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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER 000-23993
BROADCOM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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CALIFORNIA 33-0480482
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
16215 ALTON PARKWAY, IRVINE, CALIFORNIA 92618-3616
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 450-8700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK
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 [ ]
Indicated by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sale price on the Nasdaq National Market on March 26,
1999, the aggregate market value of the voting stock held by nonaffiliates of
the registrant was $2,898,882,245. For the purposes of this calculation, shares
owned by officers, directors and 10% stockholders known to the registrant have
been deemed to be owned by affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
The Company has two classes of Common Stock authorized, the Class A Common
Stock and the Class B Common Stock. The rights, preferences and privileges of
each class of Common Stock are substantially identical in all respects except
for voting rights. Each share of Class A Common Stock entitles its holder to one
vote and each share of Class B Common Stock entitles its holder to ten votes. As
of March 26, 1999, there were 35,984,972 shares of Class A Common Stock
outstanding and 54,646,007 shares of Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
definitive proxy statement (the "Proxy Statement") for the Annual Meeting of
Shareholders scheduled to be held on May 6, 1999.
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BROADCOM CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
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ITEM 1. Business..................................................................... 1
ITEM 2. Properties................................................................... 16
ITEM 3. Legal Proceedings............................................................ 16
ITEM 4. Submission of Matters to a Vote of Security Holders.......................... 18
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................... 18
ITEM 6. Selected Consolidated Financial Data......................................... 19
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 20
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk................... 37
ITEM 8. Financial Statements and Supplementary Data.................................. 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................. 38
PART III.
ITEM 10. Directors and Executive Officers of the Registrant........................... 38
ITEM 11. Executive Compensation....................................................... 38
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................................ 38
ITEM 13. Certain Relationships and Related Transactions............................... 38
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 38
OTHER INFORMATION
Glossary of Technical Terms............................................................... 40
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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" or similar expressions are intended to
identify forward-looking statements. These statements include, but are not
limited to, statements concerning projected revenues, expenses and gross profit,
need for additional capital, Year 2000 compliance, market acceptance of our
products, 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 Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
similar discussions in our other Securities and Exchange Commission ("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.
PART I.
ITEM 1. BUSINESS
Broadcom Corporation is a leading developer of highly integrated silicon
solutions that enable broadband digital data transmission to 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 have designed and developed integrated
circuits for some of the most significant broadband communications markets,
including the markets for cable set-top boxes, cable modems, high-speed
networking, digital broadcast satellite and terrestrial digital broadcast, and
xDSL. Although the communications infrastructures of these markets are very
different, we have leveraged our core technologies and introduced integrated
circuits for each of these markets that deliver the cost and performance levels
necessary to enable the widespread deployment of broadband transmission
services. Our broadband transmission products consist primarily of
high-performance digital signal processing circuits that implement complex
communications algorithms, surrounded by precision high-speed analog-to-digital
and digital-to-analog converter circuits. Our products integrate comprehensive
systems solutions into single chips or chip-sets, which:
o eliminate costly external components;
o reduce board space;
o simplify our customer's manufacturing process;
o lower our customer's system costs; and
o enable higher performance.
Customers currently shipping broadband communications equipment
incorporating our products include 3Com, Cabletron, Cisco Systems, General
Instrument, Hewlett Packard, Motorola, Nortel Networks, Samsung and
Scientific-Atlanta.
INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and
consumer demand for high-speed access to multimedia information and
entertainment content, consisting of data, voice and video. This demand is being
driven by the growth of desirable information and entertainment content
accessible via the Internet and cable and data networks. The improved
availability and affordability of access devices such as set-top boxes, PCs and
other consumer appliances have also stimulated demand for high-speed
transmissions. Computer processor speeds over the last decade have increased
dramatically and, as a result, significantly improved the rate at which
multimedia data can be processed. However, the rate at which such data can be
transmitted has not kept pace. This disparity has become known as the "bandwidth
gap" and has frustrated users and challenged solutions providers in a number of
markets.
The bandwidth gap has emerged in a variety of commercial and consumer
applications. Businesses are constantly seeking new ways to access and analyze
larger amounts of information to improve the quality of management decisions and
enhance customer and employee communications. Many businesses have deployed
local area networks, commonly known as LANs, which are principally based upon
the Ethernet standard. Ethernet is the
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predominant networking protocol used in LANs for connecting devices at data
rates of 10, 100, and soon, 1000 Megabits per second ("Mbps") by means of copper
twisted pair cabling. Emerging trends such as the convergence of voice, video
and data along with the ever-increasing volumes of electronic traffic are
placing new demands on legacy LAN technologies and infrastructures. Businesses
would prefer to address these new demands without incurring the cost of
installing new cabling or switching network technologies. In order to
accommodate the need for more bandwidth, much of the installed base of 10 Mbps
Ethernet ports will need to be upgraded to higher speed 100 and 1000 Mbps
connections. Furthermore, real-time traffic such as voice and video will not
only place additional demands on network bandwidth, it will also require
intelligence and deterministic behavior provided by devices referred to as
switches. Switches provide dedicated bandwidth to each end-user, versus
repeaters, which share the bandwidth among end-users.
Individuals are also increasingly using their home PCs to access the
Internet and to telecommute. Consumer online usage is expected to increase
rapidly with the availability and market acceptance of low cost PCs (sub $1,000)
and the increased availability and improving quality of content. In addition,
the increasing number of next generation television set-top boxes, PCs and other
devices that feature integrated Internet access will contribute to the surging
demand for rapid access to information. As the volume of traffic continues to
grow, consumers are becoming increasingly frustrated with the low performance of
"last mile" remote access connections that are typically limited to data rates
of only 28.8 kbps to 56 kbps and require several minutes or hours to download
large multimedia intensive files.
Business and residential PC users have not been the only ones affected
by the bandwidth gap. Cable television subscribers seeking more entertainment
options, including Internet access, and cable service providers seeking higher
revenue services beyond basic cable, have generally been frustrated by the
limited amount of programming that can be provided over the existing cable
infrastructure. The cable infrastructure historically also has not been able to
deliver interactive multimedia content. With the advent of digital television
and digital compression technologies such as MPEG, the conversion from analog
transmission to digital transmission enables a dramatic increase in the number
of channels available to the subscriber. In late 1996, cable television service
providers began offering expanded services, including digital programming
through new digital set-top boxes, as well as high-speed Internet access and
telecommuting through cable modems. A cable modem is a device that allows a
cable subscriber to transmit and receive data over coaxial cable. In order to
satisfy customer demand for increased programming and other entertainment
options, and to capitalize on the revenue growth opportunities associated with
these expanded services, service providers will have to deploy a new generation
of digital set-top boxes and headend equipment. A headend is the central
distribution point in a cable television system.
Much of the bandwidth gap is a result of the existing "last mile"
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper twisted pair wiring, coaxial cable
and wireless communication connections. Copper twisted pair wiring was
originally intended for the transmission of narrowband analog voice while
coaxial cable was intended for delivery of one-way analog video signals. These
analog infrastructures have numerous impairments, which make broadband
transmission of digital data very difficult.
Because it is impractical to replace these communications
infrastructures with entirely new infrastructures that are optimized for digital
data transmission, the fundamental challenge for service and equipment providers
is to enable broadband communications over existing infrastructures. These
providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace.
MARKETS
The principal segments that define this marketplace include:
Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity of and diversity
in television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide higher picture quality, cable service providers began offering digital
programming in 1996 through new digital cable set-top boxes. These digital cable
set-top boxes facilitate high-speed digital communications between a
subscriber's television and
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the cable network. Cable set-top boxes are currently able to support downstream
(to the subscriber) transmission speeds of up to 43 Mbps (North American
standard) or 56 Mbps (international standard), and several hundred MPEG-2
compressed digital television channels to be delivered to the consumer.
Additional applications for digital cable set-top boxes are expected to include
Internet access, interactive television, high definition television and cable
telephony. We believe a new generation of digital cable set-top boxes will be
introduced in the future to facilitate television Internet access and to support
high definition television.
Cable Modems
Cable television operators have been upgrading their systems to hybrid
fiber coaxial cable, commonly known as HFC in the telecommunications industry.
These upgraded HFC networks are able to support two-way communications,
high-speed Internet access and telecommuting through the use of a cable modem.
High-speed Internet access services, including @Home, RoadRunner and HighwayOne
(the predecessor to MediaOne), were introduced in 1996 in conjunction with
several cable system operators. These services use cable modems to connect PCs
to the cable network and have been designed to achieve downstream transmission
speeds of up to 43 Mbps (North American standard) or 56 Mbps (international
standard), and upstream (to the network) transmission speeds of up to 10 Mbps.
These transmission rates are nearly 1,000 times faster than the fastest analog
telephone modems (56 kbps downstream and 28.8 kbps upstream) currently
available. We believe the high speeds of cable modems should enable an entirely
new generation of multimedia-rich content over the Internet and make
telecommuting a productive and effective means for work at home. Cable modems
will allow cable operators to offer expanded services such as cable telephony.
The cable industry's adoption of the Multimedia Cable Network Systems Data Over
Cable Services Interface Specifications, commonly known as MCNS/DOCSIS, in 1997
is anticipated to enable interoperability between different manufacturers' cable
modems and headend equipment across different cable networks. We believe this
interoperability should facilitate the creation of a retail market for cable
modems.
High-Speed Networking
A LAN is comprised of different types of equipment interconnected by
cables. Computers and servers via Network Interface Cards ("NICs"), repeaters,
switches and routers are all examples of networking equipment. Ethernet is a
computer networking protocol that describes a set of rules by which devices
connected to a LAN may communicate. Ethernet physical layer standards have been
established for different data rates (10, 100, and 1000 Mbps) and transmission
mediums (copper, fiber and coax cabling). 100 Mbps Ethernet is sometimes
referred to as Fast Ethernet, and 1000 Mbps is referred to as Gigabit Ethernet.
As communications bottlenecks have appeared in corporate LANs, new
technologies such as Fast Ethernet and Gigabit Ethernet are being employed to
replace older technologies such as 10Base-T Ethernet (10 Mbps) and Token Ring
(16 Mbps). As desktop connections continue to migrate to Fast Ethernet, we
believe that Gigabit Ethernet will emerge as the predominant technology for
backbone infrastructures that support LANs, and will eventually migrate to the
desktop itself. We anticipate that a significant portion of the installed base
of 10Base-T Ethernet repeater/hub ports, switches and NICs will be upgraded to
the faster technologies. In addition, the need for dedicated and predictable
bandwidth to the desktop will drive a transition from legacy repeater to switch
connections. Switches will not only have the ability to provide dedicated
bandwidth to each connection, but will also provide routing functionality and
possess the intelligence to deal with differentiated traffic such as voice,
video and data.
DBS and Terrestrial Digital Broadcast
Digital Broadcast Satellite, commonly known as DBS in the
telecommunications industry, is the primary alternative to cable for providing
digital television programming. DBS can be used to transmit information at
speeds of up to 90 Mbps. DBS broadcasts video and audio data from satellites
directly to set-top boxes in the home via dish antennas. Due to the ability of
DBS to provide television programming where no cable infrastructure is in place,
we believe that the U.S. market for DBS may eventually be surpassed by the
international market where the cable infrastructure is generally less extensive.
Other broadband wireless technologies include:
o Terrestrial Digital Broadcast Television, the upgrade of analog
broadcast television to digital, which enables the delivery of
high definition television;
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o Multichannel Multipoint Distribution System, commonly known as
MMDS, which uses microwave frequencies (2.5 GHz) to transmit
digital video signals over terrestrial digital broadcast
channels to digital set-top boxes; and
o Local Multipoint Distribution System, commonly known as LMDS,
which uses even higher microwave frequencies (28 to 38 GHz) to
transmit video and data to digital set-top boxes over a shorter
distance via a cellular-like network.
MMDS and LMDS are wireless systems that are currently being tested in
limited deployments. These new networks, which are able to provide programming
in areas that do not have cable, will also require a digital set-top box.
Beginning in 1999, the FCC has mandated that the top four affiliated
television stations begin digital broadcasting and has required that all current
television broadcasters and their affiliates return the old analog spectrum by
the year 2006 for FCC auction. ABC, CBS and NBC have announced that they are
transmitting high definition television signals in some markets and will
continue to expand that offering in 1999. We believe this conversion to digital
broadcasting will also require new set-top boxes and television receivers.
xDSL
Digital Subscriber Lines, commonly known as xDSL, represent a family of
newer broadband technologies which use the copper twisted pair wiring in the
existing telephone local loops to deliver high speed data transmission. xDSL
speeds range from 128 kbps to 52 Mbps depending on the distance between the
central office and the subscriber. We expect that these data rates will enable a
wide range of new services, including high-speed Internet access and digital
television. Several Regional Bell Operating Companies, including Southwestern
Bell, Bell Atlantic, Bell South and U S West, and several international
telephone companies, including Bell Canada, British Telecom and Deutsche
Telekom, have conducted field trials, deployed or announced plans to conduct
trials or deploy xDSL services in select markets for high-speed Internet access
and telecommuting. Certain Internet service providers are also embracing xDSL
technologies. Asymmetric DSL, commonly known as ADSL, and very-high-bit-rate DSL
or VDSL represent the xDSL technologies that have recently attracted the most
interest from the service providers. ADSL can provide transmission at speeds of
up to 8 Mbps, and VDSL can provide transmission at speeds of up to 52 Mbps,
These broadband communications markets are at different phases in their
evolution. High-speed networking is an established market that is currently
being upgraded, cable and DBS set-top boxes are, on a global basis, in an early
growth phase, and the cable modem and xDSL markets are emerging.
The desire by equipment manufacturers and service providers to develop
these markets has created the need for new generations of semiconductor
solutions. Broadband transmission of digital information over existing
infrastructures requires highly integrated mixed-signal semiconductor solutions
to perform critical systems functions such as complex signal processing and
converting digital data to and from analog signals. Broadband communications
equipment requires substantially higher levels of system performance, in terms
of both speed and precision, that typically cannot be adequately addressed by
traditional semiconductor solutions developed for low speed transmission
applications. Moreover, solutions that are based on multiple discrete analog and
digital chips generally cannot achieve the cost-effectiveness, performance and
reliability required by the broadband communications markets. These requirements
are best addressed by new generations of highly integrated mixed-signal devices
that combine complex analog and digital functions with high performance
circuitry that can be manufactured in high volumes using cost-effective
semiconductor technologies.
THE BROADCOM SOLUTION
Broadcom Corporation is a leading developer of highly integrated silicon
solutions that enable broadband digital data transmission to the home and within
the business enterprise. Using our proprietary communications algorithms and
protocols, unique DSP architectures, silicon compiler design methodologies and
full-custom, mixed-signal circuit design techniques, we have designed and
developed integrated circuits for some of the most significant broadband
communications markets. Our expertise in communications algorithms and our
detailed understanding of transmission media enable us to integrate complex
systems incorporating signal processing functions such as digital
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demodulation, adaptive equalization and error correction in a single device. In
addition, our broad knowledge of advanced communications protocols enables us to
design protocol processing integrated circuits that seamlessly interface our
mixed-signal transceiver integrated circuits with higher-level networking layers
for communications applications.
We develop all of our products using low-cost, highly-manufacturable
Complementary Metal Oxide Semiconductor technologies, commonly known as CMOS,
that enable us to integrate comprehensive systems solutions into single-chips,
thereby eliminating costly external components, reducing board space,
simplifying the customer's equipment manufacturing process, lowering customer
system costs and enabling higher performance. Our proprietary technology and
advanced design methodologies facilitate a high likelihood of first pass silicon
success, accelerated time-to-market, and ease of porting to multiple foundries.
Our design methodologies also allow us to rapidly and cost-effectively
incorporate proprietary features or intellectual property from our key strategic
customers into products that are exclusive to those customers, thereby enabling
them to differentiate their products.
STRATEGY
Our objective is to be the leading provider of highly integrated silicon
solutions to the worldwide broadband communications markets. Key elements of our
strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. Our
strategy is to identify rapidly growing broadband digital communications
markets and to develop highly integrated silicon solutions for
applications in those markets. Our initial products were designed for
the cable set-top box, cable modem and high-speed networking markets,
which require high-performance, feature-rich and highly integrated
semiconductor solutions. We have recently leveraged our core
technologies to design and develop semiconductor solutions for the DBS
and terrestrial digital broadcast, and xDSL markets, which we believe
have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. We
have established strategic relationships with key equipment
manufacturers, including 3Com, Cisco Systems, General Instrument,
Motorola, Nortel Networks and Scientific-Atlanta, which are market and
technology leaders within the broadband communications markets. While we
design products that can be used by multiple customers, our proprietary
design methodologies allow us to design custom features rapidly based on
either our own or our customers' intellectual property. This capability
enables our customers to improve their time-to-market, differentiate
their products and address new market opportunities. We believe that
these strategic relationships are essential to our continued growth and
to the further development and acceptance of our technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. We are
aggressively building on our technology leadership by investing
substantial development resources in all of our key technology areas. We
work closely with leading communications systems companies to develop
new and enhanced algorithms that address next generation broadband
market opportunities. Our strategy is to continue to implement these
algorithms in highly integrated, full-custom integrated circuits using
DSP architectures that optimize performance, efficiency and cost. During
product development, we leverage our silicon compiler technologies and
proprietary circuit libraries and layouts of high-performance analog and
digital chip building blocks, thereby accelerating time-to-market for
new products. The silicon solutions for each of these markets benefit
from the same underlying core technologies, providing us significant
leverage in our ability to address a diverse set of end user markets
with a relatively focused investment in research and development.
Drive Industry Standards. We actively participate in the formulation of
critical standards for the broadband communications markets. We believe
such participation provides us with several significant benefits,
including accelerating and expanding the development of markets for our
products by encouraging all market participants to focus their efforts
on developing products compliant with the standards. We also believe our
participation in the formulation of industry standards provides us with
valuable insight and relationships, which assists us to be early to
market with products incorporating the standards. We have established
strategic relationships with major networking equipment and cable modem
vendors and were a principal participant in formulating and writing
MCNS/DOCSIS. These standards govern the end-to-end delivery of
high-speed data services over HFC cable networks, and facilitate the
development of interoperable networking products, including cable
modems. Our active participation in this process helped us to be the
first provider of transmission and protocol chips to
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equipment manufacturers developing MCNS/DOCSIS compliant products. We
are also currently participating in the formulation and evolution of
standards for Gigabit Ethernet, next generation cable modems and xDSL
systems.
Focus on Highly Integrated Solutions. We believe our analog mixed-signal
technology and advanced design methodologies enable us to offer silicon
solutions that are more highly integrated than competitive alternatives.
High levels of integration and aggressive product development roadmaps
allow us to enhance the value-added benefits of our products in our
customers' systems. Integration, which reduces the total component count
in the system, provides many fundamental benefits for our customers,
including streamlining their production flow, improving yields, saving
board space, shortening time-to-market, reducing production costs and
improving performance and reliability. These benefits have often helped
our customers to achieve faster and broader penetration within their
respective markets.
CUSTOMERS AND STRATEGIC RELATIONSHIPS
We sell our products to leading manufacturers of data communications
equipment in each of our target markets. Because we leverage our technology
across different markets, certain of our integrated circuits may be incorporated
into equipment used in several different markets. Equipment manufacturers from
which we recognized aggregate revenue of at least $500,000 in 1998 included,
among others:
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MARKETS CUSTOMERS
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Cable Set-Top Boxes General Instrument
Echostar
Italtel
Scientific-Atlanta
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Cable Modems 3Com
Cisco Systems
Com21
General Instrument
Hybrid Networks
Motorola
Nortel Networks
Samsung
Thomson
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High-Speed Networking 3Com
Accton Technology
Cabletron
Cisco Systems
D-Link
Delta Electronics
Hewlett-Packard
Nortel Networks
Runtop
Samsung
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DBS and Terrestrial Digital Broadcast Italtel
Samsung
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xDSL Next Level Communications
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As part of our business strategy, we periodically establish strategic
relationships with certain key customers. In September 1997, we entered into a
Development, Supply and License Agreement with General Instrument. This
agreement provides that we will develop chips for General Instrument's digital
cable set-top boxes and supply these chips to General Instrument for four years.
General Instrument agreed to purchase 100% of its requirements for components
containing transmission, communications or video decompression (MPEG) functions
for its digital cable set-top box subscriber products from us in the first year
of this agreement. General Instrument's purchase requirements are subject to our
good faith efforts to maintain our competitive position with respect to these
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components. The percentage of its product requirements that General Instrument
must purchase from us declines each year over the term of the agreement to 45%
of General Instrument's requirements in 2001. General Instrument also granted us
a royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG
and related technology.
From time to time, we have also entered into development agreements with
3Com, Cisco Systems, Nortel Networks and Sony. We have worked closely with these
customers to co-develop products for these customers.
A small number of customers have historically accounted for a
substantial portion of our total revenue. Sales to General Instrument (including
sales to its manufacturing subcontractors) represented approximately 37.9% of
our total revenue in 1998 and approximately 31.9% of our total revenue in 1997.
Sales to 3Com (including sales to its manufacturing subcontractors) represented
approximately 28.5% of our total revenue in 1998 and approximately 14.6% of our
total revenue in 1997. Sales to our five largest customers represented
approximately 78.0% of our total revenue in 1998 and approximately 61.7% of our
revenue in 1997. The loss of any key customer could materially and adversely
affect our business, financial condition and results of operations.
PRODUCTS
Our five primary product lines encompass:
o high-speed communications and MPEG video/audio/graphics devices
for the cable television set-top box market;
o high-speed data transmission and media access control devices
for the cable modem market;
o 10/100/1000Base-T Ethernet transceivers, integrated repeater
controllers, integrated switch controllers and proprietary
application specific integrated circuits ("ASICs") for the
high-speed networking market;
o receivers and MPEG video/audio/graphics devices for the DBS and
terrestrial digital broadcast markets; and
o broadband transceivers for the xDSL market.
We also develop and sell reference platforms designed around our
integrated circuit products that represent application examples for
incorporation into our customers' equipment. By providing these reference
platforms, we can assist our customers in achieving easier and faster
transitions from initial prototype designs through final production releases.
These reference platforms enhance the customer's confidence that our products
will meet their market requirements and product introduction schedules.
Cable Set-Top Boxes
We offer a suite of silicon solutions for digital cable set-top boxes
and cable headends which encompass the high-speed transmission, reception and
decompression of digital audio and video multimedia signals. These products are
also applicable to the terrestrial digital broadcast markets. Our QAMLink(TM)
transmission products integrate the core functionality required of advanced
communications transceiver devices including modulators and demodulators for
quadrature amplitude modulation commonly known as QAM and quadrature phase shift
keying commonly known as QPSK. QAM is a digital modulation technique that allows
very efficient transmission of data over media with limited available bandwidth.
QSPK is a digital modulation technique which is widely employed in DBS
transmission systems. Our QAMLink transmission products also integrate adaptive
equalization, which corrects for distortion in the transmission media, forward
error correction, which corrects for errors that occur in the transmitted data,
and high-speed analog-to-digital and digital-to-analog conversion. We have
designed these products to meet both international and North American
communications standards for cable networks. Several of these products also
incorporate additional set-top box functionality such as cable network protocol
processing for entitlement and tiered programming access and input/output device
control.
In the second quarter of 1998, we introduced our first single-chip MPEG
multimedia device that incorporates all of the processing capabilities necessary
to decode and decompress an MPEG-2 digital television data stream and
subsequently reconstruct an analog studio quality television signal that can be
displayed on a standard television receiver. This chip integrates MPEG-2 video
decompression, Dolby AC3 audio decompression, MPEG-2 transport
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processing, on-screen display, analog video reconstruction and other necessary
MPEG related functions required to deliver video and audio to a television. In
the fourth quarter of 1998, we introduced our digital set-top box graphics chip,
which incorporates studio quality graphics capabilities for displaying computer
images on ordinary television sets. We believe our combination of transmission
and MPEG silicon solutions, licensed MIPS microprocessor cores and graphics
technology will provide all of the significant silicon functionality of most
existing digital cable set-top boxes with the exception of the security
functions and memory.
Cable Modems
We have leveraged our core transmission technologies that were developed
for the cable set-top box market and adapted them to the development of a family
of products that enable digital data to be delivered over an HFC cable network
at downstream speeds of up to 56 Mbps and upstream speeds of up to 10 Mbps.
These products incorporate modulation, adaptive equalization and error
correction technologies similar to those of our set-top box products and thereby
achieve robust and reliable transmission, especially in the noisy and
interference prone upstream direction. The cable modem product family also
includes both a headend and a subscriber media access controller device,
commonly know as a MAC, that controls the upstream and downstream data flow over
the cable network. In September 1998, we introduced the Broadcom(R) BCM3300
chip, which integrates the upstream and downstream physical layers with the
MCNS/DOCSIS media access control functions. This device allows cable modems to
provide telephony over the cable network using the Internet Protocol. Our cable
modem products have been designed to conform to the MCNS/DOCSIS specifications.
The combination of the transmission and media access control chips provides a
complete end-to-end silicon platform for our customers to build headend systems
and subscriber modems. With the integration of MIPS microprocessor cores, we
believe we have all of the silicon functionality necessary to eventually reduce
the cable data modem into a single chip with the exception of the memory.
Our principal products for cable set-top boxes and cable modems include
the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
BCM3033 Universal headend QAM modulator First Quarter 1997
- ------------------------------------------------------------------------------------------
BCM3036 Universal QPSK/QAM burst modulator. Fourth Quarter 1996
- ------------------------------------------------------------------------------------------
BCM3037 Universal QPSK/QAM burst modulator for MCNS/DOCSIS Fourth Quarter 1997
applications
- ------------------------------------------------------------------------------------------
BCM3115 Downstream QAM receiver for North American set-top box Fourth Quarter 1995
applications. Includes QPSK control channel receiver.
- ------------------------------------------------------------------------------------------
BCM3116 Downstream QAM receiver for North American set-top box Fourth Quarter 1997
and MCNS/DOCSIS applications.
- ------------------------------------------------------------------------------------------
BCM3118 Downstream QAM receiver for international applications. Fourth Quarter 1996
- ------------------------------------------------------------------------------------------
BCM3120 Universal set-top box transceiver for both North Second Quarter 1998
American and international applications. Includes QAM
receiver, QPSK control channel receiver, peripheral
device interfaces and QPSK/QAM transmitter.
- ------------------------------------------------------------------------------------------
BCM3125 Universal set-top box transceiver for both North First Quarter 1999
American and international applications. Includes QAM
receiver, QPSK control channel receiver and QPSK/QAM
transmitter.
- ------------------------------------------------------------------------------------------
BCM3137 Headend QPSK/QAM burst receiver for MCNS/DOCSIS Second Quarter 1998
applications.
- ------------------------------------------------------------------------------------------
BCM3210 Headend MCNS/DOCSIS MAC for downstream and upstream Second Quarter 1998
traffic flow. Includes data encryption and decryption.
- ------------------------------------------------------------------------------------------
BCM3220 Subscriber MCNS/DOCSIS cable modem MAC for downstream Fourth Quarter 1997
and upstream traffic flow. Includes data encryption and
decryption.
- ------------------------------------------------------------------------------------------
BCM3300 Single chip MCNS/DOCSIS cable modem. Includes receiver, Third Quarter 1998
transmitter and MAC.
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
BCM3900 Downstream QAM receiver for North American set-top box First Quarter 1997
applications. Includes QPSK control channel receiver and
peripheral device interfaces.
- ---------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video Second Quarter 1998
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video
and audio to a television.
- ---------------------------------------------------------------------------------------------
BCM7014 Set-top box video graphics processor Fourth Quarter 1998
- ---------------------------------------------------------------------------------------------
</TABLE>
High-Speed Networking
Our networking products provide the core functionality required for
building Ethernet Network Interface Cards commonly known as NICs, repeater/hubs
and switches which support the Ethernet, Fast Ethernet and Gigabit Ethernet
standards. Our Digi-(PHI)(TM) transceivers are the basic elements required to
implement an Ethernet connection. The Digi-(PHI)(TM) architecture incorporates
our patent-pending DSP processing algorithms combined with high-speed
analog-to-digital and digital-to-analog converters to create a highly-robust and
cost effective solution. In addition to the DSP-based architecture, the family
of Digi-(PHI)(TM) transceiver products feature low power and low voltage (3.3
Volts) operation, making them suitable for high port density switches and hubs,
as well as PCI2.2 compliant adapter cards and computer motherboards. We also
offer a variety of integrated repeater and switch controller devices, to provide
a broad suite of Fast Ethernet products to meet the demands of the adapter card,
repeater/hub, switch, network peripheral and router markets. In addition, we
develop and produce proprietary ASICs combining our customer's intellectual
property with our advanced Digi-(PHI)(TM) transceiver and communication cores.
Our principal networking products include the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BCM5012 100Base-T managed repeater controller. Incorporates Fourth Quarter 1995
13 repeater ports, MAC port, microprocessor port, and a
port for stacking hubs. Interfaces to external transceivers.
- --------------------------------------------------------------------------------------------------------
BCM5020 100Base-T network management. Incorporates statistical analysis Second Quarter 1997
of network traffic to enable control of repeating hubs by
network management software.
- --------------------------------------------------------------------------------------------------------
BCM5100 Single-channel 10/100Base-T4 transceiver. Incorporates a Fourth Quarter 1996
10Base-T and 100Base-T4 transceiver for Category 3, 4 and 5
twisted pair cabling.
- --------------------------------------------------------------------------------------------------------
BCM5201/5202 Single-channel 3.3/5 Volt 10/100Base-TX transceiver. First Quarter 1998
Incorporates a 10Base-T and 100Base-TX transceiver for Category
5 twisted pair cabling.
- --------------------------------------------------------------------------------------------------------
BCM5203 Quad 100Base-TX transceiver. Contains four Second Quarter 1997
100Base-TX Fast Ethernet transceivers.
- --------------------------------------------------------------------------------------------------------
BCM5205 Quad 100Base-TX integrated repeater. Incorporates four Second Quarter 1997
100Base-TX transceivers, MII port, repeater controller and
repeater management functions.
- --------------------------------------------------------------------------------------------------------
BCM5208 Quad 10/100Base-T transceiver. Integrates four Third Quarter 1997
10Base-T/100Base-TX transceivers. 100Base-FX is
also supported at each port through an external
fiber optic transceiver.
- --------------------------------------------------------------------------------------------------------
BCM5209 Eight port 10/100Base-T hub. Integrates eight Fourth Quarter 1998
10/100Base-TX transceivers, nine MACs and switching
fabric.
- --------------------------------------------------------------------------------------------------------
BCM5216 Hex 10/100Base-T transceiver. Integrates six 10 Third Quarter 1998
Base-T/100Base-TX transceivers.
- --------------------------------------------------------------------------------------------------------
BCM5218 Octal 10/100Base-T transceiver. Integrates eight First Quarter 1999
10Base-T/100Base-TX transceivers.
- --------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BCM5308 Nine port 10/100Base-T switch. Integrates eight Fourth Quarter 1998
10/100 Base-TX transceivers, nine MACs and switching
fabric.
- --------------------------------------------------------------------------------------------------------
BCM5903 Single chip 10/100Base-T transceiver with integrated Second Quarter 1998
MAC.
- --------------------------------------------------------------------------------------------------------
BCM5904 Single chip 10/100Base-T transceiver with integrated First Quarter 1999
MAC ASIC.
- --------------------------------------------------------------------------------------------------------
</TABLE>
DBS and Terrestrial Digital Broadcast
Our products for the DBS market are designed to meet the needs of
satellite set-top box providers and incorporate the functionality necessary to
receive, demodulate and decode a broadband QPSK signal, including advanced
forward error correction. These products can be programmed to accommodate
satellite standards such as DSS, the DIRECTV standard; DVB, the international
standard; and Primestar. These products can operate at any data rate from 2 to
90 Mbps. Our MPEG system on a chip, the BCM7010, employs the MPEG-2 standard,
which enables it to be used in either cable set-top boxes or DBS set-top boxes.
Our principal DBS and terrestrial digital broadcast products include the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BCM4200 QPSK receiver for DSS (DIRECTV) and DVB (international) First Quarter 1997
digital satellite reception. Accommodates data rates from 2
to 90 Mbps.
- --------------------------------------------------------------------------------------------------------
BCM4201 Universal QPSK receiver for DSS, DVB and Primestar digital Third Quarter 1998
satellite reception. Accommodates data rates from 2 to 90
Mbps.
- --------------------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video decompression, Second Quarter 1998
Dolby AC3 audio decompression, MPEG transport, on-screen
display, analog video reconstruction and other MPEG related
functions for delivering video and audio to a television.
- --------------------------------------------------------------------------------------------------------
</TABLE>
xDSL
Our product for xDSL transmission incorporates the functionality to
enable data to be transmitted and received at high speed over the existing
copper twisted pair wiring in the telephone local loops. We believe our BCM6010
currently offers the industry's only single-chip silicon solution that can be
configured to operate at data rates spanning ISDN (128 kbps) to VDSL (52 Mbps),
thereby accommodating the needs of a wide variety of xDSL market segments in a
single chip. This solution offers network operators the ability to initially
install high-speed ADSL data services on the existing local loop plant and
subsequently offer higher data rates for video related services on an upgraded
plant. We have leveraged our mixed-signal and DSP processing design expertise
developed for cable television and wireless products to develop the following
QAM transceiver product for the xDSL market:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BCM6010 Scalable xDSL QAM transceiver for twisted-pair applications. Third Quarter 1997
Incorporates ATM Utopia interface and programmable rate transmitter
and receiver. Can accommodate data rates from 128 kbps to 52 Mbps
in either a symmetric or asymmetric configuration.
- --------------------------------------------------------------------------------------------------------
</TABLE>
Our future success will depend upon our ability to develop new silicon
solutions for existing and new markets, introduce such products in a timely and
cost-effective manner, and achieve design wins. We may not be able to develop or
introduce new products in a timely and cost-effective manner or in sufficient
quantities to meet customer demand. In addition, it is possible that new
products may not satisfy customer requirements or achieve market acceptance.
CORE TECHNOLOGIES
We believe that one of our key competitive advantages is our broad base
of core technologies encompassing the
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<PAGE> 13
complete design space from systems to silicon. We have developed and continue to
build on four primary technology foundations:
o proprietary communications systems algorithms and protocols;
o advanced DSP hardware architectures;
o silicon compiler design methodologies and advanced cell library
development for both standard cell and full-custom integrated
circuit design; and
o high performance analog and mixed-signal circuit design using
industry standard CMOS processes.
Communications Algorithms and Protocols
We have been an innovator in integrating a high-speed QAM digital
demodulator with adaptive equalization and forward error correction into a
single chip. In addition, we have continued to make system advances in the areas
of Forward Error Correction, QAM and QPSK modulation and demodulation, variable
rate transmitters and receivers, digital clock and carrier recovery techniques
and adaptive equalization algorithms. We have also designed and deployed fully
integrated, DSP-based transceiver chips for Fast Ethernet LAN applications. We
have developed a Digi-(PHI)(TM) core transceiver that employs high performance
125 MBaud digital equalizers and high-speed analog-to-digital converters and
clock recovery circuits. This core transceiver has been used in a number of our
single, quad, hex and octal channel transceiver products for Ethernet
(10/100Base-TX) applications including NICs, switches and repeaters. This DSP
transceiver expertise is now being extended and applied to the development of a
Gigabit copper twisted pair transceiver. In addition to data transmission
algorithms, we have developed significant expertise in networking protocols
which we have applied to the development of MAC devices for cable modems and
interactive set-top box applications as well as repeaters/hub, switch and MAC
controllers for Fast Ethernet applications. We have introduced the industry's
first MCNS/DOCSIS physical layer and media access control chips for cable
modems.
Digital Signal Processing Hardware Architectures
We have developed cost-effective, single-chip broadband transceivers by
mapping complex communications algorithms into low-complexity DSP hardware
architectures. We are a technology leader in the area of low-complexity,
high-performance "silicon embedded algorithms." We have individually implemented
these communications algorithms in full-custom logic rather than the
conventional approach of running all of the algorithms in firmware on a single
general purpose programmable DSP architecture. This design approach is combined
with silicon compiler based design methodologies which generate the custom logic
functions. This results in chips that are less complex and less expensive to
manufacture than conventional implementations. One particular area where we have
developed leading DSP technology is in digital adaptive equalization. Equalizers
are key components in all of our transceiver products. We believe that the speed
and density of our equalizers help to distinguish our products in the
marketplace. We are currently developing a single-chip, mixed-signal adaptive
DSP transceiver for Gigabit Ethernet.
Silicon Compiler Design Methodologies
We have developed proprietary silicon compiler technologies that enable
designers to implement chips using a high level of abstraction yet produce
area-efficient integrated circuit layouts and achieve short design cycles. The
cells that are synthesized from this process can be individually optimized for
functionality, performance, topology, electrical characteristics and
manufacturing process portability. We have designed compilers for standard
cells, arithmetic processing, memories and analog building blocks. In addition,
we have created compilers to manage the implementation of higher level functions
such as digital filters, adaptive equalizers, modulators, demodulators and
numerically controlled oscillators/direct digital frequency synthesizers. We
believe that these silicon compiler capabilities accelerate time-to-market by
improving designer productivity and by providing functional blocks that can be
reused in multiple products. In addition, these compiler techniques
significantly reduce errors, thereby frequently resulting in first pass silicon
success. We have also developed, and continue to improve and expand, our own
proprietary set of circuit and layout libraries for both standard-cell and
full-custom integrated circuits.
11
<PAGE> 14
Full-Custom Analog and Mixed-Signal Circuit Design
We have developed significant analog and mixed-signal circuit expertise.
We have achieved a level of circuit performance in standard CMOS process
technologies that is normally associated with more expensive special purpose
silicon fabrication technologies. All of our high-performance analog building
blocks are implemented in the same low-cost CMOS technologies as the digital
semiconductor circuitry. In addition to achieving high performance, our
analog-to-digital and digital-to-analog converters are among the lowest die area
devices in the industry, which makes them well suited for integration into high
volume mixed-signal products. Our 10-bit, 50 Msample/sec analog-to-digital
converter design received the Best Paper Award of the 1997 International Solid
State Circuits Conference, a prestigious semiconductor conference. This
converter was integrated onto the same die as our broadband QAM receiver, which
we believe was the first such mixed-signal QAM receiver product ever
demonstrated (BCM3118). We have also developed very high-speed 125 MHz
analog-to-digital converters for Fast Ethernet transceivers and 200 MHz
digital-to-analog converters for cable modulator applications. All of these data
converters were designed for integration with high-speed digital circuits in
conventional CMOS technologies. We have also evaluated experimental IC designs
and are in the development phase of producing other analog functions such as low
noise RF amplifiers, linear high-gain RF amplifiers, RF mixers, frequency
synthesizers, RF phase-locked loops and other building blocks to enable higher
levels of system integration.
RESEARCH AND DEVELOPMENT
We have assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline.
As of December 31, 1998, a majority of our 256 research and development
employees had advanced degrees, including approximately 50 with Ph.D.s. These
employees are involved in advancing our core technologies, as well as applying
these core technologies to our product development activities in the areas of
broadband communications and digital video technology in our target markets. The
transmission solutions for each of these markets benefit from the same
underlying core technologies, which enables us to leverage our ability to
address various broadband communications markets with a relatively focused
investment in research and development.
We believe that the achievement of higher levels of integration and the
introduction of new products in our target markets is essential to our growth.
As a result, we plan to continue to increase research and development staffing
levels in 1999. We have established additional design centers in San Jose,
California and Atlanta, Georgia and are establishing a design center in Bunnik,
The Netherlands. We anticipate establishing additional design centers in the
United States and other countries in the future.
MANUFACTURING
Wafer Fabrication
We manufacture our products using standard CMOS process techniques. The
standard nature of these processes permits us to engage independent silicon
foundries to fabricate our integrated circuits. By subcontracting our
manufacturing requirements, we are able to focus our resources on design and
test applications where we believe we have greater competitive advantages. This
strategy also eliminates the high cost of owning and operating a semiconductor
wafer fabrication facility.
Our Operations and Quality Engineering Group closely manages the
interface between manufacturing and design engineering. While our design
methodology typically creates smaller than average die for a given function, it
also generates full-custom integrated circuit designs. As a result, we are
responsible for the complete functional and parametric performance testing of
our devices, including quality. We employ a fully staffed operations and quality
organization similar to a vertically integrated semiconductor manufacturer. We
also arrange with our foundries to have online work-in-progress control, making
the manufacturing subcontracting process transparent to our customers.
Our key silicon foundries are Taiwan Semiconductor Manufacturing
Corporation in Taiwan and Chartered Semiconductor Manufacturing in Singapore.
