then Tenant's Basic Rent (or an equitable portion of such Basic Rent to
the extent that less than all of the Premises are affected) shall thereafter be
abated until the Premises are again usable by Tenant; provided, however, that if
Landlord is diligently pursuing the repair of such utilities or services and
Landlord provides substitute services reasonably suitable for Tenant's purposes,
as for example, bringing in portable air-conditioning equipment, then there
shall not be an abatement of Basic Rent. Any disputes concerning the foregoing
shall be submitted to and resolved by JAMS arbitration pursuant to Section 22.8
of this Lease. The foregoing provisions shall not apply in case of damage to, or
destruction of, the Premises, which shall be governed by the provisions of
Article XI of the Lease.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term,
Landlord shall operate, maintain and repair all Common Areas within any Building
comprising the Premises and the Project in a first-class manner comparable to
other Class A office buildings in the Irvine Spectrum area and in compliance
with all obligations of Landlord under this Lease. The term "Common Areas" shall
mean all areas within the exterior boundaries of the Building and other
buildings in the Project which are not held for exclusive use by persons
entitled to occupy space, and all other appurtenant areas outside the exterior
boundaries of the Building and other buildings in the Project provided by
Landlord for the common use of Landlord and tenants and their respective
employees and invitees, including without limitation parking areas and
structures, driveways, sidewalks, landscaped and planted areas, hallways and
interior stairwells not located within the premises of any tenant, common
electrical rooms and roof access entries, common entrances and lobbies,
elevators, and restrooms not located within any tenantable premises of the
Building and/or other buildings in the Project. Building hours for any Building
not wholly leased by Tenant shall be Monday through Friday 7:00 a.m. to 6:00
p.m., and Saturday 9:00 a.m. to 1:00 p.m., President's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day, New Year's Day and
Sundays excluded. Tenant shall have access to its Premises twenty-four (24)
hours per day, seven (7) days per week, fifty-two (52) weeks per year including
access to utilities and heating, ventilating and air conditioning services but
subject to Tenant's obligation to pay the reasonable costs of any such services
in any Building not wholly leased by Tenant used other than during the Building
hours described above; provided that Landlord may install access control systems
as it deems advisable for any Building not wholly leased by Tenant. The
reasonable cost of maintaining and
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repairing any such access control systems (but not the cost of installation of,
or any "capital" cost of replacing, said systems) shall be included in Project
Costs under Section 4.2.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises
shall include the use of the Common Areas in common with Landlord and with all
others for whose convenience and use the Common Areas may be provided by
Landlord, subject, however, to compliance with all rules and regulations as are
prescribed from time to time by Landlord in a reasonable and non-discriminatory
manner. Landlord shall operate and maintain the Common Areas in a first-class
manner consistent with comparable Class A office buildings in the Irvine
Spectrum as Landlord may determine to be appropriate. All reasonable costs
incurred by Landlord for the maintenance and operation of the Common Areas shall
be included in Project Costs unless excluded under Section 4.2 or unless any
particular cost incurred can be charged to a specific tenant of the Project.
Landlord shall at all times during the Term have exclusive control of the Common
Areas, and may restrain any use or occupancy, except as authorized by Landlord's
rules and regulations. Tenant shall keep the Common Areas clear of any
obstruction or unauthorized use related to Tenant's operations. Nothing in this
Lease shall be deemed to impose liability upon Landlord for any damage to or
loss of the property of, or for any injury to, Tenant, its invitees or
employees. Landlord may temporarily close any portion of the Common Areas for
repairs, remodeling and/or alterations, to prevent a public dedication or the
accrual of prescriptive rights, or for any other reason deemed sufficient by
Landlord, without liability to Landlord. Tenant shall not be required to comply
with any rules and regulations for the Project other than those attached to this
Lease unless such rules and regulations are commercially reasonable and
nondiscriminatory in content and application. Landlord's exclusive control,
operation, maintenance and repair of the Common Area shall be subject to
Tenant's parking rights contained in Section 6.4 below and to all other
limitations contained in this Lease. Landlord agrees that any temporary closure
of any portion of the Common Areas shall not unreasonably interfere with
Tenant's intended use of the Premises, nor its reasonable access to or parking
for the Premises.
SECTION 6.4. PARKING.
(a) Tenant shall be entitled to the number of vehicle parking spaces
set forth in Item 14 of the Basic Lease Provisions, which spaces shall be
located on those portions of the Common Areas designated by Landlord for
parking, and said parking spaces shall be provided at no charge to Tenant during
the Lease Term. Tenant shall not use more parking spaces than such number. In
the event the Premises is expanded at any time during the Term, the number of
spaces shall be increased by the number included in the Economic Terms for such
space. Landlord shall allow Tenant to select and mark the spaces designated on
Exhibit A-1 as "Visitor Only" and the additional spaces as designated on Exhibit
A-1 may be marked as "Broadcom Reserved" for exclusive use by Tenant's employees
and customers, provided Landlord shall have obligation to monitor the use of
such stalls but such stalls shall be considered as part of the total number of
stalls to which Tenant is entitled. All vehicle parking spaces shall be used
only for parking by vehicles no larger than full size passenger automobiles,
vans, mini-vans or pickup trucks. Tenant shall not knowingly permit or allow any
vehicles that belong to or are controlled by Tenant or Tenant's employees,
suppliers, shippers, customers or invitees to be loaded, unloaded, parked or
stored in areas other than those designated by Landlord for shipping and
receiving activities as shown on Exhibit A-1 ("Trucking Areas"). If Tenant
permits or allows any of the prohibited activities described above, then
Landlord shall have the right, without notice, in addition to such other rights
and remedies that Landlord may have, to remove or tow away the vehicle involved
and charge the costs to Tenant; provided Landlord agrees not to cause or permit
the towing of any vehicle from parking within the Common Area without first
attempting to contact Tenant to identify the Owner of the vehicle in question.
Parking within the Common Areas shall be limited to striped parking stalls, and
no parking shall be permitted in any driveways, access ways or in any area which
would prohibit or impede the free flow of traffic within the Common Areas. There
shall be no extended overnight parking of any vehicles of any kind unless
otherwise authorized by Landlord (periodic, temporary overnight parking of
employee vehicles for up to seventy-two (72) hours and vehicles used in the
ordinary course of Tenant's business at the Premises shall be permitted), and
vehicles which have been abandoned or parked in violation of the terms hereof
may be towed away at the owner's expense. Nothing contained in this Lease shall
be deemed to create liability upon Landlord for any damage to motor vehicles of
visitors or employees, for any loss of property from within those motor
vehicles, or for any injury to Tenant, its visitors or employees, unless
ultimately determined to be caused by the sole active negligence or willful
misconduct of Landlord. Landlord shall have the right to establish, and from
time to time amend, and to enforce against all users all reasonable rules and
regulations (including the designation of areas for employee parking) that
Landlord may deem necessary and advisable for the proper and efficient operation
and maintenance of parking within the Common Areas. Landlord shall have the
right to construct, maintain and operate lighting facilities within the parking
areas; to change the area, level, location and arrangement of the parking areas
and improvements therein; to restrict parking by tenants, their officers, agents
and employees to employee parking areas and to do and perform such other acts in
and to the parking areas and improvements therein as, in the use of good
business judgment, Landlord shall determine to be advisable. Any person using
the parking area shall observe all directional signs and arrows and any posted
speed limits. In no event shall Tenant interfere with the use and enjoyment of
the parking area by other tenants of the Building or their employees or
invitees. Parking areas shall be used only for parking passenger vehicles.
Servicing of vehicles, or the parking or storage of shipping and receiving
vehicles in any area other than in the Trucking Areas designated on Exhibit A-1
or in the Trucking Area for periods in excess of seventy-two hours (72), is
prohibited unless otherwise authorized by Landlord. Periodic washing and
detailing of automobiles shall be permitted, subject to the Landlord's
reasonable conditions as to time and place and as to the operator itself, and
provided further that Landlord shall have the right, from time to time, to
designate an exclusive operator for such services for the Project. Tenant shall
be liable for any damage to the parking areas caused by Tenant or Tenant's
employees, suppliers, shippers, customers or invitees, including without
limitation damage from excess oil leakage. Tenant shall have no right to install
any fixtures, equipment or personal property in the parking areas. Landlord
agrees to enforce all parking rights and restrictions and rules and regulations
for the Project on an
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equal and non-discriminatory basis. Tenant shall have no liability for
non-compliance with the provisions of the Lease regarding parking other than
with respect to Tenant's officers, directors and employees or persons under the
control of Tenant, except for Landlord's towing rights herein provided.
(b) Provided Tenant continues to be the Dominant Tenant in Building A
and the Dominant Tenant in either Building B or C, Tenant shall have the right
to use that portion of the parking area so designated on Exhibit A-1 for
recreational purposes as a basketball court (the "Recreational Area") for the
sole and exclusive use of its employees and invitees. In the event Tenant elects
to use that portion of the parking area as a basketball court, those stalls
shall be considered part of the total number of stalls to which Tenant is
entitled. Landlord shall have no obligation to improve or maintain the
Recreational Area in any manner other than as a parking facility and,
notwithstanding any provision of this Lease to the contrary, Tenant shall
defend, indemnify, protect, save and hold harmless Landlord, and its agents and
any and all affiliates of Landlord, including without limitation any
corporations or other entities controlling, controlled by, controlled under or
controlled with Landlord from and against any and all claims, liabilities, costs
or expenses arising from the use by any person of the Recreational Area. Any
recreational equipment of any kind placed on or installed into the Recreational
Area shall be considered an alteration under Section 7.3 of this Lease, must
comply in all respects with all applicable laws, rules and regulations, shall be
installed to Tenant's sole cost and expense and shall be removed by Tenant at
its sole cost and expense at such time as Tenant and/or its subtenant ceases to
be the Dominant Tenant of Building A and the Dominant Tenant of either Building
B or C or upon the expiration or earlier termination of this Lease. Tenant shall
repair any damage to the Common Area and the Recreational Area arising from such
removal.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right
to make alterations or additions to the Building or the Project, or to the
attendant fixtures, equipment and Common Areas. Landlord may at any time
relocate or remove any of the various buildings, parking areas, and other Common
Areas, and may add buildings and areas to the Project from time to time. No
change shall entitle Tenant to any abatement of rent or other claim against
Landlord. In no event, however, shall Landlord (i) impair visibility of Tenant's
Exterior Signage; (ii) materially impair access to and from the Premises from
the parking areas; (iii) reduce the number or size of Tenant's parking spaces
granted under this Lease, or (iv) otherwise materially interfere with Tenant's
access to and use of the Premises, the parking areas and the Common Areas
adjacent to the Building in any material manner without Tenant's prior written
consent, which shall not be unreasonably withheld.
SECTION 6.6. OUTDOOR COURTYARD AREA. With at least five (5) days prior
written notice to Landlord, Tenant shall have the right to use certain adjacent
courtyard area of the Common Areas as shown on Exhibit A-1 for Tenant's social
and/or business functions with no additional rent for such use payable by
Tenant, on the following terms and conditions: (i) Tenant may conduct up to
twelve (12) such functions within any calendar year; (ii) such functions shall
be limited to a reasonable number of people consistent with applicable fire,
health and safety laws; (iii) Tenant shall execute Landlord's standard form
entry permit (in form reasonably acceptable to Tenant) prior to any such
function, (iv) the insurance, indemnity and nonliability obligations and
provisions contained in Sections 10.1, 10.3(a) and 10.4 of this Lease,
respectively (including Tenant's obligations to carry liquor law liability
insurance if alcoholic beverages are served or consumed during such functions),
shall apply to and govern any claims, liabilities, costs or expenses arising
from any such function, (v) no such proposed functions shall, in Landlord's
reasonable determination, unreasonably disrupt other tenants of the Project, or
the operation or maintenance of the Common Areas, and (vi) Tenant shall pay any
and all Landlord's reasonable costs of preparation for, supervision of and/or
clean-up in connection with, such functions.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense
shall make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear, including without
limitation all glass, the interior surfaces of all windows, all doors, door
closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment
and other equipment; provided, however, Tenant shall have no obligation to
repair, maintain or replace the roof, foundations, footings, structural systems,
exterior glass, sky lights, sky light seals, window seals and vents, electrical,
plumbing, sewer and other utility lines outside the Premises, landscaping,
walkways, fencing, parking areas, exterior lighting or exterior surfaces of
exterior walls of the Building, and washing of exterior windows, all of which
obligations shall be the sole responsibility of Landlord as provided in and
subject to the terms of Section 7.2 below. Any damage or deterioration of the
Premises shall not be deemed ordinary wear and tear if the same could have been
prevented by good maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports and notices prepared by, for
or on behalf of Tenant. Landlord shall obtain on Tenant's behalf and as an
Operating Expense but subject to the provisions of Section 4.4 hereof, a
contract with a licensed contractor (the "HVAC Contractor") to provide for
regular inspection, servicing, maintenance and repair of the HVAC systems
servicing the Premises. Landlord shall select the HVAC Contractor with input
from Tenant and if the HVAC Contractor fails to maintain the HVAC system
servicing the Premises in the manner described in Section 7.2 hereof, Tenant may
propose an alternate HVAC Contractor to provide such services upon expiration or
sooner termination of the existing HVAC service contract. Landlord shall not be
obligated to use the alternate HVAC Contractor proposed by Tenant but shall use
its reasonable business judgment with Tenant's input to retain an HVAC
Contractor which provides the services required consistent with the operation of
a Class A building and in accordance with this Lease. All repairs shall be at
least equal
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in quality to the original work, shall be made only by a licensed contractor
approved in writing in advance by Landlord and shall be made only at the time or
times approved by Landlord. Any contractor utilized by Tenant shall be subject
to Landlord's standard requirements for contractors, as modified from time to
time. Landlord may impose reasonable restrictions and requirements with respect
to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall
apply to all repairs. If Tenant fails to properly maintain or repair any portion
of the Premises as required under this Section 7.1 following written notice to
Tenant and a reasonable opportunity to cure, Landlord may elect to make any such
repair on behalf of Tenant and at Tenant's expense, and Tenant shall promptly
reimburse Landlord for all costs incurred upon submission of an invoice.
Landlord agrees not to unreasonable withhold its approval of any preventive
maintenance contracts or licensed contractors selected by Tenant with respect to
Tenant's maintenance and repair obligations.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1 and
Article XI, Landlord shall provide service, maintenance and repair with respect
to any air conditioning, ventilating or heating equipment which serves the
Premises, which shall be serviced, maintained and repaired in accordance with
the manufacturer's specifications, and shall maintain in good repair in a manner
consistent with the repair and maintenance of comparable Class A office
buildings in the Irvine Spectrum area, the roof, foundations, and footings of
the Building, the exterior surfaces of the exterior walls of the Building, all
exterior glass, sky lights, sky light seals, window seals and vents of the
Building, electrical, plumbing, sewer and other utility lines outside the
Premises, landscaping, walkways, fencing, parking areas, exterior lighting and
exterior surfaces of exterior walls of the Building, and washing of exterior
windows, and the structural, electrical and mechanical systems of the Building
and all Common Area improvements within the Project, except that, subject to the
waiver of subrogation contained in Section 10.5 below, Tenant at its expense
shall make all repairs within the Premises only which Landlord deems reasonably
necessary as a result of the act or negligence of Tenant, its agents, employees,
invitees, subtenants or contractors (i.e., to the extent such repairs are not or
would not be covered by a standard policy of property insurance or the property
insurance actually maintained by Landlord). Landlord shall have the right to
employ or designate any reputable person or firm, including any employee or
agent of Landlord or any of Landlord's affiliates or divisions, to perform any
service, repair or maintenance function. Landlord need not make any other
improvements or repairs except as specifically required under this Lease, and
nothing contained in this Section shall limit Landlord's right to reimbursement
from Tenant for maintenance, repair costs and replacement costs as provided
elsewhere in this Lease. Tenant understands that it shall not make repairs at
Landlord's expense except as specifically set forth below. Tenant further
understands that Landlord shall not be required to make any repairs to the roof,
foundations, footings, structural, electrical or mechanical systems unless and
until Tenant has notified Landlord in writing of the need for such repair and
Landlord shall have a reasonable period of time thereafter to commence and
complete said repair, if warranted. Subject to the terms of Sections 2.4 and
4.2, all reasonable costs of any maintenance and repairs on the part of Landlord
provided hereunder shall be considered part of Project Costs. Tenant shall have
no obligation to maintain contracts for landscaping and irrigation systems or
for asphalt or parking lot maintenance. Except in emergency situations, where
prior notice is not reasonably possible, Landlord agrees to provide Tenant with
at least twenty-four (24) hours prior notice before commencing any repairs,
improvements or alterations to the Building or the Project which are reasonably
likely to materially impair Tenant's use or enjoyment of the Premises, Tenant's
parking areas or access to the Project or the Premises.
