<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-45619
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 3674 33-0480482
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(714) 450-8700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HENRY T. NICHOLAS, III, PH.D.
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BROADCOM CORPORATION
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(714) 450-8700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
BRUCE R. HALLETT, ESQ. LARRY W. SONSINI, ESQ.
ELLEN S. BANCROFT, ESQ. JAMES N. STRAWBRIDGE, ESQ.
LEE J. LESLIE, ESQ. JOSE F. MACIAS, ESQ.
BROBECK PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
4675 MACARTHUR COURT, SUITE 1000 PROFESSIONAL CORPORATION
NEWPORT BEACH, CALIFORNIA 92660 650 PAGE MILL ROAD
(714) 752-7535 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ----------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) 4,025,000 shares
of Class A Common Stock offered by the Company and the Selling Shareholders
pursuant to an underwritten public offering, including 525,000 shares issuable
upon exercise of the Underwriters' over-allotment option (the "Public Offering")
and (ii) 500,000 shares of Class A Common Stock offered to Cisco Systems, Inc.
by the Company in a concurrent offering that is not underwritten (the "Cisco
Offering"). Therefore, this Registration Statement contains two forms of
prospectus: one to be used in connection with the Public Offering (the "Public
Offering Prospectus") and the other to be used in connection with the concurrent
Cisco Offering (the "Cisco Prospectus"). The Public Offering Prospectus and the
Cisco Prospectus are identical in all respects except for the front cover pages,
the tables of contents, the descriptions of the plan of distribution and the
descriptions of legal matters. These sections of the Cisco Prospectus are
included herein after the final page of the Public Offering Prospectus and are
labeled "Alternate Page for Cisco Prospectus" and "Alternate Sections for Cisco
Prospectus." Final forms of each prospectus will be filed with the Securities
Exchange Commission under Rule 424(b).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued March 10, 1998
3,500,000 Shares
[BROADCOM LOGO]
CLASS A COMMON STOCK
------------------------
OF THE 3,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 2,750,000 SHARES
ARE BEING SOLD BY THE COMPANY AND 750,000 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY HAS TWO CLASSES OF COMMON STOCK: CLASS A COMMON STOCK AND CLASS B
COMMON STOCK (COLLECTIVELY, THE "COMMON STOCK"). THE SHARES OF COMMON STOCK ARE
SUBSTANTIALLY IDENTICAL EXCEPT THAT THE HOLDERS OF CLASS A COMMON STOCK ARE
ENTITLED TO ONE VOTE PER SHARE, AND THE HOLDERS OF CLASS B COMMON STOCK ARE
ENTITLED TO TEN VOTES PER SHARE, ON ALL MATTERS SUBMITTED TO A VOTE OF THE
SHAREHOLDERS. EACH SHARE OF CLASS B COMMON STOCK IS CONVERTIBLE AT THE OPTION OF
THE HOLDER INTO ONE SHARE OF CLASS A COMMON STOCK, AND GENERALLY WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A COMMON STOCK UPON TRANSFER OF
THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER. SEE "DESCRIPTION OF CAPITAL
STOCK." PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $10 AND $12 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION
OF FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
APPLICATION HAS BEEN MADE TO LIST THE SHARES OF CLASS A COMMON STOCK OFFERED
HEREBY ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "BRCM."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company and certain Selling Shareholders have granted the
Underwriters an option, exercisable within 30 days from the date hereof,
to purchase up to an aggregate of 525,000 additional Shares at the price
to public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, proceeds to Company and proceeds to Selling Shareholders
will be $ , $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
, 1998
<PAGE> 4
[Color work: Broadcom logo in the center of the page surrounded by five boxes
labeled "High-Speed Networking," "Cable Modems," "DBS Wireless," "xDSL" and
"Cable Set-Top Boxes." Caption at bottom of the page reads "Silicon Solutions
For Broadband Communications."]
INSIDE GATEFOLD
[Color work: Broadcom logo appears in the upper left hand corner of the page,
next to a caption that reads "Silicon Solutions for Broadband Communications."]
[A structure labeled "Enterprise Communications" appears on the left side of the
gatefold and contains graphics showing switches, a repeater/hub and an
enterprise router. A structure labeled "Network Service Providers" appears in
the center of the gatefold and includes graphics labeled "Satellite,"
"Terrestrial Wireless," "Telco Twisted Pair" and "Coax Cable" leading to a house
labeled "Residential Communications." The house contains different rooms which
identify devices labeled "Cable Set-Top Box," "DBS Set-Top Box," "VDSL Set-Top
Box," "HDTV," "Cable Modem" and "ADSL Modem."] [The following paragraphs are
located in the bottom part of the gatefold under the caption "Products requiring
broadband solutions:"
High-Speed Networking is critical to easing the communications
bottlenecks in enterprise networks. Fast Ethernet (100Mbps) and Gigabit
Ethernet (1000 Mbps) are being introduced to replace older Ethernet (10
Mbps) and Token Ring (16Mbps) technologies.
Cable Modems connect PCs to the cable network and provide Internet
access at speeds that are up to 1000 times faster than today's fastest
analog modems.
Cable Set-top Boxes facilitate high-speed digital communications between
a subscriber's television and the cable network, permitting delivery of
several hundred MPEG compressed digital channels and TV based web
content.
Direct Broadcast Satellite (DBS) and Terrestrial Wireless technologies
broadcast digital video and data over high bandwidth satellites and
microwave links directly to set-top boxes in the home.
xDSL represents a family of newer broadband technologies, which operate
over the existing copper twisted pair wiring in telephone local loops.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITERS."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Broadcom is a leading developer of highly integrated silicon solutions which
enable broadband digital data transmission to the home and within the business
enterprise. The Company's products enable the high-speed transmission of data
over existing communications infrastructures, most of which were not originally
intended for digital data transmission. Using proprietary technologies and
advanced design methodologies, the Company has designed and developed integrated
circuits for some of the most significant broadband communications markets,
including the markets for cable set-top boxes, cable modems, high-speed
networking, direct broadcast satellite and terrestrial wireless, and xDSL.
Although the communications infrastructures of these markets are very different,
the Company has leveraged its core technologies and introduced silicon solutions
for each market that deliver the cost and performance levels necessary to enable
the widespread deployment of broadband transmission services. The Company's
broadband transmission products consist primarily of high-performance digital
signal processing circuits that implement complex communications algorithms,
surrounded by precision high-speed analog-to-digital and digital-to-analog
converter circuits. The Company's products integrate comprehensive systems
solutions into single chips or chip-sets, thereby eliminating costly external
components, reducing board space, simplifying the customer's manufacturing
process, lowering the customer's system costs and enabling higher performance.
Customers currently shipping broadband communications equipment incorporating
the Company's products include 3Com, Bay Networks, Cisco Systems, General
Instrument (formerly known as NextLevel Systems), Motorola and
Scientific-Atlanta.
The Company was incorporated in California in August 1991. The Company's
executive offices are located at 16251 Laguna Canyon Road, Irvine, California
92618, and its telephone number is (714) 450-8700.
THE OFFERING
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<S> <C>
Class A Common Stock offered........................... 3,500,000 shares, including 2,750,000 shares by the
Company and 750,000 shares by the Selling Shareholders
Common Stock to be outstanding after this
offering(1)(2):
Class A Common Stock (one vote per share)............ 4,000,000 shares
Class B Common Stock (ten votes per share)........... 39,205,077 shares
Total.............................................. 43,205,077 shares
Use of proceeds........................................ General corporate purposes, including working capital,
acquisition of capital equipment and repayment of debt.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol................. BRCM
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $1,138 $3,636 $6,107 $21,370 $36,955
Gross profit................................................ 1,138 2,929 4,709 13,510 22,029
Total operating expense..................................... 1,127 2,690 4,822 9,208 24,267
Income (loss) from operations............................... 11 239 (113) 4,302 (2,238)
Net income (loss)........................................... 12 237 4 3,016 (1,173)
Diluted earnings (loss) per share(3)........................ $ .00 $ .01 $ .00 $ .09 $ (.04)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $22,116 $51,964
Total assets................................................ 45,244 75,092
Total debt.................................................. 2,693 193
Total shareholders' equity.................................. 33,392 65,740
</TABLE>
- ------------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 5,401,432 shares of Class B Common Stock issuable upon the exercise of
options outstanding as of December 31, 1997 at a weighted average exercise
price of $2.12 per share and (ii) 11,463,911 shares of Common Stock
available for issuance under the Company's employee benefit plans. See
"Management -- Employee Benefit Plans," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.
(2) Includes 500,000 shares of Class A Common Stock to be sold by the Company to
Cisco Systems, Inc. ("Cisco Systems") concurrent with this offering pursuant
to the exercise of Cisco Systems' option to purchase Common Stock at a price
per share equal to the initial public offering price, net of underwriting
discounts and commissions.
(3) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
(4) Adjusted to reflect the sale of (i) 2,750,000 shares of Class A Common Stock
offered by the Company hereby at an assumed initial public offering price of
$11.00 per share and the application of the net proceeds therefrom and (ii)
500,000 shares of Class A Common Stock to Cisco Systems by the Company
concurrent with this offering pursuant to the exercise of Cisco Systems'
option to purchase Common Stock at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. See
"Sale of Shares to Cisco Systems," "Use of Proceeds" and "Capitalization."
3
<PAGE> 6
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Sale of Shares to Cisco Systems........ 15
Use of Proceeds........................ 15
Dividend Policy........................ 15
Capitalization......................... 16
Dilution............................... 17
Selected Financial Data................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business............................... 25
</TABLE>
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<CAPTION>
PAGE
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<S> <C>
Management............................. 42
Certain Transactions................... 52
Principal and Selling Shareholders..... 54
Description of Capital Stock........... 55
Shares Eligible for Future Sale........ 58
Underwriters........................... 60
Legal Matters.......................... 61
Experts................................ 62
Additional Information................. 62
Glossary of Technical Terms............ 63
Index to Financial Statements.......... F-1
</TABLE>
------------------------
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first three
quarters of each year.
------------------------
Broadcom and QAMLink are registered trademarks of the Company. This
Prospectus also includes trademarks of companies other than the Company.
------------------------
Except as otherwise noted herein, information in this Prospectus assumes
(i) the conversion of all outstanding shares of convertible Preferred Stock into
an aggregate of 8,453,517 shares of Class B Common Stock upon consummation of
this offering, (ii) the recapitalization of the Company in March 1998 to effect
the conversion into Class B Common Stock of all shares of the Company's common
stock issued and outstanding or reserved for issuance prior to March 1998, (iii)
no exercise of outstanding options to purchase shares of Class B Common Stock,
of which options to purchase 5,401,432 shares were outstanding at December 31,
1997, (iv) the completion of a three-for-two stock split of the Company's Class
B Common Stock effected in March 1998 and (v) no exercise of the Underwriters'
over-allotment option.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Class
A Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. The factors that may cause such a difference include, but are not
limited to, those discussed below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Fluctuations in Results of Operations. The Company's quarterly results of
operations have fluctuated significantly in the past and may continue to
fluctuate in the future based on a number of factors, many of which are not in
the Company's control. Among other things, the Company's results of operations
have fluctuated in the past due to competitive pressures on selling prices; the
volume of product sales; the timing and cancellation of significant customer
orders; lengthy sales cycles; pricing concessions on volume sales; fluctuations
in manufacturing yields; changes in product and customer mix; intellectual
property disputes; the Company's ability to develop, introduce and market new
products and technologies on a timely basis; introduction of products and
technologies by the Company's competitors; market acceptance of the Company's
and its customers' products; and the amount and timing of recognition of
development revenue. The Company's results of operations may also fluctuate in
the future due to a number of factors, including, but not limited to, those
listed above as well as general business conditions in the semiconductor
industry and the broadband communications markets; availability of foundry
capacity and raw materials; the quality of the Company's products; the timing of
investments in research and development; the Company's ability to expand and
implement its sales and marketing programs; the level of orders received that
can be shipped in a quarter; currency fluctuations; and general economic
conditions. The Company intends 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 material
adverse effect of any revenue shortfall will be magnified by the fixed nature of
these operating expenses. Based on the foregoing or other factors, it is
possible that in some future periods the Company's reported or anticipated
operating results will fail to meet or exceed the expectations of analysts or
investors. In such event, the price of the Company's Class A Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Rapid Technological Change; Dependence on Emerging Markets. The
semiconductor industry and the broadband communications markets are
characterized by rapidly changing technology, frequent new product introductions
and evolving industry standards. Virtually all of the Company's current product
revenue is derived from sales of products for the cable set-top box, cable modem
and high-speed networking markets. These markets are characterized by intense
competition, rapid technological change and short product life cycles. In
particular, the cable set-top box, cable modem and high-speed networking markets
continue to undergo a period of rapid growth and consolidation. The Company's
business, financial condition and results of operations would be materially and
adversely affected in the event of a significant slowdown in these or other
broadband communications markets. The Company's success will depend on the
ability of its customers to develop new products and enhance existing products
for the broadband communications markets and to successfully introduce and
promote such products. There can be no assurance that the broadband
communications markets will develop as expected by the Company. The failure of
new markets to develop or the failure of the products in these markets to gain
widespread acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. Products for broadband
communications applications are generally based on industry standards, which are
continually evolving. The emergence of new industry standards could render
products of the Company or its customers unmarketable or obsolete and may
require the Company to incur substantial unanticipated costs to comply with any
such new standards. Moreover, the Company's past sales and profitability have
resulted, to a significant extent, from its ability to anticipate changes in
technology and industry standards and to develop and introduce new and enhanced
products. The Company's continued ability to adapt to such changes and
anticipate future standards will be a significant factor in maintaining or
improving its competitive position and its prospects for growth. The
5
<PAGE> 8
Company has in the past invested substantial resources in emerging technologies,
such as 100Base-T4 for high-speed networking, for which the market did not
ultimately meet the Company's expectations. There can be no assurance that the
Company will be able to anticipate the evolving standards in the semiconductor
industry and, in particular, the broadband communications markets, or that the
Company will be able to successfully develop and introduce new products into
such markets. The failure of the Company to anticipate technological change and
introduce new products that achieve market acceptance could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business--Markets" and "--Core Technologies."
Dependence on Development of New Products. The Company's future success
will depend upon its ability to develop new silicon solutions for existing and
new markets, introduce such products in a timely and cost-effective manner and
have such products selected for design into new products of leading equipment
manufacturers ("design wins"). The development of these new devices is highly
complex, and from time to time the Company has experienced delays in completing
the development and introduction of new products. Successful product development
and introduction depends on a number of factors, including, among other things,
accurate prediction of market requirements and evolving standards, accurate new
product definition, timely completion and introduction of new product designs,
availability of foundry capacity, achievement of high manufacturing yields and
market acceptance of the Company's and its customers' products. Furthermore,
there can be no assurance that the Company will be able to introduce new
products in a timely and cost-effective manner or in sufficient quantities to
meet customer demand or that such products will satisfy customer requirements or
achieve market acceptance. In particular, the Company's current MPEG chip is
presently produced on an interim basis by another manufacturer. The Company is
currently redesigning this chip to be manufactured at its outside foundries. The
Company has licensed the MPEG technology from General Instrument and expects to
introduce the next generation of this chip during the first half of 1998. If the
Company is not able to launch this product successfully, the Company could lose
significant sales to one of its key customers, and the Company's business,
financial condition and results of operations could be materially and adversely
affected. The Company's or its customers' failure to develop and introduce new
products successfully and in a timely manner would materially and adversely
affect the Company's business, financial condition and results of operations.
See "Business--Strategy."
The Company's new products are generally incorporated into customers'
products or systems at the design stage. Achieving a design win often requires
significant expenditures by the Company without any assurance of success.
Moreover, design wins frequently precede the generation of volume sales, if any,
by six months or more. The value of any design win largely depends upon the
commercial success of the customer's product and on the extent to which the
design of the customer's electronic system accommodates components manufactured
by the Company's competitors. There can be no assurance that the Company will
continue to achieve design wins or that the products for which the Company
achieves design wins will be commercially successful. See "Business--Strategy,"
"--Customers and Strategic Relationships," "--Products" and "--Research and
Development."
Customer Concentration. A relatively small number of customers has
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to General Instrument and 3Com (including sales to their
respective manufacturing subcontractors) accounted for approximately 31.9% and
14.6%, respectively, of the Company's total revenue in 1997 and approximately
25.2% and 24.9%, respectively, of the Company's total revenue in the fourth
quarter of 1997. Moreover, sales to the Company's five largest customers
(including sales to their respective manufacturing subcontractors) represented
approximately 61.7% and 71.5% of the Company's total revenue in 1997 and the
fourth quarter of 1997, respectively. Accordingly, the Company's future results
of operations will continue to be substantially dependent on the success of its
largest customers. Any reduction or delay in sales of the Company's products to
one or more of these key customers could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will retain its largest customers or that it will
be able to recruit additional key customers. The loss of one or more of the
Company's largest customers or the inability of the Company to successfully
develop
6
<PAGE> 9
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 adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Customers and Strategic
Relationships."
Dependence On Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel and on its ability to continue to attract,
retain and motivate qualified personnel, particularly experienced mixed-signal
circuit designers and systems applications engineers. The competition for such
employees is intense. The loss of the services of one or more of the Company's
key employees or the Company's failure to attract, retain and motivate qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. In particular, the loss of the
services of Henry Nicholas, the Co-Chairman, President and Chief Executive
Officer, or Dr. Henry Samueli, the Co-Chairman, Vice President of Engineering
and Chief Technical Officer, could materially and adversely affect the Company.
The Company has obtained $2.5 million key man life insurance policies covering
each of Mr. Nicholas and Dr. Samueli, the proceeds of which would be payable to
the Company in the event of death of either of such officers. There are no
employment contracts with any of the Company's employees. See
"Business--Employees" and "Management--Executive Officers and Directors."
Dependence on Independent Foundries. The Company does not own or operate a
fabrication facility, and substantially all of its semiconductor device
requirements are currently supplied by two outside foundries, Taiwan
Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and Chartered
Semiconductor Manufacturing ("Chartered") in Singapore. There are significant
risks associated with the Company's reliance on outside foundries, including the
lack of ensured wafer supply, limited control over delivery schedules, quality
assurance, manufacturing yields and production costs, and the unavailability of
or delays in obtaining access to key process technologies. In addition, the
manufacture of integrated circuits ("ICs") is a highly complex and
technologically demanding process. Although the Company works closely with its
foundries to minimize the likelihood of reduced manufacturing yields, the
Company's foundries have from time to time experienced lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.
The Company provides its foundries with rolling forecasts of its production
requirements; however, the ability of each foundry to provide semiconductor
devices to the Company is limited by the foundry's available capacity. Although
the Company has entered into contractual commitments to supply specified levels
of products to certain of its customers, the Company does not have a long-term
volume purchase agreement or a guaranteed level of production capacity with any
of its existing foundries because the Company believes excess foundry capacity
is currently available. The Company places its orders on a purchase order basis,
and these foundries may allocate capacity to the production of other companies'
products while reducing deliveries to the Company on short notice. In
particular, foundry customers that are larger and better financed than the
Company or that have long-term agreements with the Company's foundries may cause
such foundries to reallocate capacity in a manner adverse to the Company. In
addition, if the Company chooses to use a new foundry, several months are
typically required to complete the qualification process before the Company can
begin shipping the new foundry's products. Although the Company currently
utilizes two independent
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foundries, most of the Company's components are not manufactured at both
foundries at any given time. Any inability of one of the foundries to provide
the necessary components could result in significant delays and could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of a disruption, the Company may not be able
to qualify alternative manufacturing sources for existing or new products in a
timely manner. Even the Company's current outside foundries would need to have
certain manufacturing processes qualified in the event of disruption at another
foundry, which the Company may not be able to accomplish in a timely enough
manner to prevent an interruption in supply of the affected products. There can
be no assurance that any such sources would be able to produce ICs with
acceptable manufacturing yields. Furthermore, there can be no assurance that the
Company's foundries will continue to deliver sufficient quantities of
semiconductor devices on a timely basis, will not experience lower than expected
manufacturing yields in the future, or will continue to have excess capacity,
any of which could materially and adversely affect the Company's business,
financial condition and results of operations. See "Business--Manufacturing."
Limited Operating History. The Company was incorporated in August 1991 but
did not begin shipping products until 1994. Accordingly, the Company has a
limited operating history upon which investors may evaluate the Company and its
prospects. The Company's recent revenue growth may not be sustainable and should
not be considered indicative of future revenue growth, if any. There can be no
assurance that the Company will be profitable in any future period. The
Company's prospects must be considered in light of the risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the semiconductor industry and the broadband
communications markets. To address these risks, the Company must, among other
things, successfully increase the scope of its operations, respond to
competitive and technological developments, continue to attract, retain and
motivate qualified personnel and continue to commercialize products
incorporating innovative technologies. There can be no assurance that the
Company will be successful in addressing these risks and challenges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Third-Party Subcontractors for Assembly and
Test. Substantially all of the Company's products are assembled and tested by
one of two third-party subcontractors, ASAT Ltd. ("ASAT") in Hong Kong and ST
Assembly Test Services ("STATS") in Singapore. The Company does not have
long-term agreements with either of these suppliers and typically procures
services from such suppliers on a per order basis. As a result of this reliance
on third-party subcontractors for assembly and testing of its products, the
Company cannot directly control product delivery schedules, which could lead to
product shortages or quality assurance problems that could increase the costs of
manufacture, assembly or testing of the Company's products. Due to the amount of
time normally required to qualify assemblers and testers, if the Company is
required to find alternative manufacturing assemblers or testers of its
components, shipments could be delayed. Any problems associated with the
delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."
Reliance on Strategic Relationships. The Company has relied on in the past,
and intends to continue to form in the future, strategic relationships with
certain of its customers who are technology leaders in the Company's target
markets. These relationships often involve the proposed development by the
Company of new products involving significant technological challenges. Since
the proposed product under development may offer potential competitive
advantages to the strategic partner, considerable pressure is frequently placed
on the limited resources of the Company to meet development schedules. While an
essential element of the Company's strategy involves establishing such
relationships, these projects utilize substantial amounts of the Company's
limited resources, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between the Company and its strategic partners. Moreover, there can
be no assurance that customers of the Company will not develop their own
solutions for products currently supplied by the Company, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations. See "Business--Customers and Strategic Relationships."
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Risks Associated with Intellectual Property Protection. The Company's
success and future revenue growth will depend, in part, on its ability to
protect its intellectual property. The Company relies primarily on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect its proprietary technologies and processes. There
can be no assurance that such measures will provide meaningful protection for
the Company's proprietary technologies and processes. The Company has been
issued two United States patents and has filed nine United States patent
applications. There can be no assurance that any patent will issue as a result
of these applications or future applications or, if issued, that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide meaningful protection to the Company. The failure of any patents
to provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. The Company also generally
enters into confidentiality agreements with its employees and strategic
partners, and generally controls access to and distribution of its documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products,
services or technology without authorization, develop similar technology
independently or design around the Company's patents. In addition, effective
copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries. Certain of the Company's customers have entered
into agreements with the Company pursuant to which such customers have the right
to use the Company's proprietary technology in the event the Company defaults in
its contractual obligations, including product supply obligations, and fails to
cure the default within a specified period of time. Moreover, the Company often
incorporates the intellectual property of its strategic customers into its
designs, and the Company has certain obligations with respect to the non-use and
non-disclosure of such intellectual property. There can be no assurance that the
steps taken by the Company to prevent misappropriation or infringement of the
intellectual property of the Company or its customers will be successful.
Moreover, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of proprietary rights of others, including its
customers. Such litigation could result in substantial costs and diversion of
the Company's 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 is currently
involved in litigation with Stanford Telecommunications, Inc. ("STI") concerning
the alleged infringement of one of STI's patents by one of the Company's cable
modem products. There can be no assurance that the Company will prevail in this
action, or that other actions alleging infringement by the Company of
third-party patents or invalidity of the patents held by the Company will not be
asserted or prosecuted against the Company, or that any assertions of
infringement or prosecutions seeking to establish the invalidity of Company-held
patents will not materially and adversely affect the Company's business,
financial condition and results of operations. Irrespective of the validity or
successful assertion of such claims, the Company would likely incur significant
costs and diversion of its resources with respect to the defense of such claims,
which could also have a material adverse effect on the Company's business,
financial condition and results of operations. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance that under
such circumstances a license would be available on commercially reasonable
terms, if at all. See "Business--Intellectual Property" and "--Legal
Proceedings."
Lengthy Sales Cycle. The Company's sales cycle involves test and evaluation
of its products by the potential customer and design of the customer's equipment
to incorporate the Company's products. The sales cycle for the test and
evaluation of the Company's products can range from three to six months or more,
and it can take an additional six months or more before a customer commences
volume production of equipment that incorporates the Company's products. Because
of this lengthy sales cycle, the Company may experience a delay between
increasing expenses for research and development and sales and marketing efforts
and the generation of higher 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
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<PAGE> 12
customer will ultimately ship products incorporating the Company's products. The
Company's business, financial condition and results of operations could be
materially adversely affected if a significant customer curtails, reduces or
delays orders during the Company's sales cycle or chooses not to release
products employing the Company's products. See "--Customer Concentration,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Manufacturing."
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 wireless, and xDSL, which competition
has resulted and may continue to result in declining average selling prices for
the Company's products. The Company currently competes in the cable television
set-top box with Rockwell, Philips, LSI Logic and VLSI Technologies for
communication devices and with SGS-THOMSON, LSI Logic and C-Cube in the MPEG
segment. The Company expects other major semiconductor manufacturers to enter
the market as the digital broadcast television and other digital cable
television markets become more established. A number of companies, including LSI
Logic, Rockwell and Toshiba, have announced that they are developing and plan to
introduce MCNS/DOCSIS compliant products in 1998, which could result in
significant competition in the cable modem market. In the high-speed networking
market, the Company principally competes with established suppliers including
Lucent Technologies, Level One, National Semiconductor and Advanced Micro
Devices ("AMD"). The Company's principal competitors in the DBS market include
LSI Logic, Philips, SGS-THOMSON and VLSI Technologies, and the Company's
principal competitors in the xDSL market include Analog Devices, Alcatel,
Motorola and Globespan. The Company also may face competition from suppliers of
products based on new or emerging technologies. Many of the Company's
competitors operate their own fabrication facilities and have longer operating
histories and presence in key markets, greater name recognition, access to
larger customer bases and significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than the Company. As
a result, such competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the promotion and sale of their products than the Company. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, the Company's competitors may in the
future develop technologies which more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost.
There can be no assurance that the Company will be able to compete successfully
against current or potential competitors, or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company believes that the transition of its products to increasingly smaller
geometries will be important for the Company to remain competitive. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes and, consequently, have suffered reduced yields, delays
in product deliveries and increased expense levels. Moreover, the Company is
dependent on its relationships with its foundries to migrate to smaller geometry
processes successfully. No assurance can be given that the Company's future
process migrations will be achieved without difficulties. The Company's
business, financial condition and results of operations could be materially and
adversely affected if any such transition is substantially delayed or
inefficiently implemented. See "Business--Manufacturing."
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
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<PAGE> 13
shipped products or delays or difficulties in collecting accounts receivable
could result in significant charges against income, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Cyclicality of the Semiconductor Industry. The Company provides
semiconductor devices to the broadband communications markets. The semiconductor
industry is highly cyclical and subject to rapid technological change and has
been subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production over-capacity. The semiconductor industry also periodically
experiences increased demand and production capacity constraints. As a result,
the Company may experience substantial period-to-period fluctuations in future
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Risks Associated with Expansion of International Business
Activities. Approximately 15.4% of the Company's total revenue in 1997 was
derived from sales to independent customers based outside the United States. In
addition, the Company often ships products to its domestic customers'
international manufacturing divisions. Further, the Company currently procures a
substantial portion of its manufacturing, assembly and test services from
suppliers located outside the United States. Accordingly, the Company is subject
to risks inherent in international operations, which include, but are not
limited to, the imposition of governmental controls, exposure to different legal
standards (particularly with respect to intellectual property), burdens of
complying with a variety of foreign laws, export license requirements, future
import and export restrictions, unexpected changes in regulatory requirements,
foreign technical standards, political, social and economic instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
operations, difficulties in collecting receivables and potentially adverse tax
consequences. Demand for the Company's products could also be adversely affected
by seasonality of international sales and economic conditions in the Company's
primary overseas markets. All of the Company's international sales to date have
been denominated in U.S. dollars. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make the Company's products
less competitive in international markets. There can be no assurance that the
risks associated with the Company's international operations will not materially
adversely affect the Company's business, financial condition and results of
operations in the future or require the Company to modify significantly its
current business practices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from the Company's other
development efforts, claims by the Company's customers or others against the
Company, or the loss of credibility with the Company's current and prospective
customers. Any such event could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Core
Technologies" and "--Manufacturing."
Management of Expanded Operations. The Company has experienced a period of
rapid growth and expansion which has placed, and continues to place, significant
strain on its resources. To accommodate this growth, the Company will be
required to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of its accounting
and other internal management systems, all of which may require substantial
management effort. There can be no assurance that such efforts
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<PAGE> 14
can be accomplished successfully. In addition, this growth, as well as the
Company's product development and selling, general and administrative
activities, has necessitated an increase in the number of the Company's
employees, resulting in increased responsibilities for the Company's management.
If the Company sustains its growth in the future, it will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its expanding employee base.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations. Any failure to improve the
Company's operational, financial and management information systems, or to hire,
train, motivate or manage its employees could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Government Regulation. The Federal Communications
Commission (the "FCC") has broad jurisdiction over each of the Company's target
markets. Although the Company's products are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, much of the equipment into which the Company's products are incorporated
is subject to direct government regulation. Accordingly, the effects of
regulation on the Company's customers or the industries in which they operate
may, in turn, adversely impact the Company's business, financial condition and
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries other than the United States. Changes
in current laws or regulations or the imposition of new laws and regulations in
the United States or elsewhere, could materially adversely affect the Company's
business, financial condition and results of operations.
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities. Although the Company has no current
agreements or negotiations underway with respect to any material acquisitions,
the Company may make acquisitions of businesses, products or technologies in the
future. However, there can be no assurance that the Company will be able to
locate suitable acquisition opportunities. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, large
one-time write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's results of operations or
the price of the Company's Class A Common Stock. Furthermore, acquisitions
entail numerous risks, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. Since the Company has not made any material acquisitions in the
past, no assurance can be given as to the ability of the Company to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Control by Directors, Executive Officers and Their Affiliates. Upon
consummation of this offering, the Company's directors and executive officers
will own approximately 57.7% of the outstanding Common Stock and 61.4% of the
total voting control of the Company (or 61.1% of the total voting control if the
Underwriters' over-allotment option is exercised in full). In particular, upon
consummation of this offering, the two founders of the Company, Dr. Henry
Nicholas and Dr. Henry Samueli, will own an aggregate of approximately 51.8% of
the outstanding Common Stock and 55.5% of the total voting control of the
Company (or 55.2% of the total voting control if the Underwriters'
over-allotment option is exercised in full). Accordingly, such persons will
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<PAGE> 15
have sufficient voting power to control the outcome of matters (including the
election of a majority of the Board of Directors, and any merger, consolidation
or sale of all or substantially all of the Company's assets) submitted to the
shareholders for approval and will also have control over the management and
affairs of the Company. As a result of such control, certain transactions may
not be possible without the approval of such shareholders. These transactions
include proxy contests, mergers involving the Company, tender offers, open
market purchase programs or other purchases of Class A Common Stock that could
give shareholders of the Company the opportunity to realize a premium over the
then prevailing market price for their shares of Class A Common Stock. See
"Principal and Selling Shareholders."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. As a
result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. The
Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products. The Company is in the process of upgrading its
software to address the year 2000 issue. Because a large portion of the
Company's software is obtained from its vendors on a non-custom basis, the
Company believes that upgrades for its commercial programs are currently
available. The Company currently estimates that the costs associated with the
year 2000 issue, and the consequences of incomplete or untimely resolution of
the year 2000 issue, will not have a material adverse effect on the results of
operations or financial position of the Company in any given year. The Company
also relies, directly and indirectly, on external systems of business
enterprises such as customers, suppliers, creditors, financial organizations,
and of governmental entities, both domestic and international, for accurate
exchange of data. Even if the internal systems of the Company are not materially
affected by the year 2000 issue, the Company could be affected through
disruptions in the operation of the enterprises with which the Company
interacts. Despite the Company's efforts to address the year 2000 impact on its
internal systems and business operations, there can be no assurance that such
impact will not result in a material disruption of its business or have a
material adverse effect on the Company's business, financial condition or
results of operations.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that the net proceeds of this offering, together with cash generated
from its operations and funds available under its credit facilities, will be
adequate to satisfy its capital requirements for at least the next twelve
months. The Company's future capital requirements will depend on many factors,
including, but not limited to, the levels at which the Company maintains
inventory, the market acceptance of the Company's products, the levels of
promotion and advertising required to launch such products and attain a
competitive position in the marketplace, the extent to which the Company invests
in new technology and improvements to its existing technology and the response
of competitors to the products based on the Company's technology. To the extent
that the funds generated by this offering, together with 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, including purchasers of the Class A Common Stock in this offering,
would be reduced. Such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
No Prior Market; Stock Price Volatility. Prior to this offering, there has
been no public market for the Company's Common Stock. Consequently, the initial
public offering price will be determined by negotiations among the Company, the
Selling Shareholders and the representatives of the Underwriters based upon
factors that may not be indicative of future market performance. There can be no
assurance that an active public
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market for the Class A Common Stock will develop or be sustained after this
offering or that the market price of the Class A Common Stock will not decline
below the initial public offering price. The trading price of the Company's
Class A Common Stock could be subject to wide fluctuations in response to
quarter to quarter variations in results of operations, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the semiconductor, telecommunications and data
communications equipment markets, changes in earnings estimates or buy/sell
recommendations by analysts, or other events or factors. In addition, the public
stock markets have experienced extreme price and trading volume volatility,
particularly in high technology sectors of the market. This volatility has
significantly affected the market prices of securities of many technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Class A Common Stock. See "Underwriters."
Broad Management Discretion in Use of Proceeds. While the Company expects
to use the net proceeds of this offering for general corporate purposes, the
Company has not yet identified specific uses for such net proceeds, except that
the Company intends to pay approximately $2.5 million to its senior lender to
repay in full its term loan. Accordingly, the Company's management will retain
broad discretion as to the allocation of the net proceeds of this offering.
There can be no assurance that the proceeds will be utilized in a manner that
the shareholders deem optimal, or that the proceeds can or will be invested to
yield a significant return. See "Use of Proceeds."
Potential Effect of Anti-Takeover Provisions. The Company's Articles of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. In addition, the Company has outstanding Class B
Common Stock, which entitles each holder to ten votes per share on all matters
presented for a shareholder vote. The Board of Directors also has the authority
to fix the rights and preferences of shares of the Company's Preferred Stock and
to issue such shares without a shareholder vote. It is possible that the
provisions in the Company's Articles of Incorporation and Bylaws, the existence
of super voting rights held by insiders and the ability of the Board of
Directors to issue Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action by the
shareholders, may discourage bids for the Company's Class A Common Stock at a
premium over the market price of the Class A Common Stock and may adversely
affect the market price of the Class A Common Stock and the voting and other
rights of the holders of Class A Common Stock. See "Description of Capital
Stock."
Dilution. Purchasers of the Class A Common Stock in this offering will
suffer an immediate and substantial dilution of $9.48 per share in the net
tangible book value of the Common Stock from the initial public offering price.
Moreover, to the extent outstanding options or warrants to purchase the
Company's Common Stock are exercised in the future, there will be further
dilution. See "Dilution."
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market after this offering could adversely affect the
market price of the Class A Common Stock. Upon completion of this offering, the
Company will have 4,000,000 shares of Class A Common Stock and 39,205,077 shares
of Class B Common Stock outstanding. Of this amount, the 3,500,000 shares of
Class A Common Stock offered hereby will be available for immediate sale in the
public market as of the date of the Prospectus. 39,205,077 additional shares of
Class B Common Stock are "restricted securities" as defined in Rule 144
promulgated under the Securities Act, and will be available for sale, subject to
compliance with the holding period, volume limitations and other restrictions of
Rule 144. Holders of approximately 37,805,442 of such shares are subject to a
180 day lockup period (unless such lockup obligation is waived earlier by Morgan
Stanley & Co. Incorporated in its sole discretion). The holder of 500,000 shares
of Class A Common Stock is subject to a one-year lock-up period. In addition,
the holders of 30,627,267 shares of Class B Common Stock are entitled to certain
rights with respect to registration of such shares for sale in the public
market. The Company also intends to file a registration statement covering the
sale of shares of Class A Common Stock reserved for issuance under its stock
benefit plans. See "Principal and Selling Shareholders," "Shares Eligible for
Future Sale" and "Underwriters."
14
<PAGE> 17
SALE OF SHARES TO CISCO SYSTEMS
Cisco Systems has exercised its option to purchase 500,000 shares of Class
A Common Stock concurrent with this offering at a price per share equal to the
initial public offering price, net of underwriting discounts and commissions
(the "Net Price"). Such option was granted to Cisco Systems in connection with a
development agreement entered into between the Company and Cisco Systems
effective September 1996. See "Certain Transactions--Development Agreement with
Cisco Systems."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Class A Common Stock offered by the Company hereby, assuming an initial public
offering price of $11.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the sale of 500,000 shares of Class A Common Stock to Cisco Systems
at the Net Price, are estimated to be $32,347,500 ($35,672,250 if the
Underwriters' over-allotment option is exercised in full). The primary purposes
of this offering are to obtain additional equity capital, create a public market
for the Company's Class A Common Stock, facilitate future access by the Company
to public equity markets and provide increased visibility for the Company in the
marketplace. The Company intends to use up to $2.5 million of the net proceeds
of this offering to repay outstanding advances under the Company's Loan and
Security Agreement with Silicon Valley Bank ("SVB"). This term loan matures in
June 2000 and bears interest at SVB's prime rate as announced from time to time
plus 0.5%. See Note 3 of Notes to Financial Statements. The proceeds from the
term loan were used for general working capital requirements. The balance of the
net 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. Pending such uses,
the Company intends to invest its net proceeds of this offering in short-term,
investment-grade, interest-bearing securities. Management of the Company will
have broad discretion concerning the allocation and use of all of the net
proceeds of the offering to be received by the Company. The Company may use a
portion of the net proceeds of this offering for the acquisition of businesses,
products and technologies that are complementary to those of the Company. As of
the date of this Prospectus, the Company has not engaged in any agreements or
negotiations regarding any material acquisition.