While we currently use two independent foundries, few of our components are
manufactured at both foundries at any given time. Any inability of one of our
foundries to provide the necessary capacity or output could result in
significant production delays and could materially and adversely affect our
business, financial condition and results of operations. While we currently
believe we have adequate capacity to support our current sales levels, we
continue to work with our existing foundries to obtain more production capacity
and we intend to qualify new foundries to provide additional production
capacity. It is possible
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<PAGE> 15
that adequate foundry capacity may not be available on acceptable terms, if at
all. In the event either foundry experiences financial difficulties, whether as
a result of the Asian economic crisis or otherwise, or if either foundry suffers
any damage or destruction to its facilities, or in the event of any other
disruption of foundry capacity, we may not be able to qualify alternative
manufacturing sources for existing or new products in a timely manner.
Our products are currently fabricated with 0.5 micron, triple layer
metal and 0.35 micron, quad layer metal feature sizes. We continuously evaluate
the benefits, on a product by product basis, of migrating to a smaller geometry
process technology in order to reduce costs. Our experience to date with the
migration of products to smaller geometry processes has been favorable, but we
could experience difficulties in future process migration. Other companies in
our industry have experienced difficulty transitioning to new manufacturing
processes and, consequently, have suffered reduced yields or delays in product
deliveries. We believe that the transition of our products to smaller geometries
will be important for us to remain competitive. Our business, financial
condition and results of operations could be materially and adversely affected
if any such transition is substantially delayed or inefficiently implemented.
Assembly and Test
One of our independent foundries or independent wafer probe test
subcontractors conducts our wafer probe testing. Following completion of the
wafer probe tests, the die are assembled into packages and the finished products
are tested by one of our two key subcontractors: ASAT Ltd. in Hong Kong and ST
Assembly Test Services in Singapore. While we have not experienced any material
disruption in supply from assembly subcontractors to date, we could experience
assembly problems in the future. The availability of assembly and testing
services from these subcontractors could be materially and adversely affected in
the event either subcontractor experiences financial difficulties, whether as a
result of the Asian economic crisis or otherwise, or if either subcontractor
suffers any damage or destruction to its respective facilities, or in the event
of any other disruption of assembly and testing capacity.
Quality Assurance
The broadband communications industry demands high-quality and
reliability of the semiconductors incorporated into their equipment. We focus on
product reliability from the initial stage of the design cycle through each
specific design process, including layout and production test design. In
addition, we subject our designs to in-depth circuit simulation at temperature,
voltage and processing extremes before initiating the manufacturing process.
We prequalify each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. We also participate in quality and
reliability monitoring through each stage of the production cycle by reviewing
electrical and parametric data from our wafer foundry and assembly
subcontractors. We closely monitor wafer foundry production to ensure consistent
overall quality, reliability and yield levels. In cases where we purchase wafers
on a fixed cost basis, any improvement in yields can reduce our cost per chip.
As part of our total quality program, we plan to apply for ISO 9001
certification, a comprehensive International Standards Organization specified
quality system. Our objective is to exceed ISO 9001 requirements, especially in
the areas of continuous improvements and customer satisfaction. All of our
principal independent foundries and package assembly facilities are ISO 9000
certified.
PRODUCT DISTRIBUTION
Historically we have distributed products to our customers through our
operations and distributions center located in Irvine, California. We are in
the process of establishing an international distribution center in Singapore.
This new facility will put us closer to our suppliers and certain key customers
and will improve our ability to meet our customers' needs. While our Irvine
facility will continue to ship product to US destinations, we expect to
transition our international customers to the Singapore facility during the
course of 1999.
SALES AND MARKETING
Our sales and marketing strategy is to achieve design wins with
technology leaders in each of the our targeted broadband communications markets
by, among other things, providing superior field application and engineering
support. We market and sell our products in the United States through a direct
sales force, which has largely been established within the last two years. Our
direct sales force is based out of four regional sales offices located in Irvine
and San Jose, California, Atlanta, Georgia and Garwood, New Jersey. We dedicate
sales managers to principal customers to promote close cooperation and
communication. We also provide our customers with reference platform designs,
which enable our customers to achieve easier and faster transitions from the
initial prototype designs through final production releases. We believe these
reference platform designs also significantly
13
<PAGE> 16
enhance our customer's confidence that our products will meet their market
requirements and product introduction schedules.
We also market and sell our products internationally through a direct
sales force based out of regional sales offices located in Japan, The
Netherlands, Singapore and United Kingdom, as well as through a network of
independent distributors and representatives in France, Germany, Israel, Japan,
Korea and Taiwan. We select these independent entities based on their ability to
provide effective field sales, marketing communications and technical support to
our customers. All international sales to date have been denominated in U.S.
dollars.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. We believe that
the principal factors of competition for integrated circuit providers to these
industries include:
o product capabilities;
o level of integration;
o reliability;
o price;
o time-to-market;
o standards compliance;
o system cost;
o intellectual property;
o customer support; and
o reputation.
We believe that we compete favorably with respect to each of these
factors.
We compete with a number of major domestic and international suppliers
of equipment in our target broadband communications markets, which 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, Philips Electronics, STMicroelectronics and VLSI
Technology for communication devices, and with ATI Technologies, C-Cube, LSI
Logic, Motorola and STMicroelectronics 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
and others have announced MCNS/DOCSIS compliant products, which could result in
significant competition in the cable modem market. In the high-speed networking
market, we principally compete with established suppliers including Galileo,
Level One Communications, Lucent Technologies, National Semiconductor and Texas
Instruments. Intel Corporation recently announced its intention to acquire Level
One Communications. A number of smaller companies have announced products in our
target markets, such as AdHoc, Seeq 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, LSI Logic, Lucent Technologies, Philips Electronics,
Sony, STMicroelectronics and VLSI Technology. Our principal competitors in the
xDSL market include Alcatel, Analog Devices, Conexant, Globespan, Motorola, 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.
Many of our competitors operate their own fabrication facilities and
have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than we do. As a result, these competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or
devote greater resources to the promotion and sale of their products than we
can. Current and
14
<PAGE> 17
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, our competitors may develop technologies
in the future that more effectively address the transmission of digital
information through existing analog infrastructures at a lower cost. Increased
competition could result in pricing pressures and decreased margins and may
materially and adversely affect our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
Our success and future revenue growth will depend, in part, on our
ability to protect our intellectual property. We rely primarily on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect our proprietary technologies and processes. These
measures may not provide meaningful protection for our intellectual property. We
have received four United States patents and have filed 40 United States patent
applications. We may not receive any additional patents as a result of these
applications or future applications. Even if additional patents are issued, any
claims allowed may not be sufficiently broad to protect our technology. In
addition, any existing or future patents could be challenged, invalidated or
circumvented, and any right granted under such patents may not provide us with
meaningful protection. The failure of any patents to adequately protect our
technology would make it easier for our competitors to offer similar products.
In connection with our participation in the development of various industry
standards, we may be required to license certain of our patents to other
parties, including our competitors that develop products based upon the adopted
industry standards. We also generally enter into confidentiality agreements with
our employees and strategic partners, and typically control access to and
distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, to
develop similar technology independently or to design around our patents. In
addition, effective copyright, trademark and trade secret protection may not be
available or may be limited in certain foreign countries. We have also entered
into agreements with certain of our customers and granted these customers the
right to use our proprietary technology in the event we default in our
contractual obligations, including product supply obligations, and fail to cure
the default within a specified period of time. Moreover, we often incorporate
the intellectual property of our strategic customers into our designs, and we
have certain obligations with respect to the non-use and non-disclosure of their
intellectual property. It is possible that the steps taken by us to prevent
misappropriation or infringement of our intellectual property or our customers'
intellectual property may not be successful. Moreover, we may need to engage in
litigation in the future to enforce our intellectual property rights or the
rights of our customers, to protect our trade secrets or to determine the
validity and scope of proprietary rights of others, including our customers.
Such litigation could result in substantial costs and diversion of our resources
and could materially and adversely affect our business, financial condition and
results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices of claims of infringement,
misappropriation or misuse of other parties' proprietary rights. We are
currently involved in litigation with Stanford Telecommunications, Inc.
concerning the alleged infringement of one of Stanford's patents by several of
our modem products and with Sarnoff Corporation and Sarnoff Digital
Communications, Inc. concerning our alleged misappropriation and misuse of
certain of their trade secrets. In addition, we have received a letter from
counsel for BroadCom, Inc. asserting rights in the "Broadcom" trademark and
demanding that we cease and desist from any further use of the Broadcom name. We
have exchanged correspondence with Broadcom, Inc. outlining our respective
positions on the matter. It is possible that we will not prevail in these
actions, or any other actions in the future alleging our infringement of
third-party patents, our misappropriation or misuse of third-party trade
secrets, or seeking to invalidate any of our patents. Any assertions of
infringement, misappropriation or misuse or prosecutions seeking to establish
the invalidity of our patents could materially and adversely affect our
business, financial condition and results of operations. For example, in a
patent or trade secret action, an injunction could be issued against us
requiring that we withdraw certain products from the market or requiring that
certain products offered for sale or under development be redesigned. We have
also entered into certain indemnification obligations in favor of certain of our
customers and strategic partners that could be triggered upon an allegation or
finding of our infringement, misappropriation or misuse of other parties'
proprietary rights. Irrespective of the validity or successful assertion of such
claims, we would likely incur significant costs and diversion of our management
and personnel resources to defend these claims, which could also materially and
adversely affect our business. If any claims or actions are asserted against us,
we may need to obtain a license to a third party's intellectual property
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<PAGE> 18
rights. Such a license may not be available on commercially reasonable terms, if
at all.
EMPLOYEES
As of December 31, 1998, we had 411 full-time employees and 25 contract
and temporary employees, including 256 employees engaged in research and
development, 59 engaged in sales and marketing, 60 engaged in manufacturing
operations and 61 engaged in general administration activities. Our employees
are not represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our employee relations are good.
ITEM 2. PROPERTIES
We lease two adjacent buildings in Irvine, California, which have
approximately 152,350 square feet, pursuant to a lease that expires in November
2005. These facilities comprise our corporate headquarters and include our
administration, sales and marketing, and research and development departments.
We also have the right of first refusal to lease a third building in the same
complex covering an additional 60,000 square feet. In addition, we have a lease
on a 17,000 square foot facility in Irvine, California that expires in May 2000.
That facility was part of our former corporate headquarters, which we vacated in
December 1998. We are currently negotiating either a sublease of the facility or
an early buyout of the lease.
We also lease a 16,100 square foot facility in Atlanta, Georgia, which
houses our Residential Broadband Business Unit. This lease terminates in May
2002. In addition, we lease a 28,800 square foot facility in San Jose,
California, which lease expires in September 2000, for our Digital Video
Technology Group. We are also in the process of leasing space to house a design
center in The Netherlands and an international distribution center in Singapore.
We believe that our current facilities, together with planned expansions, will
be adequate for at least the next 12 months.
ITEM 3. 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 alleges that the Company's BCM3036, BCM3037,
BCM3300, BCM93220 and BCM93220B products infringe one of STI's patents (the "
'352 Patent"). STI is seeking an injunction as well as the recovery of monetary
damages, including treble damages for willful infringement, as to the products
listed above and potentially other products. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction requiring that the Company withdraw various products
from the market, substantial product redesign expenses (assuming that a
non-infringing design is feasible and economic) and associated time-to-market
delays, and indemnification claims by the Company's customers or strategic
partners, each of which events could have a material adverse effect on the
Company's business, financial condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications,
Inc. (collectively, "Sarnoff") filed a complaint in New Jersey Superior Court
against the Company and five former Sarnoff employees now employed by the
Company (the "Former Employees") asserting claims against the Former Employees
for breach of contract, misappropriation of trade secrets, and breach of the
covenant of good faith and fair dealing, and against the Company for inducing
such actions. Those claims relate to the alleged disclosure of certain
technology of Sarnoff to the Company. The complaint also asserts claims against
the Company and the Former Employees for unfair competition, misappropriation
and misuse of trade secrets and confidential, proprietary information of
Sarnoff, and tortious interference with present and prospective economic
advantage, as well as a claim against the Company alleging that it "illegally
pirated" Sarnoff's employees. The complaint seeks to preliminarily and
permanently enjoin
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<PAGE> 19
the Company and the Former Employees from utilizing any alleged Sarnoff trade
secrets, and to restrain the Former Employees from violating their alleged
statutory and contractual duties of confidentiality to Sarnoff by, for example,
precluding them from working for six months in any capacity relating to certain
of the Company's programs. The Company has asserted and believes that Sarnoff's
claims are without merit. The Company has filed an answer and is vigorously
defending itself in this action. In May 1997, the Court denied Sarnoff's request
for a temporary restraining order. In June 1998, the Court denied the Company's
motion for summary judgment. 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 Broadcom's alleged "pirating" of Sarnoff's employees. Trial of
Sarnoff's "piracy"-related claims commenced on February 22, and concluded on
March 2, 1999. The Court has yet to rule on these remaining claims, and has
asked the parties to submit proposed findings of fact and conclusions of law no
later than March 29, 1999. On February 15, 1999 Sarnoff filed a motion for
interlocutory review with the New Jersey Superior Court, Appellate Division,
seeking leave to appeal the Court's February 2 order. Sarnoff may further appeal
both the trial court's February 2 order and any subsequent rulings as a matter
of right following the entry of final judgment in this matter.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in March 1996 (which shares would have converted into
156,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company for a certain period of time.
After Mr. Davis resigned from the Company in June 1997, the Company exercised
its repurchase right. Mr. Davis' complaint alleges that the repurchase right
should not be enforceable under several legal theories and seeks unspecified
damages and declaratory relief. If Mr. Davis is successful in his claim, he may
be entitled to receive the shares of Class B Common Stock described above and
may be entitled to certain other rights as a holder of Series D Preferred Stock,
including without limitation the right to acquire certain shares of the
Company's Series E Preferred Stock (or the shares of Class B Common Stock into
which such shares of Series E Preferred Stock would have converted upon
consummation of the initial public offering). In the alternative, Mr. Davis may
be entitled to unspecified damages and punitive damages should he prevail. This
case is currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief. The Company has reached a
tentative settlement with Mr. Davis in this matter, although no formal agreement
has yet been finalized. The terms of the tentative settlement are confidential
but would not have a material effect on the Company's business, results of
operations, financial condition or equity. There can be no assurance that a
final settlement of this matter will be attained in a timely manner, if at all,
or on the terms of the tentative settlement.
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
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<PAGE> 20
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 position, the results of litigation are inherently uncertain, and such
outcome is at least reasonably possible. The Company is unable to make an
estimate of the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Class A Common Stock is traded on the Nasdaq National
Market(R) under the symbol "BRCM." The following table sets forth, for the
periods indicated, the high and low sale prices for the Class A Common Stock on
the Nasdaq National Market, adjusted to reflect the 2-for-1 stock split, in the
form of a 100% stock dividend, effective February 17, 1999:
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low
---------------- ------ ------
<S> <C> <C>
Second Quarter (commencing April 17, 1998) $38.31 $23.50
Third Quarter 44.88 23.50
Fourth Quarter 67.50 29.00
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
---------------- ------ ------
<S> <C> <C>
First Quarter (through March 19, 1999) $95.63 $46.25
</TABLE>
As of March 19, 1999, there were approximately 319 record holders of the
Company's Class A Common Stock and approximately 229 record holders of the
Company's Class B Common Stock. On March 19, 1999, the last reported sale price
of the Class A Common Stock on the Nasdaq National Market was $60.69 per share.
The Company's Class B Common Stock is not publicly traded. Each share of
Class B Common Stock is convertible at any time at the option of the holder into
one share of Class A Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
capital stock. The Company currently intends to retain all of its earnings, if
any, for use in its business and does not anticipate paying any cash dividends
in the foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors, and will depend upon a number of
factors, including, but not limited to, future earnings, the success of the
Company's business activities, its capital requirements, the general financial
condition and future prospects of the Company, general business conditions and
such other factors as the Board may deem relevant.
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<PAGE> 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with summary historical consolidated
financial data of Broadcom Corporation. We have prepared this information using
the historical consolidated financial statements of Broadcom Corporation for the
five years ended December 31, 1998. The historical consolidated financial
statements for the five years ended December 31, 1998 have been audited.
When you read this summary historical financial data, it is important
that you read it along with the historical consolidated financial statements and
related notes contained in this Report and in our quarterly reports filed with
the SEC, as well as the section of this Report and our quarterly reports titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Product revenue .......................... $198,481 $ 31,668 $ 18,981 $ 4,317 $ 1,554
Development revenue ...................... 4,614 5,287 2,389 1,790 2,082
-------- -------- -------- -------- --------
Total revenue ............................... 203,095 36,955 21,370 6,107 3,636
Cost of revenue ............................. 87,422 14,926 7,860 1,398 707
-------- -------- -------- -------- --------
Gross profit ................................ 115,673 22,029 13,510 4,709 2,929
Operating expense:
Research and development ................. 38,438 16,204 5,662 2,687 1,746
Selling, general and administrative ...... 25,005 8,063 3,546 2,135 944
-------- -------- -------- -------- --------
Total operating expense ..................... 63,443 24,267 9,208 4,822 2,690
-------- -------- -------- -------- --------
Income (loss) from operations ............... 52,230 (2,238) 4,302 (113) 239
Interest and other income, net .............. 3,767 290 213 120 41
Net loss on sale of investments ............. -- -- -- -- (42)
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... 55,997 (1,948) 4,515 7 238
Provision (benefit) for income taxes ........ 19,599 (775) 1,499 3 1
-------- -------- -------- -------- --------
Net income (loss) ........................... $ 36,398 $ (1,173) $ 3,016 $ 4 $ 237
======== ======== ======== ======== ========
Basic earnings (loss) per share (1) ......... $ .48 $ (.02) $ .06 $ .00 $ .01
======== ======== ======== ======== ========
Diluted earnings (loss) per share (1) ....... $ .39 $ (.02) $ .05 $ .00 $ .00
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents ................... $ 62,629 $ 22,116 $ 4,657 $ 1,990 $ 100
Working capital ............................. 130,192 26,262 5,529 2,247 1,958
Total assets ................................ 237,444 45,244 14,367 4,509 3,144
Long-term debt, including current portion ... 95 2,693 216 49 85
Convertible preferred stock ................. -- 28,617 6,084 3,150 2,161
Total shareholders' equity .................. 210,341 33,392 9,770 3,475 2,474
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the calculation of earnings (loss) per share. Adjusted to
reflect our 2-for-1 stock split, in the form of a 100% stock dividend,
effective February 17, 1999.
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction
with the Consolidated Financial Statements and related Notes thereto, contained
elsewhere in this Report, before deciding to invest in our company or to
maintain or increase your investment. In this Report, all share numbers and per
share amounts have been retroactively adjusted to reflect our 2-for-1 stock
split, in the form of a 100% stock dividend, effective February 17, 1999.
OVERVIEW
We are a leading developer of highly integrated silicon solutions that
enable broadband digital data transmission to 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 have designed and developed integrated
circuits for some of the most significant broadband communications markets,
including cable set-top boxes, cable modems, high-speed 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 system level reference
designs.
We recognize product revenue at the time of shipment. Provision is
concurrently made for estimated product returns, which historically have been
immaterial. Our products typically carry a one-year warranty. We recognize
development revenue when earned.
The percent of our total revenue derived from independent customers
located outside of the United States was approximately 15.8% in 1998, 15.4% in
1997 and 12.5% in 1996. All of our revenue to date has been denominated in U.S.
dollars. See Note 9 of Notes to Consolidated Financial Statements.
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) represented approximately 78.0%
of our total revenue in 1998, 61.7% of our total revenue in 1997 and 67.7% of
our total revenue in 1996. 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:
o our product mix;
o the position of our products in their respective life cycles;
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<PAGE> 23
o competitive pricing strategies;
o the mix of product revenue and development revenue; and
o 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 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
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenue:
Product revenue .............. 97.7% 85.7% 88.8%
Development revenue .......... 2.3 14.3 11.2
------ ------ ------
Total revenue ..................... 100.0 100.0 100.0
Cost of revenue ................... 43.1 40.4 36.8
------ ------ ------
Gross profit ...................... 56.9 59.6 63.2
Operating expense:
Research and development ..... 18.9 43.9 26.5
Selling, general and
administrative ............... 12.3 21.8 16.6
------ ------ ------
Total operating expense ........... 31.2 65.7 43.1
------ ------ ------
Income (loss) from operations ..... 25.7 (6.1) 20.1
Interest and other income, net .... 1.9 .8 1.0
------ ------ ------
Income (loss) before income taxes . 27.6 (5.3) 21.1
Provision (benefit) for income
taxes ............................. 9.7 (2.1) 7.0
------ ------ ------
Net income (loss) ................. 17.9% (3.2)% 14.1%
====== ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Total Revenue. Total revenue consists of product revenue generated
principally by sales of our semiconductor products and development revenue
generated under development contracts with our customers. Total revenue for 1998
was $203.1 million, an increase of $166.1 million or 449.6% from total revenue
of $37.0 million in 1997. The growth in total 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 total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by independent foundries, and costs associated with assembly,
test and quality assurance for those products, as well as costs of personnel and
equipment associated with manufacturing support and contracted development work.
Gross profit for 1998 was $115.7 million or 56.9% of total revenue, an increase
of $93.6 million or 425.1% from gross profit of $22.0 million or 59.6% of total
revenue in 1997. The
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<PAGE> 24
increase in gross profit was mainly attributable to the significant increase in
the volume of product shipments. The decrease in gross profit as a percentage of
total revenue was largely driven by volume pricing agreements on products for
the high-speed networking market. We expect that gross profit as a percentage of
total revenue may continue to decline in future periods as volume-pricing
agreements and competitive pricing strategies continue to take effect. In
addition, our gross margin may be affected by the introduction in the future of
certain lower margin products.
Research and Development Expense. Research and development expense
consists primarily of salaries and related costs of employees engaged in
research, design and development activities, as well as related subcontracting
costs. Research and development expense for 1998 was $38.4 million or 18.9% of
total revenue, an increase of $22.2 million or 137.2% from research and
development expense of $16.2 million or 43.9% of total revenue in 1997. The
increase in absolute dollars was primarily due to the addition of personnel for
the development of new products and the enhancement of existing products. The
decline in research and development expense as a percentage of total revenue
reflected a significant increase in total revenue during 1998. 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 1998 was $25.0 million or 12.3% of total revenue,
an increase of $16.9 million or 210.1% from $8.1 million or 21.8% of total
revenue in 1997. The increase in absolute dollars reflected higher personnel
related costs resulting from the hiring of sales and marketing personnel, senior
management and administrative personnel, and increased occupancy, legal and
other professional fees, including increased expenses for litigation. The
decline in selling, general and administrative expense as a percentage of total
revenue reflected a significant increase in total revenue during 1998. We expect
that selling, general and administrative expense in absolute dollars will
continue to increase for the foreseeable future to support the planned expansion
of our operations.
Deferred Compensation. In 1998, we recorded approximately $5.4 million
of net deferred compensation in connection with the grant of employee stock
options to purchase an aggregate of 2,596,100 shares of Class B Common Stock in
March 1998 (in addition to approximately $1.2 million of deferred compensation
recorded in 1997). The deferred compensation represents the difference between
the deemed value of the Class B Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. We have presented
this amount as a reduction of shareholders' equity and are amortizing this
amount ratably over the vesting period of the applicable options. We amortized
an aggregate of $1.3 million of deferred compensation in 1998. The remaining
balance of total deferred compensation will be amortized at a rate of
approximately $406,000 (pre-tax) per quarter through September 2001 and
approximately $338,000 (pre-tax) for the quarters ending December 31, 2001 and
March 31, 2002.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents and investment balances,
less interest on our long-term debt and capital lease obligations. Interest and
other income, net for 1998 was $3.8 million compared to $290,000 in 1997. This
increase was principally due to increased cash balances available to invest
resulting from the consummation of our initial public offering and sale of
shares to Cisco Systems in April 1998, and the consummation of our follow-on
offering in October 1998.
Provision (Benefit) for Income Taxes. We accrue a provision for federal
and state income tax at the applicable statutory rates. Our effective tax rates
were approximately 35% for 1998 and 40% for 1997. The federal statutory tax
rates were 35% in 1998 and 34% in 1997. Although our effective tax rate was
approximately the same as the federal statutory tax rate in 1998, we received a
benefit from research and development tax credits which was offset by state
taxes and foreign losses without benefit. The difference between our effective
tax rate and the federal statutory rate in 1997 was due mainly to research and
development tax credits. We utilize the liability method of accounting for
income taxes as set forth in Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. See Note 3 of Notes to Consolidated Financial
Statements.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Total Revenue. Total revenue for 1997 was $37.0 million, an increase of
$15.6 million or 72.9% from total
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<PAGE> 25
revenue of $21.4 million in 1996. This increase was primarily due to our
introduction of new products and also to a higher volume of shipments of
existing products to manufacturers of cable set-top boxes and networking
customers selling Fast Ethernet hubs and switches.
Gross Profit. Gross profit for 1997 was $22.0 million or 59.6% of total
revenue, an increase of $8.5 million or 63.1% from gross profit of $13.5 million
or 63.2% of total revenue in 1996. The increase in absolute dollars was largely
due to higher total revenue. Gross margin declined in 1997 from 1996 primarily
due to volume pricing concessions made in 1997 for cable set-top box products.
Research and Development Expense. Research and development expense for
1997 was $16.2 million or 43.9% of total revenue, an increase of $10.5 million
or 186.2% from research and development expense of $5.7 million or 26.5% of
total revenue in 1996. The increase in absolute dollars was primarily due to the
addition of personnel for the development of new products and the enhancement of
existing products, as well as payments to outside consultants where specific
resources were needed in the development process. The decline in research and
development expense as a percentage of total revenue reflected a significant
increase in total revenue during the period.
Selling, General and Administrative Expense. Selling, general and
administrative expense for 1997 was $8.1 million or 21.8% of total revenue, an
increase of $4.5 million or 127.4% from $3.5 million or 16.6% of total revenue
in 1996. The increase in absolute dollars principally reflected higher personnel
related costs resulting from a net increase in sales and marketing personnel to
address each of our target markets. This increase was also due to the hiring of
senior level management and administrative personnel and increased occupancy,
legal and other professional fees. As our infrastructure expanded in 1997,
selling, general and administrative expense as a percentage of total revenue
increased at a more rapid rate than total revenue.
Deferred Compensation. We recorded deferred compensation of
approximately $1.2 million during 1997 in connection with certain stock options
we granted. The deferred compensation represents the difference between the
deemed value of the Class B Common Stock for accounting purposes and the option
exercise price of such options at the date of grant. We have presented this
amount as a reduction of shareholders' equity and are amortizing this amount
ratably over the vesting period of the applicable options. In 1997, we amortized
$66,000 of deferred compensation on a pre-tax basis.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents and investment balances,
less interest on our long-term debt and capital lease obligations. Interest and
other income, net for 1997 was $290,000, compared to $213,000 in 1996. The
increase was primarily due to interest earned on higher levels of short-term
investments and cash balances, partially offset by interest expense incurred on
higher average debt balances.
Provision (Benefit) for Income Taxes. We accrue a provision for federal
and state income tax at the applicable statutory rates. Our effective tax rates
were approximately 40% for 1997 and 33% for 1996. The difference between our
effective tax rate and the federal statutory tax rate of 34% was primarily
related to state income taxes and research and development tax credits.
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
December 31, 1998, we had $130.2 million in working capital, $97.0 million in
cash, cash equivalents and short-term investments, and $42.8 million in
long-term investments.
Operating activities provided cash of $8.4 million in 1998. This was
primarily the result of net income, the non-cash impact of depreciation and
amortization and a growth in accounts payable, partially offset by increases in
accounts receivable, inventory and deferred tax assets. Operating activities
used $2.6 million in cash in 1997 and generated cash in the amount of $3.2
million in 1996.
Cash used in operating activities in 1997 was primarily attributable to
a net loss, growth in accounts receivable and inventory, and a decrease in
income taxes payable, which more than offset growth in accounts payable and the
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<PAGE> 26
non-cash impact of depreciation and amortization. Cash provided by operating
activities in 1996 was primarily attributable to net income and growth in
accounts payable and income taxes payable, partially offset by growth in
accounts receivable.
Investing activities used cash in the amount of $77.2 million in 1998
for the purchase of held-to-maturity investments and $27.3 million for the
purchase of capital equipment to support our expanding operations. Investing
activities used cash of $7.1 million in 1997 and $3.7 million in 1996, primarily
for the purchase of capital equipment.
Cash provided by financing activities was $136.6 million in 1998, which
was primarily the result of the following:
o $79.2 million in aggregate net proceeds from our initial public
offering and sale of Class A Common Stock to Cisco Systems in
April 1998;
o $30.5 million in net proceeds from our follow-on offering in
October 1998; and
o $25.2 million in tax benefits related to stock option exercises.
Cash provided by financing activities was $27.1 million in 1997 and $3.2
million in 1996, primarily from the sale of convertible preferred stock and, in
1997, from the establishment of a revolving credit facility and term loan.
We completed our initial public offering of Class A Common Stock in
April 1998. Of the 8,050,000 shares of Class A Common Stock offered, we sold
6,240,000 shares and selling shareholders sold 1,810,000 shares, at a price of
$12.00 per share. In addition, we sold 1,000,000 shares to Cisco Systems in a
concurrent, non-underwritten registered offering at a price of $11.16 per share.
We received net aggregate proceeds from the initial public offering and the sale
of shares to Cisco Systems of approximately $79.2 million in cash, net of
underwriting discounts and commissions and offering costs. In April 1998, we
used approximately $2.3 million of the net proceeds to retire all outstanding
indebtedness under a term loan.
In October 1998, we completed a follow-on public offering. Of the
6,900,000 shares of Class A Common Stock offered, we sold 940,000 shares and
selling shareholders sold 5,960,000 shares, at a price of $34.50 per share. We
received net aggregate proceeds of approximately $30.5 million after deducting
underwriting discounts and commissions and offering costs.
We believe that the net proceeds we received from our follow-on
offering, together with the net proceeds we received from our initial public
offering and sale of shares to Cisco Systems and the cash that we generate from
our 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 terms that would be
favorable to our shareholders and us, 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 $3.5 million as of December
31, 1998 for the purchase of workstation hardware and software and for
information systems infrastructure. During 1998, we spent $27.3 million on
capital equipment to support our expanding operations. We expect that we will
spend more than this amount during 1999 to purchase additional workstation
hardware and software, test equipment, design tools, information systems and
leasehold improvements as our operations continue to expand. We may finance
these purchases from the proceeds of the initial public offering and sale of
shares to Cisco Systems, the proceeds of the follow-on offering, cash generated
from our operations, or a combination thereof. See Note 5 of Notes to
Consolidated Financial Statements.
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
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will depend on many factors, including:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to
launch our products and attain a competitive position in the
marketplace;
o volume price discounts;
o our business, product, capital expenditure and research and
development plans and technology roadmap;
o the levels of inventory and accounts receivable that we
maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products; and
o our relationships with our 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 largely completed our business risk assessment of the impact
that the year 2000 problem may have on our operations. As business conditions
warrant, this assessment may be revised 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 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 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. In
the normal course of business, we are currently in the process of upgrading or
replacing all affected systems and expect to complete this process by September
1999. To date, we have 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, and are
targeting September 1999 to complete this process.
Third-Party Suppliers. We rely, directly and indirectly, on external
systems utilized by our suppliers for the management and control of fabrication,
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
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devices. 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 products to identify and, to the extent possible,
resolve issues involving the year 2000 problem. The key suppliers mentioned
above continue to track to their internal year 2000 plans, and while we expect
to resolve any significant year 2000 problems with our suppliers by October
1999, it is possible that these 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 our 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 currently
expect to complete the remediation of our facility and lab related systems by
June 1999.
We presently estimate that the total cost of addressing our year 2000
issues will be approximately $500,000. To date, we have incurred approximately
$20,000 in expenditures for testing of systems. This estimate was derived
utilizing numerous assumptions, including the assumption 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.
We are currently developing contingency plans to address those year 2000
issues that may pose a significant risk to our on-going operations. We currently
expect to complete these contingency plans by May 1999. Such plans could include
accelerated replacement of affected equipment software and systems, temporary
use of back-up equipment and software, the use of back up suppliers and buffer
inventories for certain products or the implementation of manual procedures to
compensate for system deficiencies. 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. 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 THE
FOLLOWING RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN SUCH CASE, 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 ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
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. These factors include, but
are not limited to, the following:
o the volume of our product sales and pricing concessions on
volume sales;
o the timing, rescheduling or cancellation of significant customer
orders;
o the gain or loss of a key customer;
o the timing of customer qualification and industry
interoperability certification of new products and the risk of
non-qualification or non-certification;
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o the rate at which customers and end users adopt new and emerging
technologies in our target markets;
o the rate of adoption and acceptance of new industry standards in
our target markets;
o our ability to specify, develop, introduce and market new
products and technologies in a timely manner;
o the qualification, availability and price of competing products
and technologies and the resulting effects on our sales;
o fluctuations in our manufacturing yields and other potential
problems or delays in the fabrication, assembly, testing or
delivery of our products;
o uncertainties associated with international operations;
o 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;
o problems or delays that we may face in shifting our products to
smaller geometry process technologies and in achieving higher
levels of design integration;
o intellectual property disputes;
o changes in our product or customer mix;
o economic and market conditions in the semiconductor industry and
the broadband communications market;
o the availability of foundry capacity and raw materials;
o the quality of our products;
o costs related to acquisitions of technologies or businesses;
o the level of orders received that we can ship in a quarter;
o 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
o general economic and market conditions.
We intend to continue to increase our operating expenses in 1999. 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.
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. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In that event, the market price of our
Class A Common Stock may decline.
WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES. We have derived a substantial portion of our revenues in the past
from sales to a relatively small number of customers, including General
Instrument and 3Com. Sales to our five largest customers, including sales to
their manufacturing subcontractors, represented approximately 78.0% of our total
revenue in 1998 and approximately 61.7% of our total revenue in 1997. 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:
o Most of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty.
o Our agreements with our customers typically do not require them
to purchase a minimum amount of our products.
o Many of our customers have pre-existing relationships with our
current or potential competitors that may affect their decision
to purchase our products.
o Our customers face intense competition from other manufacturers
that do not use our products.
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o Some of our customers offer or may offer products that compete
with our products.
o Our longstanding relationship 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 be materially and adversely
affected. The loss of or 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. 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 equipment in the markets for cable
set-top boxes, cable modems, high-speed 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, Philips Electronics, STMicroelectronics and
VLSI Technology for communication devices, and with ATI Technologies, C-Cube,
LSI Logic, Motorola and STMicroelectronics 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 and others have announced MCNS/DOCSIS compliant products, which could
result in significant competition in the cable modem market. In the high-speed
networking market, we principally compete with established suppliers including
Galileo, Level One Communications, Lucent Technologies, National Semiconductor
and Texas Instruments. Intel Corporation recently announced its intention to
acquire Level One Communications. A number of smaller companies have announced
products in our target markets, such as AdHoc, Seeq 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, LSI Logic, Lucent Technologies, Philips
Electronics, Sony, STMicroelectronics and VLSI Technology. Our principal
competitors in the xDSL market include Alcatel, Analog Devices, Conexant,
Globespan, Motorola, 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.
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 products. In addition, current and potential competitors have established
or may establish financial or strategic relationship 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 is likely 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.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR
INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS. 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
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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.
WE MUST ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS. 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 such
changes and to anticipate future standards, and the rate of adoption and
acceptance of those standards, will be a significant factor in maintaining or
improving 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 such markets could
materially and adversely affect our business, financial condition and results of
operations.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE DEVELOPMENT AND MARKET
ACCEPTANCE OF NEW PRODUCTS. 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 such 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 new products
will depend on various factors, including our ability to:
o accurately predict market requirements and evolving industry
standards;
o accurately define new products;
o timely complete and introduce new product designs;
o timely qualify and obtain industry interoperability
certification of our products and our customers' products into
which our products will be incorporated;
o obtain sufficient foundry capacity;
o achieve high manufacturing yields; and
o 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. Even if
our product is selected, volume sales of our new product often are not generated
for an additional six to nine months, if at all. 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 MAY BE UNABLE TO RETAIN AND ATTRACT KEY PERSONNEL. 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.
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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 GROWTH 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 164 employees in June 1997
to 436 employees in December 1998, including contract and temporary employees.
This growth has placed, and our anticipated future growth of our operations will
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 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. Such
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 result of operations could be materially and adversely affected.
WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL
OF OUR PRODUCTS. We do not own or operate a fabrication facility. Two outside
foundries, Taiwan Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and
Chartered Semiconductor Manufacturing ("Chartered") in Singapore, currently
manufacture substantially all of our semiconductor devices. Because we rely on
outside foundries, we face several significant risks, including:
o a lack of ensured wafer supply;
o limited control over delivery schedules, quality assurance and
control, manufacturing yields and production costs; and
o 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. 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 such 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
current 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 certain manufacturing processes
qualified if there is a disruption at
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the other foundry. If we choose to use a new foundry, it would typically take us
several months to qualify the new foundry before we can begin shipping products
from it. If we cannot accomplish such 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.
WE DEPEND ON TWO THIRD-PARTY SUBCONTRACTORS FOR THE ASSEMBLY AND TESTING
OF SUBSTANTIALLY ALL OF OUR PRODUCTS. Two third-party subcontractors, ASAT Ltd.
("ASAT") in Hong Kong and ST Assembly Test Services ("STATS") in Singapore,
assemble and test almost all of our 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 financial difficulties, whether as a result of the
current 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, if we are required to find alternative
assemblers or testers for our components, we could experience delays in product
shipments. 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.
WE MAY BE SUBJECT TO RISKS RELATED TO POTENTIAL ACQUISITIONS. As part of
our business strategy, we may acquire businesses, products or technologies that
would allow us to complement our existing product offerings, expand our market
coverage or enhance our technological capabilities. Acquisitions entail many
risks and could result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of the
acquired company. 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 securities to pay for a future acquisition, such
issuance may be dilutive to our existing shareholders. In addition, the debt or
equity securities that we issue may 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 find suitable acquisition
opportunities. Even if we do find such opportunities, we may not be able to
consummate any acquisitions on commercially acceptable terms. Moreover, due to
our limited acquisition experience, it may be difficult for us to integrate
successfully any acquired businesses, products, technologies or personnel, which
could materially and adversely affect our business, financial condition and
results of operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH EXPANSION OF OUR INTERNATIONAL
BUSINESS ACTIVITIES. We currently obtain substantially all of our manufacturing,
assembly and testing services from suppliers located outside of the United
States. In addition, approximately 15.8% of our total revenue in 1998 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. In the future, we intend to expand these
international business activities and also to open design and operational
centers abroad. International operations are subject to many inherent risks,
including:
o political, social and economic instability;
o trade restrictions;
o the imposition of governmental controls;
o exposure to different legal standards, particularly with respect
to intellectual property;
o burdens of complying with a variety of foreign laws;
o import and export license requirements and restrictions;
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<PAGE> 34
o unexpected changes in regulatory requirements;
o foreign technical standards;
o changes in tariffs;
o difficulties in staffing and managing international operations;
o fluctuations in currency exchange rates;
o difficulties in collecting receivables; and
o potentially adverse tax consequences.
In particular, 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,
the Asian economic crisis may materially and adversely affect our business,
financial condition and results of operations.
In addition, various government export regulations apply to the
encryption or other features contained in some of our products. We have applied
for export licenses under these regulations, but we cannot assure you that we
will obtain such licenses 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 such 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. These factors are anticipated to impact our business to
a greater degree as we expand our international business activities.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC
RELATIONSHIPS WITH CERTAIN OF OUR CUSTOMERS. 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 such strategic
relationships in the future. These relationships often require us to develop new
products that typically involve significant technological challenges. Our
partners frequently 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. 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 to 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 such 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.
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WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL
PROPERTY RIGHTS. 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 have four issued United
States patents and have filed over 40 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 such
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. 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 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 such 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.
Such litigation may be very expensive, divert management's attention and
materially and adversely affect our business, financial condition and results of
operations.
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 are
currently involved in litigation with Stanford Telecommunications, Inc. ("STI")
that relates to the alleged infringement of one of STI's patents by several of
our modem products. We are also currently involved in litigation with Sarnoff
Corporation and Sarnoff Digital Communications, Inc., who allege that we
misappropriated and misused certain of their trade secrets. In addition, we have
received a letter from counsel for BroadCom, Inc. asserting rights in the
"Broadcom" trademark and demanding that we stop using the Broadcom name. We have
exchanged correspondence with BroadCom, Inc. that outlines our differing
positions on that matter. It is possible that we will not prevail in these
suits. 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 such 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 certain products from
the market or redesign certain products offered for sale or under development.
We may also have to indemnify certain customers and strategic partners under our
agreements with such parties if a third party alleges or if a court finds that
we have infringed upon, misappropriated or misused such party's proprietary
rights. Even if claims against us are not valid or successfully asserted, such
claims could result in significant costs and a diversion of management and
personnel resources to defend such claims. 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 third party's intellectual property rights. Under
such circumstances, we may not be able to obtain a license on commercially
reasonable terms, if at all.
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OUR PRODUCTS HAVE LENGTHY SALES CYCLES THAT CAN 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 six to nine months
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 such expenditures. Even if a
customer selects our product to incorporate into its equipment, we have no
assurances that such customer will ultimately market and sell their equipment or
that such 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.
WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES. We typically sell
products pursuant to purchase orders that customers can generally cancel or
defer on short notice without incurring a significant penalty. Any 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 recognize revenue upon
shipment of products to a customer. If a customer refuses to accept shipped
products or does not timely pay for such products, we could incur significant
charges against our income. Such charges could materially and adversely affect
our operating results.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR
EXPENSES AND AFFECT THE MARKET ACCEPTANCE OF NEW PRODUCTS. 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, such 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 such 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. Such
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 BE IMPACTED BY THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. 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 general conditions in the
semiconductor industry.
WE HAVE A LIMITED OPERATING HISTORY. We did not begin shipping products
until 1994, and accordingly, we have a limited operating history upon which you
may evaluate our performance and future prospects. We may not be able to sustain
the recent growth in our revenue and you should not consider such growth as an
indicator of our future performance. We cannot assure you that we will be
profitable in any future period. You should consider our prospects in light of
the risks, challenges and difficulties frequently encountered by early stage
companies, particularly companies in intensely competitive and rapidly evolving
markets like the semiconductor industry and broadband communications markets. In
order to address these risks, we must, among other things:
o successfully manage the expansion of our operations;
o respond to competitive and technological developments;
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o continue to attract, retain and motivate qualified personnel;
o maintain our current strategic relationships and attract new
relationships with leaders in the broadband communications
markets; and
o continue to commercialize products that incorporate innovative
technologies.
We cannot assure you that we will be able to successfully address these
risks and challenges.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENT REGULATION. 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. Such 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.
WE ARE CONTROLLED BY CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND
THEIR AFFILIATES. As of March 1, 1999, our directors and executive officers
beneficially owned approximately 47.5% of our outstanding Common Stock and 70.4%
of the total voting control held by our shareholders. In particular, as of March
1, 1999, our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli,
beneficially owned a total of approximately 44.5% of our outstanding Common
Stock and 66.4% of the total voting control held by our shareholders.
Accordingly, these shareholders will 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 and the approval of
any significant corporate transaction, including a merger, consolidation or sale
of substantially all of our assets. In addition, these insiders will 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
such purchases.
OUR STOCK PRICE IS HIGHLY VOLATILE. 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 as low as $23.50 and
as high as $95.63 per share. These fluctuations have occurred and may continue
to occur in response to various factors, many of which we cannot control,
including:
o quarter-to-quarter variations in our operating results;
o announcements of technological innovations or new products by
our competitors, customers or us;
o general conditions in the semiconductor industry and
telecommunications and data communications equipment markets;
o changes in earnings estimates or investment recommendations by
analysts;
o changes in investor perceptions; or
o 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,
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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 OPERATING RESULTS 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, such 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 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 our 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. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance" for detailed information on our state of
readiness, potential risks and contingency plans regarding the Year 2000 issue.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND ADDITIONAL
FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US. We believe that the net
proceeds we received from our follow-on public offering, together with the net
proceeds we received from our initial public offering and sale of shares to
Cisco Systems and the cash that we generate from our operations, will be
sufficient to meet our capital needs for 1999. 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 terms that would be favorable to our shareholders and us, 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 securities, your percentage ownership in us 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.
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:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to
launch our products and attain a competitive position in the
marketplace;
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o volume price discounts;
o our business, product, capital expenditure and research and
development plans and technology roadmap;
o the levels of inventory and accounts receivable that we
maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products; and
o our relationships with our 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 AFFECT THE PRICE OF OUR 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 issued shares of Class B Common Stock to
certain shareholders with superior voting rights entitling the holder to ten
votes for each share held on matters that we submit to a shareholder vote. Our
Board of Directors also has the authority to fix the rights and preferences of
shares of our Preferred Stock and to issue such 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 such stock. Finally, such
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
We do not use derivative financial instruments in our non-trading
investment portfolio. We place our investments in instruments that meet high
credit quality standards, as specified in our investment policy guidelines; the
policy also limits the amount of credit exposure to any one issue, issuer or
type of instrument. We do not expect any material loss with respect to our
investment portfolio.
The table below provides information about our non-trading investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average fixed interest rates by expected maturity dates.
Our investment policy requires that all investments mature in three years or
less, with a weighted average maturity of no longer than one year.
Principal (Notional) Amounts by Expected Maturity (at December 31,
1998):
<TABLE>
<CAPTION>
FAIR VALUE
1999 2000 TOTAL 1998
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C>
Cash and cash equivalents .. $ 35,934 $ -- $ 35,934 $ 35,931
Weighted average rate ... 4.50% -- 4.50%
Investments ................ $ 34,344 $ 42,826 $ 77,170 $ 77,497
Weighted average rate ... 4.67% 3.79% 4.18%
Total portfolio ............ $ 70,278 $ 42,826 $ 113,104 $113,428
Weighted average rate ... 4.58% 3.79% 4.28%
</TABLE>
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item
are included in Part IV, Item 14 of this Form 10-K and are presented beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption
"Election of Directors," appearing in the Proxy Statement, is incorporated
herein by reference.
(b) Identification of Executive Officers. The information under the
caption "Executive Officers and Key Employees," appearing in the Proxy
Statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Compliance with Section 16(a) of the Securities Exchange Act
of 1934," appearing in the Proxy Statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Ownership of Securities," appearing
in the Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions," appearing in
the Proxy Statement, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements, and related notes
thereto, of the Company and the Report of Independent Auditors are filed as part
of this Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
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2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of the Company is filed as
part of this Form 10-K. All other schedules have been omitted because they are
not applicable, not required, or the information is included in the consolidated
financial statements or notes thereto.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors on Financial Statement Schedule S-1
Schedule II - Consolidated Valuation and Qualifying Accounts S-2
</TABLE>
3. EXHIBITS
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or incorporated
by reference into, this Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the fourth quarter of 1998.
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GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization......... Receiver technique for compensating for
distortions in a transmission media.
ADSL.......................... Asymmetric Digital Subscriber Line.
Twisted-pair modem technology that achieves
data rates up to 8 Mbps downstream to the
subscriber and 1 Mbps upstream to the network
at distances up to 18,000 feet.
Bandwidth..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).
Broadband Communications...... Data transmission at speeds of greater than 1.5
Mbps.
CMOS.......................... Complementary Metal Oxide Semiconductor.
Technology used to manufacture silicon
integrated circuits.
DBS........................... Digital Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.
DSP........................... Digital Signal Processing.
Ethernet (10Base-T)........... Networking protocol widely used in LANs for
connecting devices by means of copper twisted
pair wiring at speeds of 10 Mbps.
Fast Ethernet (100Base-T)..... An extension to the 10Base-T Ethernet network
access method which operates at 100 Mbps.
FEC........................... Forward Error Correction. A receiver technique
for correcting errors in the received data.
GHz........................... GigaHertz. One billion cycles per second.
Gigabit Ethernet
(1000Base-T).................. An extension to the 100Base-T Ethernet network
access method which operates at 1,000 Mbps or
equivalently 1 Gbps.
Headend....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
IC............................ Integrated Circuit.
kbps.......................... Kilobits per second.
LAN........................... Local Area Network. A private data
communications network linking a variety of
data devices such as computers and printers
within an office or home environment.
LMDS.......................... Local Multipoint Distribution System. A
broadband wireless communications network that
uses microwave frequencies around 28 GHz to
transmit video and data to residences over a
cellular-like network at distances under a few
miles.
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MAC........................... Media Access Control. Protocol for controlling
the upstream and downstream traffic flow in a
local or wide area network.
Mbps.......................... Megabits per second. Million bits per second.
MCNS/DOCSIS................... Multimedia Cable Network System/Data Over Cable
Service Interface Specifications. Industry
specification that defines the technical
equipment for high-speed cable modem and
headend equipment.
MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
MPEG.......................... Moving Picture Experts Group. Industry standard
for compressing and decompressing digital audio
video signals.
NIC........................... Network Interface Card. Plug-in adapter card
enables a computer to connect to a LAN.
QAM........................... Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK.......................... Quadrature Phase Shift Keying. A digital
technique which is widely employed in direct
broadcast satellite transmission systems.
VDSL.......................... Very High Bit-Rate Digital Subscriber Line.
Twisted pair modem technology that achieves
data rates up to 52 Mbps downstream to the
subscriber and 6 Mbps upstream to the network
at distances up to 4,000 feet.
WAN........................... Wide Area Network. A data communications
network, such as the Internet, which links a
variety of data devices over a large
geographical distance.
xDSL.......................... Generic representation of the entire family of
Digital Subscriber Line technology spanning
data rates from 128 kbps to 52 Mbps depending
on the distance between the central office and
subscriber.
41
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying consolidated balance sheets of Broadcom
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Broadcom Corporation at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Orange County, California
January 26, 1999
F-1
<PAGE> 45
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 62,629 $ 22,116
Short-term investments ....................................... 34,344 --
Accounts receivable (net of allowances for doubtful accounts
and sales returns of $5,061 in 1998 and $721 in 1997) ..... 36,917 9,913
Inventory .................................................... 7,307 2,705
Deferred taxes ............................................... 6,181 1,090
Income taxes receivable ...................................... 3,933 433
Prepaid expenses ............................................. 5,984 262
--------- ---------
Total current assets ................................. 157,295 36,519
Property and equipment, net .................................... 28,286 8,449
Long-term investments .......................................... 42,826 --
Deferred taxes ................................................. 5,352 --
Other assets ................................................... 3,685 276
--------- ---------
Total assets ......................................... $ 237,444 $ 45,244
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ....................................... $ 19,586 $ 7,380
Wages and related benefits ................................... 2,606 846
Accrued liabilities .......................................... 4,816 933
Current portion of long-term debt ............................ 95 1,098
--------- ---------
Total current liabilities ............................ 27,103 10,257
Long-term debt, less current portion ........................... -- 1,595
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock $.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- none in 1998
and 3,567,839 in 1997 ................................... -- 28,617
Class A Common Stock, $.0001 par value:
Authorized shares--200,000,000
Issued and outstanding shares--26,991,390 in 1998
and none in 1997 ......................................... 3 --
Class B Common Stock, $.0001 par value:
Authorized shares--100,000,000
Issued and outstanding shares--63,074,096 in 1998
and 63,003,120 in 1997 ................................... 6 6
Additional paid-in capital ................................... 179,723 7,123
Notes receivable from employees .............................. (2,743) (3,362)
Deferred compensation ........................................ (5,144) (1,090)
Retained earnings ............................................ 38,496 2,098
--------- ---------
Total shareholders' equity ........................... 210,341 33,392
--------- ---------
Total liabilities and shareholders' equity ........... $ 237,444 $ 45,244
========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 46
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product revenue ........................ $198,481 $ 31,668 $ 18,981
Development revenue .................... 4,614 5,287 2,389
-------- -------- --------
Total revenue .................. 203,095 36,955 21,370
Cost of revenue .......................... 87,422 14,926 7,860
-------- -------- --------
Gross profit ............................. 115,673 22,029 13,510
Operating expense:
Research and development ............... 38,438 16,204 5,662
Selling, general and administrative .... 25,005 8,063 3,546
-------- -------- --------
Total operating expense ........ 63,443 24,267 9,208
-------- -------- --------
Income (loss) from operations ............ 52,230 (2,238) 4,302
Interest and other income, net ........... 3,767 290 213
-------- -------- --------
Income (loss) before income taxes ........ 55,997 (1,948) 4,515
Provision (benefit) for income taxes ..... 19,599 (775) 1,499
-------- -------- --------
Net income (loss) ........................ $ 36,398 $ (1,173) $ 3,016
======== ======== ========
Basic earnings (loss) per share .......... $ .48 $ (.02) $ .06
======== ======== ========
Diluted earnings (loss) per share ........ $ .39 $ (.02) $ .05
======== ======== ========
Weighted average shares (basic) .......... 76,225 52,903 49,879
======== ======== ========
Weighted average shares (diluted) ........ 93,664 52,903 66,287
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 47
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ................... 1,600,000 $ 3,150 56,190,000 $ 6 $ 396
Issuance of Preferred Stock, net of
issuance costs of $29 ........................ 493,839 2,934 -- -- --
Exercise of stock options, net of
repurchases .................................. -- -- 2,617,536 -- 761
Net income ................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ................... 2,093,839 6,084 58,807,536 6 1,157
Issuance of Preferred Stock, net of
issuance costs of $36 ........................ 1,500,000 22,689 -- -- --
Repurchases of Preferred Stock ............... (26,000) (156) -- -- --
Issuance of Class B Common Stock ............. -- -- 570,000 -- 1,050
Exercise of stock options, net of
repurchases .................................. -- -- 3,625,584 -- 3,569
Tax benefit from exercise of stock options ... -- -- -- -- 191
Deferred compensation related to grant of
stock options ................................ -- -- -- -- 1,156
Amortization of deferred compensation ........ -- -- -- -- --
Net loss ..................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... 3,567,839 28,617 63,003,120 6 7,123
Conversion of Preferred Stock into Class B
Common Stock ................................. (3,567,839) (28,617) 16,907,034 2 28,615
Issuance of Class A Common Stock in initial
public offering, net of offering costs
of $1,628 .................................... -- -- 7,240,000 1 79,169
Issuance of Class A Common Stock in
follow-on offering, net of offering
costs of $584 ................................ -- -- 940,000 -- 30,548
Exercise of stock options, net of
repurchases .................................. -- -- 1,806,204 -- 2,003
Employee stock purchase plan ................. -- -- 169,128 -- 1,725
Repayment of notes receivable from employees . -- -- -- -- --
Tax benefit from exercise of stock options
and stock purchase plan ...................... -- -- -- -- 25,171
Deferred compensation related to grant of
stock options ................................ -- -- -- -- 5,369
Amortization of deferred compensation ........ -- -- -- -- --
Net income ................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ................... -- $ -- 90,065,486 $ 9 $ 179,723
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM DEFERRED RETAINED SHAREHOLDERS'
EMPLOYEES COMPENSATION EARNINGS EQUITY
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ................... $ (332) $ -- $ 255 $ 3,475
Issuance of Preferred Stock, net of
issuance costs of $29 ........................ -- -- -- 2,934
Exercise of stock options, net of
repurchases .................................. (416) -- -- 345
Net income ................................... -- -- 3,016 3,016
---------- ---------- ---------- ----------
Balance at December 31, 1996 ................... (748) -- 3,271 9,770
Issuance of Preferred Stock, net of
issuance costs of $36 ........................ -- -- -- 22,689
Repurchases of Preferred Stock ............... -- -- -- (156)
Issuance of Class B Common Stock ............. -- -- -- 1,050
Exercise of stock options, net of
repurchases .................................. (2,614) -- -- 955
Tax benefit from exercise of stock options ... -- -- -- 191
Deferred compensation related to grant of
stock options ................................ -- (1,156) -- --
Amortization of deferred compensation ........ -- 66 -- 66
Net loss ..................................... -- -- (1,173) (1,173)
---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... (3,362) (1,090) 2,098 33,392
Conversion of Preferred Stock into Class B
Common Stock ................................. -- -- -- --
Issuance of Class A Common Stock in initial
public offering, net of offering costs
of $1,628 .................................... -- -- -- 79,170
Issuance of Class A Common Stock in
follow-on offering, net of offering
costs of $584 ................................ -- -- -- 30,548
Exercise of stock options, net of
repurchases .................................. (191) -- -- 1,812
Employee stock purchase plan ................. -- -- -- 1,725
Repayment of notes receivable from employees . 810 -- -- 810
Tax benefit from exercise of stock options
and stock purchase plan ...................... -- -- -- 25,171
Deferred compensation related to grant of
stock options ................................ -- (5,369) -- --
Amortization of deferred compensation ........ -- 1,315 -- 1,315
Net income ................................... -- -- 36,398 36,398
---------- ---------- ---------- ----------
Balance at December 31, 1998 ................... $ (2,743) $ (5,144) $ 38,496 $ 210,341
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 48
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $ 36,398 $ (1,173) $ 3,016
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ................... 7,504 3,039 897
Amortization of deferred compensation ........... 1,315 66 --
Deferred taxes .................................. (10,443) (571) (416)
Change in operating assets and liabilities:
Accounts receivable ........................... (27,004) (6,191) (2,982)
Inventory ..................................... (4,602) (1,851) (461)
Income taxes receivable ....................... (3,500) (2,245) 1,835
Prepaid expenses and other assets ............. (9,131) (221) (251)
Accounts payable .............................. 12,206 5,240 1,276
Other accrued liabilities ..................... 5,643 1,350 285
--------- --------- ---------
Net cash provided by (used in) operating
activities ...................................... 8,386 (2,557) 3,199
INVESTING ACTIVITIES
Purchases of property and equipment, net ............. (27,341) (7,132) (3,747)
Purchases of investments ............................. (77,170) -- --
--------- --------- ---------
Net cash used in investing activities ................ (104,511) (7,132) (3,747)
FINANCING ACTIVITIES
Proceeds from bank term loan ......................... -- 3,000 --
Payments on bank term loan ........................... (2,500) (500) --
Payments on capital lease obligations ................ (98) (81) (64)
Proceeds from issuance of Preferred Stock ............ -- 22,689 2,934
Payments on repurchase of Preferred Stock ............ -- (156) --
Net proceeds from initial public offering of
Class A Common Stock ............................... 79,170 -- --
Net proceeds from follow-on offering of
Class A Common Stock ............................... 30,548 -- --
Net proceeds from issuance of Common Stock ........... 3,537 2,005 345
Tax benefit from exercise of stock options
and stock purchase plan ............................ 25,171 191 --
Proceeds from repayment of notes receivables
from employees ...................................... 810 -- --
--------- --------- ---------
Net cash provided by financing activities ............ 136,638 27,148 3,215
--------- --------- ---------
Increase in cash and cash equivalents ................ 40,513 17,459 2,667
Cash and cash equivalents at beginning of year ....... 22,116 4,657 1,990
--------- --------- ---------
Cash and cash equivalents at end of year ............. $ 62,629 $ 22,116 $ 4,657
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ........................................ $ 104 $ 191 $ 26
========= ========= =========
Income taxes paid .................................... $ 8,372 $ 1,850 $ 79
========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom Corporation (the "Company") is a leading developer of highly
integrated silicon solutions that enable broadband digital data transmission to
the home and within the business enterprise. The Company's products enable the
high-speed transmission of data over existing communications infrastructures,
most of which were not originally intended for digital data transmission. Using
proprietary technologies and advanced design methodologies, the Company has
designed and developed integrated circuits for some of the most significant
broadband communications markets, including the markets for cable set-top boxes,
cable modems, high-speed networking, direct broadcast satellite and terrestrial
digital broadcast, and digital subscriber lines.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Broadcom (BVI) Limited. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts and sales returns, inventory reserves, warranty
reserves and income tax valuation allowances.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
Provision is made currently for estimated product returns. Development revenue
is recognized when earned.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products throughout the United
States, Europe and Asia. Sales to the Company's recurring customers are
generally made on open account while sales to occasional customers are typically
made on a C.O.D. basis. The Company performs periodic credit evaluations of its
ongoing customers and generally does not require collateral. Reserves are
maintained for potential credit losses, and such losses have been minimal and
within management's expectations.
The Company invests its excess cash in deposits with major banks, in
U.S. Treasury and U.S. agency obligations and in debt securities of corporations
with strong credit ratings and in a variety of industries. It is the Company's
policy to invest in instruments that have a final maturity of no longer than
three years, with a portfolio weighted average maturity of not more than one
year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term and long-term investments, accounts receivable, accounts
payable, and borrowings. The Company believes all of the financial instruments'
recorded values approximate current values.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments
with original maturities of ninety days or less.
F-6
<PAGE> 50
INVESTMENTS
The Company accounts for its investments in debt securities under
Financial Accounting Standards Board ("FASB") Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. The investments
are adjusted for amortization of premiums and discounts to maturity and such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ................................... $ 1,251 $ 670
Work in process ................................. 4,582 1,645
Finished goods .................................. 6,257 2,076
-------- --------
12,090 4,391
Less reserve for excess and obsolete inventory .. (4,783) (1,686)
-------- --------
$ 7,307 $ 2,705
======== ========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and
amortization are provided on the straight-line method over the assets' estimated
useful lives ranging from two to seven years. Property and equipment are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements ........................... $ 648 $ 296
Office furniture and equipment ................... 3,258 1,510
Machinery and equipment .......................... 8,228 1,509
Computer software and equipment .................. 21,318 9,817
Construction in progress ......................... 5,330 --
-------- --------
38,782 13,132
Less accumulated depreciation and amortization ... (10,496) (4,683)
-------- --------
$ 28,286 $ 8,449
======== ========
</TABLE>
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
Implementation of Statement No. 121 had no impact on the consolidated financial
statements of the Company.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes
as set forth in FASB Statement No. 109, Accounting for Income Taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates.
F-7
<PAGE> 51
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and has adopted the disclosure-only alternative of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings Per Share, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the Statement No. 128 requirements and the accounting
rules set forth in Staff Accounting Bulletin 98 issued by the Securities and
Exchange Commission on February 3, 1998.
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator: net income (loss) .......................... $ 36,398 $ (1,173) $ 3,016
======== ======== ========
Denominator:
Weighted-average shares outstanding ................. 82,001 60,426 57,680
Less: nonvested common shares outstanding ........... (5,776) (7,523) (7,801)
-------- -------- --------
Denominator for basic earnings (loss) per common
share ............................................... 76,225 52,903 49,879
Effect of dilutive securities:
Nonvested common shares ............................. 3,578 -- 3,702
Stock options ....................................... 9,627 -- 390
Convertible Preferred Stock ......................... 4,227 -- 12,316
Warrants ............................................ 7 -- --
-------- -------- --------
Denominator for diluted earnings (loss) per common
share ............................................... 93,664 52,903 66,287
======== ======== ========
Basic earnings (loss) per share ..................... $ .48 $ (.02) $ .06
======== ======== ========
Diluted earnings (loss) per share ................... $ .39 $ (.02) $ .05
======== ======== ========
</TABLE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period
incurred.
WARRANTY
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The
estimated warranty liability at December 31, 1998 and 1997 was $2.0 million and
$150,000, respectively.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components in the consolidated financial
statements. For the years ended December 31, 1998, 1997 and 1996, the Company
did not have any components of comprehensive income as defined in Statement No.
130.
SEGMENTS OF A BUSINESS ENTERPRISE
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 superseded Statement No. 14, Financial Reporting for
F-8
<PAGE> 52
Segments of a Business Enterprise. Statement No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual consolidated financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement No. 131 did not affect the consolidated results of
operations or financial position of the Company.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of ninety days or less to be cash
equivalents.
The following table sets forth certain non-cash transactions excluded
from the statements of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase of equipment through capital leases ... $ -- $ 58 $ 231
Notes receivable from employees issued in
connection with exercise of stock options .... 191 2,614 416
</TABLE>
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes new standards
for recording derivatives in interim and annual financial statements. This
statement requires recording all derivative instruments as assets or
liabilities, measured at fair value. Statement No. 133 is effective for fiscal
years beginning after June 15, 1999. Management does not anticipate that the
adoption of the new statement will have a significant impact on the consolidated
results of operations or financial position of the Company.
2. INVESTMENTS
At December 31, 1998, all of the Company's investments were in
commercial paper and state, municipal and county government bonds, and were
classified as held-to-maturity. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity investments are stated at cost,
adjusted for amortization of premiums and discounts to maturity. A summary of
held-to-maturity securities by balance sheet caption at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents ........... $ 35,934 $ 1 $ (4) $ 35,931
Short-term investments ..... 34,344 39 (4) 34,379
Long-term investments ...... 42,826 292 -- 43,118
-------- -------- -------- --------
Securities classified as
held-to-maturity ......... $113,104 $ 332 $ (8) $113,428
======== ======== ======== ========
</TABLE>
Scheduled maturities of held-to-maturity investments at December 31,
1998 are as follows:
F-9
<PAGE> 53
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Debt securities maturing within:
One year ........................... $ 70,278 $ 70,310
Two years .......................... 42,826 43,118
-------- --------
$113,104 $113,428
======== ========
</TABLE>
3. INCOME TAXES
A reconciliation of the provision (benefit) for income taxes at the
federal statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income
taxes .............................................. $ 19,599 $ (662) $ 1,535
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit .............. 783 40 218
Benefit of research and development tax credits .. (3,640) (229) (270)
Foreign losses without benefit ................... 3,068 -- --
Tax exempt interest .............................. (458) -- --
Other ............................................ 247 76 16
-------- -------- --------
Total provision (benefit) for income taxes ......... $ 19,599 $ (775) $ 1,499
======== ======== ========
</TABLE>
The federal and state income tax provision (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .... $ 24,826 $ (205) $ 1,578
State ...... 5,216 1 337
-------- -------- --------
30,042 (204) 1,915
Deferred:
Federal .... (7,800) (631) (409)
State ...... (2,643) 60 (7)
-------- -------- --------
(10,443) (571) (416)
-------- -------- --------
$ 19,599 $ (775) $ 1,499
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Book depreciation in excess of tax depreciation .... $ 1,376 $ 60
Research and development tax credit carryforwards .. 3,710 141
Reserves and accruals not currently deductible
for tax purposes ................................ 6,216 1,208
California manufacturer's investment credit
carryforward .................................... 479 --
Other .............................................. 85 14
Valuation allowance ................................ (333) (333)
-------- --------
Net deferred tax assets .............................. $ 11,533 $ 1,090
======== ========
</TABLE>
F-10
<PAGE> 54
At December 31, 1998, the Company had federal and state research and
experimentation credit carryforwards of $2,288,000 and $1,422,000, respectively,
which begin to expire in 2012. Additionally, at December 31, 1998, the Company
had a California manufacturer's investment credit carryforward of $479,000,
which expires in 2006.
4. LONG-TERM DEBT
In March 1995, the Company entered into a Loan and Security Agreement
with Silicon Valley Bank ("SVB") which, as amended in June 1997, provided for a
$3.0 million term loan and a $3.0 million revolving credit facility. A $500,000
letter of credit facility was also included in the agreement provided that
sufficient credit was available under the other two facilities. During 1997, the
full amount of the $3.0 million term loan facility was utilized at an interest
rate of SVB's prime rate as announced from time to time plus .5%. At December
31, 1997, $2.5 million was outstanding under the term loan facility. During
1998, the Company repaid all outstanding indebtedness under this facility. The
Loan and Security Agreement expired on April 5, 1998.
The following is a summary of the Company's long-term debt and other
loans at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Silicon Valley Bank term loan collateralized by
substantially all of the Company's assets,
payable in varying monthly installments at a rate of 9.3% $ -- $ 2,500
Capitalized lease obligations payable in varying
monthly installments at rates from 10.4% to 22.3% ....... 95 193
------- -------
-- 2,693
Less current portion of long-term debt .................... (95) (1,098)
------- -------
$ -- $ 1,595
======= =======
</TABLE>
Interest expense for the years ended December 31, 1998, 1997 and 1996
was $84,000, $171,000, and $26,000, respectively.
5. COMMITMENTS
The Company leases its facilities and certain computer software and
equipment under operating lease agreements expiring through 2005. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more are as follows: $9.2 million in 1999; $12.6 million in 2000; $9.1 million
in 2001; $6.9 million in 2002; $6.0 million in 2003; and $5.9 million
thereafter.
The Company had commitments totaling approximately $3.5 million as of
December 31, 1998 for the purchase of workstation hardware and software and for
information systems infrastructure.
Rent expense for the years ended December 31, 1998, 1997 and 1996
aggregated $1.8 million, $739,000 and $325,000, respectively.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
In February 1998, the Board of Directors approved the amendment and
restatement of the articles of incorporation to authorize 200,000,000 shares of
Class A Common Stock, 100,000,000 shares of Class B Common Stock and 10,000,000
shares of Preferred Stock. Effective with the amendment, all outstanding Common
Stock was converted into Class B Common Stock and all outstanding stock options
became exercisable for shares of Class B Common Stock. The shares of Class A and
Class B Common Stock are substantially identical, except that holders of Class A
Common Stock are entitled to one vote for each share held, and holders of Class
B Common Stock are entitled to ten votes for each share held on all matters
submitted to a vote of the shareholders. In addition, holders of Class B Common
Stock are entitled to vote separately on the proposed issuance of additional
shares of Class B
F-11
<PAGE> 55
Common Stock. The Class A Common Stock and Class B Common Stock are sometimes
collectively referred to herein as the "Common Stock."
STOCK SPLIT
In February 1998, the Board of Directors approved a 3-for-2 stock split,
effective March 9, 1998, of the Company's Common Stock. All share and per share
amounts in the accompanying consolidated financial statements have been
retroactively restated to reflect the stock split.
SALE OF SHARES TO CISCO SYSTEMS, INC.
On February 3, 1998, Cisco Systems, Inc. ("Cisco Systems") exercised its
option to purchase 1,000,000 shares of Class A Common Stock upon consummation of
the Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco Systems in connection with the Development and
License Agreement entered into between the Company and Cisco Systems effective
in September 1996, as amended on February 3, 1998.
INITIAL PUBLIC OFFERING AND FOLLOW-ON OFFERING
In April 1998, the Company completed its initial public offering (the
"Offering") of 8,050,000 shares of its Class A Common Stock. Of these shares,
the Company sold 6,240,000 shares (including 710,000 shares issued in connection
with the exercise of the underwriters' over-allotment option) and selling
shareholders sold 1,810,000 shares (including 340,000 shares in connection with
the exercise of the underwriters' over-allotment option) at a price of $12.00
per share. In addition, the Company sold 1,000,000 shares of Class A Common
Stock to Cisco Systems, in a concurrent registered offering that was not
underwritten, at a price of $11.16 per share. The Company received aggregate net
proceeds from the Offering and the sale of shares to Cisco Systems of
approximately $79.2 million in cash (net of underwriting discounts and
commissions and offering costs). Upon consummation of the Offering, all
outstanding shares of the Company's Convertible Preferred Stock were
automatically converted into an aggregate of 16,907,034 shares of Class B Common
Stock.
In October 1998, the Company completed a follow-on public offering (the
"Follow-On Offering"). Of the 6,900,000 shares of Class A Common Stock offered,
the Company sold 940,000 shares and selling shareholders sold 5,960,000 shares,
at a price of $34.50 per share. The Company received net aggregate proceeds of
approximately $30.5 million after deducting underwriting discounts and
commissions and offering costs.
CONVERTIBLE PREFERRED STOCK
Preferred Stock consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
----------- --------------- -----------
<S> <C> <C> <C>
A ............. 500,000 500,000 $ 1,000,000
B ............. 600,000 600,000 1,200,000
C ............. 500,000 500,000 1,000,000
D ............. 500,000 467,839 2,807,034
E ............. 1,800,000 1,500,000 22,725,000
Undesignated .. 6,100,000 -- --
----------- ----------- -----------
10,000,000 3,567,839 $28,732,034
=========== =========== ===========
</TABLE>
Each share of Series A, B, C and D Preferred Stock is convertible into
six shares of Class B Common Stock. Each share of Series E Preferred Stock is
convertible into three shares of Class B Common Stock. Such shares may be
converted at any time at the option of the holder and automatically convert into
Class B Common Stock in the event of an underwritten public offering of the
Company's Common Stock as long as the value of the Company for purposes of the
public offering is not less than $45,000,000.
Holders of the Company's Series A, B, C, D and E Preferred Stock are
entitled to noncumulative annual dividends of $0.20 per share in preference to
holders of Common Stock when declared by the Board of Directors.
F-12
<PAGE> 56
No such cash dividends have been declared since the inception of the Company.
In the event of the liquidation of the Company, holders of Series A, B,
C, D and E Preferred Stock are entitled to receive an amount per share equal to
the original issuance price plus declared and unpaid dividends, prior and in
preference to any distribution of assets to holders of Common Stock.
The holders of Series A, B, C, D and E Preferred Stock have the right to
purchase additional shares of stock in order to maintain their ownership
percentage in the event of certain future sales of stock by the Company.
Holders of Series A, B, C, D and E Preferred Stock are entitled to the
same number of votes per share on any and all matters submitted to a shareholder
vote as the Class B Common Stock into which the Preferred Stock is convertible.
Upon consummation of the initial public offering in April 1998, each
share of Series A, B, C and D Preferred Stock was converted into six shares of
Class B Common Stock, and each share of Series E Preferred Stock was converted
into three shares of Class B Common Stock.
ISSUANCE OF WARRANTS
In April 1998, the Company issued a Class A Common Stock Purchase
Warrant (the "Warrant") to Brobeck, Phleger & Harrison LLP, counsel to the
Company, to purchase up to 20,000 shares of the Company's Class A Common Stock
at an exercise price of $12.00 per share. The Warrant is exercisable from April
30, 1999 to April 30, 2000. The Warrant was issued in a transaction exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933, as
amended.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the "Purchase Plan"), adopted on
February 3, 1998, allows employees to designate up to 15% of their total
compensation to purchase shares of the Company's Class A Common Stock at 85% of
fair market value (calculated in the manner provided in the Purchase Plan).
1,500,000 shares of Class A Common Stock have been reserved for issuance under
the Purchase Plan. In 1998, 169,128 shares were purchased at a price of $10.20
per share.
1994 STOCK OPTION PLAN
Under the Company's Amended and Restated 1994 Stock Option Plan (the
"1994 Plan"), the Board of Directors or a Committee consisting of two or more
members of its Board of Directors is authorized to grant options to purchase the
Company's Class B Common Stock to its employees, members of the Board of
Directors and certain consultants. Incentive options may be granted at an
exercise price equal to or greater than 100% of the fair market value of the
underlying Class B Common Stock at the date of grant, and non-qualified options
may be granted at an exercise price equal to or greater than 85% of the fair
market value of the underlying Class B Common Stock on the date of grant.
The options are exercisable immediately upon issuance and generally have
a term of ten years. The Company reserves the right to repurchase all unvested
shares held by the participant upon the participant's termination at the
original purchase price. Fully vested options not purchased by the participant
within three months after termination are cancelled and returned to the plan.
The Board of Directors or the Committee determines the vesting schedule at the
time of issuance. Stock options generally vest at the rate of 25% after one year
and ratably on a monthly basis for three years thereafter. Until the Company's
initial public offering in April 1998, the Company had the right of first
refusal to purchase any shares of Common Stock issued under the 1994 Plan.
At the discretion of the Board of Directors or the Committee, the
Company may make secured loans to option holders in amounts up to the exercise
price of their options plus related taxes or permit the option holder to pay the
exercise price in installments over a determined period. During 1998, 1997 and
1996, the Company loaned $191,000, $2,614,00 and $416,000, respectively, to
employees for the exercise of options. These notes are full-recourse, are
secured by the shares of stock, are interest bearing with rates ranging from
5.6% to 6.5%, are due
F-13
<PAGE> 57
between three and five years from the exercise date and must be ratably repaid
upon sale of the underlying shares of stock.
During 1997 and 1996, the Company's Board of Directors approved
increases in the number of shares of Class B Common Stock reserved and available
for issuance under the 1994 Plan of 19,200,000 shares and 9,000,000 shares,
respectively. A total of 39,000,000 shares of Class B Common Stock was available
for issuance at December 31, 1998 and 1997. In April 1998, all amounts reserved
for issuance under the 1994 Plan were assumed by the 1998 Plan. As of December
31, 1998, no shares were available for grant under the 1994 Plan.
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "1998 Plan"), which became
effective on April 8, 1998 (the "Plan Effective Date"), is intended to serve as
the successor equity incentive program to the Company's 1994 Plan and the
Company's 1998 Special Stock Option Plan (the "Special Plan"). The Special Plan
was adopted to permit options to be granted with terms permitted by the 1998
Plan prior to the 1998 Plan becoming effective. A total of 4,000,000 shares of
Class B Common Stock were authorized for issuance under the Special Plan. A
total of 31,896,878 shares of Common Stock have been authorized for issuance
under the 1998 Plan. Such share reserve consists of (i) the number of shares
which remain available for issuance under the 1994 Plan and the Special Plan on
the Plan Effective Date, including the shares subject to outstanding options,
and (ii) an additional increase of 6,000,000 shares of Class A Common Stock. Any
unvested shares of Class B Common Stock issued under the 1994 Plan or the
Special Plan repurchased by the Company after the Plan Effective Date will be
added to the reserve of Class A Common Stock available for issuance under the
1998 Plan. In addition, the number of shares of Class A Common Stock reserved
for issuance under the 1998 Plan will automatically increase on the first
trading day of each calendar year, beginning in calendar year 1999. The increase
will be equal to 3% of the total number of shares of Class A Common Stock
outstanding on the last trading day of the immediately preceding calendar year.
In April 1998, outstanding options under the 1994 Plan and the Special
Plan were incorporated into the 1998 Plan, and no further option grants may be
made under the 1994 Plan or the Special Plan. The incorporated options will
continue to be governed by their existing terms, unless the Plan Administrator
elects to extend one or more features of the 1998 Plan to those options.
Activity under the 1994 Plan, the Special Plan and the 1998 Plan during
1998, 1997 and 1996 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 405,000 195,000 $ .03 $ .03
Additional shares reserved 9,000,000 -- -- --
Options granted .......... (6,538,500) 6,538,500 .03- .57 .37
Options exercised ........ -- (2,628,600) .03- .57 .26
----------- ----------- ------------- ----------
Balance at December 31, 1996 2,866,500 4,104,900 .03- .57 .42
Additional shares reserved 19,200,000 -- -- --
Options granted .......... (10,660,800) 10,660,800 .57- 4.00 1.26
Options canceled ......... 22,122 (22,122) .25- .57 .39
Options exercised ........ -- (3,940,714) .03- 4.00 .94
----------- ----------- ------------- ----------
Balance at December 31, 1997 11,427,822 10,802,864 .03- 4.00 1.06
Additional shares reserved 10,000,000 -- -- --
Options granted .......... (13,894,350) 13,894,350 5.00- 60.38 22.67
Options canceled ......... 793,150 (793,150) .57- 24.50 3.70
Options repurchased ...... 6,000 -- -- --
Options exercised ........ -- (1,810,516) .03- 31.06 1.30
----------- ----------- ------------- ----------
Balance at December 31, 1998 8,332,622 22,093,548 $ .03-$60.38 $ 14.54
=========== =========== ============= ==========
</TABLE>
F-14
<PAGE> 58
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1998 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING --------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .03 to $ .62 6,000,642 8.14 $ .54 5,742,642 $ .54
$ 1.50 to $ 5.00 7,986,522 9.08 $ 4.06 3,463,739 $ 2.85
$ 12.00 to $ 40.91 6,997,384 9.70 $ 33.22 251,922 $ 12.78
$ 41.47 to $ 60.38 1,109,000 9.91 $ 47.80 -- --
</TABLE>
Additional information relating to the 1994 Plan, the Special Plan and
the 1998 Plan is as follows at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase .... 3,997,314 7,522,446 7,801,180
Weighted average repurchase price ................ $ .76 $ .52 $ .11
Unvested options outstanding ..................... 20,443,320 9,922,435 3,985,178
Total reserved Common Stock shares for
stock option plans ............................. 30,426,170 22,230,686 6,971,400
</TABLE>
The Company recorded approximately $5.4 million and $1.2 million of net
deferred compensation in the years ended December 31, 1998 and 1997,
respectively, for the difference between the exercise price of certain of the
Company's stock options granted under the 1994 Plan and the deemed fair market
value of the underlying Class B Common Stock. Such amounts have been presented
as a reduction to shareholders' equity and are being amortized ratably over the
vesting period of the applicable options. The Company amortized an aggregate of
$1.3 million and $66,000 of deferred compensation in 1998 and 1997,
respectively. The remaining balance of total deferred compensation will be
amortized at a rate of approximately $406,000 (pre-tax) per quarter through
September 2001 and approximately $338,000 (pre-tax) for the quarters ending
December 31, 2001 and March 31, 2002.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income
(loss) per share is required by Statement No. 123 for stock-based awards to
employees as if the Company had accounted for such awards using a valuation
method permitted under Statement No. 123.
The value of the Company's stock-based awards granted to employees prior
to the Company's initial public offering in April 1998 was estimated using the
minimum value method, which does not consider stock price volatility.
Stock-based awards granted in 1998 subsequent to the initial public offering
have been valued using the Black-Scholes option pricing model. Among other
things, the Black-Scholes model considers the expected volatility of the
Company's stock price, determined in accordance with Statement No. 123, in
arriving at an option valuation. Estimates and other assumptions necessary to
apply the Black-Scholes model may differ significantly from assumptions used in
calculating the value of options granted prior to the initial public offering
under the minimum value method.
The fair value of the Company's stock-based awards granted to employees
prior to the initial public offering was estimated assuming no expected
dividends, a weighted average expected life of 3.5 years, a weighted average
risk-free interest rate of 6.0% and no expected volatility. The fair value of
options granted after the initial public offering was estimated assuming no
expected dividends, a weighted average expected life of 1.5 years from vest
date, a weighted average risk-free interest rate of 5.0% and an expected
volatility of .74. The fair value of employee stock purchase rights was
estimated assuming no expected dividends, a weighted average expected life of 15
months, a weighted average risk-free interest rate of 5.0% and an expected
volatility of .74.
