<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 000-23993
BROADCOM CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0480482
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(Address of principal executive offices and zip code)
(949) 450-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock, $0.0001 par value,
outstanding as of August 3, 1998: 4,904,750 shares of Class A Common Stock and
38,835,074 shares of Class B Common Stock.
<PAGE> 2
BROADCOM CORPORATION
QUARTERLY REPORT ON
FORM 10-Q
THREE AND SIX MONTHS ENDED
JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 1
Unaudited Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 2
Unaudited Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 3
Notes to Unaudited Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Change in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADCOM CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 64,711 $ 22,116
Short-term investments 2,629 --
Accounts receivable, net 24,226 9,913
Inventory 11,473 2,705
Other current assets 2,744 1,785
--------- ---------
Total current assets 105,783 36,519
Property and equipment, net 16,305 8,449
Long-term investments 25,094 --
Other assets 919 276
--------- ---------
Total assets $ 148,101 $ 45,244
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 15,280 $ 7,380
Wages and related benefits 1,794 846
Accrued liabilities 2,211 933
Current portion of long-term debt 89 1,098
--------- ---------
Total current liabilities 19,374 10,257
Long-term debt, less current portion 45 1,595
Shareholders' equity:
Convertible preferred stock -- 28,617
Common stock 120,625 7,129
Notes receivable from employees (3,464) (3,362)
Deferred compensation (5,956) (1,090)
Retained earnings 17,477 2,098
--------- ---------
Total shareholders' equity 128,682 33,392
--------- ---------
Total liabilities and shareholders' equity $ 148,101 $ 45,244
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 4
BROADCOM CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 43,268 $ 4,210 $ 78,493 $ 8,169
Development revenue 1,900 1,185 2,019 2,257
-------- -------- -------- --------
Total revenue 45,168 5,395 80,512 10,426
Cost of revenue 20,380 2,276 34,212 4,810
-------- -------- -------- --------
Gross profit 24,788 3,119 46,300 5,616
Operating expense:
Research and development 8,667 3,519 14,619 6,205
Selling, general and administrative 5,333 1,399 9,322 2,541
-------- -------- -------- --------
Total operating expense 14,000 4,918 23,941 8,746
-------- -------- -------- --------
Income (loss) from operations 10,788 (1,799) 22,359 (3,130)
Interest and other income, net 1,083 3 1,301 63
-------- -------- -------- --------
Income (loss) before income taxes 11,871 (1,796) 23,660 (3,067)
Provision (benefit) for income taxes 4,155 (718) 8,281 (1,226)
-------- -------- -------- --------
Net income (loss) $ 7,716 $ (1,078) $ 15,379 $ (1,841)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.19 $ (0.04) $ 0.45 $ (0.07)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.16 $ (0.04) $ 0.35 $ (0.07)
======== ======== ======== ========
Weighted average shares (basic) 40,578 26,118 34,284 25,930
======== ======== ======== ========
Weighted average shares (diluted) 47,894 26,118 44,576 25,930
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
BROADCOM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 15,379 $ (1,841)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,841 1,443
Amortization of deferred compensation 503 --
Change in operating assets and liabilities:
Accounts receivable (14,313) (874)
Inventory (8,768) 483
Other assets (1,633) (118)
Accounts payable 7,900 (704)
Income taxes payable 31 (3,076)
Other accrued liabilities 2,226 3,118
-------- --------
Net cash provided by (used in) operating activities 4,166 (1,569)
INVESTING ACTIVITIES
Purchases of property and equipment (10,697) (2,985)
Purchases of held-to-maturity investments (27,723) --
-------- --------
Net cash used in investing activities (38,420) (2,985)
FINANCING ACTIVITIES
Proceeds from bank term loan -- 3,000
Payments on bank term loan (2,500) --
Payments on capital lease obligations (59) (36)
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 238 (6)
-------- --------
Net cash provided by financing activities 76,849 2,958
-------- --------
Increase (decrease) in cash and cash equivalents 42,595 (1,596)
Cash and cash equivalents at beginning of period 22,116 7,417
-------- --------
Cash and cash equivalents at end of period $ 64,711 $ 5,821
======== ========
Supplemental disclosure of non-cash activities:
Notes receivable from employees in connection
with exercise of stock options $ 191 $ 461
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Basis of Presentation
The condensed financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments which, in
the opinion of management, are necessary to present fairly the financial
position of Broadcom Corporation (the "Company") at June 30, 1998 and the
results of its operations and cash flows for the six months ended June 30, 1998
and 1997. It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
The accompanying unaudited condensed financial statements do not
include footnotes and certain financial presentations normally required under
generally accepted accounting principles. Therefore, these financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997, included in the Company's Final
Prospectus dated April 16, 1998 (the "Final Prospectus"), filed as part of a
Registration Statement on Form S-1, as amended (Reg. No. 333-45619).