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholders.
DIVIDEND POLICY
The Company has never paid cash dividends on shares of its capital stock.
The Company currently intends to retain any future earnings for use in its
business and does not anticipate paying cash dividends in the future.
Furthermore, the term loan with SVB currently prohibits the payment of cash
dividends without the prior consent of SVB.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect
the automatic conversion of all outstanding shares of Preferred Stock into an
aggregate of 8,453,517 shares of Class B Common Stock upon consummation of this
offering, and (iii) on a pro forma as adjusted basis to give effect to the sale
of 2,750,000 shares of Class A Common Stock by the Company in this offering at
an assumed initial public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 500,000 shares of Class A Common Stock
by the Company to Cisco Systems at the Net Price.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion(2)..................... $ 1,595 $ 1,595 $ 95
------- ------- -------
Shareholders' equity:
Preferred Stock, $.0001 par value; 10,000,000 shares
authorized; 3,567,839 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma and
pro forma as adjusted.................................. 28,617 -- --
Class A Common Stock, $.0001 par value; 200,000,000 shares
authorized; no shares issued and outstanding, actual
and pro forma; 4,000,000 shares issued and outstanding,
pro forma as adjusted.................................. -- -- --
Class B Common Stock, $.0001 par value; 100,000,000 shares
authorized; 31,501,560 shares issued and outstanding,
actual; 39,995,077 shares issued and outstanding, pro
forma; 39,205,077 shares issued and outstanding, pro
forma as adjusted...................................... 3 4 4
Additional paid-in capital................................ 7,126 35,742 68,090
Notes receivable from employees........................... (3,362) (3,362) (3,362)
Deferred compensation..................................... (1,090) (1,090) (1,090)
Retained earnings......................................... 2,098 2,098 2,098
------- ------- -------
Total shareholders' equity................................ 33,392 33,392 65,740
------- ------- -------
Total capitalization.............................. $34,987 $34,987 $65,835
======= ======= =======
</TABLE>
- ------------
(1) Based on shares outstanding as of December 31, 1997. Excludes (i) 5,401,432
shares of Class B Common Stock issuable upon exercise of options outstanding
at December 31, 1997 at a weighted average exercise price of $2.12 per share
and (ii) 11,463,911 shares of Common Stock reserved for issuance under the
Company's employee benefit plans. See Notes 1, 5 and 9 of Notes to Financial
Statements.
(2) See Note 3 of Notes to Financial Statements.
16
<PAGE> 19
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
approximately $4,775,000, or $0.15 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the conversion of all outstanding Preferred Stock into an
aggregate of 8,453,517 shares of Class B Common Stock, the pro forma net
tangible book value of the Company as of December 31, 1997 would have been
$33,392,000 or $0.84 per share of Common Stock. After giving effect to the sale
of the 2,750,000 shares of Class A Common Stock offered by the Company hereby at
an assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 500,000 shares of Class A Common Stock
to Cisco Systems at the Net Price, the pro forma net tangible book value of the
Company, as adjusted, at December 31, 1997 would have been $65,740,000 or $1.52
per share of Common Stock. This amount represents an immediate increase in such
net tangible book value of $0.69 per share to existing shareholders and an
immediate dilution of $9.48 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........ $ 11.00
Pro forma net tangible book value at December 31,
1997.............................................. $ 0.84
Increase attributable to Cisco Systems............... 0.11
Increase attributable to new investors............... 0.57
--------
Adjusted pro forma net tangible book value after this
offering and the sale of shares to Cisco Systems..... 1.52
--------
Dilution per share to new investors.................... $ 9.48
========
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price per share paid by
existing shareholders and to be paid by Cisco Systems and purchasers of the
shares offered by the Company hereby (assuming an initial public offering price
$11.00 per share before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)... 39,955,077 92.5% $35,746,000 50.3% $ 0.89
Cisco Systems.............. 500,000 1.2 5,115,000 7.2 10.23
New investors.............. 2,750,000 6.3 30,250,000 42.5 11.00
---------- ----- ----------- -----
Total............ 43,205,077 100.0% $71,111,000 100.0%
========== ===== =========== =====
</TABLE>
- ------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by existing shareholders to 39,205,077 or 90.7% (or 39,005,077
or 89.6% if the Underwriters' over-allotment option is exercised in full),
and will increase the number of shares held by new investors to 3,500,000 or
8.1% (or 4,025,000 or 9.2% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
As of December 31, 1997, options to purchase 5,401,432 shares of Class B
Common Stock were outstanding at a weighted average exercise price of $2.12 per
share. The computations in the foregoing tables assume no exercise of these
options. If all of these options were exercised, the dilution per share to new
investors would be decreased to $9.41. See "Management--Employee Benefit Plans"
and Note 5 of Notes to Financial Statements.
17
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
the Prospectus. The balance sheet data as of December 31, 1996 and 1997 and the
statement of operations data for the years ended December 31, 1995, 1996 and
1997 have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statement of operations data for the year ended December
31, 1994 have been derived from audited financial statements of the Company not
included herein. The balance sheet data as of December 31, 1993 and the
statement of the Company operations data for the year ended December 31, 1993
have been derived from unaudited financial statements not included herein, which
unaudited financial statements were prepared by management of the Company on the
same basis as the audited financial statements included elsewhere herein and, in
the opinion of the Company, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue........................... $ -- $1,554 $4,317 $18,981 $31,668
Development revenue....................... 1,138 2,082 1,790 2,389 5,287
------ ------ ------ ------- -------
Total revenue............................... 1,138 3,636 6,107 21,370 36,955
Cost of revenue............................. -- 707 1,398 7,860 14,926
------ ------ ------ ------- -------
Gross profit................................ 1,138 2,929 4,709 13,510 22,029
Operating expense:
Research and development.................. 875 1,746 2,687 5,662 16,204
Selling, general and administrative....... 252 944 2,135 3,546 8,063
------ ------ ------ ------- -------
Total operating expense..................... 1,127 2,690 4,822 9,208 24,267
------ ------ ------ ------- -------
Income (loss) from operations............... 11 239 (113) 4,302 (2,238)
Interest and other income, net.............. 12 41 120 213 290
Net loss on sale of investments............. (8) (42) -- -- --
------ ------ ------ ------- -------
Income (loss) before income taxes........... 15 238 7 4,515 (1,948)
Provision (benefit) for income taxes........ 3 1 3 1,499 (775)
------ ------ ------ ------- -------
Net income (loss)........................... $ 12 $ 237 $ 4 $ 3,016 $(1,173)
====== ====== ====== ======= =======
Basic earnings (loss) per share(1).......... $ .00 $ .01 $ .00 $ .12 $ (.04)
====== ====== ====== ======= =======
Diluted earnings (loss) per share(1)........ $ .00 $ .01 $ .00 $ .09 $ (.04)
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 49 $ 100 $1,990 $ 4,657 $22,116
Working capital.............................. (223) 1,958 2,247 5,529 26,262
Total assets................................. 473 3,144 4,509 14,367 45,244
Long-term debt, including current portion.... 61 85 49 216 2,693
Convertible preferred stock.................. -- 2,161 3,150 6,084 28,617
Total shareholders' equity................... 24 2,474 3,475 9,770 33,392
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those projected in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors," "Business" and elsewhere
in this Prospectus. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The Company is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed ICs for some of the most significant broadband communications markets
including cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial wireless, and xDSL. From the Company's inception in 1991 through
1994, it was primarily engaged in product development and the establishment of
strategic customer and foundry relationships. During this period, the Company
generated the majority of its total revenue from development work performed for
key customers. The Company began shipping its products in 1994, and subsequently
the Company's total revenue has grown predominately through sales of its
semiconductor products. The Company intends to continue to enter into
development contracts with key customers, but expects development revenue will
constitute a decreasing percentage of its total revenue. The Company also
generates a small percentage of its product revenue from sales of its system
level reference designs.
The Company recognizes product revenue at the time of shipment. Provision
is concurrently made for estimated product returns, which have been immaterial
prior to the fourth quarter of 1997. The Company's products typically carry a
one year warranty. In the fourth quarter of 1997, the Company experienced
product returns in excess of $500,000 due to packaging defects. Such defects
were caused by one of the Company's assemblers, which reimbursed the Company for
such expenses.
Development revenue is recognized when earned. Approximately 15.4% of the
Company's total revenue in 1997 was derived from independent customers located
outside of the United States. All of the Company's revenue to date has been
denominated in U.S. dollars. See Note 8 of Notes to Financial Statements.
From time to time, the Company's key customers have placed large orders
causing quarterly revenue to fluctuate significantly, which fluctuations are
likely to continue in the future. For example, in the fourth quarter of 1997,
sales of the Company's networking products increased to approximately $7.6
million from $759,000 in the previous quarter. More than half of this increase
was attributable to sales to a single customer. Sales to the Company's largest
five customers (including sales to their respective manufacturing
subcontractors) accounted for 61.7% and 67.7% of the Company's total revenue for
1997 and 1996, respectively. The Company expects that these five customers will
continue to account for a significant portion of the Company's total revenue for
1998. See "Risk Factors--Customer Concentration" and "Business--Customers and
Strategic Relationships."
Various factors have in the past affected and may continue in the future to
affect the Company's gross margin, including, but not limited to, the Company's
product mix, the position of the Company's products in their respective life
cycles and the mix of the Company's product revenue and development revenue. For
example, newly-introduced products generally have higher average selling prices
and gross margins, both of which typically decline over product life cycles due
to competitive pressures and volume pricing agreements. The Company's gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors. See "--Quarterly Results of Operations" and "Risk
Factors--Fluctuations in Results of Operations."
19
<PAGE> 22
The sales cycle for the test and evaluation of the Company's products can
range from three to six months or more, with an additional three to six months
or more before a customer commences volume production of equipment incorporating
the Company's products. Due to such lengthy sales cycles, the Company may
experience a delay between increasing expenses for research and development and
selling, general and administrative efforts, and the generation of corresponding
revenue, if any. Furthermore, in 1998, the Company intends to increase
significantly its investment in research and development, selling, general and
administrative functions and inventory as it expands its operations. The Company
anticipates that the rate of new orders may vary significantly from month to
month. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, and the Company's operating results for that quarter and, potentially,
future quarters would be materially and adversely affected. "See Risk
Factors--Fluctuations in Results of Operations" and "--Lengthy Sales Cycle."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue:
Product revenue........................................... 70.7% 88.8% 85.7%
Development revenue....................................... 29.3 11.2 14.3
----- ----- -----
Total revenue............................................... 100.0 100.0 100.0
Cost of revenue............................................. 22.9 36.8 40.4
----- ----- -----
Gross profit................................................ 77.1 63.2 59.6
Operating expense:
Research and development.................................. 44.0 26.5 43.9
Selling, general and administrative....................... 35.0 16.6 21.8
----- ----- -----
Total operating expense..................................... 79.0 43.1 65.7
----- ----- -----
Income (loss) from operations............................... (1.9) 20.1 (6.1)
Interest and other income, net.............................. 2.0 1.0 0.8
----- ----- -----
Income (loss) before income taxes........................... 0.1 21.1 (5.3)
Provision (benefit) for income taxes........................ -- 7.0 (2.1)
----- ----- -----
Net income (loss)........................................... 0.1% 14.1% (3.2)%
===== ===== =====
</TABLE>
Total Revenue. Total revenue consists of product revenue generated
principally by sales of the Company's semiconductor products and development
revenue generated under development contracts with the Company's customers.
Total revenue for 1997 was $37.0 million, an increase of $15.6 million or 72.9%
from 1996. Total revenue for 1996 was $21.4 million, an increase of $15.3
million or 249.9% from $6.1 million in 1995. In each year, the increase was
primarily due to the introduction of new products and to a higher volume of
shipments of existing products to manufacturers of cable set-top boxes and
networking customers selling Fast Ethernet hubs and switches. In particular, the
majority of the increase in total revenue in 1997 was derived from sales of new
products, including the Company's Fast Ethernet Quad transceivers for the high-
speed networking market and its QAM receivers for digital cable set-top boxes.
Gross Profit. Gross profit represents total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by the Company's independent foundries and costs associated
with assembly, test and quality assurance for those products, as well as costs
of personnel and equipment associated with contracted development work. Gross
profit for 1997 was $22.0 million or 59.6% of total revenue, an increase of $8.5
million or 63.1% from 1996. Gross profit in 1996 was $13.5 million or 63.2% of
total revenue, an increase of $8.8 million or 186.9% from $4.7 million or 77.1%
of total revenue in 1995. In each year, the increase in absolute dollars was
largely due to higher total revenue. Gross margin declined in
20
<PAGE> 23
1997 from 1996 primarily due to volume pricing concessions made in 1997 for
cable set-top box products. Gross margin declined in 1996 from 1995 largely due
to a decline in higher margin development revenue as a percentage of total
revenue in 1996. The Company anticipates that gross margin will continue to
decline in the near future as the Company shifts from introductory pricing for
early generation products to volume pricing and due to an anticipated shift
towards lower margin products.
Research and Development Expense. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, as well as related subcontracting costs. Research
and development expense for 1997 was $16.2 million or 43.9% of total revenue, an
increase of $10.5 million or 186.2% from 1996. Research and development expense
for 1996 was $5.7 million or 26.5% of total revenue, an increase of $3.0 million
or 110.7% from 1995 expense of $2.7 million or 44.0% of total revenue in 1995.
In each year, the increase in absolute dollars was primarily due to the addition
of personnel for the development of new products and the enhancement of existing
products, as well as payments to outside consultants where specific resources
were needed in the development process. Research and development expense in
absolute dollars increased at a fairly steady rate for each quarter between 1995
and 1997 after taking into consideration the $1.2 million of non-recurring
engineering expense paid to General Instrument in the third quarter of 1997. The
decline in research and development expense as a percentage of total revenue
reflects a significant increase in total revenue during that period. The Company
expects that research and development expense in absolute dollars will increase
in each year for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of employee related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for 1997 was $8.1 million or 21.8% of total revenue,
an increase of $4.5 million or 127.4% from 1996. Selling, general and
administrative expense for 1996 was $3.5 million or 16.6% of total revenue, an
increase of $1.4 million or 66.1% from $2.1 million or 35.0% of total revenue in
1995. In each year, the increase in absolute dollars principally reflected
higher personnel related costs resulting from a net increase in sales and
marketing personnel to address each of the Company's target markets. These
increases were also due in part to the hiring of senior level management and
administrative personnel and increased occupancy, legal and other professional
fees. The decline in selling, general and administrative expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period. As the Company's infrastructure expanded in 1997, selling, general and
administrative expense as a percentage of total revenue increased at a more
rapid rate than total revenue.
Deferred Compensation. In connection with the grant of certain stock
options to employees during 1997, the Company recorded aggregate deferred
compensation of approximately $1.1 million, representing the difference between
the deemed value of the Class B Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. Such amount is
presented as a reduction of shareholders' equity and amortized ratably over the
vesting period of the applicable options. Amortization of deferred compensation
recorded in 1997 was $66,000. The Company currently expects to record
amortization of deferred compensation of approximately $73,000 per quarter
through September 30, 2001.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and short-term investment
balances, less interest on the Company's term loan. Interest and other income,
net for 1997 was $290,000, an increase of $77,000 or 36.2% from 1996. Interest
and other income, net for 1996 was $213,000, an increase of $93,000 or 77.5%
from $120,000 in 1995. In each year, the increase was primarily due to interest
earned on higher levels of short-term investments and cash balances, partially
offset by interest expense incurred on higher average debt balances.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 40%, 33% and 43% for 1997, 1996 and 1995,
respectively. In each year, the difference between the Company's effective tax
rate and the federal statutory tax rate of 34% was primarily related to state
income taxes and research and development tax credits. The Company utilizes the
liability method of accounting for income taxes as set forth in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. See Note 2
of Notes to Financial Statements.
21
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the eight quarters through December 31, 1997. This information is
unaudited but, in the opinion of the Company's management, reflects all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................... $3,692 $4,565 $4,590 $6,134 $ 3,959 $ 4,210 $ 8,096 $15,403
Development revenue................... 347 442 1,000 600 1,072 1,185 1,159 1,871
------ ------ ------ ------ ------- ------- ------- -------
Total revenue........................... 4,039 5,007 5,590 6,734 5,031 5,395 9,255 17,274
Cost of revenue......................... 1,719 2,010 2,215 1,916 2,534 2,276 4,047 6,069
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............................ 2,320 2,997 3,375 4,818 2,497 3,119 5,208 11,205
Operating expense:
Research and development.............. 856 1,048 1,449 2,309 2,686 3,519 5,503 4,496
Selling, general and administrative... 578 817 1,041 1,110 1,142 1,399 2,670 2,852
------ ------ ------ ------ ------- ------- ------- -------
Total operating expense................. 1,434 1,865 2,490 3,419 3,828 4,918 8,173 7,348
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from operations........... 886 1,132 885 1,399 (1,331) (1,799) (2,965) 3,857
Interest and other income (expense),
net................................... 19 52 45 97 60 3 (41) 268
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes....... 905 1,184 930 1,496 (1,271) (1,796) (3,006) 4,125
Provision (benefit) for income taxes.... 300 393 309 497 (508) (718) (1,202) 1,653
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....................... $ 605 $ 791 $ 621 $ 999 $ (763) $(1,078) $(1,804) $ 2,472
====== ====== ====== ====== ======= ======= ======= =======
Basic earnings (loss) per share(1)...... $ 0.02 $ 0.03 $ 0.02 $ 0.04 $ (0.03) $ (0.04) $ (0.07) $ 0.09
====== ====== ====== ====== ======= ======= ======= =======
Diluted earnings (loss) per share(1).... $ 0.02 $ 0.02 $ 0.02 $ 0.03 $ (0.03) $ (0.04) $ (0.07) $ 0.06
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................... 91.4% 91.2% 82.1% 91.1% 78.7% 78.0% 87.5% 89.2%
Development revenue................... 8.6 8.8 17.9 8.9 21.3 22.0 12.5 10.8
------ ------ ------ ------ ------- ------- ------- -------
Total revenue........................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue......................... 42.6 40.2 39.6 28.5 50.4 42.2 43.7 35.1
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............................ 57.4 59.8 60.4 71.5 49.6 57.8 56.3 64.9
Operating expense:
Research and development.............. 21.2 20.9 26.0 34.3 53.4 65.2 59.5 26.0
Selling, general and administrative... 14.3 16.3 18.6 16.4 22.7 25.9 28.8 16.6
------ ------ ------ ------ ------- ------- ------- -------
Total operating expense................. 35.5 37.2 44.6 50.7 76.1 91.1 88.3 42.6
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from operations........... 21.9 22.6 15.8 20.8 (26.5) (33.3) (32.0) 22.3
Interest and other income (expense),
net................................... 0.5 1.0 0.8 1.4 1.2 -- (0.5) 1.6
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes....... 22.4 23.6 16.6 22.2 (25.3) (33.3) (32.5) 23.9
Provision (benefit) for income taxes.... 7.4 7.8 5.5 7.4 (10.1) (13.3) (13.0) 9.6
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....................... 15.0% 15.8% 11.1% 14.8% (15.2)% (20.0)% (19.5)% 14.3%
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
Total Revenue. Quarterly revenue increased throughout 1996 as a result of
the introduction of new products and higher unit shipments of the Company's
existing products in the cable set-top box, cable modem and high-speed
networking markets and generally reflected higher revenue from development
programs. The
22
<PAGE> 25
decrease in total revenue from $6.7 million in the fourth quarter of 1996 to
$5.0 million in the first quarter of 1997 was primarily due to a reduction of
unit shipments of 100Base-T4 high-speed networking products and pricing
concessions to a major customer for cable set-top boxes. The increase in total
revenue to $9.3 million in the third quarter of 1997 largely resulted from the
introduction of new products and increased unit shipments of existing cable
set-top box and cable modem products. The increase in total revenue to $17.3
million in the fourth quarter of 1997 was primarily due to the first significant
volume shipments of the Company's 100Base-TX high-speed networking products, as
well as $2.5 million of revenue from a take or pay contract with a significant
customer.
Gross Profit. As a percentage of total revenue, gross profit increased to
71.5% in fourth quarter 1996 as a result of a favorable product mix and a
significant increase in the volume of product shipments over the previous
quarters, which allowed fixed manufacturing costs to be spread over a larger
product base. In the first quarter of 1997, gross profit decreased to 49.6% of
total revenue as a result of an unfavorable product mix and pricing concessions
to a major customer for cable set-top boxes. Gross profit increased to 64.9% of
total revenue in the fourth quarter of 1997 as a result of volume shipments of
high-speed networking products and a significant increase in the volume of
product shipments generally.
Operating Expense. Research and development expense increased in absolute
dollars through the third quarter of 1997 to facilitate the expansion of
introduction of new products by the Company. Research and development expense in
the third quarter of 1997 included a substantial non-recurring engineering
expense, which consisted of approximately $1.2 million paid to General
Instrument for engineering support related to the Company's MPEG technology and,
as a result, research and development expense in the fourth quarter of 1997 was
lower than in the prior quarter. Selling, general and administrative expense has
also increased in absolute dollars as the Company has expanded its
infrastructure to accommodate the Company's expanding operations. In the third
and fourth quarters of 1997, the Company also incurred significant legal
expenses in conjunction with pending litigation and the negotiation of large
customer contracts. See "Business--Litigation."
The Company's quarterly results of operations have fluctuated significantly
in the past and may continue to fluctuate in the future based on a number of
factors, not all of which are in the Company's control. In particular, the
Company's results of operations have fluctuated in the past due to, among other
things, competitive pressures on selling prices; the volume of product sales;
the timing and cancellation of significant customer orders; lengthy sales
cycles; pricing concessions on volume sales; fluctuations in manufacturing
yields; changes in product mix; intellectual property disputes; the Company's
ability to develop, introduce and market new products and technologies on a
timely basis; introduction of products and technologies by the Company's
competitors; market acceptance of the Company's and its customers' products; and
the amount and timing of recognition of development revenue. The Company's
results of operations may also fluctuate in the future based on a number of
factors, including, but not limited to those listed above, as well as general
business conditions in the semiconductor industry and the broadband
communications markets; availability of foundry capacity and raw materials; the
quality of the Company's products; the timing of investments in research and
development; the Company's ability to expand and implement its sales and
marketing programs; the level of orders received that can be shipped in a
quarter; currency fluctuations; and general economic conditions. As a result of
the foregoing factors, the Company believes period to period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of private sales of equity securities and cash generated by
operations. At December 31, 1997, the Company had $26.3 million in working
capital and $22.1 million in cash and cash equivalents. The Company's operating
activities used cash in the amount of $2.6 million in 1997, and generated cash
in the amount of $3.2 million and $1.1 million in 1996 and 1995, respectively.
Cash used in operating activities in 1997 was primarily attributable to a
net loss, growth in accounts receivable and inventory and a decrease in income
taxes payable, which more than offset growth in accounts
23
<PAGE> 26
payable and the non-cash impact of depreciation and amortization. Cash provided
by operating activities in 1996 was primarily attributable to net income and
growth in accounts payable and income taxes payable, which more than offset
growth in accounts receivable. Cash provided by operating activities in 1995 was
primarily attributable to a decrease in accounts receivable, growth in accounts
payable, and the non-cash impact of depreciation and amortization.
The Company's investing activities used cash of $7.1 million in 1997, $3.7
million in 1996 and $116,000 in 1995, primarily for the purchase of capital
equipment. During 1998, the Company may use up to approximately $15.0 million to
purchase additional capital equipment to support its expanding operations. The
Company may finance these purchases from the proceeds of this offering, existing
cash, cash generated from its operations, borrowings under its credit
facilities, or a combination thereof. Cash provided by financing activities was
$27.1 million in 1997, $3.2 million in 1996 and $949,000 in 1995, primarily from
the sale of convertible preferred stock and, in 1997, the establishment of a
revolving credit facility and term loan.
In March 1995, the Company entered into a Loan and Security Agreement with
SVB which, as amended, provides for a $3.0 million term loan and a $3.0 million
revolving credit facility. This agreement also includes a $500,000 letter of
credit, provided that sufficient credit is available under the two facilities.
The availability of funds under the revolving credit facility is based on
eligible accounts receivable balances. At December 31, 1997, $2.5 million was
outstanding under the term loan and no amounts were outstanding under the
revolving credit facility or the letter of credit. The term loan matures in June
2000 and bears interest at SVB's prime rate plus 0.5%. The Company intends to
use a portion of the proceeds of this offering to repay the term loan.
Borrowings under the revolving credit facility and the term loan are secured by
substantially all of the Company's assets. The revolving credit facility and the
term loan contain significant financial and operating covenants, including
limitations on the ability of the Company to incur additional indebtedness and
restrictions on, among other things, the Company's ability to pay cash dividends
or take certain other corporate actions. See Note 3 of Notes to Financial
Statements.
As of December 31, 1997, the Company had no material commitments other than
commitments of approximately $2.1 million for the purchase of test equipment.
See Notes 3 and 4 of Notes to Financial Statements.
The Company believes that the net proceeds of this offering, together with
cash generated from its operations and funds available under its credit
facilities, will be sufficient to meet its capital requirements for at least the
next twelve months. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's products, the levels
of promotion and advertising required to launch such products and attain a
competitive position in the marketplace, volume pricing concessions, the extent
to which the Company invests in new technology and improvements to its existing
technology and the response of competitors to the products based on the
Company's technology. To the extent that the funds generated by this offering,
together with existing resources and future earnings, are insufficient to fund
the Company's future activities, the Company may need to raise additional funds
through public or private financing. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its shareholders. See "Use of Proceeds."
24
<PAGE> 27
BUSINESS
Broadcom is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed ICs for some of the most significant broadband communications markets,
including the markets for cable set-top boxes, cable modems, high-speed
networking, DBS and terrestrial wireless, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing circuits that implement complex communications algorithms, surrounded
by precision high-speed analog-to-digital and digital-to-analog converter
circuits. The Company's products integrate comprehensive systems solutions into
single chips or chip-sets, thereby eliminating costly external components,
reducing board space, simplifying the customer's manufacturing process, lowering
the customer's system costs and enabling higher performance. Customers currently
shipping broadband communications equipment incorporating the Company's products
include 3Com, Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and
consumer demand for high-speed access to multimedia information and
entertainment content, consisting of data, voice and video. This demand is being
driven by the growth of desirable information and entertainment content
accessible via the Internet and cable and data networks. Demand has also been
stimulated by the improved availability and affordability of access devices such
as set-top boxes, PCs and other consumer appliances. Computer processor speeds
over the last decade have increased dramatically and, as a result, significantly
improved the rate at which multimedia data can be processed. However, the rate
at which such data can be transmitted has not kept pace. This disparity has
become known as the "bandwidth gap" and has frustrated users and challenged
solutions providers in a number of markets.
The bandwidth gap has emerged in a variety of commercial and consumer
applications. Businesses are constantly seeking new ways to access and analyze
larger amounts of information to improve the quality of management decisions and
enhance customer and employee communications. Many businesses have deployed
local area networks ("LANs") which are principally based upon 10Base-T Ethernet
technology. Dell'Oro Group estimates that the worldwide installed base of
10Base-T Ethernet hub and switch ports was 184.3 million in 1997. The
proliferation of LAN usage within corporate networks has resulted in volumes of
electronic traffic that are rapidly outgrowing the ability of legacy LAN
technologies and infrastructures to readily transmit the traffic and has
exacerbated the bandwidth gap for businesses. As such, much of the installed
base of Ethernet ports will require upgrading to higher speeds as the
infrastructure continues to grow.
Individuals are also increasingly using their home PCs to access the
Internet and to telecommute. Consumer online usage is expected to increase
rapidly with the availability and market acceptance of low cost PCs (sub $1,000)
and the increased availability and improving quality of content. In addition,
the increasing number of next generation television set-top boxes, PCs and other
devices that feature integrated Internet access will contribute to the surging
demand for rapid access to information. International Data Corporation ("IDC")
estimates that between 1995 and 1997 the number of devices that had access to
the Internet grew from approximately 15.4 million to 64.4 million and
anticipates that the number of such devices will grow to over 232 million by
2000. Similarly, the available content on the Internet is also increasing
rapidly. IDC estimates that the number of web pages for Internet devices to
access grew from approximately 18.1 million in 1995 to approximately 250.5
million in 1997, and is expected to increase to 2.3 billion by 2000. As the
volume of traffic continues to grow, consumers are becoming increasingly
frustrated with the low performance of "last mile" remote access connections
that are typically limited to data rates of only 28.8 kbps to 56 kbps and
require several minutes or hours to download large multimedia intensive files.
25
<PAGE> 28
Business and residential PC users have not been the only ones affected by
the bandwidth gap. Cable television subscribers seeking more entertainment
options including Internet access, and cable service providers seeking higher
revenue services beyond basic cable, have generally been frustrated by the
limited amount of programming that can be provided over the existing cable
infrastructure, as well as the inability of that infrastructure to deliver
interactive multimedia content. With the advent of digital television and
digital compression technologies such as MPEG, the conversion from analog
transmission to digital transmission enables a dramatic increase in the number
of channels available to the subscriber. In late 1996, cable television service
providers began offering expanded services, including digital programming
through new digital set-top boxes as well as high-speed Internet access and
telecommuting through cable modems. Dataquest estimates that approximately 1.5
million digital cable set-top boxes were shipped worldwide in 1997, and that
approximately 12.5 million will be shipped in 2001. In order to satisfy customer
demand for increased programming and other entertainment options, and to
capitalize on the revenue growth opportunities associated with these expanded
services, service providers will have to deploy a new generation of digital set-
top boxes and headend equipment.
Much of the bandwidth gap is a result of the existing last mile
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper twisted pair wiring, coaxial cable
and wireless communication connections. Copper twisted pair wiring was
originally intended for the transmission of narrowband analog voice while
coaxial cable was intended for delivery of one-way analog video signals. These
analog infrastructures have numerous impairments, including limited spectrum,
noise, dispersion and multipath reflections, which make broadband transmission
(greater than 1.5 Mbps) of digital data very difficult.
Because it is impractical to replace these communications infrastructures
with entirely new infrastructures that are optimized for digital data
transmission, the fundamental challenge for service and equipment providers is
to enable broadband communications over existing infrastructures. These
providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace. The principal segments
that define this marketplace include:
Cable Set-Top Boxes. Cable operators are deploying digital cable set-top
boxes to facilitate high-speed digital communications between a
subscriber's television and the cable network. Cable set-top boxes are
currently able to support downstream (to the subscriber) transmission
speeds of up to 56 Mbps, thereby enabling several hundred MPEG-2 compressed
digital television channels to be delivered to the consumer. Additional
applications for digital cable set-top boxes are expected to include
Internet access, interactive television and high definition television
("HDTV").
Cable Modems. Cable modems connect PCs to the cable network and can
achieve downstream transmission speeds of up to 56 Mbps and upstream (to
the network) transmission speeds of up to 20 Mbps. These transmission rates
are almost 1,000 times faster than the fastest analog telephone modems (56
kbps downstream and 28.8 kbps upstream) currently available. The high
speeds of cable modems should enable an entirely new generation of
multimedia-rich content over the Internet and make telecommuting a
productive and effective means for work at home.
High-Speed Networking. As communications bottlenecks have appeared in
corporate LANs, technologies such as Fast Ethernet (100 Mbps) and Gigabit
Ethernet (1,000 Mbps) are being employed to replace older technologies such
as 10Base-T Ethernet (10 Mbps) and Token Ring (16 Mbps). As desktops
continue to migrate to Fast Ethernet, the Company believes that Gigabit
Ethernet will emerge as the predominant backbone and server communications
technology, and will eventually migrate to the desktop.
Direct Broadcast Satellite and Terrestrial Wireless. DBS is the primary
alternative to cable for providing digital television programming and can
be used to transmit information at speeds of up to 90 Mbps. DBS broadcasts
video and audio data from satellites directly to set-top boxes in the home
via dish antennas. Other broadband wireless technologies include (i)
terrestrial digital broadcast television, the upgrade of analog broadcast
television to digital which enables the delivery of HDTV, (ii) Multichannel
Multipoint Distribution Systems ("MMDS"), which use microwave frequencies
(2.5 GHz) to transmit digital video
26
<PAGE> 29
signals over terrestrial wireless channels to digital set-top boxes, and
(iii) Local Multipoint Distribution Systems ("LMDS"), which use even higher
microwave frequencies (28 to 38 GHz) to transmit video and data to digital
set-top boxes over a shorter distance via a cellular-like network.
Digital Subscriber Lines (xDSL). xDSL represents a family of newer
broadband technologies which use the copper twisted pair wiring in the
existing telephone local loops to deliver transmission speeds ranging from
128 kbps to 52 Mbps depending on the distance between the central office
and the subscriber. These data rates are expected to enable a wide range of
new services including high-speed Internet access and digital television.
The desire by equipment manufacturers and service providers to develop
these markets has created the need for new generations of semiconductor
solutions. Broadband transmission of digital information over existing
infrastructures requires highly integrated mixed-signal semiconductor solutions
to perform critical systems functions such as complex signal processing and
converting digital data to and from analog signals. Broadband communications
equipment requires substantially higher levels of system performance in terms of
both speed and precision that typically cannot be adequately addressed by
traditional IC solutions developed for low speed transmission applications.
Moreover, solutions that are based on multiple discrete analog and digital ICs
generally cannot achieve the cost-effectiveness, performance and reliability
required by the broadband communications markets. These requirements are best
addressed by new generations of highly integrated mixed-signal devices that
combine complex analog and digital functions with high performance digital
signal processing ("DSP") circuitry that can be manufactured in high volumes
using cost-effective semiconductor technologies.
THE BROADCOM SOLUTION
The Company is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. Using its proprietary communications algorithms and
protocols, unique DSP architectures, silicon compiler design methodologies and
full-custom, mixed-signal circuit design techniques, the Company has designed
and developed ICs for some of the most significant broadband communications
markets, which include cable set-top boxes, cable modems, high-speed networking,
DBS and terrestrial wireless, and xDSL. The Company's expertise in
communications algorithms and its detailed understanding of transmission media
enables the implementation of complex systems incorporating signal processing
functions such as digital demodulation, adaptive equalization and error
correction in a single device. In addition, the Company's comprehensive
knowledge of advanced communications protocols enables the Company to design
protocol processing ICs that seamlessly interface its mixed-signal transceiver
ICs with higher-level networking layers for communications applications.
Finally, the Company's systems level communications expertise has enabled it to
establish a viable long-term product roadmap that permits its customers to
achieve rapid time-to-market over multiple generations of equipment.
All of the Company's products are implemented in low-cost,
highly-manufacturable CMOS technologies which enable the integration of
comprehensive systems solutions into single-chip ICs, thereby eliminating costly
external components, reducing board space, simplifying the customer's equipment
manufacturing process, lowering customer system costs and enabling higher
performance. The Company's proprietary technology and advanced design
methodologies result in a high likelihood of first pass silicon success,
accelerated time-to-market, and ease of porting to multiple foundries. The
Company's design methodologies also allow it to rapidly and cost-effectively
incorporate proprietary features or intellectual property from its key strategic
customers into products that are exclusive to those customers, thereby enabling
them to differentiate their products. Customers currently shipping broadband
communications equipment that incorporates the Company's products include 3Com,
Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
27
<PAGE> 30
STRATEGY
The Company's objective is to be the leading provider of highly integrated
silicon solutions to the worldwide broadband communications markets. Key
elements of the Company's strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. The
Company's strategy is to identify rapidly growing broadband digital
communications markets and to develop highly integrated silicon solutions
for applications in those markets. The Company's initial products were
designed for the cable set-top box, cable modem and high-speed networking
markets, which require high-performance, feature-rich and highly integrated
semiconductor solutions. The Company has recently leveraged the core
technologies it developed for these markets to design and develop
semiconductor solutions for the DBS and terrestrial wireless, and xDSL
markets, which it believes have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. The
Company has established strategic relationships with key equipment
manufacturers, including 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta, which are market and
technology leaders within the broadband communications markets. While the
Company designs products that can be used by multiple customers, the
Company's proprietary design methodologies allow it to rapidly design
custom features based on either the Company's or its customers'
intellectual property. This capability enables the Company's customers to
improve their time-to-market, differentiate their products and address new
market opportunities. The Company believes that these strategic
relationships are essential to its continued growth and to further
development and acceptance of its technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. The Company
is aggressively building on its technology leadership by investing
substantial development resources in all of its key technology areas. The
Company works closely with leading communications systems companies to
develop new and enhanced algorithms that address next generation broadband
market opportunities. The Company's strategy is to continue to implement
these algorithms in highly integrated, full-custom ICs using DSP
architectures that optimize performance, efficiency and cost. During
product development, the Company leverages its silicon compiler
technologies and proprietary circuit libraries and layouts of high-
performance analog and digital IC building blocks, thereby accelerating
time-to-market for new products. The silicon solutions for each of these
markets benefit from the same underlying core technologies, providing the
Company significant leverage in its ability to address a diverse set of end
user markets with a relatively focused investment in research and
development.
Drive Industry Standards. The Company participates actively in the
formulation of critical standards for the broadband communications markets.