The weighted-average fair value of options granted during 1998, 1997 and
1996 were $13.15, $.37, $.06, respectively. The weighted-average fair value of
employee stock purchase rights granted in 1998 was $6.15. For pro
F-15
<PAGE> 59
forma purposes, the estimated value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying instruments.
The results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported ..................... $ 36,398 $ (1,173) $ 3,016
Pro forma ....................... 19,248 (1,755) 2,947
Basic earnings (loss) per share
As reported ..................... $ .48 $ (.02) $ .06
Pro forma ....................... .25 (.03) .06
Diluted earnings (loss) per share
As reported ..................... $ .39 $ (.02) $ .05
Pro forma ....................... .21 (.03) .04
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and
Investment Plan, which was established in 1996, covering substantially all of
the Company's employees, subject to certain eligibility requirements. At its
discretion, the Company may make contributions to the plan. The Company made no
contributions to this plan in 1998, 1997 and 1996.
8. LITIGATION
In December 1996, Stanford Telecommunications, Inc. ("STI") filed an
action against the Company in the United States District Court for the Northern
District of California. STI alleges that the Company's BCM3036, BCM3037,
BCM3300, BCM93220 and BCM93220B products infringe one of STI's patents (the "
'352 Patent"). STI is seeking an injunction as well as the recovery of monetary
damages, including treble damages for willful infringement, as to the products
listed above and potentially other products. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction requiring that the Company withdraw various products
from the market, substantial product redesign expenses (assuming that a
non-infringing design is feasible and economic) and associated time-to-market
delays, and indemnification claims by the Company's customers or strategic
partners, each of which events could have a material adverse effect on the
Company's business, financial condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications,
Inc. (collectively, "Sarnoff") filed a complaint in New Jersey Superior Court
against the Company and five former Sarnoff employees now employed by the
Company (the "Former Employees") asserting claims against the Former Employees
for breach of contract, misappropriation of trade secrets, and breach of the
covenant of good faith and fair dealing, and against the Company for inducing
such actions. Those claims relate to the alleged disclosure of certain
technology of Sarnoff to the Company. The complaint also asserts claims against
the Company and the Former Employees for unfair competition, misappropriation
and misuse of trade secrets and confidential, proprietary information of
Sarnoff, and tortious interference with present and prospective economic
advantage, as well as a claim against the Company alleging that it "illegally
pirated" Sarnoff's employees. The complaint seeks to preliminarily and
permanently enjoin the Company and the Former Employees from utilizing any
alleged Sarnoff trade secrets, and to restrain the Former Employees from
violating their alleged statutory and contractual duties of confidentiality to
Sarnoff by, for example, precluding them from working for six months in any
capacity relating to certain of the Company's programs. The
F-16
<PAGE> 60
Company has asserted and believes that Sarnoff's claims are without merit. The
Company has filed an answer and is vigorously defending itself in this action.
In May 1997, the Court denied Sarnoff's request for a temporary restraining
order. In June 1998, the Court denied the Company's motion for summary judgment.
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 Broadcom's
alleged "pirating" of Sarnoff's employees. Trial of Sarnoff's "piracy"-related
claims commenced on February 22, and concluded on March 2, 1999. The Court has
yet to rule on these remaining claims, and has asked the parties to submit
proposed findings of fact and conclusions of law no later than March 29, 1999.
On February 15, 1999 Sarnoff filed a motion for interlocutory review with the
New Jersey Superior Court, Appellate Division, seeking leave to appeal the
Court's February 2 order. Sarnoff may further appeal both the trial court's
February 2 order and any subsequent rulings as a matter of right following the
entry of final judgment in this matter.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in March 1996 (which shares would have converted into
156,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company for a certain period of time.
After Mr. Davis resigned from the Company in June 1997, the Company exercised
its repurchase right. Mr. Davis' complaint alleges that the repurchase right
should not be enforceable under several legal theories and seeks unspecified
damages and declaratory relief. If Mr. Davis is successful in his claim, he may
be entitled to receive the shares of Class B Common Stock described above and
may be entitled to certain other rights as a holder of Series D Preferred Stock,
including without limitation the right to acquire certain shares of the
Company's Series E Preferred Stock (or the shares of Class B Common Stock into
which such shares of Series E Preferred Stock would have converted upon
consummation of the initial public offering). In the alternative, Mr. Davis may
be entitled to unspecified damages and punitive damages should he prevail. This
case is currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief. The Company has reached a
tentative settlement with Mr. Davis in this matter, although no formal agreement
has yet been finalized. The terms of the tentative settlement are confidential
but would not have a material effect on the Company's business, results of
operations, financial condition or equity. There can be no assurance that a
final settlement of this matter will be attained in a timely manner, if at all,
or on the terms of the tentative settlement.
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
position, the results of litigation are inherently uncertain, and such outcome
is at least reasonably possible. The Company is unable to make an estimate of
the range of possible
F-17
<PAGE> 61
loss from outstanding litigation, and no amounts have been provided for such
matters in the accompanying consolidated financial statements.
9. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment, broadband communications.
During 1998, 1997 and 1996, the Company had a total of three customers whose
revenue represented a significant portion of total revenue in certain or all
years. Revenue from one customer represented approximately 37.9% in 1998, 31.9%
in 1997 and 28.0% in 1996 of total revenue for the respective year. Revenue from
a second customer was approximately 28.5% in 1998, 14.6% in 1997 and 15.2% in
1996 of total revenue for the respective year. Revenue from a third customer
accounted for approximately 16.1% of total revenue in 1996.
No other customer represented more than 10% of the Company's annual
revenue.
Export revenue to all foreign customers as a percent of total revenue
was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Europe ......... 3.7% 5.2% 6.1%
Asia ........... 7.3 6.7 2.9
Other .......... 4.8 3.5 3.5
------ ------ ------
15.8% 15.4% 12.5%
====== ====== ======
</TABLE>
The Company does not own or operate a fabrication facility. Two outside
foundries in Asia currently supply substantially all of the Company's
semiconductor device requirements. Any sudden demand for an increased amount of
semiconductor devices or sudden reduction or elimination of any existing source
or sources of semiconductor devices could result in a material delay in the
shipment of the Company's products. In addition, substantially all of the
Company's products are assembled and tested by one of two third-party
subcontractors in Asia. The Company does not have long-term agreements with any
of these suppliers. Any problems associated with the fabrication facilities, and
the delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
10. RELATED PARTY TRANSACTIONS
ISSUANCE OF COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company
issued and sold an aggregate of 450,000 shares of Class B Common Stock to Irell
& Manella LLP for an aggregate purchase price of $1.1 million. Werner F. Wolfen,
a director of the Company, served until December 31, 1998 as a Senior Partner of
Irell & Manella LLP, which firm represents the Company in various legal matters.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA LLP
Irell & Manella LLP has represented and continues to represent the
Company in various legal matters pursuant to an engagement agreement dated as of
January 1, 1997, and amended as of January 1, 1998. Under the engagement
agreement, the Company has agreed to pay Irell & Manella LLP a fixed fee plus
costs for the firm's legal services rendered from and after January 1, 1998 with
respect to certain litigation matters. Irell & Manella LLP has agreed to render
legal services to the Company on most other matters at reduced rates from the
firm's standard rates for the two-year period commencing January 1, 1998. During
1998, 1997 and 1996, the Company paid approximately $2.9 million, $1.2 million
and $19,000, respectively, to Irell & Manella LLP for legal services rendered by
that firm. At December 31, 1998, approximately $376,000 was due to Irell &
Manella LLP.
F-18
<PAGE> 62
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
DILUTED
NET EARNINGS
TOTAL GROSS INCOME (LOSS)
REVENUE PROFIT (LOSS) PER SHARE
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
1998
First Quarter $ 35,344 $ 21,512 $ 7,663 $ .09
Second Quarter 45,168 24,788 7,716 .08
Third Quarter 52,485 28,827 8,177 .08
Fourth Quarter 70,098 40,546 12,842 .13
1997
First Quarter $ 5,031 $ 2,497 $ (763) $ (.01)
Second Quarter 5,395 3,119 (1,078) (.02)
Third Quarter 9,255 5,208 (1,804) (.03)
Fourth Quarter 17,274 11,205 2,472 .03
</TABLE>
12. SUBSEQUENT EVENTS
ACQUISITION
On January 25, 1999, the Company signed a definitive agreement to
acquire Maverick Networks ("Maverick"). Maverick develops highly integrated
silicon for multi-layer switching equipment in enterprise networks. Under the
terms of the agreement, the Company will issue 1,728,400 shares of its Class B
Common Stock in exchange for all shares of Maverick Networks Preferred Stock and
Common Stock, including shares issuable upon exercise of employee stock options
and other rights. The merger transaction is currently expected to close in May
1999 and be accounted for as a pooling-of-interests. The Boards of Directors of
both companies have approved the agreement. The Company's historical
consolidated financial statements presented after the closing of the transaction
will be restated to include the financial position and results of operations of
Maverick.
STOCK SPLIT
On January 24, 1999, the Board of Directors approved a 2-for-1 split of
the Company's Common Stock, to be effected in the form of a 100% stock dividend.
Holders of the Company's Class A Common Stock received one additional share of
Class A Common Stock for every share held on the record date of February 5,
1999. The additional shares were distributed on February 17, 1999. A comparable
stock dividend was distributed to holders of the Company's Class B Common Stock.
All share and per share amounts in the accompanying consolidated financial
statements have been retroactively restated to reflect this change in the
Company's capital structure.
F-19
<PAGE> 63
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Strategic Alliance Agreement and Plan of Merger by
and between Broadcom Corporation, Mavnet
Acquisition Corp. and Maverick Networks
3.1* Amended and Restated Articles of Incorporation of
the Registrant.
3.2* Bylaws of the Registrant.
10.1* Form of Indemnification Agreement for the
Directors and Officers of the Registrant.
10.3* 1994 Amended and Restated Stock Option Plan,
together with form of Stock Option Agreement, form
of Stock Purchase Agreement, form of promissory
note and form of stock pledge agreement.
10.4*** 1998 Stock Incentive Plan, together with forms of
Stock Option Agreements, Notice of Grant, Stock
Issuance Agreement, Stock Purchase Agreement and
related Addenda.
10.5**** 1998 Employee Stock Purchase Plan, form of ESPP
Stock Purchase Agreement and Enrollment/Change
Form.
10.6* Loan and Security Agreement dated March 23, 1995
between the Registrant and Silicon Valley Bank, as
amended.
10.7* Standard Form Office Lease dated April 30, 1995
between the Registrant and Laguna Canyon, Inc., as
amended.
10.8+* Development, Supply and License Agreement dated
September 29, 1997 between the Registrant and
General Instrument Corporation, formerly known as
NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998
between the Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26,
1996 among the Registrant and certain of its
shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between
the Registrant and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form
of Stock Option Agreement and form of Stock
Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997
between the Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as
amended, between the Registrant and Irell &
Manella LLP.
10.15** Industrial Lease (Single Tenant; Net) dated August
7, 1998 between the Registrant and The Irvine
Company.
11.1 Statement Regarding Computation of Earnings Per
Share (contained in Note 1 of Notes to
Consolidated Financial Statements).
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ----------
* Incorporated by reference to the similarly numbered exhibit to
the Registration Statement on Form S-1 filed by the Registrant
(Reg. No. 333-45619).
** Incorporated by reference to the similarly numbered exhibit to
the Registration Statement on Form S-1 filed by the Registrant
(Reg. No. 333-65117).
*** Incorporated by reference to Exhibits 99.1 through 99.11 to the
Registration Statement on Form S-8 filed by the Registrant (Reg.
No. 333-60763).
<PAGE> 64
**** Incorporated by reference to Exhibits 99.12 through 99.14 to the
Registration Statement on Form S-8 filed by the Registrant (Reg.
No. 333-60763).
+ Confidential treatment has previously been granted by the
Commission for certain portions of the referenced exhibit
pursuant to Rule 406.
FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial S-1
Statement Schedule
(2) Schedule II -- Valuation and Qualifying Accounts S-2
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California, on March 30, 1999.
BROADCOM CORPORATION
By: /s/ Henry T. Nicholas III
---------------------------------------
Henry T. Nicholas III, Ph.D.
President, Chief Executive Officer
and Co-Chairman
POWER OF ATTORNEY
We, the undersigned officers and directors of Broadcom Corporation, do
hereby constitute and appoint Henry T. Nicholas III, Ph.D., and William J.
Ruehle, and each of them, our true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Henry T. Nicholas III President, Chief Executive Officer and Co- March 30, 1999
- ------------------------------- Chairman (principal executive officer)
Henry T. Nicholas III, Ph.D.
/s/ Henry Samueli Vice President of Research & Development, March 30, 1999
- ------------------------------- Chief Technical Officer and Co-Chairman
Henry Samueli, Ph.D.
/s/ Myron S. Eichen Director March 30, 1999
- -------------------------------
Myron S. Eichen
/s/ Alan E. Ross Director March 30, 1999
- -------------------------------
Alan E. Ross
/s/ Werner F. Wolfen Director March 30, 1999
- -------------------------------
Werner F. Wolfen
/s/ William J. Ruehle Vice President and Chief Financial Officer March 30, 1999
- ------------------------------- (principal accounting officer)
William J. Ruehle
</TABLE>
<PAGE> 66
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Broadcom Corporation
We have audited the consolidated financial statements of Broadcom
Corporation as of December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
January 26, 1999. Our audits also included the financial statement schedule
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 26, 1999
S-1
<PAGE> 67
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns .......................... $ 721 $ 7,817 $ -- $ 3,477 $ 5,061
Reserve for excess and obsolete
inventory .............................. 1,686 4,154 -- 1,057 4,783
Reserve for warranty ................... 150 1,872 -- -- 2,022
------- ------- ------ ------- -------
Total ............................. $ 2,557 $13,843 $ -- $ 4,534 $11,866
======= ======= ====== ======= =======
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns .......................... $ 147 $ 574 $ -- $ -- $ 721
Reserve for excess and obsolete
inventory .............................. 749 1,028 -- 91 1,686
Reserve for warranty ................... -- 150 -- -- 150
------- ------- ------ ------- -------
Total ............................. $ 896 $ 1,752 $ -- $ 91 $ 2,557
======= ======= ====== ======= =======
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns .......................... $ 162 $ 213 $ -- $ 228 $ 147
Reserve for excess and obsolete
inventory .............................. 55 1,055 -- 361 749
------- ------- ------ ------- -------
Total ............................. $ 217 $ 1,268 $ -- $ 589 $ 896
======= ======= ====== ======= =======
</TABLE>
S-2
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Strategic Alliance Agreement and Plan of Merger by and between
Broadcom Corporation, Mavnet Acquisition Corp. and Maverick
Networks
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
10.1* Form of Indemnification Agreement for the Directors and Officers
of the Registrant.
10.3* 1994 Amended and Restated Stock Option Plan, together with form
of Stock Option Agreement, form of Stock Purchase Agreement, form
of promissory note and form of stock pledge agreement.
10.4*** 1998 Stock Incentive Plan, together with forms of Stock Option
Agreements, Notice of Grant, Stock Issuance Agreement, Stock
Purchase Agreement and related Addenda.
10.5**** 1998 Employee Stock Purchase Plan, form of ESPP Stock Purchase
Agreement and Enrollment/Change Form.
10.6* Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7* Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
10.8+* Development, Supply and License Agreement dated September 29,
1997 between the Registrant and General Instrument Corporation,
formerly known as NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26, 1996 among the
Registrant and certain of its shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between the Registrant
and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as amended, between
the Registrant and Irell & Manella LLP.
10.15** Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
11.1 Statement Regarding Computation of Earnings Per Share (contained
in Note 1 of Notes to Consolidated Financial Statements).
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ----------
* Incorporated by reference to the similarly numbered exhibit to
the Registration Statement on Form S-1 filed by the Registrant
(Reg. No. 333-45619).
** Incorporated by reference to the similarly numbered exhibit to
the Registration Statement on Form S-1 filed by the Registrant
(Reg. No. 333-65117).
*** Incorporated by reference to Exhibits 99.1 through 99.11 to the
Registration Statement on Form S-8 filed by the Registrant (Reg.
No. 333-60763).
**** Incorporated by reference to Exhibits 99.12 through 99.14 to the
Registration Statement on Form S-8 filed by the Registrant (Reg.
No. 333-60763).
+ Confidential treatment has previously been granted by the
Commission for certain portions of the referenced exhibit
pursuant to Rule 406.
<PAGE> 1
EXHIBIT 2.1
STRATEGIC ALLIANCE AGREEMENT AND
PLAN OF MERGER
BY AND BETWEEN
BROADCOM CORPORATION
MAVNET ACQUISITION CORP.
AND
MAVERICK NETWORKS
Dated as of January 25, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 THE MERGER.................................................................2
1.1 The Merger.................................................................2
1.2 Effective Time.............................................................3
1.3 Effect of the Merger on Constituent Corporations...........................3
1.4 Articles of Incorporation and By-Laws of Surviving Corporation.............3
1.5 Directors and Officers of Surviving Corporation............................3
1.6 Number of Shares of Parent Common Stock to be Issued; Effect on
Outstanding Securities of the Company......................................3
(a) Conversion of Company Capital Stock.................................4
(b) Cancellation of Parent-Owned and Company-Owned Stock................4
(c) Company Options and Stock Plan......................................4
(d) Adjustments to Exchange Ratio.......................................5
(e) Fractional Shares...................................................5
(f) Capital Stock of Merger Sub.........................................5
1.7 Dissenting Shares..........................................................5
1.8 Exchange Procedures........................................................6
(a) Parent Common Stock.................................................6
(b) Exchange Procedures.................................................6
(c) Distributions With Respect to Unexchanged Shares of Company
Capital Stock.......................................................7
(d) Transfers of Ownership..............................................7
1.9 No Further Ownership Rights in Company Capital Stock.......................7
1.10 Lost, Stolen or Destroyed Certificates.....................................8
1.11 Taking of Necessary Action; Further Action.................................8
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..............................8
</TABLE>
- i -
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2.1 Organization and Qualification.............................................8
2.2 Authority Relative to this Agreement.......................................8
2.3 Capital Stock..............................................................9
2.4 No Subsidiaries............................................................10
2.5 Directors and Officers.....................................................10
2.6 No Conflicts...............................................................10
2.7 Books and Records; Organizational Documents................................10
2.8 Company Financial Statements...............................................11
2.9 Absence of Changes.........................................................11
2.10 No Undisclosed Liabilities.................................................15
2.11 Taxes......................................................................15
2.12 Legal Proceedings..........................................................16
2.13 Compliance with Laws and Orders............................................17
2.14 Plans; ERISA...............................................................17
(a) Existence of Plans..................................................17
(b) Penalties...........................................................18
(c) Qualification.......................................................18
(d) Litigation..........................................................19
2.15 Real Property..............................................................19
2.16 Tangible Personal Property.................................................20
2.17 Intellectual Property......................................................20
2.18 Contracts..................................................................23
2.19 Insurance..................................................................24
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2.20 Affiliate Transactions.....................................................25
2.21 Employees; Labor Relations.................................................25
2.22 Environmental Matters......................................................26
2.23 Accounts Receivable........................................................27
2.24 Other Negotiations; Brokers; Third Party Expenses..........................27
2.25 Warranty Obligations.......................................................27
2.26 Foreign Corrupt Practices Act..............................................28
2.27 Pooling of Interests.......................................................28
2.28 Financial Projections; Operating Plan......................................28
2.29 Approvals..................................................................28
2.30 Takeover Statutes..........................................................29
2.31 Disclosure.................................................................29
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB....................29
3.1 Organization and Qualification.............................................29
3.2 Authority Relative to this Agreement.......................................29
3.3 Issuance of Parent Common Stock............................................30
3.4 SEC Documents; Parent Financial Statements.................................30
3.5 No Conflicts...............................................................30
3.6 Absence of Changes.........................................................31
3.7 Pooling of Interests.......................................................31
3.8 Ownership of Merger Sub; No Prior Activities...............................31
3.9 Investment Advisors........................................................31
3.10 Approvals..................................................................31
ARTICLE 4 STRATEGIC ALLIANCE; CONDUCT PRIOR TO THE EFFECTIVE TIME....................31
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.1 Loan to the Company........................................................31
4.2 Operating Plan.............................................................32
4.3 Engineering Assistance.....................................................32
4.4 Joint Marketing............................................................33
4.5 Board Observer Rights......................................................33
4.6 Conduct of Business of the Company.........................................33
4.7 No Solicitation............................................................38
ARTICLE 5 ADDITIONAL AGREEMENTS......................................................39
5.1 Fairness Hearing; Registration of Shares...................................39
5.2 Approval of the Shareholders...............................................40
5.3 Access to Information......................................................41
5.4 Confidentiality............................................................41
5.5 Expenses...................................................................41
5.6 Public Disclosure..........................................................41
5.7 Approvals..................................................................42
5.8 FIRPTA Compliance..........................................................42
5.9 Notification of Certain Matters............................................42
5.10 Pooling of Interests Accounting............................................42
5.11 Company Affiliate Agreements...............................................42
5.12 Parent Affiliate Agreements................................................43
5.13 Additional Documents and Further Assurances................................43
5.14 Indemnification............................................................43
5.15 Form S-8...................................................................43
5.16 NNM Listing of Additional Shares Application...............................44
</TABLE>
- iv -
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.17 Company's Auditors.........................................................44
5.18 Termination of 401(k) Plans................................................44
5.19 Takeover Statutes..........................................................44
5.20 Section 280G Plans.........................................................44
5.21 Additional Affiliate Agreements............................................44
5.22 Employee Nonsolicitation...................................................45
5.23 Company Audited Financials.................................................45
ARTICLE 6 CONDITIONS TO THE MERGER...................................................45
6.1 Conditions to Obligations of Each Party to Effect the Merger...............45
(a) Governmental and Regulatory Approvals...............................45
(b) No Injunctions or Regulatory Restraints; Illegality.................45
(c) Tax Opinions........................................................46
(d) Opinion of Accountants..............................................46
(e) Affiliate Agreements................................................46
(f) Shareholder Approval................................................46
(g) Legal Proceedings...................................................46
(h) [Intentionally Omitted.]............................................46
(i) Fairness Approval; Effectiveness of Registration Statement..........46
6.2 Additional Conditions to Obligations of the Company........................46
(a) Representations and Warranties......................................47
(b) Performance.........................................................47
(c) [Intentionally Omitted].............................................47
(d) Legal Opinion.......................................................47
(e) NNM Listing.........................................................47
</TABLE>
- v -
<PAGE> 7
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(f) Tax Representation Letter...........................................47
6.3 Additional Conditions to the Obligations of Parent and Merger Sub..........47
(a) Representations and Warranties......................................47
(b) Performance.........................................................48
(c) [Intentionally Omitted].............................................48
(d) Legal Opinion.......................................................48
(e) Non-Competition Agreements..........................................48
(f) Retention Agreements................................................48
(g) Tax Representation Letter...........................................48
(h) Limitation on Dissent...............................................48
(i) No Bankruptcy.......................................................48
(j) Key Employee Retention..............................................48
(k) Employee Retention..................................................48
(l) FIRPTA Compliance...................................................49
(m) Third Party Consents................................................49
(n) Banks and Brokerage Accounts........................................49
(o) Company Intellectual Property.......................................49
ARTICLE 7 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS;
ESCROW PROVISIONS..........................................................49
7.1 Survival of Representations, Warranties, Covenants and Agreements..........49
7.2 Escrow Provisions..........................................................50
(a) Establishment of the Escrow Fund....................................50
(b) Recourse to the Escrow Fund.........................................50
(c) Escrow Period; Distribution of Escrow Fund upon Termination
of Escrow Period....................................................51
</TABLE>
- vi -
<PAGE> 8
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(d) Protection of Escrow Fund...........................................52
(e) Claims Upon Escrow Fund.............................................52
(f) Objections to Claims................................................52
(g) Resolution of Conflicts; Arbitration................................53
7.3 Shareholder Agent of the Shareholders; Power of Attorney...................53
(a) Shareholder Agent...................................................53
(b) Exculpation.........................................................53
(c) Actions of the Shareholder Agent....................................54
7.4 Third-Party Claims.........................................................54
7.5 Depositary Agent's Duties..................................................54
(a) Limitation on Duties of Depositary Agent............................54
(b) Compliance with Orders..............................................54
(c) Limitations on Liability of Depositary Agent........................54
(d) Good Faith of Depositary Agent......................................55
(e) Non-responsibility of Depositary Agent..............................55
(f) Indemnification of Depositary Agent.................................55
(g) Resignation of Depositary Agent.....................................55
(h) Fees................................................................56
ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER..........................................56
8.1 Termination................................................................56
8.2 Effect of Termination......................................................58
8.3 Amendment..................................................................58
8.4 Extension; Waiver..........................................................58
8.5 Remedies...................................................................58
</TABLE>
- vii -
<PAGE> 9
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 9 MISCELLANEOUS PROVISIONS...................................................59
9.1 Notices....................................................................59
9.2 Entire Agreement...........................................................60
9.3 Further Assurances; Post-Closing Cooperation...............................60
9.4 Waiver.....................................................................61
9.5 Third Party Beneficiaries..................................................61
9.6 No Assignment; Binding Effect..............................................61
9.7 Headings...................................................................61
9.8 Invalid Provisions.........................................................61
9.9 Governing Law..............................................................61
9.10 Arbitration................................................................62
(a) Application of Procedures...........................................62
(b) Discovery...........................................................62
(c) Decision of Arbitrators.............................................62
(d) Judgment; Costs.....................................................63
9.11 Construction...............................................................63
9.12 Counterparts...............................................................63
9.13 Specific Performance.......................................................63
ARTICLE 10 DEFINITIONS................................................................63
10.1 Definitions................................................................63
</TABLE>
- viii -
<PAGE> 10
STRATEGIC ALLIANCE AGREEMENT AND
PLAN OF MERGER
This STRATEGIC ALLIANCE AGREEMENT AND PLAN OF MERGER is made and entered
into as of January 25, 1999, by and among Broadcom Corporation, a California
corporation ("Parent"), Mavnet Acquisition Corp., a California corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and Maverick Networks, a
California corporation (the "Company"), and with respect to Section 7.3 only,
Nicholas Mitsakos, as Shareholder Agent and U.S. Stock Transfer Corporation, as
Depositary Agent. Capitalized terms used and not otherwise defined herein have
the meanings set forth in Article 10.
RECITALS
A. The Boards of Directors of each of Parent, Merger Sub and the Company
believe it is in the best interests of Parent, Merger Sub and the Company (as
applicable) and their respective shareholders that Parent and the Company enter
into a strategic alliance and technology sharing arrangement for the development
of the Company's Intellectual Property, including (i) a loan of $6.0 million to
the Company by Parent to be funded contemporaneously with the execution and
delivery of this Agreement, (ii) the implementation by the Company of the
Operating Plan, (iii) the provision of engineering assistance by Parent to the
Company, and (iv) a joint marketing effort for the Company's Orion SA Product
and Parent's Ethernet products, all on the terms and conditions hereinafter
provided, and, in furtherance thereof, have approved the Agreement.
B. The Board of Directors of each of Parent, Merger Sub and the Company
believes it is in the best interests of Parent, Merger Sub and the Company (as
applicable) and their respective shareholders that Parent complete a business
combination through the merger of Merger Sub with and into the Company (the
"Merger") and, in furtherance thereof, have approved the Merger.
C. The Boards of Directors of each of Parent, Merger Sub and the Company
have approved the Merger, this Agreement and the transactions contemplated
hereby.
D. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, (i) all of the issued and outstanding shares
of capital stock of the Company shall be converted into the right to receive
shares of Class B Common Stock of Parent ("Parent Common Stock") and (ii) all
outstanding Company Options, Company Warrants and Company Stock Purchase Rights
will become exercisable for Parent Common Stock, subject to the terms and
conditions hereinafter provided.
E. As an inducement to Parent and Merger Sub to enter into this
Agreement, certain shareholders of the Company have concurrently herewith
entered into (i) Support Agreements with Parent in substantially the form
attached hereto as Exhibit A ("Support Agreements") pursuant to which, among
other things, such shareholders have agreed to vote the shares of Company
Capital Stock owned by them in favor of the Merger and (ii) Company Affiliate
Agreements in the form attached hereto as Exhibit B ("Company Affiliate
Agreements") pursuant to which, among other things, such shareholders have
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agreed to refrain from selling shares of Parent Common Equity during a specified
period prior to and following consummation of the Merger.
F. As a further inducement to Parent and Merger Sub to enter into this
Agreement, certain employees of the Company have concurrently herewith entered
into (i) Non-Competition Agreements substantially in the form attached hereto as
Exhibit C (the "Non-Competition Agreements") and (ii) certain Retention
Agreements (the "Retention Agreements"), each of which shall become effective
upon the occurrence of the Effective Time.
G. As an inducement to the Company to enter into this Agreement, certain
shareholders of Parent have concurrently herewith entered into Parent Affiliate
Agreements in the form attached hereto as Exhibit D (the "Parent Affiliate
Agreements") pursuant to which, among other things, such shareholders have
agreed to refrain from selling shares of Parent Common Equity during a specified
period prior to and following consummation of the Merger.
H. Parent, Merger Sub and the Company intend that the Merger shall (i)
constitute a reorganization within the meaning of Section 368(a) of the Code,
and in furtherance thereof intend that this Agreement shall be a "Plan of
Reorganization" within the meaning of Sections 354(a) and 361(a) of the Code,
and (ii) qualify as a Pooling of Interests, reportable as a Pooling of Interests
of the Company and Parent for financial accounting purposes by Parent from and
after the Closing.
I. The Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
J. A portion of the shares of Parent Common Stock otherwise issuable or
reserved for issuance by Parent in connection with the Merger shall be placed in
escrow by Parent, the release of which amount shall be contingent upon certain
events and conditions, all as set forth in Article 7 herein.
NOW, THEREFORE, in consideration of the covenants, promises,
representations and warranties set forth herein, and for other good and valuable
consideration, intending to be legally bound hereby the parties agree as
follows:
ARTICLE 1
THE MERGER
1.1 The Merger. At the Effective Time and subject to and upon the terms
and conditions of this Agreement and the applicable provisions of the California
Code, Merger Sub shall be merged with and into the Company, the separate
corporate existence of Merger Sub shall cease, and the Company shall continue as
the surviving corporation and wholly-owned subsidiary of Parent. The Company is
sometimes referred to herein as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place within
five (5) Business Days following the satisfaction or waiver of the conditions
set forth in Article 6 at
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the offices of Irell & Manella LLP, 1800 Avenue of the Stars, Suite 900, Los
Angeles, California, unless another place or time is agreed to by Parent and the
Company. The date upon which the Closing actually occurs is herein referred to
as the "Closing Date." On the Closing Date, the parties hereto shall cause the
Merger to be consummated by filing a duly executed Agreement of Merger, in
substantially the form attached hereto as Exhibit E (the "Agreement of Merger"),
with the Secretary of State of the State of California, in accordance with the
relevant provisions of applicable law (the time of acceptance by the Secretary
of State of the State of California of such filing being referred to herein as
the "Effective Time").
1.3 Effect of the Merger on Constituent Corporations. At the Effective
Time, the effect of the Merger shall be as provided in the applicable provisions
of the California Code. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the property, rights, privileges,
powers and franchises of Merger Sub and the Company shall vest in the Surviving
Corporation, and all debts, liabilities, obligations, restrictions, disabilities
and duties of Merger Sub and the Company shall become the debts, liabilities,
obligations, restrictions, disabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation and By-Laws of Surviving Corporation.
(a) At the Effective Time, the articles of incorporation of the
Company, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation of the Surviving Corporation until thereafter amended
as provided by law and such articles of incorporation and by-laws of the
Surviving Corporation.
(b) The by-laws of the Company, as in effect immediately prior
to the Effective Time, shall be the by-laws of the Surviving Corporation until
thereafter amended as provided by such by-laws, the articles of incorporation
and applicable law.
1.5 Directors and Officers of Surviving Corporation. The directors of
Merger Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, each to hold office in accordance with the articles of
incorporation and by-laws of the Surviving Corporation. The officers of the
Company immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, each to hold office in accordance with the by-laws of the
Surviving Corporation.
1.6 Number of Shares of Parent Common Stock to be Issued; Effect on
Outstanding Securities of the Company. The number of shares of Parent Common
Stock to be issued in the Merger (including Parent Common Stock to be reserved
for issuance upon exercise of any of the Company Options, Company Warrants or
Company Stock Purchase Rights outstanding as of the Effective Time to be assumed
by Parent as provided herein) in exchange for the acquisition by Parent of all
outstanding shares of Company Capital Stock and all vested and unvested Company
Options, Company Warrants and Company Stock Purchase Rights which are unexpired
and unexercised shall be the Price Adjusted Aggregate Parent Share Number. No
adjustment shall be made in the number of shares of Parent Common Stock issued
in the Merger as a result of any consideration (in any form whatsoever) received
by the Company from the date hereof to the Effective Time as a result of any
exercise, conversion or exchange of Company Options, Company Warrants or
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<PAGE> 13
Company Stock Purchase Rights. Subject to the terms and conditions of this
Agreement, as of the Effective Time, by virtue of the Merger and without any
action on the part of Parent or Merger Sub, the Company or the holder of any
shares of the Company Capital Stock and Company Options, Company Warrants or
Company Stock Purchase Rights, the following shall occur:
(a) Conversion of Company Capital Stock. At the Effective Time,
each share of Company Capital Stock issued and outstanding immediately prior to
the Effective Time (other than any shares of Company Capital Stock to be
canceled pursuant to Section 1.6(b) and any Dissenting Shares (as provided in
Section 1.7)) will be canceled and extinguished and be converted automatically
into the right to receive that number of shares of Parent Common Stock equal to
the Exchange Ratio, rounded down to the nearest whole share of Parent Common
Stock.
(b) Cancellation of Parent-Owned and Company-Owned Stock. Each
share of Company Capital Stock owned by Parent or the Company or any Subsidiary
of Parent or the Company immediately prior to the Effective Time shall be
automatically canceled and extinguished without any conversion thereof and
without any further action on the part of Parent, Merger Sub or the Company.
(c) Company Options and Stock Plan. At the Effective Time all
unexpired and unexercised Company Options, Company Warrants and Company Stock
Purchase Rights then outstanding, whether vested or unvested, shall be assumed
by Parent in accordance with provisions described below.
(i) At the Effective Time, each unexpired and
unexercised Company Option, Company Warrant and Company Stock Purchase Right
then outstanding, whether vested or unvested, shall be, in connection with the
Merger, assumed by Parent. Each Company Option, Company Warrant and Company
Stock Purchase Right so assumed by Parent under this Agreement shall continue to
have, and be subject to, the same terms and conditions as were applicable to
such Company Option, Company Warrant or Company Stock Purchase Right immediately
prior to the Effective Time, provided that (I) such Company Option, Company
Warrant or Company Stock Purchase Right, as the case may be, shall be
exercisable for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Capital Stock that were issuable upon
exercise of such Company Option, Company Warrant or Company Stock Purchase Right
immediately prior to the Effective Time multiplied by the Exchange Ratio
(rounded to the nearest whole number of shares of Parent Common Stock) and (II)
the per share exercise price for the shares of Parent Common Stock issuable upon
exercise of such assumed Company Option, Company Warrant or Company Stock
Purchase Right, as the case may be, shall be equal to the quotient determined by
dividing the exercise price per share of Company Capital Stock at which such
Company Option, Company Warrant or Company Stock Purchase Right was exercisable
immediately prior to the Effective Time by the Exchange Ratio (rounded to the
nearest whole cent).
(ii) It is the intention of the parties that the Company
Options assumed by Parent shall qualify following the Effective Time as
incentive stock options as defined in Section 422 of the Code to the same extent
the Company Options qualified as
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<PAGE> 14
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 1.6(c) shall be applied consistent with this intent.
Following the Effective Time, Parent shall use its commercially reasonable
efforts not to take any actions that would jeopardize the treatment as incentive
stock options of any such Company Options that qualified as incentive stock
options immediately prior to the Effective Time.
(iii) Promptly following the Effective Time, Parent will
issue to each holder of an unexpired and unexercised Company Option, Company
Warrant or Company Stock Purchase Right an instrument evidencing the foregoing
assumption of such Company Option, Company Warrant or Company Stock Purchase
Right by Parent. Parent will reserve sufficient shares of Parent Common Stock
for issuance pursuant to this Section 1.6(c).
(iv) At the Effective Time, Parent shall assume the
Company's obligations under any Restricted Stock Purchase Agreements entered
into pursuant to the 1998 Stock Plan (the "Stock Plan") and the other restricted
stock purchase agreements listed on Schedule 1.6(c)(iv), true and correct copies
of which have been made available by the Company to Parent. Any and all
restrictions on the Restricted Stock issued pursuant to the Stock Plan or such
other agreements which do not lapse in accordance with their terms as in effect
on November 20, 1998 shall continue in full force and effect until such
restrictions lapse pursuant to the terms of such agreements.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be
equitably adjusted to reflect fully the effect of any stock split, reverse
split, stock combination, stock dividend (including any dividend or distribution
of securities convertible into Parent Common Stock or Company Capital Stock),
reorganization, reclassification, recapitalization or other like change with
respect to Parent Common Stock or Company Capital Stock occurring after the date
hereof and prior to the Effective Time.
(e) Fractional Shares. No fraction of a share of Parent Common
Stock will be issued in the Merger, but in lieu thereof, each holder of shares
of Company Capital Stock who would otherwise be entitled to a fraction of a
share of Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock to be received by such holder) shall be entitled to receive from
Parent an amount of cash (rounded to the nearest whole cent) equal to the
product of (a) such fraction, multiplied by (b) the Closing Price.
(f) Capital Stock of Merger Sub. Each share of common stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation. Each share
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of Company Capital Stock held by a holder who has demanded
and perfected dissenters' rights for such shares in accordance with the
California Code and who, as of the
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<PAGE> 15
Effective Time, has not effectively withdrawn or lost such dissenters' rights
("Dissenting Shares") shall not be converted into or represent a right to
receive Parent Common Stock pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by the California Code.
(b) Notwithstanding the provisions of subsection (a) above, if
any holder of shares of Company Capital Stock who demands dissenters' rights for
such shares under the California Code shall effectively withdraw or lose
(through failure to perfect or otherwise) the right to dissenters' rights, then,
as of the later of (i) the Effective Time or (ii) the occurrence of such event,
such holder's shares shall automatically be converted into and represent only
the right to receive Parent Common Stock as provided in Section 1.6, without
interest thereon, upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of its
receipt of any written demands for dissenters' rights for any shares of Company
Capital Stock, withdrawals of such demands, and any other instruments relating
to the Merger served pursuant to the California Code and received by the Company
and (ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for dissenters' rights under the California Code. The Company
shall not, except with the prior written consent of Parent or as may be required
under applicable law, voluntarily make any payment with respect to any demands
for dissenters' rights for Company Capital Stock or offer to settle or settle
any such demands.
1.8 Exchange Procedures.
(a) Parent Common Stock. On the Closing Date, Parent shall
deposit with the Exchange Agent for exchange in accordance with this Article 1,
the aggregate number of shares of Parent Common Stock issuable in exchange for
outstanding shares of Company Capital Stock; provided, however, that, on behalf
of the holders of Company Capital Stock, Parent shall deposit into an escrow
account a number of shares of Parent Common Stock equal to the Escrow Amount.
The portion of the Escrow Amount contributed on behalf of each holder of Company
Capital Stock shall be in proportion to the aggregate number of shares of Parent
Common Stock which such holder would otherwise be entitled to receive by virtue
of ownership of outstanding shares of Company Capital Stock.
(b) Exchange Procedures. As soon as practicable after the
Effective Time (but in no event more than ten (10) Business Days thereafter),
the Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Capital Stock and which
shares were converted into shares of Parent Common Stock pursuant to Section
1.6, (i) a letter of transmittal in customary form (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions
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<PAGE> 16
thereto, the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of whole shares of Parent Common
Stock (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund on such holder's behalf pursuant to Article 7 hereof), to which such
holder is entitled pursuant to Section 1.6, and the Certificate so surrendered
shall be canceled. As soon as practicable after the Effective Time, and subject
to and in accordance with the provisions of Article 7 hereof, Parent shall cause
to be distributed to the Depositary Agent a certificate or certificates (in such
denominations as may be requested by the Depositary Agent) representing that
number of shares of Parent Common Stock equal to the Escrow Amount, which
certificate shall be registered in the name of the Depositary Agent. Such shares
shall be beneficially owned by the holders on whose behalf such shares were
deposited in the Escrow Fund and shall be available to compensate Parent upon
the terms and subject to the conditions provided in Article 7. Until
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Capital Stock will be deemed from and after the
Effective Time, for all corporate purposes, other than the right to payment of
dividends declared by Parent with a record date on or after the Effective Time
(which is covered in clause (c), below), to evidence the ownership of the number
of full shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted.