2. Earnings Per Share
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator: Net income (loss) $ 7,716 $ (1,078) $ 15,379 $ (1,841)
======== ======== ======== ========
Denominator:
Weighted-average shares
outstanding 43,720 29,487 37,652 29,483
Less: nonvested common shares
outstanding (3,142) (3,369) (3,368) (3,553)
-------- -------- -------- --------
Denominator for basic earnings per
common share 40,578 26,118 34,284 25,930
Effect of dilutive securities:
Nonvested common shares 1,993 -- 2,040 --
Stock options 5,323 -- 4,026 --
Convertible preferred stock -- -- 4,226 --
-------- -------- -------- --------
Denominator for diluted earnings
per common share 47,894 26,118 44,576 25,930
======== ======== ======== ========
Basic earnings (loss) per share $ 0.19 $ (0.04) $ 0.45 $ (0.07)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.16 $ (0.04) $ 0.35 $ (0.07)
======== ======== ======== ========
</TABLE>
4
<PAGE> 7
3. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. For the three and six
month periods ended June 30, 1998 and 1997, the Company did not have any
components of comprehensive income as defined in SFAS 130.
4. Investments
The Company accounts for its investments in debt securities pursuant to
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of such
securities at the time of purchase and reevaluates such classification as of
each balance sheet date. At 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>
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>
5. Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
5
<PAGE> 8
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Work in process $ 4,299 $ 2,315
Finished goods 9,875 2,076
-------- --------
14,174 4,391
Less reserve for excess and obsolete inventory (2,701) (1,686)
-------- --------
$ 11,473 $ 2,705
======== ========
</TABLE>
6. Long-Term Debt
The following is a summary of the Company's long-term debt:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Silicon Valley Bank term loan, collateralized by
substantially all of the Company's assets,
payable in varying monthly installments at a
rate of 9.3% $ -- $ 2,500
Capitalized lease obligations payable in varying
monthly installments at rates from 10.4% to 22.3% 134 193
-------- --------
134 2,693
Less current portion of long-term debt (89) (1,098)
-------- --------
$ 45 $ 1,595
======== ========
</TABLE>
7. Shareholders' Equity
Stock Option Plan
The 1998 Stock Incentive Plan (the "1998 Plan") was adopted on February 3,
1998 to serve as the successor equity incentive program to the Company's Amended
and Restated 1994 Stock Option Plan (the "1994 Plan"). On April 8, 1998, the
1998 Plan effective date, outstanding options under the 1994 Plan and under the
1998 Special Stock Option Plan (the "Special Plan") (a plan adopted to permit
options to be granted with certain terms permitted by the 1998 Plan prior to the
1998 Plan becoming effective) were incorporated into the 1998 Plan, and no
further option grants will be made under the 1994 Plan or the Special Plan. A
total of 15,948,439 shares of Common Stock have been authorized for issuance
under the 1998 Plan (including shares reserved for issuance for options
outstanding under the 1994 Plan and Special Plan). As of June 30, 1998, 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 and 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.
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted on
February 3, 1998 and became effective on April 16, 1998. The Purchase Plan
allows eligible
6
<PAGE> 9
employees to designate up to 15% of their total compensation to purchase shares
of the Company's Class A Common Stock, at semi-annual intervals, at 85% of fair
market value (determined as provided in the Purchase Plan). The Company has
reserved 750,000 shares of Class A Common Stock for issuance under the Purchase
Plan.
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.
Stock Split
On March 9, 1998, prior to the Offering, the Company effected a 3-for-2
stock split of the Company's Class B Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect this change in the Company's capital structure.
8. Litigation
In December 1996, Stanford Telecommunications, Inc. ("STI") filed an
action against the Company in the United States District Court for the Northern
District of California. STI alleges that the Company's BCM-3036 burst modulator
used in cable modems infringes one of STI's patents (the "'352 Patent"). STI is
seeking an injunction as well as the recovery of monetary damages, including
treble damages for willful infringement. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the `352 Patent and that the `352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on both invalidity and noninfringement grounds. The Company and STI
are currently conducting discovery in this case. On June 10, 1998 and July 21,
1998, the Court issued orders interpreting the claims of the `352 patent. STI
has recently alleged that a second Company product, the BCM-3037 burst
modulator, also infringes the `352 Patent. Although the Company believes that it
has strong defenses, a finding of infringement by the Company in this action
could lead to liability for monetary damages (which could be trebled in the
event that the infringement were found to have been willful), the issuance of an
injunction requiring that the Company withdraw various modem products from the
market, substantial product redesign expenses (assuming that a non-infringing
design is feasible and economic) and associated time-to-market delays, and
indemnification claims by the Company's customers or strategic partners,
7
<PAGE> 10
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 Court
denied Sarnoff's request for a temporary restraining order. In June 1998, the
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. Discovery is
scheduled to close in August 1998. 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
former employees of RSSI. The Company and RSSI entered into a settlement in this
action, pursuant to which the Company agreed not to hire or extend an offer to
any employees from RSSI for 30 days following the consummation of the Company's
initial public offering. While this action has been dismissed without prejudice,
neither the dismissal
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<PAGE> 11
nor the settlement agreement releases any claims that RSSI may assert in the
future regarding the actual use or misappropriation by the Company of trade
secrets or other proprietary information of RSSI. The Company has asserted and
believes that no such use or misappropriation has occurred.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion and breach of the implied covenant of good
faith and fair dealing. These claims relate to Mr. Davis' alleged ownership of
26,000 shares of Series D Preferred Stock originally purchased by Mr. Davis in
February 1996 (which shares would have converted into 78,000 shares of Class B
Common Stock upon consummation of the Offering). The purchase agreement between
the Company and Mr. Davis contained a provision permitting the Company to
repurchase all 26,000 shares of Series D Preferred Stock at the original price
paid per share in the event that Mr. Davis did not continue to be employed by
the Company until the later of February 22, 1998 or one year after the
consummation of the Company's initial public offering. After Mr. Davis resigned
from the Company in June 1997, the Company exercised its repurchase right. Mr.