The Company believes such participation provides it with several
significant benefits, including (i) accelerating and expanding the
development of markets for the Company's products by encouraging all market
participants to focus their efforts on developing products compliant with
the standards, and (ii) providing valuable insight and relationships, which
assist the Company in being early to market with products incorporating the
standards. The Company has established strategic relationships with major
networking equipment and cable modem vendors and was a principal
participant in formulating and writing the Multimedia Cable Network Systems
Data Over Cable Services Interface Specifications ("MCNS/DOCSIS") for the
end-to-end delivery of high-speed data services over hybrid fiber coax
("HFC") networks, which facilitate the development of interoperable
networking products, including cable modems. The Company's active
participation in this process enabled it to be the first provider of
transmission and protocol ICs to equipment manufacturers developing
MCNS/DOCSIS compliant products. The Company is also currently participating
in the formulation and evolution of standards for Fast Ethernet, Gigabit
Ethernet and xDSL systems.
Focus on Highly Integrated Solutions. The Company believes its analog
mixed-signal technology and advanced design methodologies enable it to
offer silicon solutions that are more highly integrated than competitive
alternatives. High levels of integration and aggressive product development
roadmaps allow the Company to enhance the value-added benefits of its
products in its customers' systems. Integration, which reduces the total
component count in the system, provides many fundamental benefits for the
28
<PAGE> 31
Company's customers, including streamlining their production flow,
improving yields, saving board space, shortening time-to-market, reducing
production costs and improving performance and reliability. These benefits
have often enabled the Company's customers to achieve faster and broader
penetration within their respective markets.
MARKETS
The increased demand for the high-speed delivery of data and video services
is forcing equipment vendors and service providers to race to provide solutions
to close the bandwidth gap. The Company's silicon solutions address the
bandwidth gap in multiple communications markets. While the communication
infrastructures of these markets are very different, the Company has been able
to leverage many of its core technologies across multiple markets in various
product implementations. Many industry analysts project high growth rates for
the markets served by the Company's products even though such markets are at
different phases in their evolution. High-speed networking is an established
market that is currently going through an upgrade; cable and DBS set-top boxes
are, on a global basis, in an early growth phase, and the cable modem and xDSL
markets are emerging.
Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity in
television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide picture quality that is comparable to DBS, cable service providers began
offering digital programming in 1996 through new digital cable set-top boxes.
Kagan estimates that in 1997 only 600,000 of the 65 million cable subscribing
homes in the United States had installed digital cable set-top boxes. Dataquest
estimates that approximately 1.5 million digital cable set-top boxes were
shipped worldwide in 1997, and that approximately 12.5 million will be shipped
in 2001. General Instrument, in particular, recently announced its agreement to
provide leading multiple cable system operators with an aggregate of 15 million
digital cable set-top boxes over the next three to five years. The Company
believes a new generation of digital cable set-top boxes will be introduced in
the near future to facilitate television Internet access and to support HDTV.
Cable Modems
Cable television operators are upgrading their coaxial cable trunk systems
(backbones) to fiber to create HFC networks. These upgraded networks are able to
support two-way communications, high-speed Internet access and telecommuting
through the use of a cable modem. High-speed Internet access services, including
@Home, RoadRunner and HighwayOne (the predecessor to MediaOne), were introduced
in 1996 in conjunction with several MSOs. Kagan estimates that high-speed
Internet service was available to 11.4 million homes in 1997 and predicts that
this service will be extended to 45.7 million homes in the United States by
2001. In-Stat estimates that the number of cable modems shipped worldwide will
increase from 171,000 units in 1997 to 10.0 million by 2001. The cable
industry's adoption of the MCNS/DOCSIS specifications in 1997 for the end-to-end
delivery of high-speed data services is anticipated to enable interoperability
between different manufacturers' cable modems and headend equipment across
different cable networks. This interoperability should facilitate the creation
of a retail market for cable modems.
High-Speed Networking
The high-speed networking equipment market is undergoing a rapid transition
from 10Base-T Ethernet to Fast Ethernet (100Base-T) transceivers, with Gigabit
Ethernet (1000Base-T) anticipated to be introduced in 1998. Dell'Oro Group
estimates that the number of 100Base-T repeater/hub ports sold worldwide is
expected to grow from 5.6 million in 1997 to 23 million by 2001, and the number
of switch ports is expected to grow from 5.2 million to 64 million during the
same period. IDC predicts the number of 100Base-T network interface cards
("NIC") sold worldwide will grow from 11.5 million units in 1997 to 39 million
units by 2001. As the networking market transitions to Fast Ethernet and Gigabit
Ethernet, it is anticipated that a significant
29
<PAGE> 32
portion of the installed base of 10Base-T repeater/hub ports, switches and NICs
will be upgraded to the faster technologies.
Direct Broadcast Satellite and Terrestrial Wireless
Due to the ability of DBS to provide television programming where no cable
infrastructure is in place, it is expected that the U.S. market for DBS may
eventually be surpassed by the international market where the cable
infrastructure is generally less extensive. Dataquest estimates that
approximately 6.2 million digital satellite set-top boxes were shipped worldwide
in 1997 and that approximately 17.4 million will be shipped in 2001. Other
wireless offerings such as MMDS and LMDS are currently being tested in limited
deployments. These new networks, which are able to provide programming in areas
that do not have cable, will also require a digital set-top box. Beginning in
1999, the FCC has mandated that the top four affiliated television stations
begin digital broadcasting and has required that all current television
broadcasters and their affiliates return the old analog spectrum by the year
2006 for FCC auction. ABC, CBS and NBC have announced that they will begin
transmitting HDTV in the fall of 1998. This conversion to digital broadcasting
will also require new set-top boxes and television receivers.
Digital Subscriber Lines (xDSL)
xDSL is a family of technologies for high-speed data transmission over
existing copper twisted pair wiring in the telephone local loops. Several
Regional Bell Operating Companies ("RBOCs"), including Southwestern Bell, Bell
Atlantic, Bell South and U S West, and several international telephone
companies, including Bell Canada, British Telecom and Deutsche Telekom, have
conducted field trials, deployed or announced plans to conduct trials or deploy
xDSL services in select markets for high-speed Internet access and
telecommuting. Certain Internet service providers are also embracing xDSL
technologies. In January 1998, Compaq, Intel, Microsoft and several RBOCs
announced they would coordinate their efforts to create an interoperable xDSL
standard for 1.5 Mbps transmission. Dataquest Incorporated estimates that the
number of xDSL modems manufactured worldwide will increase from 385,000 units in
1997 to 4.9 million units in 2001. Asymmetric DSL ("ADSL"), which can provide
transmission at speeds of up to 8 Mbps, and Very-high-bit-rate DSL ("VDSL"),
which can provide transmission at speeds of up to 52 Mbps, represent the xDSL
technologies that have recently attracted the most interest from the service
providers. VDSL modems are still in the development stage, but represent a
promising medium for broadband communications.
30
<PAGE> 33
CUSTOMERS AND STRATEGIC RELATIONSHIPS
The Company sells its products to leading manufacturers of data
communications equipment in each of the Company's target markets. Equipment
manufacturers from which the Company recognized aggregate revenue of at least
$100,000 in 1997 included, among others:
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------
MARKETS CUSTOMERS
---------------------------------------------------------------------------------------
Cable Set-Top Boxes General Instrument
Scientific-Atlanta
---------------------------------------------------------------------------------------
Cable Modems 3Com
Bay Networks
Cisco Systems
Com21
Ericsson
General Instrument
Hybrid Networks
Motorola
Scientific-Atlanta
---------------------------------------------------------------------------------------
High-Speed Networking 3Com
Accton Technology
Adaptec
Alantec/Fore
Bay Networks
Cabletron
Cisco Systems
Digital Equipment Corporation
D-Link
Standard Microsystems
---------------------------------------------------------------------------------------
DBS and Terrestrial Wireless General Instrument
Italtel
Samsung
---------------------------------------------------------------------------------------
xDSL General Instrument (Next Level Communications)
Nortel
---------------------------------------------------------------------------------------
</TABLE>
As part of its business strategy, the Company periodically establishes
strategic relationships with certain key customers. In September 1997, the
Company entered into a Development, Supply and License Agreement with General
Instrument, pursuant to which the Company agreed to develop ICs for General
Instrument's digital cable set-top boxes and supply such ICs to General
Instrument for four years. Pursuant to this agreement, General Instrument agreed
to purchase from the Company 100% of its requirements for components containing
transmission, communications or video decompression (MPEG) functions for its
digital cable set-top box subscriber products in the first year of this
agreement, subject to the Company's good faith efforts to maintain its
competitive position with respect to such components. The percentage of its
product requirements that General Instrument must purchase from the Company
declines each year over the term of the agreement to 45% of General Instrument's
requirements in 2001. General Instrument also granted the Company a
royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG and
related technology.
From time to time, the Company has also entered into development agreements
with 3Com, Cisco Systems, Nortel and DirecTV, pursuant to which the Company has
worked closely with these customers to co-develop products for these customers.
A small number of customers have historically accounted for a substantial
portion of the Company's total revenue. Sales to General Instrument and 3Com
(including sales to their respective manufacturing subcontractors) accounted for
approximately 31.9% and 14.6%, respectively, of the Company's total revenue in
1997.
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<PAGE> 34
Sales to General Instrument and 3Com (including sales to their respective
manufacturing subcontractors) represented approximately 25.2% and 24.9%,
respectively, of the Company's total revenue in the fourth quarter of 1997.
Sales to the Company's five largest customers represented approximately 61.7%
and 71.5% of the Company's total revenue in 1997 and the fourth quarter of 1997,
respectively. The loss of any key customer could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors--Customer Concentration."
PRODUCTS
The Company's five primary product lines encompass: (i) high-speed
communications and MPEG video/audio devices for the cable television set-top box
market, (ii) high-speed data transmission and media access control devices for
the cable modem market, (iii) 10/100Base-T Ethernet transceivers and repeater
controllers for the high-speed networking market, (iv) receivers and MPEG
video/audio devices for the DBS and terrestrial wireless markets, and (v)
broadband twisted pair transceivers for the xDSL market. The Company also
develops and sells reference platforms designed around its IC products that
represent application examples for incorporation into its customers' equipment.
By providing these reference platforms, the Company can assist its customers in
achieving easier and faster transitions from initial prototype designs through
final production releases. These reference platforms significantly enhance the
customer's confidence that the Company's products will meet their market
requirements and product introduction schedules.
Cable Set-Top Boxes
The Company offers a suite of silicon solutions for digital cable set-top
boxes and cable headends which encompass the high-speed transmission, reception
and decompression of digital audio and video multimedia signals. These products
are also applicable to the terrestrial wireless markets. The Company's QAMLink
transmission products integrate the core functionality required of advanced
communications transceiver devices including modulators and demodulators for
quadrature amplitude modulation ("QAM") and quadrature phase shift keying
("QPSK"), adaptive equalization, forward error correction and high-speed
analog-to-digital and digital-to-analog conversion. These products have been
designed to meet both international and North American communications standards
for cable networks. Several of these products also incorporate additional
set-top box functionality such as cable network protocol processing for
entitlement and tiered programming access and input/output device control.
The Company plans to introduce its first single-chip MPEG multimedia device
in the first half of 1998 that incorporates all of the processing capabilities
necessary to decode and decompress an MPEG-2 digital television data stream and
subsequently reconstruct an analog studio quality television signal that can be
displayed on a standard television receiver. This IC will integrate MPEG-2 video
decompression, Dolby AC3 audio decompression, MPEG-2 transport processing,
on-screen display, analog video reconstruction and other necessary MPEG related
functions required to deliver video and audio to a television. The combination
of the Company's transmission and MPEG silicon solutions will provide all of the
significant silicon functionality of most existing digital cable set-top boxes
with the exception of the security functions, the general purpose microprocessor
and memory.
Cable Modems
The Company has leveraged its core transmission technologies that were
developed for the cable set-top box market and adapted them to the development
of a family of products that enable digital data to be delivered over an HFC
cable network at downstream speeds of up to 56 Mbps and upstream speeds of up to
20 Mbps. These products incorporate similar modulation, adaptive equalization
and error correction technologies as the set-top box products and thereby
achieve robust and reliable transmission, especially in the noisy and
interference prone upstream direction. The cable modem product family also
includes both a headend and a subscriber media access controller ("MAC") device
that controls the upstream and downstream data flow over the HFC network. The
Company's cable modem products have been designed to conform to the MCNS/DOCSIS
specifications. The combination of the transmission and MAC ICs provides a
complete end-to-end silicon platform for the Company's customers to build
headend systems and subscriber modems.
32
<PAGE> 35
The Company's principal products for cable set-top boxes and cable modems
include the following:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ----------------------------------------------------------------------------------------------
BCM3033 Universal headend QAM modulator. Fourth Quarter 1996
- ----------------------------------------------------------------------------------------------
BCM3036 Upstream QPSK/QAM burst transmitter. Fourth Quarter 1996
- ----------------------------------------------------------------------------------------------
BCM3037 Upstream QPSK/QAM burst transmitter for MCNS/DOCSIS applica- Third Quarter 1997
tions.
- ----------------------------------------------------------------------------------------------
BCM3115 Downstream QAM receiver for North American set-top box Fourth Quarter 1995
applications. Includes QPSK control channel receiver.
- ----------------------------------------------------------------------------------------------
BCM3116 Downstream QAM receiver for North American set-top box and Fourth Quarter 1997
MCNS/DOCSIS applications.
- ----------------------------------------------------------------------------------------------
BCM3118 Downstream QAM receiver for international applications. Fourth Quarter 1996
- ----------------------------------------------------------------------------------------------
BCM3120 Universal set-top box transceiver for both North American First Half 1998*
and international applications. Includes downstream QAM
receiver, QPSK control channel receiver, peripheral device
interfaces and upstream QPSK/QAM transmitter.
- ----------------------------------------------------------------------------------------------
BCM3137 Headend QPSK/QAM burst receiver for MCNS/DOCSIS First Half 1998*
applications.
- ----------------------------------------------------------------------------------------------
BCM3210 Headend MCNS/DOCSIS MAC for downstream and upstream traffic First Half 1998*
flow. Includes data encryption and decryption.
- ----------------------------------------------------------------------------------------------
BCM3220 Subscriber MCNS/DOCSIS cable modem MAC for downstream and Fourth Quarter 1997
upstream traffic flow. Includes data encryption and
decryption.
- ----------------------------------------------------------------------------------------------
BCM3900 Downstream QAM receiver for North American set-top box Fourth Quarter 1996
applications. Includes QPSK control channel receiver and
peripheral device interfaces.
- ----------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video First Half 1998*
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- ----------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
High-Speed Networking
The Company's networking products provide the core functionality required
for building Fast Ethernet (100Base-T) adapter cards, repeater/hubs and
switches. The Company's transceivers, which are the basic elements required for
implementing a high-speed Ethernet port, incorporate the Company's embedded DSP
algorithms combined with high-speed analog-to-digital and digital-to-analog
converters to create a highly-integrated mixed-signal solution. In addition to
the DSP based architecture, features of the 100Base-T transceiver products
include low power and low voltage operation (3.3 volts) making them suitable for
personal computer motherboards and CardBus/PCMCIA adapter cards applications for
laptop PCs. The Company also offers a variety of repeater controller and
management devices, thereby providing a broad suite of Fast Ethernet products to
meet the demands of the adapter card, repeater/hub, switch and router markets.
33
<PAGE> 36
The Company's principal networking products include the following:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ----------------------------------------------------------------------------------------------
BCM5012 100Base-T managed repeater controller. Incorporates 13 Fourth Quarter 1995
repeater ports, MAC port, microprocessor port, and a port
for stacking hubs. Interfaces to external transceivers.
- ----------------------------------------------------------------------------------------------
BCM5020 100Base-T network management processor. Incorporates Second Quarter 1997
statistical analysis of network traffic to enable control of
repeating hubs by network management software.
- ----------------------------------------------------------------------------------------------
BCM5100 Single-channel 10/100Base-T4 transceiver. Incorporates a Third Quarter 1996
10Base-T and 100Base-T4 transceiver for Category 3, 4 and 5
twisted pair cabling.
- ----------------------------------------------------------------------------------------------
BCM5201 Single-channel 10/100Base-TX transceiver. Incorporates a First Quarter 1998
10Base-T and 100Base-TX transceiver for Category 5 twisted
pair cabling.
- ----------------------------------------------------------------------------------------------
BCM5203 Quad 100Base-TX transceiver. Contains four 100Base-TX Fast Second Quarter 1997
Ethernet transceivers.
- ----------------------------------------------------------------------------------------------
BCM5205 Quad 100Base-TX integrated repeater. Incorporates four Second Quarter 1997
100Base-TX transceivers, MII port, repeater controller and
repeater management functions.
- ----------------------------------------------------------------------------------------------
BCM5208 Quad 10/100Base-T transceiver. Integrates four Third Quarter 1997
10Base-T/100Base-TX transceivers. 100Base-FX is also
supported at each port through an external fiber optic
transceiver.
- ----------------------------------------------------------------------------------------------
</TABLE>
Direct Broadcast Satellite and Terrestrial Wireless
The Company's products for the DBS market are designed to meet the needs of
satellite set-top box providers and incorporate the functionality necessary to
receive, demodulate and decode a broadband QPSK signal, including advanced
forward error correction. These products can be programmed to accommodate
satellite standards such as DSS (DirecTV), DVB (international) and Primestar,
and can operate at any data rate from 2 to 90 Mbps. The Company's MPEG system on
a chip (BCM7010) will employ the MPEG-2 standard, which enables it be used in
either cable set-top boxes or DBS set-top boxes.
The Company's principal DBS products include the following:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- -----------------------------------------------------------------------------------------
BCM4200 QPSK receiver for DSS (DirecTV) and DVB (international) First Quarter 1997
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -----------------------------------------------------------------------------------------
BCM4201 Universal QPSK receiver for DSS, DVB and Primestar First Half 1998*
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -----------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video First Half 1998*
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- -----------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
Digital Subscriber Lines (xDSL)
The Company's product for xDSL transmission incorporates the functionality
to enable data to be transmitted and received at high speed over the existing
copper twisted pair wiring in the telephone local loops. The Company believes it
currently offers the industry's only single-chip silicon solution that can be
configured to operate at data rates spanning ISDN (128 kbps) to VDSL (52 Mbps),
thereby accommodating the needs of a wide variety of xDSL market segments in a
single IC. This solution offers network operators the ability to initially
install high-speed ADSL data services on the existing local loop plant and
subsequently offer higher
34
<PAGE> 37
data rates for video related services on an upgraded plant. The Company has
leveraged its mixed-signal and digital signal processing design expertise
developed for cable television and wireless products to develop the following
QAM transceiver product for the xDSL market.
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- -----------------------------------------------------------------------------------------
BCM6010 Scalable xDSL QAM transceiver for twisted-pair Third Quarter 1997
applications. Incorporates ATM Utopia interface and
programmable rate transmitter and receiver. Can
accommodate data rates from 128 kbps to 52 Mbps in either
a symmetric or asymmetric configuration.
- -----------------------------------------------------------------------------------------
</TABLE>
The Company's future success will depend upon its ability to develop new
silicon solutions for existing and new markets, introduce such products in a
timely and cost-effective manner, and achieve design wins. There can be no
assurance that the Company will be able to develop or introduce new products in
a timely and cost-effective manner or in sufficient quantities to meet customer
demand or that such products will satisfy customer requirements or achieve
market acceptance. See "Risk Factors--Dependence on Development of New
Products."
CORE TECHNOLOGIES
The Company believes that one of its key competitive advantages is its
broad base of core technologies encompassing the complete design space from
systems to silicon. The Company has developed and continues to build on four
primary technology foundations: (i) proprietary communications systems
algorithms and protocols, (ii) advanced digital signal processing hardware
architectures, (iii) silicon compiler design methodologies and advanced cell
library development for both standard cell and full-custom IC design, and (iv)
high performance analog and mixed-signal circuit design using industry standard
CMOS processes.
Communications Algorithms and Protocols
The Company was an innovator in integrating a high-speed QAM digital
demodulator with an adaptive equalizer and forward error correction into a
single IC. In addition, the Company has continued to make system advances in the
areas of FEC, QAM and QPSK modulation and demodulation, variable rate
transmitters and receivers, digital clock and carrier recovery techniques and
adaptive equalization algorithms. The Company has also designed and deployed
fully integrated, DSP-based transceiver chips for Fast Ethernet LAN
applications. The Company has developed a compact core transceiver module that
employs high performance 125 MBaud digital equalizers and high-speed
analog-to-digital converters and clock recovery circuits. This core module has
been used in a number of the Company's single channel and quad transceiver
products for Fast Ethernet (100Base-TX) applications including NICs, switches
and repeaters. This DSP transceiver expertise is now being extended and applied
to the development of a Gigabit copper twisted pair transceiver. In addition to
data transmission algorithms, the Company has developed significant expertise in
networking protocols which it has applied to the development of MAC devices for
cable modems and interactive set-top box applications as well as repeater
controllers for Fast Ethernet applications. The Company has introduced the
industry's first MCNS/DOCSIS MAC ICs for cable modems.
Digital Signal Processing Hardware Architectures
The Company has developed cost-effective, single-chip broadband
transceivers by mapping complex communications algorithms into low-complexity
DSP hardware architectures. The Company is a technology leader in the area of
low-complexity, high-performance "silicon embedded algorithms" whereby the
communications algorithms are individually implemented in full-custom logic
rather than the conventional approach of running all of the algorithms in
firmware on a single general purpose programmable DSP architecture. This design
approach is combined with silicon compiler based design methodologies which
generate the custom logic functions. This results in ICs that are less complex
and less expensive to manufacture than conventional implementations. One
particular area where the Company has developed leading DSP technology is in
digital adaptive equalization. Equalizers are key components in all of the
Company's transceiver products. The
35
<PAGE> 38
Company believes that the speed and density of its equalizers help to
distinguish its products in the marketplace. The Company is currently developing
a single-chip, mixed-signal adaptive DSP transceiver for Gigabit Ethernet, which
the Company expects will perform in excess of 100 billion operations per second.
Silicon Compiler Design Methodologies
The Company has developed proprietary silicon compiler technologies that
enable designers to implement ICs using a high level of abstraction yet produce
area-efficient IC layouts and achieve short design cycles. The cells that are
synthesized from this process can be individually optimized for functionality,
performance, topology, electrical characteristics and manufacturing process
portability. The Company has designed compilers for standard cells, arithmetic
processing, memories and analog building blocks. In addition, the Company has
created compilers to manage the implementation of higher level functions such as
digital filters, adaptive equalizers, modulators, demodulators, numerically
controlled oscillators and direct digital frequency synthesizers. The Company
believes that these silicon compiler capabilities accelerate time-to-market by
improving designer productivity and by providing functional blocks that can be
reused in multiple products. In addition, these compiler techniques
significantly reduce errors, thereby frequently resulting in first pass silicon
success. The Company has also developed, and continues to improve and expand its
own proprietary set of circuit and layout libraries for both standard-cell and
full-custom ICs.
Full-Custom Analog and Mixed-Signal Circuit Design
The Company has developed significant analog and mixed-signal circuit
expertise. The Company has achieved a level of circuit performance in standard
CMOS process technologies that is normally associated with more expensive
special purpose silicon fabrication technologies. All of the Company's
high-performance analog building blocks are implemented in the same low-cost
CMOS technologies as the digital IC circuitry. In addition to achieving very
high performance, the Company's analog-to-digital and digital-to-analog
converters are among the lowest die area devices in the industry, which makes
them well suited for integration into high volume mixed-signal products. The
Company's 10-bit, 50 Msample/sec analog-to-digital converter received the Best
Paper Award of the 1997 International Solid State Circuits Conference, a
prestigious semiconductor conference. This converter was integrated onto the
same die as the Company's broadband QAM receiver, which the Company believes was
the first such mixed-signal QAM receiver product ever demonstrated (BCM3118).
The Company has also developed very high-speed 125 MHz analog-to-digital
converters for Fast Ethernet transceivers and 200 MHz digital-to-analog
converters for cable modulator applications. All of these data converters were
designed for integration with high-speed digital circuits in conventional CMOS
technologies. The Company has also evaluated experimental IC designs and is in
the development phase of producing other analog functions such as low noise RF
amplifiers, linear high-gain RF amplifiers, RF mixers, frequency synthesizers,
RF phase-locked loops and other building blocks to enable higher levels of
system integration.
RESEARCH AND DEVELOPMENT
The Company has assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline.
As of February 28, 1998, approximately 80% of the Company's 166 research and
development engineers had advanced degrees, including 36 with Ph.D.s. These
engineers are involved in advancing the Company's core technologies, as well as
applying these core technologies to the Company's product development activities
in the areas of broadband communications and digital video technology for cable
set-top boxes, cable modems, high-speed networking, DBS and terrestrial
wireless, and xDSL. The transmission solutions for each of these markets benefit
from the same underlying core technologies, which enables the Company to
leverage its ability to address various broadband communications markets with a
relatively focused investment in research and development.
The Company believes that the achievement of higher levels of integration
and the introduction of new products in its target markets is essential to its
growth. As a result, the Company plans to increase research and development
staffing levels in 1998. Research and development expense for 1997, 1996 and
1995 was
36
<PAGE> 39
approximately $16.2 million, $5.7 million and $2.7 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING
Wafer Fabrication
The Company's products are manufactured in standard CMOS processes, which
permit the Company to engage independent silicon foundries to fabricate its ICs.
By subcontracting its manufacturing requirements, the Company is able to focus
its resources on design and test applications where the Company believes it has
greater competitive advantages and to eliminate the high cost of owning and
operating a semiconductor wafer fabrication facility.
The Company's Operations and Quality Engineering Group closely manages the
interface between manufacturing and design engineering. While the Company's
design methodology typically creates smaller than average die for a given
function, it also generates full-custom IC designs. As a result, the Company is
responsible for the complete functional and parametric performance testing of
its devices, including quality. The Company employs a fully staffed operations
and quality organization similar to a vertically integrated semiconductor
manufacturer. The Company arranges with its foundries to have online
work-in-progress control, making the manufacturing subcontracting process
transparent to the Company's customers.
The Company's key silicon foundries are TSMC in Taiwan and Chartered in
Singapore. While the Company currently uses two independent foundries, few of
the Company's components are manufactured at both foundries at any given time.
Any inability of one of its foundries to provide the necessary capacity or
output could result in significant production delays and could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company currently believes it has adequate capacity to
support its current sales levels, the Company continues to work with its
existing foundries to obtain more production capacity and it intends to qualify
new foundries to provide additional production capacity. There can be no
assurance that adequate foundry capacity will be available on acceptable terms,
if at all. See "Risk Factors--Dependence on Independent Foundries."
The Company's foundries currently manufacture all of the Company's products
except for the Company's current MPEG chip, which is presently produced on an
interim basis by another manufacturer. The Company is presently redesigning this
chip to be manufactured at its foundries. The Company has licensed the MPEG
technology from General Instrument and expects to introduce the next generation
of this chip (BCM7010) beginning in the first half of 1998. See "Risk
Factors--Dependence on Development of New Products."
The Company's devices are currently fabricated using CMOS process
technology with 0.5 micron, triple layer metal and 0.35 micron, quad layer metal
feature sizes. The Company continuously evaluates the benefits, on a product by
product basis, of migrating to a smaller geometry process technology in order to
reduce costs. The Company's experience to date with the migration of products to
smaller geometry processes has been favorable, but there can be no assurance
that future process migration will be achieved without difficulty. Other
companies in the industry have experienced difficulty in effecting transitions
to new manufacturing processes and, consequently, have suffered reduced yields
or delays in product deliveries. The Company believes that the transition of its
products to smaller geometries will be important for the Company to remain
competitive. The Company's business, financial condition and results of
operations could be materially and adversely affected if any such transition is
substantially delayed or inefficiently implemented. See "Risk
Factors--Transition to Smaller Geometry Process Technologies."
Assembly and Test
Wafer probe testing is performed by one of the foundries or by the
Company's wafer probe test subcontractors. Following completion of the wafer
probe tests, the die are assembled into packages and the finished products are
tested by one of the Company's two subcontractors: ASAT in Hong Kong and STATS
in Singapore. While the Company has not experienced any material disruption in
supply from assembly subcontractors to date, there can be no assurance that
assembly problems will not occur in the future. See "Risk Factors--Dependence on
Third-Party Subcontractors for Assembly and Test."
37
<PAGE> 40
Quality Assurance
The data communications industry demands high-quality and reliability of
the semiconductors incorporated into their equipment. The Company focuses on
product reliability from the initial stage of the design cycle through each
specific design process, including layout and production test design. In
addition, the Company's designs are subjected to in-depth circuit simulation at
temperature, voltage and processing extremes before being committed to silicon.
The Company prequalifies each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. The Company also participates in
quality and reliability monitoring through each stage of the production cycle by
reviewing electrical and parametric data from its wafer foundry and assembly
subcontractors. The Company closely monitors wafer foundry production to ensure
consistent overall quality, reliability and yield levels. In cases where the
Company purchases wafers on a fixed cost basis, any improvement in yields can
reduce the Company's cost per IC.
As part of its total quality program, the Company plans to apply for ISO
9001 certification, a comprehensive International Standards Organization
specified quality system. The Company's objective is to exceed ISO 9001
requirements, especially in the areas of continuous improvements and customer
satisfaction. All of the Company's principal independent foundries and package
assembly facilities have achieved ISO 9000 certification.
SALES AND MARKETING
The Company's sales and marketing strategy is to achieve design wins with
technology leaders in each of the Company's targeted broadband communications
markets by, among other things, providing superior field application and
engineering support. The Company markets and sells its products in the United
States through a direct sales force, which has largely been established within
the last year, based out of four regional sales offices located in Irvine and
San Jose, California, Atlanta, Georgia and Garwood, New Jersey. Sales managers
are dedicated to principal customers to promote close cooperation and
communication. The Company also provides its customers with reference platform
designs, which enable its customers to achieve easier and faster transitions
from the initial prototype designs through final production releases and
significantly enhance the customer's confidence that the Company's products will
meet their market requirements and product introduction schedules.
The Company also markets and sells its products internationally through a
direct sales force based out of regional sales offices located in Singapore and
the Netherlands, as well as through a network of independent distributors and
representatives in France, Israel, Germany, Japan, Taiwan and Korea. The Company
selects these independent entities based on their ability to provide effective
field sales, marketing communications and technical support to the Company's
customers. All international sales to date have been denominated in U.S.
dollars.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. The Company
believes that the principal factors of competition for silicon providers to
these industries are product capabilities, level of integration, reliability,
price, time-to-market, system cost, intellectual property, customer support and
reputation. The Company believes it competes favorably with respect to each of
these factors.
The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial wireless, and xDSL, which competition
has resulted and may continue to result in declining average selling prices for
the Company's products. The Company currently competes in the cable set-top box
market with Rockwell, Philips, LSI Logic and VLSI Technologies for communication
devices and with SGS-THOMSON, LSI
38
<PAGE> 41
Logic and C-Cube in the MPEG segment. The Company expects other major
semiconductor manufacturers to enter the market as digital broadcast television
and other digital cable television markets become more established. A number of
companies, including LSI Logic, Rockwell and Toshiba, have announced that they
are developing and will 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, Level One, National Semiconductor and
AMD. The Company's principal competitors in the DBS market include LSI Logic,
Philips, SGS Thomson and VLSI Technologies. The Company's principal competitors
in the xDSL market include Analog Devices, Alcatel, Motorola and Globespan. The
Company also may face competition from suppliers of products based on new or
emerging technologies.
Many of the Company's competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than the Company. As a result, such competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the promotion and sale of their
products than the Company. Current and potential competitors have established or
may establish financial or strategic relationships among themselves or with
existing or potential customers, resellers or other third parties. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share. In addition, the Company's
competitors may in the future develop technologies which more effectively
address the transmission of digital information through existing analog
infrastructures at a lower cost. There can be no assurance that the Company will
be able to compete successfully against current or potential competitors, or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company's success and future revenue growth will depend, in part, on
its ability to protect its intellectual property. The Company relies primarily
on patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's intellectual property. The Company has been issued
two United States patents and has filed nine United States patent applications.
There can be no assurance that any patent will issue as a result of these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented, or that any right granted thereunder would provide
meaningful protection to the Company. The failure of any patents to provide
protection to the Company's technology would make it easier for the Company's
competitors to offer similar products. The Company also generally enters into
confidentiality agreements with its employees and strategic partners, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products, services
or technology without authorization, develop similar technology independently or
design around the Company's patents. In addition, effective copyright, trademark
and trade secret protection may be unavailable or limited in certain foreign
countries. Certain of the Company's customers have entered into agreements with
the Company pursuant to which such customers have the right to use the Company's
proprietary technology in the event the Company defaults in its contractual
obligations, including product supply obligations, and fails to cure the default
within a specified period of time. Moreover, the Company often incorporates the
intellectual property of its strategic customers into its designs, and the
Company has certain obligations with respect to the non-use and non-disclosure
of such intellectual property. There can be no assurance that the steps taken by
the Company to prevent misappropriation or infringement of the intellectual
property of the Company or its customers will be successful. Moreover,
litigation may be necessary in the future to enforce the intellectual property
rights of the Company or its customers, to protect the Company's trade secrets
or to determine the validity and scope of proprietary rights of others,
including its customers. Such litigation could result in substantial costs and
39
<PAGE> 42
diversion of the Company's resources and could have a material adverse affect on
the Company's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement of other parties' proprietary rights. The Company is currently
involved in litigation with STI concerning the Company's alleged infringement of
one of STI's patents. There can be no assurance that the Company will prevail in
this action, or that other actions alleging infringement by the Company of
third-party patents or invalidity of the patents held by the Company will not be
asserted or prosecuted against the Company, or that any assertions of
infringement or prosecutions seeking to establish the invalidity of Company-held
patents will not materially and adversely affect the Company's business,
financial condition and results of operations. Irrespective of the validity or
successful assertion of such claims, the Company would likely incur significant
costs and diversion of its resources with respect to the defense of such claims,
which could also have a material adverse effect on the Company's business,
financial condition and results of operations. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance that under
such circumstances a license would be available on commercially reasonable
terms, if at all. See "--Legal Proceedings."
EMPLOYEES
As of February 28, 1998, the Company had 238 full-time employees and 19
contract employees, including 172 employees engaged in research and development,
34 engaged in sales and marketing, 26 engaged in manufacturing operations and 25
engaged in general administration activities. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.
PROPERTIES
The Company leases three facilities in Irvine, California, which have
approximately 17,000 square feet, 26,300 square feet and 15,850 square feet
pursuant to three leases which expire in July 2000, December 1998 and February
1999, respectively. The Company also leases an additional 1,700 square feet in
Irvine, California on a month-to-month basis. These four facilities comprise the
Company's corporate headquarters and include the Company's administration, sales
and marketing, and research and development departments. The Company is
currently in negotiations to lease an additional 31,000 square feet in Irvine,
California to expand its corporate headquarters, and is seeking to lease
approximately 100,000 additional square feet. The Company believes that suitable
additional space will be available on commercially reasonable terms.
The Company also leases a 9,400 square foot facility in Atlanta, Georgia,
which houses the Company's Residential Broadband Business Unit. This lease
terminates in May 2002. In addition, the Company leases a 2,600 square foot
facility in San Jose, California on a month-to-month basis for the Company's
Digital Video Technology Group. The Company believes its current facilities,
together with its planned expansion, will be adequate through 1998.
LEGAL PROCEEDINGS
In December 1996, STI filed an action against the Company in the United
States District Court for the Northern District of California alleging that the
Company's BCM3036 upstream QPSK/QAM burst transmitter used in cable modems
infringed one of STI's patents (the " '352 Patent"). The complaint seeks an
injunction against the Company, 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. A claims construction hearing
in this
40
<PAGE> 43
case has been scheduled for April 1998. The Company has received an invalidity
opinion from outside counsel with respect to the '352 Patent, upon which the
Company is relying or may rely to support its defense to STI's allegation of
willful infringement.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. These
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging it "illegally pirated" Sarnoff's employees. The complaint seeks
to preliminarily and permanently enjoin the Company and the Former Employees
from utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their statutory and contractual duties of
confidentiality to Sarnoff by precluding them from working for six months in any
capacity relating to certain of the Company's programs. The Company has filed an
answer and is vigorously defending itself in this action. In May 1997, the Court
denied Sarnoff's request for a temporary restraining order. The Company
commenced its own lawsuit against Sarnoff in the Orange County Superior Court of
California alleging breach of contract, fraud, misappropriation of trade
secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. This action was removed
to the United States District Court, Central District of California and was
stayed pending resolution of the New Jersey action.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The complaint seeks to preliminarily and
permanently restrain the Company from employing a certain former employee of
RSSI and disclosing or utilizing any alleged RSSI trade secrets. The complaint
also seeks unspecified damages. The Company has reached a tentative settlement
with RSSI in this action, pursuant to which the Company has agreed not to hire
any employees from RSSI for 30 days following the consummation of this offering.
Because such settlement agreement has not yet been executed, there can be no
assurance that a final settlement will be reached on the foregoing terms, or at
all.
Any results of litigation are inherently uncertain, and there can be no
assurance that the Company will prevail in any of these lawsuits. Any suit or
proceeding involving the Company or its intellectual property could be costly,
could result in a diversion of management's efforts and could prohibit the
Company from marketing such technology without a license, which license may not
be available on acceptable terms, if at all. Any of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Intellectual Property" and "Risk Factors--Risks
Associated with Intellectual Property Protection."
41
<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding the executive
officers, directors and key employees of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D. .......... 38 Co-Chairman, President and Chief Executive Officer
Henry Samueli, Ph.D..................... 43 Co-Chairman, Vice President of Engineering and Chief
Technical Officer
William J. Ruehle....................... 55 Vice President, Chief Financial Officer and Secretary
Tim M. Lindenfelser..................... 37 Vice President of Marketing
Martin J. Colombatto.................... 39 Vice President and General Manager, Networking
Business Unit
Vahid Manian............................ 37 Vice President of Manufacturing Operations
Aurelio E. Fernandez.................... 43 Vice President of Worldwide Sales
Nariman Yousefi......................... 35 Director of Engineering, Networking Business Unit
Steve K. Tsubota........................ 39 Director of Cable-TV Business Unit
Charles P. Reames, Ph.D................. 40 Director of Cable and Satellite Systems
Myron S. Eichen(2)...................... 69 Director
Alan E. Ross(1)(2)...................... 63 Director
Werner F. Wolfen(1)..................... 67 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Henry T. Nicholas, III, co-founded the Company and has served as its
President, Chief Executive Officer and Co-Chairman since the Company's
inception. From 1988 through 1991, Dr. Nicholas was first a consultant and then
the Director of Microelectronics for PairGain Technologies, Inc. ("PairGain"), a
telecommunications equipment manufacturer, and was the founder of PairGain's
microelectronics organization. Prior to joining PairGain, Dr. Nicholas held
various senior management positions with TRW's Microelectronics Center between
1982 and 1989. Dr. Nicholas attended the United States Air Force Academy, and
received a B.S., M.S. and Ph.D. in Electrical Engineering from the University of
California, Los Angeles.
