<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 000-23993
BROADCOM CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0480482
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92618-3616
(Address of principal executive offices and zip code)
(949) 450-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock, $0.0001 par value,
outstanding as of November 10, 1999: 52,322,326 shares of Class A common stock
and 51,819,168 shares of Class B common stock.
<PAGE> 2
BROADCOM CORPORATION
QUARTERLY REPORT ON
FORM 10-Q
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 1
Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
PART II OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Change in Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 43
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 (1)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 147,926 $ 72,511
Short-term investments 78,348 34,344
Accounts receivable, net 64,460 42,279
Inventory 12,257 7,325
Deferred taxes 7,183 6,184
Other current assets 13,083 10,001
--------- ---------
Total current assets 323,257 172,644
Property and equipment, net 43,247 31,600
Long-term investments 20,072 42,826
Deferred taxes 60,865 6,721
Other assets 8,780 6,790
--------- ---------
Total assets $ 456,221 $ 260,581
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 54,796 $ 22,374
Wages and related benefits 11,792 3,135
Accrued liabilities 23,384 8,217
Current portion of long-term debt 415 7,252
--------- ---------
Total current liabilities 90,387 40,978
Long-term debt, less current portion 865 4,100
Shareholders' equity:
Common stock 314,447 206,932
Notes receivable from employees (1,825) (2,743)
Deferred compensation (5,875) (6,926)
Retained earnings 58,222 18,240
--------- ---------
Total shareholders' equity 364,969 215,503
--------- ---------
Total liabilities and shareholders' equity $ 456,221 $ 260,581
========= =========
</TABLE>
(1) The consolidated balance sheet as of December 31, 1998 has been restated
to give retroactive effect to acquisitions accounted for using the
pooling-of-interests method.
See accompanying notes.
1
<PAGE> 4
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998(1) 1999 1998(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $138,353 $ 55,474 $357,360 $141,838
Cost of revenue 55,518 24,898 144,062 60,408
-------- -------- -------- --------
Gross profit 82,835 30,576 213,298 81,430
Operating expense:
Research and development 27,791 14,085 77,153 33,344
Selling, general and administrative 13,846 8,285 40,856 20,998
-------- -------- -------- --------
Total operating expense 41,637 22,370 118,009 54,342
Merger related costs 4,088 -- 15,210 --
Litigation settlement costs -- -- 17,036 --
-------- -------- -------- --------
Income from operations 37,110 8,206 63,043 27,088
Interest and other income, net 2,091 1,260 5,723 2,884
-------- -------- -------- --------
Income before income taxes 39,201 9,466 68,766 29,972
Provision for income taxes 12,001 4,294 22,349 13,394
-------- -------- -------- --------
Net income $ 27,200 $ 5,172 $ 46,417 $ 16,578
======== ======== ======== ========
Basic earnings per share $ .27 $ .06 $ .47 $ .20
======== ======== ======== ========
Diluted earnings per share $ .23 $ .05 $ .40 $ .17
======== ======== ======== ========
Weighted average shares (basic) 100,161 90,850 98,256 81,241
======== ======== ======== ========
Weighted average shares (diluted) 117,332 105,869 114,669 100,212
======== ======== ======== ========
</TABLE>
(1) The consolidated statements of operations for the three and nine months
ended September 30, 1998 have been restated to give retroactive effect
to acquisitions accounted for using the pooling-of-interests method.
See accompanying notes.
2
<PAGE> 5
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998(1)
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 46,417 $ 16,578
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,129 6,017
Amortization of deferred compensation 3,105 913
Deferred taxes (55,143) (539)
Change in operating assets and liabilities:
Accounts receivable (22,181) (15,358)
Inventory (4,932) (3,172)
Prepaid expenses and other assets (8,141) (6,476)
Accounts payable 32,422 7,202
Income taxes 6,264 469
Other accrued liabilities 20,629 6,973
--------- ---------
Net cash provided by operating activities 28,569 12,607
INVESTING ACTIVITIES
Purchases of property and equipment (21,479) (22,515)
Purchases of held-to-maturity investments (21,250) (59,836)
--------- ---------
Net cash used in investing activities (42,729) (82,351)
FINANCING ACTIVITIES
Proceeds from long-term obligations -- 4,535
Payments on long-term obligations (6,797) (3,883)
Payments on capital lease obligations (430) (259)
Net proceeds from initial public offering
of Class A common stock -- 79,170
Net proceeds from issuance of common stock 22,432 4,188
Tax benefit from exercise of stock options and
stock purchase plan 73,452 4,151
Proceeds from repayment of notes receivables
from employees 918 430
--------- ---------
Net cash provided by financing activities 89,575 88,332
--------- ---------
Increase in cash and cash equivalents 75,415 18,588
Cash and cash equivalents at beginning of period 72,511 33,031
--------- ---------
Cash and cash equivalents at end of period $ 147,926 $ 51,619
========= =========
Supplemental disclosure of non-cash activities:
Notes receivable from employees in connection
with exercise of stock options $ -- $ 191
========= =========
Purchase of equipment through capital leases $ 297 $ 616
========= =========
</TABLE>
(1) The consolidated statement of cash flows for the nine months ended
September 30, 1998 has been restated to give retroactive effect to
acquisitions accounted for using the pooling-of-interests method.
See accompanying notes.
3
<PAGE> 6
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. Basis of Presentation
The condensed financial statements included herein are
unaudited; however, they contain all normal recurring accruals and
adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of Broadcom
Corporation and its subsidiaries (collectively, the "Company") at
September 30, 1999 and the consolidated results of its operations and
cash flows for the three and nine months ended September 30, 1999 and
1998. All intercompany accounts and transactions have been eliminated.
It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The
results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for
the full year.
The accompanying unaudited condensed consolidated financial
statements do not include footnotes and certain financial presentations
normally required under generally accepted accounting principles.
Therefore, these financial statements should be read in conjunction with
the audited restated consolidated financial statements and notes thereto
for the year ended December 31, 1998, included in the Company's Current
Report on Form 8-K/A filed with the Securities and Exchange Commission
("SEC") on September 17, 1999.
2. Business Combinations
Pooling-of-Interests Transactions
On August 31, 1999 the Company completed the acquisitions of
HotHaus Technologies Inc. ("HotHaus") and AltoCom, Inc. ("AltoCom").
HotHaus is a provider of OpenVoIP(TM) (Voice over Internet Protocol)
embedded communications software that enables transmission of digital
voice, fax and data packets over data networks, including the Internet.
AltoCom offers complete software data/fax modem implementations for
general purpose embedded processors, PC CPUs and digital signal
processors. In connection with the acquisitions, the Company issued
3,361,571 shares of its Class B common stock and reserved an additional
258,263 shares of its Class B common stock for issuance upon exercise of
outstanding employee stock options and other rights.
Each of the two acquisitions was accounted for as a pooling of
interests. Accordingly, the Company's historical consolidated financial
statements have been restated to include the pooled operations of
HotHaus and AltoCom as if they had combined with the Company at the
beginning of the first period presented. The restated historical
consolidated financial statements also include the pooled operations of
the Company's prior acquisitions.
A reconciliation of revenue, net income and diluted earnings per
share originally reported for the three and nine months ended September
30, 1998, to the amounts presented in the accompanying Statements of
Operations is as follows:
4
<PAGE> 7
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
(In thousands, except per share data)
<S> <C> <C>
Revenue
Broadcom and subsidiaries $ 52,485 $133,197
HotHaus and AltoCom 2,989 8,641
-------- --------
Total $ 55,474 $141,838
======== ========
Net income
Broadcom and subsidiaries $ 4,653 $ 15,010
HotHaus and AltoCom 519 1,568
-------- --------
Total $ 5,172 $ 16,578
======== ========
Diluted earnings per share
Broadcom and subsidiaries $ .05 $ .15
HotHaus and AltoCom -- .02
-------- --------
Total $ .05 $ .17
======== ========
</TABLE>
Included in revenue for the three and nine months ended
September 30, 1999 were revenues of $1.8 million and $8.3 million,
respectively, from HotHaus and AltoCom incurred prior to the closing of
the acquisitions on August 31, 1999. Included in net income for the
three and nine months ended September 30, 1999 were net losses of $1.5
million and $1.6 million, respectively, from HotHaus and AltoCom
incurred prior to August 31, 1999.
Merger Related Costs
In connection with the acquisitions of HotHaus and AltoCom, the
Company recorded approximately $4.1 million in charges in the three
months ended September 30, 1999 for direct and other merger-related
costs and certain restructuring programs.
Merger transaction costs of approximately $3.8 million consisted
primarily of fees of attorneys, investment bankers, accountants and
other related charges. Restructuring costs of approximately $0.3 million
included the disposal of duplicative assets and adjustments to conform
the accounting policies of HotHaus and AltoCom to those of the Company.
5
<PAGE> 8
3. Earnings Per Share
The following table sets forth the computation of earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator: Net income $ 27,200 $ 5,172 $ 46,417 $ 16,578
========= ========= ========= =========
Denominator:
Weighted-average shares outstanding 103,008 96,093 101,528 87,480
Less: nonvested common shares outstanding (2,847) (5,243) (3,272) (6,239)
--------- --------- --------- ---------
Denominator for basic earnings per common share 100,161 90,850 98,256 81,241
Effect of dilutive securities:
Nonvested common shares 2,500 3,345 2,453 3,835
Stock options 14,671 11,531 13,868 9,432
Warrants -- 143 92 69
Convertible preferred stock -- -- -- 5,635
--------- --------- --------- ---------
Denominator for diluted earnings per common share 117,332 105,869 114,669 100,212
========= ========= ========= =========
Basic earnings per share $ 0.27 $ 0.06 $ 0.47 $ 0.20
========= ========= ========= =========
Diluted earnings per share $ 0.23 $ 0.05 $ 0.40 $ 0.17
========= ========= ========= =========
</TABLE>
4. Inventory
Inventory is stated at the lower of cost (first-in, first-out)
or market and consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
<S> <C> <C>
Work in process $ 9,327 $ 3,546
Finished goods 2,930 3,779
------- -------
$12,257 $ 7,325
======= =======
</TABLE>
6
<PAGE> 9
5. Long-Term Debt
The following is a summary of the Company's long-term debt:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
<S> <C> <C>
Long-term notes at rates from 10.75% to 12.25%
secured by certain of the Company's assets $ -- $ 3,512
Non-interest bearing notes payable -- 6,427
Capitalized lease obligations payable in varying
monthly installments at rates from 8.2% to 14.7% 1,280 1,413
-------- --------
1,280 11,352
Less current portion of long-term debt (415) (7,252)
-------- --------
$ 865 $ 4,100
======== ========
</TABLE>
6. Shareholders' Equity
On February 17, 1999 the Company effected a two-for-one stock
split of the Company's Class A common stock and Class B common stock in
the form of a 100% stock dividend. All share numbers and per share
amounts contained in these notes and in the accompanying consolidated
financial statements have been retroactively restated to reflect this
change in the Company's capital structure.