(c) Distributions With Respect to Unexchanged Shares of Company
Capital Stock. No dividends or other distributions with respect to Parent Common
Stock declared or made after the Effective Time and with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, promptly following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of Parent Common Stock.
(d) Transfers of Ownership. If any certificate for shares of
Parent Common Stock is to be issued pursuant to the Merger in a name other than
that in which the Certificate surrendered in exchange therefor is registered, it
will be a condition of the issuance thereof that the Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to Parent or any agent designated
by it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Parent Common Stock in any name other than that of the
registered holder of the Certificate surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
1.9 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Company of shares of
Company Capital Stock which were outstanding immediately
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prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Article 1.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue certificates representing
such shares of Parent Common Stock in exchange for such lost, stolen or
destroyed Certificates, upon the making of an affidavit of that fact by the
holder thereof; provided, however, that Parent or the Exchange Agent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to provide an indemnity or
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.11 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, the officers and directors of the Surviving
Corporation are fully authorized to take, and will take, all such lawful and
necessary action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of Parent and Merger
Sub, subject to such exceptions as are specifically disclosed in the Disclosure
Schedule delivered herewith and dated as of the date hereof, as follows:
2.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, and has full corporate power and authority to conduct its business
as now conducted and as currently proposed to be conducted and to own, use,
license and lease its Assets and Properties. The Company is duly qualified,
licensed or admitted to do business and is in good standing in each jurisdiction
in which the ownership, use, licensing or leasing of its Assets and Properties,
or the conduct or nature of its business, makes such qualification, licensing or
admission necessary, except for such failures to be so duly qualified, licensed
or admitted and in good standing that would not reasonably be expected to have a
material adverse effect on the Business or Condition of the Company. Section 2.1
of the Disclosure Schedule sets forth each jurisdiction where the Company is so
qualified, licensed or admitted to do business and separately lists each other
jurisdiction in which the Company owns, uses, licenses or leases any material
Assets and Properties, or conducts business or has employees.
2.2 Authority Relative to this Agreement. Subject only to the requisite
approval of the Merger and this Agreement by the shareholders of the Company,
the Company has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The
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execution and delivery by the Company of this Agreement and the consummation by
the Company of the transactions contemplated hereby and the performance by the
Company of its obligations hereunder, have been duly and validly authorized by
all necessary action by the Board of Directors of the Company, and no other
action on the part of the Board of Directors of the Company is required to
authorize the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by Parent and
Merger Sub, constitutes a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws relating to the
enforcement of creditors' rights generally and by general principles of equity.
2.3 Capital Stock. The authorized capital stock of the Company consists
only of 20,000,000 shares of Common Stock, no par value (the "Company Common
Stock"), of which 3,921,003 shares of Common Stock are issued and outstanding as
of the date hereof, and 7,250,000 shares of Preferred Stock, no par value per
share (the "Company Preferred Stock"). The designation and status of the Company
Preferred Stock is as follows: (i) 300,000 shares are designated as Series A
Preferred Stock, all of which are issued and outstanding as of the date hereof,
(ii) 4,250,000 shares are designated as Series B Preferred Stock, 3,800,000 of
which are issued and outstanding as of the date hereof, and (iii) 2,700,000
shares are designated as Series C Preferred Stock, 1,800,000 of which are issued
and outstanding as of the date hereof. Except as disclosed in Section 2.3 of the
Disclosure Schedule, all of the issued and outstanding shares of Company Common
Stock and Company Preferred Stock are validly issued, fully paid and
nonassessable, and have been issued in compliance with all applicable federal,
state and foreign securities Laws. Except as disclosed in Section 2.3 of the
Disclosure Schedule, no shares of Company Common Stock or Company Preferred
Stock are held in treasury or are reserved for issuance. Section 2.3 of the
Disclosure Schedule lists the name and state of residence of each holder of
Company Common Stock and Company Preferred Stock provided to the Company by such
holder. With respect to any Company Common Stock or Company Preferred Stock that
has been issued subject to a repurchase option on the part of the Company,
Section 2.3 of the Disclosure Schedule sets forth the holder thereof, the number
and type of securities covered thereby, and the vesting schedule thereof
(including a summary description of the circumstances under which such vesting
schedule can or will be accelerated). Except as disclosed in Section 2.3 of the
Disclosure Schedule, as of the date hereof there are no outstanding Company
Options, Company Warrants, or Company Stock Purchase Rights or agreements,
arrangements or understandings to which the Company is a party (written or oral)
to issue Options with respect to the Company and there are no preemptive rights
or agreements, arrangements or understandings to issue preemptive rights with
respect to the issuance or sale of Company Capital Stock created by statute, the
articles of incorporation or by-laws of the Company, or any agreement or other
arrangement to which the Company is a party or to which it is bound and there
are no agreements, arrangements or understandings to which the Company is a
party (written or oral) pursuant to which the Company has the right to elect to
satisfy any Liability by issuing Company Common Stock or Equity Equivalents.
With respect to each Company Option, Company Warrant and Company Stock Purchase
Right, Section 2.3 of the Disclosure Schedule sets
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forth the holder thereof, the number and type of securities issuable thereunder,
and, if applicable, the exercise price therefor, the exercise period and vesting
schedule thereof (including a summary description of the circumstances under
which such vesting schedule can or will be accelerated). Except as disclosed in
Section 2.3 of the Disclosure Schedule, all of the Company Options, Company
Warrants and Company Stock Purchase Rights were issued in compliance with all
applicable federal, state and foreign securities Laws. The Company is not a
party or subject to any agreement or understanding, and, to the Company's
knowledge, there is no agreement, arrangement or understanding between or among
any Persons which affects, restricts or relates to voting, giving of written
consents, dividend rights or transferability of shares with respect to the
Company Capital Stock, including without limitation any voting trust agreement
or proxy.
2.4 No Subsidiaries. The Company has no Subsidiaries and does not
otherwise hold any equity, membership, partnership, joint venture or other
ownership interest in any Person.
2.5 Directors and Officers. The name of each director and officer of the
Company on the date hereof, and his or her position with the Company, are listed
in Section 2.5 of the Disclosure Schedule.
2.6 No Conflicts. The execution and delivery by the Company of this
Agreement does not, and the performance by the Company of its obligations under
this Agreement and the consummation of the transactions contemplated hereby do
not and will not:
(a) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the articles of incorporation or by-laws
of the Company; or
(b) subject to obtaining the consents, approvals and actions,
making the filings and giving the notices disclosed in Section 2.6 of the
Disclosure Schedule, if any, conflict with or result in a violation or breach of
any Law or Order applicable to the Company or any of its Assets and Properties,
except any such consents, approvals, actions, filings or notices the failure to
receive, take, make or give would not, either individually or in the aggregate,
be reasonably likely to have a material adverse effect on the Business or
Condition of the Company (provided that the foregoing exception shall not apply
with respect to any consents, approvals, actions, filings or notices that are
required with respect to Company Intellectual Property that (i) is presently
embodied, or is proposed to be embodied, in the Company's products (including,
but not limited to, the Orion SA Product) or (ii) constitutes a development tool
(including, but not limited to, standard cells) or design environment).
2.7 Books and Records; Organizational Documents. The minute books and
stock record books and other similar records of the Company have been provided
or made available to Parent or its counsel prior to the execution of this
Agreement, are complete and correct in all material respects and have been
maintained in accordance with sound business practices. Such minute books
contain a true and complete record of all action taken at all meetings and by
all written consents in lieu of meetings of the directors, shareholders and
committees of the Board of Directors of the Company through the date hereof. The
Company has prior to the execution of this Agreement delivered to Parent true
and complete
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copies of its articles of incorporation and by-laws, both as amended through the
date hereof. The Company is not in violation of any provisions of its articles
or bylaws.
2.8 Company Financial Statements. (a) Section 2.8 of the Disclosure
Schedule sets forth the Company Financials. The Company Financials delivered to
Parent have been prepared on the accrual method applied consistently throughout
the periods indicated and consistent with each other (except as may be indicated
in the notes thereto, and subject to normal year-end adjustments, which
adjustments will not be material in amount or significance). The Company
Financials present fairly and accurately in all material respects the financial
condition and operating results of the Company as of the dates and during the
periods indicated therein. Except as set forth in Section 2.8 to the Disclosure
Schedule, since the Financial Statement Date there has been no change in any
accounting policies, principles, methods or practices, including any change with
respect to reserves (whether for bad debts, contingent liabilities or
otherwise), of the Company.
(b) The Company Audited Financials to be delivered to Parent pursuant to
Section 5.23 will present fairly and accurately in all material respects the
financial condition and operating results of the Company as of the dates and
during the periods indicated therein in accordance with GAAP. Except to reflect
expenditures in the ordinary course of business since the Financial Statement
Date, the Company Audited Financials (i) will be materially the same as the
Company Financials, other than due to the application of GAAP rather than the
accounting methodology reflected in the Company Financials and (ii) will not
reflect any material transactions or contingent liabilities, including reserves
for such contingencies, that were not reflected in the Company Financials or
otherwise disclosed in this Agreement.
2.9 Absence of Changes. Since the Financial Statement Date, except as
set forth in Section 2.9 of the Disclosure Schedule, there has not been a
material adverse effect on the Business or Condition of the Company or any
occurrence or event which, individually or in the aggregate would be reasonably
expected to have a material adverse effect on the Business or Condition of the
Company. In addition, without limiting the foregoing, except as expressly
contemplated hereby and except as disclosed in Section 2.9 of the Disclosure
Schedule, there has not occurred since the Financial Statement Date and through
the date of this Agreement:
(a) the entering into of any Contract, commitment or transaction
or incurrence of any Liabilities in excess of $50,000 in the aggregate, outside
of the ordinary course of business consistent with past practice;
(b) the entering into of any Contract in connection with any
transaction involving a Business Combination;
(c) the alteration, or entering into of any Contract or other
commitment to alter, its interest in any corporation, association, joint
venture, partnership or business entity in which the Company directly or
indirectly holds any interest on the date hereof;
(d) the entering into of any strategic alliance, joint
development or joint marketing Contract;
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(e) any material amendment or other modification (or agreement
to do so), except in the ordinary course of business consistent with past
practice, or material violation of the terms of, any of the Contracts set forth
or described in the Disclosure Schedule;
(f) the entering into of any transaction with any officer,
director, shareholder or Affiliate of the Company, other than pursuant to (i)
any Contract in effect on the Financial Statement Date and disclosed to Parent
pursuant to Section 2.20 of the Disclosure Schedule, (ii) any contract of
employment and listed pursuant to Section 2.18(a) of the Disclosure Schedule,
(iii) compensation consistent with existing policies or as otherwise permitted
by this Agreement; or (iv) reimbursement of business expenses and similar
matters in the ordinary course of business;
(g) the entering into or amendment of any Contract pursuant to
which any other Person is granted manufacturing, marketing, distribution,
licensing or similar rights of any type or scope with respect to any products of
the Company or Company Intellectual Property other than as contemplated by the
Company's Contracts or Licenses disclosed in the Disclosure Schedule;
(h) the commencement of any Action or Proceeding;
(i) except for grants of Company Options in the ordinary course
of business consistent with past practice, the declaration, setting aside or
payment of any dividends on or making of any other distributions (whether in
cash, stock or property) in respect of any Company Capital Stock or Equity
Equivalents, or any split, combination or reclassification of any Company
Capital Stock or Equity Equivalents or issuance or authorization of the issuance
of any other securities in respect of, in lieu of or in substitution for shares
of Company Capital Stock or Equity Equivalents, or the repurchase, redemption or
other acquisition, directly or indirectly, of any shares of Company Capital
Stock or Equity Equivalents;
(j) except for (i) the issuance of shares of Company Capital
Stock upon exercise or conversion of then-outstanding Company Options, Company
Warrants, Company Stock Purchase Right or Company Preferred Stock listed in
Section 2.3 of the Disclosure Schedule or (ii) the issuance of options available
for grant under the Company's existing stock option plan in the ordinary course
of business consistent with past practice, the issuance, grant, delivery, sale
or authorization of or proposal to issue, grant, deliver or sell, or purchase or
proposal to purchase, any shares of Company Capital Stock, Equity Equivalents or
modification or amendment of the rights of any holder of any outstanding shares
of Company Capital Stock or Equity Equivalents (including to reduce or alter the
consideration to be paid to the Company upon the exercise of any outstanding
Company Options, Company Warrants or other Equity Equivalents), nor have there
been any agreements, arrangements, plans or understandings with respect to any
such modification or amendment;
(k) any amendments to the Company's articles of incorporation or
by-laws, including any actions which affect the number of shares of Company
Capital Stock for
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which any shares of Company Capital Stock, Company Options, Company Warrants or
Company Stock Purchase Right are convertible or exchangeable;
(l) any transfer (by way of a License or otherwise) to any
Person of rights to any Company Intellectual Property;
(m) any disposition or sale of, waiver of rights to, license or
lease of, or incurrence of any Lien on, any Assets and Properties of the
Company, other than dispositions of inventory, or licenses of products to
Persons to whom the Company had granted licenses of its products at the
Financial Statement Date, in the ordinary course of business of the Company
consistent with past practice or as the result of the payment for goods and
services in the ordinary course of business or as otherwise permitted by this
Agreement;
(n) any purchase or licenses of any Assets and Properties of any
Person in excess of $50,000 individually or $200,000 in the aggregate, other
than acquisitions of inventory (including office supplies) or work stations in
the ordinary course of business of the Company consistent with past practice;
(o) the making of any capital expenditures or commitments by the
Company for additions to property, plant or equipment of the Company
constituting capital assets individually or in the aggregate in an amount
exceeding $200,000;
(p) the payment, discharge or satisfaction, in an amount in
excess of $50,000, in any one case, or $100,000 in the aggregate, of any claim,
Liability or obligation (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business of Liabilities reflected or reserved against in the Company
Financials or incurred since November 30, 1998 in the ordinary course of
business;
(q) the incurrence of any Indebtedness or guarantee of any such
Indebtedness in an aggregate amount exceeding $50,000 or issuance or sale of any
debt securities of the Company or guarantee any debt securities of others;
(r) the grant of any severance or termination pay to any
director, officer employee or consultant, except payments made pursuant to
written Contracts outstanding on the date hereof, the terms of which are
disclosed in the Disclosure Schedule;
(s) the adoption, entering into, amendment, modification or
termination (partial or complete) of any Plan;
(t) the payment of any discretionary bonus (including a hiring
or referral bonus) in excess of $25,000, or the payment of any stay bonus;
(u) any action, including the acceleration of vesting of any
Company Options, Company Warrants or Company Stock Purchase Right, or other
rights to acquire shares of capital stock of the Company, which would be
reasonably likely to interfere with Parent's ability to account for the Merger
as a Pooling of Interests or any other action that
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could jeopardize the tax-free reorganization hereunder, except as expressly
required by any Contract set forth on the Disclosure Schedule as in effect on
November 20, 1998;
(v) the making or changing of any material election in respect
of Taxes, adopt or change any material accounting method in respect of Taxes,
the entering into of any tax allocation agreement, tax sharing agreement, tax
indemnity agreement or closing agreement, settlement or compromise of any claim
or assessment in respect of Taxes, or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes with
any Taxing Authority or otherwise;
(w) the making of any material change in the accounting
policies, principles, methods, practices or procedures of the Company (including
without limitation for bad debts, contingent liabilities or otherwise,
respecting capitalization or expense of research and development expenditures,
depreciation or amortization rates or timing of recognition of income and
expense);
(x) the failure to use commercially reasonable efforts to give
all notices and present all claims under all insurance policies in a timely
fashion;
(y) any material amendment, failure to renew, or failure to use
commercially reasonable efforts to maintain, its existing Approvals or failure
to observe any Law or Order applicable to the conduct of the Company's business
or the Company's Assets and Properties, except as would not, either individually
or in the aggregate, be reasonably likely to have a material adverse effect on
the Business or Condition of the Company;
(z) any failure to undertake any commercially reasonable action,
including but not limited to paying or otherwise satisfying any obligations to
procure, maintain, renew, extend or enforce any Company Intellectual Property,
including, but not limited to, submission of required documents or fees during
the prosecution of patent, trademark or other applications for Registered
Intellectual Property rights;
(aa) any physical damage, destruction or other casualty loss
(whether or not covered by insurance) affecting any of the real or personal
property or equipment of the Company individually or in the aggregate in an
amount exceeding $200,000;
(bb) the repurchase, cancellation or modification of the terms
of any Company Capital Stock, Equity Equivalents, Company Options, Company
Warrants, Company Stock Purchase Rights or other financial instrument that
derives the majority of its value from its convertibility into Company Capital
Stock or Equity Equivalents, other than transactions entered into in the
ordinary course of business and pursuant to either (i) contractual provisions or
(ii) the Stock Plan, in either case as in effect at November 20, 1998 (if in
effect on that date) or, if later, the date such contractual provision (but not
an amendment) originated; or
(cc) any entering into of any Contract, or acquiescence by the
Company in respect of, an arrangement or understanding to do, engage in, cause
or having the effect of any of the foregoing, including with respect to any
Business Combination not otherwise restricted by the foregoing paragraphs.
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<PAGE> 24
2.10 No Undisclosed Liabilities. Except as reflected or reserved
against in the Company Financials (including the notes thereto) or as disclosed
in Section 2.10 of the Disclosure Schedule, there are no liabilities of,
relating to or affecting the Company or any of its Assets and Properties of the
type that would be required to be reflected in a balance sheet as of the
Financial Statement Date prepared in accordance with GAAP (including in the
notes thereto), other than liabilities (i) incurred in the ordinary course of
business consistent with past practice since the Financial Statement Date and in
accordance with the provisions of this Agreement which, individually and in the
aggregate, are not material to the Business or Condition of the Company, and are
not for tort or for breach of contract or (ii) disclosed in any of the
Disclosure Schedules.
2.11 Taxes. Except as disclosed in Section 2.11 of the Disclosure
Schedule:
(a) All Tax Returns required to have been filed by or with
respect to the Company or any affiliated, consolidated, combined, unitary or
similar group of which the Company is or was a member (a "Relevant Group") have
been duly and timely filed (including any extensions), and each such Tax Return
correctly and completely reflects Tax liability and all other information
required to be reported thereon. All such Tax Returns are true, complete and
correct in all material respects. All Taxes due and payable by the Company or
any member of a Relevant Group, whether or not shown on any Tax Return, or
claimed to be due by any Tax Authority, have been paid or accrued on the Company
Financials.
(b) The Company has not incurred any material liability for
Taxes other than as reflected on the Company Financials. The unpaid Taxes of the
Company (i) did not, as of the most recent fiscal month end, exceed by any
material amount the reserve for liability for Income Tax (other than the reserve
for deferred taxes established to reflect timing differences between book and
tax income) set forth on the face of the Company's most recent balance sheet and
(ii) will not exceed by any material amount that reserve as adjusted for
operations and transactions through the Closing Date.
(c) The Company is not a party to any agreement extending the
time within which to file any Tax Return. No claim has ever been made by a
Taxing Authority of any jurisdiction in which the Company does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(d) The Company has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor or independent contractor.
(e) The Company does not have knowledge of any actions by any
Taxing Authority in connection with assessing additional Taxes against or in
respect of it for any past period. There is no dispute or claim concerning any
Tax liability of the Company either (i) threatened, claimed or raised by any
Taxing Authority or (ii) of which the Company is aware. There are no Liens for
Taxes upon the Assets and Properties of the Company other than Liens for Taxes
not yet due. No Tax Returns of the Company have been audited or examined by
Taxing Authorities or currently are the subject of audit or examination. The
Company has made available to Parent complete and correct copies of all federal,
state, local
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<PAGE> 25
and foreign income Tax Returns filed by the Company since the fiscal year ended
December 31, 1997.
(f) There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any Tax Returns required to be
filed by, or which include or are treated as including, the Company or with
respect to any Tax assessment or deficiency affecting the Company or any
Relevant Group.
(g) The Company has not received any written ruling related to
Taxes or entered into any agreement with a Taxing Authority relating to Taxes.
(h) The Company has no liability for the Taxes of any Person
other than the Company (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign Law), (ii) as a transferee
or successor, (iii) by Contract or (iv) otherwise.
(i) The Company (i) has neither agreed to make nor is required
to make any adjustment under Section 481 of the Code by reason of a change in
accounting method and (ii) is not a "consenting corporation" within the meaning
of Section 341(f)(1) of the Code.
(j) The Company is not a party to or bound by any obligations
under any tax sharing, tax allocation, tax indemnity or similar agreement or
arrangement.
(k) The Company is not involved in, subject to, or a party to
any joint venture, partnership, Contract or other arrangement that is treated as
a partnership for federal, state, local or foreign Income Tax purposes.
(l) The Company was not included and is not includible in the
Tax Return of any Relevant Group with any corporation other than such a return
of which the Company is the common parent corporation.
(m) There is currently no limitation on the utilization of the
net operating losses, built-in losses, capital losses, Tax credits or other
similar items of the Company under (i) Section 382 of the Code, (ii) Section 383
of the Code, (iii) Section 384 of the Code, and (iv) Section 1502 of the Code
and Treasury regulations promulgated thereunder.
(n) All material elections with respect to income Taxes
affecting the Company are set forth on Section 2.11 of the Disclosure Schedule
(o) The Company is not nor has it ever been a United States real
property holding corporation within the meaning of Section 897(c)(1)(A)(ii) of
the Code.
2.12 Legal Proceedings.
(a) Except as set forth in Section 2.12 of the Disclosure
Schedule:
(i) there are no Actions or Proceedings pending or, to
the knowledge of the Company, threatened against, relating to or affecting the
Company or its
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<PAGE> 26
Assets and Properties (provided that the Company makes no representation or
warranty, other than to its knowledge, with respect to an investigation which
constitutes an Action or Proceeding);
(ii) there are no facts or circumstances known to the
Company that would reasonably be expected to give rise to any Action or
Proceeding against, relating to or affecting the Intellectual Property presently
embodied, or proposed to be embodied, in the Company's products (including, but
not limited to, the Orion SA Product), in any Company-created or modified
development tools or design environments (including, but not limited to,
standard cells) and Company Intellectual Property developed by the Company; and
(iii) the Company has not received notice, and does not
otherwise have knowledge of any Orders outstanding against the Company.
(b) There are no responses of counsel for the Company to
auditor's requests for information for the period from December 1, 1997 through
the date of this Agreement regarding Actions or Proceedings pending or
threatened against, relating to or affecting the Company. Section 2.12(b) of the
Disclosure Schedule sets forth all Actions or Proceedings relating to or
affecting the Company or any of its Assets and Properties since December 1,
1997.
2.13 Compliance with Laws and Orders. Except as disclosed in Section
2.13 of the Disclosure Schedule, the Company is in compliance with, has not
violated, and is not currently in default under, any Law or Order of any
Governmental or Regulatory Authority applicable to the Company or any of its
Assets and Properties, except for any such violations or defaults that would not
reasonably be expected to have a material adverse effect on the Business or
Condition of the Company, and the Company is not aware of any claim of
violation, or of any actual violation, of any such Law or Orders.
2.14 Plans; ERISA.
(a) Existence of Plans. For purposes of this Agreement, the term
"Plans" shall mean (i) all "employee benefit plans" (as such term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), of which any of the Company, any Subsidiary, or any member of the
same controlled group of businesses as the Company or any Subsidiary within the
meaning of Section 4001(a)(14) of ERISA (an "ERISA Affiliate") is or ever was a
sponsor or participating employer or as to which the Company or any Subsidiary
or any of their ERISA Affiliates makes contributions or is required to make
contributions, and (ii) any similar employment, severance or other arrangement
or policy of any of the Company any Subsidiary or any of their ERISA Affiliates
(whether written or oral) providing for health, life, vision or dental insurance
coverage (including self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits or
retirement benefits, fringe benefits, or for profit sharing, deferred
compensation, bonuses, stock options, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits.
Except as disclosed on Section 2.14 of the Disclosure Schedule, (i) neither the
Company, any Subsidiary nor any of their respective ERISA Affiliates
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<PAGE> 27
maintains or sponsors (or ever maintained or sponsored), or makes or is required
to make contributions to, any Plans, (ii) none of the Plans is or was a
"multi-employer plan", as defined in Section 3(37) of ERISA, none of the Plans
is or was a "defined benefit pension plan" within the meaning of Section 3(35)
of ERISA, (iii) none of the Plans provides or provided post-retirement medical
or health benefits, (iv) none of the Plans is or was a "welfare benefit fund,"
as defined in Section 419(e) of the Code, or an organization described in
Sections 501(c)(9) or 501(c)(20) of the Code, (v) neither the Company, any
Subsidiary nor any ERISA Affiliate is or was a party to any collective
bargaining agreement, and (vi) neither the Company, any Subsidiary nor any ERISA
Affiliate has announced or otherwise made any commitment to create or amend any
Plan. Notwithstanding any statement or indication in this Agreement to the
contrary, there are no Plans (a) as to which Parent will be required to make any
contributions or with respect to which Parent shall have any obligation or
liability whatsoever, whether on behalf of the current employees of the Company
or any Subsidiary or on behalf of any other person, after the Closing, or (b)
which Parent, the Surviving Corporation or any Subsidiary will not be able to
terminate immediately after the Closing in accordance with their terms and
ERISA. The Company has made available to Parent true and complete copies of: (i)
each of the Plans and any related funding agreements thereto (including
insurance contracts) including all amendments, all of which are legally valid
and binding and in full force and effect and there are no defaults thereunder,
(ii) the currently effective Summary Plan Description pertaining to each of the
Plans, as applicable, (iii) the three (3) most recent annual reports for each of
the Plans (including all related schedules), (iv) the most recently filed PBGC
Form 1 (if applicable), (v) the most recent Internal Revenue Service
determination or opinion letter, as applicable, for each Plan which is intended
to constitute a qualified plan under Section 401 of the Code and each amendment
to each of the foregoing documents, and (vi) for each unfunded Plan, financial
statements consisting of (A) the consolidated statement of assets and
liabilities of such Plan as of its most recent valuation date, and (B) the
statement of changes in fund balance and in financial position or the statement
of changes in net assets available for benefits under such Plan for the most
recently-ended plan year, which such financial statements shall fairly present
the financial condition and the results of operations of such Plan in accordance
with GAAP, consistently applied, as of such dates.
(b) Penalties. Neither the Company, any Subsidiary nor any of
their respective ERISA Affiliates is subject to any material liability, tax or
penalty whatsoever to any person or agency whomsoever as a result of engaging in
a prohibited transaction under ERISA or the Code, and neither the Company, any
Subsidiary nor any of their respective ERISA Affiliates has any knowledge of any
circumstances which reasonably might result in any material liability, tax or
penalty, including but not limited to, a penalty under Section 502 of ERISA, as
a result of a breach of any duty under ERISA or under other Laws. Each Plan
which is required to comply with the provisions of Sections 4980B and 4980C of
the Code, or with the requirements referred to in Section 4980D of the Code, has
complied in all material respects. No event has occurred which could subject any
Plan to tax under Section 511 of the Code.
(c) Qualification. Each of the Plans which is intended to be a
qualified plan under Section 401(a) of the Code has received a favorable
determination or opinion letter from the Internal Revenue Service, and has been
operated in accordance with its terms and with the provisions of the Code. All
of the Plans have been administered and
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<PAGE> 28
maintained in substantial compliance with ERISA, the Code and all other
applicable Laws. All contributions required to be made to each of the Plans
under the terms of that Plan, ERISA, the Code or any other applicable Laws have
been timely made. Each Plan intended to meet the requirements for tax-favored
treatment under Subchapter B of Chapter 1 of the Code meet such requirements.
Except as set forth in Section 2.14 of the Disclosure Schedule, the Company has
not made any payments, is not obligated to make any payments, nor is a party to
any Contract or Plan that under certain circumstances, considered either
individually or in the aggregate, could require it to make any payments, that
are not deductible as a result of the provisions set forth in Section 280G of
the Code or the treasury regulations thereunder or would result in an excise tax
to the recipient of any such payment under Section 4999 of the Code. The Company
Financials properly reflect all amounts required to be accrued as liabilities to
date under each of the Plans. Except as disclosed on Schedule 2.14, the
execution and performance of this Agreement will not (i) result in any
obligation or liability (with respect to accrued benefits or otherwise) of
Parent, the Surviving Corporation, or any Subsidiary to any Plan, or any present
or former employee of Parent, the Surviving Corporation, or any Subsidiary, (ii)
be a trigger event under any Plan that will result in any payment (whether of
severance pay or otherwise) becoming due to any present or former employee,
officer, director, shareholder, contractor, or consultant, or any of their
dependents, or (iii) accelerate the time of payment or vesting, or increase the
amount, of compensation due to any employee, officer, director, shareholder,
contractor, or consultant of the Company or any Subsidiary. With respect to any
insurance policy which provides, or has provided, funding for benefits under any
Plan, (I) there is and will be no liability of the Company, any Subsidiary or
Parent in the nature of a retroactive or retrospective rate adjustment, loss
sharing arrangement, or actual or contingent liability as of the Closing date,
nor would there be any such liability if such insurance policy were terminated
as of the Closing Date, and (II) no insurance company issuing any such policy is
in receivership, conservatorship, bankruptcy, liquidation, or similar
proceeding, and, to the knowledge of the Company, no such proceedings with
respect to any insurer are imminent.
(d) Litigation. Other than routine claims for benefits under the
Plans, there are no pending, or, to the best knowledge of the Company,
threatened, Actions or Proceedings involving the Plans, or the fiduciaries,
administrators, or trustees of any of the Plans or the Company, any Subsidiary
or any of their respective ERISA Affiliates as the employer or sponsor under any
Plan, with any of the IRS, the Department of Labor, the PBGC, any participant in
or beneficiary of any Plan or any other person whomsoever. The Company knows of
no reasonable basis for any such claim, lawsuit, dispute, action or controversy.
2.15 Real Property.
(a) Section 2.15(a) of the Disclosure Schedule contains a true
and correct list of (i) each parcel of real property leased, utilized and/or
operated by the Company (as lessor or lessee or otherwise) (the "Leased Real
Property") and (ii) all Liens relating to or affecting any parcel of real
property referred to in clause (i) to which the Company is a party. The Company
owns no real property other than Company owned leasehold improvements, if any,
on the Leased Real Property.
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<PAGE> 29
(b) Subject to the terms of its respective leases, the Company
has a valid and subsisting leasehold estate in and the right to quiet enjoyment
of the Leased Real Properties for the full term of the leases (including renewal
periods) relating thereto. Each lease referred to in clause (i) of paragraph (a)
above is a legal, valid and binding agreement, enforceable in accordance with
its terms, of the Company and of each other Person that is a party thereto, and
except as set forth in Section 2.15(b) of the Disclosure Schedule, there is no,
and the Company has not received notice of any, material default (or any
condition or event which, after notice or lapse of time or both, would
constitute a material default) by the Company thereunder (or by any sublessor to
the Company under its underlying master lease with its lessor) .
(c) To the knowledge of the Company, except as disclosed in
Section 2.15(c) of the Disclosure Schedule, all improvements on the Leased Real
Property (i) comply with and are operated in accordance in all material respects
with applicable laws (including, without limitation, Environmental Laws) and all
applicable Liens, Approvals, Contracts, covenants and restrictions and (ii) are
in all material respects in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted.
(d) True and correct copies of the documents under which the
Leased Real Property is leased, subleased (to or by the Company or otherwise),
utilized, and/or operated (the "Lease Documents") have been made available to
Parent. The Lease Documents are unmodified and in full force and effect, and
there are no other Contracts between the Company and any third parties claiming
an interest in the interest of the Company in the Leased Real Property or
otherwise relating to the use and occupancy of the Leased Real Property.
2.16 Tangible Personal Property. The Company is in possession of and has
good and marketable title to, or has valid leasehold interests in or valid
rights under Contract to use, all tangible personal property used in the conduct
of its business, including all tangible personal property reflected on the
Company Financials and tangible personal property acquired since the Financial
Statement Date, other than property disposed of since such date in the ordinary
course of business consistent with past practice. Except as disclosed in Section
2.16 of the Disclosure Schedule, all such tangible personal property is free and
clear of all Liens and is adequate and suitable in all material respects for the
conduct by the Company of its business as presently conducted (it being
understood that the Operating Plan contemplates the requirement for significant
additions in the Company's tangible personal property), and is in good working
order and condition in all material respects, ordinary wear and tear excepted,
and its use complies in all material respects with all applicable Laws.
2.17 Intellectual Property.
(a) Section 2.17(a) of the Disclosure Schedule lists all Company
Registered Intellectual Property and lists any proceedings or actions pending as
of the date hereof before any court, tribunal (including the PTO or equivalent
authority anywhere in the world) related to any of the Company Registered
Intellectual Property.
(b) Each item of Company Intellectual Property, including all
Company Registered Intellectual Property listed in Section 2.17(a) of the
Disclosure Schedule, but
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<PAGE> 30
excluding Intellectual Property licensed to the Company under any License, is
owned exclusively by the Company and is free and clear of any Liens. The Company
(i) to its knowledge, owns exclusively all trademarks, service marks and trade
names used in connection with the operation or conduct of the business of the
Company, including the sale of any products or technology or the provision of
any services by the Company and (ii) owns exclusively, and has good title to,
all copyrighted works that are (I) Company products or (II) works of authorship
that are material to the Company's business and that the Company purports to
own; provided, however, that, in each case, such works may incorporate
copyrighted works or works of authorship of third parties which are licensed to
the Company or are in the public domain.
(c) To the extent that any Company Intellectual Property has
been developed or created by any Person other than the Company, the Company has
a written agreement with such Person with respect thereto and the Company has
either (i) obtained ownership of, and is the exclusive owner of, all such
Intellectual Property by operation of law or by valid assignment of any such
rights or (ii) has obtained a License under or to such Intellectual Property.
(d) Except pursuant to agreements described in Section 2.17(d)
of the Disclosure Schedule, the Company has not transferred ownership of or
granted any License of or other right to use or authorized the retention of any
rights to use any Intellectual Property that is or was Company Intellectual
Property, to any other Person.
(e) Except as set forth in Section 2.17(e) of the Disclosure
Schedule, the Company owns all of the Intellectual Property (i) presently
embodied, or proposed to be embodied, in the Company's products (including, but
not limited to, the Orion SA Product) currently under development or
contemplated for development or (ii) utilized in any development tool or design
environment created or modified by the Company (including, but not limited to,
standard cells) necessary or used for the development of any such products.
Except as set forth in Section 2.17(e) of the Disclosure Schedule, the Company's
rights with respect to the Intellectual Property described in clause (a) permit
the Company's design, development, distribution, marketing, manufacture, use,
import, license, and sale of such products without payment of royalties or other
fees.
(f) The Contracts and Licenses listed in Section 2.17(f) of the
Disclosure Schedule include all Contracts and Licenses, to which the Company is
a party with respect to any Intellectual Property, exclusive of Contracts and
Licenses for "off the shelf" software products (excluding development tools and
design environments) utilized in the Company's business operations and
development activities, but not embodied in its products. No Person other than
the Company has ownership rights to improvements made by the Company in
Intellectual Property which has been licensed to the Company.
(g) Section 2.17(g) of the Disclosure Schedule lists all
Contracts, Licenses and agreements between the Company and any other Person,
exclusive of provisions contained in Contracts and Licenses for "off the shelf"
software products, development tools and design environments utilized in the
Company's business operations and development activities, but not embodied in
its products, wherein or whereby the Company has agreed to, or assumed, any
obligation or duty to warrant, indemnify,
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<PAGE> 31
reimburse, hold harmless, guaranty or otherwise assume or incur any obligation
or Liability or provide a right of rescission with respect to the infringement
or misappropriation by the Company or such other Person of the Intellectual
Property of any Person other than the Company.
(h) To the Company's knowledge, the operation of the business of
the Company as currently conducted or as presently proposed to be conducted,
including the Company's design, development, use, import, manufacture and sale
of the products, technology or services (including products, technology or
services currently under development) of the Company does not infringe or
misappropriate the Intellectual Property of any Person, violate the rights of
any Person (including rights to privacy or publicity), or constitute unfair
competition or trade practices under any Laws. Except as set forth in Section
2.17(h) of the Disclosure Schedule, the Company has not received notice from any
Person claiming that such operation or any act, product, technology or service
(including products, technology or services currently under development) of the
Company infringes or misappropriates the Intellectual Property of any Person or
constitutes unfair competition or trade practices under any Law, including
notice of third party patent or other Intellectual Property rights from a
potential licensor of such rights.
(i) Each item of Company Registered Intellectual Property is
valid and subsisting, and all necessary registration, maintenance, renewal fees,
annuity fees and taxes in connection with such Registered Intellectual Property
have been paid and all necessary documents and certificates in connection with
such Company Registered Intellectual Property have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property. Section 2.17(i) of the Disclosure Schedule
lists all actions that must be taken by the Company within 180 days from the
date hereof, including the payment of any registration, maintenance, renewal
fees, annuity fees and taxes or the filing of any documents, applications or
certificates for the purposes of maintaining, perfecting or preserving or
renewing any Company Registered Intellectual Property. Except as set forth on
Section 2.17(i) of the Disclosure Schedule, the Company has registered the
copyright with the U.S. Copyright Office for the latest version of each product
or technology of the Company that constitutes or includes a copyrightable work.
In each case in which the Company has acquired any Intellectual Property rights
from any Person that is presently embodied, or proposed to be embodied, in the
Company's products (including, but not limited to, the Orion SA Product) or in
Company-created or modified development tools (including standard cells) or
design environments, the Company has obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
(including the right to seek past and future damages with respect to such
Intellectual Property) to the Company and, to the maximum extent provided for
by, and in accordance with, applicable Laws, the Company has recorded each such
assignment with the relevant Governmental or Regulatory Authority, including the
PTO, the U.S. Copyright Office, or their respective equivalents in any relevant
foreign jurisdiction, as the case may be.
(j) There are no Contracts or Licenses between the Company and
any other Person with respect to Company Intellectual Property under which there
is any dispute known to the Company regarding the scope of such Contract or
License, or performance
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under such Contract or License, including with respect to any payments to be
made or received by the Company thereunder.
(k) To the knowledge of the Company, no Person is infringing or
misappropriating any Company Intellectual Property.
(l) The Company has taken all reasonable steps to protect the
Company's rights in confidential information and trade secrets of the Company or
provided by any other Person to the Company subject to a duty of
confidentiality. Without limiting the foregoing, the Company has, and enforces,
a policy requiring each employee to execute proprietary information,
confidentiality and invention and copyright assignment agreements substantially
in the form set forth in Section 2.17(l) of the Disclosure Schedule, and
requiring each independent contractor or consultant which has or may have access
to Company Intellectual Property to execute proprietary information,
confidentiality and invention and copyright assignment agreements which contain
substantially equivalent provisions, and all current and former employees,
consultants and independent contractors of the Company have executed such an
agreement.
(m) No Company Intellectual Property or product, technology or
service of the Company is subject to any Order or Action or Proceeding that
restricts, or that is reasonably expected to restrict in any manner, the use,
transfer or licensing of any Company Intellectual Property by the Company or
that may affect the validity, use or enforceability of such Company Intellectual
Property.
(n) To the knowledge of the Company, no (i) product, technology,
service or publication of the Company, (ii) material published or distributed by
the Company or (iii) conduct or statement of Company constitutes obscene
material, a defamatory statement or material, false advertising or otherwise
violates any Law.
(o) The Company has taken all actions necessary and appropriate
to assure that all of its products currently under development will, without
interruption or manual intervention, continue to consistently, predictably and
accurately record, store, process, calculate and present calendar dates falling
on and after (and if applicable, spans of time including) January 1, 2000, and
will consistently, predictably and accurately calculate any information
dependent on or relating to such dates in the same manner, and with the same
functionality, data integrity and performance, as such products record, store,
process, calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates.
(p) Neither this Agreement nor any transactions contemplated by
this Agreement will result in Parent's granting any rights or licenses with
respect to the Intellectual Property of Parent to any Person pursuant to any
Contract to which the Company is a party or by which any of its Assets and
Properties are bound.
2.18 Contracts.
(a) Section 2.18(a)(1) of the Disclosure Schedule contains a
true and complete list of each of the Contracts or other arrangements (true and
complete copies or, if none, reasonably complete and accurate written
descriptions of which, together with all
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amendments and supplements thereto and all waivers of any terms thereof, have
been made available to Parent prior to the execution of this Agreement), to
which the Company is a party or by which any of its Assets and Properties is
bound that provide for aggregate payments or services by any party in excess of
$50,000 per Contract or series of related Contracts between the same parties
(other than employee offer letters, each of which is in substantially the form
previously provided to Parent). Section 2.18(a)(2) of the Disclosure Schedule
contains a true and complete list of each Contract of the Company which is not
terminable by the Company upon 30 days (or less) notice by the Company without
penalty or obligation to make payments based on such termination in excess of
$50,000 per Contract or series of related Contracts.