Henry Samueli co-founded the Company and has served as its Co-Chairman,
Vice President of Engineering and Chief Technical Officer since the Company's
inception. Since 1985, Dr. Samueli has also been a professor in the Electrical
Engineering Department at the University of California, Los Angeles, where he
supervises advanced research programs in broadband communications circuits and
has published more than 100 papers on the subject. Dr. Samueli was the Chief
Scientist and one of the founders of PairGain and he consulted for PairGain from
1988 to 1994. From 1980 until 1985, Dr. Samueli was employed in various
engineering management positions in the Electronics and Technology Division of
TRW. Dr. Samueli received a B.S., M.S. and Ph.D. in Electrical Engineering from
the University of California, Los Angeles.
William J. Ruehle has served as the Company's Vice President and Chief
Financial Officer since joining the Company in June 1997. Mr. Ruehle was
employed by SynOptics Communications, Inc. ("SynOptics") as Vice President and
Chief Financial Officer from 1987 until it merged with Wellfleet Communications
Incorporated ("Wellfleet") in 1994 that created Bay Networks, Inc. ("Bay
Networks"), a networking communications company. Following the merger, Mr.
Ruehle was promoted to Executive Vice President and served as Chief Financial
Officer of Bay Networks until January 1997. Mr. Ruehle received a B.A. in
Economics from Allegheny College and an M.B.A. from Harvard Business School.
Tim M. Lindenfelser has served as the Company's Vice President of Marketing
since joining the Company in February 1994. During the past four years until
December 1997, Mr. Lindenfelser also served as
42
<PAGE> 45
Vice President of Worldwide Sales. Prior to joining the Company, Mr.
Lindenfelser was employed by Brooktree Corporation, a semiconductor
manufacturer, from November 1988 until February 1994, where he was responsible
for all marketing and new business development for the Communications Strategic
Business Unit. Mr. Lindenfelser received a B.S.E.E. from the University of
Minnesota and an M.B.A. from the University of San Diego.
Martin J. Colombatto joined the Company in July 1996 as its Director of
Marketing for Broadband Access, and became the Vice President and General
Manager of the Networking Business Unit in December 1997. Prior to joining the
Company, Mr. Colombatto held various sales positions with LSI Logic Corp., a
semiconductor manufacturer, including Director, North American Sales
Communication Segment, from August 1995 to July 1996; Director, European Sales
Communication and Consumer Segment, from April 1992 to July 1995; and Regional
Sales Manager from August 1987 to June 1992. Mr. Colombatto received a B.S. from
the California Polytechnic University, Pomona.
Vahid Manian joined the Company in January 1996 as its Director of
Operations and became the Vice President of Manufacturing Operations in December
1997. Prior to that, Mr. Manian served as the Director of Operations at Silicon
Systems, Inc. from November 1983 to January 1996, where he led the
implementation, production ramp and qualification of advanced PRML-read channel
ICs. Mr. Manian received a B.S.E.E. and an M.B.A. from the University of
California, Irvine.
Aurelio E. Fernandez has served as the Vice President of Worldwide Sales
since joining the Company in December 1997. From November 1996 to December 1997,
Mr. Fernandez served as the Senior Vice President of Sales at Exar Corporation,
a semiconductor manufacturer. From November 1994 to November 1996, Mr. Fernandez
served as the Senior Vice President of Sales at ICWorks, Inc., a semiconductor
manufacturer. Prior to that, Mr. Fernandez served in a number of positions, most
recently as Vice President of Telecom Sales, at VLSI Technology, Inc., a
semiconductor manufacturer. Mr. Fernandez received a B.S.E.E. from the
University of Florida and an M.B.A. from Florida Atlantic University.
Nariman Yousefi joined the Company in March 1994 as the Director of the
Networking Business Unit. Prior to joining the Company, he served as an
Engineering Manager at Standard Microsystems Corporation, a networking equipment
manufacturer, from 1991 to 1994. From 1988 to 1991, he held various engineering
positions at Western Digital, a disk drive manufacturer, and from 1984 to 1988
he led mixed-signal chip development at Silicon Systems, a semiconductor
company. Mr. Yousefi received his B.S.E.E. from the University of California,
Davis and an M.S.E.E. from the University of Southern California.
Steve K. Tsubota joined the Company in March 1995 as its Director of the
Cable-TV Business Unit. Prior to joining the Company, Mr. Tsubota served as
Director of Product Marketing of Summit Design, Inc., an EDA company, from
February 1994 to February 1995. From February 1991 to January 1994, he served as
the Marketing Manager for the IC Group of Mentor Graphics Corporation, an EDA
company, and from June 1985 to March 1990, Mr. Tsubota held various marketing,
sales and engineering positions at Silicon Compiler Systems Corporation, an EDA
company. Mr. Tsubota received a B.S.E.E. and M.S.E.E. from the University of
California, Los Angeles.
Charles P. Reames joined the Company in June 1993 as its Director of Modem
Technology and most recently as the Director of Cable and Satellite Systems
since October 1995. Prior to joining the Company, Dr. Reames served in various
engineering positions in the Electronics and Technology Division of TRW from
June 1985 through June 1993. Dr. Reames received a B.S. in Engineering from the
California Institute of Technology and an M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
Myron S. Eichen has served as an advisor to the Board of Directors since
1994. Mr. Eichen has served as a director of the Company since February 1998.
Mr. Eichen is presently a director of Rokenbok Toy Company and has founded and
served as a director for a number of companies including Brooktree Corporation
(now a division of Rockwell International), a semiconductor manufacturer, and
Proxima Corporation, an equipment manufacturer.
Alan E. Ross has been a director of the Company since November 1995. Mr.
Ross is a Board member of several companies in the semiconductor industry,
including World Wide Semiconductor Manufacturing
43
<PAGE> 46
Corporation, Gambit Automated Design, Inc., Artest Inc., and ADC
Telecommunications, Inc. In addition, Mr. Ross served as President of Rockwell
Semiconductor Systems, Inc. from 1988 to 1996.
Werner F. Wolfen has been a director of the Company since July 1994, when
he joined the Board of Directors as the nominee of a group of investors. Mr.
Wolfen is a Senior Partner of the law firm of Irell & Manella LLP ("Irell &
Manella") and was Co-Chairman of the firm's Executive Committee from 1982 to
1992. Irell & Manella has represented the Company in several transactional and
litigation matters and currently represents the Company in certain litigation
and transactional matters. Mr. Wolfen received a J.D. from the University of
California Boalt Hall School of Law in 1953.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding the Company's
compensation policies and all forms of compensation to be provided to executive
officers and directors of the Company, including, among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1998 Plan.
The current members of the Compensation Committee are Messrs. Ross and Eichen.
Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company, including, among other things, the Company's internal audit and
control functions, the results and scope of the annual audit and other services
provided by the Company's independent auditors and the Company's compliance with
legal matters that have a significant impact on the Company's financial reports.
The Audit Committee also consults with the Company's management and the
Company's independent auditors prior to the presentation of financial statements
to shareholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent auditors. The current members of
the Audit Committee are Messrs. Ross and Wolfen.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive cash compensation for their service
as directors. Each nonemployee Director typically will receive an option to
purchase 15,000 shares of Class A Common Stock upon joining the Board of
Directors. Each incumbent director will be granted an option to purchase an
additional 3,000 shares of Class A Common Stock each year thereafter. See
"Management--Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Ross and Eichen. No interlocking relationship exists between any member
of the Company's Board of Directors or the Compensation Committee and any member
of the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
None of the Company's executive officers have employment agreements with
the Company. Accordingly, the employment of any such executive officer may be
terminated at any time at the discretion of the Board of Directors.
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<PAGE> 47
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1997 all
compensation received for services rendered to the Company in all capacities by
the Company's Chief Executive Officer and the only other executive officer of
the Company whose salary plus bonus exceeded $100,000 in 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY OPTIONS
---------------------------- ------------ ------------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D................................ $165,000(1) 375,000
Co-Chairman, President and
Chief Executive Officer
Henry Samueli, Ph.D. ....................................... 165,000(1) 375,000
Co-Chairman, Vice President of
Engineering and Chief Technical Officer
</TABLE>
- ------------
(1) Effective January 1, 1998, the annual salaries of Dr. Nicholas and Dr.
Samueli were each reduced to $110,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE
-------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED EXERCISE TERM(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED IN 1997 PER SHARE DATE 5% 10%
---- ----------- ---------------- ---------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D..................... 375,000(2) 7.2% $ 1.25(3) 06/22/07 $221,494 $630,348
Henry Samueli, Ph.D........ 375,000(2) 7.2 1.25(3) 06/22/07 221,494 630,348
</TABLE>
- ------------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission (the "Commission") and
do not represent the Company's estimate or projection of the future trading
prices of its Common Stock. There can be no assurance that any of the values
reflected in this table will be achieved. Actual gains, if any, on stock
option exercises are dependent on numerous factors, including the future
performance of the Company, overall conditions and the option holder's
continued employment with the Company throughout the entire vesting period
and option term, which factors are not reflected in this table.
(2) Options were granted on June 23, 1997 under the Company's Amended and
Restated 1994 Stock Option Plan and are immediately exercisable. All of the
shares of Common Stock that are issuable upon exercise of unvested options
are subject to repurchase by the Company. The shares underlying the options
vest and the Company's repurchase right lapses in 48 equal monthly
installments commencing January 1, 1998.
(3) The exercise price is equal to 110% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
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<PAGE> 48
AGGREGATED OPTIONS EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Executive Officers concerning unexercised options held as of December 31, 1997.
No options were exercised during the last fiscal year by any of the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D............ 375,000 -- $2,531,250 --
Henry Samueli, Ph.D..................... 375,000 -- 2,531,250 --
</TABLE>
- ------------
(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($8.00 per share,
as determined by the Board of Directors) and the exercise price of such
options ($1.25 per share).
EMPLOYEE BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to
serve as the successor equity incentive program to the Company's 1994 Amended
and Restated Stock Option Plan (the "1994 Plan") and the Company's 1998 Special
Stock Option Plan (the "Special Plan"). The 1998 Plan was adopted by the Board
of Directors and the shareholders of the Company in February 1998. The 1998 Plan
is to become effective on the date the Underwriting Agreement for the proposed
Offering is executed (the "Plan Effective Date"). A total of 16,115,343 shares
of Common Stock have been authorized for issuance under the 1998 Plan. Such
share reserve consists of (i) the number of shares which remain available for
issuance under the 1994 Plan and the Special Plan on the Plan Effective Date,
including the shares subject to outstanding options, and (ii) an additional
increase of 3,000,000 shares of Class A Common Stock. To the extent any unvested
shares of Class B Common Stock issued under the 1994 Plan or the Special Plan
are repurchased by the Company after the Plan Effective Date, at the exercise
price paid per share, in connection with the holder's termination of service,
those repurchased shares will be added to the reserve of Class A Common Stock
available for issuance under the 1998 Plan. In addition, the number of shares of
Class A Common Stock reserved for issuance under the 1998 Plan will
automatically increase on the first trading day of each calendar year, beginning
in calendar year 1999, by an amount equal to 3% percent of the total number of
shares of Common Stock outstanding on the last trading day of the immediately
preceding calendar year. In no event, however, may any one participant in the
1998 Plan receive option grants, separately exercisable stock appreciation
rights or direct stock issuances for more than 1,500,000 shares of Class A
Common Stock in the aggregate per calendar year.
On the Plan Effective Date, outstanding options under the 1994 Plan and the
Special Plan will be incorporated into the 1998 Plan, and no further option
grants will be made under the 1994 Plan or the Special Plan. The incorporated
options will continue to be governed by their existing terms, unless the Plan
Administrator elects to extend one or more features of the 1998 Plan to those
options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class A Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition
46
<PAGE> 49
of special below-market stock option grants, (iii) the Stock Issuance Program
under which such individuals may, at the Plan Administrator's discretion, be
issued shares of Class A Common Stock directly, through the purchase of such
shares at a price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the performance of services, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Class A Common Stock at an exercise price equal to 100% of their fair market
value on the grant date and (v) the Director Fee Option Grant Program which may,
in the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the retainer fee otherwise payable to them in
cash each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Option Committee except with respect to officers and
directors subject to Section 16 of the Securities and Exchange Act of 1934
("Section 16 executives"). The Option Committee as Plan Administrator will have
complete discretion to determine which eligible individuals are to receive
option grants or stock issuances under those programs, the time or times when
such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The Compensation Committee will administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 executives and will
also have the exclusive authority to select the executive officers and other
highly compensated employees who may participate in the Salary Investment Option
Grant Program in the event that program is activated for one or more calendar
years, but neither the Compensation Committee nor the Option Committee nor the
Board will exercise any administrative discretion with respect to the option
grants made under the Salary Investment Option Grant Program or under the
Automatic Option Grant and Director Fee Option Grant Programs for the
non-employee Board members. All grants under those three latter programs will be
made in strict compliance with the express provisions of each such program.
The exercise price for the shares of Class A Common Stock subject to option
grants made under the 1998 Plan may be paid in cash or in shares of Class A
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1994 Plan and the Special Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based on the fair market value per share of Class A
Common Stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Class A Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such shares. Such appreciation distribution may be
made in cash or in shares of Class A Common Stock. None of the incorporated
options from the 1994 Plan or the Special Plan contain any stock appreciation
rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
47
<PAGE> 50
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated upon similar terms and conditions. The Plan Administrator
will also have the authority to grant options which will immediately vest upon
an acquisition of the Company, whether or not those options are assumed by the
successor corporation. The Plan Administrator is also authorized under the
Discretionary Option Grant and Stock Issuance Programs to grant options and to
structure repurchase rights so that the shares subject to those options or
repurchase rights will immediately vest in connection with a change in control
of the Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period following
such change in control. The options incorporated from the 1994 Plan and the
Special Plan will immediately vest in full upon an acquisition of the Company by
merger or asset sale, unless those options are assumed by the successor entity.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each director,
executive officer and other highly compensated employee of the Company selected
for participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Class A Common Stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of Class A Common Stock on the
grant date. The option will be exercisable at a price per share equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the amount of salary invested
in that option. The option will vest in a series of twelve successive equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Plan Effective Date will
automatically receive an option grant for 15,000 shares of Class A Common Stock
on the date such individual joins the Board, provided such individual has not
been in the prior employ of the Company. In addition, on the date of each Annual
Shareholders Meeting held after the Plan Effective Date, each non-employee Board
member who is to continue to serve as a non-employee Board member will
automatically be granted an option to purchase 3,000 shares of Class A Common
Stock, provided such individual has served on the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 15,000 share automatic option grant will vest in
a series of four successive equal annual installments upon the individual's
completion of each year of Board service over the four year period measured from
the option grant date. Each annual 3,000 share automatic option grant will vest
upon the individual's completion of one year of Board service measured from the
grant date. However, the shares subject to each automatic grant will immediately
vest in full upon certain changes in control or ownership of the Company or upon
the optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option
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<PAGE> 51
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of Class
A Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the portion of the
retainer fee invested in that option. The option will become exercisable for the
option shares in a series of twelve successive equal monthly installments over
the calendar year for which the election is to be in effect. However, the option
will become immediately exercisable for all the option shares upon (i) certain
changes in the ownership or control of the Company or (ii) the death or
disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Class A Common Stock paid in connection
with the tender offer over (ii) the exercise price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required shareholder approval. The 1998 Plan will terminate on the earliest of
(i) January 31, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
As of December 31, 1997, options to purchase 5,401,432 shares of Class B
Common Stock were outstanding under the Predecessor Plan at a weighted average
exercise price of $2.12 per share.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders in February 1998 and will
become effective immediately upon the execution of the Underwriting Agreement
for this offering. The Purchase Plan is designed to allow eligible employees of
the Company and participating subsidiaries to purchase shares of Class A Common
Stock, at semi-annual intervals, through their periodic payroll deductions under
the Purchase Plan, and a reserve of 750,000 shares of Class A Common Stock has
been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in April 2000. The next offering period
will commence on the first business day in May 2000, and subsequent offering
periods will commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than five calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent quarterly entry date (the first business day of February or September
each year). Individuals who become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that offering period.
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<PAGE> 52
Payroll deductions may not exceed 15% of total compensation, and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in April and October each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Class A Common
Stock on the participant's entry date into the offering period or (ii) the fair
market value on the semi-annual purchase date. In no event, however, may any one
participant purchase more than 1,500 shares, nor may all participants in the
aggregate purchase more than 150,000 shares on any one semi-annual purchase
date.
Should the fair market value per share of Class A Common Stock on any
purchase date be less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Class A Common Stock on
the participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Class A Common Stock
immediately prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008, (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.
401(k) Profit Sharing Plan
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to
20% of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limit. At the Company's discretion, the Company may make matching
contributions to the 401(k) Plan. To date, the Company has not made any matching
contributions under the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Law concerning contacts
or transactions between the Company and a director, or (vii) under Section 316
of the California Law concerning directors' liability for improper dividends,
loans and guarantees. The limitation of liability does not affect the
availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation by a director of the director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law) through bylaw provisions, by agreement or
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<PAGE> 53
otherwise, to the fullest extent permitted by law. Pursuant to this provision,
the Company's Bylaws provide for indemnification of the Company's directors,
officers and employees. In addition, the Company may, at its discretion, provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to indemnify these directors or executive officers (other than for
liability resulting from willful misconduct of a culpable nature), to advance
expenses to them as they are incurred, provided that they undertake to repay the
amount advanced if it is ultimately determined by a court that they are not
entitled to indemnification, and to obtain directors' and officers' insurance if
available on reasonable terms. Section 317 of the California Law and the
Company's Bylaws make provision for the indemnification of officers, directors
and other corporate agents in terms sufficiently broad to indemnify such
persons, under certain circumstances, for liabilities (including reimbursement
of expense incurred) arising under the Securities Act. The Company is not aware
of any pending litigation or proceeding involving any director, officer,
employee or agent of the Company in which indemnification will be required or
permitted. Moreover, the Company is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. The Company
believes that the foregoing indemnification provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
The Company, with the approval of its Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.
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CERTAIN TRANSACTIONS
Since January 1, 1995, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the amount
involved exceeded or exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of any class of the Company's voting securities,
or any member of the immediate family of any of the foregoing persons had or
will have a direct or indirect material interest, other than the transactions
described below.
Series D Preferred Stock Financing. In February 1996, the Company issued
and sold an aggregate of 493,839 shares of convertible Series D Preferred Stock
for an aggregate purchase price of $2,963,034 or $6.00 per share. The investors
in such shares included, among others, (1) Werner F. Wolfen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock,
(2) Alan E. Ross, a director of the Company, who purchased 5,000 shares of
convertible Series D Preferred Stock, (3) Myron S. Eichen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock and
(4) a trust controlled by Leon M. Samueli and Barbara Jane Samueli, relatives of
Henry Samueli (the Company's Co-Chairman, Vice President of Engineering and
Chief Technical Officer), which purchased 30,000 shares of convertible Series D
Preferred Stock. Upon the consummation of this offering, each share of
convertible Series D Preferred Stock will automatically convert into three
shares of the Company's Class B Common Stock.
Series E Preferred Stock Financing. In September 1997, the Company issued
and sold an aggregate of 1,500,000 shares of convertible Series E Preferred
Stock to General Instrument for an aggregate purchase price of $22.7 million or
$15.15 per share (the "Series E Financing"). Upon the consummation of this
offering, each share of convertible Series E Preferred Stock will automatically
convert into 1.5 shares of the Company's Class B Common Stock. In connection
with the Series E Financing, General Instrument and the Company entered into a
Development, Supply and License Agreement, pursuant to which, among other
things, the Company has agreed to supply to General Instrument, and General
Instrument has agreed to purchase from the Company, a specified percentage of
General Instrument's silicon requirements for its digital cable set-top box
subscriber products. For 1997, the Company's sales to General Instrument (and
its subcontractor) were approximately $11.8 million, or 31.9% of total revenue.
See "Business--Customers and Strategic Relationships."
Development Agreement with Cisco Systems. Effective September 1996, the
Company entered into a development agreement with Cisco Systems, pursuant to
which the Company granted to Cisco Systems an option to purchase shares of the
Company's Class A Common Stock at the Net Price. Cisco Systems exercised this
option and will purchase 500,000 shares at the closing of this offering. In
addition, Cisco Systems has agreed that it will be subject to certain
restrictions following this offering, including (1) a one-year lock-up period
during which the shares purchased by Cisco Systems cannot be transferred, (2) a
restriction on selling more than a certain number of shares per quarter during
the first year following termination of the initial one-year lock-up period, (3)
a notification obligation should Cisco Systems desire to sell more than a
specified number of shares after the one-year lock-up period, (4) a three-year
standstill agreement preventing Cisco Systems from acquiring more than 10% of
the Company's Common Stock, and (5) a seven-year voting agreement with respect
to certain matters, which agreement includes an obligation to vote its shares in
favor of all directors nominated by the Board of Directors of the Company. Some
of these restrictions may terminate early upon certain events, such as an
acquisition of the Company. For 1997, the Company's sales to Cisco Systems were
approximately $2,000,000, or 5.4% of total revenue. See "Business--Customers and
Strategic Relationships" and "Sale of Shares to Cisco Systems."
Sale of Common Stock to Irell & Manella. Pursuant to an agreement dated as
of October 1997, the Company issued and sold an aggregate of 225,000 shares of
Class B Common Stock to Irell & Manella for an aggregate purchase price of
$1,050,000 or $4.67 per share. Werner F. Wolfen, a director of the Company, is a
Senior Partner of Irell & Manella. Irell & Manella has represented and continues
to represent the Company in various legal matters. During 1997, the Company paid
approximately $1.2 million to Irell & Manella for legal services rendered by
that firm.
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<PAGE> 55
Officer Promissory Notes. Between March 1995 and December 1997, the Company
entered into interest bearing, full-recourse promissory notes with certain of
its officers and directors to finance the purchase of Class B Common Stock upon
exercise of stock options. See "Management--Executive Compensation" and
"Employee Benefit Plans--1998 Stock Incentive Plan." All of the notes are
full-recourse, secured by the shares purchased and are due and payable upon the
earlier of the stated due date or the termination of such officer's employment
with the Company. In July 1997, in connection with the exercise of a stock
option, William J. Ruehle, the Chief Financial Officer of the Company, delivered
a $467,500 full-recourse promissory note to the Company. Such note bears
interest at 6.5% per annum and is due in July 2002. In December 1997, in
connection with the exercise of a stock option, Aurelio E. Fernandez, Vice
President of Worldwide Sales, delivered a $1,800,000 full-recourse promissory
note to the Company. Such note bears interest at 6.5% per annum and is due in
December 2002. In addition, in January 1998, Mr. Fernandez delivered a $130,000
full-recourse promissory note to the Company. Such note bears interest at 6.5%
per annum and is due in January 2002. This loan was made to Mr. Fernandez to
allow him to pay off a similar loan from his prior employer that became due when
he left that company.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of December 31, 1997
regarding beneficial ownership of the Company's Common Stock, as adjusted to
reflect the sale of 3,500,000 shares of Class A Common Stock offered hereby and
500,000 shares of Class A Common Stock to Cisco Systems concurrent with this
offering, by (i) each person (or group of affiliated persons) known by the
Company to own beneficially more than 1,000,000 shares of Class B Common Stock
or 5% of the Class A Common Stock, (ii) each of the Company's directors and
Named Executive Officers, (iii) the Company's directors and executive officers
as a group, and (iv) all other Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING
----------------------------------- SHARES BENEFICIALLY
SHARES OF OWNED AFTER OFFERING
NUMBER PERCENT OF CLASS A -------------------------------------
NUMBER OF OF TOTAL COMMON NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B VOTING STOCK CLASS A CLASS B TOTAL VOTING
NAME OF BENEFICIAL OWNERS SHARES SHARES POWER(1) OFFERED(2) SHARES SHARES POWER (1)
------------------------- --------- ---------- ---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D.(3)... -- 11,475,000(4) 28.5 275,000 -- 11,200,000 28.0
Henry Samueli, Ph.D.(3)............ -- 11,475,000(4) 28.5 275,000 -- 11,200,000 28.0
Werner F. Wolfen................... -- 550,632(5) 1.4 -- -- 550,632 1.4
Myron S. Eichen.................... -- 345,351 * -- -- 345,351 *
Alan E. Ross....................... -- 105,000 * -- -- 105,000 *
General Instrument
Corporation(6)................... -- 2,250,000 5.6 -- -- 2,250,000 5.7
Intel Corporation.................. -- 1,576,800 3.9 -- -- 1,576,800 4.0
Scientific-Atlantic, Inc........... -- 1,500,000 3.8 -- -- 1,500,000 3.8
Cisco Systems, Inc.(7)............. 500,000(8) -- * -- 500,000(8) -- *
All executive officers and
directors as a group (10
persons)(9)...................... -- 25,485,221 62.2% 554,000 -- 24,931,221 61.4
All other Selling Shareholders..... 196,000 --
</TABLE>
- ------------
(1) The number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 39,955,077 shares of Class B Common
Stock and no shares of Class A Common Stock outstanding as of December 31,
1997, and (ii) 39,205,077 shares of Class B Common Stock and 4,000,000
shares of Class A Common Stock outstanding upon consummation of this
offering. Beneficial ownership is determined in accordance with the rules
and regulations of the Commission. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of December 31,
1997 are deemed to be outstanding and beneficially owned by the person
holding such options for the purpose of computing the number of shares
beneficially owned and the percentage ownership of such person, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table, and subject to applicable community property laws, such persons have
sole and voting investment power with respect to all shares of the Company's
Common Stock show as beneficially owned by them.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 325,000 shares from the Company and up to an aggregate
of 200,000 shares from the Selling Shareholders.
(3) The address for Dr. Nicholas and Dr. Samueli is 16251 Laguna Canyon Road,
Irvine, California 92618. Dr. Nicholas and Dr. Samueli will each sell
275,000 shares in this offering and 100,000 additional shares if the
Underwriters' over-allotment option is exercised in full.
(4) Includes 375,000 shares of Class B Common Stock issuable pursuant to options
that are currently exercisable.
(5) Includes 45,000 shares of Class B Common Stock owned by the Estate of
Lawrence P. Wolfen, of which Mr. Wolfen serves as executor, and 300,000
shares of Class B Common Stock held on behalf of certain current and former
partners of Irell & Manella and Mr. Wolfen's two grandchildren. Mr. Wolfen
disclaims beneficial ownership of all of these shares. Excludes 225,000
shares of Class B Common Stock issued and sold to Irell & Manella pursuant
to an agreement dated as of October 1997, of which Mr. Wolfen's
participation in the beneficial ownership therein is less than 5% of such
shares. See "Certain Transactions."
(6) The address for General Instrument Corporation is 2200 Byberry Road,
Hatboro, PA 19040.
(7) The address for Cisco Systems, Inc. is 170 West Tasman Drive, San Jose,
California 95134.
(8) Consists of shares of Class A Common Stock issuable under an option that
Cisco Systems has exercised. See "Sales of Shares to Cisco Systems."
(9) Includes an aggregate of 1,020,000 shares of Class B Common Stock issuable
pursuant to options that are currently exercisable or are exercisable within
60 days of December 31, 1997.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock.
The following summary of the capital stock of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws does not
purport to be complete and is qualified in its entirety by the provisions of the
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 300,000,000 shares of Common Stock,
$0.0001 par value, of which 200,000,000 shares have been designated as Class A
Common Stock and 100,000,000 shares have been designated as Class B Common
Stock. At December 31, 1997, 39,955,077 shares of Class B Common Stock were
deemed outstanding (which includes 8,453,517 shares issuable upon conversion of
all of the Preferred Stock upon consummation of this offering). Such shares are
held of record by approximately 173 holders 5,401,423 shares of Class B Common
Stock were reserved for issuance upon exercise of outstanding options. At
December 31, 1997, no shares of Class A Common Stock were outstanding.
Voting Rights. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per share.
Holders of Common Stock will vote together as a single class on all matters
submitted to a vote of shareholders, except (i) as otherwise required by law and
(ii) in the case of a proposed issuance of shares of Class B Common Stock, which
issuance shall require the affirmative vote of the holders of the majority of
the outstanding Class B Common Stock shares. Under the Company's Articles of
Incorporation and Bylaws, holders of Common Stock will not have cumulative
voting rights after the Company becomes a "listed corporation" (as defined in
California Corporations Code Section 301.5) and, therefore, holders of shares
representing a majority of the voting power of Common Stock can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors. The Company anticipates it will qualify as a listed
corporation as of its first annual meeting of the shareholders following this
offering, provided that the Company has at least 800 holders of its equity
securities as of the record date of such meeting.
Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of Directors
out of funds legally available for such purposes, subject to the rights of
preferred shareholders and the terms of any existing or future agreements
between the Company and its debtholders. No dividends may be declared or paid on
any share of any class of Common Stock, unless such dividend, at the same rate
per share, is simultaneously declared or paid on each share of the other class
of Common Stock. In the case of a stock dividend or distribution, holders of
Class A Common Stock are entitled to receive the same percentage dividend or
distribution as holders of Class B Common Stock and vice versa, except that
stock dividends and distributions shall be made in shares of Class A Common
Stock to the holders of Class A Common Stock and in shares of Class B Common
Stock to the holders of Class B Common Stock unless the Company's Board of
Directors determines in its discretion that it is more desirable to distribute
shares of Class A Common Stock with respect to Class B Common Stock. The Company
presently intends to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying cash dividends in
the foreseeable future. In addition, the Company's credit facility prohibits the
payment of cash dividends without the prior consent of SVB.
Convertibility. Each share of Class B Common Stock is convertible, at the
option of its holder, into one fully paid and nonassessable share of Class A
Common Stock at any time. The Class A Common Stock is not convertible into Class
B Common Stock. Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock in the event such share shall
be transferred (including, without limitation, by way of sale, assignment,
exchange, gift, bequest, appointment or otherwise) to any person or entity other
than a Permitted Transferee as such term is defined in the Articles of
Incorporation. A Permitted Transferee generally includes the following
transferees, among others: the shareholder's spouse, the lineal descendants or
spouse of such descendants, the trustee of a trust for the benefit of the holder
or a charitable organization, a charitable organization, or certain
corporations, partnerships or other entities owned by the holder.
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Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably with
the holders of Class B Common Stock in all assets available for distributions
after payment in full to creditors and holders of Preferred Stock.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
Common Stock is identical to that received by holders of Class B Common Stock.
No class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless the other class of Common Stock concurrently is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. All outstanding shares are, and the shares of
Class A Common Stock offered hereby will be upon issuance, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company currently has outstanding convertible Preferred Stock, which
consists of 500,000 shares of convertible Series A Preferred Stock, 600,000
shares of convertible Series B Preferred Stock, 500,000 shares of convertible
Series C Preferred Stock, 467,839 shares of convertible Series D Preferred Stock
and 1,500,000 shares of convertible Series E Preferred Stock. All of the
outstanding convertible Preferred Stock will convert into an aggregate of
8,453,517 shares of Class B Common Stock upon consummation of this offering.
Each share of convertible Series A, Series B, Series C and Series D Preferred
Stock will convert into three shares of Class B Common Stock. Each share of
convertible Series E Preferred Stock will convert into 1.5 shares of Class B
Common Stock. At the option of the holder, each share of Class B Common Stock is
convertible into one share of Class A Common Stock. See Note 5 to Notes to
Financial Statements.
Upon the consummation of this offering, the Company will have authorized
10,000,000 shares of Preferred Stock, $0.0001 par value, which may be issued in
series from time to time with such designations, relative rights, priorities,
preferences, qualifications, limitations and restrictions thereof, to the extent
that such are not fixed in the Company's Articles of Incorporation, as the Board
of Directors determines. The rights, preferences, limitations and restrictions
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The Board of
Directors may authorize the issuance of Preferred Stock with rights senior to
the Common Stock with respect to the payment of dividends and the distribution
of assets on liquidation. In addition, the Board of Directors is authorized to
fix the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding. The Board of Directors, without shareholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The Company believes that the
Preferred Stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. Having such authorized shares available for
issuance will allow the Company to issue shares of Preferred Stock without the
expense and delay of a special shareholders' meeting. Although the Company's
Board of Directors has no intention at the present time of doing so, it could
issue a series of Preferred Stock, the terms of which, subject to certain
limitations imposed by the securities laws, could impede the completion of a
merger, tender offer or other takeover attempt. The Company's Board of Directors
will make any determination to issue such shares based on its judgment as to the
best interests of the Company and its shareholders at the time of issuance. The
Company's Board of Directors, in so acting, could issue Preferred Stock having
terms that could discourage an acquisition attempt or other transaction that
some, or a majority, of the shareholders might believe to be in their best
interests or in which shareholders might receive a premium for their stock over
the then market price of such stock.
REGISTRATION RIGHTS
Upon consummation of this offering, the holders of approximately 30,627,267
shares of Common Stock (the "Registrable Securities") will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. In the event that the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other securityholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in
56
<PAGE> 59
such registration, subject to certain marketing and other limitations. The
Company is generally obligated to bear the expenses, other than underwriting
discounts and sales commissions, of these registrations. The Company may in
certain circumstances defer such registrations and the underwriters have the
right, subject to certain limitations, to limit the number of Registrable
Securities included in such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is U.S. Stock
Transfer Corporation. Its telephone number is (818) 502-1404.
57
<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 43,205,077 shares of Common Stock (based upon shares outstanding at
December 31, 1997), assuming no exercise of the Underwriters's over-allotment
option. Of these shares, all of the shares registered in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "Affiliates." The remaining
39,205,077 shares of Common Stock held by existing shareholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"), Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Section 4(1) or Rules 144, 144(k) or 701 promulgated under the Securities Act,
which rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rules 144, 144(k) and 701, the Restricted
Shares will be available for sale in the public market as follows: (i) 2,149,635
shares of Class B Common Stock will be eligible for immediate sale on the date
of this Prospectus subject to compliance with the holding period, volume
limitation and other restrictions of Rule 144; (ii) 37,805,442 shares of Class B
Common Stock will be eligible for sale upon expiration of the lock-up agreements
180 days after the date of this Prospectus; and (iii) 500,000 shares of Class A
Common Stock will be eligible for sale at various times upon expiration of a
one-year holding period and, with respect to certain shareholders, any
contractual restrictions on transfer.
All officers, directors and option holders and substantially all
shareholders of the Company have agreed not to sell or otherwise transfer any
shares of Common Stock or any other securities of the Company for a period of at
least 180 days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 43,205
shares immediately after this offering); or (ii) the average weekly trading
volume of the Class A Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this offering. In general, under Rule 701 of the
Securities Act as currently in effect, any employee, consultant or advisor of
the Company who purchases shares from the Company pursuant to Rule 701 in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell, unless contractually restricted, such shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained in
Rule 144.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this
58
<PAGE> 61
offering. Any future sale of substantial amounts of Common Stock in the open
market may adversely affect the market price of the Common Stock offered hereby.
Pursuant to a Registration Rights Agreement among the Company and certain
of its shareholders, holders of 30,627,267 shares of Common Stock will be
entitled to certain piggy-back registration rights with respect to such shares.
See "Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchases by Affiliates). During the 180-day period after the date of this
Prospectus, the Company has agreed not to file any registration statement with
respect to the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable into Common Stock, other than a
Registration Statement on Form S-8 covering securities issuable under the 1994
Plan, the Special Plan and the 1998 Plan, without the prior written consent of
Morgan Stanley & Co. Incorporated.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
1994 Plan, the Special Plan and the 1998 Plan. See "Management--Employee Benefit
Plans." Such registration statement is expected to be filed and become effective
as soon as practicable after the effective date of this offering. Accordingly,
shares registered under such registration statement will, subject to Rule 144
volume limitations applicable to affiliates of the Company, be available for
sale in the open market, unless such shares are subject to vesting restrictions
with the Company or the lock-up agreements described above. As of December 31,
1997, options to purchase 5,401,432 shares of Class B Common Stock were issued
and outstanding. See "Management--Executive Compensation" and "--Employee
Benefit Plans."
59
<PAGE> 62
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters") for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown
Incorporated, Deutsche Morgan Grenfell Inc. and Hambrecht & Quist LLC are acting
as representatives (the "Representatives") have severally agreed to purchase,
and the Company and the Selling Shareholders have agreed to sell to them,
severally, the respective number of shares of Class A Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
Deutsche Morgan Grenfell Inc................................
Hambrecht & Quist LLC.......................................
--------
Total............................................. 3,500,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the Underwriters' over-allotment option described below)
if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company and certain Selling
Shareholders have granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an aggregate of 525,000
shares of Class A Common Stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with this offering of the shares of
Class A Common Stock. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Class A Common Stock as the
number set forth next to such Underwriter's name in the preceding table bears to
the total number of shares of Class A Common Stock set forth next to the names
of all Underwriters in the preceding table.
