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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-23993
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0480482
(STATE OR OTHER JURISDICTION (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
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 [ ]
Indicate 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. [ ]
Based on the closing sale price on the Nasdaq National Market(R) on March
23, 2001, the aggregate market value of the voting stock held by nonaffiliates
of the registrant was approximately $6,434,550,000. 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 a determination for other purposes.
The registrant 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. In addition, holders of Class B common stock are entitled
to vote separately on the proposed issuance of additional shares of Class B
common stock in certain circumstances. As of March 23, 2001 there were
179,717,391 shares of Class A common stock outstanding and 79,738,302 shares of
Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
registrant's definitive proxy statement (the "Proxy Statement") for the Annual
Meeting of Shareholders to be held on May 29, 2001.
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Broadcom(R), the pulse logo, QAMLink(R), Blutonium(TM), CALISTO(TM),
Digi-A(TM), Grand Champion(TM), iLine10(TM), Mercurian(TM), Open VoIP(TM),
ROBOswitch(TM), ServerWorks(TM), StrataSwitch(TM), and System I/O(TM) are
trademarks of Broadcom Corporation and/or its affiliates in the United States
and certain other countries. All other trademarks mentioned are the property of
their respective owners.
(C)2001 Broadcom Corporation. All rights reserved.
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BROADCOM CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 44
Item 8. Financial Statements and Supplementary Data................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
OTHER INFORMATION
Glossary of Technical Terms................................. 48
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CAUTIONARY STATEMENT
This Report contains forward-looking statements which include, but are not
limited to, statements concerning projected revenues, expenses, gross profit and
income, market acceptance of our products, our ability to consummate
acquisitions and integrate their operations successfully, the competitive nature
of and anticipated growth in our markets, our ability to achieve further product
integration, the status of evolving technologies and their growth potential, the
timing of new product introductions, the adoption of future industry standards,
our production capacity, our ability to migrate to smaller process geometries,
the need for additional capital, and the success of pending litigation. These
forward-looking statements are based on our current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by us. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," "will" and variations of these words or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. These statements are not guarantees
of future performance and are subject to 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, some of which are listed under the section "Risk
Factors" at the end of Item 7 of this Report. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
All share numbers and per share amounts in this Report have been
retroactively adjusted to reflect our 2-for-1 stock splits, each in the form of
a 100% stock dividend, effective February 17, 1999 and February 11, 2000,
respectively.
PART I.
ITEM 1. BUSINESS
Broadcom Corporation is the leading provider of highly integrated silicon
solutions that enable broadband communications and networking of voice, video
and data services. Using proprietary technologies and advanced design
methodologies, Broadcom designs, develops and supplies system-on-a-chip
solutions for applications in digital cable set-top boxes and cable modems,
high-speed local, metropolitan and wide area and optical networks, home
networking, Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial digital
broadcast, digital subscriber line (xDSL), wireless communications,/O(TM) server
solutions and network processing.
The desire of equipment manufacturers and service providers to develop and
expand the broadband communications 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.
MARKETS
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.
The cable industry's adoption of the Data Over Cable Service Interface
Specification (DOCSIS) in 1997
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made possible interoperability between different manufacturers' cable modems and
head-end equipment across different cable networks. This standard enables the
cost-effective deployment of cable modems via retail channels. High-speed
Internet access services use cable modems to connect PCs to the cable network.
The modems were 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, nearly 1,000 times faster
than the fastest analog telephone modems (56 kbps downstream and 28.8 kbps
upstream). The high speeds of cable modems can enable an entirely new generation
of multimedia-rich content over the Internet and allow cable operators to expand
their traditional video product offerings to include data and telephone
services.
Digital Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity of
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 the use of new digital cable set-top boxes. These
digital cable set-top boxes facilitate high-speed digital communications between
a subscriber's television and the cable network. Digital 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 include
Internet access, Personal Video Recording (PVR), interactive television, high
definition television, 3-D gaming, audio players and cable telephony. A new
generation of digital cable set-top boxes is being introduced to facilitate
television Internet access, to support high definition television and to provide
a gateway for the distribution of voice, video and data throughout the home and
business.
Enterprise Networking
Local area networks (LANs) are comprised of different types of equipment
interconnected by cables (copper, fiber and coax) over a computer networking
protocol called 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 most desktop connections have migrated to Fast
Ethernet, we believe that Gigabit Ethernet is emerging as the predominant
technology for servers and backbone infrastructures that support LANs, and will
eventually migrate to the desktop itself. As Gigabit Ethernet gets deployed to
the desktop, server and backbone connections will eventually migrate to the new
10 Gigabit standard. We anticipate that a significant portion of the installed
base of 10Base-T and 10/100Base-T Ethernet repeater/hub ports, switches and
network interface cards (NICs) will be upgraded to the faster technologies. In
addition, the need for dedicated and predictable bandwidth to the desktop is
driving 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.
Most corporations today utilize the Internet for the transmission of data
between corporate offices and remote sites, and for a variety of e-commerce and
business-to-business applications. In order to secure corporate networks from
intrusive attacks and provide for secure communication between corporate sites,
an increasing amount of networking equipment will include technology to
establish virtual private networks (VPNs). In addition to VPNs which use the
IPSec protocol, secure socket layer (SSL) is used to secure sensitive
information between users and service providers for e-commerce applications.
Servers
With the proliferation of data being accessed and sorted by the Internet
and corporate intranets, the demand for servers has increased substantially. As
an integral piece of the overall communications market, servers are
multiprocessor-based computers that are used to support users' PCs and to
perform basic PC
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transactions, such as updating databases. The Internet has created a new market
for servers as users access data and entertainment stored on servers from their
PCs, handheld computers and wireless handsets.
We acquired ServerWorks Corporation in January 2001. ServerWorks' SystemI/O
silicon solutions act as the essential conduits for delivering high-bandwidth
data in and out of servers, and coordinating all I/O transactions within the
server platform including between external Input/Output devices, the main system
memory and the CPUs.
To date, ServerWorks' chips are found in servers sold by the major server
OEMs, such as Compaq, Dell, IBM, HP and motherboard manufacturers such as Intel,
ASUSTeK and Acer. The server market is growing rapidly, and ServerWorks has
successfully leveraged its technology over the past year into faster growing
markets such as storage and networking through design wins with OEMs such as
Network Appliance and Cisco. As a first step, Broadcom's communications products
are being sold through ServerWorks' OEM channel, and in upcoming quarters,
ServerWorks plans to integrate Broadcom's technologies into its product line
thereby accelerating the combined companies' revenues.
Home Networking and Consumer Networking
The proliferation of multi-PC households and Internet appliances increases
the need for home networking solutions and lays the foundation for extending the
reach of the shared broadband Internet access, video transfer and voice at high
speeds throughout the home and small office. The industry's adoption of the Home
Phoneline Networking Alliance's (HomePNA(TM)) 2.0 standard for 32 Mbps home
networking technology has met this need by enabling the development of
affordable, easy-to-use networking solutions for the consumer. We believe
HomePNA 2.0 will enable the delivery of voice, video and data concurrently to
any network-enabled appliance, PC or consumer electronic device over ordinary
phone lines at speeds of 32 Mbps.
Wireless technologies based upon the IEEE 802.11 and Bluetooth(TM)
standards allow consumers to have mobile flexibility around their homes and
offices. Bluetooth provides a low cost wire replacement technology enabling
invisible connectivity between consumers' cell phones, PDAs, PCs, and MP3
players. This industry standard is supported by over 1,000 companies to date,
and we anticipate the adoption of this standard will increase in the next 12 to
18 months to become the defacto wireless standard in consumer products. 802.11B
is the wireless equivalent of 10 Mbps Ethernet, and has already penetrated the
corporate campus as the wireless technology of choice.
xDSL
Digital subscriber line technologies, commonly known as xDSL, represent a
family of broadband technologies that use the copper twisted pair wiring in the
existing local telephone network to deliver high speed data transmission. DSL
speeds range from 128 kbps to 52 Mbps depending on the distance between the
central office and the subscriber. These data rates are enabling a wide range of
new services, including high-speed Internet access and multi-line voice and
digital television delivery.
According to industry analysts, Global DSL subscribers in 2000 grew from
under 700,000 to over 6,000,000 as telecommunications service providers began
the mass roll-out of DSL services to end-users. Industry analysts are
forecasting a continued rapid roll-out of DSL, with near-term growth primarily
in Korea, Japan, Taiwan, Germany and the U.S.
Optical Networking
In order to cope with the increasing volume of data traffic emanating from
the rising number of broadband connections in homes and businesses, metropolitan
area networks (MANs) will have to evolve at both the transport and switching
layers. One significant obstacle preventing this evolution has been the high
cost of optical modules and next generation network elements.
We believe that the complementary metal oxide semiconductor (CMOS)
fabrication process is the key technology that will significantly reduce the
cost of deploying higher transport speeds in MANs, such OC-48, OC-192 and 10
Gigabit Ethernet, by enabling the development of smaller optical modules that
cost less and
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consume less power. Furthermore, we anticipate that the ability to achieve high
degrees of IC integration using CMOS will enable MANs to evolve from
time-division multiplex (TDM) to Internet Protocol (IP) packet switching, by
enabling hybrid network elements that combine cost-effectively TDM functionality
with IP and Ethernet.
Wireless Communications -- DBS, Terrestrial Digital Broadcast and Broadband
Fixed Wireless
Digital Broadcast Satellite, commonly known as DBS, is the primary
alternative to cable for providing digital television programming. DBS
broadcasts video and audio data from satellites directly to digital 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:
- Terrestrial Digital Broadcast Television, the upgrade of analog broadcast
television to digital, which enables the delivery of high definition
television
- Multichannel Multipoint Distribution System (MMDS), which uses microwave
frequencies (below 10 GHz) to transmit voice, video and data over two-way
terrestrial digital microwave channels to digital set-top boxes and
wireless modem
- Local Multipoint Distribution System (LMDS), which uses higher microwave
frequencies (above 10 GHz) to transmit voice, video and data to digital
set-top boxes and wireless modems over a shorter distance via a
cellular-like network
MMDS and LMDS are wireless systems that are currently being tested in
limited deployments. In the U.S. market, the MMDS and LMDS industry has
experienced significant license holder consolidation, which may lead to greater
investment in equipment and service for these markets. These new networks, which
are able to provide programming in areas that do not have cable, will also
require a digital set-top box or wireless modem.
Beginning in 1999, the FCC has mandated that the top four affiliated
television stations begin digital broadcasting. We believe this conversion to
digital broadcasting will also require new digital set-top boxes and television
receivers.
Carrier Access
Voice over Internet Protocol (VoIP) is stimulating dramatic changes in the
traditional public switched and enterprise telephone networks. With the
significant growth in data traffic for Internet and other data services, long
distance deregulation and local deregulation, packet-based bandwidth-on-demand
networks provide significant economic advantages over traditional
circuit-switched circuit-on-demand voice networks.
Carrier class media gateways and access concentrators provide packet-based
CLASS 4 and CLASS 5 interface or replacement solutions. Multi-service access
concentrators are transitioning from dial-up data access to full multi-service
voice-enabled solutions. Our high-density communications processors that employ
programmable digital signal processing are designed specifically for these
markets.
The PBX and systems markets are being radically affected by the convergence
of circuit switched and IP packet-based technologies. LAN-based solutions that
use the network infrastructure as the backbone for routing and switching of
packet-voice within a business enable IP phones in the enterprise or enterprise
telephony. Our IP phone silicon solutions integrate the essential packet
processing, voice processing and switching technologies to provide Quality of
Service (QoS), high fidelity and reliablity necessary for enterprise telephony
applications.
Our broadband access devices and residential gateways provide last-mile
telephony services over a broadband packet infrastructure such as cable, xDSL or
wireless.
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Broadband Processors
The continued growth of IP traffic coupled with the increased demand for
new services/applications such as VoIP, VPNs and high-speed Web access (e.g.
xDSL and cable) are placing great processing demands on next-generation LAN, MAN
and WAN equipment. We believe that today's networking/telecom platforms,
especially at the access and service provider edge, must scale in performance
from current OC-12 and OC-48 to OC-192 and soon OC-768 (40 Gigabits/second)
bandwidth rates.
We believe that a new generation of broadband processors that balance
aggressive performance requirements with power and die-size constraints are
required to meet the needs of current and next generation networks. These
processors must be easily programmable so that new services and features can be
upgraded with minimal hassle. We believe that leveraging a standard Instruction
Set Architecture such as MIPS that is well established in the networking market
and supported by a large host of third-party tools and software developers is
key to providing customers familiar, easy-to-use development environment.
CUSTOMERS AND STRATEGIC RELATIONSHIPS
We sell our products to leading manufacturers of broadband communications
equipment in each of our target markets. Because we leverage our technologies
across different markets, certain of our integrated circuits may be incorporated
into equipment used in several different markets.
Customers currently shipping broadband communications equipment
incorporating our products include 3Com, Cisco Systems, Hewlett-Packard,
Motorola, Nortel Networks, Pace, Pioneer, Samsung, Ericsson, Gateway and Thomson
CE, among others. In order to meet the current and future technical needs of the
market, we have established strategic relationships with multi-service operators
(MSOs) that provide broadband communications services to consumers and
businesses. We have also formalized a technical advisory board that includes
MSOs such as Comcast, AOL/Time Warner, Charter Communications, Cox
Communications, AT&T Broadband and Rogers Communications.
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 (now a wholly
owned subsidiary of Motorola), which provides that we will develop and supply
chips for General Instrument's digital cable set-top boxes. In November 2000 we
modified this agreement to amend the minimum purchase requirements. In November
2000 we also entered into a new supply agreement with General Instrument
covering our sale of cable modem chips to General Instrument.
From time to time, we have also entered into development agreements with
3Com, Cisco Systems, Nortel Networks, Sony and others. We have worked closely
with these customers to co-develop products.
A small number of customers have historically accounted for a substantial
portion of our revenue. Sales to Motorola (including General Instrument, which
was acquired by Motorola in January 2000, and sales to Motorola's manufacturing
subcontractors) represented approximately 23.2% of our net revenue in 2000 and
approximately 30.3% of our net revenue in 1999. Sales to 3Com (including sales
to its manufacturing subcontractors) represented approximately 15.1% of our net
revenue in 2000 and approximately 18.0% of our net revenue in 1999. Sales to
Cisco (including sales to its manufacturing subcontractors) represented
approximately 14.1% of our net revenue in 2000 and approximately 10.6% of our
net revenue in 1999. Sales to our five largest customers decreased to
approximately 61.8% of our net revenue in 2000 from approximately 66.6% of our
net revenue in 1999. The loss of any key customer could materially and adversely
affect our business, financial condition and results of operations.
PRODUCTS
Our core technologies combine for a "system-on-a-chip" design methodology
that we use across all of our product lines. This proven design methodology has
enabled us to be first to market with advanced chips that are highly integrated
and cost-effective, and that facilitate the easy integration of our customers'
intellectual property. Broadcom's design methodology leverages
industry-standard, state-of-the-art electronic design
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automation tools, and generally migrates easily to new silicon processes and
technology platforms. Our design methodology also allows for the easy
integration of acquired or licensed technology, providing customers with a broad
range of silicon options with differentiating networking and performance
features.
Cable Products
Our cable-TV product line consists of integrated silicon solutions for
digital cable-TV set-top boxes, cable modems and cable modem termination
systems. We currently have a leading market position in all three equipment
areas, with an extensive product offering for the high-speed, two-way
transmission and display of digital information for the delivery of voice, video
and data services to residential customers over existing hybrid-fiber cable.
Broadcom offers its customers a complete system level solution which not only
includes chips, but also reference design hardware and a full software suite in
order to support the customer's needs and accelerate time to market.
Cable Modems. All of our cable modems chips are built around the Broadcom
QAMLink(R) DOCSIS-compliant transceiver and media access controller (MAC)
silicon technology, which enables downstream data rates up to 56 Mbps and
upstream data rates up to 20 Mbps and is compliant with DOCSIS versions 1.0 and
1.1. These devices provide all the real-time DOCSIS component capabilities in
silicon, enabling Quality of Service to support constant bit rate services like
VoIP and video streaming.
The level of integration and performance that we continue to accomplish in
these devices is reducing the cost and size of cable modems while providing
consumers with easy to use features and seamless integration to other
transmission mediums. As a result, cable modem functionality is evolving into a
small silicon core that can be incorporated into other consumer devices for
broader distribution of IP-based services throughout the home. Broadcom's cable
modem technology is being incorporated into personal computers for high-speed
Internet access, cable-TV set-top boxes for high-speed Internet access through
the television, and residential broadband gateways for receiving and
distributing IP-based voice and data services in the home over existing phone
lines.
Cable Modem Termination Systems. Broadcom is the only company with a
complete end-to-end DOCSIS compliant cable modem silicon solution for both
head-end and subscriber locations. Broadcom's cable modem termination system
chipset consists of the downstream and upstream physical layer devices and the
DOCSIS MAC. This cable modem termination system enables the exchange of
information to and from the subscriber location, making it a key element in the
delivery of broadband access over cable.
Cable-TV Set-Top Boxes. We have a complete silicon platform for the
digital, cable-TV set-top box market. These highly integrated chips give
manufacturers a complete range of features and capabilities for building
standard digital, cable-TV boxes for digital video broadcasting, as well as
high-end interactive set-top boxes that merge high-speed cable modem
functionality with studio-quality graphics, text and video for both SDTV and
HDTV formats.
Our cable-TV box silicon consists of front-end transceivers with
downstream, upstream and MAC functions, single-chip cable modems that operate up
to 56 Mbps downstream and 20 Mbps upstream, advanced 2D/3D video-graphics
encoders and decoders, and CMOS-based RF television tuners. These cable-TV chips
support industry transmission and television standards, such as ITU-T J.83 Annex
A/B/C, OpenCable, DOCSIS/EuroDOCSIS, DVB/DAVIC, NTSC and PAL and Point of
Deployment, ensuring universal interoperability and easy retail channel
distribution. Peripheral modules incorporated into front-end devices also
provide support for common set-top box peripheral devices, such as IR remotes,
IR keyboards, LEDs and keypads.
Our chips provide a comprehensive silicon platform for high-end interactive
set-top boxes, supporting the simultaneous viewing of television programming
with Internet content capability in either HDTV or SDTV format. This capability
provides consumers with a true interactive environment, allowing them to access
Internet content while watching television. With the addition of our home
networking and VoIP technologies, these set-top boxes can also support the
functions of a broadband residential gateway for receiving and distributing
digital voice and data services throughout the home over the phone line.