7. Litigation
In December 1996 Stanford Telecommunications, Inc. ("STI") filed
an action against the Company in the United States District Court for
the Northern District of California. STI alleged that the Company's
BCM3036, BCM3037, BCM3300, BCM93220 and BCM93220B products infringed one
of STI's patents (the "'352 Patent"). STI sought an injunction as well
as the recovery of monetary damages, including treble damages for
willful infringement, as to the products listed above and potentially
other products. The Company filed an answer and affirmative defenses to
STI's complaint, denying the allegations in STI's complaint, and
asserted a counterclaim requesting declaratory relief that the Company
was not infringing the '352 Patent and that the '352 Patent was invalid
and unenforceable. In May 1999 the Company brought a separate action
against STI and an STI subsidiary in California Superior Court for
misappropriation of certain Company trade secrets. On June 16, 1999 the
parties entered into a settlement agreement and agreed to dismiss with
prejudice all claims and counterclaims in both actions. Under the terms
of the settlement agreement, STI granted to the Company a worldwide,
non-exclusive, royalty-free license to STI's rights in patents and
patent applications, and all inventions conceived, through the date of
the agreement, relating to any transmitter or receiver technology, or
design or invention capable of use over a coaxial cable transmission
medium, excluding patent claims specifically claiming Code Division
Multiple Access (CDMA) inventions. The Company also obtained the option
to acquire licenses on commercially reasonable terms to STI's patent
claims based upon CDMA inventions capable of use over a coaxial cable
transmission medium, and STI agreed not to bring any future action
against the Company, its suppliers or customers for patent infringement
or trade secret misappropriation resulting from commercial use of any of
the
7
<PAGE> 10
Company's existing technology, designs or products. In connection with
the settlement, the Company made a one-time payment to STI and the
parties exchanged mutual releases. Neither party admitted any liability
in connection with the various actions.
In April 1997 Sarnoff Corporation and Sarnoff Digital
Communications, Inc., now known as NxtWave Communications, Inc.,
(collectively, "Sarnoff") filed a complaint in New Jersey Superior
Court against the Company and five former Sarnoff employees now employed
by the Company (the "Former Employees") asserting claims against the
Former Employees for breach of contract, misappropriation of trade
secrets, and breach of the covenant of good faith and fair dealing, and
against the Company for inducing such actions. Those claims relate to
the alleged disclosure of certain technology of Sarnoff to the Company.
The complaint also asserted claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade
secrets and confidential, proprietary information of Sarnoff, and
tortious interference with present and prospective economic advantage,
as well as a claim against the Company alleging that it "illegally
pirated" Sarnoff's employees. The complaint sought to preliminarily and
permanently enjoin the Company and the Former Employees from utilizing
any alleged Sarnoff trade secrets, and to restrain the Former Employees
from violating their alleged statutory and contractual duties of
confidentiality to Sarnoff by, for example, precluding them from working
for six months in any capacity relating to certain of the Company's
programs. In May 1997 the Court denied Sarnoff's request for a temporary
restraining order. On February 2, 1999 the Court dismissed with
prejudice Sarnoff's misappropriation of trade secrets claims, and
granted summary judgment dismissing all of Sarnoff's remaining claims
except claims based upon the Company's alleged "pirating" of Sarnoff's
employees. Trial of Sarnoff's "piracy"-related claims commenced on
February 22, and concluded on March 2, 1999. On April 27, 1999 the Court
issued an order and opinion dismissing with prejudice all remaining
claims that Sarnoff had against the Company. The Court found in the
Company's favor on all liability, causation, and damages issues.
Subsequently the Court denied the Company's petition for attorneys' fees
in the case. Judgment on the Court's February 2 and April 27 orders was
entered on May 19, 1999. On July 1, 1999, Sarnoff filed an appeal of
both orders in the Superior Court of New Jersey, Appellate Division.
In October 1999 Sarnoff requested that the Appellate Division dismiss
the appeal and the court did so.
In July 1997 the Company commenced an action against Sarnoff in
the California Superior Court alleging breach of contract, fraud,
misappropriation of trade secrets, false advertising, trade libel,
intentional interference with prospective economic advantage and unfair
competition. The claims center on Sarnoff's violation of a
non-disclosure agreement entered into with the Company with respect to
limited use of certain of the Company's technology and on inaccurate
comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This
action was removed to the United States District Court for the Central
District of California, and was stayed pending resolution of the New
Jersey action described in the preceding paragraph. Following trial in
the New Jersey action, the parties stipulated to lift the stay so that
litigation of the California action could go forward. Sarnoff then filed
a motion for summary judgment in the California case on the basis that
the issues therein have been or should have been previously litigated in
the New Jersey action under the New Jersey "entire controversy"
doctrine. Following oral argument on August 16, 1999, the Court granted
Sarnoff's motion and dismissed Broadcom's claims on the grounds that
they should have been brought as part of the New Jersey action. The
Company believes that the California action involves facts,
8
<PAGE> 11
circumstances and claims unrelated to those at issue in the New Jersey
action, and has filed an appeal of the District Court's ruling. No
discovery has yet occurred in the case.
In March 1998 Scott O. Davis, the Company's former Chief
Financial Officer, filed a complaint in California Superior Court
against the Company and its Chief Executive Officer, Henry T. Nicholas,
III, alleging claims for fraud and deceit, negligent misrepresentation,
breach of contract, breach of fiduciary duty, constructive fraud,
conversion, breach of the implied covenant of good faith and fair
dealing, and declaratory relief. The claims related to Mr. Davis'
alleged ownership of 26,000 shares of Series D Preferred Stock
originally purchased by Mr. Davis in March 1996 (which shares would have
converted into 156,000 shares of Class B Common Stock upon consummation
of the Offering). The purchase agreement between the Company and Mr.
Davis contained a provision permitting the Company to repurchase the
shares in the event that Mr. Davis did not continue to be employed by
the Company for a certain period of time. After Mr. Davis resigned in
June 1997, the Company exercised its repurchase right. Mr. Davis'
complaint alleged that the repurchase right should not be enforceable
under several legal theories and sought unspecified damages and
declaratory relief. The Company asserted certain counterclaims against
Mr. Davis. On March 19, 1999 the parties entered into a settlement
agreement and agreed to dismiss with prejudice all of the claims and
counterclaims in the case. The settlement was approved by the Court on
April 5, 1999. The terms of the settlement are confidential but the
Company believes that they will not have a material effect on its
business, results of operations, financial condition or equity.
In September 1998 Motorola, Inc. ("Motorola") filed a complaint
in United States District Court for the District of Massachusetts
against AltoCom, asserting that (i) AltoCom's V.34 and V.90 compliant
software modem technology infringes several patents owned by Motorola,
(ii) AltoCom induces its V.34 and V.90 licensees to infringe such
patents, and (iii) AltoCom contributorily infringes such patents. The
complaint sought a preliminary and permanent injunction against AltoCom
as well as the recovery of monetary damages, including treble damages
for willful infringement. In October 1998 Motorola affirmatively
dismissed its case in the District of Massachusetts and filed a
substantially similar complaint in the United States District Court for
the District of Delaware. AltoCom has filed an answer and affirmative
defenses to the District of Delaware complaint. AltoCom has also
asserted a counterclaim requesting declaratory relief that AltoCom has
not infringed the Motorola patents and that such patents are invalid
and/or unenforceable as well as a counterclaim requesting declaratory
and injunctive relief based on breach of contract theory. AltoCom
believes that it has strong defenses to Motorola's claims on invalidity,
noninfringement and inequitable conduct grounds. The parties are
currently in the initial stages of discovery in the action. The Court
has tentatively scheduled the first stage of trial for January 2001,
with a secondary stage scheduled for March 2001. AltoCom became a
subsidiary of the Company on August 31, 1999.
Although AltoCom believes that it has strong defenses, a finding
of infringement by AltoCom in this action could lead to liability for
monetary damages (which could be trebled in the event that the
infringement were found to have been willful), the issuance of an
injunction requiring that AltoCom withdraw various products from the
market, and indemnification claims by AltoCom's customers or strategic
partners, each of which events
9
<PAGE> 12
could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is also involved in other legal proceedings, claims
and litigation arising in the ordinary course of business.
The Company's pending lawsuits 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
business, results of operations or financial condition, the results of
litigation are inherently uncertain, and an adverse outcome is at least
reasonably possible. The Company is unable to estimate the range of
possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying consolidated financial
statements.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
This Report contains forward-looking statements based on our current
expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will"
and variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements include, but are not limited to, statements
concerning projected revenues, expenses and gross profit, the need for
additional capital, Year 2000 compliance, market acceptance of our products, our
ability to consummate acquisitions and integrate their operations successfully,
our ability to achieve further integration, the status of evolving technologies
and their growth potential, our production capacity, our ability to migrate to
smaller process geometries, and the success of pending litigation. Such
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
our actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors.
The section entitled "Risk Factors" set forth in this Form 10-Q and
similar discussions in our Annual Report on Form 10-K for the year ended
December 31, 1998, in our Current Report on Form 8-K/A filed with the SEC on
September 17, 1999, and in our other SEC filings, discuss some of the important
risk factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks, in addition to the other
information in this Report and in our other filings with the SEC, before
deciding to invest in our company or to maintain or increase your investment. We
undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
The information contained in this Form 10-Q is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
SEC, including our Annual Report on Form 10-K for the year ended December 31,
1998 and our Current Report on Form 8-K/A filed September 17, 1999, that discuss
our business in greater detail and advise interested parties of certain risks,
uncertainties and other factors that may affect our business, results of
operations or financial condition.
OVERVIEW
We are a leading provider of highly integrated silicon solutions that
enable broadband digital transmission of voice, data and video content to and
throughout the home and within the business enterprise. Our 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, we design, develop
and supply integrated circuits for a number of the most significant broadband
communications markets, including the markets for cable set-top
11
<PAGE> 14
boxes, cable modems, high-speed office networks, home networking, direct
broadcast satellite and terrestrial digital broadcast, and digital subscriber
lines. From our inception in 1991 through 1994, we were primarily engaged in
product development and the establishment of strategic customer and foundry
relationships. During this period, we generated the majority of our total
revenue from development work performed for key customers. We began shipping our
products in 1994, and subsequently our total revenue has grown predominately
through sales of our semiconductor products. We intend to continue to enter into
development contracts with key customers, but expect that development revenue
will constitute a decreasing percentage of our total revenue. We also generate a
small percentage of our product revenue from sales of software and software
support and sales of system level reference designs.
From time to time, our key customers have placed large orders causing
quarterly revenue to fluctuate significantly. We expect these fluctuations will
continue in the future. Sales to our five largest customers, including sales to
their respective manufacturing subcontractors, decreased to 63.4% of our total
revenue in the three months ended September 30, 1999 compared to 69.3% in the
three months ended September 30, 1998. In the nine months ended September 30,
1999 sales to our five largest customers decreased to 69.1% of our total revenue
compared to 71.6% in the respective prior year period. We expect that our key
customers will continue to account for a significant portion of our total
revenue for 1999 and in the future.
Our gross margin has been affected in the past, and may continue to be
affected in the future, by various factors, including, but not limited to, the
following:
- our product mix;
- the position of our products in their respective life cycles;
- competitive pricing strategies;
- the mix of product revenue and development revenue; and
- manufacturing cost efficiencies and inefficiencies.