Davis' complaint alleges that the repurchase right should not be enforceable
under several legal theories and seeks unspecified damages and declaratory
relief. If Mr. Davis is successful in 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
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 Item 2 -- "Risks Associated
With Intellectual Property Protection."
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
The following discussion and other sections of this Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. These forward-looking
statements are subject to significant risks and uncertainties, including without
limitation those identified in the section of this Form 10-Q entitled "Factors
That May Affect Future Results and Financial Condition" and in the Company's
Final Prospectus as filed with the Securities and Exchange Commission (the
"SEC"). Such risks and uncertainties may cause actual results to differ
materially and adversely from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-Q are identified
by words such as "believes," "anticipates," "expects," "intends," "may" and
other similar expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The Company disclaims any
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise
to revise or update any oral or written forward-looking statement that may be
made from time to time by or on behalf of the Company.
The information contained in this Form 10-Q is not a complete description
of the Company's business or the risks associated with an investment in the
Company. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report and in the Company's other
filings with the SEC, including its Final Prospectus, that attempt to advise
interested parties of certain risks, uncertainties and other factors that may
affect the Company's business.
OVERVIEW
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed integrated circuits ("ICs") for some of the most significant broadband
communications markets including cable set-top boxes, cable modems, high-speed
networking, DBS (digital broadcast satellite) and terrestrial digital broadcast,
and xDSL (digital subscriber line). From the Company's inception in 1991 through
1994, it was primarily engaged in product development and the establishment of
strategic customer and foundry relationships. During that period, the Company
generated the majority of its total revenue from development work performed for
key customers. The Company began shipping its products in 1994, and subsequently
the Company's total revenue has grown predominately through sales of its
semiconductor products. The Company expects to continue to enter into
development contracts with key customers, but expects that
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<PAGE> 13
development revenue will constitute a decreasing percentage of its total
revenue. In any given quarter, development revenue may vary significantly due to
the number of outstanding contracts and the timing of contract milestones. The
Company generates a small percentage of its product revenue from sales of its
system level reference designs.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Product revenue 95.8% 78.0% 97.5% 78.4%
Development revenue 4.2 22.0 2.5 21.6
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 45.1 42.2 42.5 46.1
------ ------ ------ ------
Gross profit 54.9 57.8 57.5 53.9
Operating expense:
Research and development 19.2 65.2 18.1 59.5
Selling, general and administrative 11.8 25.9 11.6 24.4
------ ------ ------ ------
Total operating expense 31.0 91.1 29.7 83.9
------ ------ ------ ------
Income (loss) from operations 23.9 (33.3) 27.8 (30.0)
Interest and other income, net 2.4 -- 1.6 0.6
------ ------ ------ ------
Income (loss) before income taxes 26.3 (33.3) 29.4 (29.4)
Provision (benefit) for income taxes 9.2 (13.3) 10.3 (11.7)
------ ------ ------ ------
Net income (loss) 17.1% (20.0)% 19.1% (17.7)%
====== ====== ====== ======
</TABLE>
Total Revenue. Total revenue consists of product revenue generated
principally by sales of the Company's semiconductor products and development
revenue generated under development contracts with the Company's customers.
Total revenue for the three months ended June 30, 1998 was $45.2 million, an
increase of $39.8 million or 737% from total revenue of $5.4 million in the
three months ended June 30, 1997. Total revenue for the six months ended June
30, 1998 was $80.5 million, an increase of $70.1 million or 672% from total
revenue of $10.4 million in the six months ended June 30, 1997. The increase in
total revenue was derived mainly from shipments of ICs for digital cable set-top
boxes and for the high-speed networking market. In addition, an increase in
shipments of cable modem ICs also contributed to the increase in total revenue
from period to period.
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 three months ended June 30, 1998 was $24.8 million or 54.9%
of total revenue, an increase of $21.7 million as compared with gross
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profit of $3.1 million or 57.8% of total revenue in the three months ended June
30, 1997. 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 as compared with 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. Gross profit as a
percentage of total revenue declined in the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997 due to volume-pricing
agreements and competitive pricing strategies in cable set-top box and
high-speed networking products. 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.