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Enterprise Network Products
Our 10/100/1000 Ethernet transceivers and switches are integrated,
low-power silicon solutions that enable the high-speed transmission of voice,
video, and data over the widely deployed Category 5 unshielded twisted-pair
copper wiring in enterprise and small office network connections. These
high-speed connections are enabling users to share Internet access, exchange
graphics and video presentations, receive VoIP services and share peripheral
equipment, such as printers and scanners. We also incorporate intelligent
networking functionality into our devices, enabling system vendors to deploy an
enhanced class of services and applications, typically found only in the core of
the network, out to every corporate desktop.
Digital Signal Processing (DSP) Communication Architecture. Our complex
Ethernet transceivers are built upon a proprietary DSP communication
architecture optimized for high-speed enterprise network connections. Our
Digi-A(TM) DSP silicon core enables interoperability and robust performance over
a wide range of cable lengths and operating conditions, and delivers performance
of greater than 250 billion operations per second (GOPS). This proprietary DSP
architecture facilitates the migration path to smaller process geometries and
minimizes the development schedule and cost of our transceivers. It has been
successfully implemented in 0.5, 0.35, 0.25, 0.18 and 0.13 micron CMOS, and
implemented in chips with one, four, six and eight ports.
Ethernet Transceivers. Our 10/100 Ethernet transceiver product line ranges
from single-chip 10/100 Ethernet transceivers up to single-chip Octal 10/100
Ethernet transceivers. These devices allow information to travel over standard
Category 5 cable at rates of 10 Mbps and 100 Mbps. Additionally, we were the
first company to market a Gigabit Ethernet transceiver for copper cabling and
have a broad portfolio of 10/100/1000 Mbps Ethernet transceivers. Our Gigabit
transceivers are enabling manufacturers to develop equipment that delivers data
at Gigabit speeds (1000 Mbps) over Category 5 cabling. This equipment can
significantly upgrade the performance of existing networks without having to
rewire the network infrastructure with fiber or enhanced copper cabling.
We believe our transceivers are driving the market toward lower power,
smaller footprint solutions, making it easier and less expensive to build
10/100/1000 Ethernet LAN on Motherboards (LOMs), NICs, switches, hubs and
routers. We plan to continue to incorporate additional functionality into all of
our transceivers, providing customers with advanced networking features and
higher performance capabilities that we believe will make it easier to bring
10/100/1000 Ethernet to the desktop.
Ethernet Switches. We offer a broad "switch-on-a-chip" product line,
ranging from low-cost, unmanaged and managed, Layer 2 eight-port switches, up to
the high-end managed, Layer 3 through Layer 7 enterprise class 24-port switches.
The ROBOswitch(TM)-plus product family comprises of five- and eight-port
Layer 2 switch chips supporting 5-, 8-, 16- and 24-port 10/100 Ethernet
switches. Our switch chips are making it economical for the remote office
business office and small office home office network markets to have the same
high-speed local connectivity as the large corporate office market. Our highly
integrated family of switch products integrate the switching fabric, MACs,
10/100 Ethernet transceivers, Media Independent Interface and packet buffer
memory onto single-chip solutions. These chips give manufacturers multiple
switch design options that combine plug and play ease-of-use, scalability,
network management features and non-blocking switching performance at optimal
price points for the Remote Office/Branch Office user.
Our high-end switch product, StrataSwitch(TM), is a wire-speed multi-layer
switch chip that combines switching, routing and traffic classification
functionality into single-monolithic integrated circuits. Replacing up to as
many as 10 chips, StrataSwitch incorporates 24 Fast Ethernet and two Gigabit
Ethernet ports with advanced Layer 3 switching and multi-layer packet
classification. The multi-layer switch is capable of receiving, prioritizing,
and forwarding packets of voice, video and data at full speed over existing
corporate networks.
The StrataSwitch core is also being incorporated into a family of
copper-based Gigabit Ethernet switches. The G-Switch family is comprised of
multi-port switching devices supporting 10/100/1000 Mbps with all of the same
switching functions as StrataSwitch. Achieving a new level of integration, the
G-Switch products are
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making it cost effective to bring Gigabit connectivity to the desktop computer,
thereby enabling businesses to exchange larger graphics and imaging files,
increase voice, video, and data/Internet traffic and conduct online business
meetings and transactions. The StrataSwitch core improves the QoS of voice/video
transmission and other applications, such as IP multicasting.
We recently sampled our first switch device that is targeted at the MAN
market and incorporates 12 Gigabit Ethernet and one 10 Gigabit Ethernet ports
into a single chip solution.
We introduced a Gigabit Ethernet MAC chip in December 2000 that supports
PIC and PIC-X local bus interfaces for use in NICs and on LAN-on-Motherboard
implementations. This device includes an advanced software suite and complements
our broad family of Gigabit Ethernet transceiver products.
10-Gigabit Ethernet Transceiver. We developed the world's first 10-Gigabit
Ethernet CMOS transceiver. When combined with Coarse Wave Division Multiplexes
fiber optic modules, this device can simultaneously transmit and receive 10
Gigabit per second data rates over 50 kilometers of existing single-mode fiber.
A 10-Gigabit Ethernet link over such distances extends the reach of Ethernet
into local, regional and metropolitan fiber optic networks. We believe that
significant cost, performance and latency advantages can be realized when the
Ethernet protocol and other associated QoS capabilities are extended into these
network domains. Convergence around 10 Gigabit Ethernet should allow massive
data flow from remote storage sites, across the country, over the MAN and into
the corporate LAN, without unnecessary delays, costly buffering for speed
mis-matches or latency, or breaks in the QoS protocol.
Network Security. Our family of high-speed security processors for
enterprise networks are enabling companies to guard against Internet attacks
without compromising the speed and performance of their network. Our chips are
built upon a proprietary, scalable silicon architecture that performs
standard-compliant cryptographic functions at data rates ranging from a few
Megabits per second to multi-Gigabits per second. This scalable architecture is
being deployed across all of our product lines, addressing the entire broadband
security network spectrum from residential applications to
enterprise-networking-equipment. Using this scalable architecture, we believe
that we will be able to develop stand-alone products for very high-speed
networking applications and integrate the IP security processor core into lower
speed consumer-based silicon, such as cable and DSL modem applications.
Server Input/Output Products
A wholly owned subsidiary of Broadcom since January 2001, ServerWorks
offers products that are used to design low-end (one and two CPUs), and
mid-range (two and four CPUs) servers, storage, workstation and networking
platforms. The bandwidth of our SystemI/O solutions, both from CPU to memory and
memory to Input/Output (I/O) subsystems, such as disk drives or networks, lead
the industry. ServerWorks also provides reliability, availability and
scalability features. The current generation of SystemI/O products, the LE and
the HE, support Intel Pentium(R) III processors that run at speeds of up to 1
GHz and provide memory bandwidth of up to 3 Gigabytes per second and I/O
bandwidth of up to 1 Gigabyte per second. In February 2001, we announced our
Grand Champion(TM) SystemI/O product line that will support Intel's next
generation server CPU and will offer memory bandwidth of up to 6.4 Gigabytes per
second and I/O bandwidth of up to 5.0 Gigabytes per second.
Home Networking Products
Our home networking technology is enabling the distribution of digital
voice, video and data content over the home phone line. Our home networking
technology is the conduit for sharing IP-based broadband services, such as
Internet access and voice IP connections, throughout the home using PCs,
entertainment equipment and other intelligent devices. This technology also
enables consumers to stream digital audio/video locally or off the Internet as
well as share printers and other PC-based peripheral equipment.
Based on the HomePNA 2.0 standard, our initial home networking silicon
technology, called iLine10(TM), supports data rates up to 10 Mbps, expanding the
bandwidth capacity of the phone line by as much as 10 times. We accomplish this
by using a patented variation of Quadrature amplitude modulation (QAM), called
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Frequency-Diverse QAM (FD-QAM), which enables the high-speed transmission of
digital data reliably across degraded home phone lines, overcoming the random
topologies and varying noise conditions commonly found in these types of
networking environments.
Our HomePNA 2.0 chipset is targeted at OEMs producing equipment for
residential and small office/home office use and is being incorporated into
cable, xDSL and V.90 modems, personal computers, set-top boxes, residential
gateways and consumer electronic equipment. This chipset features a highly
integrated MAC/PHY communications engine that delivers transmission speeds up to
32 Mbps.
Residential Broadband Gateways. Leveraging our core technologies in cable
modems, home networking, VoIP and high-speed Internet security, we are
developing residential broadband gateway chips. These silicon solutions will
enable OEMs to build gateway equipment for operators to economically deliver
multiple lines of residential broadband services -- digital IP voice, video and
data for telephone, fax and Internet connections, to and throughout the home
using one telephone line.
xDSL Products
We are developing rate-adaptable DSL chips. Our DSL technology is enabling
local exchange carriers and enterprise networking vendors to deliver bundled
broadband services, such as digital video, high-speed Internet access, video
teleconferencing and IP data business services, over existing copper telephone
lines.
Broadcom is the only company with a single-chip rate-adaptable DSL solution
that supports both asymmetric DSL (ADSL) and very-high-bit rate DSL (VDSL) data
rates ranging from 0 to 52 Mbps in either asymmetric or fully symmetric modes.
This fully integrated solution allows manufacturers to build single-platform
systems capable of supporting data rates up to 52 Mbps in Fiber-to-the-Curb
networks and data rates up to 26 Mbps in Fiber-to-the-Node networks. Our DSL
chip can deliver broadband services over ATM and support framed-based services.
The latter feature enables Ethernet traffic to be easily bridged across
telephony grade wiring for workgroup-to-workgroup LAN extensions and for use in
premises where Category 5 wiring is not generally available, such as hotels and
apartments.
With our acquisition of Element 14, we now have the technology to develop
high-port density, low-power ADSL transceiver solutions for central office and
customer premise applications. We believe this technology will enable equipment
vendors of DSL access multiplexers (DSLAMs) and digital loop carriers to offer a
significant increase in the number of DSL-enabled copper twisted pairs that can
be supported within their tight heat, power and space constraints.
Optical Networking Products
Our optical communications chips are a natural extension of our large
portfolio of high-speed LAN chips, which we anticipate will enable us to provide
end-to-end IC solutions that increase the performance, intelligence and
cost-effectiveness of broadband communication networks. These chips are
providing a new class of high-speed optical communications equipment that can
support more network traffic in a much smaller form factor, decreasing the cost
and space restraints facing companies as bandwidth demands increase in corporate
network backbones, MANs and WANs.
Synchronous Optical Networks (SONET). Through our acquisition of NewPort
Communications, we acquired a large portfolio of CMOS OC-48 (2.5 Gigabit per
second) and OC-192 (10 Gigabits per second) transceiver chips for SONET
applications. Our CMOS-based solutions offer substantially higher levels of
integration and lower power than competitive Gallium Arsenide, Bipolar or
Silicon Germanium solutions. The unique implementation of these high speed
transceivers in standard CMOS processes results in low power and low
cost-per-port, this enables higher port density systems, such as Dense
Wavelength Division Multiplexing, and integration of the transceiver into the
laser module, as well as higher levels of silicon integration of the transceiver
with large ASICs, such as framers, intelligent routers, and packet processors.
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Wireless Products
Through internal engineering efforts and acquisitions, we continue to
develop silicon for fixed and short-range wireless, direct broadcast satellite
and terrestrial digital broadcast markets.
Satellite and HDTV. Broadcom has front-end receiver chips for digital
broadcast satellite and HDTV set-top boxes. We believe that we are the only
company with a complete end-to-end chipset for receiving and displaying HDTV.
This chipset provides television and set-top box manufacturers with a high
performance Vestigial Side Band receiver and a 2D/3D video-graphics subsystem
for SDTV and HDTV displays.
Fixed-Wireless Communications. We currently have a strategic relationship
with Cisco Systems to develop fixed-wireless chips for high-speed Internet
services for voice, video and data. The relationship is intended to result in a
fully custom CMOS single-chip wireless modem application specific integrated
circuit (ASIC), containing both a MAC Layer and an advanced wireless Physical
Layer based on Vector Orthogonal Frequency Division Multiplexing (VOFDM). VOFDM
is a new radio frequency technology being supported by Broadcom, Cisco Systems
and nine other industry leaders. We plan to make this chip available on the open
market, giving multiple equipment vendors a robust, cost-effective broadband
fixed wireless solution that minimizes the line-of-sight limitations and
installation problems faced by other proposed broadband fixed wireless
technologies.
Short-Range Wireless Communication. The acquisitions of Innovent and
Pivotal add patent-pending implementations of radio frequency (RF) technology in
a standard digital CMOS process to our product portfolio. We believe that this
advanced RF technology will be the foundation for a series of new products
specifically targeted for the short-range wireless communication market. Our
Blutonium(TM) product line combines RF baseband, systems and software expertise
into single-chip CMOS solutions specifically targeted for Bluetooth
applications.
Carrier Access Products
Communications Processors. Through our acquisition of Silicon Spice, we
now have the semiconductor technology, software and development tools to develop
the core-processing engine for gateway and access devices, which connect the
traditional public-switched-telephone network to packet-based networks such as
the Internet. This innovative communication processor technology will enable
Internet service providers, Internet telephony service providers,
competitive/incumbent local exchange carriers and inter-exchange carriers to
deliver voice and data services simultaneously over a unified data network with
the highest density of voice channel in the industry.
The cornerstone of our carrier access technology is CALISTO(TM). Developed
by Silicon Spice, CALISTO is the world's first single-chip communications
processor for carrier-class voice gateways and access concentrators. This
advanced silicon architecture provides increased signal processing throughput in
a more efficient silicon implementation. CALISTO provides over 3.3 GMACs of
signal processing horsepower and 1.4 Mbytes of high-speed memory, which
translates into 240 packet telephony channels on a single chip. The chip
replaces up to 10 traditional DSP discrete components with a power consumption
of less than 10 milliwatts per channel.
Voice Internet Protocol (VoIP) Software. We are developing advanced
embedded DSP technology for VoIP applications in both the residential and
business markets. VoIP refers to the transmission of telephony -- voice, data,
analog modems and signaling -- over a packet-based network. The delivery of
voice, fax and analog data over LANs and WANs with inherently unpredictable
routings requires complex DSP technology to preserve voice fidelity, fax
reliability and telephone quality of service. Our VoIP DSP software provides the
core voice, fax relay, data relay and telephony signaling for VoIP in gateways,
cable modems, DSL modems, remote access servers, LAN PBXs and Internet
appliances. Our VoIP software operates on programmable DSPs in conjunction with
our cable, home networking, LAN, DSL and carrier access chips and we anticipate
will eventually be embedded into our advanced silicon devices.
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Broadband Processors
Leveraging our expertise in high-performance, low-power very large scale
integration (VLSI) design, we are developing a family of high-performance,
low-power processor solutions designed specifically to meet the needs of
next-generation networks. Our Mercurian(TM) family of processors deliver four
key ingredients essential for today's embedded broadband network processors:
very high performance, low power, high integration of network-centric functions,
and programmability based on an industry standard instruction set architecture.
At the heart of the Mercurian family of processors is the SB-1 core, a MIPS
64-bit superscalar CPU capable of operating at frequencies up to 1 GigaHertz
(GHz). All Mercurian processors are based on the industry-standard MIPS64
architecture, our products will enable equipment vendors to immediately leverage
the large installed base of tools and software available for the MIPS
architecture, thereby shortening development time.
These processors provide customers with a solution for high-speed network
processing, including packet classification, queuing, forwarding and exception
processing. They also enable complex decisions such as routing and load
balancing to be performed at wire speed, at line rates between OC-3 (100 Mbps)
and OC-48 (2.5 Gbps).
REFERENCE PLATFORMS
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.
CORE TECHNOLOGIES
We believe that one of our key competitive advantages is our broad base of
core technologies encompassing the complete design space from systems to
silicon. We have developed and continue to build on five primary technology
foundations:
- proprietary communications systems algorithms and protocols;
- advanced DSP hardware architectures;
- silicon compiler design methodologies and advanced cell library
development for both standard cell and full-custom integrated circuit
design;
- high-performance RF, analog and mixed-signal circuit design using
industry-standard CMOS processes; and
- high-performance custom microprocessor architecture and circuit design.
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 March
31, 2001 a majority of our 1,917 research and development employees had advanced
degrees. Our work force includes approximately 228 employees 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 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 2001. We have established additional design centers in Tempe, Arizona;
San
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Diego, Sunnyvale and San Jose, California; Atlanta, Georgia; Bunnik, the
Netherlands; and Singapore. As a result of acquisitions, we also undertake
software design and development in Canada and design and development activities
in Belgium, England, India, Israel and Taiwan. 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.
Any inability of one of these 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 that adequate foundry capacity may not be
available on acceptable terms, if at all. In the event a foundry experiences
financial difficulties, or if a 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 .5 micron, triple layer metal;
.35 micron, quad layer metal; .22 micron, five layer metal; and .18 micron five
and six layer metal, feature sizes. We are currently sampling products with .13
micron 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 four key subcontractors: ASAT Ltd. in Hong Kong, ST
Assembly Test Services in Singapore, Amkor Technology in the Philippines and
South Korea, and Siliconware Precision in Taiwan. 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 a subcontractor experiences financial difficulties, if a
subcontractor suffers any damage or destruction to its respective facilities, or
in the event of any other disruption of assembly and testing capacity.
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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 received ISO 9002 certification
for our Singapore facility, a comprehensive International Standards Organization
specified quality system. All of our principal independent foundries and package
assembly facilities are currently ISO 9001 certified.
Product Distribution
Historically we had distributed products to our customers through an
operations and distribution center located in Irvine, California. In 1999, we
established an international distribution center in Singapore. This facility
puts us closer to our suppliers and certain key customers and improves our
ability to meet our customers' needs. Our Irvine facility ships products to U.S.
destinations. Our Singapore facility distributes products to our international
customers. As a result of our acquisition of ServerWorks, we also ship products
from its Los Angeles Facility.
SALES AND MARKETING
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by providing
superior sales, field application and engineering support. We market and sell
our products in the United States through a direct sales force, distributors and
manufacturer's representatives. The majority of our sales occur through our
direct sales force, while distributors and manufacturer's representatives have
been utilized in the last year with plans to increase these resources. Our
direct sales force is based out of offices located in California, Florida,
Georgia, Illinois, Maine, Massachusetts, New York, North Carolina and Texas.