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. Our gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors.
The sales cycle for the test and evaluation of our 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 our
products. Due to these lengthy sales cycles, we may experience a significant
delay between increasing expenses for research and development and selling,
general and administrative efforts, and the generation of corresponding revenue,
if any. Furthermore, during 1999 and thereafter, we intend to continue to
increase our investment in research and development, selling, general and
administrative functions and inventory as we expand our operations. We
anticipate 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
12
<PAGE> 15
levels could be disproportionately high, and our operating results for that
quarter and, potentially, future quarters would be materially and adversely
affected.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998(1) 1999 1998(1)
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 40.1 44.9 40.3 42.6
------ ------ ------ ------
Gross profit 59.9 55.1 59.7 57.4
Operating expense:
Research and development 20.1 25.4 21.6 23.5
Selling, general and administrative 10.0 14.9 11.5 14.8
------ ------ ------ ------
Total operating expense 30.1 40.3 33.1 38.3
Merger related costs 3.0 -- 4.2 --
Litigation settlement costs -- -- 4.7 --
------ ------ ------ ------
Income from operations 26.8 14.8 17.7 19.1
Interest and other income, net 1.5 2.3 1.6 2.0
------ ------ ------ ------
Income before income taxes 28.3 17.1 19.3 21.1
Provision for income taxes 8.6 7.8 6.3 9.4
------ ------ ------ ------
Net income 19.7% 9.3% 13.0% 11.7%
====== ====== ====== ======
</TABLE>
(1) Restated for acquisitions accounted for using the pooling-of-interests
method.
Effects of Pooling-of-Interests Transactions. On August 31, 1999 we
completed the acquisitions of HotHaus Technologies Inc. and AltoCom, Inc. Each
of the acquisitions was accounted for as a pooling of interests. Accordingly,
our historical consolidated financial statements and the discussion and analysis
of financial condition and results of operations for prior periods have been
restated to include the pooled operations of these two companies as if they had
combined with our company at the beginning of the first period presented. The
restated historical consolidated financial statements also include the pooled
operations of the Company's prior acquisitions. Included in revenue for the
three and nine months ended September 30, 1998 were revenues of $3.0 million and
$8.6 million, respectively, from HotHaus and AltoCom. Included in revenue for
the three and nine months ended September 30, 1999 were revenues of $1.8 million
and $8.3 million, respectively, from HotHaus and AltoCom incurred prior to
August 31, 1999. Included in net income for the three and nine months ended
September 30, 1998 were net income of $0.5 million and $1.6 million,
respectively, from HotHaus and AltoCom. Included in net income for the three and
nine months ended September 30, 1999 were net losses of $1.5 million and $1.6
million, respectively, from HotHaus and AltoCom incurred prior to August 31,
1999.
Revenue. Revenue consists principally of product revenue generated by
sales of our semiconductor products. Revenue for the three months ended
September 30, 1999 was
13
<PAGE> 16
$138.4 million, an increase of $82.9 million or 149.4% from revenue of $55.5
million in the three months ended September 30, 1998. Revenue for the nine
months ended September 30, 1999 was $357.4 million, an increase of $215.5
million or 151.9% from revenue of $141.8 million in the nine months ended
September 30, 1998. This growth in revenue was derived mainly from increases in
volume shipments of our semiconductor products for the high-speed networking
market, digital cable set-top boxes and cable modems.
Gross Profit. Gross profit represents revenue less the cost of revenue.
Cost of revenue includes the cost of purchasing the finished silicon wafers
processed by independent foundries, and costs associated with assembly, test and
quality assurance for those products, as well as costs of personnel and
equipment associated with manufacturing support and contracted development work.
Gross profit for the three months ended September 30, 1999 was $82.8 million or
59.9% of revenue, an increase of $52.3 million as compared with gross profit of
$30.6 million or 55.1% of revenue in the three months ended September 30, 1998.
Gross profit for the nine months ended September 30, 1999 was $213.3 million or
59.7% of revenue, an increase of $131.9 million as compared with gross profit of
$81.4 million or 57.4% of revenue in the nine months ended September 30, 1998.
The increase in gross profit was primarily attributable to the significant
increase in the volume of product shipments. The increase in gross profit as a
percentage of revenue was driven by cost reductions from our suppliers as well
as lower than expected rates of price erosion in our major markets. We expect
that gross profit as a percentage of revenue will decline in future periods as
volume-pricing agreements and competitive pricing strategies continue to take
effect. In addition, our gross profit may be affected by future introduction of
certain lower margin products.
Research and Development Expense. Research and development expense
consists primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to engineering design
tools, and subcontracting costs. Research and development expense for the three
months ended September 30, 1999 was $27.8 million or 20.1% of revenue, an
increase of $13.7 million or 97.3% as compared with research and development
expense of $14.1 million or 25.4% of revenue for the three months ended
September 30, 1998. Research and development expense in the nine months ended
September 30, 1999 was $77.2 million or 21.6% of revenue, an increase of $43.8
million or 131.4% as compared with research and development expense of $33.3
million or 23.5% of total revenue for the nine months ended September 30, 1998.
The increase in research and development expense in absolute dollars was
primarily due to the addition of personnel and the investment in design tools
for the development of new products and the enhancement of existing products.
The decrease in research and development expense as a percentage of revenue
reflected the significant increase in revenue in the three and nine months ended
September 30, 1999 as compared to the respective prior year periods. We expect
that research and development expense in absolute dollars will continue to
increase for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of personnel-related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for the three months ended September 30, 1999 was
$13.8 million or 10.0% of revenue, an increase of $5.6 million or 67.1% as
compared with selling, general and administrative expense of $8.3 million or
14.9% of revenue for the three months ended September 30, 1998. Selling, general
and administrative expense for the nine months ended September 30, 1999 was
$40.9 million or 11.5% of revenue, an increase of $19.9 million or 94.6% as
compared with selling, general
14
<PAGE> 17
and administrative expense of $21.0 million or 14.8% of revenue for the nine
months ended September 30, 1998. The increase in absolute dollars reflected
higher personnel related costs resulting from the hiring of sales and marketing
personnel, senior management and administrative personnel, and increased
occupancy, legal and other professional fees, including increased expenses for
litigation in the nine months ended September 30, 1999. The decline in selling,
general and administrative expense as a percentage of revenue reflected the
significant increase in revenue during the three and nine months ended September
30, 1999 as compared with the respective prior year periods. We expect that
selling, general and administrative expense in absolute dollars will continue to
increase for the foreseeable future to support the planned continued expansion
of our operations and periodic changes in our infrastructure to support
increased headcount, acquisition and integration activities, and international
operations.
Merger Related Costs. Merger related costs consist primarily of
transaction costs, such as fees for investment bankers, attorneys, accountants
and other related fees and expenses, and certain restructuring costs related to
the disposal of duplicative facilities and assets and the write-down of
unutilized assets. Merger related costs of approximately $11.1 million in the
nine months ended September 30, 1999 were incurred in connection with the
acquisitions of Maverick Networks, Epigram, Inc. and Armedia, Inc. Merger
related costs of approximately $4.1 million in the three and nine months ended
September 30, 1999 were incurred in connection with the acquisitions of HotHaus
and AltoCom. No comparable merger related costs were incurred in the
year-earlier periods.
Litigation Settlement Costs. Litigation settlement costs consist
primarily of settlement fees and associated attorneys' fees, expenses and court
costs. Litigation settlement costs of approximately $17.0 million were incurred
in the nine months ended September 30, 1999. No comparable litigation settlement
costs were incurred in the three months ended September 30, 1999 or in the
year-earlier periods.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and investment balances, less
interest on our long-term debt and capital lease obligations. Interest and other
income, net for the three months ended September 30, 1999 was $2.1 million, an
increase of $0.8 million as compared with $1.3 million in the three months ended
September 30, 1998. Interest and other income, net for the nine months ended
September 30, 1999 was $5.7 million, an increase of $2.8 million as compared
with $2.9 million in the nine months ended September 30, 1998. The increase was
principally due to higher cash balances available to invest resulting from the
consummation of our initial public offering and sale of shares to Cisco Systems,
Inc. in April 1998, a follow-on offering in October 1998 and cash generated by
operations.
Provision for Income Taxes. We accrue a provision for federal and state
income tax at the applicable statutory rates. Our effective tax rate was
approximately 32.5% for the nine months ended September 30, 1999 and
approximately 44.7% for the nine months ended September 30, 1998. The difference
between our effective tax rate for the nine months ended September 30, 1999 and
the federal statutory tax rate of 34% was primarily related to the effect of
state income taxes and research and development tax credits. The effective tax
rate in the nine months ended September 30, 1998 was negatively impacted by our
inability to recognize the tax benefit of Epigram and Armedia net operating
losses incurred during the period.
15
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through a
combination of sales of equity securities and cash generated by operations. At
September 30, 1999 we had $232.9 million in working capital, $226.3 million in
cash, cash equivalents and short-term investments, and $20.1 million in
long-term investments. At December 31, 1998 we had $131.7 million in working
capital, $106.9 million in cash, cash equivalents and short-term investments,
and $42.8 million in long-term investments.
Operating activities provided cash in the amount of $28.6 million and
$12.6 million in the nine months ended September 30, 1999 and 1998 respectively,
primarily from net income, depreciation and amortization, an increase in
accounts payable, and a growth in accrued liabilities, partially offset by
increases in deferred tax assets, accounts receivable, inventory and prepaid
expenses and other assets.
In the nine months ended September 30, 1999 our investing activities
used $21.5 million in cash for the purchase of capital equipment and $21.3
million for the purchase of held-to-maturity securities. In the nine months
ended September 30, 1998, our investing activities used $22.5 million in cash
for the purchase of capital equipment to support our expanding operations and
$59.8 million for the purchase of held-to-maturity investments.
Cash provided by financing activities was $89.6 million in the nine
months ended September 30, 1999 primarily from $73.5 million in tax benefits
related to stock option exercises and $22.4 million in proceeds from the
issuance of common stock, partially offset by $6.8 million in payments on
long-term obligations of acquired companies. Financing activities provided cash
of $88.3 million in the nine months ended September 30, 1998, primarily from the
aggregate net proceeds of $79.2 million from our initial public offering and
sale of shares to Cisco Systems in April 1998.
We believe that our existing cash, cash equivalents and investments on
hand, together with the cash we expect to generate from operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need to raise additional funds to fund our
activities beyond the next year. We could raise such funds by selling more stock
to the public or to selected investors, or by borrowing money. In addition, even
though we may not need additional funds, we may still elect to sell additional
equity securities or obtain credit facilities for other reasons. We may not be
able to obtain additional funds on favorable terms, or at all. If we raise
additional funds by issuing additional equity securities, the ownership
percentages of existing shareholders would be reduced. In addition, the equity
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
We had commitments totaling approximately $10 million as of September
30, 1999, primarily for the purchase of engineering design tools. During 1998,
we spent $30.1 million on capital equipment to support our expanding operations.
We expect that we will spend more than that amount during 1999 to purchase
additional workstation hardware and design tools, test equipment, information
systems and leasehold improvements as our operations continue to expand and as
we integrate and upgrade the capital equipment and facilities of acquired
companies.