Research and Development Expense. Research and development expense
consists primarily of salaries and related costs of employees engaged in
research, design and development activities, as well as related subcontracting
costs. Research and development expense for the three and six months ended June
30, 1998 was $8.7 million and $14.6 million or 19.2% and 18.1% of total revenue,
respectively, an increase of $5.1 million and $8.4 million as compared with
research and development expense of $3.5 million and $6.2 million or 65.2% and
59.5% of total revenue for the three and six months ended June 30, 1997,
respectively. The increase in absolute dollars was primarily due to the addition
of personnel for the development of new products and the enhancement of existing
products. The decline in research and development expense as a percentage of
total revenue reflected a significant increase in total revenue during the three
and 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 three months ended June 30, 1998 was $5.3
million or 11.8% of total revenue, an increase of $3.9 million as compared with
$1.4 million or 25.9% of total revenue for the three months ended June 30, 1997.
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 as
compared with $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 three and
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 as the Company expands its operations to support its growth.
Deferred Compensation. In the three months ended March 31, 1998, the
Company recorded approximately $6.1 million of deferred compensation related to
employee stock options to purchase 1,518,500 shares of Class B Common Stock
granted in late March 1998 (in addition to approximately $1.1 million of
deferred compensation recorded in 1997). The deferred compensation represents
the difference between the deemed value of the Class B Common Stock for
accounting purposes and the option exercise price of such options at the
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<PAGE> 15
date of grant. Such amount has been presented as a reduction of shareholders'
equity and will be amortized ratably to expense over the vesting period of the
applicable options. In the three months ended June 30, 1998, the Company
eliminated approximately $705,000 in recorded deferred compensation,
representing the unamortized balance of deferred compensation on stock options
that were cancelled. The Company amortized an aggregate of $413,000 and $503,000
of deferred compensation in the three and 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 ended December 2001 and March
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 three and six months ended June 30, 1998
was $1.1 million and $1.3 million, respectively, compared to $3,000 and $63,000
in the three and six months ended June 30, 1997, respectively. The increases
were principally due to increased cash balances available to invest resulting
from consummation of the Company's Offering and sale of shares to Cisco Systems
in April 1998, described below.
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 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.
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, cash equivalents and short-term investments, compared to $26.3
million in working capital and $22.1 million in cash and cash equivalents at
December 31, 1997. In addition, at June 30, 1998, the Company had long-term
investments of $25.1 million; at December 31, 1997, the Company had no long-term
investments.
The Company's operating activities provided cash of $4.2 million in the
six months ended June 30, 1998, primarily as a result of net income and a growth
in accounts payable, partially offset by increases in accounts receivable and
inventory. In the six months ended June 30, 1997, cash used in operating
activities was $1.6 million, primarily as a result of a net loss.
In the six months ended June 30, 1998, the Company's investing activities
used cash in the amount of $27.7 million for the purchase of held-to-maturity
investments and $10.7 million for the purchase of capital equipment to support
its expanding operations. In the six months ended June 30, 1997, the Company's
investing activities used $3.0 million for the purchase of capital equipment.
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<PAGE> 16
Cash provided by financing activities was $76.8 million for the six months
ended June 30, 1998, primarily from aggregate net proceeds of $79.2 million from
the Company's Offering and sale of shares to Cisco Systems in April 1998,
described below, partially offset by the repayment of $2.5 million outstanding
under a bank term loan. In the six months ended June 30, 1997, cash provided by
financing activities was $3.0 million from proceeds of a bank term loan.
At June 30, 1998, the Company had available a $3.0 million revolving
credit facility with Silicon Valley Bank ("SVB").
In April 1998, the Company completed its initial public offering (the
"Offering"). Of the 4,025,000 shares of Class A Common Stock offered, the
Company sold 3,120,000 shares, and selling shareholders sold 905,000 shares, at
a price of $24.00 per share. In addition, the Company sold 500,000 shares to
Cisco Systems, in a concurrent registered offering that was not underwritten, at
a price of $22.32 per share. The Company received net aggregate proceeds from
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). 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.
The Company believes that the net proceeds from the Offering and sale
of shares to Cisco Systems, together with cash generated from its operations and
funds available under its credit facility, 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 to obtain additional
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 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 lease
of new facilities to centralize all Irvine employees and operations on one
campus, which lease is currently in final negotiations. Additional capital may
be required for consummation of any acquisitions of businesses, products or
technologies. To the extent that the funds generated by the Offering, together
with existing resources and cash generated from operations, are insufficient to
fund the Company's future activities, the Company may need to raise additional
funds through public or private 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
In future periods the Company's business, financial condition and
results of operations may be affected in a material and adverse manner by many
factors, including, but not limited to, the following:
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<PAGE> 17
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 and
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, terrestrial wireless and
digital subscriber line (xDSL) markets; the rate of adoption and acceptance of
new industry standards in the foregoing markets; the qualification, availability
and pricing of competing products and technologies from other vendors; delays in
the specification or design of new products; 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; changes in product and customer mix; intellectual
property disputes; the Company's ability to develop, introduce and market new
products and technologies on a timely basis; 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 significantly in 1998. Because a large portion of the
Company's operating expense, including rent, salaries and capital lease
expenses, is fixed and difficult to reduce or modify, if total revenue does not
meet the Company's expectations, the effect of any revenue shortfall will be
magnified by the fixed nature of these operating expenses. Based on the
foregoing or other factors, it is possible that in some future periods the
Company's reported or anticipated operating results will fail to meet or exceed
the expectations of analysts or investors. In such event, the price of the
Company's Class A Common Stock would likely be materially and adversely
affected.