Independent distributors Arrow Electronics and Insight Electronics are servicing
the North American and South American market.
We dedicate sales managers to principal customers to promote close
cooperation and communication. We also provide our customers with reference
platform designs, which we believe enables 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 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 Canada, France, Germany,
Israel, Japan, the Netherlands, Singapore, France, Sweden and United Kingdom, as
well as through a network of independent distributors and representatives in
Canada, Germany, Hong Kong, India, Israel, Japan, Korea, Singapore 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.
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BACKLOG
Our sales are made primarily pursuant to standard purchase orders for
delivery of products. Due to industry practice which allows customers to cancel
or change orders with limited advance notice prior to shipment, we believe that
backlog is not a reliable indicator of future revenue levels.
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:
- product capabilities
- level of integration
- reliability
- price
- time-to-market
- standards compliance
- system cost
- intellectual property
- customer support
- 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. In all of our target markets, we also may face competition from newly
established competitors and suppliers of products based on new or emerging
technologies. We also expect to encounter further consolidation in the markets
in which we compete.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, 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. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, 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, decreased gross margins and loss of market
share 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 33 United States patents and have filed over 500 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
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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
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.
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. In January
2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a lawsuit against
us alleging infringement of a single patent relating to tuner technology. In
August 2000 Intel filed a lawsuit against us alleging infringement of five Intel
patents. In November 2000 we settled litigation with Intel Corporation and its
subsidiary Level One Communications, Inc. regarding the alleged misappropriation
of trade secrets, unfair competition and tortious interference with existing
contractual relations related to our hiring of three former Intel employees. In
1999 we settled litigation with Stanford Telecommunications, Inc. that related
to the alleged infringement of one of Stanford's patents by several of our cable
modem products. In 1999 we prevailed in litigation with Sarnoff Corporation and
NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
which alleged that we misappropriated and misused certain of their trade secrets
in connection with our hiring of five former Sarnoff employees. In January 2000
our subsidiary, AltoCom, settled patent litigation with Motorola, Inc. relating
to software modem technology. Our subsidiary, Altima, is the defendant in patent
litigation and International Trade Commission proceedings brought by Intel and
Level One. Although we are defending the pending litigation vigorously, it is
possible that we will not prevail in pending or future lawsuits. In addition, we
may be sued in the future by other parties who claim that we have infringed
their patents or misappropriated or misused their trade secrets, or who may seek
to invalidate one of our patents. Any of these claims may materially and
adversely affect our business, financial condition and results of operations.
For example, in a patent or trade secret action, a court could issue an
injunction against us that would require us to withdraw or recall certain
products from the market or redesign certain products offered for sale or under
development. In addition, we may be liable for damages for past infringement and
royalties for future use of the technology. We may also have to indemnify
certain customers and strategic partners under our agreements with such parties
if a third party alleges or if a court finds that we have infringed upon,
misappropriated or misused another party's proprietary rights. Even if claims
against us are not valid or successfully asserted, these claims could result in
significant costs and a diversion of management and personnel resources to
defend. In that event, our business, financial condition and results of
operations would likely be materially and adversely affected. If any claims or
actions are asserted against us, we may seek to obtain a license under a third
party's intellectual property rights. However, we may not be able to obtain a
license on commercially reasonable terms, if at all.
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EMPLOYEES
As of March 31, 2001 we had 2,706 full-time employees and 91 contract and
temporary employees, including 1,917 employees engaged in research and
development, 332 engaged in sales and marketing, 199 engaged in manufacturing
operations and 349 engaged in finance, legal and 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 buildings in Irvine, California that comprise our corporate
headquarters and include administration, sales and marketing, research and
development, and operations functions. We also lease engineering design centers
in Tempe, Arizona; Los Angeles County, Pleasanton, San Diego, and Santa Clara
County, California; Duluth, Georgia; Dallas, Texas; and Seattle, Washington.
Internationally, we lease a distribution center which includes engineering
design facilities in Singapore. We also lease engineering design facilities in
Belgium, Canada, India, Israel, the Netherlands, Taiwan, and the United Kingdom.
In addition, we lease various sales and marketing facilities in the United
States and several other countries.
The foregoing leases comprise an aggregate of 1.3 million square feet and
have terms expiring in or prior to December 2010. We believe that our current
facilities, together with planned expansions, will be adequate for at least the
next twelve months.
ITEM 3. LEGAL PROCEEDINGS
In March 2000 Intel Corporation and its subsidiary Level One
Communications, Inc. filed a complaint in California Superior Court asserting
claims against Broadcom for misappropriation of trade secrets, unfair
competition, and tortious interference with existing contractual relations by
the company in connection with our recent hiring of three former Intel
employees. The complaint sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel/Level One filed a first amended
complaint in April 2000 seeking additional relief and containing certain
additional allegations, but asserting the same causes of action as the original
complaint. In June 2000 we filed a cross-complaint against Intel/Level One, and
in September 2000, amended that cross-complaint. Our amended cross-complaint
included causes of action against Intel/Level One for unfair competition, trade
secret misappropriation, and tortious interference with contractual relations.
In November 2000 the parties reached a confidential settlement pursuant to which
all claims and cross-claims in the litigation were dismissed in their entirety.
In August 2000 Intel filed a complaint in the United States District Court
for the District of Delaware against Broadcom asserting that we (i) infringe
five Intel patents relating to video compression, high-speed networking and
semiconductor packaging, (ii) induce the infringement of such patents, and (iii)
contributorily infringe such patents. The complaint sought a preliminary and
permanent injunction against Broadcom as well as the recovery of monetary
damages, including treble damages for willful infringement. We have not yet
answered the complaint. In October 2000 we filed a motion to dismiss, or in the
alternative, to transfer venue; that motion is currently pending before the
Court. The parties are currently in the initial stages of discovery in the
action. The Court has tentatively scheduled a hearing on patent claims
construction to commence in September 2001 and a trial to begin in October 2001.
In October 2000 Broadcom filed a complaint for declaratory judgment in the
United States District Court for the Northern District of California against
Intel asserting that the patents asserted by Intel in the Delaware action are
not infringed.
In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a
complaint in the United States District Court for the Eastern District of Texas
against Broadcom asserting that (i) Broadcom's BCM3415 silicon tuner chip
infringes a single Microtune patent relating to tuner technology, (ii) we induce
the
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infringement of such patent, and (iii) we contributorily infringe such patent.
The complaint sought a preliminary and permanent injunction against us as well
as the recovery of monetary damages, including treble damages. We answered the
complaint in March 2001. Discovery has not commenced in the action, and a trial
date has not been set. We believe that we have strong defenses to Microtune's
claims.
Although Broadcom believes that it has strong defenses to Intel's claims in
the Delaware action and to Microtune's claims in the Texas action and is
defending both actions vigorously, a finding of infringement by Broadcom as to
one or more patents in either of these actions 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 we
withdraw various products from the market, and indemnification claims by our
customers or strategic partners, each of which events could have a material
adverse effect on our business, results of operations and financial condition.
In March 2001 Broadcom and its Chief Executive Officer, Chief Technical
Officer and Chief Financial Officer were served with a number of complaints,
separately identified in the footnote below,(1) that were filed in the United
States District Court for the Central District of California alleging violations
of the Securities Exchange Act of 1934 (the "1934 Act"). These complaints were
brought as purported shareholder class actions under Sections 10(b) and 20(a) of
the 1934 Act and Rule 10b-5 promulgated thereunder, and in general allege that
the defendants improperly accounted for certain performance-based warrants
assumed by Broadcom in connection with our acquisitions of Altima
Communications, Inc., Silicon Spice Inc., Allayer Communications, SiByte, Inc.
and Visiontech Ltd.
While there is some variation in their specific allegations and their
purported class periods (the broadest of which runs from July 31, 2000 to March
6, 2001), the essence of each of these complaints is that the defendants
intentionally failed to properly account for the performance-based warrants
assumed in connection with the acquisitions, which plaintiffs allege had the
effect of materially overstating Broadcom's reported financial results.
Plaintiffs allege that the defendants intentionally engaged in this alleged
improper accounting practice in order to inflate the value of Broadcom's stock
and thereby obtain alleged illegal insider trading proceeds, as well as to
facilitate the use of our stock as consideration in acquisitions. Plaintiffs
also allege generally that there was inadequate disclosure regarding the
warrants and the terms of the particular agreements at issue.
The enumerated complaints have only recently been filed. Broadcom is
informed that additional complaints substantially similar to those described
above have been filed but as of March 30, 2001 Broadcom had not been served in
the additional purported lawsuits. We anticipate that all of these actions will
ultimately be consolidated into one action. As of March 30, 2001 Broadcom had
not yet answered any of the complaints, and discovery had not yet commenced. We
believe that the allegations are without merit and intend to defend the actions
vigorously.
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1 Kurtz v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal. Case No.
SACV-01-275-GLT (EEx) (filed March 5, 2001); Pond Equities v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01- 285-GLT (ANx) (filed
March 7, 2001); Blasser v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-289-AHS (EEx) (filed March 8, 2001); Green v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01-298-DOC (EEx) (filed
March 9, 2001); DiMaggio v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-299-GLT (EEx) (filed March 9, 2001); Mandel v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SAVC-01-317-GLT(Anx)(filed
March 12, 2001); Garfinkel v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-327-DOC (Anx) (filed March 14, 2001); Olson v. Broadcom
Corporation, et al. U.S.D.C. C.D. Cal. Case No. SACV-01-346-AHS (Anx) (filed
March 20, 2001); Skubella v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-352-GLT (EEx) (filed March 21, 2001).
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Broadcom, along with each of its directors, has also been sued in two
derivative actions, identified in the footnote below,(2) based upon the same
general set of facts and circumstances outlined above in connection with the
shareholder class actions. These lawsuits were purportedly filed as shareholder
derivative actions under California law and allege that certain of the
individual defendants sold shares while in possession of material inside
information (and that other individual defendants aided and abetted this
activity) in purported breach of their fiduciary duties to Broadcom. The
complaints also allege "gross mismanagement, waste of corporate assets and abuse
of control" based upon the same general set of facts and circumstances. We
believe the allegations are without merit and intend to defend the actions
vigorously.
In October 1998 Motorola, Inc. filed a complaint in the United States
District Court for the District of Delaware against AltoCom, Inc. (and
co-defendant, PC-Tel, Inc.) asserting that (i) AltoCom's V.34 and V.90 compliant
software modem technology infringed several patents owned by Motorola, (ii)
AltoCom induced its V.34 and V.90 licensees to infringe such patents, and (iii)
AltoCom contributorily infringed such patents. In May 2000 Motorola filed an
amended complaint alleging that AltoCom's technology infringed an additional
Motorola patent. In its complaints, Motorola sought an injunction against
AltoCom as well as the recovery of monetary damages. AltoCom filed an answer and
affirmative defenses to the complaint and asserted certain counterclaims.
AltoCom became a subsidiary of Broadcom in August 1999. In January 2001 Motorola
and AltoCom entered into a settlement agreement and cross-license pursuant to
which they agreed to dismiss and release with prejudice all claims and
counterclaims in this action. Under the terms of the patent cross-license,
Motorola and AltoCom granted to each other and their respective affiliates
(including, in the case of AltoCom, its parent Broadcom) licenses with respect
to certain technology. Neither party admitted any liability in connection with
the action. The settlement terms are confidential, but the settlement did not
have a material effect on our business, financial condition or results of
operations.
In December 1999 Level One filed a complaint in the United States District
Court for the Eastern District of California against Altima Communications,
Inc., asserting that Altima's AC108R repeater products infringe a U.S. patent
owned by Level One. The complaint sought an injunction against Altima as well as
the recovery of monetary damages, including treble damages for willful
infringement. Altima filed an answer and affirmative defenses to the complaint.
In March 2000 Level One filed a related complaint in the U.S. International
Trade Commission ("ITC") seeking an exclusion order and cease and desist order
based on alleged infringement of the same patent. Monetary damages are not
available in the ITC. The ITC instituted an investigation in April 2000. Altima
filed an answer and affirmative defenses to the ITC complaint. In July 2000
Intel and Level One filed a second complaint in the ITC asserting that certain
of Altima's repeater, switch and transceiver products infringe three additional
U.S. patents owned by Level One or Intel. The ITC instituted a second
investigation in August 2000, and the Administrative Law Judge issued an order
consolidating the two investigations. In September 2000 Altima filed declaratory
judgment actions against Intel and Level One, respectively, in the United States
District Court for the Northern District of California asserting that Altima has
not infringed the three additional Intel and Level One patents and that such
patents are invalid or unenforceable. Pursuant to statute, Altima is entitled to
a stay of all proceedings in the three District Court actions while the ITC
investigation is pending, and all three actions have been stayed. In December
2000 Intel and Level One withdrew one of the patents asserted against Altima in
the ITC investigation.
Altima believes it has strong defenses to the claims of Level One and Intel
on noninfringement, invalidity, and inequitable conduct grounds. The parties are
currently completing discovery in the consolidated ITC action, and a hearing on
the merits before the ITC Administrative Law Judge is scheduled to begin in
April 2001. Altima became a subsidiary of Broadcom in September 2000.
- ---------------
2 David v. Werner F. Wolfen, Henry T. Nicholas, III, Henry Samueli, Myron S.
Eichen, Alan E. Ross and Does 1-25, inclusive, and Broadcom Corporation,
Orange County Superior Court Case No. 01CC03930, and Bollinger v. Henry T.
Nicholas, III, Henry Samueli, Werner F. Wolfen, Alan E. Ross, Myron S. Eichen,
and Does 1-25, inclusive, and Broadcom Corporation, Orange County Superior
Court Case No 01CC04065.
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Although Altima believes that it has strong defenses and is defending the
actions vigorously, a finding of infringement by Altima as to the patent in the
Eastern District of California action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful) and the issuance of an injunction requiring that Altima
withdraw various products from the market. A finding against Altima in the
consolidated ITC action could result in the exclusion of certain Altima
products, and possibly certain Broadcom products, from entering the United
States. Any finding adverse to Altima in these actions could also result in
indemnification claims by Altima's customers or strategic partners. Any of the
foregoing events could have a material adverse effect on Altima's, and possibly
Broadcom's, business, results of operations and financial condition.
We and our subsidiaries are also involved in other legal proceedings,
claims and litigation arising in the ordinary course of business.
The pending lawsuits involve complex questions of fact and law and likely
will require the expenditure of significant funds and the diversion of other
resources to defend. Although management currently believes the outcome of
outstanding legal proceedings, claims and litigation involving Broadcom or its
subsidiaries will not have a material adverse effect on our business, results of
operations or financial condition, the results of litigation are inherently
uncertain, and an adverse outcome is at least reasonably possible. We are unable
to estimate the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying consolidated
financial statements.
ITEM 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, 2000.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Broadcom's Class A common stock is traded on the Nasdaq National Market
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 our 2-for-1 stock splits effective
February 17, 1999 and February 11, 2000, respectively:
HIGH LOW
------- -------
FISCAL YEAR 1999
First Quarter............................................ $ 47.81 $ 23.13
Second Quarter........................................... 72.63 29.00
Third Quarter............................................ 74.75 50.75
Fourth Quarter........................................... 144.50 53.50
FISCAL YEAR 2000
First Quarter............................................ $253.00 $110.88
Second Quarter........................................... 235.75 113.00
Third Quarter............................................ 274.75 203.50
Fourth Quarter........................................... 256.19 74.75
FISCAL YEAR 2001
First Quarter............................................ $139.50 $ 27.09
As of March 29, 2001 there were approximately 3,035 record holders of
Broadcom's Class A common stock and approximately 806 record holders of
Broadcom's Class B common stock. On March 30, 2001 the last reported sale price
of the Class A common stock on the Nasdaq National Market was $28.90 per share.
Broadcom'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 and is automatically converted upon sale and most
other transfers.
DIVIDEND POLICY
Broadcom has never declared or paid cash dividends on shares of its capital
stock. Broadcom currently intends to retain all of its earnings, if any, for use
in its business and in acquisitions of other businesses, products or
technologies and does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Gross revenue................................. $1,134,763 $521,225 $216,729 $42,341 $23,874
Less: fair value of warrants earned by
customers................................... (38,603) -- -- -- --
---------- -------- -------- ------- -------
Net revenue................................... 1,096,160 521,225 216,729 42,341 23,874
Cost of revenue............................... 484,219 211,991 91,403 15,563 8,175
---------- -------- -------- ------- -------
Gross profit.................................. 611,941 309,234 125,326 26,778 15,699
Operating expense:
Research and development.................... 250,676 119,300 54,285 22,776 7,541
Selling, general and administrative......... 103,305 61,475 33,595 11,871 4,364
Stock-based compensation.................... 115,307 3,560 1,786 61 --
Amortization of goodwill.................... 136,984 -- -- -- --
Amortization of purchased intangible
assets................................... 1,255 -- -- -- --
In-process research and development......... 713,050 -- -- -- --
Merger-related costs........................ 4,745 15,210 -- -- --
Litigation settlement costs................. -- 17,036 -- -- --
---------- -------- -------- ------- -------
Income (loss) from operations................. (713,381) 92,653 35,660 (7,930) 3,794
Interest and other income, net................ 21,606 8,648 4,180 107 165
---------- -------- -------- ------- -------
Income (loss) before income taxes............. (691,775) 101,301 39,840 (7,823) 3,959
Provision (benefit) for income taxes.......... (3,953) 28,830 18,451 (852) 1,514
---------- -------- -------- ------- -------
Net income (loss)............................. $ (687,822) $ 72,471 $ 21,389 $(6,971) $ 2,445
========== ======== ======== ======= =======
Basic earnings (loss) per share(1)............ $ (3.13) $ .36 $ .13 $ (.06) $ .02
========== ======== ======== ======= =======
Diluted earnings (loss) per share(1).......... $ (3.13) $ .31 $ .10 $ (.06) $ .02
========== ======== ======== ======= =======
DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents..................... $ 523,904 $180,816 $ 77,555 $34,512 $ 9,780
Working capital............................... 673,092 310,625 136,341 35,349 9,920
Goodwill and purchased intangible assets,
net......................................... 3,260,464 -- -- -- --
Total assets.................................. 4,677,822 609,753 271,147 63,708 21,575
Convertible preferred stock................... -- -- -- 28,617 6,084
Total shareholders' equity.................... 4,475,260 516,872 224,424 45,872 15,483
- ---------------
(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 splits, each in the form of a 100% stock dividend, effective
February 17, 1999 and February 11, 2000, respectively.