The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
60
<PAGE> 63
The Company has agreed not to offer, pledge, sell or grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase,
lend or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, or enter into any
swap or similar agreement that transfers, in whole or in part, the economic risk
of ownership of the Common Stock, for a period of 180 days after the date of
this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to certain limited exceptions.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which officers, directors, shareholders and option holders of
the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to ten percent of the shares of Class A
Common Stock offered hereby (not including shares subject to the Underwriters'
over-allotment option) for certain parties who have expressed an interest in
purchasing such shares in this offering. The number of shares of Class A Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as other shares offered hereby.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
overallot in connection with this offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an Underwriter or a dealer for distributing the Class A Common Stock
in this offering, if the syndicate repurchases previously distributed Class A
Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
PRICING OF OFFERING
Prior to this offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation among the Company, the Selling Shareholders
and the Representative of the Underwriters. Among the factors to be considered
in determining the initial public offering price will be an assessment of the
future prospects of the Company and its industry in general; sales, earnings and
certain other financial and operating information of the Company in recent
periods; and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Prospectus is subject
to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Brobeck Phleger & Harrison
LLP, Newport Beach, California. Certain legal matters relating to this offering
will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
61
<PAGE> 64
EXPERTS
The financial statements and schedules of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act (the "Registration
Statement") with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed therewith. Statements contained
in this Prospectus as to the contents of any contract of other document referred
to are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission in
Washington, D.C. and copies of all or any part thereof may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains an
Internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
that file electronically with the Commission.
62
<PAGE> 65
GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization...... Receiver technique for compensating for distortions
in a transmission media.
ADSL....................... Asymmetric Digital Subscriber Line. Twisted-pair
modem technology that achieves data rates up to 8
Mbps downstream to the subscriber and 1 Mbps
upstream to the network at distances up to 18,000
feet.
Bandwidth.................. A range of signal frequencies, measured in cycles
per second or Hertz (Hz). Also refers to the speed
at which data is transmitted, measured in bits per
second (bps).
Bandwidth Gap.............. The disparity between the computer processor's
speed of processing data and the communication
infrastructure's speed of transmitting data.
Broadband Communications... Data transmission at speeds of greater than 1.5
Mbps.
CMOS....................... Complementary Metal Oxide Semiconductor. Technology
used to manufacture silicon integrated circuits.
DBS........................ Direct Broadcast Satellite. A broadband
communications technology that broadcasts digital
television programming from satellites directly to
dish antennas.
DSP........................ Digital Signal Processing.
Ethernet (10Base-T)........ Networking standard for the access method widely
used in LANs for connecting devices by means of
copper twisted pair wiring at speeds of 10 Mbps.
Fast Ethernet
(100Base-T)................ An extension to the 10Base-T Ethernet network
access method which operates at 100 Mbps.
FEC........................ Forward Error Correction. A receiver technique for
correcting errors in the received data.
Gbps....................... Gigabits per second. Billion bits per second.
GHz........................ GigaHertz. Billion cycles per second.
Gigabit Ethernet........... An extension to the 100Base-T Ethernet network
access method which operates at 1,000 Mbps or 1
Gbps.
Headend.................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HFC........................ Hybrid Fiber Coax. Upgraded cable plant which uses
a combination of fiber optic cable in the backbone
and coaxial cable in the subscriber feeder plant.
IC......................... Integrated Circuit.
kbps....................... Kilobits per second. Thousand bits per second.
LAN........................ Local Area Network. A private data communications
network linking a variety of data devices such as
computers and printers within an office or home
environment.
63
<PAGE> 66
LMDS....................... Local Multipoint Distribution Service. A broadband
wireless communications network that uses
millimeter wave frequencies around 28 to 38 GHz to
transmit video and data to residences over a
cellular-like network at distances under a few
miles.
MAC........................ Media Access Control. Protocol for controlling the
upstream and downstream traffic flow in a local or
wide area network.
Mbps....................... Megabits per second. Million bits per second.
MCNS/DOCSIS................ Multimedia Cable Network System/Data Over Cable
Service Interface Specifications. Industry
specification that defines the technical
requirements for high-speed cable modem and headend
equipment.
MMDS....................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that uses
microwave frequencies around 2.5 GHz to transmit
video to residences at distances up to tens of
miles.
MPEG....................... Moving Picture Experts Group. Industry standard for
compressing and decompressing digital audio and
video signals.
NIC........................ Network Interface Card. Plug-in adapter card that
enables a computer to connect to a LAN.
QAM........................ Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK....................... Quadrature Phase Shift Keying. A digital modulation
technique which is widely employed in direct
broadcast satellite transmission systems.
VDSL....................... Very High-Speed Digital Subscriber Line. Twisted
pair modem technology that achieves data rates up
to 52 Mbps downstream to the subscriber and 6 Mbps
upstream to the network at distances up to 4,000
feet.
WAN........................ Wide Area Network. A data communications network,
such as the Internet, which links a variety of data
devices over a large geographical distance.
xDSL....................... Generic representation of the entire family of
Digital Subscriber Line technology spanning data
rates from 128 kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
64
<PAGE> 67
BROADCOM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1996 and 1997................ F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997....................................... F-4
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying balance sheets of Broadcom Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Broadcom Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 9, 1998
F-2
<PAGE> 69
BROADCOM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
----------------- DECEMBER 31,
1996 1997 1997
------- ------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,657 $22,116
Accounts receivable (net of allowance for doubtful
accounts and sales returns of $147 in 1996 and $721 in
1997).................................................. 3,722 9,913
Inventory................................................. 854 2,705
Deferred taxes............................................ 519 1,090
Income taxes receivable................................... -- 433
Prepaid expenses.......................................... 227 262
------- -------
Total current assets.............................. 9,979 36,519
Property and equipment, net................................. 4,298 8,449
Other assets................................................ 90 276
------- -------
Total assets...................................... $14,367 $45,244
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,140 $ 7,380
Wages and related benefits................................ 372 846
Income taxes payable...................................... 1,812 --
Accrued liabilities....................................... 57 933
Current portion of long-term debt......................... 69 1,098
------- -------
Total current liabilities......................... 4,450 10,257
Long-term debt, less current portion........................ 147 1,595
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock $0.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 2,093,839 in 1996
and 3,567,839 in 1997 (pro forma--none).............. 6,084 28,617 $ --
Class A Common Stock, $0.0001 par value:
Authorized shares--200,000,000.........................
Issued and outstanding shares--none in 1996 and 1997
(pro forma--none)....................................
Class B Common Stock, $0.0001 par value:
Authorized shares--100,000,000
Issued and outstanding shares--29,403,768 in 1996 and
31,501,560 in 1997 (pro forma--39,955,077)........... 3 3 4
Additional paid-in capital................................ 1,160 7,126 35,742
Notes receivable from employees........................... (748) (3,362) (3,362)
Deferred compensation..................................... -- (1,090) (1,090)
Retained earnings......................................... 3,271 2,098 2,098
------- ------- -------
Total shareholders' equity........................ 9,770 33,392 $33,392
------- ------- =======
Total liabilities and shareholders' equity........ $14,367 $45,244
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
BROADCOM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenue:
Product revenue........................................... $4,317 $18,981 $31,668
Development revenue....................................... 1,790 2,389 5,287
------ ------- -------
Total revenue..................................... 6,107 21,370 36,955
Cost of revenue............................................. 1,398 7,860 14,926
------ ------- -------
Gross profit................................................ 4,709 13,510 22,029
Operating expense:
Research and development.................................. 2,687 5,662 16,204
Selling, general and administrative....................... 2,135 3,546 8,063
------ ------- -------
Total operating expense........................... 4,822 9,208 24,267
------ ------- -------
Income (loss) from operations............................... (113) 4,302 (2,238)
Interest and other income, net.............................. 120 213 290
------ ------- -------
Income (loss) before income taxes........................... 7 4,515 (1,948)
Provision (benefit) for income taxes........................ 3 1,499 (775)
------ ------- -------
Net income (loss)........................................... $ 4 $ 3,016 $(1,173)
====== ======= =======
Basic earnings (loss) per share............................. $ 0.00 $ 0.12 $ (0.04)
====== ======= =======
Diluted earnings (loss) per share........................... $ 0.00 $ 0.09 $ (0.04)
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
BROADCOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN FROM DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES COMPENSATION EARNINGS
--------- ------- ---------- ------ ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ 1,100,000 $ 2,161 22,995,000 $2 $ 60 $ -- $ -- $ 251
Issuance of Preferred Stock, net
of issuance costs of $11........ 500,000 989 -- -- -- -- -- --
Exercise of stock options......... -- -- 5,100,000 1 339 (332) -- --
Net income........................ -- -- -- -- -- -- -- 4
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1995........ 1,600,000 3,150 28,095,000 3 399 (332) -- 255
Issuance of Preferred Stock, net
of issuance costs of $29........ 493,839 2,934 -- -- -- -- -- --
Exercise of stock options, net of
repurchases..................... -- -- 1,308,768 -- 761 (416) -- --
Net income........................ -- -- -- -- -- -- -- 3,016
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1996........ 2,093,839 6,084 29,403,768 3 1,160 (748) -- 3,271
Issuance of Preferred Stock, net
of issuance costs of $36........ 1,500,000 22,689 -- -- -- -- -- --
Repurchases of Preferred Stock.... (26,000) (156) -- -- -- -- -- --
Issuance of Class B Common
Stock........................... -- -- 285,000 -- 1,050 -- -- --
Exercise of stock options, net of
repurchases..................... -- -- 1,812,792 -- 3,569 (2,614) -- --
Tax benefit from exercise of stock
options......................... -- -- -- -- 191 -- -- --
Deferred compensation related to
grant of stock options.......... -- -- -- -- 1,156 -- (1,156) --
Amortization of deferred
compensation.................... -- -- -- -- -- -- 66 --
Net loss.......................... -- -- -- -- -- -- -- (1,173)
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1997........ 3,567,839 $28,617 31,501,560 $3 $7,126 $(3,362) $(1,090) $ 2,098
========= ======= ========== == ====== ======= ======= =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1994........ $ 2,474
Issuance of Preferred Stock, net
of issuance costs of $11........ 989
Exercise of stock options......... 8
Net income........................ 4
-------
Balance at December 31, 1995........ 3,475
Issuance of Preferred Stock, net
of issuance costs of $29........ 2,934
Exercise of stock options, net of
repurchases..................... 345
Net income........................ 3,016
-------
Balance at December 31, 1996........ 9,770
Issuance of Preferred Stock, net
of issuance costs of $36........ 22,689
Repurchases of Preferred Stock.... (156)
Issuance of Class B Common
Stock........................... 1,050
Exercise of stock options, net of
repurchases..................... 955
Tax benefit from exercise of stock
options......................... 191
Deferred compensation related to
grant of stock options.......... --
Amortization of deferred
compensation.................... 66
Net loss.......................... (1,173)
-------
Balance at December 31, 1997........ $33,392
=======
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
BROADCOM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 4 $ 3,016 $(1,173)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 451 897 3,039
Amortization of deferred compensation.................. -- -- 66
Deferred taxes......................................... (48) (416) (571)
Change in operating assets and liabilities:
Accounts receivable.................................. 547 (2,982) (6,191)
Inventory............................................ (242) (461) (1,851)
Other assets......................................... (32) (251) (221)
Accounts payable..................................... 443 1,276 5,240
Income taxes payable................................. (23) 1,835 (2,245)
Other accrued liabilities............................ (43) 285 1,350
------- ------- -------
Net cash provided by (used in) operating activities......... 1,057 3,199 (2,557)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,112) (3,747) (7,132)
Proceeds from sales of investments available-for-sale....... 996 -- --
------- ------- -------
Net cash used in investing activities....................... (116) (3,747) (7,132)
FINANCING ACTIVITIES
Proceeds from bank term loan................................ -- -- 3,000
Payments on bank term loan.................................. -- -- (500)
Payments on capital lease obligations....................... (48) (64) (81)
Proceeds from issuance of Preferred Stock................... 989 2,934 22,689
Payments on repurchase of Preferred Stock................... -- -- (156)
Proceeds from issuance of Class B Common Stock.............. 8 345 2,196
------- ------- -------
Net cash provided by financing activities................... 949 3,215 27,148
------- ------- -------
Increase in cash and cash equivalents....................... 1,890 2,667 17,459
Cash and cash equivalents at beginning of year.............. 100 1,990 4,657
------- ------- -------
Cash and cash equivalents at end of year.................... $ 1,990 $ 4,657 $22,116
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 8 $ 26 $ 191
======= ======= =======
Income taxes paid........................................... $ 125 $ 79 $ 1,850
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 73
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the transmission of broadband
data over existing communications infrastructures, most of which were not
originally intended for digital data transmission.
In anticipation of an initial public offering of the Company's Class A
Common Stock, in February 1998, the Board of Directors approved the amendment
and restatement of the articles of incorporation to authorize 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. Upon consummation of the initial public
offering, each share of Series A, B, C and D Preferred Stock will convert into
three shares of Class B Common Stock, and each share of Series E Preferred Stock
will convert into 1.5 shares of Class B Common Stock. Effective with the
amendment of the articles of incorporation, outstanding stock options at
December 31, 1997 will be exercisable for shares of Class B Common Stock. The
shares of Class A and Class B Common Stock will be substantially identical,
except that holders of Class A Common Stock will be entitled to one vote for
each share held, and holders of Class B Common Stock will be entitled to ten
votes for each share held on all matters submitted to a vote of the
shareholders.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, inventory reserves and income tax valuation
allowances.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of three months or less to be
cash equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase of equipment through capital leases................ $ 12 $231 $ 58
Notes receivable from employees issued in connection with
exercise of stock options................................. 332 416 2,614
</TABLE>
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Provision
is made currently for estimated product returns. Development revenue is
recognized when earned.
INVESTMENTS
The Company accounts for its investments in marketable securities under
Financial Accounting Standards Board (FASB) Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. The Company's
investments have been
F-7
<PAGE> 74
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
classified as available-for-sale and are carried at fair value. The investments
are adjusted for amortization of premiums and discounts to maturity and such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Work in process........................................... $ 579 $ 2,315
Finished goods............................................ 1,024 2,076
------ -------
1,603 4,391
Less reserve for excess and obsolete inventory............ (749) (1,686)
------ -------
$ 854 $ 2,705
====== =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization
have been provided on the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment were comprised of
the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Office furniture......................................... $ 176 $ 273
Computer equipment....................................... 5,621 12,563
Leasehold improvements................................... 145 296
------- -------
5,942 13,132
Less accumulated depreciation and amortization........... (1,644) (4,683)
------- -------
$ 4,298 $ 8,449
======= =======
</TABLE>
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
Implementation of Statement No. 121 was immaterial to the financial statements
of the Company.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options.
F-8
<PAGE> 75
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings Per Share, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform with the Statement No. 128 requirements and the accounting rules set
forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998.
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Numerator: Net income (loss)........................... $ 4 $ 3,016 $ (1,173)
========== ========== ==========
Denominator:
Weighted-average shares outstanding.................. 25,618,500 28,840,023 30,212,796
Less: nonvested common shares outstanding............ (3,888,092) (3,900,591) (3,761,223)
---------- ---------- ----------
Denominator for earnings per common share.............. 21,730,408 24,939,432 26,451,573
Effect of dilutive securities:
Nonvested common shares.............................. -- 1,851,132 --
Stock options........................................ -- 194,863 --
Convertible Preferred Stock.......................... 4,550,000 6,158,057 --
---------- ---------- ----------
Denominator for diluted earnings per common share...... 26,280,408 33,143,484 26,451,573
========== ========== ==========
Basic earnings (loss) per share...................... $ 0.00 $ 0.12 $ (0.04)
========== ========== ==========
Diluted earnings (loss) per share.................... $ 0.00 $ 0.09 $ (0.04)
========== ========== ==========
</TABLE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The Company
had no reserve for estimated warranty liability at December 31, 1995 and 1996,
and had a reserve of $150,000 at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, receivables, accounts payable, and borrowings. The Company believes
all of the financial instruments' recorded values approximate current values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from
F-9
<PAGE> 76
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments by distributions to shareholders. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
2. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
A reconciliation of the provision (benefit) for income taxes at the federal
statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income taxes...... $ 2 $1,535 $(662)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit....................... 1 218 40
Benefit of research and development tax credits........... (7) (270) (229)
Other..................................................... 7 16 76
--- ------ -----
Total provision (benefit) for income taxes.................. $ 3 $1,499 $(775)
=== ====== =====
</TABLE>
The federal and state income tax provision (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 50 $1,578 $(205)
State.................................................... 1 337 1
---- ------ -----
51 1,915 (204)
Deferred:
Federal.................................................. (48) (409) (631)
State.................................................... -- (7) 60
---- ------ -----
(48) (416) (571)
---- ------ -----
$ 3 $1,499 $(775)
==== ====== =====
</TABLE>
F-10
<PAGE> 77
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... $ (33) $(54) $ --
Deferred tax assets:
Book depreciation in excess of tax depreciation........... -- -- 60
Research and experimentation tax credit carryforwards..... 164 -- 141
Net operating loss carryforwards.......................... -- -- 5
Reserves and accruals not currently deductible for tax
purposes............................................... 73 447 1,208
State tax, net of federal benefit......................... -- 117 --
Other..................................................... -- 9 9
Valuation allowance....................................... (101) -- (333)
----- ---- ------
Net deferred tax assets..................................... $ 103 $519 $1,090
===== ==== ======
</TABLE>
The reduction in the valuation allowance in 1996 was primarily due to the
utilization of research and experimentation tax credit carryforwards. The
increase in the valuation allowance in 1997 was entirely related to the state
deferred tax assets because of the uncertainty of the effect of anticipated
stock option exercises on future state taxable income. Any future benefits
recognized from any reduction of the valuation allowance will result in a
reduction of income tax expense.
At December 31, 1997, the Company had approximately $91,000 of state net
operating loss carryforwards and $141,000 of state research credit
carryforwards. These state net operating loss carryforwards and research credit
carryforwards will expire in 2002 and 2012, respectively.
3. LONG-TERM DEBT
In March 1995, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank (SVB) which, as amended in June 1997, provides for a $3.0
million term loan and a $3.0 million revolving credit facility. A $500,000
letter of credit facility is also provided in the agreement provided that
sufficient credit is available under the other two facilities. During 1997, the
full amount of the $3.0 million term loan facility was utilized at an interest
rate of SVB's prime rate as announced from time to time plus 0.5%. At December
31, 1997, $2.5 million was outstanding under the term loan facility which
matures in June 2000. The borrowing base for the revolving credit facility is
equal to 80% of the Company's eligible accounts receivable from United States
customers. Interest on this facility is equal to SVB's prime rate announced from
time to time. At December 31, 1997, no amounts were outstanding under the
revolving credit or letter of credit facilities, which expire on April 5, 1998.
The Loan and Security Agreement prohibits the payment of cash dividends,
limits the amount of additional indebtedness the Company may incur, and contains
certain minimum net worth, profitability and various other financial ratio
requirements. Substantially all of the Company's assets are collateral under the
loan and security agreement.
F-11
<PAGE> 78
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
The following is a summary of the Company's long-term debt and other loans
at December 31:
<TABLE>
<CAPTION>
1996 1997
---- -------
(IN THOUSANDS)
<S> <C> <C>
Silicon Valley Bank term loan collateralized by
substantially all of the Company's assets, payable in
varying monthly installments at a current rate of 9.3%.... $ -- $ 2,500
Capitalized lease obligations payable in varying monthly
installments at rates from 10.4% to 22.3%................. 216 193
---- -------
216 2,693
Less current portion of long-term debt...................... (69) (1,098)
---- -------
$147 $ 1,595
==== =======
</TABLE>
Principal payments on long-term debt are as follows: $1,098,000 in 1998;
$1,041,000 in 1999; $537,000 in 2000; $16,000 in 2001; and $1,000 in 2002.
Interest expense for the years ended December 31, 1995, 1996 and 1997 was
$8,000, $26,000 and $171,000, respectively.
4. COMMITMENTS
The Company has entered into operating leases for its computer equipment
and facilities with varying terms and escalation clauses. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more are as follows: $656,000 in 1998; $327,000 in 1999; $244,000 in 2000;
$140,000 in 2001; and $48,000 in 2002.
Rent expense for the years ended December 31, 1995, 1996, and 1997
aggregated $177,000, $325,000 and $739,000, respectively.
The Company had commitments totaling approximately $2.1 million as of
December 31, 1997 for the purchase of test equipment.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Preferred Stock consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
<S> <C> <C> <C>
A.............................................. 500,000 500,000 $ 1,000,000
B.............................................. 600,000 600,000 1,200,000
C.............................................. 500,000 500,000 1,000,000
D.............................................. 500,000 467,839 2,807,034
E.............................................. 1,800,000 1,500,000 22,725,000
Undesignated................................... 6,100,000 -- --
---------- --------- -----------
10,000,000 3,567,839 $28,732,034
========== ========= ===========
</TABLE>
Each share of Series A, B, C and D Preferred Stock is convertible into
three shares of Class B Common Stock. Each share of Series E Preferred Stock is
convertible into 1.5 shares of Class B Common Stock. Such shares may be
converted at any time at the option of the holder and automatically convert into
Class B
F-12
<PAGE> 79
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock in the event of an underwritten public offering of the Company's
Common Stock as long as the value of the Company for purposes of the public
offering is not less than $45,000,000.
Holders of the Company's Series A, B, C, D and E Preferred Stock are
entitled to noncumulative annual dividends of $0.20 per share in preference to
holders of Common Stock when declared by the Board of Directors. No such cash
dividends have been declared since the inception of the Company.
In the event of the liquidation of the Company, holders of Series A, B, C,
D and E Preferred Stock are entitled to receive an amount per share equal to the
original issuance price plus declared and unpaid dividends, prior and in
preference to any distribution of assets to holders of Common Stock.
The holders of Series A, B, C, D and E Preferred Stock have the right to
purchase additional shares of stock in order to maintain their ownership
percentage in the event of certain future sales of stock by the Company.
Holders of Series A, B, C, D and E Preferred Stock are entitled to the same
number of votes per share on any and all matters submitted to a shareholders
vote as the Class B Common Stock into which the Preferred Stock is convertible.
COMMON STOCK
Pursuant to an agreement dated as of October 1997, the Company issued and
sold an aggregate of 225,000 shares of Class B Common Stock to Irell & Manella
LLP for an aggregate purchase price of $1,050,000. Werner F. Wolfen, a director
of the Company, is a Senior Partner of Irell & Manella. Irell & Manella has
represented and continues to represent the Company in various legal matters.
STOCK OPTIONS
Under the Company's Amended and Restated 1994 Stock Option Plan (the 1994
Plan), the Board of Directors or a Committee consisting of two or more members
of its Board of Directors is authorized to grant options to purchase the
Company's Class B Common Stock to its employees, members of the Board of
Directors, and certain consultants. Incentive options may be granted at an
exercise price equal to or greater than 100% of the fair market value at the
date of grant, and non-qualified options may be granted at an exercise price
equal to or greater than 85% of the fair market value on the date of grant.
The options are exercisable immediately upon issuance and generally have a
term of ten years. The Company reserves the right to purchase all unvested
shares held by the participant upon the participant's termination at the
original purchase price. Fully vested shares not purchased by the participant
within three months after termination are cancelled and returned to the plan.
The vesting schedule is determined by the Board or the Committee at the time of
issuance. Stock options generally vest at the rate of 25% after one year and
ratably on a monthly basis for three years thereafter. Until the Company's
Common Stock is registered with the Securities and Exchange Commission, the
Company has the right of first refusal to purchase any shares of Common Stock
issued under the 1994 Plan.
At the discretion of the Board or the Committee, the Company may make
secured loans to option holders in amounts up to the exercise price of their
options plus related taxes or permit the option holder to pay the exercise price
in installments over a determined period. During 1995, 1996 and 1997, the
Company loaned $332,000, $416,000 and $2,614,000 to employees for the exercise
of options, respectively. These notes are full-recourse, are secured by the
shares of stock, are interest bearing with rates ranging from 6.0% to 6.5%, are
due between three and five years from the exercise date and must be repaid upon
sale of the underlying shares of stock.
F-13
<PAGE> 80
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
During 1995, 1996 and 1997, the Company's Board of Directors approved an
increase in the number of common shares reserved and available for issuance
under the 1994 Plan by 1,650,000 shares, 4,500,000 shares and 9,600,000 shares,
respectively (or from 3,750,000 shares in 1995 to 19,500,000 shares in 1997).
Activity under the 1994 Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 492,000 3,258,000 $ 0.07 $0.07
Additional shares reserved.......... 1,650,000 -- -- --
Options granted..................... (1,942,500) 1,942,500 0.07 0.07
Options canceled.................... 3,000 (3,000) 0.07 0.07
Options exercised................... -- (5,100,000) 0.07 0.07
---------- ---------- -------------- -----
Balance at December 31, 1995.......... 202,500 97,500 0.07 0.07
Additional shares reserved.......... 4,500,000 -- -- --
Options granted..................... (3,269,250) 3,269,250 0.07 - 1.13 0.73
Options exercised................... -- (1,314,300) 0.07 - 1.13 0.51
---------- ---------- -------------- -----
Balance at December 31, 1996.......... 1,433,250 2,052,450 0.07 - 1.13 0.85
Additional shares reserved.......... 9,600,000 -- -- --
Options granted..................... (5,330,400) 5,330,400 1.13 - 8.00 2.52
Options canceled.................... 11,061 (11,061) 0.50 - 1.13 0.79
Options exercised................... -- (1,970,357) 0.50 - 8.00 1.87
---------- ---------- -------------- -----
Balance at December 31, 1997.......... 5,713,911 5,401,432 $ .07 - $8.00 $2.12
========== ========== ============== =====
</TABLE>
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.07 to $1.00.............. 698,325 8.37 $0.62 698,325 $0.62
$1.13 to $1.25.............. 3,089,707 9.28 $1.16 3,089,707 $1.16
$3.00 to $5.00.............. 1,376,400 9.83 $4.04 1,376,400 $4.04
$8.00....................... 237,000 9.99 $8.00 237,000 $8.00
</TABLE>
Additional information relating to the 1994 Plan is as follows at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase.... 3,888,092 3,900,590 3,572,742
Weighted average repurchase price................ $0.07 $0.21 $1.05
Unvested options outstanding..................... 90,000 1,997,273 5,385,588
Total reserved Class B Common Stock shares for
stock option plans............................. 300,000 3,485,700 11,115,343
</TABLE>
The Company recorded deferred compensation of $1,156,000 during the year
ended December 31, 1997 for the difference between the exercise price and the
deemed value of certain of the Company's stock options
F-14
<PAGE> 81
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
granted under the 1994 Plan. These amounts are being amortized by charges to
operations over the vesting periods of the individual stock options, which are
generally four years. In the year ended December 31, 1997, $66,000 was amortized
to expense.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income (loss)
per share is required by Statement No. 123 for stock-based awards to employees
as if the Company had accounted for such awards using a valuation method
permitted under Statement No. 123.
Stock-based awards to employees under the Plan during the years ended
December 31, 1995, 1996 and 1997 were valued using the minimum value method,
assuming no expected dividends, a weighted-average expected life of 3.5 years
and a weighted-average risk-free interest rate of 6.0%. Should the Company
complete an initial public offering of its common stock, stock-based awards
granted thereafter will be valued using the Black-Scholes option pricing model.
Among other things, the Black-Scholes model considers the expected volatility of
the Company's stock price, determined in accordance with Statement No. 123, in
arriving at an estimated fair value. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes model may differ significantly from assumptions used to
calculate the value of stock-based awards under the minimum value method.
The weighted-average minimum values of options granted to employees during
1995, 1996 and 1997 were $0.01, $0.12 and $0.75, respectively. For pro forma
purposes, the estimated minimum value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying instruments.
The results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Pro forma:
Net income (loss).................................... $ -- $2,947 $(1,755)
Basic earnings (loss) per share...................... $0.00 $ 0.12 $ (0.07)
Diluted earnings (loss) per share.................... $0.00 $ 0.08 $ (0.07)
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment
Plan which was established in 1996, covering substantially all of the Company's
employees, subject to certain eligibility requirements. At its discretion, the
Company may make contributions to the plan. No contributions were made by the
Company in 1996 or 1997.
7. LITIGATION
In December 1996, Stanford Telecommunications, Inc. ("STI") filed an action
against the Company in the United States District Court for the Northern
District of California alleging that the Company's BCM-3036 upstream QPSK/QAM
burst transmitter used in cable modems infringed one of STI's patents (the
" '352 Patent"). The complaint seeks an injunction against the Company, 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
F-15
<PAGE> 82
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LITIGATION (CONTINUED)
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on both invalidity and noninfringement grounds.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. These
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging it "illegally pirated" Sarnoff's employees. The complaint seeks
to preliminarily and permanently enjoin the Company and the Former Employees
from utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their statutory and contractual duties of
confidentiality to Sarnoff by precluding them from working for six months in any
capacity relating to certain of the Company's programs. The Company has filed an
answer and is vigorously defending itself in this action. In May 1997, the Court
denied Sarnoff's request for a temporary restraining order. The Company
commenced its own lawsuit against Sarnoff in the Orange County Superior Court of
California alleging breach of contract, fraud, misappropriation of trade
secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. This action was removed
to the United States District Court, Central District of California and was
stayed pending resolution of the New Jersey action.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The complaint seeks to preliminarily and
permanently restrain the Company from employing a certain former employee of
RSSI and disclosing or utilizing any alleged RSSI trade secrets. The complaint
also seeks unspecified damages. In connection with the complaint, RSSI filed a
motion for preliminary injunction which was denied in February 1998. The Company
has reached a tentative settlement with RSSI in this action, pursuant to which
the Company has agreed not to hire any employees from RSSI for 30 days following
the consummation of this offering. Because such settlement agreement has not yet
been executed, there can be no assurance that a final settlement will be reached
on the foregoing terms, or at all.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The cases involving intellectual property rights involve complex questions
of fact and law and could require the expenditure of significant costs and
diversion of resources to defend. Although management believes the outcome of
the Company's outstanding legal proceedings, claims and litigation will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity, the results of litigation are inherently uncertain, and
such outcome is at least reasonably possible. The Company is unable to make an
estimate of the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying financial
statements.
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment, broadband communications.
During 1995, 1996 and 1997, the Company had a total of five customers whose
revenue represented a significant portion of total revenue in certain or all
years. Revenue from two of these customers was approximately 13.9% and 10.9% of
F-16
<PAGE> 83
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION (CONTINUED)
total revenue in 1995. Revenue from another customer represented approximately
13.8% in 1995, 28.0% in 1996, and 31.9% in 1997 of total revenue for the
respective year. Revenue from a fourth customer accounted for approximately
16.1% of total revenue in 1996. Revenue from a fifth customer was approximately
15.2% in 1996 and 14.6% in 1997 of total revenue for the respective year.
No other customer represented more than 10% of the Company's annual
revenue.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and amounts provided for doubtful
accounts.
Export revenue to all foreign customers as a percent of total revenue was
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Europe............................................... 10.5% 6.1% 5.2%
Asia................................................. 10.1 2.9 6.7
Other................................................ 1.9 3.5 3.5
---- ---- ----
22.5% 12.5% 15.4%
==== ==== ====
</TABLE>
The Company does not own or operate a fabrication facility, and
substantially all of its semiconductor device requirements are currently
supplied by two outside foundries in Asia. Any sudden demand for an increased
amount of semiconductor devices or sudden reduction or elimination of any
existing source or sources of semiconductor devices could result in a material
delay in the shipment of the Company's products. In addition, substantially all
of the Company's products are assembled and tested by one of two third-party
subcontractors in Asia. The Company does not have long-term agreements with any
of these suppliers. Any problems associated with the fabrication facilities, and
the delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
9. SUBSEQUENT EVENTS
STOCK SPLIT
On February 3, 1998, the Board of Directors approved a 3-for-2 split,
effective March 9, 1998, of the Company's Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect the stock split in the Company's capital structure.
SALE OF SHARES TO CISCO SYSTEMS
On February 3, 1998, Cisco Systems, Inc. (Cisco) exercised its option to
purchase 500,000 shares of Class A Common Stock upon consummation of the
Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco in connection with the Development and License
Agreement entered into between the Company and Cisco and effective in September
1996, as amended on February 3, 1998.
1998 STOCK INCENTIVE 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 1994
Plan. A total of 16,115,343 shares of Common Stock have been authorized for
issuance under the 1998 Plan. On the 1998 Plan effective date, outstanding
options under the 1994 Plan and the 1998 Special Stock Option Plan (the Special
Plan), a plan adopted to permit options to be granted with terms permitted by
the 1998 Plan prior to the 1998 Plan becoming effective,
F-17
<PAGE> 84
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (CONTINUED)
will be incorporated into the 1998 Plan, and no further option grants will be
made under the 1994 Plan or the Special Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the Purchase Plan) was adopted on
February 3, 1998, which allows employees to designate up to 15 percent of their
total compensation to purchase shares of the Company's Class A Common Stock at
85% of fair market value. 750,000 shares of Class A Common Stock have been
reserved for issuance under the Purchase Plan.
F-18
<PAGE> 85
[BROADCOM LOGO]
<PAGE> 86
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR CISCO PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued March 10, 1998
500,000 Shares
[BROADCOM LOGO]
CLASS A COMMON STOCK.
------------------------
THIS PROSPECTUS RELATES TO THE 500,000 SHARES OF CLASS A COMMON STOCK TO BE SOLD
BY THE COMPANY TO CISCO SYSTEMS, INC. THE COMPANY HAS TWO CLASSES OF COMMON
STOCK: CLASS A COMMON STOCK AND CLASS B COMMON STOCK (COLLECTIVELY, THE "COMMON
STOCK"). THE SHARES OF COMMON STOCK ARE SUBSTANTIALLY IDENTICAL EXCEPT THAT THE
HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE, AND THE
HOLDERS OF CLASS B COMMON STOCK ARE ENTITLED TO TEN VOTES PER SHARE, ON ALL
MATTERS SUBMITTED TO A VOTE OF THE SHAREHOLDERS. EACH SHARE OF CLASS B COMMON
STOCK IS CONVERTIBLE AT THE OPTION OF THE HOLDER INTO ONE SHARE OF CLASS A
COMMON STOCK, AND GENERALLY WILL AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A
COMMON STOCK UPON TRANSFER OF THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER.
SEE "DESCRIPTION OF CAPITAL STOCK." PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. THE OFFERING PRICE TO CISCO
SYSTEMS, INC. WILL BE EQUAL TO THE INITIAL PUBLIC OFFERING PRICE OF THE
COMPANY'S CLASS A COMMON STOCK, NET OF UNDERWRITING DISCOUNTS AND COMMISSIONS.
IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE. WILL BE
BETWEEN $10 AND $12 PER SHARE. APPLICATION WILL BE MADE TO LIST THE SHARES OF
CLASS A COMMON STOCK OFFERED HEREBY ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "BRCM."
------------------------
ALL REFERENCES HEREIN TO "THIS OFFERING," "OFFERED HEREBY," "THE OFFERING MADE
HEREBY" AND "SELLING SHAREHOLDERS" REFER TO THE COMPANY'S INITIAL PUBLIC
OFFERING OF CLASS A COMMON STOCK.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 87
[ALTERNATIVE SECTIONS FOR CISCO PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............. 3
Risk Factors................... 5
Sale of Shares to Cisco
Systems...................... 15
Use of Proceeds................ 15
Dividend Policy................ 15
Capitalization................. 16
Dilution....................... 17
Selected Financial Data........ 18
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 19
Business....................... 25
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management..................... 42
Certain Transactions........... 52
Principal and Selling
Shareholders................. 53
Description of Capital Stock... 54
Shares Eligible for Future
Sale......................... 56
Plan of Distribution........... 58
Legal Matters.................. 58
Experts........................ 58
Additional Information......... 58
Glossary of Technical Terms.... 59
Index to Financial
Statements................... F-1
</TABLE>
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby
will be passed upon for the Company by Brobeck Phleger & Harrison LLP,
Newport Beach, California.
The following section will replace the "Underwriters" section of
the Public Offering Prospectus:
PLAN OF DISTRIBUTION
The shares being registered hereunder are being issued and sold
by the Company to Cisco Systems pursuant to a stock purchase agreement
entered into upon exercise of an option granted to Cisco Systems in
conjunction with a development agreement. This offering is not being
underwritten. See "Sale of Shares to Cisco Systems" and "Certain
Transactions."
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by the Company.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Registration fee............................................ $ 15,895
NASD filing fee............................................. 5,888
Nasdaq National Market listing fee.......................... 27,625
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous............................................... *
--------
Total............................................. $900,000
========
</TABLE>
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (1) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interest of the Company or its shareholders or that involve
the absence of good faith on the part of the director, (iii) for any transaction
from which a director derived an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of a serious injury to the Company or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (vi) under
Section 310 of the California Law concerning contacts or transactions between
the Company and a director, or (vii) under Section 316 of the California Law
concerning directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to the Company's shareholders for any
violation by a director of the director's fiduciary duty to the Company or its
shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to
II-1
<PAGE> 89
indemnify these directors or executive officers (other than for liability
resulting from willful misconduct of a culpable nature), to advance expenses to
them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled to
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms. Section 317 of the California Law and the Company's Bylaws
make provision for the indemnification of officers, directors and other
corporate agents in terms sufficiently broad to indemnify such persons, under
certain circumstances, for liabilities (including reimbursement of expense
incurred) arising under the Securities Act.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Company and its officers and
directors, and by the Company of the Underwriters, for certain liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder, and will automatically
convert upon transfer, except to certain Permitted Transferees. The following is
a summary of transactions by the Registrant since January 1, 1995 involving
sales of the Registrant's securities that were not registered under the
Securities Act:
1. In March 1995, the Registrant issued and sold 500,000 shares of Series C
Preferred Stock to Scientific-Atlanta, Inc. at a price per share of $2.00. Each
share of Series C Preferred Stock will convert into three shares of Class B
Common Stock upon consummation of this offering.
2. In February 1996, the Registrant issued and sold an aggregate of 493,839
shares of Series D Preferred Stock to 22 accredited individual investors and
strategic partners at a price per share of $6.00. Each share of Series D
Preferred Stock will convert into three shares of Class B Common Stock upon
consummation of this offering.
3. In June 1997, the Registrant issued and sold 60,000 shares of Class B
Common Stock to the Regents of the University of New Mexico ("UNM") in
connection with a License Agreement between UNM and the Registrant. The shares
were issued as part of the Registrant's consideration to UNM in return for a
license grant and certain research and development services rendered to the
Registrant. The consideration tendered to the Registrant was valued at an
aggregate of $68,000 or $1.13 per share.