If Landlord shall fail to perform any repair obligations required
under this Lease within thirty (30) days following Tenant's written request for
such repairs, or if Landlord shall fail to perform any repairs required under
this Lease of an emergency condition within forty-eight (48) hours' written
notice from Tenant, then Tenant may elect to make such repairs at Landlord's
expense by complying with the following provisions. Before making any such
repair, Tenant shall deliver to Landlord a notice for the need for such repair
("Self-Help Notice"), which notice shall specifically advise Landlord that
Tenant intends to exercise its self-help right hereunder. Should Landlord fail,
within ten (10) days following receipt of the Self-Help Notice (or within
twenty-four (24) hours following notice in the event of necessary emergency
repairs), to commence the necessary repair or to make other arrangements
reasonably satisfactory to Tenant, then Tenant shall have the right to make such
repair on behalf of Landlord. Landlord shall reimburse Tenant for the reasonable
costs of such repairs within thirty (30) days following receipt of Tenant's
invoice for such costs, provided that in no event shall Tenant have the right to
offset Basic Rent or any other charges payable by Tenant hereunder against such
costs. It is understood that such reimbursement obligation shall be personal to
Landlord, and in no event shall any lender or other deed of trust holder
succeeding to Landlord be liable for payment of any such amount. In the event
that the work could affect the Building's structural, mechanical, electrical,
heating, ventilating, air conditioning, life safety or plumbing components or
systems, then Tenant shall use only those contractors whose names are furnished
by Landlord for such work. If those contractors are unwilling or unable to
perform the work, or if Landlord fails to furnish the names of its contractors
to Tenant prior to the commencement of the work by Tenant, Tenant shall retain
the services of qualified, reputable and licensed, bonded contractors with like
experience in similar building systems. Tenant shall be responsible for
obtaining any necessary governmental permits before commencing the repair work.
Tenant shall be liable for any damage, loss or injury resulting from said work
to the extent of Tenant's or its agent's, employee's or contractor's negligence.
Any disputes regarding these self-help provisions shall be submitted to and
resolved by JAMS arbitration pursuant to Section 22.8 of this Lease.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld, conditioned or delayed.
Notwithstanding the foregoing, but subject to the following provisions of this
Section, Landlord's consent shall not be required for any alterations, additions
or improvements to the Premises during the initial Term which cost less than the
Alteration Cost Cap. Alteration Cost Cap means an amount equal to Seventy-Five
Cents ($.75) per rentable square foot of Premises per lease year on a cumulative
basis but subject to an aggregate maximum over the
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initial Term of Five Dollars Twenty-Five Cents ($5.25) per rentable square foot.
Any such alterations are subject to all other provisions of this Section. For
example, assuming Tenant continues to occupy all of Buildings A and B but made
no alterations during the first year of the Term, Tenant could make alterations
without Landlord's prior written consent during the second year of the Term in
an amount up to $228,531.00 (152,354 feet x .75 x 2 years). Under this example,
Tenant's ability to make further alterations during the remainder of the initial
Term without Landlord's consent would be subject to an annual cap of $114,265.50
and an aggregate cap of $571,327.50. Notwithstanding anything to the contrary
contained in the preceding sentences of this Section, without the prior written
consent of Landlord, which may be withheld in Landlord's sole and absolute
discretion, in no event shall any alteration, addition or improvement: (i)
affect the exterior of the Building or outside areas (or be visible from
adjoining sites), or (ii) affect or penetrate any of the structural portions of
the Building, including but not limited to the roof, or (iii) require any
material change to the basic floor plan of the Premises, any change to any
structural or mechanical systems of the Premises, or any governmental permit as
a prerequisite to the construction thereof, or (iv) interfere in any manner with
the proper functioning of or Landlord's access to any mechanical, electrical,
plumbing or HVAC systems, facilities or equipment located in or serving the
Building. Landlord may impose, as a condition to its consent, any requirements
that Landlord in its discretion may deem reasonable or desirable, including but
not limited to requirements as to the manner, time, and contractor mutually
acceptable to Landlord and Tenant for performance of the work. Tenant shall
obtain all required permits for the work and shall perform the work in
compliance with all applicable laws, regulations and ordinances, all covenants,
conditions and restrictions affecting the Project, and the Rules and Regulations
(hereafter defined). Tenant understands and agrees that Landlord shall be
entitled to a supervision fee in the amount of three percent (3%) of the cost of
any work which is both in excess of the Alteration Cost Cap, and which requires
a governmental permit. If any governmental entity requires, as a condition to
any proposed alterations, additions or improvements to the Premises by Tenant,
that improvements be made to the Common Areas, and if Landlord consents to such
improvements to the Common Areas, then Tenant shall, at Tenant's sole expense,
make such required improvements to the Common Areas in such manner, utilizing
such materials, and with such contractors (including, if required by Landlord,
Landlord's contractors) as Landlord may reasonably require. Under no
circumstances shall Tenant make any improvement which incorporates any Hazardous
Materials, including without limitation asbestos-containing construction
materials into the Premises. Any request for Landlord's consent shall be made in
writing and shall contain architectural plans describing the work in detail
reasonably satisfactory to Landlord. Unless Landlord otherwise agrees in
writing, all alterations, additions or improvements affixed to the Premises
(excluding moveable trade fixtures and furniture) shall become the property of
Landlord and shall be surrendered with the Premises at the end of the Term,
except that Landlord may require Tenant to remove by the Expiration Date, or
sooner termination date of this Lease, all or any alterations, decorations,
fixtures, additions, improvements and the like installed either by Tenant or by
Landlord at Tenant's request and to repair any damage to the Premises arising
from that removal. Except as otherwise provided in this Lease or in any exhibit
to this Lease, should Landlord make any alteration or improvement to the
Premises for Tenant, Landlord shall be entitled to prompt reimbursement from
Tenant for all costs incurred.
Landlord shall have the right to require Tenant to remove (i) any of
the components of the initial Tenant Improvements to the Premises but only if
Landlord notifies Tenant that such removal will be required at the time of
Landlord's approval of the Preliminary Plan, and (ii) any subsequent
alterations, additions or improvements whether or not Landlord's consent was
required unless Landlord's written consent was obtained and unless at the time
of providing its consent Landlord notified Tenant in writing that Tenant would
not have to remove such items upon the expiration of the Lease Term. Landlord
and Tenant agree that Tenant shall have the right, upon expiration or
termination of this Lease, to remove any and all phone systems, furniture,
fixtures and other personal property which are not permanently affixed to the
Premises or which may be removed without significant change to the Premises
(including floor coverings, draperies, and/or removable shelves) that are
installed in the Premises at Tenant's sole expense; provided, however, that
Tenant shall, at its sole cost, repair any damage caused by such removal,
reasonable wear and tear excepted.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any
liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it reasonably deems proper, including payment
of or defense against the claim giving rise to the lien. All reasonable and
actual expenses so incurred by Landlord, including Landlord's reasonable
attorneys' fees, and any foreseeable consequential or other damages incurred by
Landlord proximately caused by such lien, shall be reimbursed by Tenant promptly
following Landlord's demand, together with interest from the date of payment by
Landlord at the Interest Rate provided for in Section 14.3(a) below until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall, at all reasonable times
upon at least twenty-four (24) hours advance written notice given in accordance
with the provisions of Article XVI of this Lease or oral notice to Tenant's
office manager or managing partner (except in emergencies, when no notice shall
be required), and provided that for security and confidentiality purposes,
Landlord's representatives are accompanied by a representative of Tenant at all
times (except in cases of emergency), have the right to enter the Premises to
inspect them, to supply services in accordance with this Lease, to protect the
interests of Landlord in the Premises, and to submit the Premises to prospective
or actual purchasers or encumbrance holders (or, during the last one hundred and
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eighty (180) days of the Term or when a Tenant default exists [which is not
cured within the expiration of the applicable cure period], to prospective
tenants), all without being deemed to have caused an eviction of Tenant and
without abatement of rent except as provided elsewhere in this Lease. Landlord
shall have the right to use any and all reasonable means which Landlord may deem
proper under the circumstances to open the doors in an emergency in order to
obtain entry to the Premises, and any entry to the Premises obtained by Landlord
by such means shall not under any circumstances be deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant
from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay before delinquency, all taxes
and assessments levied against all personal property of Tenant located in the
Premises, and against any alterations, additions or like improvements made to
the Premises by or on behalf of Tenant. When possible Tenant shall cause its
personal property, Above Standard Improvements and alterations to be assessed
and billed separately from the real property of which the Premises form a part.
If any taxes on Tenant's personal property, and/or alterations are levied
against Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property, and/or alterations of Tenant and if Landlord
pays the taxes based upon the increased assessment, Tenant shall pay to Landlord
the taxes so levied against Landlord or the proportion of the taxes resulting
from the increase in the assessment.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Tenant will not, either voluntarily or by operation of law,
assign, sublet, encumber, or otherwise transfer all or any part of Tenant's
interest in this lease, or permit the Premises to be occupied by anyone other
than Tenant, without Landlord's prior written consent, which consent shall not
be unreasonably withheld or conditioned in accordance with the provisions of
Section 9.1(b) and shall be delivered to Tenant within fifteen (15) business
days following Tenant's request. No assignment (whether voluntary, involuntary
or by operation of law) and no subletting shall be valid or effective without
Landlord's prior written consent and, at Landlord's election, any such
assignment or subletting or attempted assignment or subletting shall constitute
a material default of this Lease. Without limiting the foregoing, Landlord
agrees that the use and occupancy of any portion of the Premises by any person
performing office support services (such as mail room, copy center, shipping or
travel services) or other services incidental to Tenant's permitted use on an
outsource basis shall not constitute a sublease or other prohibited transfer of
the Premises provided Tenant continues to occupy the remainder of the Premises.
Landlord shall not be deemed to have given its consent to any assignment or
subletting by any other course of action, including its acceptance of any name
for listing in the Building directory. To the extent not prohibited by
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and
its creditors, administrators and assigns waives the applicability of Section
365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for
the estate of the bankrupt meets Landlord's standard for consent as set forth in
Section 9.1(b) of this Lease. If this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies or other
considerations to be delivered in connection with the assignment shall be
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to which this Lease is
assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to
have assumed all of the obligations arising under this Lease on and after the
date of the assignment, and shall upon demand execute and deliver to Landlord an
instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease, it shall
first notify Landlord of its desire and shall submit in writing to Landlord: (i)
the name and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment, including a copy of
the proposed assignment or sublease form; (iv) evidence of insurance of the
proposed assignee or subtenant complying with the requirements of EXHIBIT D
hereto; (v) a completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information reasonably requested by Landlord
and reasonably related to the transfer. Except as provided in Subsection (c) of
this Section, Landlord shall not unreasonably withhold its consent, provided:
(1) the use of the Premises will be consistent with the provisions of this Lease
and with Landlord's written contractual commitments to other tenants of the
Building and Project; (2) at Landlord's election, insurance requirements
relating to such transferee's occupancy shall be brought into conformity with
Landlord's then current leasing practice; (3) any proposed subtenant or assignee
demonstrates that it is financially responsible by submission to Landlord of all
reasonable information as Landlord may request concerning the proposed subtenant
or assignee, including, but not limited to, a balance sheet of the proposed
subtenant or assignee as of a date within ninety (90) days of the request for
Landlord's consent, statements of income or profit and loss of the proposed
subtenant or assignee for the two-year period preceding the request for
Landlord's consent; (4) any proposed subtenant or assignee demonstrates to
Landlord's reasonable satisfaction a record of successful experience in
business; (5) the proposed assignee or subtenant is not an existing tenant of
the Building or Project or a prospect with whom Landlord is actively negotiating
in writing to become a tenant at the Building or Project and Landlord has
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available for lease within the Project space which is comparable in size to that
being offered by Tenant; and (6) the proposed transfer will not impose
additional burdens or adverse tax effects on Landlord.
If Landlord consents to the proposed transfer, Tenant may within
ninety (90) days after the date of the consent effect the transfer upon the
terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within fifteen (15) business days following receipt of Tenant's written request,
the information set forth above, and the fee set forth below.
(c) In lieu of consenting to a proposed assignment or subletting of
thirty-seven percent (37%) or more of the rentable area of the Premises in the
aggregate taking into consideration prior subleases for the duration of the then
remaining Term, Landlord may elect to recapture the portion of the Premises
subject to the proposed subletting, and lease such recaptured Premises directly
to the proposed assignee or sublessee or to any third party, as provided in this
paragraph. In the event Tenant proposes to sublease any space in the Building,
such space proposed for sublease must be separately leaseable and tenantable, as
reasonably determined by Landlord. Tenant shall provide Landlord with notice of
its proposal to sublease (which notice shall include all material terms of the
proposed sublease, including rental rate, tenant improvements, base year, etc.).
Landlord shall have fifteen (15) business days within which to notify Tenant of
its intent to recapture the portion of the Premises designated for subletting.
If Landlord declines to exercise its right to recapture, Tenant shall have one
hundred eighty (180) days from the time Landlord notifies Tenant of its decision
not to recapture the space, to sublease said space to any party at terms
(inclusive of rental rate, tenant improvements, base year, etc.) not materially
different than those proposed to Landlord and, if Tenant is unsuccessful, Tenant
shall repeat the procedures set forth in this paragraph. In the event of any
such recapture by Landlord, this Lease shall terminate as to the recaptured
space and the rent payable under this Lease shall be proportionately reduced,
and Landlord shall be responsible for any brokerage commissions and other
leasing costs relating to such re-leasing of the recaptured space.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by an
assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case of a sublease of a portion of the
Premises, in excess of the Basic Rent reasonably allocated to such portion, plus
(ii) Tenant's direct out-of-pocket costs such as tenant improvements, moving
costs or brokerage commissions which Tenant certifies to Landlord have been paid
to provide occupancy related services to such assignee or subtenant of a nature
commonly provided by landlords of similar space, shall be the property of
Landlord and such amounts shall be payable directly to Landlord by the assignee
or subtenant or, at Landlord's option, by Tenant. At Landlord's request, a
written agreement shall be entered into by and among Tenant, Landlord and the
proposed assignee or subtenant confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant, except for
any transfer to a "Tenant Affiliate" (as hereinafter defined). Such fee is
hereby acknowledged as a reasonable amount to reimburse Landlord for all of its
costs of review and evaluation of a proposed assignee/sublessee, and Landlord
shall not be obligated to commence such review and evaluation unless and until
such fee is paid.
(f) Landlord agrees to execute and deliver to Tenant, within fifteen
(15) days following Tenant's request, a consent to lien waiver, including lease
estoppel language as may be requested by Tenant's lender (all in a form
reasonably acceptable to Tenant's lender and Landlord).