Customer Concentration. A relatively small number of customers have
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to three of the Company's key customers (including sales to
their respective manufacturing subcontractors) accounted for approximately
41.6%, 23.4% and 10.2% of the Company's total revenue in the three months ended
June 30, 1998. Sales to two of these customers accounted for approximately 31.8%
and 36.8% of total revenue in the six months ended June 30, 1998 and 31.9% and
14.6% of total revenue in fiscal year 1997. Moreover, sales to the Company's
five largest customers (including sales to their respective manufacturing
subcontractors) represented approximately 81.1% and 81.7% in the three and six
months ended June 30, 1998, respectively, and accounted for approximately 61.7%
of the Company's total revenue in fiscal year 1997. Accordingly, the Company's
future results of operations will continue to be substantially dependent on the
success of its largest customers and on the Company's success in selling its
existing and future products to those customers in significant quantities.
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<PAGE> 18
Any reduction or delay in sales of the Company's products to one or more of
these key customers could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will retain its largest customers or that it will be
able to obtain additional key customers. The loss of one or more of the
Company's largest customers or the inability of the Company to successfully
develop relationships with additional key customers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Most of the Company's customers can cease incorporating the Company's
products in their own products with limited notice to the Company and with
little or no penalty. The Company's agreements with its customers typically do
not require minimum purchases. In addition, certain of the Company's customers
offer or may offer products (designed by themselves or third parties) that
compete with those offered by the Company. Many of the Company's customers have
pre-existing relationships with current or potential competitors of the Company,
which may affect such customers' purchasing decisions. In addition, the
Company's longstanding relationship with certain of its larger customers may
affect the purchasing decisions of other potential customers who compete with
these customers. The Company's customers face intense competition from other
manufacturers that do not use the Company's products. Further, some of the
Company's customers have "most favored nation" pricing arrangements which could
materially and adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements.
Rapid Technological Change; Dependence on Emerging Markets and Evolving
Standards. The semiconductor industry and the broadband communications markets
are characterized by rapidly changing technology, frequent new product
introductions and evolving industry standards. Substantially all of the
Company's current product revenue is derived from sales of products for the
high-speed networking, cable set-top box and cable modem markets. These markets
are characterized by intense competition, rapid technological change and short
product life cycles. In particular, the high-speed networking, cable set-top box
and cable modem markets continue to undergo a period of rapid growth and
consolidation. The Company's business, financial condition and results of
operations would be materially and adversely affected in the event of a
significant slowdown in 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
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<PAGE> 19
its prospects for growth. The Company has in the past invested substantial
resources in emerging technologies, such as 100Base-T4 for high-speed
networking, for which the market did not ultimately meet the Company's
expectations. There can be no assurance that the Company will be able to
anticipate the evolving standards in the semiconductor industry and, in
particular, the broadband communications markets, or that the Company will be
able to successfully develop and introduce new products into such markets. The
failure of the Company to anticipate technological change and introduce new
products that achieve market acceptance could materially and adversely affect
the Company's business, financial condition and results of operations.
Dependence on Development of New Products. The Company's future success
will depend upon its ability to develop new silicon solutions for existing and
new markets, introduce such products in a timely and cost-effective manner and
have such products selected for design into new products of leading equipment
manufacturers ("design wins"). The development of these new devices is highly
complex, and from time to time the Company has experienced delays in completing
the development and introduction of new products. Successful product development
and introduction depends on a number of factors, including, among other things,
accurate prediction of market requirements and evolving standards, accurate new
product definition, timely completion and introduction of new product designs,
timely qualification and industry interoperability certification of the
Company's products and the products into which the Company's products will be
incorporated, availability of foundry capacity, achievement of high
manufacturing yields, and market acceptance of the Company's and its customers'
products. Furthermore, there can be no assurance that the Company will be able
to introduce new products in a timely and cost-effective manner or in sufficient
quantities to meet customer demand or that such products will satisfy customer
requirements or achieve market acceptance. The Company's quarterly results have
in the past been and are expected in the future to continue to be dependent upon
the introduction of a relatively small number of new products and the timely
completion and delivery of those products to customers. The Company's or its
customers' failure to develop and introduce new products successfully and in a
timely manner would materially and adversely affect the Company's business,
financial condition and results of operations. The Company's new products are
generally incorporated into customers' products or systems at the design stage.
Achieving a design win often requires significant expenditures by the Company
without any assurance of success. Moreover, design wins frequently precede the
generation of volume sales, if any, by six to nine months or more. The value of
any design win largely depends upon the commercial success of the customer's
product and on the extent to which the design of the customer's electronic
system accommodates components manufactured by the Company's competitors. There
can be no assurance that the Company will continue to achieve design wins or
that the products for which the Company achieves design wins will be
commercially successful.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon the continued service of its executive officers and
other key management and technical personnel and on its ability to continue to
attract, retain and motivate qualified personnel, particularly experienced
mixed-signal circuit designers and systems applications engineers. The
competition for such employees is intense, and the Company may not be able to
attract as many qualified new personnel as it was able to employ prior to the
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
17
<PAGE> 20
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, or Dr. Henry Samueli, the
co-founder, Vice President of Research & Development and Chief Technical
Officer, could materially and adversely affect the Company. The Company does not
have employment contracts with its employees.