4. In September 1997, the Registrant issued and sold 1,500,000 shares of
Series E Preferred Stock to General Instrument Corporation at a price per share
of $15.15. This transaction was undertaken in connection with a Development,
Supply and License Agreement between General Instrument and the Registrant. Each
share of Series E Preferred Stock will convert into 1.5 shares of Class B Common
Stock upon consummation of this offering.
5. In October 1997, the Registrant issued and sold 225,000 shares of Class
B Common Stock to Irell & Manella LLP at a price per share of $4.67, or an
aggregate purchase price of $1,050,000.
6. Since January 1, 1995, the Registrant has issued non-qualified stock
options under its 1994 Plan to certain eligible officers, directors, consultants
and employees to the purchase an aggregate of 10,911,750 shares of Class B
Common Stock. Such optionees included consultants who rendered bonafide
consulting services to the Registrant, which services included engineering
support, marketing services and strategic planning and guidance. None of the
optionees paid any cash consideration for such options. Such options did not
involve a
II-2
<PAGE> 90
"sale" of securities; and, accordingly, registration was not required. The
following table sets forth the grant date, number of options, current exercise
price and class of optionees for all of such options:
<TABLE>
<CAPTION>
NO. OF EXERCISE CLASS OF
GRANT DATE OPTIONS PRICE OPTIONEES
- --------------------- --------- -------- -------------------------
<S> <C> <C> <C>
03/01/95 to 01/31/96 2,212,500 $ 0.07 Employees and Consultants
03/01/96 to 07/08/96 1,507,500 $ 0.50 Employees and Consultants
07/11/96 to 07/31/96 418,500 $ 1.00 Employees and Consultant
08/06/96 to 08/29/97 3,770,250 $ 1.13 Employees and Consultants
06/23/97 750,000 $ 1.25 Two Officers
09/15/97 to 09/30/97 421,500 $ 3.00 Employees
10/09/97 to 10/31/97 514,200 $ 4.00 Employees
11/03/97 to 11/28/97 485,700 $ 5.00 Employees and a Director
12/01/97 to 12/31/97 462,000 $ 8.00 Employees
01/01/98 to 01/31/98 212,700 $10.00 Employees
02/01/98 to 02/28/98 156,900 $10.00 Employees
</TABLE>
The sale and issuance of securities set forth above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof or Rule 701 adopted thereunder. The recipients of the securities in each
of the transactions set forth in above represented their intention to acquire
such securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments used in such transactions. All
recipients received adequate information about the Registrant at the time of the
acquisition of such securities or had access, through employment or other
relationships with the Registrant, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen certificate representing shares of Class A Common
Stock of the Registrant.
5.1* Form of Opinion of Brobeck Phleger & Harrison LLP.
10.1** Form of Indemnification Agreement for Directors of the
Registrant.
10.2** Form of Indemnification Agreement for Officers of the
Registrant.
10.3** 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.
10.5** 1998 Employee Stock Purchase Plan.
10.6** Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7** Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
</TABLE>
II-3
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.8+** Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9** Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10** Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11 Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
11.1** Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Financial Statements).
23.1 Consent of Independent Auditors.
23.2* Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1** Power of Attorney (contained on signature page on page
II-5).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
+ Registrant has sought confidential treatment pursuant to Rule 406 of portions
of the referenced exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule
(2) Schedule II--Valuation and qualifying accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
II-4
<PAGE> 92
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 9th day of March, 1998.
BROADCOM CORPORATION
By: /s/ HENRY SAMUELI
------------------------------------
Henry Samueli
Co-Chairman, Vice President of
Engineering
and Chief Technical Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Co-Chairman, President and March 9, 1998
- ----------------------------------------------------- Chief Executive Officer
Henry T. Nicholas, III (principal executive officer)
/s/ HENRY SAMUELI Co-Chairman, Vice President March 9, 1998
- ----------------------------------------------------- of Engineering and
Henry Samueli Chief Technical Officer
/s/ WILLIAM J. RUEHLE Vice President, Chief March 9, 1998
- ----------------------------------------------------- Financial Officer and
William J. Ruehle Secretary
(principal financial and
accounting officer)
* Director March 9, 1998
- -----------------------------------------------------
Alan E. Ross
* Director March 9, 1998
- -----------------------------------------------------
Werner F. Wolfen
* Director March 9, 1998
- -----------------------------------------------------
Myron S. Eichen
</TABLE>
*By: /s/ HENRY SAMUELI
-------------------------------
Henry Samueli
Attorney-in-Fact
II-6
<PAGE> 94
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Broadcom Corporation
We have audited the financial statements of Broadcom Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated January 16, 1998,
except for Note 9, as to which the date is March 9, 1998 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 9, 1998
S-1
<PAGE> 95
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $ 50,000 $ 162,000 $ -- $ 50,000 $ 162,000
Reserve for excess and obsolete
inventory........................ -- 55,000 -- -- 55,000
-------- ---------- ---- -------- ----------
Total......................... $ 50,000 $ 217,000 $ -- $ 50,000 $ 217,000
======== ========== ==== ======== ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $162,000 $ 213,000 $ -- $228,000 $ 147,000
Reserve for excess and obsolete
inventory........................ 55,000 1,055,000 -- 361,000 749,000
-------- ---------- ---- -------- ----------
Total......................... $217,000 $1,268,000 $ -- $589,000 $ 896,000
======== ========== ==== ======== ==========
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $147,000 $ 574,000 $ -- $ -- $ 721,000
Reserve for excess and obsolete
inventory........................ 749,000 1,028,000 -- 91,000 1,686,000
-------- ---------- ---- -------- ----------
Total......................... $896,000 $1,602,000 $ -- $ 91,000 $2,407,000
======== ========== ==== ======== ==========
</TABLE>
S-2
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
------- ----------- -------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement..............................
3.1* Amended and Restated Articles of Incorporation of the
Registrant..................................................
3.2* Bylaws of the Registrant....................................
4.1* Specimen certificate representing shares of Class A Common
Stock of the Registrant.....................................
5.1* Form of Opinion of Brobeck Phleger & Harrison LLP...........
10.1** Form of Indemnification Agreement for Directors of the
Registrant..................................................
10.2** Form of Indemnification Agreement for Officers of the
Registrant..................................................
10.3** 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement...................................................
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.......
10.5** 1998 Employee Stock Purchase Plan...........................
10.6** Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended..............
10.7** Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended..............
10.8+** Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc. .....
10.9** Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc. .........................
10.10** Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as
amended.....................................................
10.11 Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners...................
11.1** Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Financial Statements)......
23.1 Consent of Independent Auditors.............................
23.2* Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1)................................................
24.1** Power of Attorney (contained on signature page on page
II-5).......................................................
27.1** Financial Data Schedule.....................................
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
+ Registrant has sought confidential treatment pursuant to Rule 406 of portions
of the referenced exhibit.
<PAGE> 1
Exhibit 10.11
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
AS-IS
BETWEEN
IRVINE TECHNOLOGY PARTNERS III
AND
BROADCOM CORPORATION
<PAGE> 2
INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net)
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premisess
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
Section 2.4 Must Take Space
ARTICLE III. TERM
Section 3.1 General
Section 3.2 Delay in Possession
Section 3.3 Right to Terminate
Section 3.4 Early Entry by Tenant
Section 3.5 Tenant's Option to Extend Term
ARTICLE IV. RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. COMMON AREAS; SERVICES
Section 6.1 Utilities and Services
Section 6.2 Operation and Maintenance of Common Areas
Section 6.3 Use of Common Areas
Section 6.4 Parking
Section 6.5 Changes and Additions by Landlord
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
Section 9.5 Transfer to Affiliate
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Tenant's Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
(ii)
<PAGE> 3
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIAL
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
Section 14.9 Limitation of Actions Against Landlord
ARTICLE XV. END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII. BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
EXHIBITS
Exhibit A Description of the Premises
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit Y Project Site Plan
(iii)
<PAGE> 4
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
THIS LEASE is made as of the 16th day of February, 1998, by and
between IRVINE TECHNOLOGY PARTNERS III, a California general
partnership, hereafter called "Landlord," and BROADCOM CORPORATION, a
California corporation, hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall
mean and refer to the following collective terms, the application of which
shall be governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section
2.1.
Address of Building: 15326 Alton Parkway, Irvine, CA 92618
2. Project Description (if applicable): Alton/Technology Park
3. Use of Premises: General administrative office use and for light
assembly and testing of Tenant's products, marketing, storage and
distribution of Tenant's products and related uses in compliance with
all applicable laws, rules and regulations and covenants, conditions
and restrictions of record.
4. Commencement Date: February 15, 1998
5. Lease Term: The Term of this Lease shall expire at midnight on
February 28, 1999.
6. Basic Rent: Nineteen Thousand Eight Hundred Twelve Dollars
($19,812.00) per month.
Basic Rent shall increase to Thirty Nine Thousand Six Hundred Twenty
Four Dollars ($39,624.00) when Tenant takes possession of the Must Take
Space not later than August 15, 1998 (See Section 2.4).
7. Guarantor(s): N/A
8. Floor Area of Premises: approximately 15,850 rentable square feet
subject to increase on of before August 15, 1998 in accordance with
Section 2.4.
9. Security Deposit: $43,586.00
10. Broker(s): CB Madison
11. Additional Insureds: Insignia Commercial Group
12. Address for Payments and Notices:
LANDLORD TENANT
Insignia Commercial Group, Inc. BROADCOM CORPORATION
One Technology Drive, Suite F-207 16251 Laguna Canyon Road
Irvine, CA 92618 Irvine, CA 92618
Attention: Chief Financial Officer
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
13. Tenant's Liability Insurance Requirement: $2,000,000.00
14. Vehicle Parking Spaces: One Hundred Twenty-Six (126)
15. Estimated Space Plan Approval Date: N/A
1
<PAGE> 5
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and
Tenant leases from Landlord the premises shown in Exhibit A (the "Premises"),
including the building identified in Item 1 of the Basic Lease Provisions
(which together with the underlying real property, is called the "Building"),
and containing approximately the floor area set forth in Item 8 of the Basic
Lease Provisions. The Premises is a portion of the project shown in Exhibit Y
(the "Project").
SECTION 2.2. ACCEPTANCE OF PREMISES.
(a) Landlord shall deliver the Premises to Tenant in its
"As-Is" condition on the Commencement Date. Landlord warrants to Tenant that
the existing plumbing, including, without limitation, sewer and drain lines,
electrical systems, fire sprinkler system, lighting, air conditioning and
heating systems and loading doors, if any, in the Premises, other than those
constructed by Tenant, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement
Date, Landlord shall, except as otherwise provided in this Lease, promptly
after receipt of written notice from Tenant setting forth with specificity the
nature and extent of such non-compliance, rectify same but the cost associated
with any such correction shall be a Building Cost. If Tenant does not give
Landlord written notice of a non-compliance with this warranty within thirty
(30) days after Tenant commences business operations in the Premises,
correction of that non-compliance shall be the obligation of Tenant at Tenant's
sole cost and expense. Tenant shall be responsible at its sole cost and
expense for any improvements to the Building or the Premises which may be
required to cause the Building or the Premises to be in compliance with law
after the Commencement Date as a result of alterations or improvements which
Tenant undertakes within the Premises.
(b) Except as specifically set forth above, Tenant
acknowledges that the Premises shall be leased to Tenant in an "as-is"
condition, that neither Landlord nor any representative of Landlord has made
any representation or warranty with respect to the Premises or the Building or
the suitability or fitness of either for any purpose, including without
limitation any representations or warranties regarding zoning or other land use
matters, and that neither Landlord nor any representative of Landlord has made
any representations or warranties regarding (i) what other tenants or uses may
be permitted or intended in the Building and the Project, or (ii) any
exclusivity of use by Tenant with respect to its permitted use of the Premises
as set forth in Item 3 of the Basic Lease Provisions. Tenant further
acknowledges that neither Landlord nor any representative of Landlord has
agreed to undertake any alterations or additions to the Premises except as
expressly provided in this Lease. The taking of possession or use of the
Premises by Tenant for any purpose shall conclusively establish that the
Premises and the Building were in satisfactory condition and in conformity with
the provisions of this Lease in all respects.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize
any name selected by Landlord from time to time for the Building and/or the
Project as any part of Tenant's corporate or trade name. Landlord shall have
the right to change the name, address, number or designation of the Building or
Project without liability to Tenant.
SECTION 2.4. MUST TAKE SPACE. Tenant hereby agrees that not later
than August 15, 1998, Tenant shall lease for a term equal to the then unexpired
portion of the Term of this Lease, the approximately 15,849 rentable square
feet of space comprising the second floor of the Building as shown on Exhibit
A-1 attached to this Lease (the "Must Take Space"). Tenant shall provide ten
days' prior written notice to Landlord of the date Tenant intends to commence
leasing the Must Take Space. The Must Take Space shall be subject to all of the
terms of this Lease except that (i) the term shall commence on the date
specified in Tenant's notice, which date shall be not later August 15, 1998;
(ii) the basic rent for the Must Take Space shall be Nineteen Thousand Eight
Hundred Twelve Dollars ($19,812.00) per month; and (iii) the Must Take Space
shall be leased in its existing condition (i.e., "as-is"), as more particularly
provided in Section 2.2 of this Lease. If the lease of the Must Take Space
commences on a date other than the first day of a calendar month, basic and
additional rent for the Must Take Space shall be prorated to reflect the actual
number of days remaining in such calendar month. Upon the commencement of
Tenant's lease of the Must Take Space, the Must Take Space shall become part of
the "Premises" as that term is used in this Lease. Landlord agrees not to
permit any other person or entity to occupy the Must Take Space prior to
Tenant's lease of the Must Take Space.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in
Item 5 of the Basic Lease Provisions. The Term shall commence ("Commencement
Date") on the date set forth in Item 4 of the Basic Lease Provisions. Promptly
following the Commencement Date, the parties shall memorialize on a form
provided by Landlord the actual Commencement Date and the expiration date
("Expiration Date") of this Lease. Tenant's failure to execute that form shall
not affect the validity of Landlord's determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason
whatsoever, cannot deliver possession of the Premises to Tenant on or before
the Commencement Date, this Lease shall not be void or voidable nor shall
Landlord be liable to Tenant for any resulting loss or damage; provided,
however, that in the event Landlord fails to tender possession of the Premises
to Tenant within thirty (30) days after the Commencement Date, Tenant shall
have
2
<PAGE> 6
the right to cancel this Lease by written notice to Landlord and Landlord shall
return the Security Deposit and any prepaid rent to Tenant within fifteen (15 )
business days of such notice. However, Tenant shall not be liable for any rent
and the Commencement Date shall not occur until Landlord delivers possession of
the Premises and the Premises are in fact available for Tenant's occupancy,
except that if Landlord's failure to so deliver possession on the Commencement
Date is attributable to any action or inaction by Tenant, then the Commencement
Date shall not be advanced to the date on which possession of the Premises is
tendered to Tenant, and Landlord shall be entitled to full performance by
Tenant (including the payment of rent) from the date Landlord would have been
able to deliver the Premises to Tenant but for Tenant's delay(s).
SECTION 3.3. RIGHT TO TERMINATE. Provided Tenant is not in
default under any provision of the Lease, Tenant shall have the right at any
time during the Term hereof, to terminate this Lease by executing a new lease
with Landlord (the "New Lease"), provided: (i) the terms and conditions of the
New Lease (including, without limitation, the basic rent, tenant improvement
allowance and location of the new leased premises) are acceptable to both
Tenant and Landlord in their sole and absolute discretion, (ii) the leased
premises of the New Lease contain at least 30,000 rentable square feet, and
(iii) the lease term of the New Lease shall be for not less than twelve (12)
months. All rental and other charges due under this Lease shall be paid by
Tenant to Landlord through the effective date of termination of this Lease and
any remaining Security Deposit and unearned rent shall be refunded to Tenant
within thirty (30) days following such termination. Except as specifically
provided in the foregoing sentence, any such termination shall not abrogate any
obligation hereunder existing as of the date thereof or otherwise attributable
to Tenant's occupancy of the Premises.
SECTION 3.4. EARLY ENTRY TO PREMISES. Notwithstanding the
provisions of Section 3.1 above, upon the full execution and delivery of this
Lease by both parties and delivery of the amounts required to be paid, Landlord
hereby agrees to provide Tenant with immediate access to the Premises to enable
Tenant to install fixtures and telephone and office equipment in the Premises.
Such access shall be subject to all of the terms and conditions of this Lease,
except that Tenant's rental obligation shall not commence to accrue until the
Commencement Date hereof.
SECTION 3.5. TENANT'S OPTION TO EXTEND TERM. Provided that Tenant
is not in default under any provision of this Lease after notice and expiration
of applicable cure periods, either at the time of exercise of the extension
rights granted herein or at the time of the commencement of such extension, and
provided further that Tenant (or an Affiliate of Tenant) is occupying the
Premises, both at the time of exercise and at the time of commencement of such
extension, Tenant shall have the option to extend the Term of this Lease with
respect to the entire Premises only for two (2) periods of three (3) months
each. Tenant shall exercise its right to extend the Term by and only by
delivering to Landlord not less than ninety (90) days nor more than one hundred
eighty (180) days prior to the then current expiration date of the Term,
Tenant's irrevocable written notice of its commitment to extend (the
"Commitment Notice"). In the event Tenant fails to deliver a Commitment Notice
in accordance with the terms of this Section for the first extension period,
Tenant's rights to the second extension option shall terminate. The Basic Rent
payable under the Lease during such extension of the Term shall be Forty One
Thousand Two Hundred Nine Dollars ($41,209.00) based on One Dollar Thirty Cents
($1.30) per square foot of the Premises. In addition, Tenant shall continue to
pay Operating Expenses in accordance with the provisions and subject to the
limitations set forth in Section 4.2 of this Lease during any such extension.
If Tenant fails to timely comply with any of the provisions of
this Section, Tenant's right to extend the Term shall be extinguished and the
Lease shall automatically terminate as of the expiration date of the Term,
without any extension and without any liability to Landlord. Any attempt to
assign or transfer any right or interest created by this paragraph, except to
an "Affiliate" of Tenant, shall be void from its inception. Tenant shall have
no other right to extend the Term beyond the two (2) three (3) month extensions
granted pursuant to this Section. Unless agreed to in a writing signed by
Landlord and Tenant, any extension of the Term, whether created by an amendment
to this Lease or by a holdover of the Premises by Tenant, or otherwise, shall
be deemed a part of, and not in addition to, any duly exercised extension
period permitted by this Section.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date,
Tenant shall pay to Landlord without deduction or offset, Basic Rent for the
Premises in the total amount shown (including subsequent adjustments, if any)
in Item 6 of the Basic Lease Provisions. Except as set forth in Section 2.4
above, any rental adjustment shown in Item 6 shall be deemed to occur on the
specified monthly anniversary of the Commencement Date, whether or not that
date occurs at the end of a calendar month. The rent shall be due and payable
in advance commencing on the Commencement Date (as prorated for any partial
month) and continuing thereafter on the first day of each successive calendar
month of the Term until expiration or earlier termination of this Lease. No
demand, notice or invoice shall be required for the payment of Basic Rent. An
installment of rent in the amount of one (1) full month's Basic Rent at the
initial rate specified in Item 6 of the Basic Lease Provisions shall be
delivered to Landlord concurrently with Tenant's execution of this Lease and
shall be applied against the Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
3
<PAGE> 7
(a) Tenant shall pay to Landlord, as additional rent,
"Building Costs" and "Property Taxes," as those terms are defined below,
incurred by Landlord in the operation of the Building and Project. For
convenience of reference, Property Taxes and Building Costs shall be referred
to collectively as "Operating Expenses".
(b) Commencing prior to the start of the first full
"Expense Recovery Period" (as defined below) of the Lease, and prior to the
start of each full or partial Expense Recovery Period thereafter, Landlord
shall give Tenant a written estimate of the amount of Operating Expenses for
the Expense Recovery Period. Tenant shall pay the estimated amounts to
Landlord in equal monthly installments, in advance, with Basic Rent. If
Landlord has not furnished its written estimate for any Expense Recovery Period
by the time set forth above, Tenant shall continue to pay cost reimbursements
at the rates established for the prior Expense Recovery Period, if any;
provided that when the new estimate is delivered to Tenant, Tenant shall, at
the next monthly payment date, pay any accrued cost reimbursements based upon
the new estimate. For purposes hereof, "Expense Recovery Period" shall mean
every twelve month period during the Term (or portion thereof for the first and
last lease years) commencing July 1 and ending June 30.
(c) Within one hundred twenty (120) days after the end of
each Expense Recovery Period, Landlord shall furnish to Tenant a statement
showing in reasonable detail the actual or prorated Operating Expenses incurred
by Landlord during the period, and the parties shall within thirty (30) days
thereafter make any payment or allowance necessary to adjust Tenant's estimated
payments, if any, to Tenant's actual owed amounts as shown by the annual
statement. Any delay or failure by Landlord in delivering any statement
hereunder shall not constitute a waiver of Landlord's right to require Tenant
to pay Operating Expenses pursuant hereto. Any amount due Tenant shall be
credited against installments next coming due under this Section 4.2, and any
deficiency shall be paid by Tenant together with the next installment. If
Tenant has not made estimated payments during the Expense Recovery Period, any
amount owing by Tenant pursuant to subsection (a) above shall be paid to
Landlord in accordance with Article XVI. Should Tenant fail to object in
writing to Landlord's determination of actual Operating Expenses within sixty
(60) days following delivery of Landlord's expense statement, Landlord's
determination of actual Operating Expenses for the applicable Expense Recovery
Period shall be conclusive and binding on the parties and any future claims to
the contrary shall be barred.
(d) Even though the Lease has terminated and the Tenant
has vacated the Premises, when the final determination is made of Operating
Expenses for the Expense Recovery Period in which the Lease terminates, Tenant
shall upon notice pay the entire increase due over the estimated expenses paid
provided that any such notice is delivered within ninety (90) days after the
expiration of the Expense Recovery Period during which the Lease terminates.
Conversely, any overpayment made in the event expenses decrease shall be
promptly rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period,
any one or more of the Operating Expenses are increased to a rate(s) or
amount(s) in excess of the rate(s) or amount(s) used in calculating the
estimated expenses for the year, then the estimate of Operating Expenses shall
be increased for the month in which such rate(s) or amount(s) becomes effective
and for all succeeding months by an amount equal to the increase. Landlord shall
give Tenant written notice of the amount or estimated amount of the increase,
the month in which the increase will become effective, and the month for which
the payments are due. Tenant shall pay the increase to Landlord as a part of
Tenant's monthly payments of estimated expenses as provided in paragraph (b)
above, commencing with the month in which effective.
(f) The term "Building Costs" shall include all expenses
of operation and maintenance of the Building and of the Building's
proportionate share of the Project, if applicable (determined as the rentable
square footage of the Building divided by the rentable square footage of all
space in the Project), to the extent such expenses are not billed to and paid
directly by Tenant, and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums
or reasonable premium equivalents for the reasonable cost of administering a
self-insurance program should Landlord elect to self-insure any risk that
Landlord is authorized to insure hereunder; license, permit, and inspection
fees; heat; light; power; air conditioning; supplies; materials; equipment;
tools; the reasonable cost of any environmental, insurance, tax or other
consultant utilized by Landlord in connection with the Building and/or Project;
establishment of reasonable reserves for replacements and/or repair of Common
Area improvements (if applicable), equipment and supplies; costs incurred in
connection with compliance of any laws or changes in laws applicable to the
Building or the Project enacted after the Commencement Date; the cost of any
capital investments (other than tenant improvements for specific tenants) to
the extent of the amortized amount thereof over the useful life of such capital
investments calculated at a market cost of funds, all as reasonably determined
by Landlord, for each such year of useful life during the Term; labor;
reasonably allocated wages and salaries, fringe benefits, and payroll taxes for
administrative and other personnel directly applicable to the Building and/or
Project, including both Landlord's personnel and outside personnel; any expense
incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and 10.2; and a commercially
reasonable overhead/management fee for the professional operation of the
Building and Project. It is understood that Building Costs shall include
competitive charges for direct services provided by any subsidiary or division
of Landlord.
(g) The term "Property Taxes" as used herein shall
include the following: (i) all real estate taxes or personal property taxes,
as such property taxes may be reassessed from time to time; and (ii) other
taxes, charges and assessments which are levied with respect to this Lease or
to the Building and/or the Project, and any improvements, fixtures and
equipment and other property of Landlord located in the Building and/or the
Project, except that general net income and franchise taxes imposed against
Landlord shall be excluded; and (iii) all assessments and fees for public
improvements, services, and facilities and impacts thereon, including without
limitation arising out of any Community Facilities Districts, "Mello Roos"
districts, similar assessment districts, and any traffic impact mitigation
assessments or fees; (iv) any tax, surcharge or assessment which shall be
levied in addition to or in lieu of real estate or personal
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property taxes, other than taxes covered by Article VIII; and (v) costs and
expenses incurred in contesting the amount or validity of any Property Tax by
appropriate proceedings. If, by applicable law, any taxes or assessments may be
paid in installments at the option of the taxpayer, then whether or not
Landlord elects to pay such taxes or assessments in installments, Tenant's
liability for such taxes shall be computed as if such election had been made
and only the installments thereof which would have become due during the Term
of this Lease shall be included within the definition of Property Taxes.
(h) Notwithstanding the definition of Building Costs and
Property Taxes set forth above, Tenant's obligation to pay Operating Expenses
shall not exceed the sum of Twenty Cents (.20) per square foot of Premises per
month during the Term of this Lease or any extension thereof. The foregoing
limitation of Tenant's obligation to pay Operating Expenses shall not apply to
capital repairs, replacements or other costs of a capital nature which are
required or are caused by Tenant's particular use of the Premises or
improvements or alterations undertaken by Tenant during the Term hereof.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's
delivery of this Lease, Tenant shall deposit with Landlord the sum, if any,
stated in Item 9 of the Basic Lease Provisions, to be held by Landlord as
security for the full and faithful performance of Tenant's obligations under
this Lease (the "Security Deposit"). Subject to the last sentence of this
Section, the Security Deposit shall be understood and agreed to be the property
of Landlord upon Landlord's receipt thereof, and may be utilized by Landlord in
its discretion towards the payment of all prepaid expenses by Landlord for
which Tenant would be required to reimburse Landlord under this Lease,
including without limitation brokerage commissions and Tenant Improvement
costs. Upon any default by Tenant, including specifically Tenant's failure to
pay rent or to abide by its obligations under Sections 7.1 and 15.3 below,
whether or not Landlord is informed of or has knowledge of the default, the
Security Deposit shall be deemed to be automatically and immediately applied,
without waiver of any rights Landlord may have under this Lease or at law or in
equity as a result of the default, as a setoff for full or partial compensation
for that default. If any portion of the Security Deposit is applied after a
default by Tenant, Tenant shall within ten (10) business days after written
demand by Landlord deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on the Security Deposit. If Tenant
fully performs its obligations under this Lease, the Security Deposit or any
balance thereof shall be returned to Tenant (or, at Landlord's option, to the
last assignee of Tenant's interest in this Lease) after the expiration of the
Term, provided that Landlord may retain the Security Deposit to the extent and
until such time as all amounts due from Tenant in accordance with this Lease
have been determined and paid in full.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the
purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities.
The parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not do or permit to be done anything which will invalidate or increase
the cost of any insurance policy(ies) covering the Building, the Project and/or
their contents, and shall comply with all applicable insurance underwriters
rules and the requirements of the Pacific Fire Rating Bureau or any other
organization performing a similar function. Tenant shall comply at its expense
with all present and future laws, ordinances, restrictions, regulations,
orders, rules and requirements of all governmental authorities that pertain
specifically to Tenant or to Tenant's particular use of the Premises, including
without limitation all federal and state occupational health and safety
requirements, whether or not Tenant's compliance will necessitate expenditures
or interfere with its use and enjoyment of the Premises. Tenant shall comply
at its expense with all present and future covenants, conditions, easements or
restrictions now or hereafter affecting or encumbering the Building and/or
Project, and any amendments or modifications thereto which do not materially
interfere with Tenant's rights nor materially increase Tenant's obligations
under this Lease, including without limitation the payment by Tenant of any
periodic or special dues or assessments charged against the Premises or Tenant
which may be allocated to the Premises or Tenant in accordance with the
provisions thereof. Tenant shall promptly upon demand reimburse Landlord for
any additional insurance premium charged by reason of Tenant's failure to
comply with the provisions of this Section, and shall indemnify Landlord from
any liability and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Except as approved in writing by Landlord,
in its sole discretion, Tenant shall have no right to maintain identification
signs in any location in, on or about the Premises, the Building or the Project
and shall not place or erect any signs, displays or other advertising materials
that are visible from the exterior of the Building. Notwithstanding the
foregoing, provided Tenant continues to occupy the entire Premises, Tenant
shall have the exclusive right to maintain one (1) identification sign in a
location on the exterior of the Building designated by Landlord which conforms
to the Signage Criteria. The size, design, graphics, material, style, color and
other physical aspects of any permitted sign shall be subject to Landlord's
written approval prior to installation (which approval may be withheld in
Landlord's discretion), any covenants, conditions or restrictions encumbering
the Premises, Landlord's signage program for the Project, as in effect from
time to time and approved by the City of Irvine ("Signage Criteria"), and any
applicable
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municipal or other governmental permits and approvals. Tenant acknowledges
having received and reviewed a copy of the current Signage Criteria for the
Project. Tenant shall be responsible for the cost of any permitted sign,
including the fabrication, installation, maintenance and removal thereof. If
Tenant fails to maintain its sign, or if Tenant fails to remove same upon
termination of this Lease and repair any damage caused by such removal,
Landlord may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous
Materials" includes (i) any "hazardous materials" as defined in Section
25501(n) of the California Health and Safety Code, (ii) any other substance or
matter which results in liability to any person or entity from exposure to such
substance or matter under any statutory or common law theory, and (iii) any
substance or matter which is in excess of permitted levels set forth in any
federal, California or local law or regulation pertaining to any hazardous or
toxic substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous
Materials to be brought upon, stored, used, generated, released or disposed of
on, under, from or about the Premises (including without limitation the soil
and groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to utilize within the Premises standard
office products that may contain Hazardous Materials (such as photocopy toner,
"White Out", and the like), provided however, that (i) Tenant shall maintain
such products in their original retail packaging, shall follow all instructions
on such packaging with respect to the storage, use and disposal of such
products, and shall otherwise comply with all applicable laws with respect to
such products, and (ii) all of the other terms and provisions of this Section
5.3 shall apply with respect to Tenant's storage, use and disposal of all such
products. Landlord may, in its sole discretion, place such conditions as
Landlord deems appropriate with respect to any such Hazardous Materials, and
may further require that Tenant demonstrate that any such Hazardous Materials
are necessary or useful to Tenant's business and will be generated, stored,
used and disposed of in a manner that complies with all applicable laws and
regulations pertaining thereto and with good business practices. Tenant
understands that Landlord may utilize an environmental consultant to assist in
determining conditions of approval in connection with the storage, generation,
release, disposal or use of Hazardous Materials by Tenant on or about the
Premises, and/or to conduct periodic inspections of the storage, generation,
use, release and/or disposal of such Hazardous Materials by Tenant on and from
the Premises, and if any such inspection reveals a violation by Tenant of its
obligations under this Section, Tenant agrees that any costs reasonably
incurred by Landlord in connection therewith shall be reimbursed by Tenant to
Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall
complete, execute and deliver to Landlord an Environmental Questionnaire and
Disclosure Statement (the "Environmental Questionnaire") in the form of Exhibit
B attached hereto. The completed Environmental Questionnaire shall be deemed
incorporated into this Lease for all purposes, and Landlord shall be entitled
to rely fully on the information contained therein. On each anniversary of the
Commencement Date until the expiration or sooner termination of this Lease,
Tenant shall disclose to Landlord in writing the names and amounts of all
Hazardous Materials which were stored, generated, used, released and/or
disposed of on, under or about the Premises for the twelve-month period prior
thereto, and which Tenant desires to store, generate, use, release and/or
dispose of on, under or about the Premises for the succeeding twelve-month
period. In addition, to the extent Tenant is permitted to utilize Hazardous
Materials upon the Premises, Tenant shall promptly provide Landlord with
complete and legible copies of all the following environmental documents
relating thereto: reports filed pursuant to any self-reporting requirements;
permit applications, permits, monitoring reports, workplace exposure and
community exposure warnings or notices and all other reports, disclosures,
plans or documents (even those which may be characterized as confidential)
relating to water discharges, air pollution, waste generation or disposal, and
underground storage tanks for Hazardous Materials; orders, reports, notices,
listings and correspondence (even those which may be considered confidential)
of or concerning the release, investigation of, compliance, cleanup, remedial
and corrective actions, and abatement of Hazardous Materials; and all
complaints, pleadings and other legal documents filed by or against Tenant
related to Tenant's use, handling, storage, release and/or disposal of
Hazardous Materials.
(d) Landlord and its agents shall have the right, but not
the obligation, to inspect, sample and/or monitor the Premises and/or the soil
or groundwater thereunder at any time to determine whether Tenant is complying
with the terms of this Section 5.3, and in connection therewith Tenant shall
provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under
or about the Premises caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, Landlord and its agents shall have the
right, but not the obligation, without limitation upon any of Landlord's other
rights and remedies under this Lease, to immediately enter upon the Premises
without notice and to discharge Tenant's obligations under this Section 5.3 at
Tenant's expense, including without limitation the taking of emergency or
long-term remedial action. Landlord and its agents shall endeavor to minimize
interference with Tenant's business in connection therewith, but shall not be
liable for any such interference. In addition, Landlord, at Tenant's expense,
shall have the right, but not the obligation, to join and participate in any
legal proceedings or actions initiated in connection with any claims arising
out of the storage, generation, use, release and/or disposal by Tenant or its
agents, employees, contractors, licensees or invitees of Hazardous Materials
on, under, from or about the Premises.
(e) If the presence of any Hazardous Materials on, under,
from or about the Premises or the Project caused or permitted by Tenant or its
agents, employees, contractors, licensees or invitees results in (i) injury to
any person, (ii) injury to or any contamination of the Premises or the Project,
or (iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises and the Project and any other affected real or personal
property owned by Landlord to the condition existing
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prior to the introduction of such Hazardous Materials and to remedy or repair
any such injury or contamination, including without limitation, any cleanup,
remediation, removal, disposal, neutralization or other treatment of any such
Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without
Landlord's prior written consent, take any remedial action in response to the
presence of any Hazardous Materials on, under or about the Premises or the
Project or any other affected real or personal property owned by Landlord or
enter into any similar agreement, consent, decree or other compromise with any
governmental agency with respect to any Hazardous Materials claims; provided
however, Landlord's prior written consent shall not be necessary in the event
that the presence of Hazardous Materials on, under or about the Premises or the
Project or any other affected real or personal property owned by Landlord (i)
imposes an immediate threat to the health, safety or welfare of any individual
or (ii) is of such a nature that an immediate remedial response is necessary
and it is not possible to obtain Landlord's consent before taking such action.
To the fullest extent permitted by law, Tenant shall indemnify, hold harmless,
protect and defend (with attorneys acceptable to Landlord) Landlord and any
successors to all or any portion of Landlord's interest in the Premises and the
Project and any other real or personal property owned by Landlord from and
against any and all liabilities, losses, damages, diminution in value,
judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses
(including without limitation attorneys' fees, court costs and other
professional expenses), whether foreseeable or unforeseeable, arising directly
or indirectly out of the use, generation, storage, treatment, release, on- or
off-site disposal or transportation of Hazardous Materials on, into, from,
under or about the Premises, the Building and the Project and any other real or
personal property owned by Landlord caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees, specifically including without
limitation the cost of any required or necessary repair, restoration, cleanup
or detoxification of the Premises, the Building and the Project and any other
real or personal property owned by Landlord, and the preparation of any closure
or other required plans, whether or not such action is required or necessary
during the Term or after the expiration of this Lease. If Landlord at any time
discovers that Tenant or its agents, employees, contractors, licensees or
invitees may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises or the Project or any other real or personal
property owned by Landlord, Tenant shall, at Landlord's request, immediately
prepare and submit to Landlord a comprehensive plan, subject to Landlord's
approval, specifying the actions to be taken by Tenant to return the Premises
or the Project or any other real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such cleanup plan, which approval shall not be
unreasonably withheld, conditioned or delayed provided such plan has been
approved by the appropriate governmental agencies, Tenant shall, at its
expense, and without limitation of any rights and remedies of Landlord under
this Lease or at law or in equity, immediately implement such plan and proceed
to cleanup such Hazardous Materials in accordance with all applicable laws and
as required by such plan and this Lease. The provisions of this subsection (e)
shall expressly survive the expiration or sooner termination of this Lease.
(f) If the release of any Hazardous Materials on, under,
from or about the Premises or the Project caused by Landlord, its authorized
agents or employees, and not introduced by Tenant, its agents, employees,
contractors, licensees, or invitees results in (i) injury to any person, or
(ii) injury to or any contamination of the Premises or the Project at levels
which require clean-up or remediation under applicable laws, Landlord, at its
expense (which shall not be included in Operating Expenses), shall promptly
take all actions necessary to return the Premises and the Project to the
condition existing prior to the introduction of such Hazardous Materials, or to
such condition as is satisfactory to all governmental agencies asserting
jurisdiction, and to remedy or repair any such injury or contamination,
including, without limitation, any clean-up, remediation, removal, disposal,
neutralization or other treatment of any such Hazardous Materials.