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its obligation to pay rent and to
perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any act
or omission by an assignee or subtenant. Each assignee, other than Landlord,
shall be deemed to assume all obligations of Tenant under this Lease and shall
be liable jointly and severally with Tenant for the payment of all rent, and for
the due performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document memorializing the
transfer is delivered to Landlord and both the assignee/subtenant and Tenant
deliver to Landlord an executed consent to transfer instrument prepared by
Landlord and consistent with the requirements of this Article. The acceptance by
Landlord of any payment due under this Lease from any other person shall not be
deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any transfer. Consent by Landlord to one or more transfers shall not
operate as a waiver or estoppel to the future enforcement by Landlord of its
rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than with
respect to the payment of rent hereunder) is incorporated by reference into and
made a part of such sublease, with "Landlord" hereunder meaning the sublandlord
therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
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of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that an uncured default exists
in the performance of Tenant's obligations under this Lease, to pay to Landlord
all sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) Except as permitted under Section 9.4 below, in the event of the
termination of this Lease, Landlord may, at its sole option, take over Tenant's
entire interest in any sublease and, upon notice from Landlord, the subtenant
shall attorn to Landlord. In no event, however, shall Landlord be liable for any
previous act or omission by Tenant under the sublease or for the return of any
advance rental payments or deposits under the sublease that have not been
actually delivered to Landlord, nor shall Landlord be bound by any sublease
modification executed without Landlord's consent or for any advance rental
payment by the subtenant in excess of one month's rent. The general provisions
of this Lease, including without limitation those pertaining to insurance and
indemnification, shall be deemed incorporated by reference into the sublease
despite the termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. Notwithstanding anything to the contrary
contained in this Article IX, Landlord's consent shall not be required for the
assignment of this Lease to any parent or wholly owned subsidiary of Tenant or
as a result of a merger by Tenant with or into another entity controlling, under
common control with, or controlled by Tenant, so long as (i) the net worth of
the successor entity after such assignment is at least equal to the greater of
the net worth of Tenant as of the execution of this Lease by Landlord or the net
worth of Tenant immediately prior to the date of such assignment, evidence of
which, satisfactory to Landlord, shall be presented to Landlord prior to such
assignment, (ii) Tenant shall provide to Landlord, prior to such assignment or
merger, written notice of such transactions and such documentation and other
information as Landlord may request in connection therewith, and (iii) the terms
of Section 9.2 shall be applicable to any such assignment. Each of the successor
entities described in the foregoing is herein referred to as a "Tenant
Affiliate".
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in EXHIBIT D.
Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord shall provide the following
types of insurance, in amounts and coverages as may be determined by Landlord in
its reasonable discretion provided such amounts, coverages and deductibles are
reasonable and comparable to coverages maintained on comparable properties in
the area: "all risk" property insurance, subject to standard exclusions covering
the Building and the Project, and commercial general liability coverage.
Further, Landlord may, in its sole and absolute discretion, obtain coverage for
such other risks as Landlord or its mortgagees may from time to time deem
appropriate, including without limitation, coverage for leasehold improvements
and/or earthquake (provided, however, that the cost of earthquake insurance
shall not be included as an Operating Expense unless Landlord elects or is
required to carry such coverage on the entire Project). Landlord shall not be
required to carry insurance of any kind on Tenant's property, including
leasehold improvements, trade fixtures, furnishings, equipment, plate glass,
signs and all other items of personal property, and shall not be obligated to
repair or replace that property should damage occur. All proceeds of insurance
maintained by Landlord upon the Building and Project shall be the property of
Landlord, whether or not Landlord is obligated to or elects to make any repairs.
At Landlord's option, Landlord may self-insure all or any portion of the risks
for which Landlord is required or elects to provide insurance hereunder;
provided, however, that in the event that Landlord transfers its fee interest in
the Project including the Premises (other than to an entity affiliated with,
controlled, controlling or under common control with Landlord, or in which
Landlord retains an interest), such transferee shall demonstrate a financial net
worth of at least Fifty Million Dollars ($50,000,000.00) or cash reserves of Ten
Million Dollars ($10,000,000.00), and in the absence of such financial net worth
or cash reserves, such transferee shall instead maintain insurance coverage as
required by this Section 10.2 from third-party insurance carrier(s).
SECTION 10.3. JOINT INDEMNITY.
(a) To the fullest extent permitted by law, but subject to the express
limitations on liability contained in Section 10.5 of this Lease, Tenant shall
defend, indemnify, protect, save and hold harmless Landlord, its agents, and any
and all affiliates of Landlord, including, without limitation, any corporations
or other entities controlling, controlled by or under common control with
Landlord, from and against any and all claims, liabilities, costs or expenses
arising either before or after the Commencement Date from Tenant's use or
occupancy of the Premises, or from the conduct of its business, or from any
activity, work, or thing done, permitted or suffered by Tenant or its agents,
employees, invitees or licensees in or about the Premises, or from any
negligence or willful misconduct of Tenant or its agents, employees, visitors,
patrons, guests, invitees or licensees. In cases of alleged negligence asserted
by third parties against Landlord which arise out of, are occasioned by, or in
any way attributable to Tenant's, its agents, employees, contractors, licensees
or invitees use and occupancy of the Premises, or from the conduct of its
business or from any activity, work or thing done, permitted or suffered by
Tenant or its agents, employees, invitees
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or licensees on Tenant's part to be performed under this Lease, or from any
negligence or willful misconduct of Tenant, its agents, employees, licensees or
invitees, Tenant shall accept any tender of defense for Landlord and shall,
notwithstanding any allegation of negligence or willful misconduct on the part
of the Landlord, defend Landlord and protect and hold Landlord harmless and pay
all costs, expenses and attorneys' fees incurred in connection with such
litigation, provided that Tenant shall not be liable for any such injury or
damage, and Landlord shall reimburse Tenant for the reasonable attorney's fees
and costs for the attorney representing both parties, all to the extent and in
the proportion that such injury or damage is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Landlord) to be attributable to the negligence or willful misconduct of
Landlord. Upon Landlord's request, Tenant shall at Tenant's sole cost and
expense, retain a separate attorney reasonably selected by Landlord to represent
Landlord in any such suit if Landlord reasonably determines that the
representation of both Tenant and Landlord by the same attorney would cause a
conflict of interest; provided, however, that to the extent and in the
proportion that the injury or damage which is the subject of the suit is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Landlord) to be attributable to the
negligence or willful misconduct of Landlord, Landlord shall reimburse Tenant
for the reasonable legal fees and costs of the separate attorney retained by
Tenant. The provisions of this Subsection 10.3(a) shall expressly survive the
expiration or sooner termination of this Lease.
(b) To the fullest extent permitted by law, but subject to the express
limitations on liability contained in this Lease (including, without limitation,
the provisions of Sections 10.4, 10.5 and 14.8 of this Lease), Landlord shall
defend, indemnify, protect, save and hold harmless Tenant, its agents and any
and all affiliates of Tenant, including, without limitation, any corporations,
or other entities controlling, controlled by or under common control with
Tenant, from and against any and all claims, liabilities, costs or expenses
arising either before or after the Commencement Date from the operation,
maintenance or repair of the Common Areas, the Project and/or the Building by
Landlord or its employees or authorized agents. In cases of alleged negligence
asserted by third parties against Tenant which arise out of, are occasioned by,
or in any way attributable to the maintenance or repair of the Common Areas, the
Project or the Building by Landlord or its authorized agents or employees,
Landlord shall accept any tender of defense for Tenant and shall,
notwithstanding any allegation of negligence or willful misconduct on the part
of Tenant, defend Tenant and protect and hold Tenant harmless and pay all cost,
expense and attorneys' fees incurred in connection with such litigation,
provided that Landlord shall not be liable for any such injury or damage, and
Tenant shall reimburse Landlord for the reasonable attorney's fees and costs for
the attorney representing both parties, all to the extent and in the proportion
that such injury or damage is ultimately determined by a court of competent
jurisdiction (or in connection with any negotiated settlement agreed to by
Tenant) to be attributable to the negligence or willful misconduct of Tenant.
Upon Tenant's request, Landlord shall at Landlord's sole cost and expense,
retain a separate attorney reasonably selected by Tenant to represent Tenant in
any such suit if Tenant reasonably determines that the representation of both
Tenant and Landlord by the same attorney would cause conflict of interest;
provided, however, that to the extent and the proportion that the injury or
damage which is the subject of the suit is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Tenant) to be attributable to the negligence or willful misconduct or
Tenant, Tenant shall reimburse Landlord for the reasonable legal fees and costs
of the separate attorney retained by Landlord. The provisions of this Subsection
10.3(b) shall expressly survive the expiration or sooner termination of this
Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Subject to the express indemnity
obligations contained in Section 10.3(b) of this Lease, Landlord shall not be
liable to Tenant, its employees, agents and invitees, and Tenant hereby waives
all claims against Landlord for loss of or damage to any property or personal
injury, or any other loss, cost, damage, injury or liability whatsoever
resulting from fire, explosion, falling plaster, steam, gas, electricity, water
or rain which may leak or flow from or into any part of the Premises or from the
breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building, whether the damage or injury results from conditions arising in
the Premises or in other portions of the Building. Notwithstanding any provision
of this Lease to the contrary, including, without limitation, the provisions of
Section 10.3(b) of this Lease, Landlord shall in no event be liable to Tenant,
its employees, agents, and invitees, and Tenant hereby waives all claims against
Landlord, for loss or interruption of Tenant's business or income (including,
without limitation, any consequential damages and lost profit or opportunity
costs), or any other loss, cost, damage, injury or liability resulting from, but
not limited to, Acts of God (except with respect to restoration obligations
pursuant to Article XI below), acts of civil disobedience or insurrection, acts
or omissions (criminal or otherwise) of any third parties (other than Landlord's
employees or authorized agents), including without limitation, any other tenants
within the Project or their agents, employees, contractors, guests or invitees.
It is understood that any such condition may require the temporary evacuation or
closure of all or a portion of the Building. Except as provided in Sections 6.1,
11.1 and 12.1 below, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
(including without limitation consequential damages and lost profit or
opportunity costs) arising from the making of any repairs, alterations or
improvements to any portion of the Building, including repairs to the Premises,
nor shall any related activity by Landlord constitute an actual or constructive
eviction; provided, however, that in making repairs, alterations or
improvements, Landlord shall interfere as little as reasonably practicable with
the conduct of Tenant's business in the Premises. Neither Landlord nor its
agents shall be liable for interference with light or other similar intangible
interests. Tenant shall immediately notify Landlord in case of fire or accident
in the Premises, the Building or the Project and of defects in any improvements
or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives
all rights of recovery against the other and the other's agents on account of
loss and damage occasioned to the property of such waiving party to the extent
only that such loss or damage would be covered under any "all risk" property
insurance policies required by this Article X; provided however, that (i) the
foregoing waiver shall not apply to the extent of
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Tenant's obligations to pay deductibles under any such policies and this Lease,
and (ii) if any loss is due to the negligent act, omission or willful misconduct
of Tenant or its agents, employees, contractors, guests or invitees, Tenant's
liability insurance shall be primary and shall cover all losses and damages
prior to any other insurance hereunder. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned by
the negligence of such party, its agents, employees, contractors, guests or
invitees. The provisions of this Section shall not limit the indemnification
provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building of which the Premises are a part is damaged,
Landlord shall diligently repair that damage as soon as reasonably possible, at
its expense, unless: (i) Landlord reasonably determines that the cost of repair
is not covered by Landlord's fire and extended coverage insurance then in place
(or if Landlord is self-insuring, would not be covered by a standard policy of
"all risk" fire insurance), plus such additional amounts Tenant elects, at its
option, to contribute, excluding however the deductible (for which Tenant shall
be responsible for Tenant's Share); (ii) Landlord reasonably determines that the
Premises cannot, with reasonable diligence, be fully repaired by Landlord (or
cannot be safely repaired because of the presence of hazardous factors,
including without limitation Hazardous Materials, earthquake faults, and other
similar dangers) within two hundred seventy (270) days after the date of the
damage; (iii) the damage occurs during the final twelve (12) months of the Term.
Should Landlord elect not to repair the damage for one of the preceding reasons,
Landlord shall so notify Tenant in writing within thirty (30) days after the
damage occurs and this Lease shall terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in accordance with
subsection (a) above, this Lease shall continue in effect for the remainder of
the Term and Landlord shall promptly notify Tenant in writing of Landlord's
election to restore the Premises and of the time Landlord estimates to complete
such restoration; provided that so long as Tenant is not in default under this
Lease following the expiration of the applicable cure period, if the damage is
so extensive that Landlord reasonably determines that the Premises cannot, with
reasonable diligence, be repaired by Landlord (or cannot be safely repaired
because of the presence of hazardous factors, earthquake faults, and other
similar dangers) so as to allow Tenant's substantial use and enjoyment of the
Premises within two hundred seventy (270) days after the date of damage, then
Tenant may elect to terminate this Lease by written notice to Landlord within
the thirty (30) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and ending
on the sooner of the date the damage is repaired or the date this Lease is
terminated, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Premises that is rendered unusable by the
damage from time to time bears to the total floor area of the Premises, and if
as a result of any partial damage, Tenant reasonably determines that it cannot
conduct its business in the remaining portions of the Premises, the rent for the
entire Premises shall be abated. Any such abatement shall be conditioned upon
Tenant's then carrying the required business interruption insurance as described
in EXHIBIT D.
(d) Notwithstanding the provisions of subsections (a), (b) and (c) of
this Section, and subject to the provisions of Section 10.5 above, the cost of
any repairs shall be borne by Tenant, and Tenant shall not be entitled to rental
abatement or termination rights, if the damage is due to the fault or neglect of
Tenant or its employees, subtenants, invitees or representatives, but only to
the extent such damage is not covered by a standard policy of "all risk"
insurance (whether or not Landlord is self-insuring). In addition, the
provisions of this Section shall not be deemed to require Landlord to repair any
improvements or fixtures that Tenant is obligated to repair or insure pursuant
to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing Tenant's
personal property and any nonstructural debris from the Premises to facilitate
all inspections of the Premises and the making of any repairs. Notwithstanding
anything to the contrary contained in this Lease, if Landlord in good faith
believes there is a risk of injury to persons or damage to property from entry
into the Building or Premises following any damage or destruction thereto,
Landlord may restrict entry into the Building or the Premises by Tenant, its
employees, agents and contractors in a non-discriminatory manner, without being
deemed to have violated Tenant's rights of quiet enjoyment to, or made an
unlawful detainer of, or evicted Tenant from, the Premises. Upon request,
Landlord shall consult with Tenant to determine if there are safe methods of
entry into the Building or the Premises solely in order to allow Tenant to
retrieve files, data in computers, and necessary inventory, subject however to
all indemnities and waivers of liability from Tenant to Landlord contained in
this Lease and any additional indemnities and waivers of liability which
Landlord may require. If damage or destruction rendering the Premises unusable
occurs during the final twelve (12) months of the Lease Term or the final twelve
(12) months of any extension period which cannot be repaired within sixty (60)
days following such damage or destruction, Tenant shall have the option to
terminate the Lease by providing Landlord written notification of Tenant's
election to terminate within thirty (30) days after the damage occurs. For all
purposes of this Section 11.1, damage to Tenant's parking areas and access to
the Premises shall be deemed damage to the Building.