The table above sets forth our selected consolidated financial data. We
prepared this information using the consolidated financial statements of
Broadcom for the five years ended December 31, 2000, which have been restated to
include the operations of acquisitions accounted for on a pooling-of-interests
basis as if they had been combined with Broadcom prior to the beginning of each
period presented. See Note 2 of Notes to Consolidated Financial Statements.
You should read this selected consolidated financial data along with the
Consolidated Financial Statements and related Notes contained in this Report and
in our subsequent reports filed with the Securities and Exchange Commission
("SEC"), as well as the section of this Report and our other reports titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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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
splits, each in the form of a 100% stock dividend, effective February 17, 1999
and February 11, 2000, respectively.
OVERVIEW
We are the leading provider of highly integrated silicon solutions that
enable broadband communications and networking of voice, video and data
services. Using proprietary technologies and advanced design methodologies, we
design, develop and supply system-on-a-chip solutions for applications in
digital cable set-top boxes and cable modems, high-speed local, metropolitan and
wide area and optical networks, home networking, VoIP, carrier access,
residential broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, xDSL, wireless communications, SystemI/O(TM) server solutions
and network processing. From our inception in 1991 through 1994, we were
primarily engaged in product development and the establishment of strategic
customer and foundry relationships. During that period, we generated the
majority of our revenue from development work performed for key customers. We
began shipping our products in 1994, and subsequently our 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 the
sale of software and the provision of software support services and sales of
system-level reference designs.
We recognize product revenue at the time of shipment, except for shipments
to stocking distributors whereby revenue is recognized upon sale to the end
customer. Provision is concurrently made for estimated product returns, which
historically have been immaterial. Our products typically carry a one-year
warranty. Development revenue is generally recognized under the
percentage-of-completion method. Revenue from licensed software is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided that the fee is fixed and determinable and collectibility is probable.
Revenue from post-contract customer support and any other future deliverables is
deferred and earned over the support period or as contract elements are
delivered. We also recognize as a reduction of gross revenue the fair value of
assumed performance-based warrants earned by certain customers in connection
with purchase and development agreements.
The percentage of our net revenue derived from independent customers
located outside of the United States was approximately 20.3% in 2000 and 17.2%
in both 1999 and 1998. 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 our
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 61.8%
of our net revenue in 2000, 66.6% of our revenue in 1999 and 74.1% of our
revenue in 1998. We expect that our key customers will continue to account for a
significant portion of our revenue for 2001 and in the future.
Our gross margin has been affected in the past, and may continue to be
affected in the future, by various factors, including, but not limited to, the
following:
- our product mix;
- the position of our products in their respective life cycles;
- competitive pricing strategies;
- the mix of product revenue and development revenue;
- manufacturing cost efficiencies and inefficiencies;
- stock-based compensation; and
- the fair value of performance-based warrants earned by certain customers.
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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 incurring expenses for research and development and selling,
general and administrative efforts, and the generation of corresponding revenue,
if any. Furthermore, during 2001 and thereafter, we may 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.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to reduce the
time required to develop new technologies and products and bring them to market,
complement our existing product offerings, expand our market coverage, increase
our engineering workforce or enhance our technological capabilities. We will
continue to evaluate opportunities for strategic acquisitions from time to time,
and may make additional acquisitions in the future.
During 2000 we completed eight acquisitions that were accounted for as
purchase transactions, for aggregate consideration of $5.1 billion. These
acquisitions included Innovent Systems, Inc., a developer of radio frequency
integrated circuits for wireless data communications; Puyallup Integrated
Circuit Company, Inc., a provider of integrated circuit design services,
including full chip designs and embedded macro blocks for microprocessors,
system-on-a-chip and ASIC designs; Altima Communications, Inc., a supplier of
networking integrated circuits for the small-to-medium sized business networking
market; NewPort Communications, Inc., a supplier of mixed-signal integrated
circuits for the high-speed communications infrastructure market; Silicon Spice
Inc., a developer of communications processors and other technology for
high-density voice, fax and data packet transmission over wide area networks;
Element 14, Inc., a developer of high-port density, low-power digital subscriber
line chipsets, software and communications processor technology; Allayer
Communications, a developer of high-performance enterprise and optical
networking communications chips; and SiByte, Inc., a developer of
high-performance microprocessor solutions for broadband networking. Because each
of these acquisitions was accounted for as a purchase transaction, the
accompanying consolidated financial statements include the results of operations
of the acquired companies incurred after their respective acquisition dates. See
Note 2 of Notes to Consolidated Financial Statements.
In addition, we completed nine pooling-of-interests transactions in 2000
and 1999. In 2000 we completed the acquisitions of Digital Furnace Corporation,
a developer of communications algorithms and software that increase the capacity
of existing broadband networks for interactive services; BlueSteel Networks,
Inc., a developer of high-performance Internet security processors for
e-commerce and VPN applications; Stellar Semiconductor, Inc., a developer of 3D
graphics technology; and Pivotal Technologies Corporation, a developer of
high-performance communications links for both wired and wireless environments.
In 1999 we completed the acquisitions of Maverick Networks, a developer of
highly integrated silicon for multi-layer switching equipment in enterprise
networks; Epigram, Inc., a developer of advanced semiconductor products for
high-speed home networking; Armedia, Inc., a developer of high performance
digital video decoders; HotHaus Technologies Inc., a provider of OpenVoIP(TM)
embedded communications software that enables transmission of digital voice, fax
and data packets over data networks, including the Internet; and AltoCom, Inc.,
a provider of complete software data/fax modem implementations for general
purpose embedded processors, PC CPUs and digital signal processors. Because each
of these acquisitions was accounted for as a pooling of interests transaction,
our historical consolidated financial statements and the discussion and analysis
of financial condition and results of operations for prior periods have been
restated to include the operations of these nine companies as if they had been
combined with our company at the beginning of the first period presented.
Included in revenue and net loss for 2000 were revenue and net losses from the
four pooling-of-interests transactions completed in that year and incurred prior
to the respective closings of those transactions, aggregating $0.3 million and
$8.8 million, respectively. Included in restated revenue and net income for 1999
were revenue and net losses incurred prior to the respective closings of the
nine pooling-of-interests transactions, aggregating $11.3 million and $19.6
million, respectively.
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During the course of negotiating the acquisitions of Altima, Silicon Spice,
Allayer and SiByte, we challenged each company's management to substantiate its
assertions regarding the value and market acceptance of the company's
technologies and products by securing significant purchase and development
commitments from key or strategic industry customers. We presented these
companies with the concept of issuing performance-based warrants to obtain
long-term commitments from customers. The companies were able to secure such
commitments from several significant customers. The agreements negotiated by the
acquired companies required their customers to purchase minimum quantities of
the respective company's products on a quarterly basis during the term or
required payments for development services in accordance with a specified
schedule, contained substantial cash penalties if the customers failed to
purchase the contractually specified minimum levels of product or to fulfill
their obligations under the development agreements, and required the acquired
companies to issue performance-based warrants to purchase the company's stock to
the customers, which warrants would vest only if and to the extent the minimum
purchase provisions of the purchase agreements and obligations under the
development agreements were met. At the time the warrants were issued, we were
under no obligation to purchase the respective companies, but the companies and
their customers were obligated to fulfill their contractual commitments under
the purchase and development agreements and the warrants. With these customer
relationships and agreements in place, each of the acquired companies, in our
assessment, had a higher value than it had prior to entering into the
agreements. Because the performance-based warrants would be assumed by us if an
acquisition were to occur, we provided technical assistance and advice to each
company's management to assure that the performance-based warrants would be
structured to qualify for fixed accounting under Emerging Issues Task Force
("EITF") Issue 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services("EITF 96-18").
In allocating the purchase price for Altima, Silicon Spice, Allayer and
SiByte, no value has been assigned to the purchase and development agreements
because they were executory contracts and their terms were at fair value.
However, pursuant to the provisions of EITF 96-18, the related warrants have
been assigned fixed values of approximately $238.56, $227.31, $142.81 and
$123.13 per share, respectively, the warrant fair values determined using the
Black-Scholes pricing model at the respective dates that we acquired Altima,
Silicon Spice, Allayer and SiByte. Under EITF 96-18, a performance-based warrant
is accounted for using its value at its date of issuance if a significant
disincentive to the customer exists that makes the customer's performance
probable ("fixed accounting"). At the time we assumed the warrants and related
purchase and development agreements, we determined, in consultation with our
independent auditors, that fixed accounting, with the date of acquisition as the
valuation measurement date, was required. With respect to the purchase
agreements, this determination was based on the fact that the customers are
subject to substantial penalties, which include cash penalties if there are
shortfalls in meeting the minimum purchase requirements on a periodic basis
throughout the term of the agreements and in some cases further cash penalties
payable at the end of the agreements if aggregate purchase commitments are not
met. With respect to the development agreements, this determination was based on
the fact that the customers are subject to substantial cash penalties if the
customers fail to fulfill their obligations. In our evaluation, we considered
the significance of the cash penalties in relation to both the amounts in each
purchase and development agreement and the financial statements of the
customers, the effect of forfeiture of the value of the warrants, and the intent
and ability of customers to purchase the required products and development
services under the agreements.
These warrants will be accounted for in our financial statements pursuant
to EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable
Equity Instruments Granted to a Nonemployee ("EITF D-90"). EITF D-90 announces
an SEC Staff position that an issuer of a performance-based warrant should treat
it as unissued for accounting purposes until the issuer has received benefit and
the warrant vests. Accordingly, the warrants assumed in the Altima, Silicon
Spice, Allayer and SiByte acquisitions will be recorded as a reduction of
revenue, in the amounts of $238.56, $227.31, $142.81 and $123.13 per share,
respectively, only as and to the extent any warrants are earned and vest in
future periods. The warrants generally vest quarterly over the period from
October 2000 through July 2004, subject to satisfaction by customers of the
applicable purchase and development requirements, and are generally exercisable
for one year after the vesting date at a weighted average exercise price per
share of approximately $0.01. The effect of the warrants will be included in our
calculation of basic and diluted earnings (loss) per share as of the beginning
of the period in which they are earned by the customers. During the twelve
months ended December 31, 2000, certain customers earned performance-based
warrants to purchase 162,280 shares of our Class A common stock, with an
aggregate fair value of $38.6 million.
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We and the managements of Altima, Silicon Spice, Allayer and SiByte viewed
the purchase and development agreements and related warrants as a means of
solidifying each of the acquired company's relationships with key customers. In
addition, the purchase and development agreements allowed us to gain confidence
in the acceptance of each of the companies' products by such key customers.
At the time we acquired Altima, Silicon Spice, Allayer and SiByte, we
expected these companies and their customers to perform under the purchase and
development agreements and for the assumed warrants to be earned. However, on
February 28, 2001 one of the five customers that had entered into a purchase
agreement with Altima gave notice to us that it was terminating its purchase
agreement. Additionally, based on the recent significant economic slowdown in
the technology sector and current market conditions, we have concluded that
certain of the remaining purchase and development agreements may no longer be
desirable. Therefore, we have terminated or are in the process of negotiating
termination of certain of these purchase and development agreements and have
cancelled or are in the process of negotiating cancellation of the related
warrants. In addition, we may in the future consider revising or terminating any
of the remaining purchase and development agreements, which could result in
cancellation of the related warrants. See Note 11 of Notes to Consolidated
Financial Statements. The accounting for any warrants earned in prior periods
will not be affected by such terminations.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net revenue for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Gross revenue............................................... 103.5% 100.0% 100.0%
Less: fair value of warrants earned by customers............ (3.5) -- --
----- ----- -----
Net revenue................................................. 100.0 100.0 100.0
Cost of revenue............................................. 44.2 40.7 42.2
----- ----- -----
Gross profit................................................ 55.8 59.3 57.8
Operating expense:
Research and development.................................. 22.9 22.9 25.0
Selling, general and administrative....................... 9.4 11.8 15.5
Stock-based compensation.................................. 10.5 0.6 0.8
Amortization of goodwill.................................. 12.5 -- --
Amortization of purchased intangible assets............... 0.1 -- --
In-process research and development....................... 65.1 -- --
Merger-related costs...................................... 0.4 2.9 --
Litigation settlement costs............................... -- 3.3 --
----- ----- -----
Income (loss) from operations............................... (65.1) 17.8 16.5
Interest and other income, net.............................. 2.0 1.6 1.9
----- ----- -----
Income (loss) before income taxes........................... (63.1) 19.4 18.4
Provision (benefit) for income taxes........................ (0.4) 5.5 8.5
----- ----- -----
Net income (loss)........................................... (62.7)% 13.9% 9.9%
===== ===== =====
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenue. Gross revenue consists of product revenue generated principally by
sales of our semiconductor products, and to a lesser extent, from the sales of
software and the provision of software support services and development revenue
generated under development contracts with our customers. Net revenue represents
gross revenue less the fair value of performance-based warrants earned by
customers. Gross revenue for 2000 was $1.135 billion, an increase of $613.5
million or 117.7% as compared with gross revenue of $521.2 million in 1999.
Gross revenue for 2000 was reduced by $38.6 million representing the fair value
of the performance-based warrants to purchase 162,280 shares of Class A common
stock earned by certain customers in connection with purchase and development
agreements. Net revenue for
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2000 was $1.096 billion, an increase of $574.9 million or 110.3% as compared
with net revenue of $521.2 million in 1999. The growth in revenue resulted
mainly from increases in volume shipments of our semiconductor products for the
high-speed networking market, digital cable set-top boxes and cable modems. In
the future, net revenue may be reduced by the effect of the fair value of
outstanding performance-based warrants earned by certain customers. Also, due to
the recent significant economic slowdown in the technology sector and current
market conditions, we are not currently able to assess the likely trend of
revenue in future periods.
Gross Profit. Gross profit represents net revenue less the cost of revenue.
Cost of revenue includes the cost of purchasing the finished silicon wafers
processed by independent foundries, costs associated with assembly, test and
quality assurance for those products, amortization of purchased technology and
costs of personnel and equipment associated with manufacturing support and
contracted development work. Gross profit for 2000 was $611.9 million or 55.8%
of net revenue, an increase of $302.7 million or 97.9% from gross profit of
$309.2 million or 59.3% of net revenue in 1999. The increase in gross profit was
mainly attributable to the significant increase in the volume of semiconductor
product shipments. The decrease in gross profit as a percentage of revenue was
largely driven by volume-pricing agreements and competitive pricing strategies
on certain high volume products. Included in cost of revenue were approximately
$4.6 million and $0.1 million of stock-based compensation in 2000 and 1999,
respectively, and approximately $2.3 million of amortization of purchased
intangible assets in 2000. We expect that gross profit as a percentage of net
revenue will continue to decline in future periods as volume-pricing agreements
and competitive pricing strategies continue to take effect, which decline may be
mitigated to some extent by lower anticipated silicon wafer costs. In addition,
our gross margin may be affected by the future introduction of certain lower
margin products.
Research and Development Expense. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, costs related to engineering design tools, and
subcontracting costs. Research and development expense for 2000 was $250.7
million or 22.9% of net revenue, an increase of $131.4 million or 110.1% as
compared with research and development expense of $119.3 million or 22.9% of net
revenue in 1999. The increase in absolute dollars was primarily due to the
addition of personnel and the investment in design tools for the development of
new products and the enhancement of existing products. Based upon our experience
in 2000, we would anticipate that research and development expense in absolute
dollars would continue to increase for the foreseeable future as a result of the
growth and diversification of the markets we serve, new product opportunities
and our expansion into new markets and technologies. However, due to the recent
significant economic slowdown in the technology sector and current market
conditions, we are not currently able to assess the likely trend of research and
development expense.
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 2000 was $103.3 million or 9.4% of net revenue,
an increase of $41.8 million or 68.0% as compared with selling, general and
administrative expense of $61.5 million or 11.8% of net revenue in 1999. The
increase in absolute dollars reflected higher personnel-related costs resulting
from the hiring of sales and marketing personnel, senior management and
administrative personnel, increased facilities expenses and legal and other
professional fees. The decrease in selling, general and administrative expense
as a percentage of revenue reflected the significant increase in revenue during
2000 as compared with 1999. Based upon our experience in 2000, we would expect
that selling, general and administrative expense in absolute dollars would
continue to increase for the foreseeable future to support the planned continued
expansion of our operations through indigenous growth and acquisitions, as a
result of periodic changes in our infrastructure to support increased headcount,
acquisition and integration activities, and international operations, and in
view of the volume of current litigation. However, due to the recent significant
economic slowdown in the technology sector and current market conditions, we are
not currently able to assess the likely trend of selling, general and
administrative expense.
Stock-Based Compensation. Stock-based compensation generally represents the
amortization of deferred compensation. We recorded approximately $1.2 billion
and $9.3 million of deferred compensation in 2000 and 1999, respectively,
primarily in connection with stock options assumed in our acquisitions. Deferred
compensation represents the difference between the fair value of the underlying
common stock for accounting purposes and the exercise price of the stock options
at the date of grant. Deferred compensation is presented as a reduction of
shareholders' equity and is amortized ratably over the respective vesting
periods of the applicable options, generally three to four years. Stock-based
compensation expense for 2000 was $115.3 million or 10.5% of net revenue, an
increase of $111.7 million, as compared with stock-based
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compensation expense of $3.6 million or 0.6% of net revenue in 1999.
Approximately $0.3 million and $1.0 million of additional stock-based
compensation in 2000 and 1999 was classified as merger-related costs. In
addition, approximately $4.6 million and $0.1 million of stock-based
compensation has been classified as cost of revenue in 2000 and 1999,
respectively. The significant increase in stock-based compensation in 2000
relates primarily to stock options assumed in the eight purchase transactions
completed during the year that were accounted for in accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25. See Notes 1, 2 and 6 of Notes to Consolidated Financial
Statements. We expect to incur additional stock-based compensation expense in
future periods as a result of the continued amortization of deferred
compensation related to these purchase transactions and additional purchase
transactions consummated during the first quarter of 2001.