(b) Each Contract required to be disclosed in Section 2.18(a) of
the Disclosure Schedule is in full force and effect and constitutes a legal,
valid and binding agreement, enforceable in accordance with its terms, and to
the knowledge of the Company, each other party thereto; and except as disclosed
in Section 2.18(b) of the Disclosure Schedule, to the knowledge of the Company,
no other party to such Contract is, nor has received notice that it is, in
violation or breach of or default under any such Contract (or with notice or
lapse of time or both, would be in violation or breach of or default under any
such Contract).
(c) Except as disclosed in Section 2.18(c) of the Disclosure
Schedule, the Company is not a party to or bound by any Contract that has had or
would reasonably be expected to have, individually or in the aggregate with any
other similar Contracts, a material adverse effect on the Business or Condition
of the Company or that has or would reasonably be expected to result,
individually or in the aggregate with any such other Contracts, in Losses to the
Company in excess of $50,000.
(d) Except as disclosed in Section 2.18(d) of the Disclosure
Schedule, the Company is not a party to or bound by any Contract that contains
any covenant or other provision which limits the Company's ability to compete
with any Person in any line of business or in any area or territory, except if
such covenant or provision would not be reasonably expected to have a material
adverse effect on the Business or Condition of the Company.
2.19 Insurance. Section 2.19 of the Disclosure Schedule contains a true
and complete list (including the names and addresses of the insurers, the
expiration dates thereof, the annual premiums and payment terms thereof, the
period of time covered thereby and a brief description of the interests insured
thereby) of all liability, property, workers' compensation, directors' and
officers' liability and other insurance policies currently in effect that insure
the business, operations or employees of the Company or affect or relate to the
ownership, use or operation of any of the Assets and Properties of the Company
and that (a) have been issued to the Company or (b) to the knowledge of the
Company, have been issued to any Person (other than the Company) for the benefit
of the Company. The insurance coverage provided by the policies described in
clause (a) above will not terminate or lapse by reason of any of the
transactions contemplated by this Agreement. The insurance policies listed in
Section 2.19 of the Disclosure Schedule are in amounts and have coverages as
required by any Contract to which the Company is a party or by which any of its
Assets and Properties is bound. Section 2.19 of the Disclosure Schedule contains
a list of
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all outstanding claims made under any insurance policies covering the Company.
The Company has not received notice that any insurer under any policy referred
to in this Section is denying liability with respect to a claim thereunder or
defending under a reservation of rights clause.
2.20 Affiliate Transactions. Except as disclosed in Section 2.20 of the
Disclosure Schedule, there are no Contracts, Liabilities, transactions or
relationships that would be required to be disclosed by the Company by Item 404
of Regulation S-K (without regard to any ordinary course of business exception)
if the Company was subject to such regulation. Except as disclosed in Section
2.20 of the Disclosure Schedule, each of the Contracts, Liabilities,
transactions or relationships listed in Section 2.20 of the Disclosure Schedule
were entered into or incurred, as the case may be, on terms no less favorable to
the Company (in the reasonable judgment of the Company) than if such Contract,
Liability, transaction or relationship was entered into or incurred on an arm's-
length basis on competitive terms.
2.21 Employees; Labor Relations.
(a) Except as set forth in Section 2.21(a) of the Disclosure
Schedule, the Company is not a party to any collective bargaining agreement and
there is no unfair labor practice or labor arbitration proceedings pending with
respect to the Company, or, to the knowledge of the Company, threatened. To the
knowledge of the Company, there are no organizational efforts presently underway
or threatened involving any employees of the Company or any of the employees
performing work for the Company but provided by an outside employment agency, if
any. There has been no work stoppage, strike or other concerted action by
employees of the Company.
(b) All employees of the Company are employed at will, except as
set forth in Section 2.21(b) of the Disclosure Schedule. Section 2.21(b) of the
Disclosure Schedule sets forth, individually and by category, the name (or
initials or number) of each officer, employee and consultant, together with such
person's position or function, annual base salary or wage and any incentive,
severance or bonus arrangements with respect to such person (including under any
Plan, employment Contract or other employee compensation arrangement). Except as
described in Section 2.21(b) of the Disclosure Schedule, to the knowledge of the
Company, there are no family relationships between any of the Company's
officers, employees and consultants. Except as described in Section 2.21(b) of
the Disclosure Schedule, the completion of the transactions contemplated by this
Agreement will not result in any payment or increased payment becoming due from
the Company to any officer, director, or employee of, or consultant to, the
Company, and to the knowledge of the Company no employee of the Company has made
any threat, or otherwise revealed an intent, to terminate such employee's
relationship with the Company, for any reason, including because of the
consummation of the transactions contemplated by this Agreement. The Company is
not a party to any agreement for the provision of labor from any outside agency
except as set forth in Section 2.21(b) of the Disclosure Schedule. To the
knowledge of the Company, since December 1, 1997 there have been no claims by
employees of such outside agencies, if any, or any independent contractors with
regard to employees assigned to work for the Company or by independent
contractors, and no claims by any governmental agency with regard to such
employees or independent contractors except as set forth in Section 2.21(b) of
the Disclosure Schedule.
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<PAGE> 35
(c) Since December 1, 1997, there have been no federal or state
claims based on sex, sexual or other harassment, age, disability, race or other
discrimination or common law claims, including claims of wrongful termination,
by any employees of the Company or by any of the employees performing work for
the Company but provided by an outside employment agency, and there are no facts
or circumstances known to the Company that would reasonably be expected to give
rise to such complaint or claim. The Company has complied in all material
respects with all laws related to the employment of employees and, except as set
forth in Section 2.21(c) of the Disclosure Schedule, since December 1, 1997 the
Company has not received any notice of any claim that it has not complied in any
material respect with any Laws relating to the employment of employees,
including without limitation, any provisions thereof relating to wages, hours,
collective bargaining, the payment of Social Security and similar taxes, equal
employment opportunity, employment discrimination, the WARN Act, employee
safety, or that it is liable for any arrearages of wages or any taxes or
penalties for failure to comply with any of the foregoing.
(d) The Company has no written policies and/or employee
handbooks or manuals except as set forth in Section 2.21(d) of the Disclosure
Schedule.
(e) To the knowledge of the Company, no officer, employee or
consultant of the Company is obligated under any Contract or other agreement or
subject to any Order or Law that would interfere with the Company's business as
currently conducted. Except as provided for in this Agreement or as set forth on
Section 2.21 of the Disclosure Schedule, neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business as presently
conducted nor any activity of such officers, employees or consultants in
connection with the carrying on of the Company's business as presently
conducted, will conflict with or result in a breach of the terms, conditions or
provisions of, constitute a default under, or trigger a condition precedent to
any rights under any Contract or other agreement under which any of such
officer's, employees or consultants is now bound.
2.22 Environmental Matters.
(a) To the knowledge of the Company, the Company possesses any
and all Environmental Permits necessary to or required for the operation of its
business.
(b) To the knowledge of the Company, the Company is in
compliance with (i) all terms, conditions and provisions of its Environmental
Permits; and (ii) all Environmental Laws.
(c) The Company has not received any written notice of alleged,
actual or potential responsibility for, or any inquiry regarding, (i) any
Release or threatened or suspected Release of any Hazardous Material, or (ii)
any violation of Environmental Law.
(d) To the knowledge of the Company, the Company does not have
any obligation or liability with respect to any Hazardous Material, including
any Release or threatened or suspected Release of any Hazardous Material, and,
to the Company's knowledge, there are no past or present events, facts or
circumstances which would be reasonably likely to form the basis of any such
obligation or liability.
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<PAGE> 36
(e) To the knowledge of the Company, no Releases of Hazardous
Material(s) have occurred at, from, in, to, on, or under any Site and no
Hazardous Material is present in, on, about or migrating to or from any Site.
(f) To the knowledge of the Company, no Site is a current or
proposed Environmental Clean-up Site.
(g) To the knowledge of the Company, there is no (i) underground
storage tank, active or abandoned, (ii) polychlorinated biphenyl containing
equipment, (iii) asbestos-containing material, (iv) radon, (v) lead-based paint
or (vi) urea formaldehyde at any Site.
(h) To the knowledge of the Company, there have been no
environmental investigations, studies, audits, tests, reviews or other analyses
conducted with respect to any Site which have not been delivered to Parent prior
to execution of this Agreement.
(i) Except as set forth on Section 2.15 of the Disclosure
Schedule, the Company is not a party, whether as a direct signatory or as
successor, assign, third party beneficiary or otherwise, to, and is not
otherwise bound by, any lease or other contract under which the Company is
obligated or may be obligated by any representation, warranty, covenant,
restriction, indemnification or other undertaking respecting Hazardous Materials
or under which any other person is or has been released respecting Hazardous
Materials.
(j) To the knowledge of the Company, the Company has provided
all notifications and warnings, made all reports, and kept and maintained all
records required pursuant to Environmental Laws.
2.23 Accounts Receivable. Except as set forth in Section 2.23 of the
Disclosure Schedule, there are no accounts or notes receivable reflected on the
Company Financials or which have arisen in connection with the conduct of the
Company's business subsequent to the Financial Statement Date. Since its
inception through the date of this Agreement, the Company has not had any sales
transactions, whether in the ordinary course of business or otherwise, and the
Company has not otherwise recorded, or been obligated under GAAP to record, any
revenues.
2.24 Other Negotiations; Brokers; Third Party Expenses. Neither the
Company nor, to the knowledge of the Company, any of its Affiliates (nor any
investment banker, financial advisor, attorney, accountant or other Person
retained by or acting for or on behalf of the Company or any such Affiliate) (a)
has entered into any Contract that conflicts with any of the transactions
contemplated by this Agreement or (b) has entered into any Contract or had any
discussions with any Person regarding any transaction involving the Company
which could result in Parent, the Company or any general partner, limited
partner, manager, officer, director, employee, agent or Affiliate of any of them
being subject to any claim for liability to said Person as a result of entering
into this Agreement or consummating the transactions contemplated hereby.
2.25 Warranty Obligations. Since its inception, the Company has no
inventory of products and has not sold any products or services and accordingly
does not have and has not had any warranties, guarantees or warranty policies in
respect of any products and
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<PAGE> 37
services ("Warranty Obligations") and salespersons, employees and agents of the
Company are not authorized to undertake obligations to any customer or other
Person with respect to Warranty Obligations.
2.26 Foreign Corrupt Practices Act. Neither the Company, nor to the
knowledge of the Company, any agent, employee or other Person associated with or
acting on behalf of the Company has, directly or indirectly, used any corporate
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds, violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff,
influence payment, kickback or other similar unlawful payment.
2.27 Pooling of Interests. Neither the Company nor any of its directors,
officers or shareholders has intentionally taken any action which would
reasonably be expected to preclude Parent's ability to account for the Merger as
a Pooling of Interests.
2.28 Financial Projections; Operating Plan. (a) The Company has made
available to Parent certain financial projections with respect to the Company's
business which projections were prepared for internal use only. The Company
makes no representation or warranty regarding the accuracy of such projections
or as to whether such projections will be achieved, except that the Company
represents and warrants that such projections were prepared in good faith and
are based on assumptions believed by it to be reasonable as of the date of this
Agreement.
(b) The Company has made available to Parent the Operating Plan.
The Company makes no representation or warranty regarding its ability to
successfully execute the Operating Plan, except that the Company represents and
warrants that the Operating Plan was prepared in good faith and is based on
assumptions believed by it to be reasonable as of the date of this Agreement,
and that any amendment thereto in compliance with this Agreement will be
prepared in good faith and be based upon assumptions believed by it to be
reasonable as of the date of any such amendment.
2.29 Approvals.
(a) Section 2.29(a) of the Disclosure Schedule contains a list
of all material Approvals of Governmental or Regulatory Authorities relating to
the business conducted by the Company which are required to be given to or
obtained by the Company from any and all Governmental or Regulatory Authorities
in connection with the consummation of the transactions contemplated by this
Agreement.
(b) Except as set forth in Section 2.29(b)(1) of the Disclosure
Schedule, the Company has obtained all material Approvals from Governmental or
Regulatory Authorities necessary to conduct the business conducted by the
Company in the manner as it is currently being conducted and since December 1,
1997, there has been no written notice received by the Company of any material
violation or material non-compliance with any such Approvals. All material
Approvals from Governmental or Regulatory Authorities
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<PAGE> 38
necessary to conduct the business conducted by the Company as it is currently
being conducted are set forth in Section 2.29(b)(2) of the Disclosure Schedule.
2.30 Takeover Statutes. No California Takeover Statute applicable to the
Company is applicable to the Merger or the transactions contemplated hereby.
2.31 Disclosure. To the knowledge of the Company, no representation or
warranty contained in this Agreement, and no statement contained in the
Disclosure Schedule or in any certificate, list or other writing furnished to
Parent pursuant to any provision of this Agreement (including the Company
Financials and the notes thereto) contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
herein or therein, in the light of the circumstances under which they were made,
not misleading.
IN THE EVENT THE MERGER IS CONSUMMATED, THE SOLE AND EXCLUSIVE REMEDY
FOR ANY CLAIMS ARISING OUT OF OR RELATING TO A BREACH OF ONE OR MORE OF THE
REPRESENTATIONS OR WARRANTIES SET FORTH IN THIS ARTICLE 2 SHALL BE DAMAGES,
SUBJECT TO THE LIMITATIONS AND PROCEDURES SET FORTH IN ARTICLE 7 BELOW.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrants to the Company as follows:
3.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
California and Merger Sub is a corporation duly organized, validly existing and
in good standing under the Laws of the State of California, each with full
corporate power and authority to conduct its business as now conducted and as
currently proposed to be conducted and to own, use and lease its Assets and
Properties. Each of Parent and Merger Sub are duly qualified, licensed or
admitted to do business and are in good standing in each jurisdiction in which
the ownership, use, licensing or leasing of its Assets and Properties, or the
conduct or nature of its business, makes such qualification, licensing or
admission necessary, except for such failures to be so duly qualified, licensed
or admitted and in good standing that would not reasonably be expected to have a
material adverse effect on the Business or Condition of Parent.
3.2 Authority Relative to this Agreement. Each of Parent and Merger Sub
has full corporate power and authority to execute and deliver this Agreement, to
perform their obligations hereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by Parent and Merger
Sub of this Agreement and the consummation by Parent and Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary action by the Board of Directors of each of Parent and Merger Sub, and
no other action on the part of the Board of Directors of either Parent or Merger
Sub is required to authorize the execution, delivery and performance of this
Agreement and the consummation by Parent and Merger Sub of the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by
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Parent and Merger Sub and, assuming the due authorization, execution and
delivery hereof by the Company, constitutes a legal, valid and binding
obligation of Parent and Merger Sub enforceable against Parent and Merger Sub in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar Laws relating to the enforcement of creditors' rights generally
and by general principles of equity.
3.3 Issuance of Parent Common Stock. The shares of Parent Common Stock
to be issued pursuant to the Merger, when issued, will be duly authorized,
validly issued, fully paid and non-assessable. The shares of Parent's Class A
Common Stock into which the Parent Common Stock issuable (or reserved for
issuance) in connection with the Merger are convertible, have been reserved for
issuance and, when issued upon such conversion, will be duly authorized, validly
issued, fully paid and non-assessable.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all SEC Documents
filed by it with the SEC since September 30, 1998, all in the form so filed. As
of their respective filing dates, such SEC Documents filed by Parent and all SEC
Documents filed after the date hereof but before the Closing complied or will
comply in all material respects with the requirements of the Securities Act and
the Exchange Act and the rules and regulations of the SEC thereunder, as the
case may be, and to the knowledge of Parent, none of the SEC Documents contained
or will contain any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances in which they were made, not
misleading, except to the extent such SEC Documents have been corrected, updated
or superseded by a document subsequently filed with the SEC. The financial
statements of Parent, including the notes thereto, included in the SEC Documents
(the "Parent Financial Statements") comply as to form in all material respects
with the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP consistently applied (except as may be
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q under the Exchange Act) and present fairly the
consolidated financial position of Parent at the dates thereof and the
consolidated results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited financial statements, to normal year-end
adjustments). There has been no change in Parent's accounting policies except as
described in the notes to the Parent Financial Statements. Except as reflected
or reserved against in the Parent Financial Statements, Parent has no material
Liabilities or other obligations, except for Liabilities and obligations (i)
incurred in the ordinary course of business or (ii) that would not be required
to be reflected or reserved against in the balance sheet of Parent prepared in
accordance with GAAP.
3.5 No Conflicts. The execution and delivery by Parent and Merger Sub of
this Agreement does not, and the performance by the Parent of its obligations
under this Agreement and the consummation of the transactions contemplated
hereby do not and will not:
(a) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the articles of incorporation or by-laws
of Parent or Merger Sub; or
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<PAGE> 40
(b) conflict with or result in a violation or breach of any Law
or Order applicable to Parent or Merger Sub or their respective Assets or
Properties, except as would not be reasonably expected to have a material
adverse effect on the Business or Condition of the Company.
3.6 Absence of Changes. Since the SEC Report Date, there has not been a
material adverse effect, or any event or development which, individually or
together with other such events, would reasonably be expect to result in a
material adverse effect, on the Business or Condition of Parent.
3.7 Pooling of Interests. Neither the Parent nor any of its directors,
officers or shareholders has intentionally taken any action which would
reasonably be expected to preclude Parent's ability to account for the Merger as
a Pooling of Interests.
3.8 Ownership of Merger Sub; No Prior Activities. As of the date hereof
and the Effective Time, except for obligations or Liabilities incurred in
connection with its incorporation or organization and the transactions
contemplated by this Agreement and except for this Agreement and any other
agreements or arrangements contemplated by this Agreement, Merger Sub has not
and will not have incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or engaged in any business activities
of any type or kind whatsoever or entered into any agreements or arrangements
with any Person.
3.9 Investment Advisors. No broker, investment banker, financial advisor
or other Person is entitled to any broker's, finder's, financial advisor's or
similar fee or commission in connection with this Agreement and the transactions
contemplated hereby based on arrangements made by or on behalf of Parent.
3.10 Approvals. Schedule 3.10 contains a list of all material Approvals
of Governmental or Regulatory Authorities relating to the business conducted by
Parent which are required to be given to or obtained by Parent from any and all
Governmental or Regulatory Authorities in connection with the consummation of
the transactions contemplated by this Agreement.
ARTICLE 4
STRATEGIC ALLIANCE; CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Loan to the Company. Concurrently with the execution of this
Agreement, Parent will loan $6.0 million to the Company (the "Loan"). (The
transactions described in this Section 4.1 and in Sections 4.2, 4.3, 4.4 and 4.5
are referred to as the "Strategic Alliance"). The Loan will be evidenced by a
Note in the form of Exhibit F (the "Note"). The Company represents and warrants
to Parent in connection with the Loan and the execution and delivery by the
Company of the Note, as follows:
(a) The Company has full corporate power and authority to
execute and deliver the Note and to perform its obligations thereunder. The
execution and delivery by the Company of the Note and the performance by the
Company of its obligations thereunder, have been duly and validly authorized by
all necessary action by the Board of
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Directors of the Company, and no other action on the part of the Board of
Directors of the Company is required to authorize the execution, delivery and
performance of the Note.
(b) The Note, upon delivery by the Company to Parent, will have
been duly and validly executed and delivered by the Company and, assuming the
receipt of the Loan by the Company, will constitute the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other similar
Laws relating to the enforcement of creditors' rights generally and by general
principles of equity. The execution and delivery by the Company of the Note and
the performance by the Company of its obligations under the Note will not:
(i) conflict with or result in a violation or breach of
any of the terms, conditions or provisions of the articles of incorporation or
by-laws of the Company;
(ii) conflict with or result in a violation or breach of
any Law or Order applicable to the Company or any of its Assets and Properties;
or
(iii) (I) conflict with or result in a violation or
breach of, (II) constitute a default (or an event that, with or without notice
or lapse of time or both, would constitute a default) under, (III) require the
Company to obtain any consent, approval or action of, make any filing with or
give any notice to any Person as a result or under the terms of, (IV) result in
or give to any Person any right of termination, cancellation, acceleration or
modification in or with respect to, (V) result in or give to any Person any
additional rights or entitlement to increased, additional, accelerated or
guaranteed payments or performance under, (VI) result in the creation or
imposition of (or the obligation to create or impose) any Lien upon the Company
or any of its Assets and Properties or (VII) result in the loss of a material
benefit under, any of the terms, conditions or provisions of any Contract or
License to which the Company is a party or by which any of its Assets and
Properties is bound.
4.2 Operating Plan. The Company has previously delivered to Parent its
Orion SA Product development and operating plan (as the same may be modified as
hereinafter provided, the "Operating Plan"). The Company will in all material
respects use the proceeds of the Loan in accordance with the Operating Plan,
which may hereafter be modified from time to time by the Company's Board of
Directors (at a duly noticed meeting (which may be telephonic) and not by
unanimous written consent) to the extent that the Board of Directors believes in
good faith that such change would enhance the value of the Company to Parent as
an acquired entity. No such change or modification to the Operating Plan shall
become effective prior to five (5) Business Days after written notice of such
change or modification is provided to Parent. The Company agrees to conduct its
business and product development in material compliance with the Operating Plan,
and to submit all material changes or modifications to the Operating Plan for
the prior review and approval of the Company's Board of Directors..
4.3 Engineering Assistance. So long as the Company is not in material
breach of its obligations hereunder, including compliance with the Operating
Plan, from the date
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hereof to the Effective Time or, if earlier, the termination of this Agreement
in accordance with Article 8, upon request of the Company, Parent will use
commercially reasonable efforts to make its existing engineers available
(subject to the demands of Parent's development and other engineering projects
as they may exist from time to time) to assist and supplement the Company's
engineering resources in order to facilitate the completion of the Company's
Orion SA Product technical and schedule milestones as set forth in the Operating
Plan. The Company and Parent shall agree in writing, in advance of Parent
providing such services to the Company, on the charges and reimbursable expenses
to be paid by the Company to Parent in respect of such engineering services.
4.4 Joint Marketing. So long as the Company is not in material breach of
its obligations hereunder, including compliance with the Operating Plan, from
the date hereof until the Effective Time or, if earlier, the termination of this
Agreement in accordance with Article 8, Parent and the Company will engage in a
cooperative sales and marketing effort to promote the Company's Orion SA Product
and the Parent's ethernet networking products to potential customers. Such
marketing effort will under all circumstances be in full and complete compliance
with applicable antitrust laws. To this end, Parent and the Company agree that
such marketing effort will not involve or directly affect the price at which
each party sells its products or the quantity level at which each party produces
such products. To encourage a successful relationship, both parties agree to
promote with their customers the other party's product(s) as the preferred
solution. Parent and the Company agree, however, that the other party will not
be restricted in any way from supporting their customers who have chosen to use
a third party's products. The parties will cooperate in the joint sales and
marketing effort by, among other things, developing a joint marketing plan and
committing resources to such efforts, provided that, neither shall commit the
other (financially or otherwise) without its prior written consent. The parties
will also engage in an exchange of technical information to ensure compatibility
and ease of implementation.
4.5 Board Observer Rights. From the date hereof to the first to occur of
(a) the Effective Time or (b) the termination of this Agreement in accordance
with Article 8, Parent will be invited to have up to two representatives of
Parent attend all meetings of the Company's the Board of Directors and any board
committees as an observer and to receive copies of all materials and
communications provided to the Company's Board of Directors and board committees
when so distributed, all subject to an appropriate confidentiality agreement.
Parent's representatives will not be excluded from any portion of such meetings
or discussions except only for those portions (i) in which the Company's
position on issues with Parent is considered, (ii) in which the Company's
attorney communicates with the Company's Board of Directors on matters where
Parent's attendance might jeopardize the maintenance of the corporate
attorney-client privilege for the Company, (iii) in which matters involving the
relationship of the Company with competitors of Parent or other similar matters
which would involve a substantial conflict of interest for Parent and (iv) in
which, in the good faith judgment of counsel to the Company, participation by
Parent is not appropriate under applicable Law, including, but not limited to,
portions involving data which is not appropriate for dissemination to Parent
under applicable antitrust or trade regulation Laws.
4.6 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the
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Effective Time, the Company agrees (unless Parent shall give its prior consent
in writing which consent will not be unreasonably withheld or delayed) to carry
on its business in the usual, regular and ordinary course consistent with past
practice and the Operating Plan, to pay its Liabilities and Taxes consistent
with the Company's past practices, to pay or perform other obligations when due
consistent with the Company's past practices, subject to any good faith disputes
over such Liabilities, Taxes and other obligations and, to the extent consistent
with such business, to use commercially reasonable efforts and institute all
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees,
independent contractors and other Persons having business dealings with it, all
with the express purpose and intent of preserving unimpaired its goodwill and
ongoing businesses at the Effective Time. Except as expressly contemplated by
this Agreement or as set forth in the Disclosure Schedule, the Company shall
not, without the prior written consent of Parent, which consent will not be
unreasonably withheld or delayed (and which shall be deemed to have been given
if the action taken by the Company is in conformance with the Operating Plan):
(a) enter into any Contract, commitment or transaction or incur
any Liabilities in excess of $50,000 in the aggregate outside of the ordinary
course of business consistent with past practice;
(b) enter into any Contract in connection with any transaction
involving a Business Combination;
(c) alter, or enter into any Contract or other commitment to
alter, its interest in any corporation, association, joint venture, partnership
or business entity in which the Company directly or indirectly holds any
interest on the date hereof;
(d) enter into any strategic alliance, joint development or
joint marketing Contract;
(e) materially amend or otherwise modify (or agree to do so),
except in the ordinary course of business consistent with past practice, or
materially violate the terms of, any of the Contracts set forth or described in
the Disclosure Schedule;
(f) enter into any transaction with any officer, director,
shareholder or Affiliate of the Company, other than (i) pursuant to any Contract
disclosed to Parent pursuant to Section 2.20 of the Disclosure Schedule, (ii)
any contract of employment and listed pursuant to Section 2.18(a) of the
Disclosure Schedule, (iii) compensation consistent with existing policies or as
otherwise permitted by this Agreement or (iv) reimbursement of business expenses
and similar matters in the ordinary course of business;
(g) enter into or amend any Contract pursuant to which any other
Person is granted manufacturing, marketing, distribution, licensing or similar
rights of any type or scope with respect to any products of the Company or
Company Intellectual Property other than as contemplated by the Company's
Contracts, Licenses or agreements disclosed in the Disclosure Schedule;
(h) commence any Action or Proceeding;
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<PAGE> 44
(i) except for (i) the issuance of shares of Company Capital
Stock upon exercise or conversion of presently outstanding (or subsequently
issued in compliance with this Agreement) Company Options, Company Warrants,
Company Stock Purchase Right or Company Preferred Stock listed in Section 2.3 of
the Disclosure Schedule, (ii) the issuance in the ordinary course of business of
Company Options available for grant under the Stock Plan as in effect on the
date hereof to employees who are not officers of the Company at exercise prices
at least equal to the fair market value of the Company Common Stock on the
Company Option grant date (fair market value being determined by the Company's
Board of Directors in good faith and in consideration of reports of qualified
independent valuation specialists to be obtained as of the date of this
Agreement and at least once per quarter thereafter for the term of this
Agreement) and with grant amounts and other terms consistent with past practice,
or (iii) the repurchase of Company Restricted Stock from terminated employees in
accordance with the Restricted Stock Purchase Agreement pursuant to which such
Company Restricted Stock was sold (provided that any such repurchases,
considered in the aggregate with the exercise of dissenters' rights, shall not
prevent the ability of the parties to account for the Merger as a Pooling of
Interests), the Company will not declare, set aside or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any Company Capital Stock or Equity Equivalents, or split, combine or reclassify
any Company Capital Stock or Equity Equivalents or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of Company Capital Stock or Equity Equivalents, or repurchase, redeem
or otherwise acquire, directly or indirectly, any shares of Company Capital
Stock or Equity Equivalents;
(j) except for (i) the issuance of shares of Company Capital
Stock upon exercise or conversion of presently outstanding (or subsequently
issued in compliance with this Agreement) Company Options, Company Warrants,
Company Stock Purchase Rights or Company Preferred Stock listed in Section 2.3
of the Disclosure Schedule, (ii) the issuance in the ordinary course of business
of Company Options available for grant under the Stock Plan as in effect on the
date hereof to employees who are not officers of the Company at exercise prices
at least equal to the fair market value of the Company Common Stock on the
Company Option grant date (fair market value being determined by the Company's
Board of Directors in good faith and in consideration of reports of qualified
independent valuation specialists to be obtained as of the date of this
Agreement and at least once per quarter thereafter for the term of this
Agreement) and with grant amounts and other terms consistent with past practice,
or (iii) the repurchase of Company Restricted Stock from terminated employees in
accordance with the Restricted Stock Purchase Agreement pursuant to which such
Company Restricted Stock was sold (provided that any such repurchases,
considered in the aggregate with the exercise of dissenters' rights, shall not
prevent the ability of the parties to account for the Merger as a Pooling of
Interests), the Company will not issue, grant, deliver, sell or authorize or
propose the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of Company Capital Stock, Equity Equivalents or modify
or amend the rights of any holder of any outstanding shares of Company Capital
Stock or Equity Equivalents (including to reduce or alter the consideration to
be paid to the Company upon the exercise of any outstanding Company Options,
Company Warrants, Company Stock Purchase Rights or other Equity Equivalents) or
enter into any agreements, arrangements, plans or understandings with respect to
any such modification or amendment, nor shall the Company shall take any action
to affect the number of shares of Company Capital Stock for which any shares of
Company Capital
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<PAGE> 45
Stock, Company Options, Company Warrants or Company Stock Purchase Rights are
convertible or exchangeable into, nor shall the Company issue any shares of
Company Capital Stock which exchange or convert into shares of Company Common
Stock at a ratio other than one-for-one;
(k) take any action that would change the corporate governance
of the Company, including (i) cause or permit any amendments to its articles of
incorporation or by-laws or (ii) change the number of directors or the Persons
serving as directors of the Company;
(l) transfer (by way of a License or otherwise) to any Person
rights to any Company Intellectual Property other than Licenses incidental to
the sale of the Company's products in the ordinary course of business;
(m) dispose of or sell, waive any right to license or lease, or
incur any Lien on, any Assets and Properties of the Company, other than
acquisitions or dispositions of inventory, or Licenses of products as permitted
by clause (l) of this Section 4.6, or as the result of the payment for goods and
services in the ordinary course or as otherwise permitted by this Agreement;
(n) purchase any Assets and Properties of any Person other than
acquisitions of inventory (including office supplies) or licenses of products in
the ordinary course of business of the Company consistent with past practice;
(o) make any capital expenditures or commitments by the Company
for additions to property, plant or equipment of the Company constituting
capital assets, individually or in the aggregate in an amount exceeding
$200,000;
(p) except to comply with GAAP, write-off or write-down or make
any determination to write off or write-down, or revalue, any of the Assets and
Properties of the Company, or make changes in any reserves or liabilities
associated therewith, individually or in the aggregate in an amount exceeding
$100,000;
(q) pay, discharge or satisfy, in an amount in excess of
$50,000, in any one case, or $200,000 in the aggregate, any claim, Liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary course of
business of Liabilities reflected or reserved against in the Company Financials
or incurred after November 30, 1998 in the ordinary course of business
consistent with this Agreement;
(r) fail to pay or otherwise satisfy its Liabilities consistent
with the Company's past practices, except such as are being contested in good
faith;
(s) incur any Indebtedness or guarantee any such Indebtedness in
an aggregate amount exceeding $50,000 or issue or sell any debt securities of
the Company or guarantee any debt securities of others;
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<PAGE> 46
(t) grant any severance or termination pay to any director,
officer employee or consultant, except payments made pursuant to written
agreements outstanding on the date hereof, the terms of which are disclosed in
the Disclosure Schedule;
(u) increase greater than fifteen percent (15%) the salary, rate
of commissions, rate of consulting fees or any other compensation of any current
or former officer, director, shareholder, employee, independent contractor or
consultant of the Company;
(v) make any payment of consideration of any nature whatsoever
to any current or former officer, director, shareholder, employee, independent
contractor or consultant of the Company, other than (i) salary, commissions or
consulting fees and customary benefits paid to any current or former officer,
director, shareholder, employee or consultant of the Company or (ii)
discretionary or stay bonuses which (x) continue existing employee compensation
arrangements or (y) do not exceed $15,000 individually or $100,000 in the
aggregate;
(w) establish or modify (i) targets, goals, pools or similar
provisions under any Plan, employment Contract or other employee compensation
arrangement or independent contractor Contract or other compensation arrangement
or (ii) salary ranges, increased guidelines or similar provisions in respect of
any Plan, employment Contract or other employee compensation arrangement or
independent contractor Contract or other compensation arrangement;
(x) adopt, enter into, amend, modify or terminate (partial or
complete) any Plan;
(y) take any action, including the acceleration of vesting of
any Company Options, Company Warrants, Company Stock Purchase Rights or
Restricted Stock, or other rights to acquire shares of capital stock of the
Company which would be reasonably likely to interfere with Parent's ability to
account for the Merger as a Pooling of Interests or any other action that could
jeopardize the tax-free reorganization hereunder, except as expressly required
by any Contract set forth on the Disclosure Schedule as in effect on November
12, 1998;
(z) make or change any material election in respect of Taxes,
adopt or change any material accounting method in respect of Taxes, enter into
any tax allocation agreement, tax sharing agreement, tax indemnity agreement or
closing agreement, settle or compromise any claim or assessment in respect of
Taxes, or consent to any extension or waiver of the limitation period applicable
to any claim or assessment in respect of Taxes with any Taxing Authority or
otherwise;
(aa) except as required by GAAP, make any material change in the
accounting policies, principles, methods, practices or procedures of the Company
(including without limitation for bad debts, contingent liabilities or
otherwise, respecting capitalization or expense of research and development
expenditures, depreciation or amortization rates or timing of recognition of
income and expense);
(bb) commence, terminate or change any line of business;
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<PAGE> 47
(cc) cancel, materially amend or fail to renew any insurance
policy other than in the ordinary course of business consistent with past
practice, or fail to use commercially reasonable efforts to give all notices and
present all claims under all such policies in a timely fashion;
(dd) materially amend, fail to renew, or fail to use
commercially reasonable efforts to maintain, its existing Approvals or fail to
observe any Law or Order applicable to the conduct of the Company's business or
the Company's Assets and Properties, except as would not be reasonably likely to
be material, either individually or in the aggregate;
(ee) any failure to undertake any commercially reasonable
action, including but not limited to paying or otherwise satisfying any
obligations to procure, maintain, renew, extend or enforce any Company
Intellectual Property;
(ff) repurchase, cancel or modify the terms of any Company
Capital Stock, Equity Equivalent, Company Option, Company Warrant, Company Stock
Purchase Right or other financial instrument that derives the majority of its
value from its convertibility into Company Capital Stock or Equity Equivalents,
other than transactions entered into in the ordinary course of business and
pursuant to either (i) contractual provisions or (ii) the Stock Plan, in either
case as in effect at November 20, 1998 (if in effect on that date) or, if later,
the date such contractual provision (but not an amendment) originated (provided
that any such repurchases, cancellations or modifications, considered in the
aggregate with dissenters' rights, shall not prevent the ability of the parties
to account for the Merger as a Pooling of Interests); or
(gg) take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (ff) above, or any other action
that would prevent the Company from performing or cause the Company not to
perform its agreements and covenants hereunder.
4.7 No Solicitation. Until the earlier of the Effective Time and the
date of termination of this Agreement pursuant to the provisions of Article 8
hereof, the Company will not (and will instruct all of the Company's officers,
directors, shareholders, attorneys, investment advisors, agents, representatives
or Affiliates not to, and will use its commercially reasonable efforts so that
any of the foregoing will not) directly or indirectly, take any of the following
actions with any Person other than Parent and its designees: (a) solicit,
initiate, entertain, review, or encourage any proposals or offers from, or
conduct discussions with or engage in negotiations with, any Person relating to
any possible Business Combination with the Company or any of its Subsidiaries
(whether such Subsidiaries are in existence on the date hereof or are hereafter
organized), (b) provide information with respect to the Company to any Person,
other than Parent, relating to, or otherwise cooperate with, facilitate or
encourage any effort or attempt by any such Person with regard to, any possible
Business Combination with the Company or any Subsidiary of the Company (whether
such Subsidiaries are in existence on the date hereof or are hereafter
organized), (c) enter into a Contract with any Person, other than Parent,
providing for a Business Combination with the Company or any Subsidiary (whether
such Subsidiaries are in existence on the date hereof or are hereafter
organized), or (d) make or authorize any
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<PAGE> 48
statement, recommendation or solicitation in support of any possible Business
Combination with the Company or any Subsidiary (whether such Subsidiary is in
existence on the date hereof or are hereafter organized) other than by Parent.
The Company shall immediately cease and cause to be terminated any such contacts
or negotiations with any Person relating to any such transaction or Business
Combination. In addition to the foregoing, if the Company receives prior to the
Effective Time or the termination of this Agreement any offer or proposal
(formal or informal) relating to any of the above, the Company shall immediately
notify Parent thereof and provide Parent with the details thereof. Each of the
Company and Parent acknowledge that this Section 4.7 was a significant
inducement for Parent to enter into this Agreement. If a shareholder of the
Company who is also an employee inadvertently violates the restrictions set
forth in this Section 4.7, the Company shall promptly, and any event within
three (3) Business Days of becoming aware of such inadvertent violation, (x)
instruct such employee-shareholder in writing to immediately cease all such
activities, (y) notify in writing the Person with whom such employee-shareholder
has had contact informing such Person of the restrictions imposed by this
Section 4.7, and (z) notify Parent in writing of such inadvertent violation,
including the nature thereof. In an effort to avoid any such inadvertent
violation, the Company shall inform each Person whose activities are restricted
by this Section 4.7 of the terms of such restriction. An inadvertent violation
of the restrictions set forth in this Section 4.7 by an employee-shareholder of
the Company shall not constitute a material breach of this Agreement by the
Company. Violations of the restrictions set forth in this Section 4.7 by any
shareholder-employee who is also an officer or director of the Company shall in
no event be considered to be "inadvertent".
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Fairness Hearing; Registration of Shares. Parent, Merger Sub and the
Company shall each take all steps necessary or desirable, utilize all
commercially reasonable efforts and cooperate with one another in every way to
obtain as promptly as practicable the approval of the Commissioner of the
California Department of Corporations (the "Commissioner") of the fairness (the
"Fairness Approval") of the terms and conditions of the issuance of the Parent
Common Stock as contemplated by this Agreement after a hearing held pursuant to
Section 25142 of the California Code and the rules of the Commissioner
thereunder. If for any reason whatsoever the Commissioner does not render a
Fairness Approval of the terms and conditions of the issuance of the Parent
Common Stock as contemplated by this Agreement (or if Parent determines in its
reasonable judgment on or before February 5, 1999 not to pursue such a hearing;
provided that Parent shall consult with the Company prior to making such
determination), the parties hereto agree to take all steps necessary and
desirable, utilize all commercially reasonable efforts and cooperate with one
another in every way to have the issuance of the shares of Parent Common Stock
to be issued in the Merger registered with the SEC on Form S-4 or a successor
registration form (the "Registration Statement") by filing with the SEC as
promptly as practicable after the decision to utilize the Registration Statement
is made, the Registration Statement with respect to the Parent Common Stock to
be issued in connection with the Merger, which shall be in form and substance
satisfactory to Parent (but with advance copies provided to the Company for its
review and comment, which such comments shall be promptly conveyed by the
Company). Each of Parent and the Company will use all commercially reasonable
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<PAGE> 49
efforts to respond to any comments of the SEC. Each of Parent and the Company
will notify the other promptly of the receipt of any comments from the SEC and
of any request by the SEC for amendments or supplements to the Registration
Statement or additional information, and will supply the other party with copies
of all correspondence between such party or any of its representatives and the
SEC with respect to the Registration Statement. As promptly as practicable after
comments are received from the SEC, Parent shall file with the SEC an amendment
to the Registration Statement and Parent and the Company shall use all
commercially reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. Whenever any event occurs that is
required to be set forth in an amendment or supplement to the Registration
Statement, Parent or the Company, as the case may be, shall promptly inform the
other party of such occurrence and cooperate in filing with the SEC and/or
mailing to shareholders of the Company, such amendment or supplement.