16
<PAGE> 19
Although we believe we have sufficient capital to fund our activities
for at least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to
launch our products and achieve and maintain a competitive
position in the marketplace;
- volume price discounts;
- our business, product, capital expenditure and research and
development plans and technology roadmap;
- the levels of inventory and accounts receivable that we
maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products; and
- our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
YEAR 2000 COMPLIANCE
We are aware of the widely publicized problems associated with computer
systems as they relate to the Year 2000. Many existing computer hardware systems
and software applications, and embedded computer chips, software and firmware in
control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such system applications
and devices could fail or create erroneous results unless corrected so that they
can correctly process data related to the Year 2000 and beyond. These problems
are expected to increase in frequency and severity as the Year 2000 approaches.
We have completed our business risk assessment of the impact that the
Year 2000 problem may have on our operations. We may need to revise this
assessment as new information is made available to us. To date, we have
identified the following four key areas of our business that may be affected:
Products. We have evaluated each of our current products and believe
that they do not contain date sensitive functionality. We cannot determine
whether all of our customers' products into which our products are incorporated
will be Year 2000 compliant because we have little or no control over the
design, production and testing of our customers' products.
Internal Infrastructure. The Year 2000 problem could affect the systems,
transaction processing computer applications and devices used by us to operate
and monitor all major aspects of our business, including financial systems (such
as general ledger, accounts payable and payroll), security systems, customer
services, infrastructure, materials requirement
17
<PAGE> 20
planning, master production scheduling, networks and telecommunications systems
and other systems with embedded computer chips. We believe that we have
identified substantially all of the major systems, software applications and
related equipment used in connection with our internal operations that must be
modified or upgraded in order to minimize the possibility of a material
disruption to our business. To date, we have upgraded or replaced affected
critical systems and completed testing of our Enterprise Resource Planning
transactional application and believe it is Year 2000 ready. Because most of the
software applications used by us are recent versions of vendor supported,
commercially available products, we have not incurred, and do not expect in the
future to incur, significant costs to upgrade these applications as Year 2000
compliant versions are released by the respective vendors. We will continue to
seek certifications that products installed are Year 2000 ready through the end
of 1999.
Third-Party Suppliers. We rely, directly and indirectly, on external
systems utilized by our third-party suppliers for the management and control of
fabrication and the assembly and testing of substantially all of our products.
We have completed surveys and on-site visits of the two independent foundries,
Taiwan Semiconductor Manufacturing Corporation and Chartered Semiconductor
Manufacturing, that fabricate substantially all of our semiconductor devices in
current production. In addition, we have completed surveys and on-site visits of
the two subcontractors, ASAT Ltd. and ST Assembly Test Services, that assemble
and test substantially all of our current products to identify and, to the
extent possible, resolve issues involving the Year 2000 problem. The key
suppliers mentioned above reported completion of their Year 2000 readiness.
While we continue to monitor their readiness status and expect to resolve any
significant Year 2000 problems, it is possible that these suppliers or new
suppliers will not be able to resolve all or any Year 2000 problems with their
systems in a timely manner. Any failure of these third parties to resolve their
Year 2000 problems in a timely manner could materially disrupt our business. Any
such disruption could negatively impact our sales, harm our relationships with
our customers, and materially and adversely affect our business, financial
condition and results of operations.
Facility and Laboratory Related Systems. Systems such as heating,
sprinklers, elevators, test equipment and security at our facilities and labs
may also be affected by the Year 2000 problem. We have completed assessing the
business risks of and costs of remediating the Year 2000 problem on our facility
and lab related systems. We estimate that the total cost of completing any
required modifications, upgrades or replacements of these systems will not have
a material adverse effect on our business or results of operations.
We presently estimate that the total cost of addressing our Year 2000
issues will be approximately $300,000. To date, we have incurred approximately
$80,000 in expenditures for testing of systems. This estimate was derived using
numerous assumptions, including but not limited to the assumptions that we have
already identified our most significant Year 2000 issues and that the plans of
our third party suppliers will be fulfilled in a timely manner without cost to
us. However, these assumptions may not be accurate, and actual results could
differ materially and adversely from those anticipated after completion of
remediation, testing and contingency planning phases.
18
<PAGE> 21
We have developed contingency plans to address those Year 2000 issues
that may pose a significant risk to our on-going operations. These plans include
buffer inventories for certain products, implementation of manual procedures to
compensate for system deficiencies, and contract IS resources to immediately
address issues should they arise. However, any contingency plans we implement
may not succeed or may not be adequate to meet our needs without materially
impacting our operations. In addition, the delays and inefficiencies inherent in
conducting operations in an alternative manner could materially and adversely
affect our results of operations. More specifically, if our third party
suppliers were to lose power, or the ability to ship product as a result of Year
2000 related issues, we would be exposed to missing customer shipments and
potentially losing revenues and profits.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH THE SEC,
INCLUDING OUR ANNUAL REPORT ON FORM 10-K AND SUBSEQUENT REPORTS ON FORMS 10-Q
AND 8-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US
OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF
ANY OF THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE
FOR OUR CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly revenues and operating results have fluctuated
significantly in the past and may continue to vary from quarter to quarter due
to a number of factors, many of which are not within our control. If our
operating results do not meet the expectations of securities analysts or
investors, our stock price may decline. Fluctuations in our operating results
may be due to a number of factors, including the following:
- the volume of our product sales and pricing concessions on
volume sales;
- the timing, rescheduling or cancellation of significant customer
orders;
- the gain or loss of a key customer;
- the qualification, availability and pricing of competing
products and technologies and the resulting effect on sales and
pricing of our products;
- wafer pricing and the availability of foundry and assembly
capacity and raw materials;
- our ability to specify, develop, complete, introduce, market and
transition to volume production new products and technologies in
a timely manner;
- the timing of customer qualification and industry
interoperability certification of new products and the risks of
non-qualification or non-certification;
19
<PAGE> 22
- the rate at which our present and future customers and end users
adopt Broadcom's technologies in our target markets;
- the rate of adoption and acceptance of new industry standards in
our target markets;
- intellectual property disputes and customer indemnification
claims;
- the risks inherent in our acquisitions of technologies and
businesses, including the timing and successful completion of
technology and product development through volume production,
integration issues, costs and unanticipated expenditures,
changing relationships with customers, suppliers and strategic
partners, potential contractual, intellectual property or
employment issues, accounting charges, and the risks that the
acquisition cannot be completed successfully or that anticipated
benefits are not realized;
- the effectiveness of our product cost reduction efforts;
- fluctuations in our manufacturing yields and other problems or
delays in the fabrication, assembly, testing or delivery of our
products;
- the effects of new and emerging technologies;
- risks and uncertainties associated with our international
operations;
- our ability to retain and hire key executives, technical
personnel and other employees in the numbers, with the
capabilities and at the compensation levels that we need to
implement our business and product plans;
- problems or delays that we may face in shifting our products to
smaller geometry process technologies and in achieving higher
levels of design integration;
- changes in our product or customer mix;
- the quality of our products and any remediation costs;
- the effects of natural disasters and other events beyond our
control;
- the level of orders received that we can ship in a fiscal
quarter;
- economic and market conditions in the semiconductor industry and
the broadband communications markets;
- potential business disruptions, claims, expenses and other
difficulties resulting from "Year 2000" problems in
computer-based systems used by us, our suppliers or our
customers; and
- general economic and market conditions.
We intend to continue to increase our operating expenses in 1999 and
2000. A large portion of our operating expenses, including rent, salaries and
capital lease expenditures, is fixed and difficult to reduce or change.
Accordingly, if our total revenue does not meet our expectations, we probably
would not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenue. In that event, our business, financial condition and
results of operations would be materially and adversely affected.
20
<PAGE> 23
Due to all of the foregoing factors, and the other risks discussed in
this report, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of future performance.
BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. IN
ADDITION, IF WE ARE UNABLE TO CONTINUE TO SELL EXISTING AND NEW PRODUCTS TO OUR
KEY CUSTOMERS IN SIGNIFICANT QUANTITIES OR TO ATTRACT NEW SIGNIFICANT CUSTOMERS,
OUR FUTURE OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. As a result, the loss of any
significant customer could materially and adversely affect our financial
condition and results of operations. Sales to General Instrument, 3Com and
Cisco, including sales to their respective manufacturing subcontractors,
accounted for approximately 29.7%, 17.6% and 11.8%, respectively, of our revenue
in the nine months ended September 30, 1999. Sales to our five largest
customers, including sales to their respective manufacturing subcontractors,
decreased to 63.4% of our total revenue in the three months ended September 30,
1999 compared to 69.3% in the three months ended September 30, 1998. In the nine
months ended September 30, 1999 sales to our five largest customers decreased to
69.1% of our total revenues compared to 71.6% in the respective prior year
period. We expect that our key customers will continue to account for a
substantial portion of our revenues for 1999 and in the future. Accordingly, our
future operating results will continue to depend on the success of our largest
customers and on our ability to sell existing and new products to these
customers in significant quantities.
We may not be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:
- Most of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty.
- Our agreements with our customers typically do not require them
to purchase a minimum amount of our products.
- Many of our customers have pre-existing relationships with our
current or potential competitors that may affect their decision
to purchase our products.
- Our customers face intense competition from other manufacturers
that do not use our products.
- Some of our customers offer or may offer products that compete
with our products.
- Our longstanding relationships with some of our larger customers
may also deter other potential customers who compete with these
customers from buying our products.
In addition, in order to attract new customers or retain existing
customers, we may offer certain customers favorable prices on our products. If
these prices are lower than the prices paid by our existing customers, we would
have to offer the same lower prices to certain of our customers who have
contractual "most favored nation" pricing arrangements. In that event, our
average selling prices and gross margins would decline. The loss of a key
21
<PAGE> 24
customer, a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.
WE FACE INTENSE COMPETITION IN THE BROADBAND COMMUNICATIONS MARKETS AND
SEMICONDUCTOR INDUSTRY, WHICH COULD REDUCE OUR MARKET SHARE IN EXISTING MARKETS
AND AFFECT OUR ENTRY INTO NEW MARKETS.
The broadband communications markets and semiconductor industry are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We currently compete with a number of major domestic and
international suppliers of integrated circuits in the markets for cable set-top
boxes, cable modems, high-speed office networks, home networking, direct
broadcast satellite and terrestrial digital satellite, and digital subscriber
lines. This competition has resulted and may continue to result in declining
average selling prices for our products. We currently compete in the cable
set-top box market with Conexant, Fujitsu, LSI Logic, Motorola, Philips
Electronics, STMicroelectronics, Texas Instruments and VLSI Technology, a
subsidiary of Philips Electronics, for communication devices, and with ATI
Technologies, C-Cube, LSI Logic, Motorola, STMicroelectronics and Texas
Instruments in the MPEG/graphics segment. We expect that other major
semiconductor manufacturers will enter the market as digital broadcast
television and other digital cable television markets become more established. A
number of companies, including Conexant, Libit Signal Processing, a subsidiary
of Texas Instruments, and others have announced MCNS/DOCSIS compliant products,
which could result in significant competition in the cable modem market. In the
high-speed office networking market, we principally compete with established
suppliers including Galileo, Level One Communications, a subsidiary of Intel
Corporation, Lucent Technologies, National Semiconductor and Texas Instruments.