In connection with the acquisitions of Allayer and SiByte, if certain
future performance goals are satisfied, the consideration for these acquisitions
will be increased. Any additional consideration paid that is allocated to
deferred compensation will be amortized over the remaining vesting periods of
the underlying options and restricted stock assumed in the acquisitions. In
addition, outstanding options assumed in these transactions are subject to
variable accounting and will be periodically revalued over the vesting period
until all performance goals are satisfied.
Amortization of Goodwill and Purchased Intangible Assets. In connection
with the eight purchase transactions completed during 2000, we recorded
approximately $3.4 billion of goodwill and purchased intangible assets. Goodwill
is recorded as the difference, if any, between the aggregate consideration paid
for an acquisition and the fair value of the net tangible and intangible assets
acquired. We obtained independent appraisals of the fair value of the tangible
and intangible assets acquired in order to allocate the purchase price. Goodwill
and purchased intangible assets are amortized on a straight-line basis over the
economic lives of the respective assets, generally three to five years. The
amortization of goodwill and purchased intangible assets for 2000 was $138.2
million or 12.6% of net revenue. No comparable amortization of goodwill and
purchased intangible assets was incurred in 1999. In addition, approximately
$2.3 million of amortization of purchased intangible assets has been classified
as cost of revenue in 2000. In connection with the acquisitions of Allayer and
SiByte, if certain future performance goals are satisfied, the consideration for
these transactions will be increased. Any additional consideration paid that is
allocated to goodwill for these acquisitions will be amortized over the
remaining respective useful lives. We expect to incur additional amortization of
goodwill and purchased intangible assets in future periods as a result of these
purchase transactions and will incur additional goodwill and purchased
intangible assets as a result of the purchase transactions consummated during
the first quarter of 2001. See Notes 1, 2 and 11 of Notes to Consolidated
Financial Statements.
In-Process Research and Development. In-process research and development
("IPR&D") aggregated $713.1 million for the purchase transactions completed in
2000. No amounts of IPR&D were incurred in 1999. The amounts allocated to IPR&D
were determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition as it was determined that the
underlying projects had not reached technological feasibility and no alternative
future uses existed. We expect to incur additional IPR&D in the future as a
result of the additional purchase transactions consummated during the first
quarter of 2001.
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D performed to date.
The fair value of completed technology is included in identifiable intangible
assets, and the fair values of IPR&D to be completed and future research and
development are included in goodwill. We believe the amounts recorded as IPR&D,
as well as developed technology, represent fair values and approximate the
amounts an independent party would pay for these projects.
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As of the closing date of each purchase transaction, development projects
were in process. Although the costs to bring the products from the acquired
companies to technological feasibility are not expected to have a material
impact on our future results of operations or financial condition, the
development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products, and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging
markets and could have a material and adverse impact on our business and
operating results.
The following table summarizes the significant assumptions underlying the
valuations for our significant purchase acquisitions completed in fiscal 2000:
AVERAGE ESTIMATED RISK
AVERAGE ESTIMATED COST TO ADJUSTED
PURCHASE PERCENT TIME TO COMPLETE DISCOUNT IPR&D
TRANSACTION DEVELOPMENT PROJECTS COMPLETE COMPLETE (IN MILLIONS) RATE (IN MILLIONS)
----------- -------------------- -------- --------- ------------- -------- -------------
Innovent RF integrated circuits for wireless 43 % 1.5 $ 6.9 30 - 35% $ 41.7
years
Altima Ethernet physical layer transceivers 47 % 1 year 2.9 30 - 35% 4.0
NewPort Integrated circuits for optical communications 70 % 1 year 3.7 30 - 35% 198.5
equipment
Silicon Spice Communications processors 84 % 1 year 10.0 30% 219.3
Element 14 Integrated circuits used in DSL 49 % 1 year 13.2 40 - 45% 64.6
Allayer Integrated circuits for wide area and Ethernet 43 % 1.5 5.0 31 - 36% 11.6
switching applications years
SiByte Network processors 42 % 1.5 31.4 30 - 35% 173.4
years
Actual results to date have been consistent, in all material respects, with
our assumptions at the time of the above acquisitions. The assumptions primarily
consist of expected completion dates for the in-process projects, estimated
costs to complete the projects, and revenue and expense projections once the
products have entered the market. Shipment volumes of products from the
above-acquired technologies are not material to our overall financial results at
the present time. It is difficult to determine the accuracy of overall revenue
projections early in the technology life cycle. Failure to achieve the expected
levels of revenue and net income from these products will negatively impact the
return on investment expected at the time that the acquisitions were completed
and may potentially result in impairment of goodwill and other long-lived
assets.
Merger-Related Costs. Merger-related costs consist primarily of transaction
costs, such as fees for investment bankers, attorneys, accountants and other
related fees and expenses, and certain restructuring costs related to the
disposal of duplicative facilities and assets and the write-down of unutilized
assets. Merger-related costs of approximately $4.8 million and $15.2 million
were incurred in 2000 and 1999, respectively, in connection with the
pooling-of-interests transactions.
Litigation Settlement Costs. Litigation settlement costs consist primarily
of settlement fees and associated attorneys' fees, expenses and court costs.
Litigation settlement costs of approximately $17.0 million were incurred in
1999. No comparable litigation settlement costs were incurred in 2000.
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 debt and capital lease obligations. Interest and other
income, net, for 2000 was $21.6 million as compared with $8.6 million in 1999.
This increase was principally due to increased cash balances available to invest
resulting from the cash generated by operations, cash balances assumed in
acquisitions, and cash received from the exercise of employee stock options.
Provision for Income Taxes. Our effective tax rate was 0.6% for 2000 and
28.5% for 1999. The federal statutory rate was 35% for both periods. The primary
differences between our effective tax rates for 2000 and 1999 and the federal
statutory rate resulted from the effects of nondeductible IPR&D and
acquisition-related expenses from the eight purchase transactions completed
during 2000. Our effective tax rate on income before the effects of these items,
and before the effects of payroll tax expenses relating to certain stock option
exercises, was 20% for 2000 and 29.9% for 1999. The primary reasons for our
decreased effective tax rate on income before such items for 2000 compared to
1999 were benefits
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from increased research and development credits and beneficial tax rate
differentials on foreign earnings. We utilize the liability method of accounting
for income taxes as set forth in FASB Statement No. 109, Accounting for Income
Taxes. See Note 4 of Notes to Consolidated Financial Statements.
At December 31, 2000 and 1999 we provided a valuation allowance of $6.9
million against a portion of certain acquired net operating losses, due to
uncertainty regarding their future realization. The utilization of such losses
is subject to stringent limitations under the Internal Revenue Code. There is no
valuation allowance provided against the remainder of our deferred tax assets,
as we believe it is more likely than not that these assets will be realized. The
primary basis for this conclusion is the expectation of future income from our
ordinary and recurring operations.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue. Revenue for 1999 was $521.2 million, an increase of $304.5 million
or 140.5% as compared with revenue of $216.7 million in 1998. The growth in
revenue resulted 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 for 1999 was $309.2 million or 59.3% of revenue,
an increase of $183.9 million or 146.7% from gross profit of $125.3 million or
57.8% of revenue in 1998. The increase in gross profit was mainly attributable
to the significant increase in the volume of semiconductor product shipments.
The increase in gross profit as a percentage of revenue was driven by cost
reductions from our suppliers as well as lower than expected rates of price
erosion in our major markets. Included in cost of revenue is approximately $0.1
million of stock-based compensation in both 1999 and 1998.
Research and Development Expense. Research and development expense for 1999
was $119.3 million or 22.9% of revenue, an increase of $65.0 million or 119.8%
as compared with research and development expense of $54.3 million or 25.0% of
revenue in 1998. The increase in absolute dollars was primarily due to the
addition of personnel and the investment in design tools for the development of
new products and the enhancement of existing products. The decrease in research
and development expense as a percentage of revenue reflected the significant
increase in revenue during 1999 as compared with 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense for 1999 was $61.5 million or 11.8% of revenue, an
increase of $27.9 million or 83.0% as compared with selling, general and
administrative expense of $33.6 million or 15.5% of revenue in 1998. The
increase in absolute dollars reflected higher personnel-related costs resulting
from the hiring of sales and marketing personnel, senior management and
administrative personnel, and increased occupancy, legal and other professional
fees, including increased expenses for litigation. The decline in selling,
general and administrative expense as a percentage of revenue reflected the
significant increase in revenue during 1999 as compared with 1998.
Stock-Based Compensation. We recorded approximately $9.3 million and $8.9
million of deferred compensation in 1999 and 1998, respectively. Of these
amounts, the entire amount in 1999 and approximately $3.6 million in 1998
represent deferred compensation related to the grant of stock options to certain
employees of acquired companies. Deferred compensation represents the difference
between the fair value of the common stock for accounting purposes and the
exercise price of such options at the date of grant. We have presented these
amounts as a reduction of shareholders' equity and are amortizing these amounts
ratably over the respective vesting periods of the applicable options.
Stock-based compensation aggregated $3.6 million in 1999 and $1.8 million in
1998. Approximately $1.0 million of additional stock-based compensation in 1999
was classified as merger-related costs. In addition, approximately $0.1 million
of stock-based compensation has been classified as cost of revenue in both 1999
and 1998.
Merger-Related Costs. Merger-related costs of approximately $15.2 million
in 1999 were incurred in connection with the acquisitions of Maverick, Epigram,
Armedia, HotHaus and AltoCom. No comparable merger-related costs were incurred
in 1998.
Litigation Settlement Costs. Litigation settlement costs consist primarily
of settlement fees and associated attorneys' fees, expenses and court costs.
Litigation settlement costs of approximately $17.0 million were incurred in
1999. No comparable litigation settlement costs were incurred in 1998.
Interest and Other Income, Net. Interest and other income, net, for 1999
was $8.6 million as compared with $4.2 million in 1998. This increase was
principally due to increased cash balances available to invest resulting from
the
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consummation of our initial public offering and sale of shares to Cisco Systems,
Inc. in April 1998, a follow-on offering in October 1998, and cash generated by
operations.
Provision for Income Taxes. Our effective tax rate was 28.5% for 1999 and
46.3% for 1998. The federal statutory rate was 35% for both periods. Our 1999
effective tax rate was reduced by tax benefits associated with research and
development credits. Our 1998 effective tax rate was increased by our inability
to recognize the tax benefits of the net operating losses incurred by Epigram,
Armedia and HotHaus during 1998.
At December 31, 1999 and 1998 we provided a valuation allowance of $6.9
million against a portion of certain acquired net operating losses, due to
uncertainty regarding their future realization. The utilization of such losses
is subject to stringent limitations under the Internal Revenue Code. There is no
valuation allowance provided against the remainder of our deferred tax assets,
as we believe it is more likely than not that these assets will be realized. The
primary basis for this conclusion is the expectation of future income from our
ordinary and recurring operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement No 133"). Statement No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. We are required to and will adopt Statement 133
in the first quarter of 2001. We do not expect the initial adoption of Statement
133 to have a significant effect on our consolidated results of operations or
financial position.
In December 1999 the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain
areas of the Staff's views in applying Generally Accepted Accounting Principles
to revenue recognition in financial statements. We believe that our current
revenue recognition policies comply with SAB 101.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through a
combination of sales of equity securities and cash generated by operations. At
December 31, 2000 we had $673.1 million in working capital, $601.6 million in
cash, cash equivalents and short-term investments, and $2.0 million in long-term
investments.
Cash and cash equivalents increased from $180.8 million at the end of 1999
to $523.9 million at the end of 2000. During 2000, operating activities provided
$200.6 million in cash. The net loss of $687.8 million in 2000 was more than
offset by the non-cash impact of depreciation and amortization, the fair value
of warrants earned by customers, stock-based compensation, amortization of
goodwill and purchased intangible assets, IPR&D, and the tax benefit from the
exercise of stock options. Operating activities provided cash of $109.3 million
in 1999 and $13.5 million in 1998.
Investing activities provided cash in the amount of $3.0 million in 2000,
as a result of $69.4 million of net cash received from purchase acquisitions and
$53.9 million net proceeds from the sale of investments, partially offset by the
purchase of $25.9 million in minority investments and the purchase of $80.7
million of capital equipment to support our expanding operations. Investing
activities used cash of $57.0 million in 1999 for the net purchase of
held-to-maturity investments, the purchase of minority investments and the
purchase of capital equipment to support our expanding operations. Investing
activities used cash of $107.1 million in 1998, primarily for the purchase of
capital equipment and the net purchase of held-to-maturity investments.
Cash provided by financing activities was $139.5 million in 2000, which
primarily was the result of $144.6 million in net proceeds received from
issuances of common stock, partially offset by $6.3 million in payments on debt
obligations of acquired companies. Cash provided by financing activities was
$51.0 million in 1999, which was primarily the result of $56.7 million in net
proceeds from issuances of common stock, partially offset by $8.4 million in
payments on debt obligations of acquired companies. Cash provided by financing
activities in 1998 was $136.6 million, primarily the result of $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, $30.5 million in net proceeds from
our follow-on offering in October 1998 and $25.8 million in net proceeds from
other issuances of common stock.
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We believe that our existing cash, cash equivalents and investments on
hand, together with cash that we expect to 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 or to consummate acquisitions of other
businesses, products or technologies. 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 or convertible debt securities, the ownership percentages of
existing shareholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
We had outstanding capital commitments totaling approximately $18.7 million
as of December 31, 2000, primarily for the purchase of engineering design tools,
computer hardware and information systems infrastructure. During 2000 we spent
approximately $80.8 million on capital equipment to support our expanding
operations. We expect that we will continue to spend substantial amounts during
2001 to purchase additional engineering design tools, computer hardware, test
equipment, information systems and leasehold improvements, as our operations
continue to expand and as we integrate and upgrade the capital equipment and
facilities of acquired companies. We may finance these purchases from our cash
and cash equivalents and investments on hand, cash generated from our
operations, borrowings, equity offerings, or a combination thereof. See Note 5
of Notes to Consolidated Financial Statements.
Although we believe that we have sufficient capital to fund our activities
for at least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to
launch our new products and achieve and maintain a competitive
position in the marketplace;
- volume price discounts;
- our business, product, capital expenditure and research and
development plans and product and technology roadmaps;
- the levels of inventory and accounts receivable that we maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products;
- our relationships with suppliers and customers; and
- general economic conditions and specific conditions in the
semiconductor industry and the broadband communications markets,
including the effects of the current economic slowdown.
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.
BUSINESS COMBINATIONS
On January 3, 2001 we completed the acquisition of substantially all the
assets of Visiontech Ltd. and on January 16, 2001 we completed the acquisition
of ServerWorks Corporation. These acquisitions will be accounted for as purchase
transactions. We will record a one-time charge for IPR&D related to these
acquisitions in the fiscal year ending December 31, 2001. See Note 11 of Notes
to Consolidated Financial Statements.
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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 contained in this Report and in our other filings with
the SEC, including our subsequent reports on Forms 10-Q, 8-K and 8-K/A. The
risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price for our
Class A common stock could decline and you may lose all or part of your
investment.
WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH THE RECENT SLOWDOWN IN THE U.S.
ECONOMY.
Concerns about inflation, decreased consumer confidence and reduced
corporate profits and capital spending have resulted in a recent downturn in the
U.S. economy. As a result of these unfavorable economic conditions, we have
recently experienced a significant slowdown in customer orders. If the economic
conditions in the U.S. worsen or if a wider or global economic slowdown occurs,
our business, financial condition and results of operations may be materially
and adversely affected.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
We operate in the semiconductor industry, which is cyclical and subject to
rapid technological change. From time to time, including during the first
quarter of 2001, the semiconductor industry has experienced significant
downturns characterized by diminished product demand, accelerated erosion of
prices and excess production capacity. The current downturn and future downturns
in the semiconductor industry may be severe and prolonged. Future downturns in
the semiconductor industry, or any failure of this industry to fully recover
from its recent downturn, could seriously impact our revenues and harm our
business, financial condition and results of operations. This industry also
periodically experiences increased demand and production capacity constraints,
which may affect our ability to ship products in future periods. Accordingly,
our quarterly results may vary significantly as a result of the general
conditions in the semiconductor industry, which could cause our stock price to
decline.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly revenues and operating results have fluctuated significantly
in the past and may continue to vary from quarter to quarter due to a number of
factors, many of which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors, our stock price
may decline. Fluctuations in our operating results may be due to a number of
factors, including the following:
- the volume of our product sales and pricing concessions on volume sales;
- the timing, rescheduling or cancellation of significant customer orders;
- the gain or loss of a key customer;
- economic and market conditions in the semiconductor industry and the
broadband communications markets, including the effects of the current
economic slowdown;
- the qualification, availability and pricing of competing products and
technologies and the resulting effect on sales and pricing of our
products;
- silicon wafer pricing and the availability of foundry and assembly
capacity and raw materials;
- the risks inherent in our acquisitions of technologies and businesses,
including the timing and successful completion of technology and product
development through volume production, integration issues, costs and
unanticipated expenditures, changing relationships with customers,
suppliers and strategic partners, potential contractual, intellectual
property or employment issues, accounting treatment and charges, and the
risks that the acquisition cannot be completed successfully or that
anticipated benefits are not realized;
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- our ability to specify, develop or acquire, complete, introduce, market
and transition to volume production new products and technologies in a
timely manner;
- the timing of customer-industry qualification and certification of our
products and the risks of non-qualification or non-certification;
- the rate at which our present and future customers and end users adopt
Broadcom technologies in our target markets;
- the rate of adoption and acceptance of new industry standards in our
target markets;
- the effects of new and emerging technologies;
- intellectual property disputes and customer indemnification claims;
- the effectiveness of our product cost reduction efforts;
- fluctuations in the manufacturing yields of our third party semiconductor
foundries and other problems or delays in the fabrication, assembly,
testing or delivery of our products;
- the risks of producing products with new suppliers and at new fabrication
and assembly facilities;
- the risks and uncertainties associated with our international operations;
- problems or delays that we may face in shifting our products to smaller
geometry process technologies and in achieving higher levels of design
integration;
- 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;
- changes in our product or customer mix;
- the quality of our products and any remediation costs;
- the effects of natural disasters and other events beyond our control;
- the level of orders received that we can ship in a fiscal quarter; and
- general economic and market conditions.
We expect to continue to increase our operating expenses in the future. 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.
BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. IN
ADDITION, IF WE ARE UNABLE TO CONTINUE TO SELL EXISTING AND NEW PRODUCTS TO OUR
KEY CUSTOMERS IN SIGNIFICANT QUANTITIES OR TO ATTRACT NEW SIGNIFICANT CUSTOMERS,
OUR FUTURE OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. As a result, the loss of any
significant customer could materially and adversely affect our financial
condition and results of operations. Sales to Motorola, 3Com and Cisco Systems,
including sales to their respective manufacturing subcontractors, accounted for
approximately 23.2%, 15.1% and 14.1% respectively, of our net revenue in the
year ended December 31, 2000. Sales to our five largest customers, including
sales to their respective manufacturing subcontractors, decreased to 61.8% of
our net revenue in 2000 compared to 66.6% in the year ended December 31, 1999.
We expect that our key customers will continue to account for a substantial
portion of our revenues for 2001 and in the future.
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Accordingly, our future operating results will continue to depend on the success
of our largest customers and on our ability to sell existing and new products to
these customers in significant quantities.
We may not be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:
- Most of our customers can stop incorporating our products into their own
products with limited notice to us and suffer little or no penalty.
- Our agreements with our customers typically do not require them to
purchase a minimum amount of our products.
- Many of our customers have pre-existing relationships with our current or
potential competitors that may affect their decision to purchase our
products.
- Our customers face intense competition from other manufacturers that do
not use our products.
- Some of our customers offer or may offer products that compete with our
products.
- Our longstanding relationships with some of our larger customers may also
deter other potential customers who compete with these customers from
buying our products.
In addition, in order to attract new customers or retain existing
customers, we may offer certain customers favorable prices on our products. If
these prices are lower than the prices paid by our existing customers, we would
have to offer the same lower prices to certain of our customers who have
contractual "most favored nation" pricing arrangements. In that event, our
average selling prices and gross margins would decline. The loss of a key
customer, a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.
WE FACE INTENSE COMPETITION IN THE BROADBAND COMMUNICATIONS MARKETS AND
SEMICONDUCTOR INDUSTRY, WHICH COULD REDUCE OUR MARKET SHARE IN EXISTING MARKETS
AND AFFECT OUR ENTRY INTO NEW MARKETS.
The broadband communications markets and semiconductor industry are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We currently compete with a number of major domestic and
international suppliers of integrated circuits in the markets for digital cable
set-top boxes, cable modems, high-speed local, metropolitan and wide area and
optical networks, home networking, Voice over Internet Protocol, carrier access,
residential broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, digital subscriber lines, wireless communications, SystemI/O
server solutions and network processing. We also compete with suppliers of
system-level and motherboard-level solutions incorporating integrated circuits
that are proprietary or sourced from manufacturers other than Broadcom. This
competition has resulted and may continue to result in declining average selling
prices for our products. In all of our target markets, we also may face
competition from newly established competitors, suppliers of products based on
new or emerging technologies, and customers who choose to develop their own
silicon solutions. We also expect to encounter further consolidation in the
markets in which we compete.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, 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. They may also be
able to devote greater resources to the promotion and sale of their products. In
addition, current and potential competitors have established or may establish
financial or strategic relationships among themselves or with existing or
potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Existing or new competitors may also
develop technologies in the future that more effectively address the
transmission of digital information through existing analog infrastructures or
through new digital infrastructures at lower costs than our technologies.
Increased competition has in the past and is likely to continue to result in
price reductions, reduced gross margins and loss of market share. We cannot
assure you that we will be able to continue to compete successfully or that
competitive pressures will not materially and adversely affect our business,
financial condition and results of operations.
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OUR ACQUISITION STRATEGY MAY REQUIRE US TO UNDERTAKE SIGNIFICANT CAPITAL
INFUSIONS, BE DILUTIVE TO OUR EXISTING SHAREHOLDERS, RESULT IN UNANTICIPATED
ACCOUNTING CHARGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, AND
RESULT IN DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS,
PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to complement
our existing product offerings, expand our market coverage, increase our
engineering workforce or enhance our technological capabilities. Between January
1, 1999 and January 16, 2001, we acquired 19 companies, including ServerWorks
Corporation and Visiontech Ltd., which acquisitions were completed in January
2001. We plan to continue to pursue acquisition opportunities in the future.
Acquisitions may require significant capital infusions, typically entail
many risks and could result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of the
acquired company. We may also encounter delays in the timing and successful
completion of the acquired company's technologies and product development
through volume production, costs and unanticipated expenditures, changing
relationships with customers, suppliers and strategic partners, or contractual,
intellectual property or employment issues. In addition, the key personnel of
the acquired company may decide not to work for us. The acquisition of another
company or its products and technologies may also require us to enter into a
geographic or business market in which we have little or no prior experience.
These challenges could disrupt our ongoing business, distract our management and
employees and increase our expenses. In addition, acquisitions may materially
and adversely affect our results of operations because they may require large
one-time charges or could result in increased debt or contingent liabilities,
adverse tax consequences, substantial depreciation or deferred compensation
charges, or the amortization of amounts related to deferred compensation,
goodwill and other intangible assets. In connection with our prior acquisitions,
we recorded goodwill in the aggregate amount of $3.4 billion. The portion of
such goodwill attributable to each acquisition generally will be amortized over
a 60 month period from the date that such acquisition closed. In addition, in
connection with our prior acquisitions we incurred deferred compensation charges
in the aggregate amount of $1.2 billion, which will be amortized over the period
of time for which the relevant options or restricted stock may continue to vest.
We anticipate recording additional goodwill and deferred compensation charges in
connection with future acquisitions. 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. Acquisitions made entirely or partially for cash may reduce our cash
reserves. Furthermore, if we issue equity or convertible debt securities in
connection with an acquisition, as in the case of our recent acquisitions, the
issuance may be dilutive to our existing shareholders. In addition, the equity
or debt securities that we may issue could have rights, preferences or
privileges senior to those of our common stock. For example, as a consequence of
the pooling-of-interests rules, the securities issued in nine of the completed
acquisitions described above were shares of Class B common stock, which has
voting rights superior to our publicly-traded Class A common stock.
We cannot assure you that we will be able to consummate any pending or
future acquisitions or that we will realize the benefits anticipated from these
acquisitions. In the future, we may not be able to find other suitable
acquisition opportunities that are available at attractive valuations, if at
all. Even if we do find suitable acquisition opportunities, we may not be able
to consummate the acquisitions on commercially acceptable terms. Moreover, it
may be difficult for us to successfully integrate any acquired businesses,
products, technologies or personnel, which could materially and adversely affect
our business, financial condition and results of operations.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKETS IN ORDER TO REMAIN COMPETITIVE.
Our future success will depend on our ability to anticipate and adapt to
changes in technology and industry standards. We will also need to continue to
develop and introduce new and enhanced products to meet our customers' changing
demands. Substantially all of our product revenue in recent fiscal quarters has
been derived from sales of products for the cable modem, digital cable set-top
box and high-speed office network markets. These markets are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and short product life cycles. In addition, these markets continue
to undergo rapid growth and consolidation. A significant slowdown in any of
these markets or other broadband communications markets could materially and
adversely affect our business, financial condition and results of operations.
Our success will also depend on the ability of our customers to develop new
products and enhance existing products for the broadband communications markets
and to introduce and promote those products
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successfully. The broadband communications markets may not continue to develop
to the extent or in the timeframes that we anticipate. If new markets do not
develop as we anticipate, or if our products do not gain widespread acceptance
in these markets, our business, financial condition and results of operations
could be materially and adversely affected.
IF WE DO NOT ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS IN THE
SEMICONDUCTOR INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS, OUR PRODUCTS COULD
BECOME OBSOLETE AND WE COULD LOSE MARKET SHARE.
Products for broadband communications applications generally are based on
industry standards that are continually evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards. Our past sales and profitability have resulted, to a
large extent, from our ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products incorporating
the new standards. Our ability to adapt to these changes and to anticipate
future standards, and the rate of adoption and acceptance of those standards,
will be a significant factor in maintaining or improving our competitive
position and prospects for growth. We have in the past invested substantial
resources in emerging technologies that did not achieve the market acceptance
that we had expected. Our inability to anticipate the evolving standards in the
semiconductor industry and, in particular the broadband communications markets,
or to develop and introduce new products successfully into these markets could
materially and adversely affect our business, financial condition and results of
operations.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY AND IN A
COST-EFFECTIVE AND TIMELY MANNER OR TO ACHIEVE MARKET ACCEPTANCE OF OUR NEW
PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
Our future success will depend on our ability to develop new silicon
solutions for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to
select these products for design into their own new products. Our quarterly
results in the past have been, and are expected in the future to continue to be,
dependent on the introduction of a relatively small number of new products and
the timely completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from time to time we
have experienced delays in completing the development and introduction of new
products. Our ability to develop and deliver new products successfully will
depend on various factors, including our ability to:
- accurately predict market requirements and evolving industry standards;
- accurately define new products;
- timely complete and introduce new product designs;
- timely qualify and obtain industry interoperability certification of our
products and our customers' products into which our products will be
incorporated;
- obtain sufficient foundry capacity;
- achieve high manufacturing yields; and
- gain market acceptance of our products and our customers' products.
If we are not able to develop and introduce new products successfully and
in a cost-effective and timely manner, our business, financial condition and
results of operations would be materially and adversely affected.
Our new products generally are incorporated into our customers' products at
the design stage. We have often incurred significant expenditures on the
development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product. The value
of our products largely depends on the commercial success of our customers'
products and on the extent to which those products accommodate components
manufactured by our competitors. We cannot assure you that we will continue to
achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.
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OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD
OF BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
In the past, we have relied on our strategic relationships with certain
customers who are technology leaders in our target markets. We intend to pursue
and continue to form these strategic relationships in the future but we cannot
assure you that we will be able to do so. 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 could be materially and adversely affected.
WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT FOUNDRY CAPACITY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We do not own or operate a fabrication facility. Two outside foundries,
Taiwan Semiconductor Manufacturing Corporation, or TSMC, in Taiwan and Chartered
Semiconductor Manufacturing, or Chartered, in Singapore, manufacture
substantially all of our semiconductor devices in current production. In
September 1999 TSMC's principal facility was affected by a significant
earthquake in Taiwan. As a consequence of this earthquake, TSMC suffered power
outages and equipment damage that impaired TSMC's wafer deliveries which,
together with strong demand, resulted in wafer shortages and higher wafer
pricing industrywide. In addition, if either TSMC or Chartered experiences
financial difficulties, if either foundry suffers any damage to its facilities,
experiences power outages or in the event of any other disruption of foundry
capacity, we may not be able to qualify an alternative foundry in a timely
manner. Even our current foundries would need to have new manufacturing
processes qualified if there is a disruption in an existing process. If we
choose to use a new foundry or process, it would typically take us several
months to qualify the new foundry or process before we can begin shipping
products from it. If we cannot accomplish this qualification in a timely manner,
we may still experience a significant interruption in supply of the affected
products.
Because we rely on outside foundries with limited capacity, we face several
significant risks, including:
- a lack of ensured wafer supply and potential wafer shortages and higher
wafer prices;
- limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs; and
- the unavailability of or potential delays in obtaining access to key
process technologies.
In addition, the manufacture of integrated circuits is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries have
from time to time experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the installation and
start-up of new process technologies.
The ability of each foundry to provide us with semiconductor devices is
limited by its available capacity. Although we have entered into contractual
commitments to supply specified levels of products to certain of our customers,
we do not have a long-term volume purchase agreement or a guaranteed level of
production capacity with either TSMC or Chartered. Foundry capacity may not be
available when we need it or at reasonable prices. Availability of foundry
capacity has in the recent past been reduced due to strong demand. We place our
orders on the basis of our customers' purchase orders, and TSMC and Chartered
can allocate capacity to the production of other companies' products and reduce
deliveries to us on short notice. It is possible that foundry customers that are
larger and better financed than we are, or that have long-term agreements with
TSMC or Chartered, may induce our foundries to reallocate capacity to them. Such
a reallocation could impair our ability to secure the supply of components that
we need. Although we primarily use two independent foundries, most of our
components are not manufactured at both foundries at any given time and some of
our products may be designed to be manufactured at only one. Accordingly, if one
of our foundries is unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
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those components. Any of these delays would likely materially and adversely
affect our business, financial condition and results of operations. 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.
Certain of our acquired companies have established relationships with
foundries other than TSMC and Chartered, and we are using these other foundries
to produce the initial products of these acquired companies. We may utilize such
foundries for other products in the future. In using these new foundries, we
will be subject to all of the same risks described in the foregoing paragraphs
with respect to TSMC and Chartered.
WE MAY BE UNABLE TO RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL AND
ATTRACT ADDITIONAL KEY EMPLOYEES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel, in particular, our
co-founder, President and Chief Executive Officer, Dr. Henry T. Nicholas III,
and our co-founder, Vice President of Research & Development and Chief Technical
Officer, Dr. Henry Samueli. We do not have employment agreements with these
executives or any other key employees that govern the length of their service.
The loss of the services of Dr. Nicholas or Dr. Samueli, or certain other key
employees, would likely materially and adversely affect our business, financial
condition and results of operations. Our future success also depends on our
ability to continue to attract, retain and motivate qualified personnel,
particularly digital circuit designers, mixed-signal circuit designers and
systems applications engineers. Competition for these employees is intense. Our
inability to attract and retain additional key employees could have an adverse
effect on our business, financial condition and results of operations.
OUR INABILITY TO MANAGE OUR SIGNIFICANT RECENT AND ANTICIPATED FUTURE GROWTH
COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES, AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
During the past year, we have continued to significantly increase the scope
of our operations and expand our workforce, growing from 1,069 employees as of
December 31, 1999 to 2,497 employees as of December 31, 2000, including contract
and temporary employees and employees who joined us as the result of
acquisitions. This growth has placed, and our anticipated future growth of
operations is expected to continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the ongoing improvement of our accounting and
other internal management systems. We also will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors will require
substantial management effort. In the future, we will likely need to expand our
facilities or relocate some or all of our employees or operations from time to
time to support our growth. These relocations could result in temporary
disruptions of our operations or a diversion of management's attention and
resources. If we are unable to effectively manage expanding operations, our
business, financial condition and results of operations could be materially and
adversely affected.
THE LOSS OF ANY OF THE FOUR THIRD-PARTY SUBCONTRACTORS THAT ASSEMBLE AND TEST
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS COULD DISRUPT OUR SHIPMENTS, HARM OUR
CUSTOMER RELATIONSHIPS AND ADVERSELY AFFECT OUR NET SALES.
Four third-party subcontractors, ASAT Ltd. in Hong Kong, ST Assembly Test
Services, or STATS, in Singapore, Siliconware Precision Industries Ltd., or
SPIL, in Taiwan and Amkor Technology in the Philippines and South Korea,
assemble and test almost all of our current products. Because we rely on
third-party subcontractors to assemble and test our products, we cannot directly
control our product delivery schedules and quality assurance and control. This
lack of control has in the past resulted, 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 any of these subcontractors and typically procure services from these
suppliers on a per order basis. If any of these subcontractors experiences
capacity constraints or financial difficulties, if any subcontractor suffers any
damage to its facilities, experiences power outages or in the event of any other
disruption of assembly and testing capacity, we may not be able to obtain
alternative assembly and testing services in a timely manner. Due to the amount
of time that it usually takes us to qualify assemblers and testers, we could
experience significant delays in product shipments if we are required to find
alternative assemblers or testers for our components. Any problems that we may
encounter with the delivery, quality or cost of our products could materially
and adversely affect our business, financial condition or results of operations.
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We are continuing to develop relationships with additional third-party
subcontractors to assemble and test our products. In using these new
subcontractors, we will be subject to all of the same risks described in the
foregoing paragraph with respect to ASAT, STATS, SPIL and Amkor.
AS OUR INTERNATIONAL BUSINESS EXPANDS, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGAL, BUSINESS AND
ECONOMIC RISKS SPECIFIC TO OUR INTERNATIONAL OPERATIONS.
We currently obtain substantially all of our manufacturing, assembly and
testing services from suppliers located outside of the United States. In
addition, approximately 20.3% of our net revenue in the year ended December 31,
2000 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 1999 we established an
international distribution center in Singapore and a design center in the
Netherlands. Furthermore, as a result of our acquisitions of Armedia, HotHaus,
Altima, Element 14 and Visiontech, we also currently undertake design and
development activities in India, Canada, Taiwan, the United Kingdom, Belgium and
Israel. In the future, we intend to continue to expand our international
business activities and also to open other design and operational centers
abroad. International operations are subject to many inherent risks, including:
- political, social and economic instability;
- trade restrictions;
- the imposition of governmental controls;
- exposure to different legal standards, particularly with respect to
intellectual property;
- burdens of complying with a variety of foreign laws;
- import and export license requirements and restrictions of the United
States and each other country in which we operate;
- unexpected changes in regulatory requirements;
- foreign technical standards;
- changes in tariffs;
- difficulties in staffing and managing international operations;
- fluctuations in currency exchange rates;
- difficulties in collecting receivables from foreign entities; and
- potentially adverse tax consequences.
VARIOUS EXPORT LICENSING REQUIREMENTS, THE SEASONALITY OF INTERNATIONAL SALES OR
AN INCREASE IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO FOREIGN CURRENCIES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS OR REQUIRE US TO MODIFY OUR CURRENT
BUSINESS PRACTICES SIGNIFICANTLY.
Various government export regulations apply to the encryption or other
features contained in some of our products. We have applied for and received
several export licenses under these regulations, but we cannot assure you that
we will obtain any licenses for which we have currently applied or any licenses
that we may apply for in the future. If we do not receive the required licenses,
we may be unable to manufacture the affected products at our foreign foundries
or to ship these products to certain customers located outside the United
States. Moreover, the seasonality of international sales and economic conditions
in our primary overseas markets may negatively impact the demand for our
products abroad. All of our international sales to date have been denominated in
U.S. dollars. Accordingly, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Any one or more of the foregoing factors could materially
and adversely affect our business, financial condition or results of operations
or require us to modify our current business practices significantly. We
anticipate that these factors will impact our business to a greater degree as we
further expand our international business activities.
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WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY
RESULT IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND
INCREASED EXPENSES.