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 Rockwell, Philips, LSI Logic and VLSI
Technology for communication devices and with ST Microelectronics, LSI Logic and
C-Cube in the MPEG segment. The Company expects other major semiconductor
manufacturers to enter the market as the digital broadcast television and other
digital cable television markets become more established. A number of companies,
including Rockwell, Libit Signal Processing Ltd. and STI, 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 Lucent Technologies and Level One
Communications. The Company's principal competitors in the DBS market include
LSI Logic, Philips, Rockwell, ST Microelectronics and VLSI Technology, and the
Company's principal competitors in the xDSL market include Analog Devices,
Alcatel, Motorola and Globespan. The Company also may face competition from
suppliers of products based on new or emerging technologies. Many of the
Company's competitors operate their own fabrication facilities and have longer
operating histories and presence in key markets, greater name recognition,
access to larger customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than the
Company. As a result, such competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the promotion and sale of their products than the Company. Current
and potential competitors have established or may establish financial or
strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, existing or new competitors may in the
future develop technologies that more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost.
There can be no assurance that the Company will be able to compete successfully
against current or potential competitors, or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations
Management of Growth. The Company has experienced a period of rapid
growth, expanding from 164 employees in June 1997 to 378 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
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<PAGE> 21
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 is in final
negotiations to lease and improve new facilities that will allow all of its
Irvine employees and operations to be centralized on one campus. This relocation
of the Company's headquarters and Irvine operations could result in a temporary
disruption of the Company's operations or a temporary diversion of management
attention and resources. From time to time the Company engages in other
relocations of employees or operations. If the Company sustains its growth in
the future, it will need to continue to implement and improve its operational,
financial and management information systems and to hire, train, motivate and
manage its expanding employee base. There can be no assurance that the Company's
systems, procedures and controls will be adequate to support the Company's
operations. Any difficulties resulting from relocation of employees or
operations or any failure to improve the Company's operational, financial and
management information systems, or to hire, train, motivate or manage its
employees could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Independent Foundries. The Company does not own or
operate a fabrication facility, and substantially all of its semiconductor
device requirements are currently supplied by two outside foundries, 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 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
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 the new foundry's products. Although the Company
primarily utilizes two independent foundries, most of the Company's components
are not manufactured at both foundries at any given time. Any inability of one
of the foundries to provide the necessary components could result in significant
delays and could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event either foundry
experiences financial difficulties (whether as a result of the Asian economic
crisis or otherwise) or suffers any damage or destruction to its respective
facilities, or in the event of any other disruption of foundry capacity, the
Company
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may not be able to qualify alternative manufacturing sources for existing or new
products in a timely manner. Even the Company's current outside foundries would
need to have certain manufacturing processes qualified in the event of
disruption at another foundry, which the Company may not be able to accomplish
in a timely enough manner to prevent an interruption in supply of the affected
products. There can be no assurance that any such sources would be able to
produce ICs with acceptable manufacturing yields. Furthermore, there can be no
assurance that the Company's foundries will continue to deliver sufficient
quantities of semiconductor devices on a timely basis, will not experience lower
than expected manufacturing yields in the future, or will continue to have
excess capacity, any of which events could materially and adversely affect the
Company's business, financial condition and results of operations.
Dependence on Third-Party Subcontractors for Assembly and Test.
Substantially all of the Company's products are assembled and tested by one of
two third-party subcontractors, ASAT 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 aversely affected in the event
either subcontractor experiences financial difficulties (whether as a result of
the Asian economic crisis or otherwise) or suffers any damage or destruction to
its respective facilities, or in the event of any other disruption of assembly
and testing capacity. As a result of this reliance on third-party subcontractors
for assembly and testing of its products, the Company cannot directly control
product delivery schedules, which has in the past, and could in the future
result in product shortages or quality assurance problems that could increase
the costs of manufacture, assembly or testing of the Company's products. Due to
the amount of time normally required to qualify assemblers and testers, if the
Company is required to find alternative manufacturing assemblers or testers of
its components, shipments could be delayed. Any problems associated with the
delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities. Although the Company has no current
agreements or negotiations underway with respect to any material acquisitions,
the Company may make acquisitions of businesses, products or technologies in the
future. However, there can be no assurance that the Company will be able to
locate suitable acquisition opportunities or to consummate any such acquisitions
on terms and conditions acceptable to the Company. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities,
large one-time write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's results of operations or
the price of the Company's Class A Common Stock. Furthermore, acquisitions
entail numerous risks, including difficulties in the assimilation and
integration of operations, personnel, technologies, products and the information
systems of the acquired companies, diversion of management's attention from
other business concerns, risks of entering geographic or business markets in
which the Company has no or limited prior experience and the potential loss of
key employees. Since the Company has not made any material acquisitions in the
past, no assurance can be given as to the ability of the Company to
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successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks Associated with Expansion of International Business Activities.