A number of smaller companies have announced products in our target markets,
such as Altima, Seeq, a subsidiary of LSI Logic, and Allayer. We also compete
for customer specific ASICs against traditional ASIC suppliers such as Lucent,
LSI Logic, NEC and Toshiba. Our principal competitors in the DBS and terrestrial
broadcast market include Conexant, Fujitsu, Hyundai, LG Semiconductors, Libit,
LSI Logic, Lucent, Motorola, Nxtwave Communications, Oren, Philips Electronics,
Sony, STMicroelectronics and VLSI Technology. Our principal competitors in the
xDSL market include Alcatel, Analog Devices, Conexant, Globespan, Lucent,
Motorola, Siemens and Texas Instruments. As the home networking market develops,
we expect to encounter competition from various competitors, including Advanced
Micro Devices, Conexant, Intel, Lucent and Texas Instruments. In all of the
foregoing markets, we also may face competition from newly established
competitors and suppliers of products based on new or emerging technologies. We
also believe we will encounter further consolidation in the markets in which we
compete.
Many of our competitors operate their own fabrication facilities and
have longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution and technical resources than we do.
As a result, these competitors may be able to adapt more quickly than we can to
new or emerging technologies and changes in customer requirements. They may also
be able to devote greater resources than we can to the promotion and sale of
their
22
<PAGE> 25
products. In addition, 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. Existing or new competitors may also
develop technologies in the future that more effectively address the
transmission of digital information through existing analog infrastructures at
lower costs than our technologies. Increased competition has in the past and is
likely to continue to result in price reductions, reduced gross margins and loss
of market share. We cannot assure you that we will be able to continue to
compete successfully or that competitive pressures will not materially and
adversely affect our business, financial condition and results of operations.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO MAKE SIGNIFICANT CAPITAL INFUSIONS,
BE DILUTIVE TO OUR EXISTING SHAREHOLDERS, AND RESULT IN DIFFICULTIES IN
ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS
AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that would allow us to
complement our existing product offerings, expand our market coverage or enhance
our technological capabilities. Since January 1999, we have acquired Maverick
Networks, Epigram, Inc., Armedia, Inc., HotHaus Technologies Inc. and AltoCom,
Inc. We plan to continue to pursue acquisition opportunities in the future.
Acquisitions may require significant capital infusions, typically entail many
risks and could result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of the
acquired company. We may also encounter delays in the timing and successful
completion of the acquired company's technology and product development to
production readiness, unanticipated expenditures, changing relationships with
customers, suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, the key personnel of the acquired
company may decide not to work for us. The acquisition of another company or its
products and technologies may also require us to enter into a geographic or
business market in which we have little or no prior experience. These challenges
could disrupt our ongoing business, distract our management and employees and
increase our expenses. In addition, acquisitions may materially and adversely
affect our results of operations because they may require large one-time
write-offs, increased debt and contingent liabilities, substantial depreciation
or deferred compensation charges or the amortization of expenses related to
goodwill and other intangible assets. We may seek to account for acquisitions
under the pooling-of-interests accounting method, but that method may not be
available. Any of these events could cause the price of our Class A common stock
to decline. Furthermore, if we issue equity or convertible debt securities to
pay for an acquisition, as in the case of our recent acquisitions, the issuance
may be dilutive to our existing shareholders. In addition, the equity or debt
securities that we may issue could have rights, preferences or privileges senior
to those of the holders of our Common Stock.
We cannot assure you that we will be able to consummate any of our
acquisitions or that we will realize the benefits anticipated from these
acquisitions. In the future, we may not be able to find other suitable
acquisition opportunities. Even if we do find suitable acquisition
opportunities, we may not be able to consummate the acquisitions on commercially
acceptable terms. Moreover, due to our limited acquisition experience, it may be
difficult for
23
<PAGE> 26
us to successfully integrate any acquired businesses, products, technologies or
personnel, which could materially and adversely affect our business, financial
condition and results of operations.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKETS IN ORDER TO REMAIN COMPETITIVE.
Our future success will depend on our ability to anticipate and adapt to
changes in technology and industry standards. We will also need to continue to
develop and introduce new and enhanced products to meet our customers' changing
demands. Substantially all of our current product revenue is derived from sales
of products for the high-speed networking, cable set-top box and cable modem
markets. These markets are characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and short
product life cycles. In addition, these markets continue to undergo rapid growth
and consolidation. A significant slowdown in any of these markets or other
broadband communications markets could materially and adversely affect our
business, financial condition and results of operations. Our success will also
depend on the ability of our customers to develop new products and enhance
existing products for the broadband communications markets and to successfully
introduce and promote those products. The broadband communications markets may
not continue to develop to the extent or in the timeframes that we anticipate.
If new markets do not develop as we anticipate or if our products do not gain
widespread acceptance in these markets, our business, financial condition and
results of operations could be materially and adversely affected.
IF WE DO NOT ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS IN THE
SEMICONDUCTOR INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS, OUR PRODUCTS COULD
BECOME OBSOLETE AND WE COULD LOSE MARKET SHARE.
Products for broadband communications applications generally are based
on industry standards that are continually evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards. Our past sales and profitability have resulted, to a
large extent, from our ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products. Our ability to
adapt to these changes and to anticipate future standards, and the rate of
adoption and acceptance of those standards, will be a significant factor in
maintaining or improving our competitive position and prospects for growth. We
have in the past invested substantial resources in emerging technologies, such
as 100Base-T4 for high-speed networking, which did not achieve the market
acceptance that we had expected. Our inability to anticipate the evolving
standards in the semiconductor industry and, in particular the broadband
communications markets, or to develop and introduce new products successfully
into these markets could materially and adversely affect our business, financial
condition and results of operations.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW SILICON SOLUTIONS SUCCESSFULLY AND
IN A COST-EFFECTIVE AND TIMELY MANNER OR TO ACHIEVE MARKET ACCEPTANCE OF OUR NEW
PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
24
<PAGE> 27
Our future success will depend on our ability to develop new silicon
solutions for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to
select these products for design into their own new products. Our quarterly
results in the past have been, and are expected in the future to continue to be,
dependent on the introduction of a relatively small number of new products and
the timely completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from time to time we
have experienced delays in completing the development and introduction of new
products. Our ability to successfully develop and deliver new products will
depend on various factors, including our ability to:
- accurately predict market requirements and evolving industry
standards;
- accurately define new products;
- timely complete and introduce new product designs;
- timely qualify and obtain industry interoperability
certification of our products and our customers' products into
which our products will be incorporated;
- obtain sufficient foundry capacity;
- achieve high manufacturing yields; and
- gain market acceptance of our products and our customers'
products.
If we are not able to develop and introduce new products successfully
and in a cost-effective and timely manner, our business, financial condition and
results of operations would be materially and adversely affected.
Our new products generally are incorporated into our customers' products
at the design stage. We have often incurred significant expenditures on the
development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product. The value
of our products largely depends on the commercial success of our customers'
products and on the extent to which those products accommodate components
manufactured by our competitors. We cannot assure you that we will continue to
achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.
WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT FOUNDRY CAPACITY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We do not own or operate a fabrication facility. Two outside foundries,
Taiwan Semiconductor Manufacturing Corporation, or TSMC, in Taiwan and Chartered
Semiconductor Manufacturing, or Chartered, in Singapore, currently manufacture
substantially all of our semiconductor devices in current production. In
September 1999, TSMC's principal facility was affected by a significant
earthquake in Taiwan. As a consequence of this earthquake, TSMC suffered power
outages and equipment damage that have impaired TSMC's wafer deliveries and,
together with strong demand, could result in wafer shortages and higher wafer
pricing industry wide.
25
<PAGE> 28
Because we rely on outside foundries with limited capacity, we face
several significant risks, including:
- a lack of ensured wafer supply;
- limited control over delivery schedules, quality assurance and
control, manufacturing yields and production costs; and
- the unavailability of or potential delays in obtaining access to
key process technologies.
In addition, the manufacture of integrated circuits is a highly complex
and technologically demanding process. Although we work closely with our
foundries to minimize the likelihood of reduced manufacturing yields, our
foundries have from time to time experienced lower than anticipated
manufacturing yields. This often occurs during the production of new products or
the installation and start-up of new process technologies.
The ability of each foundry to provide us with semiconductor devices is
limited by its available capacity. Although we have entered into contractual
commitments to supply specified levels of products to certain of our customers,
we do not have a long-term volume purchase agreement or a guaranteed level of
production capacity with either TSMC or Chartered. Excess foundry capacity may
not always be available when we need it or at reasonable prices. Availability of
excess foundry capacity has recently been reduced due to strong demand. We place
our orders on the basis of our customers' purchase orders, and TSMC and
Chartered can allocate capacity to the production of other companies' products
and reduce deliveries to us on short notice. It is possible that foundry
customers that are larger and better financed than we are or that have long-term
agreements with TSMC or Chartered, may induce our foundries to reallocate
capacity to them. Such a reallocation could impair our ability to secure the
supply of components that we need. Although we primarily use two independent
foundries, most of our components are not manufactured at both foundries at any
given time and some of our products may be designed to be manufactured at only
one. Accordingly, if one of our foundries is unable to provide us with
components as needed, we could experience significant delays in securing
sufficient supplies of those components. Any of these delays would likely
materially and adversely affect our business, financial condition and results of
operations. In addition, if either TSMC or Chartered experiences financial
difficulties, whether as a result of the recent Asian economic crisis or
otherwise, if either foundry suffers any damage to its facilities or in the
event of any other disruption of foundry capacity, we may not be able to qualify
an alternative foundry in a timely manner. Even our current foundries would need
to have new manufacturing processes qualified if there is a disruption in an
existing process. If we choose to use a new foundry or process, it would
typically take us several months to qualify the new foundry or process before we
can begin shipping products from it. If we cannot accomplish this qualification
in a timely manner, we may still experience a significant interruption in supply
of the affected products. We cannot assure you that any of our existing or new
foundries would be able to produce integrated circuits with acceptable
manufacturing yields. Furthermore, our foundries may not be able to deliver
enough semiconductor devices to us on a timely basis, or at reasonable prices.
Maverick and Broadcom HomeNetworking, Inc., formerly known as Epigram,
Inc., have established relationships with foundries other than TSMC and
Chartered, and we currently
26
<PAGE> 29
expect to use these other foundries to produce the initial products of Maverick
and Broadcom HomeNetworking, subject to satisfactory qualification. We may
utilize such foundries for other products in the future. In using these new
foundries, we will be subject to all of the same risks described in the
foregoing paragraphs with respect to TSMC and Chartered.