In order to remain competitive, we expect to continue to transition our
products to increasingly smaller geometries. This transition will require us to
redesign certain products and modify the manufacturing processes for our
products. We periodically 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 certain products from .50 micron to .35
micron, .22 micron and smaller geometry processes. In the past, we have
experienced some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes. These difficulties resulted in
reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
relationships with our foundries. If our foundries or we experience significant
delays in this transition or fail to efficiently implement this transition, our
business, financial condition and results of operations could be materially and
adversely affected. As smaller geometry processes become more prevalent, we
expect to integrate greater levels of functionality, as well as customer and
third party intellectual property, into our products. However, we may not be
able to achieve higher levels of design integration or deliver new integrated
products on a timely basis, or at all.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We primarily rely on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
methods, to protect our proprietary technologies and processes. Despite our
efforts to protect our proprietary technologies and processes, it is possible
that certain of our competitors or other parties may obtain, use or disclose our
technologies and processes. We currently hold 33 issued United States patents
and have filed over 500 United States patent applications. We cannot assure you
that any additional patents will be issued. Even if a new patent is issued, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, any of our existing or future patents may be challenged, invalidated
or circumvented. Moreover, any rights granted under these patents may not
provide us with meaningful protection. If our patents do not adequately protect
our technology, then our competitors may be able to offer products similar to
ours. Our competitors may also be able to develop similar technology
independently or design around our patents. Moreover, because we have
participated in developing various industry standards, we may be required to
license some of our technology and patents to others, including competitors, who
develop products based on the adopted standards.
We generally enter into confidentiality agreements with our employees and
strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, parties may attempt to copy, disclose, obtain or use our products,
services or technology without our authorization. As a result, our technologies
and processes may be misappropriated, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.
In addition, some of our customers have entered into agreements with us
that grant them the right to use our proprietary technology if we ever fail to
fulfill our obligations, including product supply obligations, under those
agreements, and do not correct this failure within a specified time period.
Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization. We cannot
assure you that our efforts to prevent the misappropriation or infringement of
our intellectual property or the intellectual property of our customers will
succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others, including our customers.
This litigation may be very expensive and time consuming, divert management's
attention and materially and adversely affect our business, financial condition
and results of operations.
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INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM
THIRD PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.
Companies in the semiconductor industry often aggressively protect and
pursue their intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties' proprietary rights. In January
2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a lawsuit against
us alleging infringement of a single patent relating to tuner technology. In
August 2000 Intel filed a lawsuit against us alleging infringement of five Intel
patents. In November 2000 we settled litigation with Intel Corporation and its
subsidiary Level One Communications, Inc. regarding the alleged misappropriation
of trade secrets, unfair competition and tortious interference with existing
contractual relations related to our hiring of three former Intel employees. In
1999 we settled litigation with Stanford Telecommunications, Inc. that related
to the alleged infringement of one of Stanford's patents by several of our cable
modem products. In 1999 we prevailed in litigation with Sarnoff Corporation and
NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
which alleged that we misappropriated and misused certain of their trade secrets
in connection with our hiring of five former Sarnoff employees. In January 2001
our subsidiary, AltoCom, settled patent litigation with Motorola, Inc. relating
to software modem technology. Our subsidiary, Altima, is the defendant in patent
litigation and International Trade Commission proceedings brought by Intel and
Level One. Although we are defending the pending litigation vigorously, it is
possible that we will not prevail in pending or future lawsuits. In addition, we
may be sued in the future by other parties who claim that we have infringed
their patents or misappropriated or misused their trade secrets, or who may seek
to invalidate one of our patents. Any of these claims may materially and
adversely affect our business, financial condition and results of operations.
For example, in a patent or trade secret action, a court could issue an
injunction against us that would require us to withdraw or recall certain
products from the market or redesign certain products offered for sale or under
development. In addition, we may be liable for damages for past infringement and
royalties for future use of the technology. We may also have to indemnify
certain customers and strategic partners under our agreements with such parties
if a third party alleges or if a court finds that we have infringed upon,
misappropriated or misused another party's proprietary rights. Even if claims
against us are not valid or successfully asserted, these claims could result in
significant costs and a diversion of management and personnel resources to
defend. In that event, our business, financial condition and results of
operations would likely be materially and adversely affected. If any claims or
actions are asserted against us, we may seek to obtain a license under a third
party's intellectual property rights. However, we may not be able to obtain a
license on commercially reasonable terms, if at all.
OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES. A CUSTOMER MAY DECIDE TO
CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED
SALES. IN ADDITION, OUR AVERAGE PRODUCT CYCLES TEND TO BE SHORT AND, AS A
RESULT, WE MAY HOLD EXCESS OR OBSOLETE INVENTORY WHICH COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
After we have developed and delivered a product to a customer, our customer
will often test and evaluate our product prior to designing its own equipment to
incorporate our product. Our customer may need three to six months or longer to
test and evaluate our product and an additional three to six months or more to
begin volume production of equipment that incorporates our product. Due to this
lengthy sales cycle, we may experience delays from the time we increase our
operating expenses and our investments in inventory until the time that we
generate revenues for these products. It is possible that we may never generate
any revenues from these products after incurring 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.
While our sales cycles are typically long, our average product life cycles
tend to be short as a result of the rapidly changing technology environment in
which we operate. As a result, the resources devoted to product sales and
marketing may not generate material revenues for us, and from time to time, we
may need to write off excess and obsolete inventory. If we incur significant
marketing and inventory expenses in the future that we are not able to recover,
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at
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reduced prices in anticipation of cost reductions and we still have higher cost
products in inventory, our operating results would be harmed.
BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically sell products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals could materially and
adversely affect our business, financial condition and results of operations. In
addition, cancellations or deferrals could cause us to hold excess inventory,
which could reduce our profit margins and restrict our ability to fund our
operations. We recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely pay for these
products, we could incur significant charges against our income, which could
materially and adversely affect our operating results.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH CURRENT OR PROSPECTIVE
CUSTOMERS.
Highly complex products such as the products that we offer frequently
contain defects and bugs when they are first introduced or as new versions are
released. We have in the past experienced, and may in the future experience,
these defects and bugs. If any of our products contain defects or bugs, or have
reliability, quality or compatibility problems, our reputation may be damaged
and customers may be reluctant to buy our products, which could materially and
adversely affect our ability to retain existing customers or attract new
customers. In addition, these defects or bugs 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 products are tested by our
suppliers, our customers and ourselves, it is possible that our new products
will contain defects or bugs. If any of these problems are not found until after
we have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF ONE OF THE TWO INDEPENDENT
FOUNDRIES UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT
PRODUCTS ARE LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER
NATURAL DISASTERS.
Our California facilities, including our principal executive offices, are
located near major earthquake fault lines. If there is a major earthquake or any
other natural disaster in a region where one of our facilities is located, our
business could be materially and adversely affected. In addition, TSMC, one of
the two outside foundries upon which we rely to manufacture substantially all of
our semiconductor devices, is located in Taiwan, a country that is also subject
to earthquakes. Any earthquake or other natural disaster in Taiwan could
materially disrupt TSMC's production capabilities and could result in our
experiencing a significant delay in delivery, or substantial shortage, of wafers
and possibly in higher wafer prices.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
The Federal Communications Commission has broad jurisdiction over each of
our target markets. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly applicable to
our products, they do apply to much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. For example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions specifications. We
and our customers may also be subject to regulation by countries other than the
United States. Foreign
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governments may impose tariffs, duties and other import restrictions on
components that we obtain from non-domestic suppliers and may impose export
restrictions on products that we sell internationally. These tariffs, duties or
restrictions could materially and adversely affect our business, financial
condition and results of operations. Changes in current laws or regulations or
the imposition of new laws and regulations in the United States or elsewhere
could also materially and adversely affect our business.
CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES CAN CONTROL
THE OUTCOME OF MATTERS THAT REQUIRE THE APPROVAL OF OUR SHAREHOLDERS, AND
ACCORDINGLY WE WILL NOT BE ABLE TO ENGAGE IN CERTAIN TRANSACTIONS WITHOUT THEIR
APPROVAL.
As of January 31, 2001 our directors and executive officers beneficially
owned approximately 27.3% of our outstanding common stock and 70.5% of the total
voting control held by our shareholders. In particular, as of January 31, 2001
our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially
owned a total of approximately 26.2% of our outstanding common stock and 68.3%
of the total voting control held by our shareholders. Accordingly, these
shareholders currently have enough voting power to control the outcome of
matters that require the approval of our shareholders. These matters include the
election of a majority of our Board of Directors, the issuance of additional
shares of Class B common stock, and the approval of most significant corporate
transactions, including a merger, consolidation or sale of substantially all of
our assets. In addition, these insiders currently also control the management of
our business. Because of their significant stock ownership, we will not be able
to engage in certain transactions without the approval of these shareholders.
These transactions include proxy contests, mergers, tender offers, open market
purchase programs or other purchases of our Class A common stock that could give
our shareholders the opportunity to receive a higher price for their shares than
the prevailing market price at the time of such purchases.
OUR STOCK PRICE IS HIGHLY VOLATILE. ACCORDINGLY, YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES OF COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.
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 August 1, 2000 our Class A common stock has traded at prices
as low as $27.09 and as high as $274.75 per share. These fluctuations have
occurred and may continue to occur in response to various factors, many of which
we cannot control, including:
- quarter-to-quarter variations in our operating results;
- announcements of technological innovations or new products by our
competitors, customers or us;
- general conditions in the semiconductor industry and telecommunications
and data communications equipment markets;
- changes in earnings estimates or investment recommendations by analysts;
- changes in investor perceptions; or
- changes in expectations relating to our products, plans and strategic
position or those of our competitors or customers.
In addition, the market prices of securities of Internet-related,
semiconductor and other high technology companies have been especially volatile.
This volatility has significantly affected the market prices of securities of
many technology companies for reasons frequently unrelated to the operating
performance of the specific companies. Accordingly, you may not be able to
resell your shares of common stock at or above the price you paid. In the past,
companies that have experienced volatility in the market price of their
securities have been the subject of securities class action litigation, and as
noted in the discussion of "Legal Proceedings" we have recently been sued in
several purported securities class action lawsuits, which we anticipate will be
consolidated. We and our directors have also been sued in shareholder derivative
actions. Although we believe that the lawsuits lack merit, an adverse
determination could have a very significant effect upon our business and
materially affect the price of our stock. Moreover, regardless of the ultimate
result, it is likely that the lawsuits will divert management's attention and
resources from other matters, which could also adversely affect the price of our
stock.
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WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES OR BY BORROWING MONEY, AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that our existing cash, cash equivalents and investments on
hand, together with the cash that we expect to generate from our operations,
will be sufficient to meet our capital needs for at least the next 12 months.
However, it is possible that we may need to raise additional funds to fund our
activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We could raise these funds by selling more
stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We may not be able to obtain additional funds on favorable terms, or at all. If
adequate funds are not available, we may be required to curtail our operations
significantly or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain technologies or
potential markets. If we raise additional funds by issuing additional equity or
convertible debt securities, the ownership percentages of existing shareholders
would be reduced. In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of our common stock.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain provisions that may
prevent or discourage a third party from acquiring us, even if the acquisition
would be beneficial to our shareholders. In addition, we have in the past issued
and may in the future issue shares of Class B common stock in connection with
certain acquisitions, upon exercise of certain stock options, and for other
purposes. Class B shares have superior voting rights entitling the holder to ten
votes for each share held on matters that we submit to a shareholder vote (as
compared with one vote per share in the case of our Class A common stock). Our
Board of Directors also has the authority to fix the rights and preferences of
shares of our preferred stock and to issue 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, our officers'
ownership of a majority of the Class B common stock and the ability of our Board
of Directors to issue preferred stock may prevent parties from acquiring us. In
addition, these factors may discourage third parties from bidding for our Class
A common stock at a premium over the market price for this stock. Finally, these
factors may also materially and adversely affect the market price of our Class A
common stock, and the voting and other rights of the holders of our common
stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We maintain an investment portfolio of various holdings, types and
maturities. We do not use derivative financial instruments in our non-trading
investment portfolio. We place our cash 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.
Debt securities are generally classified as held to maturity and are stated
at cost, adjusted for amortization of premiums and discounts to maturity. Our
investment policy for held-to-maturity investments requires that all investments
mature in three years or less, with a weighted average maturity of no longer
than one year. Primarily, these investments
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are sensitive to changes in interest rates. The following table presents
principal cash flows and related weighted average fixed interest rates by
expected maturity dates.
Principal (notional) amounts by expected maturity (at December 31, 2000):
FAIR VALUE
2001 2002 TOTAL 2000
-------- ------ -------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash equivalents................................... $ 60,750 $ -- $ 60,750 $ 60,721
Weighted average rate............................ 6.62% -- 6.62%
Investments........................................ $ 77,682 $1,984 $ 79,666 $ 79,668
Weighted average rate............................ 6.19% 7.33% 6.22%
Total portfolio.................................... $138,432 $1,984 $140,416 $140,389
Weighted average rate............................ 6.38% 7.33% 6.39%
Equity securities are generally classified as available for sale and are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income.
Included in our portfolio is an equity investment in one of our significant
customers, a publicly traded company. As a result of recent market price
volatility, we recorded a $3.8 million unrealized loss in 2000 related to this
investment. As of December 31, 2000 the fair value of this publicly traded
equity investment was $17.3 million. We have also invested in several privately
held companies, many of which can still be considered to be in the start-up or
development stage, or in funds that invest in such companies. We make
investments in key business partners and other industry participants in order to
establish important strategic relationships, expand existing relationships and
achieve a return on our investment. These investments are inherently risky as
the markets for the technologies or products these companies have under
development are typically in the early stages and may never materialize. As
such, we could lose our entire investment in these companies. As of December 31,
2000, the fair value of these investments was $29.4 million.
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.
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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 "Section 16(a) Beneficial Ownership Reporting Compliance,"
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.
PAGE
----
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
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.
PAGE
----
Report of Independent Auditors on Financial Statement
Schedule.................................................. S-1
Schedule II -- Consolidated Valuation and Qualifying
Accounts.................................................. S-2
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3. Exhibits.
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby incorporated
by reference into, this Form 10-K.
(b) Reports on Form 8-K.
The Company filed the following current reports on Form 8-K during the
quarter ended December 31, 2000:
Form 8-K/A filed on October 2, 2000 providing the historical financial
statements of Innovent Systems, Inc. and unaudited pro forma financial
information (Item 7).
Form 8-K filed on October 11, 2000 reporting its agreement to acquire
Element 14, Inc. (Item 5).
Form 8-K filed on October 18, 2000 reporting the completion of its
acquisition of NewPort Communications, Inc. (Item 2).
Form 8-K filed on October 19, 2000 reporting its third quarter earnings
press release and its agreement to acquire Allayer Communications (Item 5).
Form 8-K filed on October 23, 2000 reporting the completion of its
acquisition of Silicon Spice Inc. (Item 2).
Form 8-K filed on November 7, 2000 reporting its agreement to acquire
SiByte, Inc. (Item 5). This Form 8-K was subsequently amended on Form 8-K/A
filed on November 9, 2000 to correct a minor typographical error.
Form 8-K/A filed on November 13, 2000 providing the historical financial
statements of Altima Communications, Inc., NewPort Communications, Inc. and
Silicon Spice Inc., and unaudited pro forma financial information (Item 7). This
Form 8-K/A was subsequently amended on Form 8-K/A (Amendment No. 2) filed on
March 30, 2000 to revise the unaudited pro forma financial information.
Form 8-K filed on November 22, 2000 disclosing its settlement of certain
litigation with Intel (Item 9).
Form 8-K filed on November 28, 2000 reporting its agreement to acquire
Visiontech Ltd. (Item 5).
Form 8-K filed on November 30, 2000 disclosing the completion of its
acquisition of Element 14, Inc. (Item 9).
Form 8-K filed on December 15, 2000 disclosing its strategic alliance with
3Com Corporation (Item 9).
Form 8-K filed on December 15, 2000 disclosing the completion of its
acquisition of Allayer Communications (Item 9).
Form 8-K filed on December 29, 2000 reporting the completion of its
acquisition of SiByte, Inc. (Item 2).
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GLOSSARY OF TECHNICAL TERMS
802.11 ................................... A family of specifications for the wireless local area
network.
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).
Bluetooth................................. A computing and telecommunications industry specification
that describes how mobile phones, computers, and personal
digital assistants can interconnect with each other and with
home and business phones and computers using a short-range
wireless connection.
Broadband Communications.................. Data transmission at speeds of greater than 1.5 Mbps.
Category 5................................ Network cabling that consists of four twisted pairs of
copper wire terminated by connectors.
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.
DOCSIS.................................... Data Over Cable Service Interface Specifications. Industry
specification that defines the technical equipment for
high-speed cable modem and headend equipment.
DSLAM..................................... Digital Subscriber Line Access Multiplexer. A network device
that receives signals from multiple Digital Subscriber Line
connections and puts the signal on a high speed backbone.
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.
Head-end.................................. 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.
HomePNA 2.0............................... Home Phoneline Networking Alliance's 2.0 Standard for 32
Mbps home networking technology.
IC........................................ Integrated Circuit.
IPSec. ................................... Internet Protocol Security. A standard for security at the
network or packet processing layer of network communication.
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.
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LMDS...................................... Local Multipoint Distribution System. A broadband wireless communications network
that uses microwave frequencies above 10 GHz to transmit video and data to
residences over a cellular-like network at distances under a few miles.
MAC....................................... Media Access Control. Protocol for controlling the upstream and downstream traffic
flow in a local or wide area network.
MAN....................................... Metropolitan Area Network. A private data communications network linking a variety
of data devices such as computers and printers within a geographic area.
Mbps...................................... Megabits per second. Million bits per second.
MMDS...................................... Multichannel Multipoint Distribution Service. A broadband wireless communications
network that uses microwave frequencies below 10 GHz to transmit video and data 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.
RISC...................................... Reduced Instruction Set Computer.
RF........................................ Radio Frequency.
SSL....................................... Secure Socket Layer. A protocol for securing message transmission on the Internet.
SONET..................................... Synchronous Optical Network. A standard for synchronous data transmission on
optical media.
V.90 ..................................... A modem standard approved by the International Telecommunications Union for
transmitting data downstream at a 56 Kbbps (thousand bits per second)
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.
VoIP...................................... Voiceover Internet Protocol. A protocol allowing telephone calls to be made and
faxes to be sent over Internet-based data networks.
VSB....................................... Vestigial Side Band. North American standard for broadcast HDTV.