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SECTION 11.2. LEASE GOVERNS/JAMS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
Any disputes regarding the obligations of the parties under this Article XI
shall be submitted to and resolved by JAMS arbitration pursuant to Section 22.8
of this Lease.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises which materially impairs Tenant's ability to conduct business from the
Premises is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event title to a portion of the Building or Project, other
than the Premises, is taken or sold in lieu of taking, and if Landlord elects to
restore the Building in such a way as to alter the Premises materially, either
party may terminate this Lease, by written notice to the other party, effective
on the date of vesting of title. In the event neither party has elected to
terminate this Lease as provided above, then Landlord shall promptly, after
receipt of a sufficient condemnation award, proceed to restore the Premises to
substantially their condition prior to the taking, and a proportionate allowance
shall be made to Tenant for the rent corresponding to the time during which, and
to the part of the Premises of which, Tenant is deprived on account of the
taking and restoration. In addition, Tenant's share of Operating Expenses and
all other elements of this Lease which are a function of the square footage of
the Premises shall be adjusted to reflect the taking. In the event of a taking,
Landlord shall be entitled to the entire amount of the condemnation award
without deduction for any estate or interest of Tenant; provided that nothing in
this Section shall be deemed to give Landlord any interest in, or prevent Tenant
from seeking any award against the taking authority for, the taking of personal
property and fixtures belonging to Tenant or for relocation or business
interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed ninety (90)
days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking
of the parking area such that Landlord can no longer provide sufficient parking
to comply with this Lease, Landlord may substitute reasonably equivalent parking
in a location reasonably close to the Building; provided that if Landlord fails
to make that substitution within ninety (90) days following the taking and if
the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant
may, at its option, terminate this Lease by written notice to Landlord. If this
Lease is not so terminated by Tenant, there shall be no abatement of rent and
this Lease shall continue in effect. Any dispute regarding the substitution of
parking spaces under this Section 12.3 shall be submitted to and resolved by
JAMS arbitration pursuant to Section 22.8 of this Lease.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall be
either superior or subordinate to all ground or underlying leases, mortgages and
deeds of trust, if any, which may hereafter affect the Building, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, that so long as Tenant is not in default under this Lease following
the expiration of the applicable cure period, this Lease shall not be terminated
or Tenant's quiet enjoyment of the Premises disturbed in the event of
termination of any such ground or underlying lease, or the foreclosure of any
such mortgage or deed of trust, to which Tenant has subordinated this Lease
pursuant to this Section. Any such subordination instrument presented for
Tenant's signature shall contain nondisturbance provisions for Tenant's benefit
substantially in accordance with the provisions for Tenant's benefit set forth
in this Section. In the event of a termination or foreclosure, Tenant shall
become a tenant of and attorn to the successor-in-interest to Landlord upon the
same terms and conditions as are contained in this Lease, and shall execute any
instrument reasonably required by Landlord's successor for that purpose. Tenant
shall also, upon written request of Landlord, execute and deliver all
instruments as may be required from time to time to subordinate the rights of
Tenant under this Lease to any ground or underlying lease or to the lien of any
mortgage or deed of trust (provided that such instruments include the
nondisturbance and attornment protections set forth above in form reasonably
acceptable to Tenant), or, if requested by Landlord, to subordinate, in whole or
in part, any ground or underlying lease or the lien of any mortgage or deed of
trust to this Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than fifteen (15) days
prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured
defaults on the part of Landlord, or specifying each default if any are claimed,
and
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(iii) setting forth all further information that Landlord may reasonably
require. Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of all or any portion of the Building or Project.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within fifteen (15) days
following written notice therefor shall be conclusive upon Tenant that (i) this
Lease is in full force and effect, without modification except as may be
represented by Landlord, (ii) there are no uncured defaults in Landlord's
performance, and (iii) not more than one month's rental has been paid in
advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time within fifteen (15) days following Landlord's
request but not more than once in each calendar year, Tenant's current tax
returns and financial statements, certified true, accurate and complete by the
chief financial officer of Tenant, including a balance sheet and profit and loss
statement for the most recent prior year (collectively, the "Statements"), which
Statements shall accurately and completely reflect the financial condition of
Tenant. Landlord agrees that it will keep the Statements confidential, except
that Landlord shall have the right to deliver the same to any proposed purchaser
of the Building or Project (provided that any such purchaser shall agree to keep
said Statements confidential), and to any encumbrancer of all or any portion of
the Building or Project (provided that Landlord shall request that any such
encumbrancer keep said Statements confidential).
(b) Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again on
the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default
set forth in this Lease, the occurrence of any one or more of the following
events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of ten (10) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended. For purposes of these default and remedies provisions,
the term "additional rent" shall be deemed to include all amounts of any type
whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement provided by
Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the benefit
of creditors; (ii) the filing by or against Tenant of a petition to have Tenant
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within sixty (60) days; (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within sixty (60) days; or (v) Tenant's convening of a meeting of its
creditors for the purpose of effecting a moratorium upon or composition of its
debts. Landlord shall not be deemed to have knowledge of any event described in
this subsection unless notification in writing is received by Landlord, nor
shall there be any
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presumption attributable to Landlord of Tenant's insolvency. In the event that
any provision of this subsection is contrary to applicable law, the provision
shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which
the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which
the unpaid rent and additional rent for the balance of the Term after the time
of award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result from Tenant's default, including, but not limited to, the cost
of recovering possession of the Premises, refurbishment of the Premises to the
condition required upon surrender under this Lease, marketing costs, commissions
and other expenses of reletting, including necessary repair, the unamortized
portion of any tenant improvements and brokerage commissions funded by Landlord
in connection with this Lease, reasonable attorneys' fees, and any other
reasonable costs (provided that the unamortized portion of any tenant
improvements shall not be computed separately from the rent which includes such
amounts); and
(5) At Landlord's election, all other amounts in addition
to or in lieu of the foregoing as may be permitted by law. The term "rent" as
used in this Lease shall be deemed to mean the Basic Rent and all other sums
required to be paid by Tenant to Landlord pursuant to the terms of this Lease.
Any sum, other than Basic Rent, shall be computed on the basis of the average
monthly amount accruing during the twenty-four (24) month period immediately
prior to default, except that if it becomes necessary to compute such rental
before the twenty-four (24) month period has occurred, then the computation
shall be on the basis of the average monthly amount during the shorter period.
As used in subparagraphs (1) and (2) above, the "worth at the time of award"
shall be computed by allowing interest at the rate of ten percent (10%) per
annum. As used in subparagraph (3) above, the "worth at the time of award" shall
be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy provided by this subsection (ii), Landlord shall not
unreasonably withhold its consent to an assignment or subletting of the Premises
subject to the reasonable standards for Landlord's consent as are contained in
this Lease.
(b) The various rights and remedies reserved to Landlord in this Lease
or otherwise shall be cumulative and, except as otherwise provided by California
law, Landlord may pursue any or all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord
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or of Landlord's agents shall have any power to accept the keys to the Premises
prior to the termination of this Lease, and the delivery of the keys to any
employee shall not operate as a termination of the Lease or a surrender of the
Premises.
SECTION 14.3. LATE PAYMENTS. Any rent due under this Lease that is not
received by Landlord within ten (10) days of the date when due shall bear
interest at the rate of ten percent (10%) per annum not to exceed the maximum
rate permitted by law (the "Interest Rate") from the date due until fully paid.
The payment of interest shall not cure any default by Tenant under this Lease.
In addition, Tenant acknowledges that the late payment by Tenant to Landlord of
rent will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Those costs may include, but are not limited to, administrative,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any rent due from Tenant shall not be received by
Landlord or Landlord's designee within ten (10) days after the date due, then
Tenant shall pay to Landlord, in addition to the interest provided above, a late
charge in a sum equal to the greater of five percent (5%) of the amount overdue
or Two Hundred Fifty Dollars ($250.00) for each delinquent payment; provided
that such late charge shall be waived for the initial late rent payment during
each calendar year during the Term and any extension. Acceptance of a late
charge by Landlord shall not constitute a waiver of Tenant's default with
respect to the overdue amount, nor shall it prevent Landlord from exercising any
of its other rights and remedies.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to
be performed by Tenant under this Lease shall be performed at Tenant's sole cost
and expense and without any abatement of rent or right of set-off. If Tenant
fails to pay any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure continues
beyond any applicable grace period set forth in Section 14.1, then in addition
to any other available remedies, Landlord may, at its election make the payment
or perform the other act on Tenant's part. Landlord's election to make the
payment or perform the act on Tenant's part shall not give rise to any
responsibility of Landlord to continue making the same or similar payments or
performing the same or similar acts. Tenant shall, promptly upon demand by
Landlord, reimburse Landlord for all sums paid by Landlord and all necessary
incidental costs, together with interest at the maximum rate permitted by law
from the date of the payment by Landlord. Landlord shall have the same rights
and remedies if Tenant fails to pay those amounts as Landlord would have in the
event of a default by Tenant in the payment of rent. Landlord shall provide
Tenant with written notice and the appropriate cure period provided in the Lease
before performing any act on behalf of Tenant and will provide Tenant with
written request for any reimbursement payable under this Section 14.4.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion. If Landlord shall default in the performance of any of
its obligations under the Lease (after notice and an opportunity to cure as
provided herein), Tenant shall have the right to pursue any and all remedies
available to it as set forth in this Lease, at law, or in equity, subject to the
express limitations on liability contained in this Lease.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the expiration or earlier termination
of this Lease, including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten percent
(10%) per annum. Should either Landlord or Tenant bring any action in connection
with this Lease, the prevailing party shall be entitled to recover as a part of
the action its reasonable attorneys' fees, and all other costs. The prevailing
party for the purpose of this paragraph shall be determined by the trier of the
facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do not
constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Project and out of the rent or other income from such property receivable by
Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Project and no action for any deficiency may be sought or obtained by Tenant.
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ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be one hundred twenty percent
(120%) of the Basic Rent for the month immediately preceding the date of
termination for the initial two (2) months of holdover by Tenant and for the
third (3rd) month and each month Tenant holds over thereafter, one hundred fifty
percent (150%) of the Basic Rent for the month immediately preceding the date of
termination. If Tenant fails to surrender the Premises upon the expiration of
this Lease despite Landlord's written demand to do so (which demand shall
include notice to Tenant of a succeeding tenant and the need for Tenant's
immediate surrender), then Tenant shall be liable for Landlord's foreseeable
consequential and other damages (including, without limitation, reasonable
attorney's fees) proximately caused by such failure to surrender. Acceptance by
Landlord of rent after the termination shall not constitute a consent to a
holdover or result in a renewal of this Lease. The foregoing provisions of this
Section are in addition to and do not affect Landlord's right of re-entry or any
other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
from the Premises all personal property and debris, except for any items that
Landlord may by written authorization allow to remain. Tenant shall repair all
damage to the Premises resulting from such removal, which repair shall include
the patching and filling of holes (other than holes resulting from the hanging
of pictures or other items of decoration, which Tenant shall not be obligated to
patch and fill) and repair of structural damage, provided that Landlord may
instead elect to repair any structural damage at Tenant's expense. If Tenant
shall fail to comply with the provisions of this Section following ten (10) days
written notice to Tenant and failure to cure, Landlord may effect the removal
and/or make any repairs, and the cost to Landlord shall be additional rent
payable by Tenant upon demand. If Tenant fails to remove Tenant's personal
property from the Premises upon the expiration of the Term, Landlord may remove,
store, dispose of and/or retain such personal property, at Landlord's option, in
accordance with then applicable laws, all at the expense of Tenant. If requested
by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an
instrument in writing releasing and quitclaiming to Landlord all right, title
and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset (except as otherwise expressly provided in this Lease), in lawful money
of the United States to Landlord at its address set forth in Item 12 of the
Basic Lease Provisions, or at any other place as Landlord may designate in
writing. Unless this Lease expressly provides otherwise, as for example in the
payment of rent pursuant to Section 4.1, all payments shall be due and payable
within five (5) days after demand. All payments requiring proration shall be
prorated on the basis of a thirty (30) day month and a three hundred sixty (360)
day year. Any notice, election, demand, consent, approval or other communication
to be given or other document to be delivered by either party to the other may
be delivered in person or by courier or overnight delivery service to the other
party, or may be deposited in the United States mail, duly registered or
certified, postage prepaid, return receipt requested, and addressed to the other
party at the address set forth in Item 12 of the Basic Lease Provisions. Either
party may, by written notice to the other, served in the manner provided in this
Article, designate a different address. If any notice or other document is sent
by mail, it shall be deemed served or delivered on the date actually received or
refused as indicated on the return receipt. If more than one person or entity is
named as Tenant under this Lease, service of any notice upon any one of them
shall be deemed as service upon all of them. Unless the Lease expressly provides
otherwise, all payments shall be due and payable within ten (10) days of demand.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as EXHIBIT E, and any reasonable and nondiscriminatory
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the
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<PAGE> 34
Premises, Building, Project and Common Areas. Landlord shall not be liable to
Tenant for any violation of the Rules and Regulations or the breach of any
covenant or condition in any lease by any other tenant or such tenant's agents,
employees, contractors, guests or invitees. One or more waivers by Landlord of
any breach of the Rules and Regulations by Tenant or by any other tenant(s)
shall not be a waiver of any subsequent breach of that rule or any other.
Tenant's failure to keep and observe the Rules and Regulations shall constitute
a default under this Lease. In the case of any conflict between the Rules and
Regulations and this Lease, this Lease shall be controlling. Tenant's agreement
to abide by, keep and observe all reasonable rules and regulations which
Landlord may make shall be limited to those rules and restrictions which are
consistently applied by Landlord to all tenants of the Project in a
non-discriminatory manner.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) pursuant to Landlord's separate
agreement with said Broker. Tenant warrants that it has had no dealings with any
other real estate broker or agent in connection with the negotiation of this
Lease, and Tenant agrees to indemnify and hold Landlord harmless from any cost,
expense or liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real estate broker or
agent employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease. To the fullest extent permitted by law,
Landlord agrees to indemnify, defend and hold harmless Tenant from and against
any and all costs, expenses and liabilities for any compensation claimed by any
broker, finder or agent employed or claiming to have been employed by Landlord
in connection with the negotiation of this Lease.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises,
Landlord agrees to transfer, by credit to the purchase price or otherwise,
Tenant's Security Deposit to the transferee, and the transferor shall thereupon
be automatically relieved of all obligations on the part of Landlord accruing
under this Lease from and after the date of the transfer, provided that: (i) any
other funds held by the transferor in which Tenant has an interest shall be
turned over, subject to that interest, to the transferee and Tenant is notified
of the transfer as required by law and (ii) any such transferee shall assume, in
writing, all non-accrued obligations of Landlord under this Lease
Notwithstanding the foregoing, no holder of a mortgage and/or deed of trust to
which this Lease is or may be subordinate, and no landlord under a so-called
sale-leaseback, shall be responsible in connection with the Security Deposit,
unless the mortgagee or holder of the deed of trust or the landlord actually
receives the Security Deposit. It is intended that the covenants and obligations
contained in this Lease on the part of Landlord shall, subject to the foregoing,
be binding on Landlord, its successors and assigns, only during and in respect
to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
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SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have. The
failure of Tenant or Landlord to seek redress for violation of, or to insist
upon the strict performance of, any term, covenant or condition of the Lease
shall not be deemed a waiver of such violation or prevent a subsequent act which
would have originally constituted a violation from having all the force and
effect of the original violation, nor shall any custom or practice which may
become established between the parties in the administration of the terms hereof
be deemed a waiver of, or in any way affect, the right of a party to insist upon
the performance by the other party of its obligations in strict accordance with
said terms. Any payment of rents or other sums hereunder by Tenant shall not, in
and of itself, be deemed a waiver of any preceding breach by Landlord of any
term, covenant or condition of this Lease, regardless of Tenant's knowledge of
such preceding breach at the time of payment of such rent or other sums.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be
delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement or
implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. Tenant and Landlord each
represent and warrant that each individual executing this Lease on behalf of
Tenant or Landlord, respectively, is duly authorized to execute and deliver this
Lease on behalf of Tenant or Landlord, respectively, and that this Lease is
binding upon Tenant or Landlord, respectively, in accordance with its terms.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No
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actions, policies, oral or informal arrangements, business dealings or other
course of conduct by or between the parties shall be deemed to modify this Lease
in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Project, either directly or indirectly,
without the prior written consent of Landlord, provided, however, that Tenant
may disclose the terms to prospective subtenants or assignees under this Lease.
The provisions of this Section are not intended to prevent Tenant from
disclosing the existence or terms of this Lease as may be required of a public
company in its filings with regulatory agencies.
SECTION 22.2. GUARANTY. [INTENTIONALLY OMITTED]
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining
financing for the Project, the lender shall request reasonable modifications in
this Lease as a condition to the financing, Tenant will not unreasonably
withhold or delay its consent, provided that the modifications do not materially
increase the obligations of Tenant or materially and adversely affect the
leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of
Landlord which would otherwise entitle Tenant to be relieved of its obligations
hereunder or to terminate this Lease shall result in such a release or
termination unless (a) Tenant has given notice by registered or certified mail
to any beneficiary of a deed of trust or mortgage covering the Building whose
address has been furnished to Tenant and (b) such beneficiary is afforded a
reasonable opportunity to cure the default by Landlord (which in no event shall
be less than sixty (60) days), including, if necessary to effect the cure, time
to obtain possession of the Building by power of sale or judicial foreclosure
provided that such foreclosure remedy is commenced within such sixty (60) day
period and is thereafter diligently pursued. Tenant agrees that each beneficiary
of a deed of trust or mortgage covering the Building is an express third party
beneficiary hereof, Tenant shall have no right or claim for the collection of
any deposit from such beneficiary or from any purchaser at a foreclosure sale
unless such beneficiary or purchaser shall have actually received and not
refunded the deposit, and Tenant shall comply with any written directions by any
beneficiary to pay rent due hereunder directly to such beneficiary without
determining whether an event of default exists under such beneficiary's deed of
trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this Lease
shall be construed to be conditions as well as covenants as though the words
specifically expressing or imparting covenants and conditions were used in each
separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Project. Tenant assumes all
responsibility for the protection of Tenant, its agents, invitees and property
from acts of third parties. Nothing herein contained shall prevent Landlord, at
its sole option, from providing security protection for the Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Project Costs.