5.2 Approval of the Shareholders. Promptly (and in any event within
fifteen (15) days) following the Fairness Approval (or, if such Fairness
Approval is not obtained or if Parent determines in its reasonable judgment on
or before February 5, 1999 not to pursue such a hearing, as soon as permissible
under applicable Law following the effectiveness of the Registration Statement),
the Company shall submit this Agreement and the transactions contemplated hereby
to its shareholders for approval and adoption at a special meeting of its
shareholders or by written consent (the "Special Meeting") as provided by the
California Code, its articles of incorporation and by-laws. The Company shall
use all commercially reasonable efforts to obtain the "approval of the
shareholders" of the Company within the meaning of Section 153 of the California
Code to the Merger and this Agreement and the transactions contemplated hereby
and to enable the Closing to occur as promptly as practicable. Concurrently with
the execution and delivery of this Agreement, the Company has delivered to
Parent an executed Support Agreement from each of the shareholders listed in
Schedule 5.2., who beneficially own shares of Company Capital Stock representing
more than 50% of the voting power of the issued and outstanding Company Capital
Stock entitled to vote with respect to the Merger and more than 50% of each
class of Company Capital Stock that is entitled to vote as a separate class with
respect to the Merger. The materials submitted to the shareholders of the
Company in respect of the Special Meeting shall include any materials required
by the rules and regulations promulgated under the Code in connection with
obtaining the Fairness Approval and shall have been subject to prior review and
comment by Parent (which such comments will be promptly conveyed by Parent,
which shall have at least five (5) Business Days to review such materials) and
shall include information regarding the Company, the terms of the Merger and
this Agreement and the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger, this Agreement and the transactions contemplated
thereby (and, if a Registration Statement is used, the prospectus included as
part of the Registration Statement). Parent will promptly provide to the Company
any information in its possession or reasonably available to it that is
necessary for preparation of the information or proxy statement that the Company
will send to its shareholders in connection with the Company's solicitation of
written consents or proxies for the Special Meeting. The written information
that Parent will supply to the Company expressly for inclusion by the Company in
such information or proxy statement, and any written information that the
Company will supply to Parent expressly for inclusion in either the materials to
be filed with the California Department of Corporations in connection with the
Fairness Hearing or the Registration Statement, will not
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<PAGE> 50
knowingly contain any untrue statement of material fact or omit any material
facts required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading.
5.3 Access to Information. Between the date of this Agreement and the
earlier of the Effective Time or the termination of this Agreement, upon
reasonable notice the Company shall (i) give Parent, Merger Sub and their
respective officers, employees, accountants, counsel, financing sources and
other agents and representatives full access (subject to reasonable supervision
and, at the Company's option, logging of information to which access is
provided) to all buildings, offices, and other facilities and to all Books and
Records of the Company, whether located on the premises of the Company or at
another location; (ii) permit Parent and Merger Sub to make such inspections as
they may require; (iii) cause its officers to furnish Parent and Merger Sub such
financial, operating, technical and product data and other information with
respect to the business and Assets and Properties of the Company as Parent and
Merger Sub from time to time may request, including without limitation financial
statements and schedules (provided that, except as required or necessary in
connection with the parties' obligations pursuant to Sections 4.3 and 4.4, the
Company shall not be required to make any technical information (other than
technical information of the type typically made available to customers or
potential customers) available at any location other than the Company's
headquarters and none of such technical information shall be removed from such
headquarters (whether in written, electronic or other format) without the prior
written consent of the Company); (iv) allow Parent and Merger Sub the
opportunity to interview such employees and other personnel and Affiliates of
the Company with the Company's prior written consent, which consent shall not be
unreasonably withheld or delayed; and (v) assist and cooperate with Parent and
Merger Sub in the development of integration plans for implementation by Parent
and the Surviving Corporation following the Effective Time; provided, however,
that no investigation pursuant to this Section 5.3 shall affect or be deemed to
modify any representation or warranty made by the Company herein. Materials
furnished to Parent pursuant to this Section 5.3 may be used by Parent for
strategic and integration planning purposes relating to accomplishing the
transactions contemplated hereby.
5.4 Confidentiality. Contemporaneously with the execution and delivery
of this Agreement, the parties shall enter into an amended Joint Nondisclosure
Agreement substantially in the form attached hereto as Exhibit G, which, among
other things, shall apply to any information exchanged pursuant to Sections 4.3,
4.4, 4.5, 5.2 (other than information that is included in the Registration
Statement or the Company's information or proxy statement) and 5.3.
5.5 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including all legal, accounting,
financial advisory, consulting and all other fees and expenses of third parties
("Third Party Expenses") incurred by a party in connection with the negotiation
and effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by Law (including
federal and state securities laws) or, as to Parent, by the rules and
regulations of the NASD, prior to the
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<PAGE> 51
Effective Time, no disclosure (whether or not in response to any inquiry) of the
existence of any subject matter of, or the terms and conditions of, this
Agreement shall be made by any party hereto unless approved by Parent and the
Company prior to release, provided that such approval shall not be unreasonably
withheld or delayed. Parent will use its good faith efforts to provide advance
notice to the Company of any disclosure that it intends to make as required by
Law or by the rules and regulations of the NASD. The parties have, prior to the
execution and delivery of this Agreement, agreed upon the text of a joint press
release with respect to the announcement of this Agreement.
5.7 Approvals. Parent and the Company shall use commercially reasonable
efforts to obtain the Approvals from Governmental or Regulatory Authorities or
under any of the Contracts or other agreements as may be required in connection
with the Merger so as to preserve all rights of and benefits to Parent or the
Company (as applicable) thereunder and each party shall provide the other with
such assistance and information as is reasonably required to obtain such
Approvals.
5.8 FIRPTA Compliance. On or prior to the Closing Date, the Company
shall deliver to Parent a properly executed statement in a form reasonably
acceptable to Parent for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3).
5.9 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company, Parent
or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate at or prior to the Closing Date and (ii) any failure of the Company,
Parent or Merger Sub, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.10 Pooling of Interests Accounting. The Company, Parent and Merger Sub
shall each use their commercially reasonable efforts to cause the business
combination to be effected by the Merger to be accounted for as a Pooling of
Interests from and after the Effective Time. The Company and Parent shall each
use their commercially reasonable efforts to cause their respective employees,
directors, shareholders and Affiliates not to knowingly take any action that
would adversely affect the ability of Parent to account for the business
combination to be effected by the Merger as a Pooling of Interests from and
after the Effective Time.
5.11 Company Affiliate Agreements. Schedule 5.11 sets forth those
persons who, in the Company's reasonable judgment following consultation with
Latham & Watkins and the Company's Independent Accountants, are or may be
"affiliates" of the Company within the meaning of the SEC's Accounting Releases
Nos. 130 and 135 (the "Company Affiliates"). The Company shall provide Parent
such information and documents as Parent shall reasonably request for purposes
of reviewing such list. The Company shall use all commercially reasonable
efforts to deliver or cause to be delivered to Parent on or prior to the Closing
from each of the Company Affiliates, an executed Affiliate Agreement.
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5.12 Parent Affiliate Agreements. Schedule 5.12 sets forth those persons
who, in Parent's reasonable judgment following consultation with Irell & Manella
LLP and Ernst & Young LLP, are or may be "affiliates" of Parent within the
meaning of the SEC's Accounting Releases Nos. 130 and 135 (the "Parent
Affiliates"). Parent shall provide the Company such information and documents as
the Company shall reasonably request for purposes of reviewing such list. Parent
shall use all commercially reasonable efforts to deliver or cause to be
delivered to Parent prior to the Closing from each of the Parent Affiliates, an
executed Parent Affiliate Agreement.
5.13 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things (including, but not
limited to, all action reasonably necessary to seek and obtain any and all
consents and approvals of any Government or Regulatory Authority or Person,
provided that Parent shall not be obligated to consent to any divestitures or
operational limitations or activities in connection therewith and no party shall
be obligated to make a payment of money as a condition to obtaining any such
condition or approval) as may be reasonably necessary or desirable for effecting
completely the consummation of this Agreement and the transactions contemplated
hereby.
5.14 Indemnification. Parent, Merger Sub, the Company and the Surviving
Corporation agree that all rights to indemnification or exculpation (including
mandatory advancement of expenses) existing on the date of this Agreement in
favor of the employees, agents, directors or officers of the Company and any
person who served at the Company's request as a fiduciary or other
representative for any Plan maintained by the Company (the "Company Indemnified
Parties") as provided in its Articles of Incorporation or Bylaws or
indemnification agreements shall continue in full force and effect for a period
of not less than six years from the Closing Date, assuming the consummation of
the Merger; provided, however, that, in the event any claim or claims are
asserted or made within such six-year period, all rights to indemnification in
respect of any such claim or claims shall continue to disposition of any and all
such claims. Any determination required to be made with respect to whether a
Company Indemnified Party's conduct complies with the standards set forth in the
Articles of Incorporation or Bylaws or indemnification agreements of the
Surviving Corporation or otherwise shall be made by independent counsel selected
by the Surviving Corporation reasonably satisfactory to the Company Indemnified
Party (whose fees and expenses shall be paid by the Surviving Corporation),
which such determination shall be final and binding on the parties thereto and
Parent. Parent unconditionally guarantees the Surviving Corporation's payment
and other obligations provided for in this Section 5.14.
5.15 Form S-8. In the event of the consummation of the Merger, Parent
shall file a registration statement on Form S-8 for the shares of Parent Common
Stock issuable with respect to assumed Company Options and Company Stock
Purchase Rights promptly (and in any event within ten (10) Business Days) after
the Effective Time to the extent the shares of Parent Common Stock issuable upon
exercise of such Company Options or Company Stock Purchase Rights qualify for
registration on Form S-8. Parent shall use its commercially reasonable efforts
(and in any event the same efforts as it uses with respect to any registration
statement filed by Parent for options issued to its employees) to keep such
registration statement (or a successor) effective for so long as any such
options are outstanding and exercisable.
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5.16 NNM Listing of Additional Shares Application. Parent shall use its
commercially reasonable efforts to cause to be authorized for listing on the NNM
the shares of Class A Common Stock of Parent into which the shares of Parent
Common Stock to be issued, and the shares of Parent Common Stock required to be
reserved for issuance, in connection with the Merger, will be converted upon
disposition, upon official notice of issuance.
5.17 Company's Auditors. The Company will use commercially reasonable
efforts to cause its management and the Company's Independent Accountants to
facilitate on a timely basis (i) the preparation of financial statements
(including pro forma financial statements if required) as required by Parent to
comply with applicable SEC regulations and (ii) the review of any Company audit
work papers since formation of the Company, including, as applicable, the review
of selected interim financial statements and data.
5.18 Termination of 401(k) Plans. Upon the request of Parent, the Board
of Directors of the Company, and of any Subsidiary, shall adopt resolutions
terminating, immediately before the Closing Date, any Plan which is intended to
meet the requirements of Section 401(k) of the Code, and which is sponsored, or
contributed to, by the Company or any Subsidiary. Nothing in this Section 5.18
shall obligate the Company or any Subsidiary to take any action before the
Closing Date in connection with the termination of any such Plan (including,
without limitation, the making of distributions to participants or the filing of
Form 5310 with the Internal Revenue Service), other than the adoption of
resolutions as set forth in the preceding sentence and the notification to
participants in such Plan that such resolutions have been adopted.
5.19 Takeover Statutes. If any Takeover Statute is or may become
applicable to the transactions contemplated hereby, the Board of Directors of
the Company will grant such approvals and take such actions as are necessary so
that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate the
effects of any Takeover Statute on any of the transactions contemplated hereby.
5.20 Section 280G Plans. To the extent that it would not prevent the
ability of the parties to account for the Merger as a Pooling of Interests, the
Company shall use its commercially reasonable efforts to cause its shareholders
to approve any employee compensation arrangements, payments, Company Options or
Company Stock Purchase Rights or Company Restricted Stock so that at the
Effective Time the Company is not obligated to make any payments, nor is it a
party to any Contract that that (i) could result in payments or issuances of
Company Capital Stock are not deductible as a result of the provisions set forth
in Section 280G of the Code or the treasury regulations thereunder or (ii) would
result in an excise tax to the recipient of any such payment under Section 4999
of the Code, as a result of, in connection with, or following the consummation
of, the Merger; provided, however, that nothing set forth in this Section 5.20
shall authorize or require the Company or its shareholders to take any action
that would prevent the ability of the parties to account for the Merger as a
Pooling of Interests.
5.21 Additional Affiliate Agreements. Each of the Company and Parent
agrees that if any Person would have been a Company Affiliate or Parent
Affiliate had such Person
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been a shareholder of the Company or Parent, respectively, the Company or
Parent, as appropriate, shall cause such person to execute and deliver to the
Company or Parent a Company Affiliate Agreement or Parent Affiliate Agreement,
as appropriate, promptly upon such Person attaining such status.
5.22 Employee Nonsolicitation. Parent and the Company each agree that,
for a period of eighteen months from the date of this Agreement, it will not,
directly or indirectly, solicit to employ any of officers or employees of the
other, without obtaining the prior written consent of Parent or the Company, as
applicable; provided, however, that nothing contained herein shall prohibit
Parent or the Company from making offers of employment to or hiring persons who
first approach it regarding employment; and provided further that general
advertising regarding the availability of employment opportunities (whether by
print, radio, electronic media, website or otherwise) shall not constitute
"solicitation". The parties each acknowledge that their employees are subject to
confidentiality and similar agreements which prohibit the use or dissemination
of proprietary information.
5.23 Company Audited Financials. The Company will use its commercially
reasonable efforts to prepare and deliver to Parent within twenty days of the
date of this Agreement (i) the Company Audited Financials and (ii) a schedule
summarizing the adjustments made to the Company Financials for the period ended
December 31, 1998 (which will be prepared on a basis consistent in all material
respects with the Company Financials) in order to arrive at the Company Audited
Financials.
ARTICLE 6
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Governmental and Regulatory Approvals. Approvals from any
Governmental or Regulatory Authority (if any) deemed appropriate or necessary by
any party to this Agreement shall have been timely obtained; and any waiting
period applicable to the consummation of the Merger under the HSR Act (including
with respect to the receipt of Parent Common Stock by a shareholder of the
Company) shall have expired or been terminated.
(b) No Injunctions or Regulatory Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction or other Order
issued by any court of competent jurisdiction or Governmental or Regulatory
Authority or other legal or regulatory restraint or prohibition preventing the
consummation of the Merger shall be in effect; nor shall there be any action
taken, or any Law or Order enacted, entered, enforced or deemed applicable to
the Merger or the other transactions contemplated by the terms of this Agreement
that would prohibit the consummation of the Merger or which would permit
consummation of the Merger only if certain divestitures were made or if Parent
were to agree to limitations on its business activities or operations (unless
such divestitures would be required as a result of the acquisition of another
business entity by Parent after the date hereof).
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(c) Tax Opinions. Parent and the Company shall each have
received written opinions from their counsel in form and substance reasonably
satisfactory to each of them, and dated the Closing Date, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code. The parties to this Agreement agree to make such reasonable
representations as requested by such counsel for the purpose of rendering such
opinions; if these opinions cannot be delivered, the parties agree to negotiate
in good faith to attempt to agree upon an alternative structure that would allow
the tax opinions to be rendered, but which does not change the expected benefits
to the parties of the transaction.
(d) Opinion of Accountants. Parent and the Company shall each
have received letters, dated on or prior to the Closing Date in form and
substance reasonably satisfactory to them, and dated the Closing Date, (i) from
Ernst & Young LLP and regarding that firm's concurrence with Parent management's
and Company management's conclusions, respectively, as to the appropriateness of
accounting for the Merger as a Pooling of Interests if the Merger is closed and
consummated in accordance with this Agreement and (ii) from the Company's
Independent Accountants and regarding that firm's concurrence with Company
management's conclusion as to the ability of the Company to participate in a
Pooling of Interests transaction as of the Closing Date.
(e) Affiliate Agreements. Each Company Affiliate and Parent
Affiliate shall have executed and delivered to the Company and Parent a Company
Affiliate Agreement and Parent Affiliate Agreement, and such agreements shall be
in full force and effect.
(f) Shareholder Approval. The Merger shall have been approved by
the requisite votes of the Company's shareholders in accordance with California
Law.
(g) Legal Proceedings. No Governmental or Regulatory Authority
shall have notified either party to this Agreement that it intends to commence
proceedings to restrain or prohibit the transactions contemplated hereby or
force rescission, unless such Governmental or Regulatory Authority shall have
withdrawn such notice and abandoned any such proceedings prior to the time which
otherwise would have been the Closing Date.
(h) [Intentionally Omitted.]
(i) Fairness Approval; Effectiveness of Registration Statement.
The Fairness Approval shall have been obtained, or, if Parent elects to proceed
with the Registration Statement as provided in Section 5.1, the Registration
Statement shall have been declared effective by the SEC under the Securities
Act, and no stop order (or similar action) suspending the Fairness Approval or,
if applicable, the effectiveness of the Registration Statement shall have been
issued by the Commissioner or the SEC, as applicable, and no proceedings for
that purpose and no similar proceeding in respect of the Company's information
or proxy statement shall have been initiated or threatened by the Commissioner
or the SEC, as applicable.
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement
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shall be subject to the satisfaction at or prior to the Closing of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company:
(a) Representations and Warranties. Each of the representations
and warranties made by Parent and Merger Sub in this Agreement shall be true and
correct on and as of the Closing Date though each such representation and
warranty was made on and as of the Closing Date, and any representation and
warranty made as of a specified date shall also have been true and correct on
and as of such earlier date, except where the failure of any such
representations and warranties to be true and correct (without regard to any
materiality qualifier contained therein and considered individually or in the
aggregate) would not be reasonably expected to have a material adverse effect on
the Business or Condition of Parent, and the Company shall have received a
certificate to such effect signed by the Chief Executive Officer of Parent.
(b) Performance. Parent and Merger Sub shall have performed and
complied with in all material respects each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by the Parent or
Merger Sub at or before the Closing, and the Company shall have received a
certificate to such effect signed by the Chief Executive Officer of Parent.
(c) [Intentionally Omitted].
(d) Legal Opinion. The Company shall have received a legal
opinion from Irell & Manella LLP, counsel to Parent, in form and substance
reasonably satisfactory to it.
(e) NNM Listing. The shares of Class A Common Stock of Parent
into which the Parent Common Stock issuable to shareholders of the Company
pursuant to this Agreement and such other shares required to be reserved for
issuance in connection with the Merger will be converted upon disposition shall
have been authorized for listing on the NNM upon official notice of issuance.
(f) Tax Representation Letter. Parent shall have executed and
delivered to the Company a tax representation letter in form and substance
reasonably satisfactory to the Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. Each of the representations
and warranties made by the Company in this Agreement shall be true and correct
on and as of the Closing Date though each such representation and warranty was
made on and as of the Closing Date, and any representation and warranty made as
of a specified date shall also have been true and correct on and as of such
earlier date, except where the failure of any such representations and
warranties to be true and correct (without regard to any materiality qualifier
contained therein and considered individually or in the aggregate) would not be
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reasonably expected to have a material adverse effect on the Business or
Condition of the Company, and Parent and Merger Sub shall have received a
certificate to such effect signed by the Chief Executive Officer of the Company.
(b) Performance. The Company shall have performed and complied
with in all material respects each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by the Company on or
before the Closing Date, and Parent and Merger Sub shall have received a
certificate to such effect signed by the Chief Executive Officer of the Company.
(c) [Intentionally Omitted].
(d) Legal Opinion. Parent shall have received legal opinions
from Latham & Watkins and General Counsel Associates, legal counsel to the
Company, in form and substance reasonably satisfactory to it.
(e) Non-Competition Agreements. Each of the persons listed on
Schedule 6.3(e) shall have executed and delivered to Parent a Non-Competition
Agreement.
(f) Retention Agreements. Each of the persons listed on Schedule
6.3(f) shall have executed and delivered to Parent a Retention Agreement.
(g) Tax Representation Letter. The Company shall have executed
and delivered to Parent a tax representation letter in form and substance
reasonably substantially to Parent.
(h) Limitation on Dissent. Holders of no more than 3.0% of the
outstanding shares of Company Capital Stock shall have exercised and not
withdrawn, forfeited or otherwise permitted to lapse appraisal, dissenters' or
similar rights under applicable law with respect to their shares by virtue of
the Merger.
(i) No Bankruptcy. There shall not have been a Bankruptcy Event.
(j) Key Employee Retention. Each of the individuals listed on
Schedule 6.3(j) shall continue to be employed by the Company as of the Closing,
except if such employment has terminated as the result of the death or Permanent
Disability of such individual; provided, however, that this condition shall be
deemed waived by Parent with respect to a particular individual named in
Schedule 6.3(j) unless Parent gives the Company written notice of termination of
the Agreement within thirty days after receipt of written notice from the
Company that such individual has ceased to be employed by the Company for
reasons other than death or Permanent Disability.
(k) Employee Retention. Either (i) at least seventy five percent
(75%) of the twenty eight (28) engineering and research and development
employees of the Company as of the date of this Agreement shall be employed by
the Company as of the Closing, or (ii) less than seventy five percent (75%) but
at least fifty percent (50%) of such employees shall be employed by the Company
as of the Closing and there has not been a material adverse effect on the
Business or Condition of the Company, the Operating Plan or the Company's
product plans or schedule as a result of any diminution in the number of such
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employees. For purposes of this Section 6.3(k), individuals who are not employed
by virtue of death, Permanent Disability or involuntary termination by the
Company are excluded from all calculations.
(l) FIRPTA Compliance. The executed statement in the form
reasonably acceptable to Parent for purposes of satisfying Parent's obligations
under Treasury Regulation Section 1.1445-2(c)(3) previously delivered by the
Company to Parent shall continue to be in full force and effect.
(m) Third Party Consents. Parent shall have received evidence
satisfactory to it that the Company has obtained the consents, approvals and
waivers listed in Schedule 6.3(m) (with such consents, approvals or waivers to
be in form and substance satisfactory to Parent and sufficient to enable Parent
to utilize, exploit or transfer any such Company Intellectual Property through
the Company or Parent or through or to any other Subsidiary of Parent).
(n) Banks and Brokerage Accounts. Parent shall have received
from the Company (a) a true and complete list of the names and locations of all
banks, trust companies, securities brokers and other financial institutions at
which the Company has an account or safe deposit box or maintains a banking,
custodial, trading or other similar relationship, (b) a true and complete list
and description of each such account, box and relationship, indicating in each
case the account number and the names of the respective officers, employees,
agents or other similar representatives of the Company having signatory power
with respect thereto and (c) a list of each Investment Asset, the name of the
record and beneficial owner thereof, the location of the certificates, if any,
therefor, the maturity date, if any, and any stock or bond powers or other
authority for transfer granted with respect thereto.
(o) Company Intellectual Property. No Person shall have (i)
commenced, or shall have notified either party to this Agreement that it intends
to commence, an Action or Proceeding or (ii) provided the Company with notice,
in either case which allege(s) that any of the Intellectual Property, including
the Company Intellectual Property, presently embodied, or proposed to be
embodied, in the Company's products (including, but not limited to, the Orion SA
Product) or utilized in Company-designed or modified development tools
(including standard cells) or design environments infringes or otherwise
violates the intellectual property rights of such Person, is available for
licensing from a potential licensor providing the notice or otherwise alleges
that the Company does not otherwise own or have the right to exploit such
Intellectual Property, including the Company Intellectual Property, unless such
Person shall have withdrawn such notice and abandoned any such Action or
Proceeding prior to the time which otherwise would have been the Closing Date.
ARTICLE 7
SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS; ESCROW PROVISIONS
7.1 Survival of Representations, Warranties, Covenants and Agreements.
Notwithstanding any right of Parent, Merger Sub or the Company (whether or not
exercised) to investigate the affairs of Parent, Merger Sub or the Company
(whether pursuant to
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Section 5.3 or otherwise), each party shall have the right to rely fully upon
the representations, warranties, covenants and agreements of the other party
contained in this Agreement or in any instrument required to be delivered
pursuant to Article 6 of this Agreement; provided, however, that, except in the
case of fraud (i.e., an intentional breach of a representation, warranty,
covenant or agreement, but excluding any negligent or reckless breach), no
reliance can be made on, or claim made in respect of, any representation,
warranty, covenant or agreement specific compliance with which was waived in
writing, including, but not limited to, the waiver of any related closing
condition contained in Article 6. Except as otherwise provided in Section 9.5,
all of the representations, warranties, covenants and agreements of the Company,
Parent and Merger Sub contained in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Merger and continue until the
earlier of (i) the six month anniversary of the Closing Date or (ii) the
Financial Statements Publication Date for the fiscal year in which the Closing
Date occurs (the earlier to occur of (i) and (ii) is referred to herein as the
"Expiration Date"). Each of the parties hereto agrees that, except for the
representations and warranties contained in this Agreement, none of Parent,
Merger Sub or the Company has made any representations or warranties, and except
for the representations and warranties contained in this Agreement or in any
instrument delivered pursuant to Article 6 of this Agreement, each of Parent,
Merger Sub and the Company acknowledges that no representations or warranties
have been made by, and it has not relied upon any representations or warranties
made by, any of the parties hereto or any of their respective officers,
directors, employees, agents, financial and legal advisors or other
representatives (collectively, "Representatives") with respect to this Agreement
and the transactions contemplated hereby, and the documents and instruments
referred to herein, notwithstanding the delivery or disclosure to such party or
its Representatives of any documentation or other information with respect to
any one or more of the foregoing. The inclusion of any entry on the Company
Disclosure Schedule shall not constitute an admission by, or agreement of, the
Company that such matter is material to the Company.
7.2 Escrow Provisions.
(a) Establishment of the Escrow Fund. As soon as practicable
after the Effective Time, the Escrow Amount, without any act of any shareholder,
will be deposited with the Depositary Agent (plus a proportionate share of any
additional shares of Parent Common Stock as may be issued upon any stock splits,
stock dividends or recapitalizations effected by Parent following the Effective
Time), such deposit to constitute the Escrow Fund to be governed by the terms
set forth herein and at Parent's sole cost and expense. The portion of the
Escrow Amount contributed on behalf of each shareholder of the Company shall be
in proportion to the aggregate number of shares of Parent Common Stock which
such holder would otherwise be entitled under Section 1.6. Notwithstanding the
references in this Agreement to the "escrow" and the Escrow Fund, the parties
acknowledge and agree that the Depositary Agent is acting as a depository and
not as an escrow agent pursuant to this Article 7.
(b) Recourse to the Escrow Fund. The Escrow Fund shall be
available (and, subject to the last sentence of this clause (b), shall be the
sole and exclusive remedy) to compensate Parent and Merger Sub, and their
respective officers, directors, employees, agents and Affiliates, for any and
all Losses (whether or not involving a Third Party Claim),
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incurred or sustained by Parent or Merger Sub, their respective officers,
directors, employees, agents or Affiliates, directly or indirectly, as a result
of any inaccuracy or breach of any representation, warranty, covenant or
agreement of the Company contained herein or in any instrument delivered by the
Company pursuant to Article 6 of this Agreement which survived the Effective
Time in accordance with this Agreement; provided, however, that Parent and
Merger Sub may not make any claims against the Escrow Fund unless the aggregate
Losses incurred or sustained exceed $100,000 (at which such time claims may be
made for all such Losses incurred or sustained); and provided further that
Parent may not make any claims against the Escrow Fund for any failure of the
Company to make payments of principal or interest under the Note. Parent, Merger
Sub and the Company each acknowledge that such Losses, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the Effective Time would have led to a reduction in the aggregate Merger
consideration to be paid to the shareholders of the Company. The shareholders of
the Company shall not have any liability under this Agreement of any sort
whatsoever in excess of the Escrow Fund, except in the event of a fraudulent
breach (i.e., an intentional breach of a representation, warranty, covenant or
agreement, but excluding a negligent or reckless breach) by the Company of any
of its representations, warranties, agreements or covenants contained herein or
in any other instrument or document required to be delivered pursuant to Article
6 of this Agreement in connection herewith. In the event of such a fraudulent
breach, Parent and Merger Sub shall have all remedies available at law or in
equity (including for tort) with respect to such breach; provided, however,
that, notwithstanding anything to the contrary contained in this Agreement, in
no event shall any shareholder of the Company have any liability in excess of
the Merger consideration received by such shareholder in connection with the
Merger or the proceeds, if any, received by such shareholder in connection with
the disposition of such Merger consideration.
(c) Escrow Period; Distribution of Escrow Fund upon Termination
of Escrow Period. Subject to the following requirements, the Escrow Fund shall
be in existence immediately following the Effective Time and shall terminate at
5:00 p.m., Pacific Time, on the Expiration Date (the period of time from the
Effective Time through and including the Expiration Date is referred to herein
as the "Escrow Period"); and all shares of Parent Common Stock remaining in the
Escrow Fund shall be distributed as set forth in the last sentence of this
Section 7.2(c); provided, however, that the Escrow Period shall not terminate
with respect to such amount (or some portion thereof) that is necessary in the
reasonable judgment of Parent, subject to the objection of the Shareholder Agent
and the subsequent arbitration of the matter in the manner as provided in
Section 7.2(g) hereof, to satisfy any unsatisfied written claims under this
Section 7.2 concerning facts and circumstances existing prior to the termination
of such Escrow Period which claims are specified in any Officer's Certificate
delivered to the Depositary Agent prior to termination of such Escrow Period. As
soon as all such claims, if any, have been resolved, the Depositary Agent shall
deliver to the shareholders of the Company the remaining portion of the Escrow
Fund not required to satisfy such claims. Deliveries of shares of Parent Common
Stock remaining in the Escrow Fund to the shareholders of the Company pursuant
to this Section 7.2(c) shall be made ratably in proportion to their respective
contributions to the Escrow Fund and Parent shall use all its commercially
reasonable efforts to have such shares delivered within five (5) Business Days
of such resolution.
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(d) Protection of Escrow Fund.
(i) The Depositary Agent shall hold and safeguard the
Escrow Fund during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and not as the property of Parent
and shall hold and dispose of the Escrow Fund only in accordance with the terms
hereof.
(ii) Any shares of Parent Common Stock or other Equity
Equivalents securities issued or distributed by Parent ("New Shares") in respect
of Parent Common Stock in the Escrow Fund which have not been released from the
Escrow Fund shall be added to the Escrow Fund. New Shares issued in respect of
shares of Parent Common Stock which have been released from the Escrow Fund
shall not be added to the Escrow Fund but shall be distributed to the record
holders thereof. Cash dividends on Parent Common Stock shall not be added to the
Escrow Fund but shall be distributed to the record holders of the Parent Common
Stock on the record date set for any such dividend.
(iii) Each shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such shareholder (and on any voting securities added to the Escrow Fund in
respect of such shares of Parent Common Stock).
(e) Claims Upon Escrow Fund.
(i) Upon receipt by the Depositary Agent at any time on
or before the last day of the Escrow Period of a certificate signed by any
officer of Parent (an "Officer's Certificate"): (A) stating that Parent has paid
or properly accrued or reasonably anticipates that it will have to pay or accrue
Losses, directly or indirectly, as a result of any inaccuracy or breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any instrument delivered pursuant to this Agreement, and (B) specifying in
reasonable detail the individual items of Losses included in the amount so
stated, the date each such item was paid or properly accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty, agreement or covenant to which such item is related (including, but
not limited to, the specific provision breached), the Depositary Agent shall,
subject to the provisions of Section 7.2(f) hereof, deliver to Parent out of the
Escrow Fund, as promptly as practicable, shares of Parent Common Stock held in
the Escrow Fund in an amount equal to such Losses.
(ii) For the purposes of determining the number of
shares of Parent Common Stock to be delivered to Parent out of the Escrow Fund
pursuant to Section 7.2(e)(i), the shares of Parent Common Stock shall be valued
at the Closing Price.
(f) Objections to Claims. At the time of delivery of any
Officer's Certificate to the Depositary Agent, a duplicate copy of such
certificate shall be delivered to the Shareholder Agent and for a period of
thirty (30) days after such delivery, the Depositary Agent shall make no
delivery to Parent of any Escrow Amounts pursuant to Section 7.2(e) hereof
unless the Depositary Agent shall have received written authorization from the
Shareholder Agent to make such delivery. After the expiration of such thirty
(30) day period, the Depositary Agent shall make delivery of shares of Parent
Common Stock from
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the Escrow Fund in accordance with Section 7.2(e) hereof, provided that no such
payment or delivery may be made if the Shareholder Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Depositary Agent prior to the
expiration of such 30 day period.
(g) Resolution of Conflicts; Arbitration.
(i) In case the Shareholder Agent shall object in
writing to any claim or claims made in any Officer's Certificate, the
Shareholder Agent and Parent shall attempt in good faith to agree upon the
rights of the respective parties with respect to each of such claims. If the
Shareholder Agent and Parent should so agree, joint written instructions setting
forth such agreement shall be prepared and signed by both parties and shall be
furnished to the Depositary Agent. The Depositary Agent shall be entitled to
rely on any such instructions and distribute shares of Parent Common Stock from
the Escrow Fund in accordance with the terms thereof. If no such agreement can
be reached after good faith negotiation, either Parent or the Shareholder Agent
may demand arbitration of the dispute pursuant to Section 9.10 unless the amount
of the damage or loss is at issue in a pending Action or Proceeding involving a
Third Party Claim, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration.
7.3 Shareholder Agent of the Shareholders; Power of Attorney.
(a) Shareholder Agent. In the event that the Merger is approved
by the shareholders of the Company, effective upon such vote, and without
further act of any shareholder, Nicholas Mitsakos shall be appointed as agent
and attorney-in-fact (the "Shareholder Agent") for each shareholder of the
Company (except such shareholders, if any, as shall have perfected their
dissenters' rights under California Law), for and on behalf of shareholders of
the Company, to give and receive notices and communications, to authorize
delivery to Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of the
Shareholder Agent for the accomplishment of the foregoing. Such agency may be
changed by the shareholders of the Company from time to time upon not less than
30 days prior written notice to Parent; provided, however, that the Shareholder
Agent may not be removed unless holders of a two-thirds interest in the Escrow
Fund agree to such removal and to the identity of the substituted shareholder
agent. Any vacancy in the position of Shareholder Agent may be filled by
approval of the holders of a majority in interest of the Escrow Fund. No bond
shall be required of the Shareholder Agent, and the Shareholder Agent shall not
receive compensation for his services. Notices or communications to or from the
Shareholder Agent shall constitute notice to or from each of the shareholders of
the Company.
(b) Exculpation. The Shareholder Agent shall not be liable for
any act done or omitted hereunder as Shareholder Agent while acting in good
faith and in the exercise of reasonable judgment.
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(c) Actions of the Shareholder Agent. A decision, act, consent
or instruction of the Shareholder Agent shall constitute a decision for all of
the shareholders for whom a portion of the Escrow Amount otherwise issuable to
them are deposited in the Escrow Fund, and shall be final, binding and
conclusive upon each of such shareholders, and the Depositary Agent and Parent
may rely upon any such decision, act, consent or instruction of the Shareholder
Agent as being the decision, act, consent or instruction of every such
shareholder of the Company. The Depositary Agent and Parent are hereby relieved
from any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Shareholder Agent.
7.4 Third-Party Claims. In the event Parent becomes aware of a
third-party claim (a "Third Party Claim") which Parent reasonably expects may
result in a demand against the Escrow Fund, Parent shall promptly notify the
Shareholder Agent of such claim, and the Shareholder Agent, as representative
for the shareholders of the Company, shall be entitled, at their expense, to
participate in any defense of such claim. Parent shall have the right in its
sole discretion to settle any Third Party Claim; provided, however, that if
Parent settles any Third Party Claim without the Shareholder Agent's consent
(which consent shall not be unreasonably withheld or delayed), Parent may not
make a claim against the Escrow Fund with respect to the amount of Losses
incurred by Parent in such settlement. In the event that the Shareholder Agent
has consented to any such settlement, the Shareholder Agent shall have no power
or authority to object under any provision of this Article 8 to the amount of
any claim by Parent against the Escrow Fund with respect to the amount of Losses
incurred by Parent in such settlement as consented to by the Shareholder Agent.
7.5 Depositary Agent's Duties.
(a) Limitation on Duties of Depositary Agent. The Depositary
Agent shall be obligated only for the performance of such duties as are
specifically set forth herein, and as set forth in any additional written escrow
instructions which the Depositary Agent may receive after the date of this
Agreement which are signed by an officer of Parent and the Shareholder Agent,
and may rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed to be genuine and to have been signed or
presented by the proper party or parties. The Depositary Agent shall not be
liable for any act done or omitted hereunder as Depositary Agent while acting in
good faith and in the exercise of reasonable judgment, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence of such
good faith.
(b) Compliance with Orders. The Depositary Agent is hereby
expressly authorized to comply with and obey Orders of any court of law or
Governmental or Regulatory Authority, notwithstanding any notices, warnings or
other communications from any party or any other person to the contrary. In case
the Depositary Agent obeys or complies with any such Order, the Depositary Agent
shall not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such Order being subsequently
reversed, modified, annulled, set aside, vacated or found to have been entered
without jurisdiction or proper authority.
(c) Limitations on Liability of Depositary Agent. The Depositary
Agent shall not be liable:
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(i) in any respect on account of the identity, authority
or rights of the parties executing or delivering or purporting to execute or
deliver this Agreement or any documents or papers deposited or called for
hereunder; or
(ii) for the expiration of any rights under any statute
of limitations with respect to this Agreement or any documents deposited with
the Depositary Agent.
(d) Good Faith of Depositary Agent. In performing any duties
under the Agreement, the Depositary Agent shall not be liable to any party for
damages, losses, or expenses, except for gross negligence or willful misconduct
on the part of the Depositary Agent. The Depositary Agent shall not incur any
such liability for (i) any act or failure to act made or omitted in good faith,
or (ii) any action taken or omitted in reliance upon any instrument, including
any written statement or affidavit provided for in this Agreement that the
Depositary Agent shall in good faith believe to be genuine, nor will the
Depositary Agent be liable or responsible for forgeries, fraud, impersonations
or determining the scope of any representative authority. In addition, the
Depositary Agent may consult with legal counsel in connection with the
Depositary Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered, or permitted by him/her in good faith in accordance
with the advice of counsel. The Depositary Agent is not responsible for
determining and verifying the authority of any person acting or purporting to
act on behalf of any party to this Agreement.
(e) Non-responsibility of Depositary Agent. If any controversy
arises between the parties to this Agreement, or with any other party,
concerning the subject matter of this Agreement, its terms or conditions, the
Depositary Agent will not be required to determine the controversy or to take
any action regarding it. The Depositary Agent may hold all documents and shares
of Parent Common Stock and may wait for settlement of any such controversy by
final appropriate legal proceedings or other means as, in the Depositary Agent's
discretion, the Depositary Agent may be required, despite what may be set forth
elsewhere in this Agreement. In such event, the Depositary Agent will not be
liable for any damages. Furthermore, the Depositary Agent may at its option,
file an action of interpleader requiring the parties to answer and litigate any
claims and rights among themselves. The Depositary Agent is authorized to
deposit with the clerk of the court all documents and shares of Parent Common
Stock held in escrow, except all costs, expenses, charges and reasonable
attorney fees incurred by the Depositary Agent due to the interpleader action
and which the parties jointly and severally agree to pay. Upon initiating such
action, the Depositary Agent shall be fully released and discharged of and from
all obligations and liability imposed by the terms of this Agreement.
(f) Indemnification of Depositary Agent. Parent and the
Surviving Corporation and their respective successors and assigns agree jointly
and severally to indemnify and hold the Depositary Agent harmless against any
and all Losses incurred by the Depositary Agent in connection with the
performance of the Depositary Agent's duties under this Agreement, including but
not limited to any litigation arising from this Agreement or involving its
subject matter.
(g) Resignation of Depositary Agent. The Depositary Agent may
resign at any time upon giving at least 30 days written notice to the parties;
provided, however, that
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no such resignation shall become effective until the appointment of a successor
Depositary Agent which shall be accomplished as follows: the parties shall use
their best efforts to mutually agree on a successor Depositary Agent within 30
days after receiving such notice. If the parties fail to agree upon a successor
Depositary Agent within such time, the Depositary Agent shall have the right to
appoint a successor Depositary Agent authorized to do business in the State of
California. The successor Depositary Agent shall execute and deliver an
instrument accepting such appointment and it shall, without further acts, be
vested with all the estates, properties, rights, powers, and duties of the
predecessor Depositary Agent as if originally named as Depositary Agent. The
Depositary Agent shall be discharged from any further duties and liability under
this Agreement.