WE MAY BE UNABLE TO RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL AND
ATTRACT ADDITIONAL KEY EMPLOYEES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel, in particular, our
co-founder, President and Chief Executive Officer, Dr. Henry T. Nicholas III,
and our co-founder, Vice President of Research & Development, and Chief
Technical Officer, Dr. Henry Samueli. We do not have employment agreements with
these executives or any other key employees that govern the length of their
service. The loss of the services of Dr. Nicholas or Dr. Samueli, or certain
other key employees, would likely materially and adversely affect our business,
financial condition and results of operations. Our future success also depends
on our ability to continue to attract, retain and motivate qualified personnel,
particularly digital circuit designers, mixed-signal circuit designers and
systems applications engineers. Competition for these employees is intense. We
may not be able to attract as many qualified new personnel as we were able to
employ prior to our initial public offering. Our inability to attract and retain
additional key employees could have an adverse effect on our business, financial
condition and results of operations.
OUR INABILITY TO MANAGE OUR SIGNIFICANT RECENT AND ANTICIPATED FUTURE GROWTH
COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES, AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
During the past year, we have significantly increased the scope of our
operations and expanded our workforce, growing from 546 employees in September
1998 to 849 employees in September 1999, including contract and temporary
employees. This growth has placed, and our anticipated future growth of
operations is expected to continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the ongoing improvement of our accounting and
other internal management systems. We also expect we will need to continue to
expand, train, manage and motivate our workforce. All of these endeavors will
require substantial management effort. In order to support our growth, we
recently relocated our headquarters and Irvine operations into larger
facilities, which allowed us to centralize all of our Irvine employees and
operations on one campus. In the future, we may engage in other relocations of
our employees or operations from time to time. These relocations could result in
temporary disruptions of our operations or a diversion of our management's
attention and resources. If we are unable to effectively manage our expanding
operations, our business, financial condition and results of operations could be
materially and adversely affected.
THE LOSS OF EITHER OF THE TWO THIRD-PARTY SUBCONTRACTORS THAT ASSEMBLE AND TEST
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS COULD DISRUPT OUR SHIPMENTS, HARM OUR
CUSTOMER RELATIONSHIPS AND ADVERSELY AFFECT OUR NET SALES.
27
<PAGE> 30
Two third-party subcontractors, ASAT Ltd. in Hong Kong and ST Assembly
Test Services, or STATS, in Singapore, assemble and test almost all of our
current products. Because we rely on third- party subcontractors to assemble and
test our products, we cannot directly control our product delivery schedules and
quality assurance and control. This lack of control has in the past, and could
in the future, result in product shortages or quality assurance problems that
could increase our manufacturing, assembly or testing costs. We do not have
long-term agreements with either ASAT or STATS. We typically procure services
from these suppliers on a per order basis. If either ASAT or STATS experiences
capacity constraints or financial difficulties, whether as a result of the
recent Asian economic crisis or otherwise, if either subcontractor suffers any
damage to its facilities or in the event of any other disruption of assembly and
testing capacity, we may not be able to obtain alternative assembly and testing
services in a timely manner. Due to the amount of time that it usually takes us
to qualify assemblers and testers, we could experience significant delays in
product shipments if we are required to find alternative assemblers or testers
for our components. Any problems that we may encounter with the delivery,
quality or cost of our products could materially and adversely affect our
business, financial condition or results of operations.
AS OUR INTERNATIONAL BUSINESS EXPANDS, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGAL, BUSINESS AND
ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS.
We currently obtain substantially all of our manufacturing, assembly and
testing services from suppliers located outside of the United States. In
addition, approximately 16.5% of our total revenue in the nine months ended
September 30, 1999 was derived from sales to independent customers outside the
United States. We also frequently ship products to our domestic customers'
international manufacturing divisions and subcontractors. We recently
established an international distribution center in Singapore and a design
center in The Netherlands. As a result of our acquisition of HotHaus in August
1999, we now undertake software design, development and marketing activities in
Canada. Furthermore, as a result of our acquisition of Armedia in May 1999, we
also undertake design and development activities in India. In the future, we
intend to continue to expand these international business activities and also to
open other design and operational centers abroad. International operations are
subject to many inherent risks, including:
- political, social and economic instability;
- trade restrictions;
- the imposition of governmental controls;
- exposure to different legal standards, particularly with respect
to intellectual property;
- burdens of complying with a variety of foreign laws;
- import and export license requirements and restrictions of the
United States and each other country in which we operate;
- unexpected changes in regulatory requirements;
- foreign technical standards;
- changes in tariffs;
28
<PAGE> 31
- difficulties in staffing and managing international operations;
- fluctuations in currency exchange rates;
- difficulties in collecting receivables from foreign entities;
and
- potentially adverse tax consequences.
Because we rely on Asian foundries and assemblers and have expanded our
international operations in Asia, our business may be materially and
adversely affected by the recent Asian economic crisis.
Certain Asian countries have recently experienced significant economic
difficulties. These difficulties include currency devaluation and instability,
business failures and a generally depressed business climate, particularly in
the semiconductor industry. Because we rely on Asian foundries and assemblers
and have expanded our international operations in that region, the Asian
economic crisis may materially and adversely affect our business, financial
condition and results of operations.
Various export licensing requirements, the seasonality of international
sales or an increase in the value of the U.S. dollar relative to foreign
currencies could materially and adversely affect our business or require
us to modify our current business practices significantly.
Various government export regulations apply to the encryption or other
features contained in some of our products. We have applied for and received
several export licenses under these regulations, but we cannot assure you that
we will obtain any licenses for which we have currently applied or any licenses
that we may apply for in the future. If we do not receive the required licenses,
we may be unable to manufacture the affected products at our foreign foundries
or to ship these products to certain customers located outside the United
States. Moreover, the seasonality of international sales and economic conditions
in our primary overseas markets may negatively impact the demand for our
products abroad. All of our international sales to date have been denominated in
U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative
to foreign currencies could make our products less competitive in international
markets. Any one or more of the foregoing factors could materially and adversely
affect our business, financial condition or results of operations or require us
to modify our current business practices significantly. We anticipate that these
factors will impact our business to a greater degree as we further expand our
international business activities.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD
OF BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
In the past, we have relied on our strategic relationships with certain
customers who are technology leaders in our target markets. We intend to pursue
and continue to form these strategic relationships in the future. These
relationships often require us to develop new products that typically involve
significant technological challenges. Our partners frequently
29
<PAGE> 32
place considerable pressure on us to meet their tight development schedules.
Accordingly, we may have to devote a substantial amount of our limited resources
to our strategic relationships, which could detract from or delay our completion
of other important development projects. Delays in development could impair our
relationships with our strategic partners and negatively impact sales of the
products under development. Moreover, it is possible that our customers may
develop their own solutions or adopt a competitor's solution for products that
they currently buy from us. If that happens, our business, financial condition
and results of operations would be materially and adversely affected.
WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION THAT MAY RESULT
IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND INCREASED
EXPENSES.
In order to remain competitive, we believe that we will have to
transition our products to increasingly smaller geometries. This transition will
require us to redesign certain of our products and modify the manufacturing
process for our products. We continually evaluate the benefits, on a
product-by-product basis, of migrating to smaller geometry process technologies
in order to reduce our costs, and we have begun shifting some of our products
from .50 micron to .35 micron and smaller geometry processes. In the past, we
have experienced some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes. These difficulties resulted in
reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
relationships with our foundries. If our foundries or we experience significant
delays in this transition or fail to efficiently implement this transition, our
business, financial condition and results of operations could be materially and
adversely affected. As smaller geometry processes become more prevalent, we
expect to integrate greater levels of functionality, as well as customer and
third party intellectual property, into our products. However, we may not be
able to achieve higher levels of design integration or deliver new integrated
products on a timely basis, or at all.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.
Our success and future revenue growth will depend, in part, on our
ability to protect our intellectual property. We primarily rely on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods, to protect our proprietary technologies and processes.
Despite our efforts to protect our proprietary technologies and processes, it is
possible that certain of our competitors or other parties may obtain, use or
disclose our technologies and processes. We currently hold five issued United
States patents and have filed over 180 United States patent applications. We
cannot assure you that any additional patents will be issued. Even if a new
patent is issued, the claims allowed may not be sufficiently broad to protect
our technology. In addition, any of our existing or future patents may be
challenged, invalidated or circumvented. Moreover, any rights granted under
these patents may not provide us with meaningful protection. If our patents do
not adequately protect our technology, then our competitors may be able to offer
products similar to ours.
30
<PAGE> 33
Our competitors may also be able to develop similar technology independently or
design around our patents. Moreover, because we have participated in developing
various industry standards, we may be required to license some of our technology
and patents to others, including competitors, who develop products based on the
adopted standards.
We generally enter into confidentiality agreements with our employees
and strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, parties may attempt to copy, disclose, obtain or use our products,
services or technology without our authorization. As a result, our technologies
and processes may be misappropriated, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.
In addition, some of our customers have entered into agreements with us
that grant them the right to use our proprietary technology if we ever fail to
fulfill our obligations under those agreements, including product supply
obligations, and do not correct this failure within a specified time period.
Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization. We cannot
assure you that our efforts to prevent the misappropriation or infringement of
our intellectual property or the intellectual property of our customers will
succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others, including our customers.
This litigation may be very expensive, divert management's attention and
materially and adversely affect our business, financial condition and results of
operations.
INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM
THIRD PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.
Companies in the semiconductor industry often aggressively protect and
pursue their intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties' proprietary rights. We recently
settled litigation with Stanford Telecommunications, Inc. that related to the
alleged infringement of one of Stanford's patents by several of our modem
products. We are also currently involved in litigation with Sarnoff Corporation
and NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
who allege that we misappropriated and misused certain of their trade secrets.
Our subsidiary, AltoCom, is the defendant in patent litigation brought by
Motorola, Inc. It is possible that we will not prevail in these matters. In
addition, we may be sued in the future by other parties who claim that we have
infringed their patents or misappropriated or misused their trade secrets, or
who may seek to invalidate one of our patents. Any of these claims may
materially and adversely affect our business, financial condition and results of
operations. For example, in a patent or trade secret action, a court could issue
an injunction against us that would require us to withdraw or recall certain
products from the market or redesign certain products offered for sale or under
development. In addition, we may be liable for damages for past infringement and
royalties for future use of the technology. We may also have to indemnify
certain customers and strategic partners under our agreements with these parties
if a third party alleges or if a court finds that we have infringed upon,
misappropriated
31
<PAGE> 34
or misused these party's proprietary rights. Even if claims against us are not
valid or successfully asserted, these claims could result in significant costs
and a diversion of management and personnel resources to defend. In that event,
our business, financial condition and results of operations would likely be
materially and adversely affected. If any claims or actions are asserted against
us, we may seek to obtain a license under a third party's intellectual property
rights. However, we may not be able to obtain a license on commercially
reasonable terms, if at all.
OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES THAT INCREASE OUR RISK THAT A
CUSTOMER WILL DECIDE TO CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US
TO LOSE ANTICIPATED SALES. IN ADDITION, OUR AVERAGE PRODUCT CYCLES TEND TO BE
SHORT AND, AS A RESULT, WE MAY HOLD EXCESS OR OBSOLETE INVENTORY WHICH COULD
ADVERSELY AFFECT OUR OPERATING RESULTS.
After we have developed and delivered a product to a customer, our
customer will often test and evaluate our product prior to designing its own
equipment to incorporate our product. Our customer may need three to six months
or longer to test and evaluate our product and an additional three to six months
or more to begin volume production of equipment that incorporates our product.