SECTION 22.7. COMMUNICATIONS/SECURITY EQUIPMENT. At any time upon the
execution by Tenant of Landlord's standard License Agreement (a copy of which is
attached hereto as EXHIBIT F), Tenant shall have the right at its sole cost and
expense, during the Term of this Lease, to install, maintain and operate
communications equipment on the roof of the Building A or in subterranean
conduit between the Buildings in the area shown in the License Agreement and to
install a security system on the interior and exterior of the Buildings as
necessary. Such systems may include trenching and the connection of services
between the Buildings. The operation and maintenance of any such equipment shall
be subject to the terms of said License Agreement. Tenant shall not be obligated
to pay any license fee for such equipment during the Lease Term or any
extensions.
SECTION 22.8. JAMS ARBITRATION.
(a) All claims or disputes between Landlord and Tenant arising out of,
or relating to the Lease which either party is expressly authorized by a
provision hereof to submit to arbitration, shall be decided by the
JAMS/ENDISPUTE, or its successor, in Orange, California ("JAMS"), unless the
parties mutually agree otherwise. Within ten (10) business days following
submission to JAMS, JAMS shall designate three arbitrators and each party may,
within five (5) business days thereafter, veto one of the three persons so
designated. If two different designated arbitrators have been vetoed, the third
arbitrator shall hear and decide the matter. Any arbitration pursuant to this
Section 22.8 shall be
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decided within thirty (30) days of submission of JAMS. The decision of the
arbitrator shall be final and binding on the parties. All costs associated with
arbitration shall be awarded to the prevailing party as determined by the
arbitrator.
(b) Notice of the demand for arbitration by either party to the Lease
shall be filed in writing with the other party to the Lease and with JAMS and
shall be made within a reasonable time after the dispute has arisen. The award
rendered by the arbitrators shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having jurisdiction thereof.
Except by written consent of the person or entity sought to be joined, no
arbitration arising out of or relating to the Lease shall include, by
consolidation, joinder or in any other manner, any person or entity not a party
to the Lease under which such arbitration is filed if (1) such person or entity
is substantially involved in a common question of fact or law, (2) the presence
of such person or entity is required if complete relief is to be accorded in the
arbitration, or (3) the interest or responsibility of such person or entity in
the matter is not insubstantial.
(c) The agreement herein among the parties to the Lease and any other
written agreement to arbitrate referred to herein shall be specifically
enforceable under prevailing law.
[seal legal approval]
LANDLORD: TENANT:
THE IRVINE COMPANY, BROADCOM CORPORATION
A DELAWARE CORPORATION A CALIFORNIA CORPORATION
By: /s/ RICHARD G. SIM By: /s/ HENRY T NICHOLAS
----------------------------------- --------------------------
Richard G. Sim Name: Henry T Nicholas
--------------------------
Group President, Investment Properties Title: CEO
--------------------------
By: /s/ CLARENCE W. BARKER By: /s/ DAVID DULL
-------------------------------------- --------------------------
Name: David Dull
Clarence W. Barker, President --------------------------
Irvine Industrial Company, Title: VP & SECRETARY
a division of The Irvine Company --------------------------
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EXHIBIT A-1
DESCRIPTION OF PREMISES
[drawing]
Pie shaped property on corner of Laguna Canyon Road and Alton Parkway. Three
buildings (A, B, C) in campus environment surrounding center courtyard area.
<PAGE> 39
EXHIBIT A-2
TEMPORARY PREMISES - SECOND FLOOR OF BUILDING C
[drawing]
Second floor building C floorplan highlighting offices, common area, and steps
<PAGE> 40
EXHIBIT B
IRVINE INDUSTRIAL COMPANY
HAZARDOUS MATERIALS SURVEY FORM
The purpose of this form is to obtain information regarding the use of
hazardous substances on Irvine Industrial Company property. Prospective tenants
and contractors should answer the questions in light of their proposed
operations on the premises. Existing tenants and contractors should answer the
questions as they relate to ongoing operations on the premises and should update
any information previously submitted.
If additional space is needed to answer the questions, you may attach
separate sheets of paper to this form. When completed, the form should be sent
to the following address:
___________________________________
___________________________________
___________________________________
___________________________________
(insert address of Property
Management Company)
Your cooperation in this matter is appreciated. If you have any questions,
please do not hesitate to call [insert name of Property Manager] at [insert
phone number] for assistance.
1. GENERAL INFORMATION
Name of Responding Company:
--------------------------------------------------
Check all that apply: Tenant (X) Contractor ( ) Prospective ( )
Existing ( )
Mailing Address: 16251 Laguna Canyon Road, Irvine, CA 92618
-------------------------------------------------------------
Contact Person & Title: Dick Salvi - Director Corporate Services
------------------------------------------------------
Telephone Number: ( ) - 949 - 450 - 8700 ext. 1257
------------- ----------------------------------
Address of Leased Premises: 16251/16205 Laguna Canyon Road, Irvine, CA
--------------------------------------------------
Length of Lease or Contract Term: 7 Years
--------------------------------------------
Describe the proposed operations to take place on the property, including
principal products manufactured or services to be conducted. Existing tenants
and contractors should describe any proposed changes to ongoing operations.
Research, design engineering and test of semiconductor devices
--------------------------------------------------------------
--------------------------------------------------------------
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes ( ) No ( X )
Chemical Products Yes ( ) No ( X )
Biological Hazards/ Yes ( ) No ( X )
Infectious Wastes Yes ( ) No ( X )
Radioactive Materials Yes ( ) No ( X )
2.2 List any hazardous materials to be used or stored, the quantities
that will be on-site at any given time, and the location and method
of storage (e.g., bottles in storage closet on the premises).
Location and Method
NONE
1
<PAGE> 41
Waste/Products of Storage Quantity
-------------- ------------- ---------
-------------- ------------- ---------
-------------- ------------- ---------
-------------- ------------- ---------
2.3 Is any underground storage of hazardous substances proposed or
currently conducted on the premises? Yes ( ) No (X)
If yes, describe the materials to be stored, and the size and
construction of the tank. Attach copies of any permits obtained for
the underground storage of such substances.
------------------------
--------------------------------------------------------------------
3. SPILLS
3.1 During the past year, have any spills occurred on the premises? Yes
( ) No (X) If so, please describe the spill and attach the results
of any testing conducted to determine the extent of such spills.
3.2 Were any agencies notified in connection with such spills? Yes ( )
No (X) If so, attach copies of any spill reports or other
correspondence with regulatory agencies.
3.3 Were any clean-up actions undertaken in connection with the spills?
Yes ( ) No (X) If so, briefly describe the actions taken. Attach
copies of any clearance letters obtained from any regulatory
agencies involved and the results of any final soil or groundwater
sampling done upon completion of the clean-up work.
4. WASTE MANAGEMENT
4.1 List the waste, if any, generated or to be generated at the
premises, whether it is as hazardous waste, biological or
radioactive hazard, its hazard class and the quantity generated on a
monthly basis.
Waste Hazard Class Quantity/Month
None
------------- ----------------- -----------------
------------- ----------------- -----------------
------------- ----------------- -----------------
------------- ----------------- -----------------
4.2 Describe the method(s) of disposal for each waste. Indicate where
and how often disposal will take place. n/a
-----------------------------
--------------------------------------------------------------------
4.3 Is any treatment or processing of hazardous, infectious or
radioactive wastes currently conducted or proposed to be conducted
at the premises? Yes ( ) No (X)
If yes, please describe any existing or proposed treatment methods.
--------------------------------------------------------------------
4.4 Attach copies of any hazardous waste permits or licenses issued to
your company with respect to its operations on the premises.
5. WASTEWATER TREATMENT/DISCHARGE
5.1 Do you discharge industrial wastewater to:
storm drain? sewer?
--- ---
surface water? X no industrial discharge
--- ---
5.2 Is your industrial wastewater treated before discharge? Yes ( )
No ( )
If yes, describe the type of treatment conducted.
5.3 Attach copies of any wastewater discharge permits issued to your
company with respect to its operations on the premises.
N/A
2
<PAGE> 42
6. AIR DISCHARGES
6.1 Do you have any air filtration systems or stacks that discharge into
the air? Yes ( ) No (X)
6.2 Do you operate any equipment that require air emissions permits? Yes
( ) No (X)
6.3 Attach copies of any air discharge permits pertaining to these
operations.
N/A
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Does your company handle an aggregate of at least 500 pounds, 55
gallons or 200 cubic feet of hazardous material at any given time?
If so, state law requires that you prepare a hazardous materials
management plan. Yes ( ) No (X)
7.2 Has your company prepared a hazardous materials management plan
('business plan') pursuant to state and Orange County Fire
Department requirements? Yes ( ) No (X) If so, attach a copy of the
business plan.
7.3 Are any of the chemicals used in your operations regulated under
Proposition 65? Yes ( ) No (X) If so, describe the actions taken, or
proposed actions to be taken, to comply with Proposition 65
requirements.
7.4 Is your company subject to OSHA Hazard Communication Standard
Requirements? Yes ( ) No (X) If so, describe the procedures followed
to comply with these requirements.
8. ENFORCEMENT ACTIONS, COMPLAINTS
8.1 Has your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees? Yes ( ) No (X)
If so, describe the actions and any continuing compliance
obligations imposed as a result of these actions.
8.2 Has your company ever received requests for information, notice or
demand letters, or any other inquiries regarding its operations? Yes
( ) No (X)
8.3 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns? Yes ( ) No (X)
8.4 Has an environmental audit ever been conducted at your company's
current facility? Yes (X) No ( ) If so, discuss the results of the
audit.
A review of Broadcom facilities revealed no use of hazardous
chemicals.
8.5 Have there been any problems or complaints from neighbors at your
company's current facility? Yes (X) No ( )
-------------------------------------------
-------------------------------------------
By: /s/ HENRY T.NICHOLAS
----------------------------------------
Name: HENRY T.NICHOLAS
--------------------------------------
Title: CEO
-------------------------------------
Date: 8/7/98
--------------------------------------
3
<PAGE> 43
EXHIBIT C
LANDLORD'S DISCLOSURES
(SPECTRUM III)
The capitalized terms used and not otherwise defined in this Exhibit shall
have the same definitions as set forth in the Lease. The provisions of this
Exhibit shall supersede any inconsistent or conflicting provisions of the Lease.
1. Landlord has been informed that the El Toro Marine Corps Air Station (MCAS)
has been listed as a Federal Superfund site as a result of chemical releases
occurring over many years of occupancy. Various chemicals including jet fuel,
motor oil and solvents have been discharged in several areas throughout the MCAS
site. A regional study conducted by the Orange County Water District has
estimated that groundwaters beneath more than 2,900 acres have been impacted by
Trichloroethlene (TCE), an industrial solvent. There is a potential that this
substance may have migrated into the ground water underlying the Premises. The
U.S. Environmental Protection Agency, the Santa Ana Region Quality Control
Board, and the Orange County Health Care Agency are overseeing the
investigation/cleanup of this contamination. To the Landlord's current actual
knowledge, the ground water in this area is used for irrigation purposes only,
and there is no practical impediment to the use or occupancy of the Premises due
to the El Toro discharges.
2. Portions of the real property on which the Project is located or is
adjacent to were used as the Orange County International Raceway from
approximately the mid-1960s to the mid-1980s. During this period, oil and other
substances associated with race car driving were deposited onto such real
property. To the Landlord's current actual knowledge, these substances were
removed, and the Landlord is currently unaware of any contamination existing
upon such real property as a result of such prior use.
Page 1 of 1
<PAGE> 44
EXHIBIT D
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in effect at the
Premises. Landlord reserves the right to adopt reasonable nondiscriminatory
modifications and additions to those standards. Tenant agrees to obtain and
present evidence to Landlord that it has fully complied with the insurance
requirements.
1. Tenant shall, at its sole cost and expense, commencing on the date Tenant
is given access to the Premises for any purpose and during the entire Term,
procure, pay for and keep in full force and effect: (i) commercial general
liability insurance with respect to the Premises and the operations of or on
behalf of Tenant in, on or about the Premises, including but not limited to
personal injury, owned and nonowned automobile, blanket contractual, independent
contractors, broad form property damage (with an exception to any pollution
exclusion with respect to damage arising out of heat, smoke or fumes from a
hostile fire), fire and water legal liability, products liability (if a product
is sold from the Premises), liquor law liability (if alcoholic beverages are
sold, served or consumed within the Premises), and severability of interest,
which policy(ies) shall be written on an "occurrence" basis and for not less
than the amount set forth in Item 13 of the Basic Lease Provisions, with a
combined single limit (with a $50,000 minimum limit on fire legal liability) per
occurrence for bodily injury, death, and property damage liability, or the
current limit of liability carried by Tenant, whichever is greater, and subject
to such increases in amounts as Landlord may determine from time to time; (ii)
workers' compensation insurance coverage as required by law, together with
employers' liability insurance; (iii) with respect to improvements, alterations,
and the like required or permitted to be made by Tenant under this Lease,
builder's all-risk insurance, in an amount equal to the replacement cost of the
work; (iv) insurance against fire, vandalism, malicious mischief and such other
additional perils as may be included in a standard "all risk" form in general
use in the county in which the Premises are situated, insuring Tenant's
leasehold improvements, trade fixtures, furnishings, equipment and items of
personal property of Tenant located in the Premises, in an amount equal to not
less than ninety percent (90%) of their actual replacement cost (with
replacement cost endorsement); and (v) business interruption insurance in
amounts satisfactory to cover one (1) year of loss. In no event shall the limits
of any policy be considered as limiting the liability of Tenant under this
Lease.
2. In the event Landlord consents to Tenant's use, generation or storage of
Hazardous Materials on, under or about the Premises pursuant to Section 5.3 of
this Lease, Landlord shall have the continuing right to require Tenant, at
Tenant's sole cost and expense (provided the same is available for purchase upon
commercially reasonable terms), to purchase insurance specified and approved by
Landlord, with coverage not less than Five Million Dollars ($5,000,000.00),
insuring (i) any Hazardous Materials shall be removed from the Premises, (ii)
the Premises shall be restored to a clean, healthy, safe and sanitary condition,
and (iii) any liability of Tenant, Landlord and Landlord's officers, directors,
shareholders, agents, employees and representatives, arising from such Hazardous
Materials.
3. All policies of insurance required to be carried by Tenant pursuant to this
Exhibit D containing a deductible exceeding Ten Thousand Dollars ($10,000.00)
per occurrence must be approved in writing by Landlord prior to the issuance of
such policy. Tenant shall be solely responsible for the payment of all
deductibles.
4. All policies of insurance required to be carried by Tenant pursuant to this
Exhibit D shall be written by responsible insurance companies authorized to do
business in the State of California and with a Best's rating of not less than
"A" subject to final acceptance and approval by Landlord. Any insurance required
of Tenant may be furnished by Tenant under any blanket policy carried by it or
under a separate policy, so long as (i) the Premises are specifically covered
(by rider, endorsement or otherwise), (ii) the limits of the policy are
applicable on a "per location" basis to the Premises and provide for restoration
of the aggregate limits, and (iii) the policy otherwise complies with the
provisions of this Exhibit D. A true and exact copy of each paid up policy
evidencing the insurance (appropriately authenticated by the insurer) or a
certificate of insurance, certifying that the policy has been issued, provides
the coverage required by this Exhibit D and contains the required provisions,
shall be delivered to Landlord prior to the date Tenant is given the right of
possession of the Premises. Proper evidence of the renewal of any insurance
coverage shall also be delivered to Landlord not less than thirty (30) days
prior to the expiration of the coverage. Landlord may at any time, and from time
to time, inspect and/or copy any and all insurance policies required by this
Lease.