(h) Fees. All fees of the Depositary Agent for performance of
its duties hereunder shall be paid by Parent. In the event that the conditions
of this Agreement are not promptly fulfilled, or if the Depositary Agent renders
any service not provided for in this Agreement, or if the parties request a
substantial modification of its terms, or if any controversy arises, or if the
Depositary Agent is made a party to, or intervenes in, any Action or Proceeding
pertaining to this escrow or its subject matter, the Depositary Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, and expenses occasioned by such default, delay,
controversy or Action or Proceeding. Parent agrees to pay these sums upon
demand.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual agreement of the Company, Parent and Merger Sub;
(b) by Parent, Merger Sub or the Company if: (i) the Effective
Time has not occurred before 11:59 p.m. (Pacific Time) on May 31, 1999 (the
"Termination Date") (provided, however, that the right to terminate this
Agreement under this clause 9.1(b)(i) shall not be available to any party whose
willful failure to fulfill any obligation hereunder has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date;
and provided further that if the Closing does not occur by May 31, 1999 as the
result of the failure by Alliance Semiconductor Corporation to receive early
termination or expiration of the applicable waiting period under the HSR Act for
its acquisition of shares of Parent Common Stock in connection with the Merger
(other than because of Parent's failure to make any required responsive filings
under the HSR Act) and at that time Alliance Semiconductor Corporation is
continuing to seek such early termination or expiration, then the Termination
Date shall be extended to the fifth (5th) Business Day after such early
termination or expiration is obtained or such efforts are abandoned, but in no
event later than June 30, 1999); (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any Governmental or Regulatory
Authority that would make consummation of the Merger illegal;
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(c) by Parent and Merger Sub or the Company if there shall be
any action taken, or any Law or Order enacted, promulgated or issued or deemed
applicable to the Merger, by any Governmental or Regulatory Authority, which
would: (i) prohibit Parent's or the Merger Sub's ownership or operation of all
or any portion of the business of the Company or (ii) compel Parent or Merger
Sub to dispose of or hold separate all or any portion of the Assets and
Properties of the Company as a result of the Merger (unless, in the case of
Parent and Merger Sub, such dispositions or obligations to hold separate would
be required as a result of the acquisition of another business entity by Parent
after the date hereof ); provided, however, that the Company may not exercise
its termination right pursuant to clause (ii) if Parent notifies the Company in
writing within ten (10) calendar days of the event that would otherwise trigger
such right that it will agree to, or will agree to negotiate in good faith (and
continues thereafter to negotiate in good faith) with respect to, such a
disposition or obligation to hold separate);
(d) by Parent if neither it nor Merger Sub are in material
breach of their obligations under this Agreement and there has been a breach of
any representation, warranty, covenant or agreement contained in this Agreement
on the part of the Company and (i) the Company has not cured and is not using
its commercially reasonable efforts to cure such breach after notice of such
breach to the Company (provided that, no cure period shall be required for a
breach which by its nature cannot be cured) and (ii) as a result of such breach
the conditions set forth in Section 6.1 or 6.3, as the case may be, would not
then be satisfied;
(e) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and (i) Parent has not cured and is not using
its commercially reasonable efforts to cure such breach after notice of such
breach to Parent (provided that, no cure period shall be required for a breach
which by its nature cannot be cured), and (ii) as a result of such breach the
conditions set forth in Section 6.1 or 6.2, as the case may be, would not then
be satisfied by the Company;
(f) by Parent if, if at any time after five (5) days following
the Special Meeting, holders of more than 3.0% of the outstanding shares of
Company Capital Stock shall have exercised, or have any continued right to
exercise, appraisal, dissenters' or similar rights under applicable law with
respect to their shares by virtue of the Merger;
(g) by Parent, if neither Parent nor Merger Sub is in material
breach of its obligations under this Agreement, if the Merger shall not have
been approved at the Special Meeting by the requisite votes of the Company's
shareholders in accordance with the California Code;
(h) By Parent, if any of the individuals listed on Schedule
6.3(j) cease to be employed by the Company, except if such employment has
terminated as the result of the death or Permanent Disability of such
individual; provided, however, that Parent may exercise this termination right
with respect to a particular individual named in Schedule 6.3(j) only if Parent
gives the Company written notice of termination of the Agreement within thirty
days after receipt of written notice from the Company that such individual has
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ceased to be employed by the Company for reasons other than death or Permanent
Disability; or
(i) By Parent, if, at any time, (i) less than seventy five
percent (75%) of the twenty eight (28) engineering and research and development
employees of the Company as of the date of this Agreement shall be employed by
the Company and there has been a material adverse effect on the Business or
Condition of the Company, the Operating Plan or the Company's product plans or
schedule as a result of any diminution in the number of such employees or (ii)
less than fifty percent (50%) of such employees of the Company shall be employed
by the Company. For purposes of this Section 8.1(i), individuals who are not
employed by virtue of death, Permanent Disability or involuntary termination by
the Company are excluded from all calculations.
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
Board of Directors of the party taking such action.
8.2 Effect of Termination. In the event of a valid termination of this
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Merger Sub
or the Company, or their respective officers, directors or shareholders or
Affiliates; provided, however, that each party shall remain liable for any
breaches of this Agreement prior to its termination; and provided further that,
the provisions of Sections 5.4, 5.5, 5.6, 5.22, 9.1, 9.2, 9.5, 9.6, 9.7, 9.9,
9.10 and 9.11 and Section 7.1 of this Agreement shall remain in full force and
effect and survive any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
the shareholders of the Company approve the Merger and this Agreement, this
Agreement may be amended by the parties hereto at any time by execution of an
instrument in writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent,
Merger Sub and the Company may, to the extent legally allowed, (i) extend the
time for the performance of any of the obligations of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements, covenants or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
8.5 Remedies. If the Merger is not consummated as the result of an
intentional breach of this Agreement by a party hereto, then the non-breaching
party shall be entitled to such remedies as may be available at law or in
equity. If the Merger is not consummated as the result of the failure of any of
the conditions to the parties' respective obligations thereto (other than the
conditions set forth in Section 6.1(a) (as it relates to the HSR Act), 6.1(e)
(as it relates to delivery of Company Affiliate Agreements), 6.1(f), 6.3(e),
6.3(f), 6.3(g), 6.3(h), 6.3(i), 6.3(l), 6.3(m), 6.3(n) or 6.3(o)), then if such
failure occurs as the result of either (x) an inadvertent or unintentional
breach of this Agreement by Parent or Merger Sub or
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(y) any reason other than a breach of this Agreement by any of the parties
hereto, then the principal amount of the Note will be reduced as set forth in
the Note (with any such event which causes such reduction being referred to as a
"Step-down Event"), and the Company agrees that such reduction in the principal
amount of the Note shall be its sole and exclusive remedy hereunder. If the
Merger is not consummated as the result of the failure of any of the conditions
to Parent's or Merger Sub's obligations hereunder and such failure is the result
of an inadvertent or unintentional breach of this Agreement by the Company, then
Parent and Merger Sub agree that their sole and exclusive remedy shall be to
terminate this Agreement as provided in Section 8.1 hereof. If the Merger is not
consummated as the result of the failure of any of the conditions to the
parties' respective obligations thereto set forth in Section 6.1(e) (as it
relates to delivery of Company Affiliate Agreements), 6.1(a) (as it relates to
the HSR Act), 6.1(f), 6.3(e), 6.3(f), 6.3(g), 6.3(h), 6.3(i) 6.3(l), 6.3(m),
6.3(n), or 6.3(o)), which failure was not the result of any intentional breach
of this Agreement by Parent or Merger Sub, then the Company agrees that its sole
and exclusive remedy shall be to terminate the agreement as provided in Section
8.1 hereof.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.1 Notices. All notices, requests and other communications hereunder
must be in writing and will be deemed to have been duly given only if delivered
personally against written receipt or by facsimile transmission against
facsimile confirmation or mailed by prepaid first class certified mail, return
receipt requested, or mailed by overnight courier prepaid, to the parties at the
following addresses or facsimile numbers:
If to Parent or Merger Sub to:
Broadcom Corporation
16215 Alton Parkway
Irvine, California 92618
Facsimile No.: (949) 450-8715
Attn: President and Chief Executive Officer and
Attn: General Counsel
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Facsimile No.: (310) 203-7199
Attn: Milton B. Hyman, Esq.
If to the Company to:
Maverick Networks
683 River Oaks Parkway
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San Jose, CA 95134
Facsimile No.: (408) 434-6032
Attn: President and Chief Executive Officer
with copies to:
Latham & Watkins
135 Commonwealth Drive
Menlo Park, California 94025
Facsimile No.: (650) 463-2600
Attn: Christopher L. Kaufman, Esq.
and to:
General Counsel Associates LLP
1891 Landings Drive
Mountain View, CA 94043
Facsimile No.: (650) 428-3901
Attn: Betsy E. Bayha, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided for in this Section, be deemed given upon facsimile confirmation, (iii)
if delivered by mail in the manner described above to the address as provided
for in this Section, be deemed given on the earlier of the third Business Day
following mailing or upon receipt and (iv) if delivered by overnight courier to
the address as provided in this Section, be deemed given on the earlier of the
first Business Day following the date sent by such overnight courier or upon
receipt (in each case regardless of whether such notice, request or other
communication is received by any other Person to whom a copy of such notice is
to be delivered pursuant to this Section). Any party from time to time may
change its address, facsimile number or other information for the purpose of
notices to that party by giving notice specifying such change to the other party
hereto.
9.2 Entire Agreement. This Agreement supersedes all prior discussions
and agreements between the parties with respect to the subject matter hereof and
thereof and contains the sole and entire agreement between the parties hereto
with respect to the subject matter hereof and thereof.
9.3 Further Assurances; Post-Closing Cooperation. At any time or from
time to time after the Closing, the parties shall execute and deliver to the
other party such other documents and instruments, provide such materials and
information and take such other actions as the other party may reasonably
request to consummate the transactions contemplated by this Agreement and
otherwise to cause the other party to fulfill its obligations under this
Agreement and the transactions contemplated hereby. Each party agrees to use
commercially reasonable efforts to cause the conditions to its obligations to
consummate the Merger to be satisfied.
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9.4 Waiver. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
9.5 Third Party Beneficiaries. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights, and this Agreement does not
confer any such rights, upon any other Person other than, from and after the
Effective Time, any Person entitled to indemnity under Section 5.14 or Article 7
or any holder of Company Options, Company Warrants or Company Stock Purchase
Rights entitled to have such Company Options, Company Warrants or Company Stock
Purchase Rights assumed by the Company pursuant to Section 1.6(c) or to have the
shares of Parent Common Stock issuable from and after the Effective Time in
connection with the exercise or conversion thereof registered pursuant to
Section 5.15. Notwithstanding anything to the contrary contained in Section 7.1,
the parties obligations under Sections 1.6, 1.7, 1.8, 1.10, 1.11, 5.13, 5.14,
5.15 and 5.16 and Articles VII, IX and X shall survive consummation of the
Merger until the parties' obligations thereunder have been satisfied in full.
9.6 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned (by operation of law or
otherwise) by any party without the prior written consent of the other party and
any attempt to do so will be void. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and their respective successors and assigns.
9.7 Headings. The headings and table of contents used in this Agreement
have been inserted for convenience of reference only and do not define or limit
the provisions hereof.
9.8 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of California, without giving
effect to any
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choice of law or conflict of law provision or rule (whether of the State of
California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California. Subject to any
temporary injunctive relief pursuant to Section 9.13, any and all disputes
between the parties with respect to this Agreement shall be determined by
binding arbitration in accordance with the provisions of Section 9.10 hereof.
9.10 Arbitration . In the event of any dispute under this Agreement
which the parties are unable to resolve themselves, the matter, regardless of
its nature, shall be settled by arbitration in accordance with the then most
applicable rules of the American Arbitration Association conducted in the city
and county of Orange County, California (if arbitration is requested by the
Company) or Santa Clara, California (if arbitration is requested by Parent), by
three arbitrators, one (1) selected by Parent and one (1) selected by the
Shareholder Agent, and the two (2) arbitrators selected by Parent and the
Shareholder Agent shall select a third arbitrator from a list of nine
arbitrators drawn by the two arbitrators at random from the "Independent" or
"Gold Card" list of retired judges. Any arbitration shall be administered by the
American Arbitration Association only if the parties so agree. Each of the
arbitrators selected by Parent and the Company must be a corporate lawyer who is
a partner at a nationally-recognized law firm which has not provided and does
not provide services to either Parent or the Company.
(a) Application of Procedures. This agreement to resolve any
disputes by binding arbitration shall extend to any claims against any
shareholder of any of the parties, any brother-sister company, parent,
subsidiary, Affiliate, any officer, director, employee or agent of any of the
parties, and shall apply as well to claims arising out of federal or state Laws
as well as to claims arising under common law. The arbitrators shall apply the
same substantive law, and may only utilize the same remedies, as would be
applied or utilized, as applicable, by a court having jurisdiction over the
parties and their dispute. The arbitrators shall, upon an appropriate motion,
dismiss any claim brought in arbitration if the arbitrators determine that the
claim does not state a claim or a cause of action which could have properly been
pursued through court litigation. In the event of a conflict between the then
most applicable rules of the American Arbitration Association and these
procedures, the provisions of these procedures shall govern.
(b) Discovery. The arbitrators shall set a limited time period
and establish procedures designed to reduce the cost and time for discovery of
information relating to any dispute while allowing the parties an opportunity,
adequate as determined in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel, limit or allow
discovery as they shall deem appropriate given the nature and extent of the
disputed claim. The arbitrators shall also have the authority to impose
sanctions, including attorneys' fees and other costs incurred by the parties, to
the same extent as a court of law or equity, should the arbitrators determine
that discovery was sought without substantial justification or that discovery
was refused or objected to by a party without substantial justification.
(c) Decision of Arbitrators. The decision of a majority of the
three (3) arbitrators as to any claim, including as to the validity and amount
of any claim in such Officer's Certificate shall be binding and conclusive upon
the parties to this Agreement, and
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notwithstanding anything in Section 7.2(e) hereof, the Depositary Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith. Such decision shall be written
and shall be supported by written findings of fact and conclusions regarding the
dispute which shall set forth the award, judgment, decree or order awarded by
the arbitrators. In the event that a court determines that the arbitration
procedures set forth herein is not absolutely final and binding, then it is the
intent of the parties that any arbitration decision should be fully admissible
in evidence, given great weight by any finder of fact and treated as
determinative to the maximum extent permitted by law.
(d) Judgment; Costs. Judgment upon any award rendered by the
arbitrators may be entered in any court having competent jurisdiction. The
arbitrators shall have the power to award the prevailing party in any
arbitration (as determined by the arbitrators) its costs and expenses incurred
in connection with the arbitration, including without limitation, reasonable
attorneys' fees and costs, the fees of each arbitrator and the administrative
costs of the arbitration.
9.11 Construction. The parties hereto agree that this Agreement is the
product of negotiation between sophisticated parties and individuals, all of
whom were represented by counsel, and each of whom had an opportunity to
participate in and did participate in, the drafting of each provision hereof.
Accordingly, ambiguities in this Agreement, if any, shall not be construed
strictly or in favor of or against any party hereto but rather shall be given a
fair and reasonable construction without regard to the rule of contra
preferentum.
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
9.13 Specific Performance. Subject to the provisions of Section 8.5, the
parties hereto agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, pending final resolution
of any dispute by arbitration pursuant to Section 9.10, it is agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction.
ARTICLE 10
DEFINITIONS
10.1 Definitions.
(a) As used in this Agreement, the following defined terms shall
have the meanings indicated below:
"Actions or Proceedings" means any action, suit, complaint,
petition, investigation known to the party, proceeding, arbitration, litigation
or Governmental or Regulatory Authority audit or other proceeding known to the
party, whether civil or criminal, in law or in equity, or before any arbitrator
or Governmental Regulatory Authority.
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"Affiliate" means, as applied to any Person, (a) any other
Person directly or indirectly controlling, controlled by or under common control
with, that Person, (b) any other Person that owns or controls (i) 10% or more of
any class of equity securities of that Person or (ii) 10% or more of any class
of equity securities (including any equity securities issuable upon the exercise
of any option or convertible security) of that Person, or (c) any director,
partner or officer of such Person. For the purposes of this definition,
"control" (including with correlative meanings, the terms "controlling",
"controlled by", and "under common control with") as applied to any Person,
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of that Person, whether through
ownership of voting securities or by contract or otherwise.
"Aggregate Company Share Number" means the aggregate number of
shares of Company Common Stock and Company Preferred Stock outstanding
immediately prior to the Effective Time (including all shares of Company Common
Stock issued or issuable upon exercise, conversion or exchange of all issued and
outstanding Company Options, Company Warrants and Company Stock Purchase Rights
which are not exercised, converted, exchanged or expired as of the Effective
Time).
"Aggregate Parent Share Number" means 864,200 shares of Parent
Common Stock (as appropriately adjusted to reflect the effect of any stock
split, stock dividend, stock combination, reorganization, reclassification or
similar change occurring after the date of this Agreement and prior to the
Effective Time).
"Aggregate Parent Share Number Coefficient" means: (i) 1.00 in
the event that the Closing Price is greater than or equal to 90% of the November
Price, (ii) 1.267 in the event that the Closing Price is less than or equal to
60% of the November Price or (iii) 1.00 plus the Price Change Adjustment in the
event that the Closing Price is less than 90% but greater than 60% of the
November Price.
"Agreement" means this Strategic Alliance Agreement and Plan of
Merger, the Exhibits and the Disclosure Schedule and the certificates and
instruments required to be delivered pursuant to Article 6 in connection
herewith, as the same may be amended or supplemented from time to time in
accordance with the terms hereof.
"Agreement of Merger" has the meaning ascribed to it in Section
1.1.
"Approval" means any approval, authorization, consent, permit,
qualification or registration, or any waiver of any of the foregoing, required
to be obtained from or made with, or any notice, statement or other
communication required to be filed with or delivered to, any Governmental or
Regulatory Authority or any other Person.
"Assets and Properties" of any Person means all assets and
properties of every kind, nature, character and description (whether real,
personal or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), operated, owned, licensed
or leased by such Person, including cash, cash equivalents, Investment Assets,
accounts and notes receivable, chattel paper, documents, instruments, general
intangibles, real estate, equipment, inventory, goods and Intellectual Property.
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"Bankruptcy Event" means that the Company shall have, pursuant
to or within the meaning of any Bankruptcy Law, (A) commenced a voluntary case,
(B) had an involuntary case instituted against it (other than by Parent) which
has not been dismissed within sixty days or, in any event, prior to the date
that would otherwise have been the Closing Date, (C) consented to the
appointment of a custodian of or for all or substantially all of its assets, or
(D) made a general assignment for the benefit of creditors.
"Bankruptcy Law" means Title 11, U.S. Code or any similar
foreign or U.S. federal or state law for the relief of debtors.
"Books and Records" means all files, documents, instruments,
papers, books and records maintained by the Company, including financial
statements, internal reports, Tax Returns and related work papers and letters
from accountants, budgets, pricing guidelines, ledgers, journals, deeds, title
policies, minute books, stock certificates and books, stock transfer ledgers,
Contracts, Licenses, customer lists, computer files and programs (including data
processing files and records), retrieval programs, operating data and plans and
environmental studies and plans.
"Business Combination" means, with respect to any Person, (i)
any merger, consolidation or other business combination to which such Person is
a party, (ii) any sale, dividend, split or other disposition of any capital
stock or other equity interests of such Person, (iii) any tender offer
(including a self tender), exchange offer, recapitalization, restructuring,
liquidation, dissolution or similar or extraordinary transaction, (iv) any sale,
dividend or other disposition of all or a material portion of the Assets and
Properties of such Person or (v) the entering into of any agreement or
understanding, the granting of any rights or options, or the acquiescence of the
Company, with respect to any of the foregoing.
"Business Day" means a day other than Saturday, Sunday or any
day on which banks located in the State of California are authorized or
obligated to close.
"Business or Condition of Parent" means the business, financial
condition, results of operations or Assets and Properties of the Parent and each
of its Subsidiaries, in the aggregate.
"Business or Condition of the Company" means the business,
financial condition, results of operations or Assets and Properties of the
Company and each of its Subsidiaries, in the aggregate.
"California Code" means the California Corporations Code, as
amended.
"Certificates" has the meaning ascribed to them in Section
1.7(b).
"Closing" means the closing of the transactions contemplated by
Section 1.1.
"Closing Date" has the meaning ascribed to it in Section 1.1.
"Closing Price" means the average closing sales price of
Parent's Class A Common Stock as traded on the NNM and reported by the Wall
Street Journal, for the 30 consecutive market trading days commencing on the
thirty-second trading day prior to the
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Closing Date and ending on (inclusive) the third market trading day prior to the
Closing Date (subject to equitable adjustment for any such closing sales prices
which occur prior to any of the events described in Section 1.6(d)).
"Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"Commissioner" has the meaning ascribed to it in Section 5.1.
"Company" has the meaning ascribed to it in the forepart of this
Agreement.
"Company Affiliates" has the meaning ascribed to it in Section
5.11.
"Company Affiliate Agreement" has the meaning ascribed to it in
Recital E.
"Company Capital Stock" means the Company Common Stock and
Company Preferred Stock.
"Company Common Stock" has the meaning ascribed to it in Section
2.3.
"Company Audited Financials" means the audited balance sheet of
the Company as of December 31, 1998, and the related audited statement of
operations and statement of cash flows for the period from inception of the
Company through December 31, 1998, together with the notes thereto and the
unqualified report of the Company's Independent Accountants with respect
thereto.
"Company Financials" means (i) the unaudited balance sheet of
the Company as of November 30, 1998, and the related unaudited statement of
operations and statement of cash flows for the period from January 1, 1998
through November 30, 1998 and (ii) the monthly unaudited balance sheets of the
Company for each month thereafter and the related unaudited statement of
operations for such month, beginning with December 1998 and through and
including the month ending immediately prior to the date of this Agreement.
"Company Indemnified Party" has the meaning ascribed to it in
Section 5.14.
"Company Intellectual Property" shall mean any Intellectual
Property that is (i) owned by; (ii) licensed to; or (iii) was developed or
created by or for the Company.
"Company Option(s)" means any Option to purchase Company Capital
Stock, excluding the Company Warrants.
"Company Preferred Stock" has the meaning ascribed to it in
Section 2.3.
"Company Registered Intellectual Property" means all Registered
Intellectual Property owned by, or filed in the name of, the Company.
"Company Restricted Stock" means shares of Company Capital Stock
purchased pursuant to an exercise of a Company Stock Purchase Right which are
subject to a repurchase option by the Company.
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"Company Stock Purchase Right" means a right to purchase
Restricted Stock of the Company granted pursuant to Section 11 of the Stock Plan
or otherwise.
"Company Warrants" means all of the warrants to purchase Company
Capital Stock listed on Section 2.3 of the Disclosure Schedule.
"Company's Independent Accountants" means PricewaterhouseCoopers
LLP.
"Contract" means any legally binding agreement, lease, evidence
of Indebtedness, mortgage, indenture, security agreement or other contract or
business arrangement (whether written or oral).
"Depositary Agent" means U.S. Stock Transfer Corporation (or
other institution acceptable to Parent and the Shareholder Agent).
"Disclosure Schedule" means the schedules delivered to Parent
and Merger Sub by or on behalf of the Company, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein in connection with the representations and warranties made
by the Company in Article 2 of this Agreement.
"Dissenting Shares" has the meaning ascribed to it in Section
1.7(a).
"Effective Time" has the meaning ascribed to it in Section 1.2.
"Environment" means air, surface water, ground water, or land,
including land surface or subsurface, and any receptors such as persons,
wildlife, fish, biota or other natural resources.
"Environmental Clean-up Site" means any location which is listed
or proposed for listing on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System, or on any
similar state list of sites relating to investigation or cleanup, or which is
the subject of any pending or threatened action, suit, proceeding, or
investigation related to or arising from any location at which there has been a
Release or threatened or suspected Release of a Hazardous Material.
"Environmental Law" means any federal, state, local or foreign
environmental, health and safety or other Law relating to of Hazardous
Materials, including without limitation the Comprehensive, Environmental
Response Compensation and Liability Act, the Clean Air Act, the Federal Water
Pollution Control Act, the Solid Waste Disposal Act, the Federal Insecticide,
Fungicide and Rodenticide Act, and the California Safe Drinking Water and Toxic
Enforcement Act.
"Environmental Permit" means any permit, license, approval,
consent or authorization required under or in connection with any Environmental
Law and includes without limitation any and all orders, consent orders or
binding agreements issued or entered into by a Governmental or Regulatory
Authority.
"Equity Equivalents" means securities (including Options to
purchase any shares of Company Capital Stock) which, by their terms, are or may
be exercisable,
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convertible or exchangeable for or into common stock, preferred stock or other
securities at the election of the holder thereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" has the meaning ascribed to it in Section
2.14.
"Escrow Amount" and "Escrow Fund" means the number of shares of
Parent Common Stock obtained by multiplying (x) the aggregate number of shares
of Parent Common Stock issuable by Parent at the Effective Time to holders of
Company Capital Stock in accordance with Section 1.6(a) by (y) 0.10.
"Escrow Period" has the meaning ascribed to it in Section
7.2(c).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder.
"Exchange Agent" means U.S. Stock Transfer Corporation.
"Exchange Ratio" means the quotient obtained by dividing (i) the
Price Adjusted Aggregate Parent Share Number by (ii) the Aggregate Company Share
Number.
"Expiration Date" has the meaning ascribed to it in Section 7.1.
"Fairness Approval" has the meaning ascribed to it in Section
5.1.
"Financial Statement Date" means November 30, 1998.
"Financial Statements Publication Date" means the date that
Parent actually first releases for general public distribution (including, but
not limited to, by press release disseminated to the financial community
generally) the results of operations and balance sheet for such period.
"GAAP" means generally accepted accounting principles in the
United States, as in effect from time to time.
"Governmental or Regulatory Authority" means any court,
tribunal, arbitrator, authority, agency, bureau, board, commission, department,
official or other instrumentality of the United States, any foreign country or
any domestic or foreign state, county, city or other political subdivision , and
shall include any stock exchange, quotation service and the National Association
of Securities Dealers.
"Hazardous Material" means (a) any chemical, material, substance
or waste including, containing or constituting petroleum or petroleum products,
solvents (including chlorinated solvents), nuclear or radioactive materials,
asbestos in any form that is or could become friable, radon, lead-based paint,
urea formaldehyde foam insulation or polychlorinated biphenyls, (b) any
chemicals, materials, substances or wastes which are now defined as or included
in the definition of "hazardous substances," "hazardous wastes,"
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"hazardous materials," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants" or words of similar import under
any Environmental Law; or (c) any other chemical, material, substance or waste
which is regulated by any Governmental or Regulatory Authority or which could
constitute a nuisance.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Income Tax" means (i) any income, alternative or add-on minimum
tax, gross income, gross receipts, franchise, profits, including estimated taxes
relating to any of the foregoing, or other similar tax or other like assessment
or charge of similar kind whatsoever, excluding any Other Tax, together with any
interest and any penalty, addition to tax or additional amount imposed by any
Taxing Authority responsible for the imposition of any such Tax (domestic or
foreign); or (ii) any liability of a Person for the payment of any taxes,
interest, penalty, addition to tax or like additional amount resulting from the
application of Treas. Reg. Section1.1502-6 or comparable provisions of any
Taxing Authority in respect of a Tax Return of a Relevant Group.
"Indebtedness" of any Person means, without duplication, all
obligations of such Person (a) for borrowed money, (b) evidenced by notes,
bonds, debentures or similar instruments, (c) for the deferred purchase price of
goods or services (other than trade payables or accruals incurred in the
ordinary course of business), (d) under capital leases and (e) in the nature of
guarantees of the obligations described in clauses (a) through (d) above of any
other Person.
"Intellectual Property" means all trademarks and trademark
rights, trade names and trade name rights, service marks and service mark
rights, service names and service name rights, patents and patent rights,
utility models and utility model rights, copyrights, mask work rights, brand
names, trade dress, product designs, product packaging, business and product
names, logos, slogans, rights of publicity, trade secrets, inventions (whether
patentable or not), invention disclosures, improvements, processes, formulae,
industrial models, processes, designs, specifications, technology,
methodologies, computer software (including all source code, object code),
firmware, development tools, flow charts, annotations, all Web addresses, sites
and domain names, all data bases and data collections and all rights therein,
any other confidential and proprietary right or information, whether or not
subject to statutory registration, and all related technical information,
manufacturing, engineering and technical drawings, know-how and all pending
applications for and registrations of patents, utility models, trademarks,
service marks and copyrights, and the right to sue for past infringement, if
any, in connection with any of the foregoing, and all documents, disks, records,
files and other media on which any of the foregoing is stored.
"Investment Assets" means all debentures, notes and other
evidences of Indebtedness, stocks, securities (including rights to purchase and
securities convertible into or exchangeable for other securities), interests in
joint ventures and general and limited partnerships, mortgage loans and other
investment or portfolio assets owned of record or beneficially by the Company.
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"IRS" means the United States Internal Revenue Service or any
successor entity.
"Law" or "Laws" means any law, statute, order, decree, consent
decree, judgment, rule, regulation, ordinance or other pronouncement having the
effect of law whether in the United States, any foreign country, or any domestic
or foreign state, county, city or other political subdivision or of any
Governmental or Regulatory Authority.
"Leased Real Property(ies)" has the meaning ascribed to it in
Section 2.15(a).
"Liabilities" means all Indebtedness, obligations and other
liabilities of a Person, whether absolute, accrued, contingent (or based upon
any contingency), known or unknown, fixed or otherwise, or whether due or to
become due.
"License" means any Contract that grants a Person the right to
use or otherwise enjoy the benefits of any Intellectual Property (including
without limitation any covenants not to sue with respect to any Intellectual
Property).
"Liens" means any mortgage, pledge, assessment, security
interest, lease, lien, easement, license, covenant, condition, restriction,
adverse claim, levy, charge, option, equity, adverse claim or restriction or
other encumbrance of any kind, or any conditional sale Contract, title retention
Contract or other Contract to give any of the foregoing, except for any
restrictions on transfer generally arising under any applicable federal or state
securities law.
"Loss(es)" means any and all damages, fines, fees, Taxes,
penalties, deficiencies, losses and expenses, including actual interest paid,
reasonable out-of-pocket expenses of investigation, court costs, reasonable fees
and expenses of attorneys, accountants and other experts or other expenses of
litigation or other proceedings or of any claim, default or assessment (such
fees and expenses to include all fees and expenses, including fees and expenses
of attorneys, incurred in connection with (i) the investigation or defense of
any Third Party Claims or (ii) asserting or disputing any rights under this
Agreement against any party hereto or otherwise).
"Merger" has the meaning ascribed to it in the recitals to this
Agreement.
"Merger Sub" has the meaning ascribed to it in the forepart of
this Agreement.
"NASD" means the National Association of Securities Dealers,
Inc.
"New Shares" has the meaning ascribed to it in Section
7.2(d)(ii).
"NNM" means the Nasdaq National Market.
"Non-Competition Agreement" has the meaning ascribed to it in
Recital F.
"November Price" means $87-13/16, representing the closing price
of a share of Parent's Class A Common Stock on the NNM on November 20, 1998
(subject to
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equitable adjustment to reflect fully the result of any of the events described
in Section 1.6(d)).
"Officer's Certificate" has the meaning ascribed to it in
Section 7.2(e)(i).
"Operating Plan" has the meaning ascribed to it in Section 4.2.
"Option" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right or other Contract that
gives the right to (i) purchase or otherwise receive or be issued any shares of
capital stock or other equity interests of such Person or any security of any
kind convertible into or exchangeable or exercisable for any shares of capital
stock or other equity interests of such Person or (ii) receive any benefits or
rights similar to any rights enjoyed by or accruing to the holder of shares of
capital stock or other equity interests of such Person, including any rights to
participate in the equity, income or election of directors or officers of such
Person (excluding convertible Company Preferred Stock and including Alliance
Semiconductor Corporation's right to acquire 300,000 shares of Series B
Preferred Stock of the Company under that certain Series B Preferred Stock
Purchase Agreement dated as of February 20, 1998 between Alliance Semiconductor
Corporation and the Company).
"Order" means any writ, judgment, decree, injunction or similar
order of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"Orion SA Product" means a 24 Fast Ethernet/2 Gigabit Ethernet
standalone switch chip.
"Other Tax" means any sales, use, ad valorem, business license,
withholding, payroll, employment, excise, stamp, transfer, recording,
occupation, premium, property, value added, custom duty, severance, windfall
profit or license tax, governmental fee or other similar assessment or charge,
together with any interest and any penalty, addition to tax or additional amount
imposed by any Taxing Authority responsible for the imposition of any such tax
(domestic or foreign).
"Parent" has the meaning ascribed to it in the forepart of this
Agreement.
"Parent Affiliate" has the meaning ascribed to it in Section
5.12.
"Parent Affiliate Agreement" has the meaning ascribed to it in
Recital G.
"Parent Common Stock" has the meaning ascribed to it in the
recitals to this Agreement.
"Parent Financial Statements" has the meaning ascribed to it in
Section 3.4.
"Parent Common Equity" means the Parent Common Stock and the
Class A Common Stock of Parent.
"PBGC" means the Pension Benefit Guaranty Corporation
established under ERISA.
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"Percentage Price Change" means the percentage difference
between the Closing Price and the November Price, expressed in, and rounded to,
the nearest two decimal points, minus point ten (.10), but in no event less than
zero (0) or greater than point thirty (.30).
"Permanent Disability" means, with respect to any individual,
that such individual shall have become physically or mentally disabled, whether
totally or partially, so that he or she (i) is prevented from performing his or
her duties for the Company for an aggregate period (whether or not consecutive)
of sixty (60) days or more from the date hereof through the Closing or, if such
individual has had an onset of a physical or mental disability, (ii) would not
reasonably be expected to be able to perform his or her duties for the Company
for an aggregate period (whether or not consecutive) of sixty (60) days or more
of a period of one hundred eighty (180) consecutive days (whether before or
after the date the Closing would otherwise have occurred or been required to
occur in the absence of the Permanent Disability of such individual).
"Permit" means any license, permit, franchise or authorization.
"Person" means any natural person, corporation, general
partnership, limited partnership, limited liability company or partnership,
proprietorship, other business organization, trust, union, association or
Governmental or Regulatory Authority.
"Plan" has the meaning ascribed to it in Section 2.14.
"Pooling of Interests" shall mean pooling of interests
accounting treatment under Accounting Principles Board Opinion No. 16.
"Price Adjusted Parent Aggregate Share Number" means the
Aggregate Parent Share Number multiplied by the Aggregate Parent Share Number
Coefficient.
"Price Change Adjustment" means (i) 0.889% multiplied by (ii)
the Percentage Price Change.
"PTO" means the United States Patent and Trademark Office.
"Registered Intellectual Property" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks and servicemarks,
applications to register trademarks, intent-to-use applications, other
registrations or applications to trademarks or servicemarks, or trademarks or
servicemarks in which common law rights are owned or otherwise controlled; (iii)
registered copyrights and applications for copyright registration; (iv) any mask
work registrations and applications to register mask works; and (v) any other
Intellectual Property that is the subject of an application, certificate,
filing, registration or other document issued by, filed with, or recorded by,
any state, government or other public legal authority.
"Registration Statement" has the meaning ascribed to it in
Section 5.1.
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<PAGE> 82
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing of a Hazardous Material into the Environment.
"Relevant Group" has the meaning ascribed to it in Section
2.11(a).
"Representatives" has the meaning ascribed to it in Section 7.1.
"Restricted Stock Purchase Agreement" means a Restricted Stock
Purchase Agreement in one of the forms attached to the Stock Plan pursuant to
which the Company has sold Company Restricted Stock or issued Company Stock
Purchase Rights or as may otherwise been entered into by the Company prior to
the date of this Agreement.
"Retention Agreement" has the meaning ascribed to it in Recital
F.
"SEC" means the Securities and Exchange Commission or any
successor entity.
"SEC Documents" means, with respect to any Person, each report,
schedule, form, statement, registration statement or other document filed or
required to be filed with the SEC by such Person.
"SEC Report Date" means September 30, 1998, the date
representing the last day of the last reporting period for which Parent has
filed a periodic report with the SEC under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Shareholder Agent" has the meaning ascribed to it in Section
7.3(a).
"Site" means any of the real properties currently or previously
owned, leased, occupied, used or operated by the Company, any predecessors of
the Company, or any entities previously owned by the Company, including all
soil, subsoil, surface waters and groundwater.
"Special Meeting" has the meaning ascribed to it in Section 5.2.
"Step-down Event" has the meaning ascribed to it in Section 8.5.
"Stock Plan" has the meaning ascribed to it in Section
1.6(c)(iv).
"Strategic Alliance" has the meaning ascribed to it in Section
4.1.
"Subsidiary" means any Person in which the Company or Parent, as
the context requires, directly or indirectly through Subsidiaries or otherwise,
beneficially owns at least 50% of either the equity interest in, or the voting
control of, such Person, whether or not existing on the date hereof.
"Support Agreement" has the meaning ascribed to it in Recital E.
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"Surviving Corporation" has the meaning ascribed to it in
Section 1.1.
"Takeover Statute" means a "fair price," "moratorium," "control
share acquisition" or other similar antitakeover statute or regulation enacted
under state or federal laws in the United States.
"Tax" or "Taxes" means Income Taxes and/or Other Taxes, as the
context requires.
"Tax Laws" means the Code, federal, state, county, local or
foreign laws relating to Taxes and any regulations or official administrative
pronouncements released thereunder.
"Tax Returns" means any return, report, information return,
schedule, certificate, statement or other document (including any related or
supporting information) filed or required to be filed with, or, where none is
required to be filed with a Taxing Authority, the statement or other document
issued by, a Taxing Authority in connection with any Tax.
"Taxing Authority" means any governmental agency, board, bureau,
body, department or authority of any United States federal, state or local
jurisdiction or any foreign jurisdiction, having or purporting to exercise
jurisdiction with respect to any Tax.
"Termination Date" has the meaning ascribed to it in Section
8.1(b).
"Third Party Claim" has the meaning ascribed to it in Section
7.2(j).
"Third Party Expenses" has the meaning ascribed to it in Section
5.5.
"Warranty Obligations" has the meaning ascribed to it in Section
2.29.
(b) Unless the context of this Agreement otherwise requires, (i)
words of any gender include each other gender, (ii) words using the singular or
plural number also include the plural or singular number, respectively, (iii)
the terms "hereof," "herein," "hereby" and derivative or similar words refer to
this entire Agreement as a whole and not to any particular Article, Section or
other subdivision, (iv) the terms "Article" or "Section" or other subdivision
refer to the specified Article, Section or other subdivision of the body of this
Agreement, (v) the phrases "ordinary course of business" and "ordinary course of
business consistent with past practice" refer to the business and practice of
the Company, (vi) the words "include," "includes" and "including" shall be
deemed to be followed by the phrase "without limitation," and (vii) when a
reference is made in this Agreement to Exhibits, such reference shall be to an
Exhibit to this Agreement unless otherwise indicated. All accounting terms used
herein and not expressly defined herein shall have the meanings given to them
under GAAP. The term "party" or "parties" when used herein refer to Parent and
Merger Sub, on the one hand, and the Company, on the other.
(c) When used herein, the phrase "to the knowledge of" any
Person, "to the best knowledge of" any Person, "known to" any Person or any
similar phrase, means (i) with respect to Parent and Merger Sub, the actual
knowledge of Henry T. Nicholas, III,
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Ph.D, William J. Ruehle, Martin J. Colombatto and David A. Dull and (ii) with
respect to the Company, G. Venkatesh, Bill Burger, Jim Mannos and Shiri Kadambi,
in each case without any duty of inquiry.
(d) For purposes of Section 6.2(a) and Section 6.3(a) of this
Agreement, in determining whether there has been a material adverse effect on
the Business or Condition of the Company or on the Business or Condition of
Parent, (a) any change or effect that relates to or results primarily from (i)
the announcement or other disclosure of the transactions contemplated by this
Agreement or (ii) change in economic conditions in the economy generally, (b)
any change in the market for the Company's or Parent's products, as applicable,
including but not limited to any action taken by any competitor of the Company
or Parent or (c) any general delay or other setback in the Company's current new
product development activities, shall not be considered.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Parent, Merger Sub and Company, and with respect to
Section 7.3 only, the Shareholder Agent and Depositary Agent, have caused this
Agreement to be signed by their duly authorized representatives, all as of the
date first written above.
MAVERICK NETWORKS BROADCOM CORPORATION
By: /s/ G. VENKATESH By: /s/ HENRY T. NICHOLAS, III, Ph.D.
--------------------------------- -------------------------------------
G. Venkatesh Henry T. Nicholas, III, Ph.D.
President and Chief Executive President and Chief Executive Officer
Officer
MAVNET ACQUISITION CORP. SHAREHOLDER AGENT
By: /s/ MARTIN J. COLOMBATTO By: /s/ NICHOLAS MITSAKOS
--------------------------------- -------------------------------------
Martin J. Colombatto Nicholas Mitsakos
President and Chief Executive
Officer
U.S. STOCK TRANSFER CORPORATION,
AS DEPOSITARY AGENT
By: /s/ RICHARD BROWN
---------------------------------
Richard Brown
Vice President
- 76 -
<PAGE> 86
Strategic Alliance Agreement and
Plan of Merger
by and between
Broadcom Corporation
Mavnet Acquisition Corp.
and
Maverick Networks
Dated as of January 25, 1999.
List of Exhibits
Exhibit A. Support Agreement
Exhibit B. Company Affiliate Agreement
Exhibit C. Non-Competition Agreement
Exhibit D. Parent Affiliate Agreement
Exhibit E. Agreement of Merger
Exhibit F. Promissory Note
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement pertaining to the Broadcom Corporation 1998 Stock Incentive Plan and
1998 Employee Stock Purchase Plan (Form S-8 No. 333-60763) of our reports dated
January 26, 1999, with respect to the consolidated financial statements and
financial statement schedule of Broadcom Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Orange County, California
March 25, 1999
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