Due to this lengthy sales cycle, we may experience delays from the time we
increase our operating expenses and our investments in inventory, until the time
that we generate revenues for these products. It is possible that we may never
generate any revenues from these products after incurring these expenditures.
Even if a customer selects our product to incorporate into its equipment, we
have no assurances that this customer will ultimately market and sell their
equipment or that these efforts by our customer will be successful. The delays
inherent in our lengthy sales cycle increase the risk that a customer will
decide to cancel or change its product plans. Such a cancellation or change in
plans by a customer could cause us to lose sales that we had anticipated. In
addition, our business, financial condition and results of operations could be
materially and adversely affected if a significant customer curtails, reduces or
delays orders during our sales cycle or chooses not to release equipment that
contains our products.
While our sales cycles are typically long, our average product life
cycles tend to be short as a result of the rapidly changing technology
environment in which we operate. As a result, the resources devoted to product
sales and marketing may not generate material revenues for us, and from time to
time, we may need to write off excess and obsolete inventory. If we incur
significant marketing and inventory expenses in the future that we are not able
to recover, and we are not able to compensate for these expenses, our operating
results could be adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions, and we still have higher cost
products in inventory, our operating results would be harmed.
BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD SERIOUSLY HARM OUR OPERATING RESULTS.
We typically sell products pursuant to purchase orders that customers
can generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals could materially and
adversely affect our business, financial condition and results of operations. In
addition, cancellations or deferrals could cause us to hold excess inventory,
which could reduce our profit margins and restrict our ability to fund our
operations. We
32
<PAGE> 35
recognize revenue upon shipment of products to a customer. If a customer refuses
to accept shipped products or does not timely pay for these products, we could
incur significant charges against our income. These charges could materially and
adversely affect our operating results.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH OUR CURRENT OR
PROSPECTIVE CUSTOMERS.
Highly complex products such as the products that we offer frequently
contain defects and bugs when they are first introduced or as new versions are
released. We have in the past experienced, and may in the future continue to
experience, these errors, defects and bugs. If any of our products contain
defects or bugs, or have reliability, quality or compatibility problems, our
reputation may be damaged and customers may be reluctant to buy our products,
which could materially and adversely affect our ability to retain existing
customers or attract new customers. In addition, these defects or problems could
interrupt or delay sales to our customers. In order to alleviate these problems,
we may have to invest significant capital and other resources. Although our
suppliers, our customers and we test our products, we cannot assure you that our
new products will not contain defects or bugs. If any of these problems are not
found until after we have commenced commercial production of a new product, we
may be required to incur additional development costs and product repair or
replacement costs. These problems may also result in claims against us by our
customers or others. In addition, these problems may divert our technical and
other resources from other development efforts. Moreover, we would likely lose,
or experience a delay in, market acceptance of the affected product or products
and lose credibility with our current and prospective customers.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
We operate in the semiconductor industry, which is highly cyclical and
subject to rapid technological change. From time to time, the semiconductor
industry has experienced significant economic downturns, characterized by
diminished product demand, accelerated erosion of prices and excess production
capacity. This industry also periodically experiences increased demand and
production capacity constraints. Accordingly, our quarterly results may vary
significantly as a result of the general conditions in the semiconductor
industry.
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF ONE OF THE TWO INDEPENDENT
FOUNDRIES UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT
PRODUCTS ARE LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER
NATURAL DISASTERS.
Our California facilities, including our principal executive offices,
are located near major earthquake fault lines. If there is a major earthquake or
any other natural disaster in a region where one of our facilities is located,
our business could be materially and adversely affected. In addition, TSMC, one
of the two outside foundries upon which we rely to manufacture substantially all
of our semiconductor devices, is located in Taiwan, a country that is also
subject to earthquakes. Any earthquake or other natural disaster in Taiwan could
materially
33
<PAGE> 36
disrupt TSMC's production capabilities and could result in our experiencing a
significant delay in delivery, or substantial shortage, of wafers and possibly
in higher fabrication fees.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
The Federal Communications Commission has broad jurisdiction over each
of our target markets. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly applicable to
our products, they do apply to much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. For example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions specifications. We
may also be subject to regulation by countries other than the United States.
Foreign governments may impose tariffs, duties and other import restrictions on
components that we obtain from non-domestic suppliers and may impose export
restrictions on products that we sell internationally. These tariffs, duties or
restrictions could materially and adversely affect our business, financial
condition and results of operations. Changes in current laws or regulations or
the imposition of new laws and regulations in the United States or elsewhere
could also materially and adversely affect our business.
CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES CAN CONTROL
THE OUTCOME OF MATTERS THAT REQUIRE THE APPROVAL OF OUR SHAREHOLDERS AND
ACCORDINGLY, WE WILL NOT BE ABLE TO ENGAGE IN CERTAIN TRANSACTIONS WITHOUT THEIR
APPROVAL.
As of September 30, 1999, our directors and executive officers
beneficially owned approximately 39.4% of our outstanding Common Stock and 66.9%
of the total voting control held by our shareholders. In particular, as of
September 30, 1999, our two founders, Dr. Henry T. Nicholas III and Dr. Henry
Samueli, beneficially owned a total of approximately 37.2% of our outstanding
Common Stock and 63.6% of the total voting control held by our shareholders.
Accordingly, these shareholders currently have enough voting power to control
the outcome of matters that require the approval of our shareholders. These
matters include the election of a majority of our Board of Directors, the
issuance of additional shares of Class B common stock and the approval of any
significant corporate transaction, including a merger, consolidation or sale of
substantially all of our assets. In addition, these insiders currently also
control the management of our business. Because of their significant stock
ownership, we will not be able to engage in certain transactions without the
approval of these shareholders. These transactions include proxy contests,
mergers, tender offers, open market purchase programs or other purchases of our
Class A common stock that could give our shareholders the opportunity to receive
a higher price for their shares than the prevailing market price at the time of
these purchases.
OUR STOCK PRICE IS HIGHLY VOLATILE. ACCORDINGLY, YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES OF COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.
34
<PAGE> 37
The market price of our Class A common stock has fluctuated
substantially in the past and is likely to continue to be highly volatile and
subject to wide fluctuations. Since our initial public offering in April 1998,
our Class A common stock has traded at prices as low as $23.50 and as high as
$181.25 per share. These fluctuations have occurred and may continue to occur in
response to various factors, many of which we cannot control, including:
- quarter-to-quarter variations in our operating results;
- announcements of technological innovations or new products by
our competitors, customers or us;
- general conditions in the semiconductor industry and
telecommunications and data communications equipment markets;
- changes in earnings estimates or investment recommendations by
analysts;
- changes in investor perceptions; or
- changes in expectations relating to our products, plans and
strategic position or those of our competitors or customers.
In addition, the market prices of securities of Internet-related and
other high technology companies have been especially volatile. 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. Accordingly, you may not be able to resell your shares of
common stock at or above the price you paid. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of securities class action litigation. If we were the object of a
securities class action litigation, it could result in substantial losses and
divert management's attention and resources from other matters.
OUR PRODUCTS AND INTERNAL INFORMATION SYSTEMS AND THE PRODUCTS AND SYSTEMS OF
OUR CUSTOMERS AND THE THIRD PARTY SUPPLIERS WHO FABRICATE, TEST AND ASSEMBLE OUR
PRODUCTS MAY BE NEGATIVELY IMPACTED BY YEAR 2000 COMPLIANCE PROBLEMS.
Many existing computer systems and applications and other control
devices use only two digits to identify a year in the date field. These systems
and software applications will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, these systems and
applications will need to be upgraded to comply with the Year 2000 requirements
or risk system failure, miscalculations or other disruptions to normal business
activities.
We are currently evaluating our Year 2000 readiness, both in terms of
the compliance of our products and the compliance of our information systems and
applications which monitor all aspects of our business, including financial
systems, customer services, marketing information, infrastructure and
telecommunications equipment. We are presently updating our products and
internal information systems, but we may not be able to complete these
35
<PAGE> 38
upgrades in a timely manner or at reasonable costs. We also may not be able to
anticipate the extent of the Year 2000 impact until the Year 2000 arrives due to
the interaction between our own systems and products and the systems and
products of third parties. We believe our greatest exposure to Year 2000 risks
relates to the readiness of the third party suppliers who fabricate, assemble
and test our products and of our customers, who incorporate our products into
their own products. Any failure of these third parties to resolve their own Year
2000 issues in a timely manner could cause a material disruption in our business
and affect the marketability of our products.
We also rely on the external systems of other third parties such as
creditors, financial organizations, governmental entities and other suppliers,
both domestic and international, to provide us with accurate data. Our business
could be materially and adversely affected if any of these third parties
experience disruptions in their operations or if an economic crisis or general
widespread problems result from systems that are not Year 2000 compliant.
Although we are working on contingency plans to address these issues, any
contingency plans that we implement may not be adequate to meet our needs
without disrupting our business or without causing delays and inefficiencies
inherent in conducting operations in an alternative manner. If we fail to
address any of the foregoing Year 2000 risks, our business, financial condition
and results of operations may be materially and adversely affected.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES OR BY BORROWING MONEY, AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that the cash, cash equivalents and investments on hand and
the cash we expect to generate from operations will be sufficient to meet our
capital needs for at least the next twelve months. However, it is possible that
we may need to raise additional funds to fund our activities beyond the next
year. We could raise these funds by selling more stock to the public or to
selected investors, or by borrowing money. In addition, even though we may not
need additional funds, we may still elect to sell additional equity securities
or obtain credit facilities for other reasons. We may not be able to obtain
additional funds on favorable terms, or at all. If adequate funds are not
available, we may be required to curtail our operations significantly or to
obtain funds through arrangements with strategic partners or others that may
require us to relinquish rights to certain technologies or potential markets. If
we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentages of existing shareholders would be reduced.
In addition, the equity or debt securities that we issue may have rights,
preferences or privileges senior to those of the holders of our common stock.
It is possible that our future capital requirements may vary materially
from those now planned. The amount of capital that we will need in the future
will depend on many factors, including:
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to
launch our products and achieve and maintain a competitive
position in the marketplace;
- volume price discounts;
36
<PAGE> 39
- our business, product, capital expenditure and research and
development plans and technology roadmap;
- the levels of inventory and accounts receivable that we
maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products; and
- our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain provisions that may
prevent or discourage a third party from acquiring us, even if the acquisition
would be beneficial to our shareholders. In addition, we have in the past issued
and will in the future issue shares of Class B common stock to certain holders.
Those shares have superior voting rights entitling the holder to ten votes for
each share held on matters that we submit to a shareholder vote (as compared
with one vote per share in the case of our publicly-held Class A common stock).