(g) If the release of Hazardous Materials caused by
Landlord, its authorized agents or employees, renders the Premises untenantable
in whole or in part or results in Tenant being required to vacate the Premises
in whole or in part pursuant to an order or requirement of any governmental
agency or authority, then the Basic Rent and Operating Expenses payable by
Tenant hereunder for the period during which the Premises (or a portion
thereof) remain so impaired shall be abated in proportion to the degree to
which Tenant's use of the Premises is impaired and for the period of such
impairment. If the period of such impairment shall exceed three (3) months,
Tenant shall have the right to terminate this Lease upon written notice to
Landlord given within ten (10) days following the passage of such three (3)
month period. Tenant's termination of the Lease pursuant to this paragraph
shall be effective as of the date of such notice.
(h) Landlord hereby discloses to Tenant, and Tenant
hereby acknowledges, certain facts relating to Hazardous Materials at the
Project known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Landlord represents that
other than the matters referenced on Exhibit C, to the best of its actual
knowledge without duty of inquiry or investigation whatsoever, there are no
Hazardous Materials in or about the Premises which are in violation of any
applicable federal, state or local law, ordinance or regulation. Tenant shall
have no liability or responsibility with respect to the Hazardous Materials
facts described in Exhibit C, nor with respect to any Hazardous Materials which
Tenant proves were not caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees. Notwithstanding the preceding two
sentences, Tenant agrees to notify its agents, employees, contractors,
licensees, and invitees of any exposure or potential exposure to Hazardous
Materials at the Premises that Landlord brings to Tenant's attention.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible
for and shall pay promptly, directly to the appropriate supplier, all charges
for water, gas, electricity, sewer, heat, light, power, telephone, refuse
pickup, janitorial service, interior landscape maintenance and all other
utilities, materials and services furnished directly
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to Tenant or the Premises or used by Tenant in, on or about the Premises during
the Term, together with any taxes thereon. Landlord shall not be liable for
damages or otherwise for any failure or interruption of any utility or other
service furnished to the Premises, and no such failure or interruption shall be
deemed an eviction or entitle Tenant to terminate this Lease or withhold or
abate any rent due hereunder. Landlord shall at all reasonable times have free
access to all electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During
the Term, Landlord shall operate all Common Areas within the Project. The term
"Common Areas" shall mean all areas which are not held for exclusive use by
persons entitled to occupy space, and all other appurtenant areas and
improvements provided by Landlord for the common use of Landlord and tenants
and their respective employees and invitees, including without limitation
parking areas and structures, driveways, sidewalks, landscaped and planted
areas, hallways and interior stairwells not located within the premises of any
tenant, common electrical rooms and roof access entries, common entrances and
lobbies, elevators, and restrooms not located within the premises of any
tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of
the Premises shall include the use of the Common Areas in common with Landlord
and with all others for whose convenience and use the Common Areas may be
provided by Landlord, subject, however, to compliance with all rules and
regulations as are prescribed from time to time by Landlord. Landlord shall
operate and maintain the Common Areas in the manner Landlord may determine to be
appropriate. All costs reasonably incurred by Landlord for the maintenance and
operation of the Common Areas shall be included in Building Costs unless any
particular cost incurred can be charged to a specific tenant of the Project.
Landlord shall at all times during the Term have exclusive control of the Common
Areas, and may restrain any use or occupancy, except as authorized by Landlord's
rules and regulations. Tenant shall keep the Common Areas clear of any
obstruction or unauthorized use related to Tenant's operations. Nothing in this
Lease shall be deemed to impose liability upon Landlord for any damage to or
loss of the property of, or for any injury to, Tenant, its invitees or
employees. Landlord may temporarily close any portion of the Common Areas for
repairs, remodeling and/or alterations, to prevent a public dedication or the
accrual of prescriptive rights, or for any other reason deemed sufficient by
Landlord, without liability to Landlord.
SECTION 6.4. PARKING. Tenant shall be entitled to the number of
vehicle parking spaces set forth in Item 14 of the Basic Lease Provisions,
which spaces shall be unreserved and unassigned, on those portions of the
Common Areas designated by Landlord for parking and such parking shall be
provided at no additional charge to Tenant, its agents, employees, contractors
and invitees. Tenant shall not use more parking spaces than such number. All
parking spaces shall be used only for parking by vehicles no larger than full
size passenger automobiles or pickup trucks. Tenant shall not permit or allow
any vehicles that belong to or are controlled by Tenant or Tenant's employees,
suppliers, shippers, customers or invitees to be loaded, unloaded or parked in
areas other than those designated by Landlord for such activities. If Tenant
permits or allows any of the prohibited activities described above, then
Landlord shall have the right, without notice, in addition to such other rights
and remedies that Landlord may have, to remove or tow away the vehicle involved
and charge the costs to Tenant. Parking within the Common Areas shall be
limited to striped parking stalls, and no parking shall be permitted in any
driveways, access ways or in any area which would prohibit or impede the free
flow of traffic within the Common Areas. There shall be no overnight parking
of any vehicles of any kind unless otherwise authorized by Landlord (but
periodic overnight parking of employee vehicles in the ordinary course of
Tenant's business at the Premises shall be permitted), and vehicles which have
been abandoned or parked in violation of the terms hereof may be towed away at
the owner's expense. Nothing contained in this Lease shall be deemed to create
liability upon Landlord for any damage to motor vehicles of visitors or
employees, for any loss of property from within those motor vehicles, or for
any injury to Tenant, its visitors or employees, unless ultimately determined
to be caused by the sole active negligence or willful misconduct of Landlord,
its agents, servants and employees. Landlord shall have the right to
establish, and from time to time amend, and to enforce against all users all
reasonable rules and regulations (including the designation of areas for
employee parking) that Landlord may deem necessary and advisable for the proper
and efficient operation and maintenance of parking within the Common Areas.
Landlord shall have the right to construct, maintain and operate lighting
facilities within the parking areas; to change the area, level, location and
arrangement of the parking areas and improvements therein; to restrict parking
by tenants, their officers, agents and employees to employee parking areas; to
enforce parking charges (by operation of meters or otherwise); and to do and
perform such other acts in and to the parking areas and improvements therein
as, in the use of good business judgment, Landlord shall determine to be
advisable. Any person using the parking area shall observe all directional
signs and arrows and any posted speed limits. In no event shall Tenant
interfere with the use and enjoyment of the parking area by other tenants of
the Project or their employees or invitees. Parking areas shall be used only
for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or
the storage of vehicles for 24-hour periods, is prohibited unless otherwise
authorized by Landlord. Tenant shall be liable for any damage to the parking
areas caused by Tenant or Tenant's employees, suppliers, shippers, customers or
invitees, including without limitation damage from excess oil leakage. Tenant
shall have no right to install any fixtures, equipment or personal property in
the parking areas.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves
the right to make alterations or additions to the Project, or to the attendant
fixtures, equipment and Common Areas. Landlord may at any time relocate or
remove any of the various buildings (other than the Building), parking areas,
and other Common Areas, and may add buildings and areas to the Project from
time to time provided that any such changes shall not: (i) materially impair
access to and from the Premises from the parking areas; (ii) reduce the number
or size of Tenant's parking spaces granted under this Lease, or (iv) otherwise
materially interfere with Tenant's access to and use of the Premises, the
parking areas and the Common Areas adjacent to the Building in any material
manner without Tenant's prior written consent, which shall not be unreasonably
withheld. No change shall entitle Tenant to any abatement of rent or other
claim against Landlord, provided that the change does not deprive Tenant of
reasonable access to or use of the Premises.
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ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole
expense shall comply with all applicable laws and governmental regulations
governing the Premises and Tenant's use and occupancy thereof and make all
repairs necessary to keep the Premises in the condition as existed on the
Commencement Date (or on any later date that the improvements may have been
installed), excepting ordinary wear and tear, including without limitation the
electrical and mechanical systems, any air conditioning, ventilating or heating
equipment which serves the Premises, all walls, glass, windows, doors, door
closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment
and other equipment. Tenant's repair obligations shall not include repairs
requiring a capital expenditure or replacements of capital items which shall be
Landlord's obligation, subject to reimbursement by Tenant as a Building Cost,
unless such capital repairs, replacements or expenditures are caused or
required by Tenant's particular use of the Premises or alterations or
improvements undertaken by Tenant during the Term of this Lease. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Tenant. As
part of its maintenance obligations hereunder, Tenant shall, at Landlord's
request, provide Landlord with copies of all maintenance schedules, reports and
notices prepared by, for or on behalf of Tenant. Tenant shall obtain
preventive maintenance contracts from a licensed heating and air conditioning
contractor to provide for regular inspection and maintenance of the heating,
ventilating and air conditioning systems servicing the Premises, all subject to
Landlord's approval. All repairs shall be at least equal in quality to the
original work, shall be made only by a licensed contractor approved in writing
in advance by Landlord and shall be made only at the time or times approved by
Landlord. Any contractor utilized by Tenant shall be subject to Landlord's
standard requirements for contractors, as modified from time to time. Landlord
shall have the right at all times to inspect Tenant's maintenance of all
equipment (including without limitation air conditioning, ventilating and
heating equipment), and may impose reasonable restrictions and requirements
with respect to repairs, as provided in Section 7.3, and the provisions of
Section 7.4 shall apply to all repairs. Alternatively, Landlord may elect to
make any repair or maintenance required hereunder on behalf of Tenant and at
Tenant's expense, and Tenant shall promptly reimburse Landlord for all costs
incurred upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to
Section 7.1 and Article XI, Landlord shall provide service, maintenance and
repair with respect to the roof, foundations, and footings of the Building, all
landscaping, walkways, parking areas, Common Areas, exterior lighting, and the
exterior surfaces of the exterior walls of the Building, except that Tenant at
its expense shall make all repairs which Landlord reasonably deems necessary as
a result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or
designate any reputable person or firm, including any employee or agent of
Landlord or any of Landlord's affiliates or divisions, to perform any service,
repair or maintenance function. Landlord need not make any other improvements
or repairs except as specifically required under this Lease, and nothing
contained in this Section shall limit Landlord's right to reimbursement from
Tenant for maintenance, repair costs and replacement costs as provided
elsewhere in this Lease. Tenant understands that it shall not make repairs at
Landlord's expense or by rental offset. Tenant further understands that
Landlord shall not be required to make any repairs to the roof, foundations or
footings unless and until Tenant has notified Landlord in writing of the need
for such repair and Landlord shall have a reasonable period of time thereafter
to commence and complete said repair, if warranted. All costs of any
maintenance and repairs on the part of Landlord provided hereunder shall be
considered part of Building Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations,
additions or improvements to the Premises without the prior written consent of
Landlord, which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which
cost less than One Dollar ($1.00) per square foot of the improved portions of
the Premises (excluding warehouse square footage) and do not (i) affect the
exterior of the Building or outside areas (or be visible from adjoining sites),
or (ii) affect or penetrate any of the structural portions of the Building,
including but not limited to the roof, or (iii) require any change to the basic
floor plan of the Premises, any change to any structural or mechanical systems
of the Premises, or any governmental permit as a prerequisite to the
construction thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical, electrical, plumbing or
HVAC systems, facilities or equipment located in or serving the Building, or
(v) diminish the value of the Premises. Landlord may impose, as a condition to
its consent, any requirements that Landlord in its discretion may deem
reasonable or desirable, including but not limited to a requirement that all
work be covered by a lien and completion bond satisfactory to Landlord and
requirements as to the manner, time, and contractor for performance of the
work. Tenant shall obtain all required permits for the work and shall perform
the work in compliance with all applicable laws,
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regulations and ordinances, all covenants, conditions and restrictions
affecting the Project, and the Rules and Regulations (hereafter defined).
Tenant understands and agrees that Landlord shall be entitled to a supervision
fee in the amount of five percent (5%) of the cost of any work for which
governmental permits are required. If any governmental entity requires, as a
condition to any proposed alterations, additions or improvements to the
Premises by Tenant, that improvements be made to the Common Areas, and if
Landlord consents to such improvements to the Common Areas, then Tenant shall,
at Tenant's sole expense, make such required improvements to the Common Areas
in such manner, utilizing such materials, and with such contractors (including,
if required by Landlord, Landlord's contractors) as Landlord may require in its
sole discretion. Under no circumstances shall Tenant make any improvement
which incorporates any Hazardous Materials, including without limitation
asbestos-containing construction materials into the Premises. Any request for
Landlord's consent shall be made in writing and shall contain architectural
plans describing the work in detail reasonably satisfactory to Landlord.
Unless Landlord otherwise agrees in writing, all alterations, additions or
improvements affixed to the Premises (excluding moveable trade fixtures and
furniture) shall become the property of Landlord and shall be surrendered with
the Premises at the end of the Term, except that Landlord may, by notice to
Tenant prior to the expiration of the Term, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or any
alterations, decorations, fixtures, additions, improvements and the like
installed either by Tenant or by Landlord at Tenant's request and to repair any
damage to the Premises arising from that removal. Except as otherwise provided
in this Lease or in any Exhibit to this Lease, should Landlord make any
alteration or improvement to the Premises for Tenant, Landlord shall be
entitled to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises
free from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall
promptly cause any such lien to be released by posting a bond in accordance
with California Civil Code Section 3143 or any successor statute. In the event
that Tenant shall not, within thirty (30) days following the imposition of any
lien, cause the lien to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other available remedies, the
right to cause the lien to be released by any means it deems proper, including
payment of or defense against the claim giving rise to the lien. All expenses
so incurred by Landlord, including Landlord's attorneys' fees, and any
consequential or other damages incurred by Landlord arising out of such lien,
shall be reimbursed by Tenant promptly following Landlord's demand, together
with interest from the date of payment by Landlord at the maximum rate
permitted by law until paid. Tenant shall give Landlord no less than twenty
(20) days' prior notice in writing before commencing construction of any kind
on the Premises so that Landlord may post and maintain notices of
nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all
reasonable times, upon written or oral notice (except in emergencies, when no
notice shall be required) have the right to enter the Premises to inspect them,
to supply services in accordance with this Lease, to protect the interests of
Landlord in the Premises, and to submit the Premises to prospective or actual
purchasers or encumbrance holders (or, during the last one hundred and eighty
(180) days of the Term or when an uncured Tenant default exists, to prospective
tenants), all without being deemed to have caused an eviction of Tenant and
without abatement of rent except as provided elsewhere in this Lease. Landlord
shall have the right, if desired, to retain a key which unlocks all of the
doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall
have the right to use any and all means which Landlord may deem proper to open
the doors in an emergency in order to obtain entry to the Premises, and any
entry to the Premises obtained by Landlord shall not under any circumstances be
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or any eviction of Tenant from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days
before delinquency, all taxes and assessments levied against all personal
property of Tenant located in the Premises and against any alterations,
additions or like improvements made to the Premises by or on behalf of Tenant.
When possible Tenant shall cause its personal property, Above Standard
Improvements and alterations to be assessed and billed separately from the real
property of which the Premises form a part. If any taxes on Tenant's personal
property, Above Standard Improvements and/or alterations are levied against
Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property, Above Standard Improvements and/or
alterations of Tenant and if Landlord pays the taxes based upon the increased
assessment, Tenant shall pay to Landlord the taxes so levied against Landlord
or the proportion of the taxes resulting from the increase in the assessment.
In calculating what portion of any tax bill which is assessed against Landlord
separately, or Landlord and Tenant jointly, is attributable to Tenant's Above
Standard Improvements, alterations and personal property, Landlord's reasonable
determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the
contrary, Tenant will not, either voluntarily or by operation of law, assign,
sublet, encumber, or otherwise transfer all or any part of Tenant's interest in
this lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(b). No
assignment (whether voluntary, involuntary or by operation of law) and no
subletting shall be valid or effective without Landlord's prior written consent
and, at Landlord's election, any such assignment or subletting or attempted
assignment or subletting shall constitute a material default of this Lease.
Without limiting the foregoing, Landlord agrees that the use and occupancy of
any portion of the Premises by any person performing office support services
(such as mail room, copy center, shipping or travel services) or other services
incidental to Tenant's permitted use on an outsource basis shall not constitute
a sublease or other prohibited transfer of the Premises provided Tenant
continues to occupy the remainder of the Premises. Landlord shall not be deemed
to have given its consent to any assignment or subletting by any other course
of action, including its acceptance of any name for listing in the Building
directory. To the extent not prohibited by provisions of the Bankruptcy Code,
11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section
365(f)(1), Tenant on behalf of itself and its creditors, administrators and
assigns waives the applicability of Section 365(e) of the Bankruptcy Code
unless the proposed assignee of the Trustee for the estate of the bankrupt
meets Landlord's standard for consent as set forth in Section 9.1(b) of this
Lease. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, any and all monies or other considerations
to be delivered in connection with the assignment shall be delivered to
Landlord, shall be and remain the exclusive property of Landlord and shall not
constitute
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property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant
to the provisions of the Bankruptcy Code shall be deemed to have assumed all of
the obligations arising under this Lease on and after the date of the
assignment, and shall upon demand execute and deliver to Landlord an
instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this
Lease, it shall first notify Landlord of its desire and shall submit in writing
to Landlord: (i) the name and address of the proposed transferee; (ii) the
nature of any proposed subtenant's or assignee's business to be carried on in
the Premises; (iii) the terms and provisions of any proposed sublease or
assignment, including a copy of the proposed assignment or sublease form; (iv)
evidence of insurance of the proposed assignee or subtenant complying with the
requirements of Exhibit D hereto; (v) a completed Environmental Questionnaire
from the proposed assignee or subtenant; and (vi) any other information
reasonably requested by Landlord and reasonably related to the transfer.
Except as provided in Subsection (e) of this Section, Landlord shall not
unreasonably withhold its consent, provided: (1) the use of the Premises will
be consistent with the provisions of this Lease and with Landlord's commitment
to other tenants of the Project; (2) the proposed assignee or subtenant has not
been required by any prior landlord, lender or governmental authority to take
remedial action in connection with Hazardous Materials contaminating a property
arising out of the proposed assignee's or subtenant's actions or use of the
property in question and is not subject to any enforcement order issued by any
governmental authority in connection with the use, disposal or storage of a
Hazardous Material; (3) at Landlord's election, insurance requirements shall be
brought into conformity with Landlord's then current leasing practice; (4) any
proposed subtenant or assignee demonstrates that it is financially responsible
by submission to Landlord of all reasonable information as Landlord may request
concerning the proposed subtenant or assignee, including, but not limited to, a
balance sheet of the proposed subtenant or assignee as of a date within ninety
(90) days of the request for Landlord's consent and statements of income or
profit and loss of the proposed subtenant or assignee for the two-year period
preceding the request for Landlord's consent, and/or a certification signed by
the proposed subtenant or assignee that it has not been evicted or been in
arrears in rent at any other leased premises for the 3-year period preceding
the request for Landlord's consent; (5) any proposed subtenant or assignee
demonstrates to Landlord's reasonable satisfaction a record of successful
experience in business; (6) the proposed assignee or subtenant is not an
existing tenant of the Project or a prospect with whom Landlord is actively
negotiating to become a tenant at the Project; and (7) the proposed transfer
will not impose additional burdens or adverse tax effects on Landlord. If
Tenant has any exterior sign rights under this Lease, such rights are personal
to Tenant and may not be assigned or transferred to any assignee of this Lease
or subtenant of the Premises without Landlord's prior written consent, which
may be withheld in Landlord's sole and absolute discretion.
If Landlord consents to the proposed transfer, Tenant
may within ninety (90) days after the date of the consent effect the transfer
upon the terms described in the information furnished to Landlord; provided
that any material change in the terms shall be subject to Landlord's consent as
set forth in this Section. Landlord shall approve or disapprove any requested
transfer within thirty (30) days following receipt of Tenant's written request,
the information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b)
above, in lieu of consenting to a proposed assignment or subletting, Landlord
may elect to (i) sublease the Premises (or the portion proposed to be
subleased), or take an assignment of Tenant's interest in this Lease, upon the
same terms as offered to the proposed subtenant or assignee (excluding terms
relating to the purchase of personal property, the use of Tenant's name or the
continuation of Tenant's business), or (ii) terminate this Lease as to the
portion of the Premises proposed to be subleased or assigned with a
proportionate abatement in the rent payable under this Lease, effective on the
date that the proposed sublease or assignment would have become effective.
Landlord may thereafter, at its option, assign or re-let any space so
recaptured to any third party, including without limitation the proposed
transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts
paid by the assignee or subtenant, however described, in excess of (i) the
Basic Rent payable by Tenant hereunder, or in the case of a sublease of a
portion of the Premises, in excess of the Basic Rent reasonably allocable to
such portion, plus (ii) Tenant's direct out-of-pocket costs which Tenant
certifies to Landlord have been paid to provide occupancy related services to
such assignee or subtenant of a nature commonly provided by landlords of
similar space, shall be the property of Landlord and such amounts shall be
payable directly to Landlord by the assignee or subtenant or, at Landlord's
option, by Tenant. At Landlord's request, a written agreement shall be entered
into by and among Tenant, Landlord and the proposed assignee or subtenant
confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred
Dollars ($500.00) if and when any transfer hereunder is requested by Tenant.
Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord
for its costs of review and evaluation of a proposed assignee/sublessee, and
Landlord shall not be obligated to commence such review and evaluation unless
and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment,
even with the consent of Landlord, shall relieve Tenant of its obligation to
pay rent and to perform all its other obligations under this Lease. Moreover,
Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3,
for any act or omission by an assignee or subtenant. Each assignee, other than
Landlord, shall be deemed to assume all obligations of Tenant under this Lease
and shall be liable jointly and severally with Tenant for the payment of all
rent, and for the due performance of all of Tenant's obligations, under this
Lease. No transfer shall be binding on Landlord unless any document
memorializing the transfer is delivered to Landlord and both the
assignee/subtenant and Tenant deliver to Landlord an executed consent to
transfer instrument prepared by Landlord and consistent with the requirements
of this Article. The acceptance by Landlord of any payment due under this
Lease from any other person shall not be deemed to be a waiver by Landlord of
any provision of this Lease or to be a consent to any transfer. Consent by
Landlord to one or more transfers shall not operate as a waiver or estoppel to
the future enforcement by Landlord of its rights under this Lease.
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SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and
conditions shall apply to any subletting by Tenant of all or any part of the
Premises and shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease
(other than with respect to the payment of rent hereunder) is incorporated by
reference into and made a part of such sublease, with "Landlord" hereunder
meaning the sublandlord therein and "Tenant" hereunder meaning the subtenant
therein.
(b) Tenant hereby irrevocably assigns to Landlord all of
Tenant's interest in all rentals and income arising from any sublease of the
Premises, and Landlord may collect such rent and income and apply same toward
Tenant's obligations under this Lease; provided, however, that until a default
occurs in the performance of Tenant's obligations under this Lease, Tenant
shall have the right to receive and collect the sublease rentals. Landlord
shall not, by reason of this assignment or the collection of sublease rentals,
be deemed liable to the subtenant for the performance of any of Tenant's
obligations under the sublease. Tenant hereby irrevocably authorizes and
directs any subtenant, upon receipt of a written notice from Landlord stating
that an uncured default exists in the performance of Tenant's obligations under
this Lease, to pay to Landlord all sums then and thereafter due under the
sublease. Tenant agrees that the subtenant may rely on that notice without any
duty of further inquiry and notwithstanding any notice or claim by Tenant to
the contrary. Tenant shall have no right or claim against the subtenant or
Landlord for any rentals so paid to Landlord.
(c) In the event of the termination of this Lease,
Landlord may, at its sole option, take over Tenant's entire interest in any
sublease and, upon notice from Landlord, the subtenant shall attorn to
Landlord. In no event, however, shall Landlord be liable for any previous act
or omission by Tenant under the sublease or for the return of any advance
rental payments or deposits under the sublease that have not been actually
delivered to Landlord, nor shall Landlord be bound by any sublease modification
executed without Landlord's consent or for any advance rental payment by the
subtenant in excess of one month's rent. The general provisions of this Lease,
including without limitation those pertaining to insurance and indemnification,
shall be deemed incorporated by reference into the sublease despite the
termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially
all of Tenant's assets (other than bulk sales in the ordinary course of
business) or, if Tenant is a corporation, an unincorporated association, or a
partnership, the transfer, assignment or hypothecation of any stock or interest
in such corporation, association, or partnership in the aggregate of
twenty-five percent (25%) (except for publicly traded shares of stock
constituting a transfer of twenty-five percent (25%) or more in the aggregate,
so long as no change in the controlling interest of Tenant occurs as a result
thereof) shall be deemed an assignment within the meaning and provisions of
this Article. Notwithstanding the foregoing, Landlord's consent shall not be
required for the assignment of this Lease as a result of a merger by Tenant
with or into another entity, so long as (i) the net worth of the successor
entity after such merger is at least equal to the greater of the net worth of
Tenant as of the execution of this Lease by Landlord or the net worth of Tenant
immediately prior to the date of such merger, evidence of which, satisfactory
to Landlord, shall be presented to Landlord prior to such merger, (ii) Tenant
shall provide to Landlord, prior to such merger, written notice of such merger
and such assignment documentation and other information as Landlord may request
in connection therewith, and (iii) all of the other terms and requirements of
this Article shall apply with respect to such assignment.
SECTION 9.5. TRANSFER TO AFFILIATE. Notwithstanding any
provision of this Lease to the contrary, Landlord's consent shall not be
required for an assignment, sublease or other use or occupancy of all or any
portion of the Premises by any Affiliate of Tenant as long as the following
conditions are met:
(a) At least ten (10) business days before any such
transfer, Landlord received written notice of the transfer and Tenant
thereafter provides within a reasonable time copies of any documents or any
other information reasonably requested by Landlord regarding the transfer.
(b) The transfer is not a subterfuge by Tenant to avoid
its obligations under the Lease and the Affiliate shall assume in writing the
obligations of Tenant under this Lease.
(c) Tenant shall remain responsible for the performance
of the Lease. "Affiliate" means any entity that controls, is controlled by or
is under common control with Tenant. For the purposes of this Section
"control" means the direct or indirect ownership of more than fifty percent
(50%) of the voting securities of an entity or possession of the right to vote
more than fifty percent (50%) of the voting interest in the ordinary direction
of the entity's affairs.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and
expense, shall provide and maintain in effect the insurance described in
Exhibit D. Evidence of that insurance must be delivered to Landlord prior to
the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord shall either provide
the following types of insurance or shall self insure for all or any portion of
such risks, with deductibles and in amounts and coverages as may be reasonably
determined by Landlord in its discretion provided such coverages are reasonable
and comparable to coverages maintained by prudent landlords for comparable
buildings in the area: "all risk" property insurance, subject to standard
exclusions, covering the Building or Project, and such other risks as Landlord
or its mortgagees may from
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time to time deem appropriate, including leasehold improvements made by
Landlord, and commercial general liability coverage. Landlord shall not be
required to carry insurance of any kind on Tenant's property, including
leasehold improvements, trade fixtures, furnishings, equipment, plate glass,
signs and all other items of personal property, and shall not be obligated to
repair or replace that property should damage occur. All proceeds of insurance
maintained by Landlord upon the Building and Project shall be the property of
Landlord, whether or not Landlord is obligated to or elects to make any
repairs. At Landlord's option, Landlord may self-insure all or any portion of
the risks for which Landlord elects to provide insurance hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted
by law, Tenant shall defend, indemnify, protect, save and hold harmless
Landlord, its agents, and any and all affiliates of Landlord, including,
without limitation, any corporations or other entities controlling, controlled
by or under common control with Landlord, from and against any and all claims,
liabilities, costs or expenses arising either before or after the Commencement
Date from Tenant's use or occupancy of the Premises, the Building or the Common
Areas, or from the conduct of its business, or from any activity, work, or
thing done, permitted or suffered by Tenant or its agents, employees, invitees
or licensees in or about the Premises, the Building or the Common Areas, or
from any default in the performance of any obligation on Tenant's part to be
performed under this Lease, or from any act or negligence of Tenant or its
agents, employees, visitors, patrons, guests, invitees or licensees. Landlord
may, at its option, require Tenant to assume Landlord's defense in any action
covered by this Section through counsel satisfactory to Landlord. The
provisions of this Section shall expressly survive the expiration or sooner
termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be
liable to Tenant, its employees, agents and invitees, and Tenant hereby waives
all claims against Landlord for loss of or damage to any property, or any
injury to any person, or loss or interruption of business or income, or any
other loss, cost, damage, injury or liability whatsoever (including without
limitation any consequential damages and lost profit or opportunity costs)
resulting from, but not limited to, Acts of God, acts of civil disobedience or
insurrection, acts or omissions of other tenants within the Project or their
agents, employees, contractors, guests or invitees, fire, explosion, falling
plaster, steam, gas, electricity, water or rain which may leak or flow from or
into any part of the Building or from the breakage, leakage, obstruction or
other defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, electrical works or other fixtures in the Building, whether the
damage or injury results from conditions arising in the Premises or in other
portions of the Project. It is understood that any such condition may require
the temporary evacuation or closure of all or a portion of the Building.
Except as provided in Sections 11.1 and 12.1 below, there shall be no abatement
of rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business (including without limitation consequential damages and
lost profit or opportunity costs) arising from the making of any repairs,
alterations or improvements to any portion of the Building, including repairs
to the Premises, nor shall any related activity by Landlord constitute an
actual or constructive eviction; provided, however, that in making repairs,
alterations or improvements, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the Premises. Neither
Landlord nor its agents shall be liable for interference with light or other
similar intangible interests. Tenant shall immediately notify Landlord in case
of fire or accident in the Premises, the Building or the Project and of defects
in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each
hereby waives all rights of recovery against the other and the other's agents
on account of loss and damage occasioned to the property of such waiving party
to the extent only that such loss or damage would be covered under any "all
risk" property insurance policies required by this Article X; provided however,
that (i) the foregoing waiver shall not apply to the extent of Tenant's
obligations to pay deductibles under any such policies and this Lease, and (ii)
if any loss is due to the negligent act, omission or willful misconduct of
Tenant or its agents, employees, contractors, guests or invitees, Tenant's
liability insurance shall be primary and shall cover all losses and damages
prior to any other insurance hereunder. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned
by the negligence of such party, its agents, employees, contractors, guests or
invitees. The provisions of this Section shall not limit the indemnification
provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall diligently
repair that damage as soon as reasonably possible, at its expense, unless: (i)
Landlord reasonably determines that the cost of repair is not covered by
Landlord's fire and extended coverage insurance (or if Landlord is self
insuring the Building, Landlord determines that such repair would not have been
covered by fire and extended coverage property insurance) plus such additional
amounts Tenant elects, at its option, to contribute, excluding however the
deductible (for which Tenant shall be responsible for Tenant's proportionate
share); (ii) Landlord reasonably determines that the Premises cannot, with
reasonable diligence, be fully repaired by Landlord (or cannot be safely
repaired because of the presence of hazardous factors, including without
limitation Hazardous Materials, earthquake faults, and other similar dangers)
within ninety (90) days after the date of the damage; or (iii) an event of
default by Tenant has occurred and is continuing at the time of such damage.
Should Landlord elect not to repair the damage for one of the preceding
reasons, Landlord shall so notify Tenant in writing within thirty (30) days
after the damage occurs and this Lease shall terminate as of the date of that
notice.
(b) Unless Landlord elects to terminate this Lease in
accordance with subsection (a) above, this Lease shall continue in effect for
the remainder of the Term; provided that so long as Tenant is not in default
under this
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Lease, if the damage is so extensive that Landlord reasonably determines that
the Premises cannot, with reasonable diligence, be repaired by Landlord (or
cannot be safely repaired because of the presence of hazardous factors,
earthquake faults, and other similar dangers) so as to allow Tenant's
substantial use and enjoyment of the Premises within ninety (90) days after the
date of damage, then Tenant may elect to terminate this Lease by written notice
to Landlord within the thirty (30) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building,
and ending on the sooner of the date the damage is repaired or the date this
Lease is terminated, the rental to be paid under this Lease shall be abated in
the same proportion that the floor area of the Building that is rendered
unusable by the damage from time to time bears to the total floor area of the
Building, but only to the extent that any business interruption insurance
proceeds are received by Landlord therefor from Tenant's insurance described in
Exhibit D.
(d) Notwithstanding the provisions of subsections (a),
(b) and (c) of this Section, and subject to the provisions of Section 10.5
above, the cost of any repairs shall be borne by Tenant, and Tenant shall not
be entitled to rental abatement or termination rights, if the damage is due to
the fault or neglect of Tenant or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be
deemed to require Landlord to repair any improvements or fixtures that Tenant
is obligated to repair or insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in
removing Tenant's personal property and any debris from the Premises to
facilitate all inspections of the Premises and the making of any repairs.
Notwithstanding anything to the contrary contained in this Lease, if Landlord
in good faith believes there is a risk of injury to persons or damage to
property from entry into the Building or Premises following any damage or
destruction thereto, Landlord may restrict entry into the Building or the
Premises by Tenant, its employees, agents and contractors in a
non-discriminatory manner, without being deemed to have violated Tenant's
rights of quiet enjoyment to, or made an unlawful detainer of, or evicted
Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to
determine if there are safe methods of entry into the Building or the Premises
solely in order to allow Tenant to retrieve files, data in computers, and
necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of
this Lease, including without limitation Section 11.1, shall govern any damage
or destruction and shall accordingly supersede any contrary statute or rule of
law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material
portion of the Premises is taken by any lawful authority by exercise of the
right of eminent domain, or sold to prevent a taking, either Tenant or Landlord
may terminate this Lease effective as of the date possession is required to be
surrendered to the authority. In the event title to a portion of the Premises
is taken or sold in lieu of taking, and if Landlord elects to restore the
Premises in such a way as to alter the Premises materially, either party may
terminate this Lease, by written notice to the other party, effective on the
date of vesting of title. In the event neither party has elected to terminate
this Lease as provided above, then Landlord shall promptly, after receipt of a
sufficient condemnation award, proceed to restore the Premises to substantially
their condition prior to the taking, and a proportionate allowance shall be
made to Tenant for the rent corresponding to the time during which, and to the
part of the Premises of which, Tenant is deprived on account of the taking and
restoration. In the event of a taking, Landlord shall be entitled to the
entire amount of the condemnation award without deduction for any estate or
interest of Tenant; provided that nothing in this Section shall be deemed to
give Landlord any interest in, or prevent Tenant from seeking any award against
the taking authority for, the taking of personal property and fixtures
belonging to Tenant or for relocation or business interruption expenses
recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the
Premises shall terminate this Lease or give Tenant any right to abatement of
rent, and any award specifically attributable to a temporary taking of the
Premises shall belong entirely to Tenant. A temporary taking shall be deemed
to be a taking of the use or occupancy of the Premises for a period of not to
exceed ninety (90) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be
a taking of the parking area such that Landlord can no longer provide
sufficient parking to comply with this Lease, Landlord may substitute
reasonably equivalent parking in a location reasonably close to the Building;
provided that if Landlord fails to make that substitution within sixty (60)
days following the taking and if the taking materially impairs Tenant's use and
enjoyment of the Premises, Tenant may, at its option, terminate this Lease by
written notice to Landlord. If this Lease is not so terminated by Tenant,
there shall be no abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease
shall be either superior or subordinate to all ground or underlying leases,
mortgages and deeds of trust, if any, which may hereafter affect the Premises,
and to all renewals, modifications, consolidations, replacements and extensions
thereof; provided, that so long
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as Tenant is not in default under this Lease after the expiration of any
applicable cure period, this Lease shall not be terminated or Tenant's quiet
enjoyment of the Premises disturbed in the event of termination of any such
ground or underlying lease, or the foreclosure of any such mortgage or deed of
trust, to which Tenant has subordinated this Lease pursuant to this Section.
Any subordination instrument presented for Tenant's signature shall contain
commercially reasonable nondisturbance and attornment provisions. In the event
of a termination or foreclosure, Tenant shall become a tenant of and attorn to
the successor-in-interest to Landlord upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required
by Landlord's successor for that purpose. Tenant shall also, upon written
request of Landlord, execute and deliver all instruments as may be required
from time to time to subordinate the rights of Tenant under this Lease to any
ground or underlying lease or to the lien of any mortgage or deed of trust
(provided that such instruments include the nondisturbance and attornment
provisions set forth above), or, if requested by Landlord, to subordinate, in
whole or in part, any ground or underlying lease or the lien of any mortgage or
deed of trust to this Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10)
days prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no
uncured defaults on the part of Landlord, or specifying each default if any are
claimed, and (iii) setting forth all further information that Landlord may
reasonably require. Tenant's statement may be relied upon by any prospective
purchaser or encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of
Landlord, Tenant's failure to deliver any estoppel statement within the
provided time shall be conclusive upon Tenant that (i) this Lease is in full
force and effect, without modification except as may be represented by
Landlord, (ii) there are no uncured defaults in Landlord's performance, and
(iii) not more than one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the
execution of this Lease and thereafter at any time upon Landlord's request,
Tenant's current tax returns and financial statements, certified true, accurate
and complete by the chief financial officer of Tenant, including a balance
sheet and profit and loss statement for the most recent prior year
(collectively, the "Statements"), which Statements shall accurately and
completely reflect the financial condition of Tenant. Landlord agrees that it
will keep the Statements confidential, except that Landlord shall have the
right to deliver the same to any proposed purchaser or encumbrancer of the
Premises.
(b) Tenant acknowledges that Landlord is relying on the
Statements in its determination to enter into this Lease, and Tenant represents
to Landlord, which representation shall be deemed made on the date of this
Lease and again on the Commencement Date, that no material change in the
financial condition of Tenant, as reflected in the Statements, has occurred
since the date Tenant delivered the Statements to Landlord. The Statements are
represented and warranted by Tenant to be correct and to accurately and fully
reflect Tenant's true financial condition as of the date of submission by any
Statements to Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due, where the
failure continues for a period of three (3) days after written notice from
Landlord to Tenant; provided, however, that any such notice shall be in lieu
of, and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. For purposes of these default
and remedies provisions, the term "additional rent" shall be deemed to include
all amounts of any type whatsoever other than Basic Rent to be paid by Tenant
pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer
of the Lease by Tenant, either voluntarily or by operation of law, whether by
judgment, execution, transfer by intestacy or testacy, or other means, without
the prior written consent of Landlord.