5. Each policy evidencing insurance required to be carried by Tenant pursuant
to this Exhibit D shall contain the following provisions and/or clauses
satisfactory to Landlord: (i) a provision that the policy and the coverage
provided shall be primary and that any coverage carried by Landlord shall be
noncontributory with respect to any policies carried by Tenant except as to
workers' compensation insurance; (ii) a provision including Landlord, the
Additional Insureds identified in Item 11 of the Basic Lease Provisions, and any
other parties in interest designated by Landlord as an additional insured,
except as to workers' compensation insurance; (iii) a waiver by the insurer of
any right to subrogation against Landlord, its agents, employees, contractors
and representatives which arises or might arise by reason of any payment under
the policy or by reason of any act or omission of Landlord, its agents,
employees, contractors or representatives; and (iv) a provision that the insurer
will not cancel or change the coverage provided by the policy without first
giving Landlord thirty (30) days prior written notice.
6. In the event that Tenant fails to procure, maintain and/or pay for, at the
times and for the durations specified in this Exhibit D, any insurance required
by this Exhibit D, or fails to carry insurance required by any governmental
authority, Landlord may at its election procure that insurance and pay the
premiums, in which event Tenant shall repay Landlord all sums paid by Landlord,
together with interest at the maximum rate permitted by law and any related
costs or expenses incurred by Landlord, within ten (10) days following
Landlord's written demand to Tenant.
Page 1 of 1
<PAGE> 45
EXHIBIT E
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing Tenant's
use of the Premises leased to Tenant pursuant to the terms, covenants and
conditions of the Lease to which this Exhibit is attached and therein made part
thereof. In the event of any conflict or inconsistency between this Exhibit and
the Lease, the Lease shall control.
1. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door, partition or wall which may appear unsightly from
outside the Premises.
2. The walls, walkways, sidewalks, entrance passages, courts and
vestibules shall not be obstructed or used for any purpose other than ingress
and egress of pedestrian travel to and from the Premises, and shall not be used
for loitering or gathering, or to display, store or place any merchandise,
equipment or devices, or for any other purpose. The walkways, entrance
passageways, courts, vestibules and roof are not for the use of the general
public and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence in the judgment of the Landlord
shall be prejudicial to the safety, character, reputation and interests of the
Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant or employee or invitee of any tenant shall be
permitted upon the roof of the Building except pursuant to our executed License
Agreement with Landlord.
3. No awnings or other projection shall be attached to the outside
walls of the Building. No security bars or gates, curtains, blinds, shades or
screens shall be attached to or hung in, or used in connection with, any window
or door of the Premises without the prior written consent of Landlord. Neither
the interior nor exterior of any windows shall be coated or otherwise
sunscreened without the express written consent of Landlord.
4. Except for the ordinary hanging of pictures, signs, white boards or
other items of decoration, Tenant shall not mark, nail, paint, drill into, or in
any way deface any part of the Premises or the Building. Tenant shall not lay
linoleum, tile, carpet or other similar floor covering so that the same shall be
affixed to the floor of the Premises in any manner except as approved by
Landlord in writing. The expense of repairing any damage resulting from a
violation of this rule or removal of any floor covering shall be borne by
Tenant.
5. The toilet rooms, urinals, wash bowls and other plumbing apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, caused it.
6. No boring or cutting for wires will be allowed without the prior
consent of Landlord
7. The Premises shall not be used for manufacturing or for the storage
of merchandise except as such storage may be incidental to the permitted use of
the Premises. No exterior storage shall be allowed at any time without the prior
written approval of Landlord. The Premises shall not be used for cooking or
washing clothes without the prior written consent of Landlord, or for lodging or
sleeping or for any immoral or illegal purposes.
8. Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall not
use, keep or permit to be used, or kept, any foul or obnoxious gas or substance
in the Premises or permit or suffer the Premises to be used or occupied in any
manner offensive or objectionable to Landlord or other occupants of this or
neighboring buildings or premises by reason of any odors, fumes or gases.
9. No animals shall be permitted at any time within the Premises.
10. Tenant shall not use the name of the Building or the Project in
connection with or in promoting or advertising the business of Tenant, except as
Tenant's address, without the written consent of Landlord. Landlord shall have
the right to prohibit any advertising by any Tenant which, in Landlord's
reasonable opinion, tends to impair the reputation of the Project or its
desirability for its intended uses, and upon written notice from Landlord any
Tenant shall refrain from or discontinue such advertising.
11. Canvassing, soliciting, peddling, parading, picketing,
demonstrating or otherwise engaging in any conduct that unreasonably impairs the
value or use of the Premises or the Project are prohibited and each Tenant shall
cooperate to prevent the same.
12. No equipment of any type shall be placed on the Premises which in
Landlord's opinion exceeds the load limits of the floor or otherwise threatens
the soundness of the structure or improvements of the Building.
1
<PAGE> 46
13. No air conditioning unit or other similar apparatus shall be
installed or used by any Tenant without the prior written consent of Landlord.
14. No aerial antenna shall be erected on the roof or exterior walls
of the Premises, or on the grounds, without in each instance, the prior written
consent of Landlord as set forth in a separate License Agreement. Any aerial or
antenna installed without such written consent shall be subject to removal by
Landlord at any time without prior notice at the expense of the Tenant, and
Tenant shall upon Landlord's demand pay a removal fee to Landlord of not less
than $200.00.
15. The entire Premises, including vestibules, entrances, doors,
fixtures, windows and plate glass, shall at all times be maintained in a safe,
neat and clean condition by Tenant. All trash, refuse and waste materials shall
be regularly removed from the Premises by Tenant and placed in the containers at
the locations designated by Landlord for refuse collection. All cardboard boxes
must be "broken down" prior to being placed in the trash container. All
styrofoam chips must be bagged or otherwise contained prior to placement in the
trash container, so as not to constitute a nuisance. Pallets may not be disposed
of in the trash container or enclosures. The burning of trash, refuse or waste
materials is prohibited.
16. Tenant shall use at Tenant's cost a pest extermination contractor
at such intervals as may reasonably be required to maintain the Premises in
first class condition.
17. All keys for the Premises shall be provided to Tenant by Landlord
and Tenant shall return to Landlord any of such keys so provided upon the
termination of the Lease. Tenant shall not change locks or install other locks
on doors of the Premises, without the prior written consent of Landlord. In the
event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to
Landlord the costs thereof.
18. No person shall enter or remain within the Project while
intoxicated or under the influence of liquor or drugs. Landlord shall have the
right to exclude or expel from the Project any person who, in the absolute
discretion of Landlord, is under the influence of liquor or drugs.
Landlord reserves the right to amend or supplement the foregoing Rules
and Regulations and to adopt and promulgate additional rules and regulations
applicable to the Premises. Notice of such rules and regulations and amendments
and supplements thereto, if any, shall be given to the Tenant.
2
<PAGE> 47
EXHIBIT F
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("License") made this ____ day of ,199 , by and
______________________between __________________________________________________
("Licensor"), and ___________________________________("Licensee").
RECITALS
Licensor is the owner of certain real property, located at
__________________________________, Irvine, California (the "Building").
Licensor and Licensee have entered into a lease (the "Lease") for space in the
Building more particularly described as Suite__. The parties desire to provide
for the use by Licensee of a portion of the roof of the Building and adjacent
property as provided below.
TERMS AND CONDITIONS
1. Licensed Area: For valuable consideration, receipt of which is hereby
acknowledged and the covenants and conditions to be observed and performed by
Licensee, Licensor hereby grants to Licensee a license and permission to enter
upon the areas shown on Exhibit A of this License to: (i) install, operate and
maintain one satellite dish ("Dish") on the roof of the Building in the location
designated by Licensor (the "Roof License Area"); and (ii) to install, operate
and maintain telecommunication transmission lines, conduits, markers and related
equipment and facilities (the "Equipment") for services to its Premises (the
"Equipment License Area). Licensor reserves the right upon reasonable notice to
Licensee to require either (a) the relocation of all equipment installed by
Licensee in the Roof License Area to another location on the roof of the
Building, or (b) the removal of the Dish or related equipment or the Equipment
any or all of such equipment should Licensor determine that its presence may
result in damage to the Building and that Licensee has not made satisfactory
arrangements to protect Licensor therefrom.
2. Term: The term of this License shall be coterminous with the Lease.
3. Use: Licensee shall use the Roof License Area for the installation and
maintenance of the Dish (of which the height, appearance and installation
procedures must be approved in writing by Licensor) and the necessary mechanical
and electrical equipment to service said Dish and the Equipment License Area for
the operation and maintenance of the Equipment. Licensee may have access to the
Licensed Area during normal business hours and at other times by providing
Licensor with reasonable prior notice and by reimbursing Licensor for any
expenses incurred by Licensor in connection therewith.
4. Rental. Licensee shall pay no additional rent or fees for the use and
occupancy of the Licensed Area.
5. Licensee's Operations: During the term of this License, the Licensed Area
and all equipment placed and maintained thereon shall be used by the Licensee
for the use specified and for no other use or purpose. Licensee shall not use or
permit any other person to use the Licensed Area, or any part thereof, for any
purposes tending to injure the reputation thereof or for any improper or
offensive use or to constitute a nuisance and Licensee shall at all times
conform to and cause all persons using any part of the Licensed Area to comply
with all public laws, ordinances and regulations from time to time applicable
thereto and to all operations thereon.
Licensee shall require its employees, when using the Licensed Area, to
stay within the immediate confines thereof. In addition, in the event a cable
television system or other communication system is operating in the area,
Licensee shall at all times during the term of the License conduct its
operations so as to ensure that such systems shall not be subjected to harmful
interference as a result of such operations by Licensee. Upon notification from
Licensor of any such interference, Licensee agrees to immediately take the
necessary steps to correct such situation, and Licensee's failure to do so shall
be deemed a default under the terms of this License.
During the term of this License, Licensee shall comply with any
standards promulgated by applicable governmental authorities or otherwise
reasonably established by Licensor regarding the generation of electromagnetic
fields. Should Licensor determine in good faith at any time that the Dish or
Equipment poses a health or safety hazard to occupants of the Building, Licensor
may require Licensee to remove the Dish or Equipment or make other
EXHIBIT F
To Lease
1
<PAGE> 48
arrangements satisfactory to Licensor. Any claim or liability resulting from the
use of the Dish or Equipment shall be subject to the indemnification obligation
as set forth in the Paragraph below entitled "Licensor's Nonliability."
6. Removal: Upon the expiration or earlier termination of this License,
Licensee shall remove the Dish and the other Equipment installed by it and shall
restore the Licensed Area to its original condition except that any conduit in
the Equipment License Area shall be sealed in place.
7. Licensor's Nonliability: Licensor shall not be liable for any loss, damage
or injury of any kind whatsoever to the property of Licensee or the property or
person, including death, of any of Licensee's employees, agents or invitees or
of any other person whomsoever caused by any use of the Licensed Area or
occasioned by the failure on the part of Licensee to maintain said Licensed Area
in safe condition, or by any act or omission of Licensee or of any of Licensee's
employees, agents or invitees, or arising from any other cause whatsoever; and
Licensee, as a material part of the consideration of this License, hereby waives
on its behalf all claims and demands against Licensor for any such loss, damage
or injury suffered by Licensee, and hereby agrees to indemnify, defend and save
Licensor free and harmless from liability for any such loss, damage or injury of
third persons, and from all costs, expenses and charges arising therefrom or in
connection therewith, including reasonable attorneys' fees. In addition,
Licensee agrees to reimburse Licensor for the cost of repairing any damage to
the Building caused by the exercise of Licensee's rights hereunder.
8. Liens: Licensee shall not permit to be enforced against the Licensed Area
any mechanics', materialmen's, contractors' or other liens arising from, or any
claims for damage growing out of, any work of installation, repair or alteration
as herein authorized or otherwise arising (except from the actions of Licensor)
and Licensee shall pay or cause to be paid all of said liens and claims before
any action is brought to enforce the same against Licensor or the Licensed Area;
and Licensee agrees to indemnify and hold Licensor and the Licensed Area free
and harmless from all liability for any and all such liens and claims and all
costs and expenses in connection therewith.
9. Taxes: During the term of this License, Licensor shall pay all taxes
attributable to the Building of which the Licensed Area is a part, and Licensee
shall pay all taxes attributable to the Dish and the Equipment owned and
installed by Licensee.
10. Assignment: This License shall not be assignable in whole or in part, and
any attempted assignment thereof, without the consent of Licensor, shall
immediately terminate this License.
11. Insurance/Indemnity: The insurance and indemnity provisions of the Lease
shall govern Licensee's use of the Licensed Area. Moreover, should the exercise
of Licensee's rights hereunder result in any increase in Licensor's insurance
rates on the Building, Licensee shall promptly following demand reimburse
Licensor for such additional expenses incurred by Licensor.
12. Remedies: Should Licensee default in the performance of or breach any
covenant or condition on Licensee's part to be kept and performed under the
Lease or this License, then in any such event Licensor may, at its option,
without prejudice to any other right or remedy it may have, terminate this
License and the Lease by giving Licensee written notice of such termination, and
upon such termination all rights of Licensee shall cease and end.
13. Covenants and Conditions: This License and each and all of the covenants
and conditions hereof shall inure to the benefit of and shall bind the
successors in interest of Licensor and subject to the restrictions set forth in
the above Paragraph entitled "Assignment," the successors and assigns of
Licensee.
14. Notices: All rents, notices or other communication shall be sent by
first-class mail or personally delivered to the notice address set forth under
the signature blocks below, or at such other places as the parties may hereafter
designate in writing.
[Signatures on following page.]
EXHIBIT F
To Lease
2
<PAGE> 49
The parties hereto have executed this License as of the date first above
written.
LICENSOR: LICENSEE:
- -------------------------------- ------------------------------------
- -------------------------------- ------------------------------------
By: By:
----------------------------- ---------------------------------
Name: Name:
------------------------ ----------------------------
Title: Title:
----------------------- ----------------------
By: By:
----------------------------- ---------------------------------
Name: Name:
------------------------ ----------------------------
Title: Title:
----------------------- ----------------------
NOTICE ADDRESS: NOTICE ADDRESS:
- -------------------------------- ----------------------------------
- -------------------------------- ----------------------------------
- -------------------------------- ----------------------------------
With a copy of notices to:
The Irvine Company
P.O. Box I
Newport Beach, CA 92658-8904
Attn: V.P. Operations, Investment Properties Group
EXHIBIT F
To Lease
3
<PAGE> 50
EXHIBIT G
PRE-COMMENCEMENT REPAIR SCHEDULE
SURVEY SUMMARIES
===============================================================================
These findings are based upon information given to Insignia/ESG, Inc. and are a
result of three diagnostic surveys conducted by; Mesa Energy Systems Inc.,
Ontario Refrigeration and Southland Industries. As a result the general
condition of the equipment as well as a list of repairs is as follows:
GENERAL INFORMATION
The general appearance of the heating, ventilation and air conditioning (HVAC)
units is good. In all HVAC units the P-Traps should be changed to J-Traps and
the air conditioning (A/C) drain lines should be replaced with copper and
properly supported.
In a number of units, incompatible fuses have been installed and should be
changed to the proper type. All inlet vanes and exhaust dampers need to be
lubed and the linkages repaired or replaced. Some of the actuator motors need
to be replaced.
Also, the evaporator and condensing coils need to be cleaned but are in good
condition for the age of the units. Some of the condensing coil fins are
slightly deteriorating on the tope section of the coil. Existing problems with
the units are space pressurization. The fan cycle controls switch must be
repaired as necessary.
All HVAC units require general clean up and maintenance. The refrigerant charge
on each HVAC unit must be checked. All HVAC unit static controllers, fuses,
conduits and linkages must be checked for proper operation and repaired or
replaced as necessary. All Return Air/Outside Air Dampers and Actuators must be
repaired or replaced as necessary. All Air Compressors, Circulation Pumps and
Boilers require general maintenance and clean up. Each also requires chemical
treatment and paint, as necessary.
BUILDING NO. 1
Unit 1A
1. Condenser Fan Motor (1) - replace.
2. Inlet Guide Vane Actuator - defective linkage knuckle.
3. Fan Pressure Switch - replace.
4. Blower Motor Belts - replace.
5. Include replacement of minimum four contactors per unit.
6. Clean and coat condensate pan.
===============================================================================
AST Research Engineering Survey Summary Page 1
<PAGE> 51
SURVEY SUMMARIES (CONTINUED)
===============================================================================
Unit 1B
- -------
1. Blower Motor Belts - replace.
2. Inlet Guide Vane Actuator - defective linkage knuckle; the current
linkage has worn a 1/8" groove into the hollow section of the fan
shaft. Replacement of fan shaft may be necessary.