Our Board of Directors also has the authority to fix the rights and preferences
of shares of our preferred stock and to issue these shares without a shareholder
vote. It is possible that the provisions in our charter documents, the existence
of supervoting rights by holders of our Class B common stock, and our officers'
ownership of a majority of the Class B common stock and the ability of our Board
of Directors to issue preferred stock may prevent parties from acquiring us. In
addition, these factors may discourage third parties from bidding for our Class
A common stock at a premium over the market price for this stock. Finally, these
factors may also materially and adversely affect the market price of our Class A
common stock, and the voting and other rights of the holders of our Class A
common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the section titled Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Current Report on Form 8-K/A
filed with the SEC on September 17, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996 Stanford Telecommunications, Inc. ("STI") filed an
action against the Company in the United States District Court for the Northern
District of California. STI alleged that the Company's BCM3036, BCM3037,
BCM3300, BCM93220 and BCM93220B products infringed one of STI's patents (the
"352 Patent"). STI sought an injunction as well
37
<PAGE> 40
as the recovery of monetary damages, including treble damages for willful
infringement, as to the products listed above and potentially other products.
The Company filed an answer and affirmative defenses to STI's complaint, denying
the allegations in STI's complaint, and asserted a counterclaim requesting
declaratory relief that the Company was not infringing the '352 Patent and that
the '352 Patent was invalid and unenforceable. In May 1999 the Company brought a
separate action against STI and an STI subsidiary in California Superior Court
for misappropriation of certain Company trade secrets. On June 16, 1999 the
parties entered into a settlement agreement and agreed to dismiss with prejudice
all claims and counterclaims in both actions. Under the terms of the settlement
agreement, STI granted to the Company a worldwide, non-exclusive, royalty-free
license to STI's rights in patents and patent applications, and all inventions
conceived, through the date of the agreement, relating to any transmitter or
receiver technology, or design or invention capable of use over a coaxial cable
transmission medium, excluding patent claims specifically claiming Code Division
Multiple Access (CDMA) inventions. The Company also obtained the option to
acquire licenses on commercially reasonable terms to STI's patent claims based
upon CDMA inventions capable of use over a coaxial cable transmission medium,
and STI agreed not to bring any future action against the Company, its suppliers
or customers for patent infringement or trade secret misappropriation resulting
from commercial use of any of the Company's existing technology, designs or
products. In connection with the settlement, the Company made a one-time payment
to STI and the parties exchanged mutual releases. Neither party admitted any
liability in connection with the various actions.
In April 1997 Sarnoff Corporation and Sarnoff Digital Communications,
Inc., now known as NxtWave Communications, Inc., (collectively, "Sarnoff") filed
a complaint in New Jersey Superior Court against the Company and five former
Sarnoff employees now employed by the Company (the "Former Employees") asserting
claims against the Former Employees for breach of contract, misappropriation of
trade secrets, and breach of the covenant of good faith and fair dealing, and
against the Company for inducing such actions. Those claims relate to the
alleged disclosure of certain technology of Sarnoff to the Company. The
complaint also asserted claims against the Company and the Former Employees for
unfair competition, misappropriation and misuse of trade secrets and
confidential, proprietary information of Sarnoff, and tortious interference with
present and prospective economic advantage, as well as a claim against the
Company alleging that it "illegally pirated" Sarnoff's employees. The complaint
sought to preliminarily and permanently enjoin the Company and the Former
Employees from utilizing any alleged Sarnoff trade secrets, and to restrain the
Former Employees from violating their alleged statutory and contractual duties
of confidentiality to Sarnoff by, for example, precluding them from working for
six months in any capacity relating to certain of the Company's programs. In May
1997 the Court denied Sarnoff's request for a temporary restraining order. On
February 2, 1999 the Court dismissed with prejudice Sarnoff's misappropriation
of trade secrets claims, and granted summary judgment dismissing all of
Sarnoff's remaining claims except claims based upon the Company's alleged
"pirating" of Sarnoff's employees. Trial of Sarnoff's "piracy"-related claims
commenced on February 22, and concluded on March 2, 1999. On April 27, 1999 the
Court issued an order and opinion dismissing with prejudice all remaining claims
that Sarnoff had against the Company. The Court found in the Company's favor on
all liability, causation, and damages issues. Subsequently the Court denied the
Company's petition for attorneys' fees in the case. Judgment on the Court's
February 2 and April 27 orders was entered on May 19, 1999. On July 1, 1999,
Sarnoff filed an appeal of both orders in the Superior Court of New Jersey,
Appellate Division. In October 1999 Sarnoff requested that the Appellate
Division dismiss the appeal and the court did so.
38
<PAGE> 41
In July 1997 the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Following trial in the New Jersey action, the
parties stipulated to lift the stay so that litigation of the California action
could go forward. Sarnoff then filed a motion for summary judgment in the
California case on the basis that the issues therein have been or should have
been previously litigated in the New Jersey action under the New Jersey "entire
controversy" doctrine. Following oral argument on August 16, 1999, the Court
granted Sarnoff's motion and dismissed Broadcom's claims on the grounds that
they should have been brought as part of the New Jersey action. The Company
believes that the California action involves facts, circumstances and claims
unrelated to those at issue in the New Jersey action, and has filed an appeal of
the District Court's ruling. No discovery has yet occurred in the case.
In March 1998 Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. The claims related to Mr. Davis'
alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in March 1996 (which shares would have converted into
156,000 shares of Class B Common Stock upon consummation of the Offering). The
purchase agreement between the Company and Mr. Davis contained a provision
permitting the Company to repurchase the shares in the event that Mr. Davis did
not continue to be employed by the Company for a certain period of time. After
Mr. Davis resigned in June 1997, the Company exercised its repurchase right. Mr.
Davis' complaint alleged that the repurchase right should not be enforceable
under several legal theories and sought unspecified damages and declaratory
relief. The Company asserted certain counterclaims against Mr. Davis. On March
19, 1999 the parties entered into a settlement agreement and agreed to dismiss
with prejudice all of the claims and counterclaims in the case. The settlement
was approved by the Court on April 5, 1999. The terms of the settlement are
confidential but the Company believes that they will not have a material effect
on its business, results of operations, financial condition or equity.
In September 1998 Motorola, Inc. ("Motorola") filed a complaint in
United States District Court for the District of Massachusetts against AltoCom,
asserting that (i) AltoCom's V.34 and V.90 compliant software modem technology
infringes several patents owned by Motorola, (ii) AltoCom induces its V.34 and
V.90 licensees to infringe such patents, and (iii) AltoCom contributorily
infringes such patents. The complaint sought a preliminary and permanent
injunction against AltoCom as well as the recovery of monetary damages,
including treble damages for willful infringement. In October 1998 Motorola
affirmatively dismissed its case in the District of Massachusetts and filed a
substantially similar complaint
39
<PAGE> 42
in the United States District Court for the District of Delaware. AltoCom has
filed an answer and affirmative defenses to the District of Delaware complaint.
AltoCom has also asserted a counterclaim requesting declaratory relief that
AltoCom has not infringed the Motorola patents and that such patents are invalid
and/or unenforceable as well as a counterclaim requesting declaratory and
injunctive relief based on breach of contract theory. AltoCom believes that it
has strong defenses to Motorola's claims on invalidity, noninfringement and
inequitable conduct grounds. The parties are currently in the initial stages of
discovery in the action. The Court has tentatively scheduled the first stage of
trial for January 2001, with a secondary stage scheduled for March 2001. AltoCom
became a subsidiary of the Company on August 31, 1999.
Although AltoCom believes that it has strong defenses, a finding of
infringement by AltoCom in this action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful), the issuance of an injunction requiring that AltoCom
withdraw various products from the market, and indemnification claims by
AltoCom's customers or strategic partners, each of which events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The Company's pending lawsuits 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 business, results of operations or financial
condition, the results of litigation are inherently uncertain, and an adverse
outcome is at least reasonably possible. The Company is unable to estimate the
range of possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities. On April 21,
1998, the Company completed an initial public offering (the "Offering") of its
Class A common stock, $0.0001 par value. The shares of Class A common stock sold
in the Offering were registered under the Securities Act of 1993, as amended, on
a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-45619) that was declared effective by the SEC on April 16, 1998. Of the
total shares sold, 6,240,000 shares were sold by the Company (including 710,000
shares sold pursuant to the exercise of the Underwriters' over-allotment
option), 1,810,000 shares were sold by selling shareholders (including 340,000
shares sold pursuant to the exercise of the Underwriters' over-allotment option)
and 1,000,000 shares were sold by the Company to Cisco Systems in a concurrent
registered offering that was not underwritten. The purchase price for the
underwritten shares was $12.00 per share and the purchase price of the shares
sold to Cisco Systems was $11.16 per share. The aggregate price of the Offering
amount registered was approximately $107.8 million.
40
<PAGE> 43
In connection with the Offering, the Company paid an aggregate of
approximately $5.2 million in underwriting discounts and commissions and paid
other expenses of approximately $1.6 million. After deducting the underwriting
discounts and commissions and other expenses, the Company received net aggregate
proceeds from the Offering and sale of shares to Cisco Systems of approximately
$79.2 million. Through September 30, 1999, the Company has used approximately
$66.2 million of the proceeds for repayment of debt, purchase of capital
equipment, payment of merger related costs and for payment of litigation
settlement costs. The balance of the proceeds will be used for general corporate
purposes, including working capital and capital purchases such as design tools,
lab equipment and leasehold improvements associated with the Company's continued
growth. None of the Company's net proceeds of the Offering were paid directly or
indirectly to any director, officer, general partner of the Company or their
associates, persons owning 10 percent or more of any class of equity securities
of the Company, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 21, 1999 the Company filed a report on Form 8-K relating
to its agreement to acquire HotHaus Technologies Inc.
On August 12, 1999 the Company filed a report on Form 8-K
relating to its agreement to acquire AltoCom, Inc.
On September 1, 1999 the Company filed a report on Form 8-K
relating to the completion of its acquisitions of HotHaus and AltoCom.
On September 17, 1999 the Company filed a report on Form 8-K/A
to provide restated historical consolidated financial statements to
reflect the pooled operations of Maverick, Epigram and Armedia.
41
<PAGE> 44
On September 28, 1999 the Company filed a report on Form 8-K to
provide selected unaudited pro forma combined financial statements
giving effect to the business combinations between the Company and
HotHaus and AltoCom.
42
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADCOM CORPORATION
A CALIFORNIA CORPORATION
(Registrant)
November 15, 1999 /s/ WILLIAM J. RUEHLE
----------------------------------------
William J. Ruehle
Vice President and Chief Financial
Officer (principal financial
and accounting officer)
43
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 147,926
<SECURITIES> 78,348
<RECEIVABLES> 72,168
<ALLOWANCES> 7,708
<INVENTORY> 12,257
<CURRENT-ASSETS> 323,257
<PP&E> 64,396
<DEPRECIATION> 21,149
<TOTAL-ASSETS> 456,221
<CURRENT-LIABILITIES> 90,387
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 364,959
<TOTAL-LIABILITY-AND-EQUITY> 456,221
<SALES> 357,360
<TOTAL-REVENUES> 357,360
<CGS> 144,062
<TOTAL-COSTS> 144,062
<OTHER-EXPENSES> 149,779
<LOSS-PROVISION> 476
<INTEREST-EXPENSE> (5,723)
<INCOME-PRETAX> 68,766
<INCOME-TAX> 22,349
<INCOME-CONTINUING> 46,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,417
<EPS-BASIC> .47
<EPS-DILUTED> .40
</TABLE>