The Company currently procures substantially all of its manufacturing, assembly
and test services from suppliers located outside the United States and may
expand its manufacturing activities abroad. Approximately 15.1% and 13.1% of the
Company's total revenue in the three and six months ended June 30, 1998,
respectively, was derived from sales to independent customers based outside the
United States. In calendar year 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.
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
21
<PAGE> 24
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.
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company believes that the transition of its products to increasingly smaller
geometries will be important for the Company to remain competitive. 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.
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 fourteen 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
22
<PAGE> 25
such customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its designs, and the Company has certain obligations
with respect to the non-use and non-disclosure of such intellectual property.
There can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of proprietary
rights of others, including its customers. Such litigation could result in
substantial costs and diversion of management's efforts and other Company
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection of
and pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement of other parties' proprietary rights. The Company has received a
letter from counsel for BroadCom, Inc. asserting rights in the "Broadcom"
trademark and demanding that the Company cease and desist from any further use
of the Broadcom name. The Company and BroadCom, Inc. have exchanged
correspondence outlining their respective positions on the matter. In addition,
the Company is currently involved in litigation with STI concerning the alleged
infringement of one of STI's patents by one or more of the Company's modem
products and with Sarnoff concerning the alleged misappropriation and misuse of
certain Sarnoff trade secrets by the Company. There can be no assurance that the
Company will prevail in these actions, or that other actions alleging
infringement by the Company of third-party patents, misappropriation or misuse
by the Company of third-party trade secrets or the invalidity of one or more
patents held by the Company will not be asserted or prosecuted against the
Company, or that any assertions of infringement, misappropriation or misuse or
prosecutions seeking to establish the invalidity of Company-held patents will
not materially and adversely affect the Company's business, financial condition
and results of operations. For example, in a patent or trade secret action, an
injunction could issue against the Company requiring that the Company withdraw
certain products from the market or necessitating that certain products offered
for sale or under development be redesigned; the Company has also entered into
certain indemnification obligations in favor of its customers and strategic
partners that could be triggered upon an allegation or finding of the Company's
infringement, misappropriation or misuse of other parties' proprietary rights.
Irrespective of the validity or successful assertion of such claims, the Company
would likely incur significant costs and diversion of its management and
personnel resources with respect to the defense of such claims, which could also
have a material adverse effect on the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all.
Lengthy Sales Cycle. The Company's sales cycle involves test and
evaluation of its products by the potential customer and design of the
customer's equipment to incorporate the Company's products. The sales cycle for
the test and evaluation of the Company's products can range from three to six
months or more, and it can take an additional six to nine months or more before
a customer commences volume production of equipment that incorporates the
23
<PAGE> 26
Company's products. Because of this lengthy sales cycle, the Company may
experience a delay between increasing expenses for research and development,
sales and marketing, and general and administrative efforts, as well as
increasing investments in inventory, and the generation of revenues, if any,
from such expenditures. In addition, the delays inherent in such lengthy sales
cycle raise additional risks of customer decisions to cancel or change product
plans, which could result in the loss of anticipated sales by the Company.
Achieving a design win provides no assurance that such customer will ultimately
ship products incorporating the Company's products. The Company's business,
financial condition and results of operations could be materially adversely
affected if a significant customer curtails, reduces or delays orders during the
Company's sales cycle or chooses not to release products employing the Company's
products.
Order and Shipment Uncertainties. The Company's sales are generally
made pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or deferral
of product orders could 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.
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from the Company's other
development efforts, product repair or replacement costs, claims by the
Company's customers or others against the Company, or the loss of credibility
with the Company's current and prospective customers. Any such event could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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.
24
<PAGE> 27
Limited Operating History. The Company was incorporated in August 1991
but did not begin shipping products until 1994. Accordingly, the Company has a
limited operating history upon which investors may evaluate the Company and its
prospects. The Company's recent revenue growth may not be sustainable and should
not be considered indicative of future revenue growth, if any. There can be no
assurance that the Company will be profitable in any future period. The
Company's prospects must be considered in light of the risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the semiconductor industry and the broadband
communications markets. To address these risks, the Company must, among other
things, successfully increase the scope of its operations, respond to
competitive and technological developments, continue to attract, retain and
motivate qualified personnel and continue to commercialize products
incorporating innovative technologies. There can be no assurance that the
Company will be successful in addressing these risks and challenges.
Risks Associated with Government Regulation. The Federal Communications
Commission (the "FCC") has broad jurisdiction over each of the Company's target
markets. Although the Company's products are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, much of the equipment into which the Company's products are incorporated
is subject to direct government regulation. Accordingly, the effects of
regulation on the Company's customers or the industries in which they operate
may, in turn, adversely impact the Company's business, financial condition and
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries 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 of the Company's assets)
submitted to the shareholders for approval and will also have control over the
management and affairs of the Company. As a result of such control, certain
transactions may not be possible without the approval of such shareholders.
These transactions include proxy contests, mergers involving the Company, tender
offers, open market purchase programs or other purchases of Class A
25
<PAGE> 28
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.
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 is evaluating its products for
material year 2000 compliance and will consider making any changes to its
current or future products required to achieve such compliance. 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.
Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that the aggregate net proceeds from the Offering and sale of shares to
Cisco Systems, together with cash generated from its operations and funds
available under its credit facilities, will be sufficient to meet its capital
requirements for at least the next twelve months. 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 the products based on the Company's
technology and other factors discussed above under "Liquidity and Capital
Resources." To the extent the Company's existing resources and any future
earnings are insufficient to fund the Company's activities, the Company may need
to raise additional funds through public or private financing. No assurance can
be given that additional financing will be available or that if available, any
such financing can be obtained on terms favorable to the Company and its
shareholders. If adequate funds are not available, the Company may be required
to curtail its operations significantly or to obtain funds through arrangements
with strategic partners or others that may require the Company to relinquish
rights to certain of its technologies or potential markets. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the then existing shareholders of the Company would be reduced. Such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock.
26
<PAGE> 29
Stock Price Volatility. The trading price of the Company's Class A
Common Stock has been and could 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 or its
competitors, general conditions in the semiconductor, telecommunications and
data communications equipment markets, changes in earnings estimates or buy/sell
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. 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.
Potential Effect of Anti-Takeover Provisions. The Company's Articles of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. In addition, the Company has outstanding Class B
Common Stock, which entitles each holder thereof to ten votes per share on all
matters presented for a shareholder vote. The Board of Directors also has the
authority to fix the rights and preferences of shares of the Company's Preferred
Stock and to issue such shares without a shareholder vote. It is possible that
the provisions in the Company's Articles of Incorporation and Bylaws, the
existence of super voting rights held by insiders and the ability of the Board
of Directors to issue Preferred Stock may have the effect of delaying, deferring
or preventing a change of control of the Company without further action by the
shareholders, may discourage bids for the Company's Class A Common Stock at a
premium over the market price of the Class A Common Stock and may adversely
affect the market price of the Class A Common Stock and the voting and other
rights of the holders of Class A Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, claims and
litigation arising in the ordinary course of business. The current status of the
Company's previously reported claims and litigation is discussed in Note 8 of
the "Notes to Unaudited Condensed Financial Statements" in Part I, Item 1, and
under "Risks Associated with Intellectual Property Protection" in Part I, Item
2, elsewhere in this Form 10-Q, which sections are hereby incorporated by this
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities. During the three months ended June
30, 1998, the Company issued to three employees an aggregate of 10,250 shares of
Class B Common
27
<PAGE> 30
Stock for an aggregate purchase price of $17,417, upon the exercise of options
to purchase shares of Class B Common Stock. All sales of Class B Common Stock
made by the Company pursuant to the exercise of stock options were made pursuant
to the exemptions from registration either by Section 4(2) of the Securities Act
of 1933, as amended, or by Rule 701 promulgated thereunder.
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.
(d) Use of Proceeds from Sales of Registered Securities. On April 21,
1998, the Company completed an initial public offering of its Class A Common
Stock, $0.0001 par value. The managing underwriters in the Offering were Morgan
Stanley & Co. Incorporated, BT Alex. Brown Incorporated, Deutsche Morgan
Grenfell, Inc. and Hambrecht & Quist LLC (the "Underwriters"). The shares of
Class A Common Stock sold in the Offering were registered under the Securities
Act of 1993, as amended, on a Registration Statement on Form S-1 (the
"Registration Statement") (Reg. No. 333-45619) that was declared effective by
the SEC on April 16, 1998.
The Offering commenced on April 16, 1998 and terminated on April 21, 1998
after all 4,525,000 shares of Class A Common Stock registered under the
Registration Statement were sold. Of the total shares sold, 3,120,000 shares
were sold by the Company (including 355,000 shares sold pursuant to the exercise
of the Underwriters' over-allotment option), 905,000 shares were sold by selling
shareholders (including 170,000 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) and 500,000 shares were sold by the Company
to Cisco Systems in a concurrent registered offering that was not underwritten.
The purchase price for the underwritten shares was $24.00 per share and the
purchase price of the shares sold to Cisco Systems was $22.32 per share. The
aggregate price of the Offering amount registered was $107,760,000.
In connection with the Offering, the Company paid an aggregate of
$5,241,600 in underwriting discounts and commissions to the Underwriters and
paid other expenses of approximately $1,628,000. After deducting the
underwriting discounts and commissions and other expenses, the Company received
net aggregate proceeds from the Offering and sale of shares to Cisco Systems of
approximately $79,170,400. In April 1998, the Company used $2,250,000 of the
proceeds to repay the balance outstanding under its term loan with Silicon
Valley Bank. The balance of the proceeds will be used for general corporate
purposes, including working capital and capital purchases such as test equipment
and leasehold improvements associated with the Company's planned facilities
expansion. None of the Company's net proceeds of the Offering were paid directly
or indirectly to any director, officer, general partner of the Company or their
associates, persons owning 10 percent or more of any class of equity securities
of the Company, or an affiliate of the Company.
28
<PAGE> 31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No such reports were filed during the three months ended June 30, 1998.
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADCOM CORPORATION
A CALIFORNIA CORPORATION
(Registrant)
August 3, 1998 /s/ WILLIAM J. RUEHLE
--------------------------------------------
William J. Ruehle
Vice President and Chief Financial Officer
(principal financial and accounting officer)
30
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