3. Inlet Guide Vanes - frozen into one position due to lack of
lubrication.
4. Mechanical Cooling - repair.
5. Include replacement of minimum four contactors per unit.
6. Clean and coat condensate pan.
Unit 1C
- -------
1. Blower Motor Belts - replace.
2. Inlet Guide Vanes - frozen into one position due to lack of
lubrication.
3. Condensate Drain - plugged with debris.
4. Include replacement of minimum four contactors per unit.
5. Clean and coat condensate pan.
Unit 1D
- -------
1. Condenser Fan Motor (2) - replace.
2. Compressor (2) - possibly low on change.
3. Second Stage Compressor - replace to prevent it from failing.
4. Contactor Fuses Blower Belts - replace.
5. Include replacement of minimum four contactors per unit.
6. Clean and coat condensate pan.
Unit 1F
- -------
1. Blower Motor Belts - replace.
2. Inlet Guide Vane Actuator - defective linkage knuckle.
3. Inlet Guide Vanes - frozen into one position due to lack of
lubrication.
4. First Stage Compressor - circuit has a leak and is low on
refrigerant; neutral wire has been removed.
5. Include replacement of minimum four contactors per unit.
6. Clean and coat condensate pan.
===============================================================================
AST Research Engineering Survey Summary Page 2
<PAGE> 52
SURVEY SUMMARIES (CONTINUED)
===============================================================================
Unit 1F
- -------
1. Blower Motor Belts - replace.
2. Actuator Motor for Inlet Vane (Modutrol) - replace.
3. Inlet Guide Vane Actuator - defective linkage knuckle.
4. Inlet Guide Vanes - frozen into one position due to lack of
lubrication.
5. Fan Cycle Pressure Switches (2510) and (2511) - replace.
6. Include replacement of minimum four contactors per unit.
7. Clean and coat condensate pan.
Air Compressor
- --------------
1. Requires belts.
2. Requires service.
Circulation Pump
- ----------------
1. Replace seal.
Boiler
- ------
1. Air Vent Discharge - needs to be diverted.
2. Hoffman Air Vents (2) - recommended that the air vents located on the
high points of the piping be replaced.
3. Boiler - replace metal hood.
4. Change pump seal.
BUILDING NO. 2
Unit 2A
- -------
1. Linkages - connect all linkages and set for proper operation.
2. Actuator Motors - check for proper operation.
3. Include replacement of minimum four contactors per unit.
4. Clean and coat condensate pan.
5. Inlet Guide Vane Actuator - defective linkage knuckle.
6. Actuator Relief Damper Linkage - removed.
7. Clean and coat condensate pan.
8. Blower Motor Belt - replace.
===============================================================================
AST Research Engineering Survey Summary Page 3
<PAGE> 53
SURVEY SUMMARIES (CONTINUED)
===============================================================================
Unit 2B
- -------
1. Compressor Contactors(2)-replace with 50 amp contactors.
2. Linkages-repair or replace.
3. Exhaust Damper Linkages and Inlet Vane-lube and adjust.
4. Condenser Fan Motor(1)-replace.
5. Inlet Guide Vane Actuator-defective linkage knuckle.
6. Relief Damper Actuator-replace.
7. Blower Motor Belt-replace.
8. Fan Cycle Switches (2510) and (2511)-replace.
9. Control Conduit-broken.
10. Actuator Relief Damper Linkage-removed.
11. Include replacement of minimum four contactors per unit.
12. Clean and coat condensate pan.
Unit 2C
- -------
1. Second Stage Compressor-repair.
2. Inlet Guide Vane Actuator-defective linkage knuckle; missing crank
arm.
3. Clean and coat condensate pan.
4. Dwyer Differential Pressure Transmitter-repair.
5. Fan Cycle Switch (2510)-replace.
6. Loose Control Wires-not landed.
7. Actuator Motor-check for proper operation.
8. Condenser Fan Motor(1)-replace.
9. Inlet Vanes-lube.
10. Blower Motor Belts-replace.
11. Linkage-repair or replace.
12. Evaporation Coil-check for leakage.
13. Replace contactors as necessary.
Unit 2D
- -------
1. Blower Motor Belts-replace.
2. Replace contractors as necessary.
3. Clean and coat condensate pan.
4. Indoor Fan Section-large/loud vibration; replace barrings and repair.
5. Actuator Motor-check for proper operation; repair as necessary.
===============================================================================
AST Research Engineering Survey Summary Page 4
<PAGE> 54
SURVEY SUMMARIES (CONTINUED)
===============================================================================
Air Compressor
- --------------
1. Belts and Pulleys - check.
2. Motor Base Plate - repair.
3. Lead-lag Setting - check.
4. Oil and Air Filters - recommend replacing.
Circulation Pump
- ----------------
1. Coupler - replace.
2. Motor Shaft - realign.
Boiler
- ------
1. Hot Water Pump Gasket - replace.
2. Expansion Tank HVAC Reheat System - no air gap.
3. Hot Water Pump - defective seal and relief valve (on the domestic hot
water heater), which are both leaking.
================================================================================
AST Research Engineering Survey Summary Page 5
<PAGE> 55
[INDEPENDENT ROOFING CONSULTANTS LETTERHEAD]
June 12, 1998
Mr. Dick Salvi
Broadcom
16251 Laguna Canyon Road
Irvine, CA 92718
Reference: Site Investigation
AST Buildings 1 & 3
16215 & 16205 Alton Parkway
Irvine, CA
IRC Project No. 12490.00
Dear Mr. Salvi:
A Roof Inspection/Site Investigation was performed on the above referenced
buildings on June 5, 1998. The intent of this roof inspection was to assess the
existing roof conditions and note deficient conditions that could affect the
performance of the roofing system. The observations made and deficient
conditions noted during this inspection are documented in this report.
BUILDING 1
1. The granular surfacing of the modified bitumen base flashing membrane was
cracking. (Refer to Photographs #1 and #2.) The cracking was generally more
severe on the South and East facing walls which are exposed to the heat of
the sun for a longer period. The application of a reflective coating on the
base flashing membrane could help deter or at least slow down further
cracking.
2. The elastomeric sealant in the receiver lip of the surface mounted reglet
along the parapet walls was cracked and had settled down allowing water to
collect along the lip. (Refer to Photographs #3 & #4.) The entire length of
the reglet should be resealed with new elastomeric sealant.
3. Isolated membrane blisters were noted. (Refer to Photographs #5 & #6.) A
large membrane blister had formed along the edge of a drain sump. Large
membrane blisters should be cut and repaired with a modified bitumen
membrane.
<PAGE> 56
AST Buildings 1 & 3 - Irvine, CA
Broadcom Site Investigation
- -------------------------------------------------------------------------------
4. Dirt accumulation in the drain sumps was noted. (Refer to Photograph #7.) A
general clean up should be performed on the roof.
5. The salvage edge of the modified bitumen base flashing membrane on the
sides of the platform for the boiler unit was exposed as well as the nail
heads. (Refer to Photograph #8.) The salvage edge should be coated with a
reflective coating to prevent premature deterioration.
6. There were several tenant improvement pipe flashings that had been set and
sealed with roof cement only. (Refer to Photographs #9 & #10.) An antenna
stand was found screwed down through the roofing membrane and sealed with
an elastomeric sealant. The pipe flashings should be stripped in with
modified bitumen membrane to prevent them from being continuous maintenance
items.
7. Within the equipment screen area, a puncture in the membrane that had gone
through and exposed the underlying concrete deck was found beside an
electrical junction box. (Refer to Photograph #11.) The puncture should be
sealed with modified bitumen membrane.
BUILDING 3
1. The granular surfacing of the modified bitumen base flashing membrane was
cracking. (Refer to Photograph #12.) The cracking was generally more severe
on the South and East facing walls and surfaces which are exposed to the
heat of the sun for a longer period. The application of a reflective
coating on the base flashing membrane could help deter or at least slow
down further cracking.
2. The salvage edge of the modified bitumen base flashing membrane along the
control joint was found exposed. (Refer to Photograph #13.) The salvage
edge should be coated with a reflective coating.
3. The elastomeric sealant in the receiver lip of the surface mounted reglet
along the parapet walls was cracked leaving the reglet wide open to water
entry and had settled down allowing water to collect along the lip. (Refer
to Photographs #14 & #15.) The entire length of the reglet should be
resealed with new elastomeric sealant.
4. A tilt up wall panel joint with the concrete chipped and the sealant
missing was found wide open on the East wall. (Refer to Photograph #16.)
5. A blister was noted in the base flashing membrane where the reglet was
found with the sealant cracked and wide open to water entry. (Refer to
Photograph #17.) The blister was probably caused by water entering through
the open reglet and getting behind the base flashing membrane.
Page 2 of 3
Independent Roofing Consultants
(800) 666-7663
<PAGE> 57
Broadcom AST Buildings 1 & 3 - Irvine, CA
Site Investigation
- --------------------------------------------------------------------------------
6. A relief cut in the roofing membrane over a hump on the deck was not sealed
and had started to open up. (Refer to Photograph #18.) The membrane cut
should be sealed with a three-course application of elastomeric roof cement
reinforced with fiberglass webbing and covered with an aluminum coating.
7. The top edge of a lead pipe flashing was found open to water entry with the
cracking of the roof cement seal. (Refer to Photograph #19.) Several tenant
improvement pipe flashings were found set in roof cement only. One such
pipe flashing was found near the equipment screen door with its flange
corner lifting and wide open to water entry. (Refer to Photograph #20.)
8. The platform for a compressor was blocking the water flow between the two
air handling units and creating a ponding condition. (Refer to Photograph
#21.) This area should be monitored closely.
9. Punctures in the roofing membrane were found along the step up transition
between the roof deck and the concrete equipment pads inside the equipment
screen area. (Refer to Photographs #22, #23 & #24.) The membrane punctures
should be patched with a modified bitumen membrane.
10. A nail was found stepped into the roofing membrane beside the roof hatch.
(Refer to Photograph #25.)
11. An open base flashing lap was observed on one side of the platform of the
boiler unit. (Refer to Photograph #26.)
This concludes the list of deficient conditions noted during this roof
inspection. Should you have any questions concerning this report, please do not
hesitate to contact me at your convenience.
Sincerely,
INDEPENDENT ROOFING CONSULTANTS
/s/ TONY CANCIO
- -----------------
Tony Cancio
Consultant
TC25
TC:sk
Enclosures
Independent Roofing Consultants Page 3 of 3
(800) 666-7663
<PAGE> 58
EXHIBIT H
ENTITIES EXCLUDED FROM PROJECT SIGNAGE
Advanced Micro Devices (AMD)
Alcatel
C-Cube
Globespan
Level One
LSI Logic
Lucent Technologies
Motorola
National Semiconductor
Philips
Rockwell
SGS Thompson
Toshiba
VSLI Technologies
<PAGE> 59
EXHIBIT X
INDUSTRIAL WORK LETTER
DOLLAR ALLOWANCE
The Tenant Improvement work (herein "Tenant Improvements") shall consist of any
work, including work in place as of the date hereof, required to complete the
Premises pursuant to the approved Working Drawings and Specifications (as
hereinafter defined). All of the Tenant Improvement work shall be performed by a
contractor mutually selected by Landlord and Tenant in accordance with the
procedures and requirements set forth below.
I. ARCHITECTURAL AND CONSTRUCTION PROCEDURES.
A. Preliminary Plan. Tenant and Landlord have approved, or shall approve
prior to the Estimated Space Plan Approval Date referenced in the Lease
detailed space plan for the Premises, prepared by Beck Martin Architects
who shall be engaged by Tenant ("Tenant's Architect") which includes
interior partitions, ceilings, interior finishes, interior doors, suite
entrance, floor coverings, window coverings, lighting, electrical and
telephone outlets, plumbing connections, heavy floor loads and other
special requirements ("Preliminary Plan").
B. Landlord's Review Responsibilities. Tenant agrees and understands the
review of all plans pursuant to this Work Letter by Landlord is solely
to protect the interest of Landlord in the Premises and Landlord shall
not be the guarantor of, nor responsible for, the correctness or
accuracy of any such plans or compliance of such plans with applicable
laws. Tenant's administration/supervision fee described in Section II B
below shall cover all of Landlord's cost incurred in approving the
Preliminary Plan, Working Drawings and Specifications and Engineering
Drawings. Landlord shall not receive any fee described for profit,
overhead or general conditions in connection with the construction of
the Tenant Improvements.
C. Non-Standard Improvements. Except as specified in the Preliminary Plan
or otherwise authorized by Landlord, the Tenant Improvements shall
incorporate Landlord's building standard materials and specifications as
shown on Schedule X-1 attached hereto ("Standards"). No deviations from
the Standards shall be permitted, provided that Landlord may, in its
sole and absolute discretion, authorize in writing one or more of such
deviations if requested by Tenant ("Non-Standard Improvements"), in
which event any excess cost of such deviations shall be part of
"Tenant's Contribution" (as hereinafter defined) and Tenant shall be
solely responsible for the cost of replacing same with the applicable
Standard item(s) upon the expiration or termination of this Lease.
Landlord shall in no event be required to approve any deviations from
the Standards if Landlord determines that such improvement (i) is of a
lesser quality than the corresponding Standard, (ii) fails to conform to
applicable governmental requirements, (iii) requires building services
beyond the level normally provided to other tenants, (iv) would delay
construction of the Tenant Improvements beyond the Estimated
Commencement Date and Tenant declines to accept such delay in writing as
a Tenant Delay, or (v) would have an adverse aesthetic impact from the
exterior of the Premises.
D. Preparation And Approval of Working Drawings and Specifications. After
the Preliminary Plan is finally approved by Landlord, Tenant shall
submit to Landlord drawings prepared by the Tenant's Architect which
shall be compatible with the design, construction and equipment of the
existing building shell(s), comply with all applicable laws, be capable
of logical measurement and construction, contain all such information as
may be required for the construction of the Tenant Improvements and the
preparation of the Engineering Drawings (as defined below), and contain
all partition locations, plumbing locations, HVAC requirements and duct
work, and ceiling plans. Such Working Drawings and Specifications must
incorporate the Standards and approved Non-Standard Improvements. The
Working Drawings and Specifications may be submitted in one or more
stages and at one or more times, and the time periods for Landlord's
approval shall apply with respect to each such portion submitted.
Landlord shall approve the Working Drawings and Specifications, or such
portion as has from time to time been submitted, within five (5) days
after receipt of same or designate by notice given within such time
period to Tenant the specific changes reasonably required to be made to
the Working Drawings and Specifications in order to correct any design
problem. Tenant's Architect shall make the changes necessary in order to
correct any such design problem and shall return the Working Drawings to
Landlord, which Landlord shall approve or disapprove within three (3)
days after Landlord receives the revised Working Drawings and
Specifications. This procedure shall be repeated until all of the
Working Drawings and Specifications are finally approved by Landlord and
written approval has been delivered and received by Tenant.
E. Preparation and Approval of Engineering Drawings. After the Working
Drawings and Specifications are finally approved by Landlord, Tenant
shall submit to Landlord, for Landlord's review and approval,
engineering drawings showing complete mechanical, electrical, plumbing,
HVAC ("Engineering Drawings"). Engineering Drawings may be submitted in
one or more stages and at one or more times, and the time periods for
Landlord's approval shall apply with respect to each such portion
submitted. Landlord shall approve the
EXHIBIT X
1
<PAGE> 60
Engineering Drawings, or such portion as has from time to time been
submitted within five (5) days after receipt of same or designate by
notice given within such time period to Tenant specific changes
reasonably required to be made to the Engineering Drawings in order to
correct any design problem. Tenant shall make the changes necessary in
order to correct any such design problem and shall return the
Engineering Drawings to Landlord, which Landlord shall approve or
disapprove within three (3) days after Landlord receives revised
Engineering Drawings. This procedure shall be repeated until the
Engineering Drawings are finally approved by Landlord and written
approval has been delivered to and received by Tenant. The Final Cost
Estimate submitted by Landlord's Contractor shall reflect both the
Working Drawings and Specifications and the Engineering Drawings as
integrated by Tenant's Architect into the Working Drawings and
Specifications.