(c) The discovery by Landlord that any financial
statement provided by Tenant, or by any affiliate, successor or guarantor of
Tenant, was materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or
perform any of the express or implied covenants or provisions of this Lease to
be observed or performed by Tenant, other than as specified in any other
subsection of this Section, where the failure continues for a period of thirty
(30) days after written notice from Landlord
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to Tenant or such shorter period as is specified in any other provision of this
Lease; provided, however, that any such notice shall be in lieu of, and not in
addition to, any notice required under California Code of Civil Procedure
Section 1161 and 1161(a) as amended. However, if the nature of the failure is
such that more than thirty (30) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant commences the cure within
thirty (30) days, and thereafter diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment
for the benefit of creditors; (ii) the filing by or against Tenant of a
petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code
or to have debts discharged or a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed within thirty (30) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
if possession is not restored to Tenant within thirty (30) days; (iv) the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where the seizure is not discharged within thirty (30) days; or (v) Tenant's
convening of a meeting of its creditors for the purpose of effecting a
moratorium upon or composition of its debts. Landlord shall not be deemed to
have knowledge of any event described in this subsection unless notification in
writing is received by Landlord, nor shall there be any presumption
attributable to Landlord of Tenant's insolvency. In the event that any
provision of this subsection is contrary to applicable law, the provision shall
be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the
event of the abandonment of the Premises by Tenant, then in addition to any
other remedies available to Landlord, Landlord may exercise the following
remedies:
(i) Landlord may terminate Tenant's right to
possession of the Premises by any lawful means, in which case this Lease shall
terminate and Tenant shall immediately surrender possession of the Premises to
Landlord. Such termination shall not affect any accrued obligations of Tenant
under this Lease. Upon termination, Landlord shall have the right to reenter
the Premises and remove all persons and property. Landlord shall also be
entitled to recover from Tenant:
(1) The worth at the time of award of
the unpaid rent and additional rent which had been earned at the time of
termination;
(2) The worth at the time of award of
the amount by which the unpaid rent and additional rent which would have been
earned after termination until the time of award exceeds the amount of such
loss that Tenant proves could have been reasonably avoided;
(3) The worth at the time of award of
the amount by which the unpaid rent and additional rent for the balance of the
Term after the time of award exceeds the amount of such loss that Tenant proves
could be reasonably avoided;
(4) Any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result from Tenant's default, including,
but not limited to, the cost of recovering possession of the Premises,
refurbishment of the Premises, marketing costs, commissions and other expenses
of reletting, including necessary repair, the unamortized portion of any tenant
improvements and brokerage commissions funded by Landlord in connection with
this Lease, reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other
amounts in addition to or in lieu of the foregoing as may be permitted by law.
The term "rent" as used in this Lease shall be deemed to mean the Basic Rent
and all other sums required to be paid by Tenant to Landlord pursuant to the
terms of this Lease. Any sum, other than Basic Rent, shall be computed on the
basis of the average monthly amount accruing during the twenty-four (24) month
period immediately prior to default, except that if it becomes necessary to
compute such rental before the twenty-four (24) month period has occurred, then
the computation shall be on the basis of the average monthly amount during the
shorter period. As used in subparagraphs (1) and (2) above, the "worth at the
time of award" shall be computed by allowing interest at the rate of ten
percent (10%) per annum. As used in subparagraph (3) above, the "worth at the
time of award" shall be computed by discounting the amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(ii) Landlord may elect not to terminate Tenant's
right to possession of the Premises, in which event Landlord may continue to
enforce all of its rights and remedies under this Lease, including the right to
collect all rent as it becomes due. Efforts by the Landlord to maintain,
preserve or relet the Premises, or the appointment of a receiver to protect the
Landlord's interests under this Lease, shall not constitute a termination of
the Tenant's right to possession of the Premises. In the event that Landlord
elects to avail itself of the remedy provided by this subsection (ii), Landlord
shall not unreasonably withhold its consent to an assignment or subletting of
the Premises subject to the reasonable standards for Landlord's consent as are
contained in this Lease.
(b) Landlord shall be under no obligation to observe or
perform any covenant of this Lease on its part to be observed or performed
which accrues after the date of any default by Tenant unless and until the
default is cured by Tenant, it being understood and agreed that the performance
by Landlord of its obligations under this Lease are expressly conditioned upon
Tenant's full and timely performance of its obligations under this Lease. The
various
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rights and remedies reserved to Landlord in this Lease or otherwise shall be
cumulative and, except as otherwise provided by California law, Landlord may
pursue any or all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any
right or remedy shall be construed as a waiver of the right or remedy or of any
default by Tenant. The acceptance by Landlord of rent shall not be a (i)
waiver of any preceding breach or default by Tenant of any provision of this
Lease, other than the failure of Tenant to pay the particular rent accepted,
regardless of Landlord's knowledge of the preceding breach or default at the
time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise
any remedy available to Landlord by virtue of the breach or default. The
acceptance of any payment from a debtor in possession, a trustee, a receiver or
any other person acting on behalf of Tenant or Tenant's estate shall not waive
or cure a default under Section 14.1. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent required by this Lease shall be
deemed to be other than a partial payment on account of the earliest due
stipulated rent, nor shall any endorsement or statement on any check or letter
be deemed an accord and satisfaction and Landlord shall accept the check or
payment without prejudice to Landlord's right to recover the balance of the
rent or pursue any other remedy available to it. No act or thing done by
Landlord or Landlord's agents during the Term shall be deemed an acceptance of
a surrender of the Premises, and no agreement to accept a surrender shall be
valid unless in writing and signed by Landlord. No employee of Landlord or of
Landlord's agents shall have any power to accept the keys to the Premises prior
to the termination of this Lease, and the delivery of the keys to any employee
shall not operate as a termination of the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by
Landlord within five (5) days of the date when due shall bear interest at the
maximum rate permitted by law from the date due until fully paid. The payment
of interest shall not cure any default by Tenant under this Lease. In
addition, Tenant acknowledges that the late payment by Tenant to Landlord of
rent will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Those costs may include, but are not limited to, administrative,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any rent due from Tenant shall not be received by
Landlord or Landlord's designee within five (5) days after the date due, then
Tenant shall pay to Landlord, in addition to the interest provided above, a
late charge in a sum equal to the greater of five percent (5%) of the amount
overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment.
Acceptance of a late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor shall it prevent
Landlord from exercising any of its other rights and remedies.
(b) Following each second consecutive installment of rent
that is not paid within five (5) days following notice of nonpayment from
Landlord, Landlord shall have the option (i) to require that beginning with the
first payment of rent next due, rent shall no longer be paid in monthly
installments but shall be payable quarterly three (3) months in advance and/or
(ii) to require that Tenant increase the amount, if any, of the Security
Deposit by one hundred percent (100%). Should Tenant deliver to Landlord, at
any time during the Term, two (2) or more insufficient checks, the Landlord may
require that all monies then and thereafter due from Tenant be paid to Landlord
by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and
agreements to be performed by Tenant under this Lease shall be performed at
Tenant's sole cost and expense and without any abatement of rent or right of
set-off. If Tenant fails to pay any sum of money, other than rent, or fails to
perform any other act on its part to be performed under this Lease, and the
failure continues beyond any applicable grace period set forth in Section 14.1,
then in addition to any other available remedies, Landlord may, at its election
make the payment or perform the other act on Tenant's part. Landlord's
election to make the payment or perform the act on Tenant's part shall not give
rise to any responsibility of Landlord to continue making the same or similar
payments or performing the same or similar acts. Tenant shall, promptly upon
demand by Landlord, reimburse Landlord for all sums paid by Landlord and all
necessary incidental costs, together with interest at the maximum rate
permitted by law from the date of the payment by Landlord. Landlord shall have
the same rights and remedies if Tenant fails to pay those amounts as Landlord
would have in the event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to
be in default in the performance of any obligation under this Lease unless and
until it has failed to perform the obligation within thirty (30) days after
written notice by Tenant to Landlord specifying in reasonable detail the nature
and extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably
incurred by Landlord in connection with any event of default by Tenant under
this Lease or holding over of possession by Tenant after the expiration or
earlier termination of this Lease, including without limitation all costs,
expenses and actual accountants, appraisers, attorneys and other professional
fees, and any collection agency or other collection charges, shall be due and
payable by Tenant to Landlord on demand, and shall bear interest at the rate of
ten percent (10%) per annum. Should either Landlord or Tenant bring any action
in connection with this Lease, the prevailing party shall be entitled to
recover as a part of the action its reasonable attorneys' fees, and all other
costs. The prevailing party for the purpose of this paragraph shall be
determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS
CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY
EXPRESSLY AND
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KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR
ANY CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of
Landlord do not constitute the personal obligations of the individual partners,
trustees, directors, officers or shareholders of Landlord or its constituent
partners. Should Tenant recover a money judgment against Landlord, such
judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levied thereon against the right, title and
interest of Landlord in the Project and out of the rent or other income from
such property receivable by Landlord or out of consideration received by
Landlord from the sale or other disposition of all or any part of Landlord's
right, title or interest in the Project, and no action for any deficiency may
be sought or obtained by Tenant.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim,
demand or right of any kind by Tenant which is based upon or arises in
connection with this Lease shall be barred unless Tenant commences an action
thereon within six (6) months after the date that the act, omission, event or
default upon which the claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without
further notice upon the expiration of the Term, and any holding over by Tenant
after the expiration shall not constitute a renewal or extension of this Lease,
or give Tenant any rights under this Lease, except when in writing signed by
both parties. If Tenant holds over for any period after the expiration (or
earlier termination) of the Term without the prior written consent of Landlord,
such possession shall constitute a tenancy at sufferance only; such holding
over with the prior written consent of Landlord shall constitute a
month-to-month tenancy commencing on the first (1st) day following the
termination of this Lease. In either of such events, possession shall be
subject to all of the terms of this Lease, except that the monthly Basic Rent
shall be the greater of (a) two hundred percent (200%) of the Basic Rent for
the month immediately preceding the date of termination or (b) the then
currently scheduled Basic Rent for comparable space in the Building. If Tenant
fails to surrender the Premises upon the expiration of this Lease despite
demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless
from all loss or liability, including without limitation, any claims made by
any succeeding tenant relating to such failure to surrender. Acceptance by
Landlord of rent after the termination shall not constitute a consent to a
holdover or result in a renewal of this Lease. The foregoing provisions of
this Section are in addition to and do not affect Landlord's right of re-entry
or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other
surrender of this Lease by Tenant, or a mutual termination of this Lease, shall
terminate any or all existing subleases unless Landlord, at its option, elects
in writing to treat the surrender or termination as an assignment to it of any
or all subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall
quit and surrender possession of the Premises to Landlord in as good order,
condition and repair as when received or as hereafter may be improved by
Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord, remove or cause to
be removed from the Premises all personal property and debris, except for any
items that Landlord may by written authorization allow to remain. Tenant shall
repair all damage to the Premises resulting from the removal, which repair
shall include the patching and filling of holes and repair of structural
damage, provided that Landlord may instead elect to repair any structural
damage at Tenant's expense. If Tenant shall fail to comply with the provisions
of this Section, Landlord may effect the removal and/or make any repairs, and
the cost to Landlord shall be additional rent payable by Tenant upon demand.
If Tenant fails to remove Tenant's personal property from the Premises upon the
expiration of the Term, Landlord may remove, store, dispose of and/or retain
such personal property, at Landlord's option, in accordance with then
applicable laws, all at the expense of Tenant. If requested by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an instrument in
writing releasing and quitclaiming to Landlord all right, title and interest of
Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without
deduction or offset, in lawful money of the United States to Landlord at its
address set forth in Item 12 of the Basic Lease Provisions, or at any other
place as Landlord may designate in writing. Unless this Lease expressly
provides otherwise, as for example in the payment of rent pursuant to Section
4.1, all payments shall be due and payable within five (5) days after demand.
All payments requiring proration shall be prorated on the basis of a thirty
(30) day month and a three hundred sixty (360) day year. Any notice, election,
demand, consent, approval or other communication to be given or other document
to be delivered by either party to the other may be delivered in person or by
courier or overnight delivery service to the other party, or may be deposited
in the United States mail, duly registered or certified, postage prepaid,
return receipt requested, and addressed to the other party at the address set
forth in Item 12 of the Basic Lease Provisions. Either party may, by written
notice to the other, served in the manner provided in this Article, designate a
different address. If any notice or other
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document is sent by mail, it shall be deemed served or delivered twenty-four
(24) hours after mailing. If more than one person or entity is named as Tenant
under this Lease, service of any notice upon any one of them shall be deemed as
service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules
and Regulations, attached as Exhibit E, and any reasonable and
nondiscriminatory amendments, modifications and/or additions as may be adopted
and published by written notice to tenants by Landlord for the safety, care,
security, good order, or cleanliness of the Premises, and Project and Common
Areas (if applicable). Landlord shall not be liable to Tenant for any
violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under
this Lease. In the case of any conflict between the Rules and Regulations and
this Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent
employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease. If Tenant fails to take possession of
the Premises or if this Lease otherwise terminates prior to the Expiration Date
as the result of failure of performance by Tenant, Landlord shall be entitled
to recover from Tenant the unamortized portion of any brokerage commission
funded by Landlord in addition to any other damages to which Landlord may be
entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises,
the transferor shall be automatically relieved of all obligations on the part
of Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or
deed of trust to which this Lease is or may be subordinate, and no landlord
under a so-called sale-leaseback, shall be responsible in connection with the
Security Deposit, unless the mortgagee or holder of the deed of trust or the
landlord actually receives the Security Deposit. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord
shall, subject to the foregoing, be binding on Landlord, its successors and
assigns, only during and in respect to their respective successive periods of
ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this
Lease requires, the words "Landlord" and "Tenant" shall include the plural as
well as the singular, and words used in neuter, masculine or feminine genders
shall include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles
and sections of this Lease are for convenience only, are not a part of this
Lease and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person
or entity is named as Tenant, the obligations imposed upon each shall be joint
and several and the act of or notice from, or notice or refund to, or the
signature of, any one or more of them shall be binding on all of them with
respect to the tenancy of this Lease, including, but not limited to, any
renewal, extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all
rights and liabilities given to or imposed upon Landlord and Tenant shall
extend to and bind their respective heirs, executors, administrators,
successors and assigns. Nothing contained in this Section is intended, or
shall be construed, to grant to any person other than Landlord and Tenant and
their successors and assigns any rights or remedies under this Lease.
19
<PAGE> 23
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect
to the performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this
Lease, the deletion of which would not adversely affect the receipt of any
material benefit by either party or the deletion of which is consented to by
the party adversely affected, shall be held invalid or unenforceable to any
extent, the remainder of this Lease shall not be affected and each term and
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers
by Landlord or Tenant of any breach of any term, covenant or condition
contained in this Lease shall not be a waiver of any subsequent breach of the
same or any other term, covenant or condition. Consent to any act by one of
the parties shall not be deemed to render unnecessary the obtaining of that
party's consent to any subsequent act. No breach by Tenant of this Lease shall
be deemed to have been waived by Landlord unless the waiver is in a writing
signed by Landlord. The rights and remedies of Landlord under this Lease shall
be cumulative and in addition to any and all other rights and remedies which
Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party
shall be delayed or hindered in or prevented from the performance of any work
or in performing any act required under this Lease by reason of any cause
beyond the reasonable control of that party, then the performance of the work
or the doing of the act shall be excused for the period of the delay and the
time for performance shall be extended for a period equivalent to the period of
the delay. The provisions of this Section shall not operate to excuse Tenant
from the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and
other attachments cover in full each and every agreement of every kind between
the parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement
or implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance
of all the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without
hindrance or interruption by Landlord or any other person claiming by or
through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of
the respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or
more counterparts, each of which shall constitute an original and all of which
shall be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement
or certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The
submission of this Lease to Tenant shall be for examination purposes only, and
shall not constitute an offer to or option for Tenant to lease the Premises.
Execution of this Lease by Tenant and its return to Landlord shall not be
binding upon Landlord, notwithstanding any time interval, until Landlord has in
fact executed and delivered this Lease to Tenant, it being intended that this
Lease shall only become effective upon execution by Landlord and delivery of a
fully executed counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease
without the prior written consent of Landlord. Tenant, upon the request of
Landlord, shall execute and acknowledge a "short form" memorandum of this Lease
for recording purposes.
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<PAGE> 24
SECTION 21.5. AMENDMENTS. No amendment or termination of this
Lease shall be effective unless in writing signed by authorized signatories of
Tenant and Landlord, or by their respective successors in interest. No
actions, policies, oral or informal arrangements, business dealings or other
course of conduct by or between the parties shall be deemed to modify this
Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or
similar reproduction of this Lease shall be deemed an original for all
purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and
addenda attached to this Lease are hereby incorporated into and made a part of
this Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges
and agrees that the terms of this Lease are confidential and constitute
proprietary information of Landlord. Disclosure of the terms could adversely
affect the ability of Landlord to negotiate other leases and impair Landlord's
relationship with other tenants. Accordingly, Tenant agrees that it, and its
partners, officers, directors, employees and attorneys, shall not intentionally
and voluntarily disclose the terms and conditions of this Lease to any other
tenant or apparent prospective tenant of the Project, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this
Lease by Landlord, the obligations, covenants and performance of the Tenant as
herein provided shall be guaranteed in writing by the Guarantor(s) listed in
Item 7 of the Basic Lease Provisions, if any, on a form of guaranty provided by
Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Project, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on
the part of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Premises
whose address has been furnished to Tenant and (b) such beneficiary is afforded
a reasonable opportunity to cure the default by Landlord (which in no event
shall be less than sixty (60) days), including, if necessary to effect the
cure, time to obtain possession of the Premises by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently pursued.
Tenant agrees that each beneficiary of a deed of trust or mortgage covering the
Premises is an express third party beneficiary hereof, Tenant shall have no
right or claim for the collection of any deposit from such beneficiary or from
any purchaser at a foreclosure sale unless such beneficiary or purchaser shall
have actually received and not refunded the deposit, and Tenant shall comply
with any written directions by any beneficiary to pay rent due hereunder
directly to such beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of
this Lease shall be construed to be conditions as well as covenants as though
the words specifically expressing or imparting covenants and conditions were
used in each separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that
Landlord shall have no obligation whatsoever to provide guard service or other
security measures for the benefit of the Premises or the Project. Tenant
assumes all responsibility for the protection of Tenant, its agents, invitees
and property from acts of third parties. Nothing herein contained shall
prevent Landlord, at its sole option, from providing security protection for
the Project or any part thereof, in which event the cost thereof shall be
included within the definition of Building Costs.
LANDLORD: TENANT:
IRVINE TECHNOLOGY PARTNERS III, BROADCOM CORPORATION,
a California general partnership a California corporation
By: THE IRVINE COMPANY,
Its General Partner
By: /s/ CLARENCE W. BARKER By: /s/ WILLIAM J. RUEHLE
--------------------------------- ------------------------------
Clarence W. Barker, William J. Ruehle
President, Irvine Industrial Company, VP, CFO and Secretary
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a division of The Irvine Company
By: /s/ JOHN C. TSU By:
-------------------- -------------------------------
John C. Tsu, Name:_________________________
Assistant Secretary Title:________________________
22
<PAGE> 26
EXHIBIT A
Floor plan for the first floor of the building at 15326 Alton, Irvine, CA.
<PAGE> 27
EXHIBIT A-1
Floor plan for the second floor of the building at 15326 Alton, Irvine, CA.
<PAGE> 28
EXHIBIT B
IRVINE INDUSTRIAL COMPANY
-------------------------
HAZARDOUS MATERIALS SURVEY FORM
-------------------------------
The purpose of this form is to obtain information regarding the use of
hazardous substances on Irvine Industrial Company property. Prospective
tenants and contractors should answer the questions in light of their proposed
operations on the premises. Existing tenants and contractors should answer the
questions as they relate to ongoing operations on the premises and should
update any information previously submitted.
If additional space is needed to answer the questions, you may attach
separate sheets of paper to this form. When completed, the form should be sent
to the following address:
Insignia Commercial Group
-------------------------
One Technology Drive, Suite F-207
---------------------------------
Irvine, CA 92618
----------------
(insert address of Property
Management Company)
Your cooperation in this matter is appreciated. If you have any
questions, please do not hesitate to call [insert name of Property Manager] at
[insert phone number] for assistance.
1. GENERAL INFORMATION
Name of Responding
Company: Broadcom Corporation
---------------------------------------------------------------------
Check all that apply: Tenant (X) Contractor ( ) Prospective ( ) Existing ( )
Mailing Address: 16251 Laguna Canyon Road, Irvine, CA 92618
----------------------------------------------------------------
Contact Person & Title:
---------------------------------------------------------
Telephone Number: (714) 450-8700
--------------------------------------------------------------
Address of Leased Premises:
-----------------------------------------------------
Length of Lease or Contract Term: Twelve months
----------------------------------------------
Describe the proposed operations to take place on the property, including
principal products manufactured or services to be conducted. Existing tenants
and contractors should describe any proposed changes to ongoing operations.
Corporate headquarters for developing highly integrated silicon solutions
- --------------------------------------------------------------------------------
which enable broadband digital data transmission to the home and within the
- --------------------------------------------------------------------------------
business enterprise.
- --------------------------------------------------------------------------------
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes ( ) No (X)
Chemical Products Yes ( ) No (X)
Biological Hazards/ Yes ( ) No (X)
Infectious Wastes Yes ( ) No (X)
Radioactive Materials Yes ( ) No (X)
2.2 List any hazardous materials to be used or stored, the
quantities that will be on-site at any given time, and the
location and method of storage (e.g., bottles in storage
closet on the premises).
Location and Method
-------------------
Waste/Products of Storage Quantity
-------------- -- ------- --------
None other than standard copier and cleaning products.
-----------------------------------------------------
-------------- ----------- -----------
-------------- ----------- -----------
-------------- ----------- -----------
2.3 Is any underground storage of hazardous substances proposed or
currently conducted on the premises? Yes ( ) No (X)
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<PAGE> 29
If yes, describe the materials to be stored, and the size and
construction of the tank. Attach copies of any permits
obtained for the underground storage of such
substances.__________________________________________________
_____________________________________________________________
3. SPILLS
3.1 During the past year, have any spills occurred on the
premises? Yes ( ) No (X) If so, please describe the spill and
attach the results of any testing conducted to determine the
extent of such spills.
3.2 Were any agencies notified in connection with such spills? Yes
( ) No ( ) If so, attach copies of any spill reports or other
correspondence with regulatory agencies.
3.3 Were any clean-up actions undertaken in connection with the
spills? Yes ( ) No ( ) If so, briefly describe the actions
taken. Attach copies of any clearance letters obtained from
any regulatory agencies involved and the results of any final
soil or groundwater sampling done upon completion of the
clean-up work.
4. WASTE MANAGEMENT
4.1 List the waste, if any, generated or to be generated at the
premises, whether it is as hazardous waste, biological or
radioactive hazard, its hazard class and the quantity
generated on a monthly basis.
Waste Hazard Class Quantity/Month
None
__________ _________________ _____________________
__________ _________________ _____________________
__________ _________________ _____________________
4.2 Describe the method(s) of disposal for each waste. Indicate
where and how often disposal will take place.________________
_____________________________________________________________
_____________________________________________________________
4.3 Is any treatment or processing of hazardous, infectious or
radioactive wastes currently conducted or proposed to be
conducted at the premises? Yes ( ) No (X)
If yes, please describe any existing or proposed treatment
methods._____________________________________________________
_____________________________________________________________
4.4 Attach copies of any hazardous waste permits or licenses
issued to your company with respect to its operations on the
premises.
5. WASTEWATER TREATMENT/DISCHARGE
5.1 Do you discharge industrial wastewater to: None
___ storm drain? ___ sewer?
___ surface water? ___ no industrial discharge
5.2 Is your industrial wastewater treated before discharge?
Yes ( ) No ( )
If yes, describe the type of treatment conducted.
5.3 Attach copies of any wastewater discharge permits issued to
your company with respect to its operations on the premises.
6. AIR DISCHARGES
6.1 Do you have any air filtration systems or stacks that
discharge into the air? Yes ( ) No (X)
6.2 Do you operate any equipment that require air emissions
permits? Yes ( ) No (X)
6.3 Attach copies of any air discharge permits pertaining to these
operations.
7. HAZARDOUS MATERIALS DISCLOSURES
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<PAGE> 30
7.1 Does your company handle an aggregate of at least 500 pounds,
55 gallons or 200 cubic feet of hazardous material at any
given time? If so, state law requires that you prepare a
hazardous materials management plan. Yes ( ) No ( )
7.2 Has your company prepared a hazardous materials management
plan ('business plan') pursuant to state and Orange County
Fire Department requirements? Yes ( ) No ( ) If so, attach a
copy of the business plan.
7.3 Are any of the chemicals used in your operations regulated
under Proposition 65? Yes ( ) No ( ) If so, describe the
actions taken, or proposed actions to be taken, to comply with
Proposition 65 requirements.
7.4 Is your company subject to OSHA Hazard Communication Standard
Requirements? Yes ( ) No ( ) If so, describe the procedures
followed to comply with these requirements.
8. ENFORCEMENT ACTIONS, COMPLAINTS
8.1 Has your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees? Yes ( ) No
( ) If so, describe the actions and any continuing compliance
obligations imposed as a result of these actions.
8.2 Has your company ever received requests for information,
notice or demand letters, or any other inquiries regarding its
operations? Yes ( ) No ( )
8.3 Have there ever been, or are there now pending, any lawsuits
against your company regarding any environmental or health and
safety concerns? Yes ( ) No ( )
8.4 Has an environmental audit ever been conducted at your
company's current facility? Yes ( ) No ( ) If so, discuss the
results of the audit.
8.5 Have there been any problems or complaints from neighbors at
your company's current facility? Yes ( ) No ( )
________________________________________________________________________________
By:_____________________________________
Name:_____________________________
Title: ___________________________
Date: ____________________________
28
<PAGE> 31
EXHIBIT C
LANDLORD'S DISCLOSURES
SPECTRUM
The capitalized terms used and not otherwise defined in this Exhibit
shall have the same definitions as set forth in the Lease. The provisions of
this Exhibit shall supersede any inconsistent or conflicting provisions of the
Lease.
1. Landlord has been informed that the El Toro Marine Corps Air
Station (MCAS) has been listed as a Federal Superfund site as a result of
chemical releases occurring over many years of occupancy. Various chemicals
including jet fuel, motor oil and solvents have been discharged in several
areas throughout the MCAS site. A regional study conducted by the Orange
County Water District has estimated that groundwaters beneath more than 2,900
acres have been impacted by Trichloroethlene (TCE), an industrial solvent.
There is a potential that this substance may have migrated into the ground
water underlying the Premises. The U.S. Environmental Protection Agency, the
Santa Ana Region Quality Control Board, and the Orange County Health Care
Agency are overseeing the investigation/cleanup of this contamination. To the
Landlord's current actual knowledge, the ground water in this area is used for
irrigation purposes only, and there is no practical impediment to the use or
occupancy of the Premises due to the El Toro discharges.
Page 1 of 1
<PAGE> 32
EXHIBIT D
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in effect at
the Building. Landlord reserves the right to adopt reasonable
nondiscriminatory modifications and additions to those standards. Tenant
agrees to obtain and present evidence to Landlord that it has fully complied
with the insurance requirements.
1. Tenant shall, at its sole cost and expense, commencing on the date
Tenant is given access to the Premises for any purpose and during the entire
Term, procure, pay for and keep in full force and effect: (i) commercial
general liability insurance with respect to the Premises and the operations of
or on behalf of Tenant in, on or about the Premises, including but not limited
to personal injury, owned and nonowned automobile, blanket contractual,
independent contractors, broad form property damage (with an exception to any
pollution exclusion with respect to damage arising out of heat, smoke or fumes
from a hostile fire), fire and water legal liability, products liability (if a
product is sold from the Premises), liquor law liability (if alcoholic
beverages are sold, served or consumed within the Premises), and severability
of interest, which policy(ies) shall be written on an "occurrence" basis and
for not less than the amount set forth in Item 13 of the Basic Lease
Provisions, with a combined single limit (with a $50,000 minimum limit on fire
legal liability) per occurrence for bodily injury, death, and property damage
liability, or the current limit of liability carried by Tenant, whichever is
greater, and subject to such increases in amounts as Landlord may determine
from time to time; (ii) workers' compensation insurance coverage as required by
law, together with employers' liability insurance; (iii) with respect to
improvements, alterations, and the like required or permitted to be made by
Tenant under this Lease, builder's all-risk insurance, in an amount equal to
the replacement cost of the work; (iv) insurance against fire, vandalism,
malicious mischief and such other additional perils as may be included in a
standard "all risk" form in general use in Orange County, California, insuring
Tenant's leasehold improvements, trade fixtures, furnishings, equipment and
items of personal property of Tenant located in the Premises, in an amount
equal to not less than ninety percent (90%) of their actual replacement cost
(with replacement cost endorsement); and (v) business interruption insurance in
amounts satisfactory to cover one (1) year of loss. In no event shall the
limits of any policy be considered as limiting the liability of Tenant under
this Lease.
2. In the event Landlord consents to Tenant's use, generation or
storage of Hazardous Materials on, under or about the Premises pursuant to
Section 5.3 of this Lease, Landlord shall have the continuing right to require
Tenant, at Tenant's sole cost and expense (provided the same is available for
purchase upon commercially reasonable terms), to purchase insurance specified
and approved by Landlord, with coverage not less than Five Million Dollars
($5,000,000.00), insuring (i) any Hazardous Materials shall be removed from the
Premises, (ii) the Premises shall be restored to a clean, healthy, safe and
sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord's
officers, directors, shareholders, agents, employees and representatives,
arising from such Hazardous Materials.
3. All policies of insurance required to be carried by Tenant
pursuant to this Exhibit D containing a deductible exceeding Five Thousand
Dollars ($5,000.00) per occurrence must be approved in writing by Landlord
prior to the issuance of such policy. Tenant shall be solely responsible for
the payment of all deductibles.
4. All policies of insurance required to be carried by Tenant
pursuant to this Exhibit D shall be written by responsible insurance companies
authorized to do business in the State of California and with a Best's rating
of not less than "A" subject to final acceptance and approval by Landlord. Any
insurance required of Tenant may be furnished by Tenant under any blanket
policy carried by it or under a separate policy, so long as (i) the Premises
are specifically covered (by rider, endorsement or otherwise), (ii) the limits
of the policy are applicable on a "per location" basis to the Premises and
provide for restoration of the aggregate limits, and (iii) the policy otherwise
complies with the provisions of this Exhibit D. A true and exact copy of each
paid up policy evidencing the insurance (appropriately authenticated by the
insurer) or a certificate of insurance, certifying that the policy has been
issued, provides the coverage required by this Exhibit D and contains the
required provisions, shall be delivered to Landlord prior to the date Tenant is
given the right of possession of the Premises. Proper evidence of the renewal
of any insurance coverage shall also be delivered to Landlord not less than
thirty (30) days prior to the expiration of the coverage. Landlord may at any
time, and from time to time, inspect and/or copy any and all insurance policies
required by this Lease.
5. Each policy evidencing insurance required to be carried by Tenant
pursuant to this Exhibit D shall contain the following provisions and/or
clauses satisfactory to Landlord: (i) a provision that the policy and the
coverage provided shall be primary and that any coverage carried by Landlord
shall be noncontributory with respect to any policies carried by Tenant except
as to workers' compensation insurance; (ii) a provision including Landlord, the
Additional Insureds identified in Item 11 of the Basic Lease Provisions, and
any other parties in interest designated by Landlord as an additional insured,
except as to workers' compensation insurance; (iii) a waiver by the insurer of
any right to subrogation against Landlord, its agents, employees, contractors
and representatives which arises or might arise by reason of any payment under
the policy or by reason of any act or omission of Landlord, its agents,
employees, contractors or representatives; and (iv) a provision that the
insurer will not cancel or change the coverage provided by the policy without
first giving Landlord thirty (30) days prior written notice.
6. In the event that Tenant fails to procure, maintain and/or pay
for, at the times and for the durations specified in this Exhibit D, any
insurance required by this Exhibit D, or fails to carry insurance required by
any governmental authority, Landlord may at its election procure that insurance
and pay the premiums, in which event Tenant shall repay Landlord all sums paid
by Landlord, together with interest at the maximum rate permitted by law and
any related costs or expenses incurred by Landlord, within ten (10) days
following Landlord's written demand to Tenant.
Page 1 of 1
<PAGE> 33
EXHIBIT E
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing
Tenant's use of the Premises leased to Tenant pursuant to the terms, covenants
and conditions of the Lease to which this Exhibit is attached and therein made
part thereof. In the event of any conflict or inconsistency between this
Exhibit and the Lease, the Lease shall control.
1. Tenant shall not place anything or allow anything to be
placed near the glass of any window, door, partition or wall which may appear
unsightly from outside the Premises.
2. The walls, walkways, sidewalks, entrance passages, courts and
vestibules shall not be obstructed or used for any purpose other than ingress
and egress of pedestrian travel to and from the Premises, and shall not be used
for loitering or gathering, or to display, store or place any merchandise,
equipment or devices, or for any other purpose. The walkways, entrance
passageways, courts, vestibules and roof are not for the use of the general
public and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence in the judgment of the Landlord
shall be prejudicial to the safety, character, reputation and interests of the
Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant or employee or invitee of any tenant shall be
permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to the
outside walls of the Building. No security bars or gates, curtains, blinds,
shades or screens shall be attached to or hung in, or used in connection with,
any window or door of the Premises without the prior written consent of
Landlord. Neither the interior nor exterior of any windows shall be coated or
otherwise sunscreened without the express written consent of Landlord.
4. Tenant shall not mark, nail, paint, drill into, or in any way
deface any part of the Premises or the Building. Tenant shall not lay
linoleum, tile, carpet or other similar floor covering so that the same shall
be affixed to the floor of the Premises in any manner except as approved by
Landlord in writing. The expense of repairing any damage resulting from a
violation of this rule or removal of any floor covering shall be borne by
Tenant.
5. The toilet rooms, urinals, wash bowls and other plumbing
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, caused it.
6. Landlord shall direct electricians as to the manner and
location of any future telephone wiring. No boring or cutting for wires will
be allowed without the prior consent of Landlord. The locations of the
telephones, call boxes and other office equipment affixed to the Premises shall
be subject to the prior written approval of Landlord.
7. The Premises shall not be used for manufacturing or for the
storage of merchandise except as such storage may be incidental to the
permitted use of the Premises. No exterior storage shall be allowed at any
time without the prior written approval of Landlord. The Premises shall not be
used for cooking or washing clothes without the prior written consent of
Landlord, or for lodging or sleeping or for any immoral or illegal purposes.
8. Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall
not use, keep or permit to be used, or kept, any foul or obnoxious gas or
substance in the Premises or permit or suffer the Premises to be used or
occupied in any manner offensive or objectionable to Landlord or other
occupants of this or neighboring buildings or premises by reason of any odors,
fumes or gases.
9. No animals shall be permitted at any time within the
Premises.
10. Tenant shall not use the name of the Building or the Project
in connection with or in promoting or advertising the business of Tenant,
except as Tenant's address, without the written consent of Landlord. Landlord
shall have the right to prohibit any advertising by any Tenant which, in
Landlord's reasonable opinion, tends to impair the reputation of the Project or
its desirability for its intended uses, and upon written notice from Landlord
any Tenant shall refrain from or discontinue such advertising.
11. Canvassing, soliciting, peddling, parading, picketing,
demonstrating or otherwise engaging in any conduct that unreasonably impairs
the value or use of the Premises or the Project are prohibited and each Tenant
shall cooperate to prevent the same.
12. No equipment of any type shall be placed on the Premises
which in Landlord's opinion exceeds the load limits of the floor or otherwise
threatens the soundness of the structure or improvements of the Building.
13. No air conditioning unit or other similar apparatus shall be
installed or used by any Tenant without the prior written consent of Landlord.
14. No aerial antenna shall be erected on the roof or exterior
walls of the Premises, or on the grounds, without in each instance, the prior
written consent of Landlord. Any aerial or antenna so installed without such
written
31
<PAGE> 34
consent shall be subject to removal by Landlord at any time without prior
notice at the expense of the Tenant, and Tenant shall upon Landlord's demand
pay a removal fee to Landlord of not less than $200.00.
15. The entire Premises, including vestibules, entrances, doors,
fixtures, windows and plate glass, shall at all times be maintained in a safe,
neat and clean condition by Tenant. All trash, refuse and waste materials
shall be regularly removed from the Premises by Tenant and placed in the
containers at the locations designated by Landlord for refuse collection. All
cardboard boxes must be "broken down" prior to being placed in the trash
container. All styrofoam chips must be bagged or otherwise contained prior to
placement in the trash container, so as not to constitute a nuisance. Pallets
may not be disposed of in the trash container or enclosures. The burning of
trash, refuse or waste materials is prohibited.
16. Tenant shall use at Tenant's cost such pest extermination
contractor as Landlord may direct and at such intervals as Landlord may
require.
17. All keys for the Premises shall be provided to Tenant by
Landlord and Tenant shall return to Landlord any of such keys so provided upon
the termination of the Lease. Tenant shall not change locks or install other
locks on doors of the Premises, without the prior written consent of Landlord.
In the event of loss of any keys furnished by Landlord for Tenant, Tenant shall
pay to Landlord the costs thereof.
18. No person shall enter or remain within the Project while
intoxicated or under the influence of liquor or drugs. Landlord shall have the
right to exclude or expel from the Project any person who, in the absolute
discretion of Landlord, is under the influence of liquor or drugs.
Landlord reserves the right to amend or supplement the foregoing
Rules and Regulations and to adopt and promulgate additional rules and
regulations applicable to the Premises. Notice of such rules and regulations
and amendments and supplements thereto, if any, shall be given to the Tenant.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 16, 1998, except for Note 9, as to which the
date is March 9, 1998 in Amendment No. 2 to the Registration Statement (Form S-1
No. 333-45619) and related Prospectus of Broadcom Corporation.
/s/ Ernst & Young LLP
Orange County, California
March 9, 1998