F. Selection of Landlord's Contractor. Landlord's Contractor shall be the
contractor selected pursuant to a procedure whereby the Working Drawings
and Specifications and a construction contract approved by Tenant are
submitted to three (3) contractors, selected by Tenant from a list
approved by Landlord who are requested to each submit a sealed fixed
price contract bid price (on such contract form as prepared by Landlord
and approved by Tenant) to construct the Tenant Improvements designated
on the Working Drawings and Specifications, to Landlord and Tenant, who
shall jointly open and review the bids. After adjustments for the
inconsistent assumptions to reflect an "apples to apples" comparison,
Landlord and Tenant shall select the qualified lowest priced bidder and
such contractor with the qualified lowest priced bid ("Landlord's
Contractor") shall enter into a construction contract with Landlord
consistent with the terms of the bid to construct the Tenant
Improvements ("Construction Contract"). The Construction Contract shall
not, unless Tenant otherwise directs, require the Landlord's Contractor
to post a completion bond, but shall provide a provision penalizing the
Landlord's Contractor for not completing the Tenant Improvements within
a specific period of time for reasons other than Tenant Delays.
G. Changes. In the event that Tenant requests in writing a revision in the
approved Working Drawings and Specifications ("Change"), Landlord shall
advise Tenant by written change order as soon as is practical of any
increase in the Completion Cost and/or any Tenant Delay such Change
would cause. Tenant shall approve or disapprove such change order in
writing within two (2) days following its receipt from Landlord.
Tenant's approval of such Change shall be conditioned upon by Tenant's
payment of any such increase in the Completion Cost. Landlord shall have
the right to decline Tenant's request for a Change for any of the
reasons set forth in Paragraph C above for Landlord's disapproval of a
Non-Standard Improvement. It is understood that Landlord shall have no
obligation to interrupt or modify the Tenant Improvement work pending
Tenant's approval of a change order.
H. Tenant Delays. Notwithstanding any provision in the Lease to the
contrary, if Tenant fails to comply with any of the time periods
specified in this Work Letter, fails otherwise to approve or reasonably
disapprove any submittal within five (5) days, fails to approve in
writing the Preliminary Plan for the Tenant Improvements by the Plan
Approval Date, fails to provide the Working Drawings and Specifications
or requests any Changes, furnishes inaccurate or erroneous
specifications or other information, or otherwise delays in any manner
the completion of the Tenant Improvements (including without limitation
by specifying materials that are not readily available) or the issuance
of an occupancy certificate (any of the foregoing being referred to in
this Lease as a "Tenant Delay"), then Tenant shall bear any resulting
additional construction cost or other expenses, and the Commencement
Date of this Lease shall be deemed to have occurred for all purposes,
including Tenant's obligation to pay rent, as of the date Landlord
reasonably determines that it would have been able to deliver the
Premises to Tenant but for the collective Tenant Delays. In no event,
however, shall such date be earlier than the Estimated Commencement Date
set forth in the Basic Lease Provisions. Should Landlord determine that
the Commencement Date should be advanced in accordance with the
foregoing, it shall so notify Tenant in writing. Landlord's
determination shall be conclusive unless Tenant notifies Landlord in
writing, within five (5) days thereafter, of Tenant's election to
contest same by arbitration with JAMS Endispute in Orange County,
California. Pending the outcome of such arbitration proceedings, Tenant
shall make timely payment of all rent due under this Lease based upon
the Commencement Date set forth in the aforesaid notice from Landlord.
I. Early Entry. Landlord shall permit Tenant and its agents to enter the
Premises prior to the Commencement Date of the Lease in order that
Tenant may perform any work to be performed by Tenant hereunder through
its own contractors, subject to Landlord's prior written approval, and
in a manner and upon terms and conditions and at times satisfactory to
Landlord's representative. The foregoing license to enter the Premises
prior to the Commencement Date is, however, conditioned upon Tenant's
contractors and their subcontractors and employees working in harmony
and not interfering with the work being performed by Landlord. If at any
time that entry shall cause disharmony or interfere with the work being
performed by Landlord, this license may be withdrawn by Landlord upon
twenty-four (24) hours written notice to Tenant. That license is further
conditioned upon the compliance by Tenant's contractors with all
requirements imposed by Landlord on third party contractors, including
without limitation the maintenance by Tenant and its contractors and
subcontractors of workers' compensation and public liability and
property damage insurance in amounts and with companies and on forms
satisfactory to Landlord, with certificates of such insurance being
furnished to Landlord prior to proceeding with any such entry. The entry
shall be deemed to be under all of the provisions of the Lease except as
to the covenants to pay rent. Landlord shall not be liable in any way
for any injury, loss
EXHIBIT X
2
<PAGE> 61
or damage which may occur to any such work being performed by Tenant,
the same being solely at Tenant's risk. In no event shall the failure of
Tenant's contractors to complete any work in the Premises extend the
Commencement Date of this Lease beyond the date that Landlord has
completed its Tenant Improvement work and tendered the Premises to
Tenant.
J. Walk-Through. After the Tenant Improvements to the Premises are
substantially completed (excepting punch list items) and prior to the
Commencement Date, Landlord shall cause Landlord's Contractor to inspect
the Premises with the Tenant's representative and complete a punch list
of unfinished or incorrect items of the Tenant Improvements. Authorized
representatives for the Landlord and Tenant shall execute said punch
list to indicate their approval thereof. The items listed on such punch
list shall be completed by the Landlord's Contractor within thirty (30)
days after the approval of such punch list or as soon thereafter as
reasonable practicable.
Landlord shall clean the Premises prior to the Commencement Date,
including removal of all rubbish and debris. Such cleaning shall leave
the Premises in a manner consistent with the commencement of business
from comparable premises in the Irvine Spectrum.
K. Tenant's Representative. Tenant hereby designates Richard Salvi,
Telephone No. (949) 450-8700, as its representative, agent and
attorney-in-fact for the purpose of receiving notices, approving
submittals and issuing requests for Changes, and Landlord shall be
entitled to rely upon authorizations and directives of such person(s) as
if given directly by Tenant. Tenant may amend the designation of its
construction representative(s) at any time upon delivery of written
notice to Landlord.
II. COST OF TENANT IMPROVEMENTS
A. Landlord shall complete, or cause to be completed, the Tenant Improvements,
at the construction cost shown in the Final Cost Estimate (subject to the
provisions of this Work Letter), in accordance with final Working Drawings and
Specifications approved by both Landlord and Tenant. Landlord shall pay towards
the final construction costs ("Completion Cost") as incurred a maximum of Two
Million Two Hundred Eighty-Three Thousand Seven Hundred Forty-Four Dollars
($2,283,744.00) ("Landlord's Contribution"), based on $16.00 per square foot of
the Premises, and Tenant shall be fully responsible for the remainder ("Tenant's
Contribution"). Landlord's Contribution shall only be used for construction and
installation of Standards incorporated into a Preliminary Plan, except as
otherwise specifically approved by Landlord and for other costs outlined below.
Landlord shall pay or reimburse Tenant as part of Landlord's Contribution within
fifteen (15) days after receipt of invoices from Tenant costs incurred by Tenant
in connection with preparation of Tenant's preliminary space plan be up to a
maximum amount of Twenty-Two Thousand Eight Hundred Fifty-Three Dollars
($22,853.00) based on Fifteen Cents (.15) per rentable square foot of the
Premises.
B. The Completion Cost shall include all costs of Landlord in completing
the Tenant Improvements in accordance with the approved Working Drawings
and Specifications, including but not limited to the following: (i)
payments made to architects, engineers, contractors, subcontractors and
other third party consultants in the performance of the work, (ii)
salaries and fringe benefits of persons, if any, in the direct employ of
Landlord performing any part of the construction work, (iii) permit fees
and other sums paid to governmental agencies, and (iv) costs of all
materials incorporated into the work or used in connection with the
work. The Completion Cost shall also include an administrative/
supervision fee to be paid to Landlord or to Landlord's management agent
in the amount of two and one-half percent (2 1/2%) of all such costs.
C. Prior to start of construction of the Tenant Improvements (the "Start
Date"), Tenant shall pay to Landlord forty percent (40%) of the amount
of the Tenant's Contribution as set forth in the Final Cost Estimate and
the balance shall be paid as follows:
(i) An additional thirty percent (30%) of the Final Cost
Estimate shall be paid to Landlord on or before the date which is thirty
(30) days after the Start Date;
(ii) An additional twenty percent (20%) of the Final Cost
Estimate shall be paid to Landlord on or before the date which is sixty
(60) days after the Start Date;
(iii) The balance together with any increase because of
modifications or extras not reflected on the approved Working Drawings
and Specifications, or because of Tenant Delays, shall be due and
payable upon completion of any punchlist corrective work but not later
than forty-five (45) days after the Commencement Date for such Building.
If Tenant defaults in the payment of any sums due under this Work
Letter, Landlord shall (in addition to all other remedies) have the same
rights as in the case of Tenant's failure to pay rent under the Lease.
EXHIBIT X
3
<PAGE> 62
Schedule X-1 Standards
BROADCOM CORPORATION
TENANT IMPROVEMENT INTERIOR CONSTRUCTION
Revised 7/27/98.
INTERIOR PARTITIONS:
2 1/2", 25 Ga. metal studs at 24" oc to underside of ceiling. Gyp. bd. to be
5/8" Type X both sides taped smooth and paint ready.
1-HOUR CORRIDORS:
1-hr. corridors to be gyp. bd. tunnel configuration with gyp. bd. clg. or as
indicated in plans.
1 HOUR WALLS:
2 1/2", 25 Ga. metal studs at 24" oc to underside of floor or roof structure
above. Gyp. bd. to be 5/8" Type X both sides with smooth finish and paint ready
to 6" above ceiling.
PAINT:
All walls painted washable flat finish, color to be selected be Tenant.
CARPET:
Designweave - carpet to be selected $12.00 per yard budget.
Carpet to be direct glue down Broadloom.
Corridors will be different than office interiors carpet.
Boardroom, Executive offices and Executive lobby to be up graded over pad.
SPECIAL FLOORS: Labs, Tester and Telephone Rooms
12" x 12" Vinyl tile ESD manufactured by either: 3M 8433 Series, Marley Flexco
or Forbo Colorex.
VINYL COMPOSITION FLOORS:
Electric rooms, lunch, copy, coffee rooms, shipping and storage rooms.
Mannington Essentials 12" x 12" vinyl composition tile or Armstrong Premium
Excelon 12" x 12" Color to be determined.
BASE:
2 1/2" Burke or Roppe rubber base coved throughout.
Color to coordinate with carpet, flooring or door trim.
CEILING:
Armstrong Cortega 2' x 4' with 15/16" T-bar grid (match existing to be
verified). Note: Existing Ceiling and grid to be reused. Repair and or replace
all damaged or stained tiles. Add compression struts if not present. "See
special note for building B cafeteria ceiling.
<PAGE> 63
-2-
WINDOW COVERING:
Levelor Riviera Horizontal Miniblinds. Color to match existing.
Provide new blinds to match existing where walls connect to exterior window
mullions.
DOORS:
Doors to match existing 3' x 8' x 1 3/4" solid core white ash plain sliced with
Maple stain. Doors in Executive Office to match existing 3' x 8'-10". Include
an allowance for cleaning and refinishing existing doors.
DOOR HOLD OPEN:
Provide smoke activated magnetic door hold open at corridor doors leading into
rated lobbies as indicated on plan.
DOOR HARDWARE:
Hardware to match existing Schlage D Series Rhodes in chrome finish 625 with
lock sets. Key way to match Irvine Co. standard.
Existing Timely door frames to be refinished to match new.
Additional Door frames to match existing Timely Steel, Prefinished black 2D
Gauge. Use 4 1/2" square corner hinges chrome finish. Ratings as required.
OFFICE SIDELIGHTS:
Sidelights at all office doors, to be 24" w x 8'0" tall tempered glass
integrated into door frame 2 1/2" AFF to bottom jamb (below jamb to receive
topset base -- 2 1/2").
FIRE EXTINGUISHERS AND CABINETS:
Fire Extinguisher Cabinets with extinguisher 2A-10BC min. semi-recess painted
every 75' of travel. Match existing Potter Roerner.
MILLWORK:
Coffee and Break Area (see plan for lineal footage):
Upper and lower plastic laminate cabinets with 4" polished chrome wire pulls.
Stainless steel sink with disposal and insta-hot water.
Provide water line to Refrigerator (by tenant) with in-line filter.
Copy Areas:
Upper and lower plastic laminate cabinets with 4" polished chrome wire pulls.
All laminate colors to be selected by tenant and approved by landlord.
ELEVATOR:
Replace wall panels with new plastic laminate.
Replace existing rail to 1 1/2" diameter brushed stainless steel.
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-3-
ELECTRICAL:
LIGHTING:
Use existing fixtures where possible: 2 x 4 w/prismatic lens.
New lights to match existing as needed.
2 X 4 Fluorescent; 3 lamp energy-saving ballasts with prismatic lens as needed.
Double switch per Title 24, paired in double ganged box, white plastic cover,
42" AFF to switch centerline.
Relamp all lights including soffit and downlights.
Clean lenses and replace any unmatched lenses with acrylic prismatic type to
match existing.
Install 2 lights per typical office on switch with Timeclock shut-off and
override.
OUTLETS:
Each office will draw approximately 9 amps from anticipated equipment.
Power: 15 amp 125 volt specification grade duplex receptacle mounted
vertically, 18" AFF to centerline, white plastic coverplate.
Telephone: Single gang box with mud ring and pull string, mounted vertically,
18" AFF to centerline, white coverplate cable by tenant.
LAB ELECTRICAL REQUIREMENTS:
8' AFF 8" wide wiring cable tray, ladder type, suspended from ceiling. Provide
two trays the length of the room min. with two cross connections.
Provide separate circuit breaker panels per lab as required.
Provide grounded bus bar along two main walls in all labs and Tester Lab.
Quad outlets at 6' on center on walls and in tray rated at 80 amps 2 per
circuit.
No circuit sharing outside lab.
Testers (6) require 480v, 60 amp connections each with dedicated panel.
Provide (1) 220V AC receptacle in each lab for Test Equipment.
Provide dedicated panel for each Lab.
SPECIAL ITEMS, BUILDING SPECIFIC:
3 STORY, BUILDING A:
Add recessed paper towel/trash receptacle in each restroom to match existing.
Remove door and case opening at 2nd door leading into restrooms for HC
accessibility.
Remove raised floor and in-fill with compacted sand (or other) and 4" concrete
slab with #3 rebar at 24" E.W. dowel into existing slab.
Refinish lobby wood veneer as needed to match existing. Refinish Zolotone wall
above reception.
Reception Counter: Add corian counter at back to match existing.
Repair/replace ceramic tile at elevator lobby.
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-4-
2 STORY BUILDING B:
Replace ceiling grid 2' x 4' and tiles in cafeteria seating area: Armstrong Fine
fissured 2nd Look II angled tegular with Armstrong 15/16" T-bar to match
existing. Replace with T-bar to match existing. Serving area and kitchen:
Armstrong Clean room VL non-perforated 2' x 2', 2' x 4' in kitchen with new
grid.
Replace sheet vinyl in serving area and kitchen with similar sheet vinyl spec.
Replace plastic laminate surfaces on cabinets in serving area.
Fabricate and install wrought iron fencing to match adjacent building, at North
East Corner between columns with exit door and electrical for point of
connection for process equipment hook up.
Replace lavatory counter in women's shower.
Replace sheet vinyl with 12 x 12 VCT Armstrong in Men's and Women's shower.
Install 9' tall x 20' long mirror on gym wall.
Replace 4 Blue floor tiles in lobby with red.
Add 2 shower stalls in men's locker with stalls to match existing (Handicap
accessibility to be verified).
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EXHIBIT Y
[DRAWING]
Pie shaped property on corner of Laguna Canyon Road and Alton Parkway. Three
buildings (A, B, C) in campus environment surrounding center courtyard area.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 16, 1998, except for Note 9, as to which the
date is March 31, 1998 and Note 7, as to which the date is September 25, 1998 in
the Registration Statement (Form S-1) and related Prospectus of Broadcom
Corporation to be filed on September 30, 1998.
/s/ Ernst & Young LLP
Orange County, California
September 29, 1998