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
technologies spanning data rates from 128 kbps to 52 Mbps depending on the
distance between the central office and subscriber.
49
53
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, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Broadcom
Corporation at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
January 23, 2001, except for
Notes 2, 8 and 11 as to which
the date is March 30, 2001
F-1
54
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-----------------------
2000 1999
----------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 523,904 $180,816
Short-term investments.................................... 77,682 90,059
Accounts receivable (net of allowances for doubtful
accounts and sales returns and allowances of $18,910 in
2000 and $7,673 in 1999)............................... 172,314 92,124
Inventory................................................. 52,137 19,177
Deferred taxes............................................ 10,397 8,380
Prepaid expenses.......................................... 39,220 12,950
----------- --------
Total current assets.............................. 875,654 403,506
Property and equipment, net................................. 132,870 51,151
Long-term investments....................................... 1,984 9,351
Deferred taxes.............................................. 351,937 137,779
Goodwill and purchased intangible assets, net............... 3,260,464 --
Other assets................................................ 54,913 7,966
----------- --------
Total assets...................................... $ 4,677,822 $609,753
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 78,163 $ 46,458
Wages and related benefits................................ 34,720 15,430
Accrued liabilities....................................... 66,030 26,131
Note payable.............................................. 21,051 --
Other current liabilities................................. 2,598 4,862
----------- --------
Total current liabilities......................... 202,562 92,881
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- none in 2000 and
1999.................................................. -- --
Class A common stock, $.0001 par value:
Authorized shares -- 800,000,000
Issued and outstanding shares -- 163,148,904 in 2000
and 110,402,852 in 1999............................... 16 11
Class B common stock, $.0001 par value:
Authorized shares -- 400,000,000
Issued and outstanding shares -- 81,172,979 in 2000 and
102,596,638 in 1999................................... 8 10
Additional paid-in capital................................ 6,236,968 451,284
Notes receivable from employees........................... (14,575) (1,821)
Deferred compensation..................................... (1,135,555) (12,632)
Retained earnings (accumulated deficit)................... (607,791) 80,031
Accumulated other comprehensive loss...................... (3,811) (11)
----------- --------
Total shareholders' equity........................ 4,475,260 516,872
----------- --------
Total liabilities and shareholders' equity........ $ 4,677,822 $609,753
=========== ========
See accompanying notes.
F-2
55
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- -------- --------
Gross revenue............................................... $1,134,763 $521,225 $216,729
Less: fair value of warrants earned by customers............ (38,603) -- --
---------- -------- --------
Net revenue................................................. 1,096,160 521,225 216,729
Cost of revenue(1).......................................... 484,219 211,991 91,403
---------- -------- --------
Gross profit................................................ 611,941 309,234 125,326
Operating expense:
Research and development(2)............................... 250,676 119,300 54,285
Selling, general and administrative(2).................... 103,305 61,475 33,595
Stock-based compensation.................................. 115,307 3,560 1,786
Amortization of goodwill.................................. 136,984 -- --
Amortization of purchased intangible assets............... 1,255 -- --
In-process research and development....................... 713,050 -- --
Merger-related costs...................................... 4,745 15,210 --
Litigation settlement costs............................... -- 17,036 --
---------- -------- --------
Income (loss) from operations............................... (713,381) 92,653 35,660
Interest and other income, net.............................. 21,606 8,648 4,180
---------- -------- --------
Income (loss) before income taxes........................... (691,775) 101,301 39,840
Provision (benefit) for income taxes........................ (3,953) 28,830 18,451
---------- -------- --------
Net income (loss)........................................... $ (687,822) $ 72,471 $ 21,389
========== ======== ========
Basic earnings (loss) per share............................. $ (3.13) $ .36 $ .13
========== ======== ========
Diluted earnings (loss) per share........................... $ (3.13) $ .31 $ .10
========== ======== ========
Weighted average shares (basic)............................. 220,101 201,667 169,716
========== ======== ========
Weighted average shares (diluted)........................... 220,101 235,651 205,511
========== ======== ========
- ------------------------------
(1) Cost of revenue includes the following:
Stock-based compensation.............................. $ 4,578 $ 149 $ 114
Amortization of purchased intangible assets........... 2,266 -- --
---------- -------- --------
$ 6,844 $ 149 $ 114
========== ======== ========
(2) Excludes stock-based compensation as follows:
Research and development.............................. 85,302 2,433 1,259
Selling, general and administrative................... 30,005 1,127 527
---------- -------- --------
$ 115,307 $ 3,560 $ 1,786
========== ======== ========
Excludes amortization of purchased intangible assets as
follows:
Research and development.............................. $ 1,152 $ -- $ --
Selling, general and administrative................... 103 -- --
---------- -------- --------
$ 1,255 $ -- $ --
========== ======== ========
See accompanying notes.
F-3
56
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- --------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES COMPENSATION
---------- -------- ------------ ------ ---------- ---------- ------------
Balance at December 31, 1997......... 3,567,839 $ 28,617 140,676,397 $14 $ 26,925 $ (3,362) $ (1,090)
Conversion of preferred stock....... (3,567,839) (28,617) 33,814,068 3 28,614 -- --
Initial public offering............. -- -- 14,480,000 2 79,168 -- --
Follow-on offering.................. -- -- 1,880,000 -- 30,548 -- --
Pooling-of-interest transactions.... -- -- 5,108,730 -- 18,306 -- --
Exercise of stock options, net...... -- -- 3,612,408 1 2,002 (191) --
Employee stock purchase plan........ -- -- 338,256 -- 1,725 -- --
Repayment of notes receivable....... -- -- -- -- -- 810 --
Tax benefit from stock plans........ -- -- -- -- 25,171 -- --
Deferred compensation, net.......... -- -- -- -- 8,888 -- (8,888)
Stock-based compensation............ -- -- -- -- -- -- 1,900
Components of comprehensive income:
Translation adjustments........... -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
Comprehensive income................ -- -- -- -- -- -- --
---------- -------- ----------- --- ---------- -------- -----------
Balance at December 31, 1998......... -- -- 199,909,859 20 221,347 (2,743) (8,078)
Pooling-of-interest transactions.... -- -- 3,406,871 -- 37,642 -- --
Exercise of stock options, net...... -- -- 8,945,672 1 23,909 (394) --
Employee stock purchase plan........ -- -- 737,088 -- 5,016 -- --
Repayment of notes receivable....... -- -- -- -- -- 1,316 --
Tax benefit from stock plans........ -- -- -- -- 154,103 -- --
Deferred compensation, net.......... -- -- -- -- 9,267 -- (9,267)
Stock-based compensation............ -- -- -- -- -- -- 4,713
Components of comprehensive income:
Translation adjustments........... -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
Comprehensive income................ -- -- -- -- -- -- --
---------- -------- ----------- --- ---------- -------- -----------
Balance at December 31, 1999......... -- -- 212,999,490 21 451,284 (1,821) (12,632)
Purchase transactions............... -- -- 20,899,073 2 3,893,441 -- --
Pooling-of-interest transactions.... -- -- 176,049 -- 1,061 -- --
Exercise of stock options, net...... -- -- 9,767,556 1 131,786 (13,668) --
Employee stock purchase plan........ -- -- 479,715 -- 11,774 -- --
Repayment of notes receivable....... -- -- -- -- -- 914 --
Tax benefit from stock plans........ -- -- -- -- 465,887 -- --
Deferred compensation, net.......... -- -- -- -- 1,236,013 -- (1,236,013)
Stock-based compensation............ -- -- -- -- 7,119 -- 113,090
Fair value of warrants earned by
customers......................... -- -- -- -- 38,603 -- --
Components of comprehensive loss:
Change in net unrealized loss on
investment...................... -- -- -- -- -- -- --
Translation adjustments........... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Comprehensive loss.................. -- -- -- -- -- -- --
---------- -------- ----------- --- ---------- -------- -----------
Balance at December 31, 2000......... -- $ -- 244,321,883 $24 $6,236,968 $(14,575) $(1,135,555)
========== ======== =========== === ========== ======== ===========
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
(ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
DEFICIT) LOSS EQUITY
------------ ------------- -------------
Balance at December 31, 1997......... $ (5,232) $ -- $ 45,872
Conversion of preferred stock....... -- -- --
Initial public offering............. -- -- 79,170
Follow-on offering.................. -- -- 30,548
Pooling-of-interest transactions.... (2,162) -- 16,144
Exercise of stock options, net...... -- -- 1,812
Employee stock purchase plan........ -- -- 1,725
Repayment of notes receivable....... -- -- 810
Tax benefit from stock plans........ -- -- 25,171
Deferred compensation, net.......... -- -- --
Stock-based compensation............ -- -- 1,900
Components of comprehensive income:
Translation adjustments........... -- (117) (117)
Net income........................ 21,389 -- 21,389
----------
Comprehensive income................ -- -- 21,272
--------- ------- ----------
Balance at December 31, 1998......... 13,995 (117) 224,424
Pooling-of-interest transactions.... (6,435) -- 31,207
Exercise of stock options, net...... -- -- 23,516
Employee stock purchase plan........ -- -- 5,016
Repayment of notes receivable....... -- -- 1,316
Tax benefit from stock plans........ -- -- 154,103
Deferred compensation, net.......... -- -- --
Stock-based compensation............ -- -- 4,713
Components of comprehensive income:
Translation adjustments........... -- 106 106
Net income........................ 72,471 -- 72,471
----------
Comprehensive income................ -- -- 72,577
--------- ------- ----------
Balance at December 31, 1999......... 80,031 (11) 516,872
Purchase transactions............... -- -- 3,893,443
Pooling-of-interest transactions.... -- -- 1,061
Exercise of stock options, net...... -- -- 118,119
Employee stock purchase plan........ -- -- 11,774
Repayment of notes receivable....... -- -- 914
Tax benefit from stock plans........ -- -- 465,887
Deferred compensation, net.......... -- -- --
Stock-based compensation............ -- -- 120,209
Fair value of warrants earned by
customers......................... -- -- 38,603
Components of comprehensive loss:
Change in net unrealized loss on
investment...................... -- (3,799) (3,799)
Translation adjustments........... -- (1) (1)
Net loss.......................... (687,822) -- (687,822)
----------
Comprehensive loss.................. -- -- (691,622)
--------- ------- ----------
Balance at December 31, 2000......... $(607,791) $(3,811) $4,475,260
========= ======= ==========
See accompanying notes.
F-4
57
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- -------- ---------
OPERATING ACTIVITIES
Net income (loss)........................................ $(687,822) $ 72,471 $ 21,389
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 24,493 16,070 9,718
Fair value of warrants earned by customers............. 38,603 -- --
Stock-based compensation............................... 120,209 4,713 1,900
Amortization of goodwill and purchased intangible
assets.............................................. 140,505 -- --
In-process research and development.................... 713,050 -- --
Tax benefit from stock plans........................... 121,631 51,653 25,171
Deferred taxes......................................... (154,060) (27,973) (13,815)
Change in operating assets and liabilities:
Accounts receivable................................. (78,350) (49,661) (31,798)
Inventory........................................... (29,850) (11,852) (4,613)
Prepaid expenses and other assets................... (37,929) (3,255) (12,673)
Accounts payable.................................... (1,802) 23,952 12,753
Other accrued liabilities........................... 31,895 33,197 5,457
--------- -------- ---------
Net cash provided by operating activities...... 200,573 109,315 13,489
INVESTING ACTIVITIES
Purchases of property and equipment, net................. (80,666) (31,278) (29,890)
Purchase of minority investments......................... (25,900) (3,500) --
Net cash received from purchase transactions............. 69,402 -- --
Proceeds from sale of held-to-maturity investments....... 53,857 -- 8,808
Purchases of held-to-maturity investments................ (13,668) (22,240) (85,978)
--------- -------- ---------
Net cash provided by (used in) investing
activities................................... 3,025 (57,018) (107,060)
FINANCING ACTIVITIES
Proceeds from debt obligations........................... 250 1,367 5,440
Payments on debt obligations............................. (6,295) (8,422) (5,202)
Net proceeds from initial public offering................ -- -- 79,170
Net proceeds from follow-on offering..................... -- -- 30,548
Net proceeds from issuance of common stock............... 144,621 56,703 25,848
Proceeds from repayment of notes receivable.............. 914 1,316 810
--------- -------- ---------
Net cash provided by financing activities...... 139,490 50,964 136,614
--------- -------- ---------
Increase in cash and cash equivalents.................... 343,088 103,261 43,043
Cash and cash equivalents at beginning of year........... 180,816 77,555 34,512
--------- -------- ---------
Cash and cash equivalents at end of year................. $ 523,904 $180,816 $ 77,555
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................ $ 153 $ 625 $ 506
========= ======== =========
Income taxes paid........................................ $ 4,028 $ 2,401 $ 9,890
========= ======== =========
See accompanying notes.
F-5
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom Corporation (the "Company") is the leading provider of highly
integrated silicon solutions that enable broadband communications and networking
of voice, video and data services. Using proprietary technologies and advanced
design methodologies, the Company designs, develops and supplies system-on-a-
chip solutions for applications in digital cable set-top boxes and cable modems,
high-speed local, metropolitan and wide area and optical networks, home
networking, Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial digital
broadcast, digital subscriber lines (xDSL), wireless communications,
SystemI/O(TM) server solutions and network processing.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
All historical financial information has been restated to include the
operations of nine acquisitions accounted for on a pooling-of-interests basis as
if each acquired Company had been combined with the Company prior to the
beginning of each period presented.
In 1999 the Company established an international distribution center in
Singapore and a design center in the Netherlands. Additionally, as a result of
acquisitions, the Company has software design, development and marketing
activities in Canada and design and development activities in India, Taiwan, the
United Kingdom, Belgium and Israel. At December 31, 2000 approximately $205.0
million of the Company's net assets were located outside of the United States,
primarily in Singapore.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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, sales returns and allowances,
inventory reserves, warranty reserves and income tax valuation allowances.
REVENUE RECOGNITION
Gross revenue from product sales is recognized at the time of shipment,
except for shipments to stocking distributors whereby revenue is recognized upon
sale to the end customer. Provision is concurrently made for estimated product
returns. Development revenue is generally recognized under the
percentage-of-completion method. Revenue from licensed software is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided that the fee is fixed and determinable and collectibility is probable.
Revenue from post-contract customer support and any other future deliverables is
deferred and earned over the support period or as contract elements are
delivered. Net revenue represents gross revenue less the fair value of warrants
earned by customers. See Note 2.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products throughout North America,
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
prepaid or letter of credit 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 not
been significant and have been within management's expectations.
F-6
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
INVESTMENTS
The Company accounts for its investments in debt and equity 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.
The Company also has certain other minority investments in publicly traded
and privately held companies for the promotion of business and strategic
objectives. These investments are included in other assets on the Company's
balance sheet and are carried at fair value or cost, as appropriate. The Company
monitors these investments for impairment and makes appropriate reductions in
carrying values when necessary. No impairment has been indicated to date.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Work in process.......................................... $18,513 $11,878
Finished goods........................................... 33,624 7,299
------- -------
$52,137 $19,177
======= =======
F-7
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are provided using the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment are comprised of
the following:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Leasehold improvements................................. $ 34,477 $ 5,999
Office furniture and equipment......................... 22,354 6,999
Machinery and equipment................................ 35,408 20,027
Computer software and equipment........................ 70,218 40,614
Construction in progress............................... 17,369 4,478
-------- --------
179,826 78,117
Less accumulated depreciation and amortization......... (46,956) (26,966)
-------- --------
$132,870 $ 51,151
======== ========
GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill is recorded as the difference, if any, between the aggregate
consideration paid for an acquisition and the fair value of the net tangible and
intangible assets acquired. Goodwill and purchased intangible assets are
amortized on a straight-line basis over the economic lives of the respective
assets, generally three to five years. Goodwill and purchased intangible assets
were comprised of the following at December 31, 2000 (in thousands):
Goodwill................................................. $3,350,659
Other purchased intangible assets........................ 50,310
----------
3,400,969
Less accumulated amortization............................ (140,505)
----------
$3,260,464
==========
Other purchased intangible assets include items such as assembled
workforce, completed technology, customer base and software. No goodwill or
purchased intangible assets were recorded in 1999.
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with 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. Reviews are regularly performed to determine whether the carrying
value of assets is impaired. Impairment is based on the excess of the carrying
amount over the fair value of those assets. No impairment has been indicated to
date.
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-8
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board ("APB") 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 ("Statement No.
123"). Options granted to non-employees, as defined, have been accounted for at
fair market value in accordance with Statement No. 123.
In March 2000 the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation -- An Interpretation of APB Opinion
No. 25 ("FIN 44"). FIN 44 clarifies the definition of an employee for purposes
of applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000 but certain conclusions therein cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The provisions
of FIN 44 change the accounting for an exchange of unvested employee stock
options and restricted stock awards in a purchase business combination. The new
rules require that the intrinsic value of the unvested awards be allocated to
deferred compensation and recognized as stock-based compensation over the
remaining future vesting period. The Company adopted these new rules in its
third fiscal quarter (beginning July 1, 2000) for acquisitions accounted for as
purchase business combinations.
The Company also complies with the provisions of Emerging Issues Task Force
("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or
Services ("EITF 96-18"), with respect to stock option grants to non-employees
who are consultants to the Company. EITF 96-18 requires variable plan accounting
with respect to such non-employee stock options, whereby compensation associated
with such options is measured on the date such options vest, and incorporates
the then-current fair market value of the Company's common stock into the option
valuation model.
EARNINGS PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is calculated by adjusting outstanding shares,
assuming any dilutive effects of options, warrants and convertible securities.
F-9
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of earnings (loss) per
share:
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator: net income (loss)...................... $(687,822) $ 72,471 $ 21,389
========= ======== ========
Denominator:
Weighted average shares outstanding............. 223,200 207,701 181,269
Less: nonvested common shares outstanding....... (3,099) (6,034) (11,553)
--------- -------- --------
Denominator for basic earnings (loss) per common
share........................................... 220,101 201,667 169,716
Effect of dilutive securities:
Nonvested common shares......................... -- 4,798 7,156
Stock options................................... -- 29,178 20,172
Convertible preferred stock..................... -- -- 8,453
Warrants........................................ -- 8 14
--------- -------- --------
Denominator for diluted earnings (loss) per common
share........................................... 220,101 235,651 205,511
========= ======== ========
Basic earnings (loss) per share................. $ (3.13) $ .36 $ .13
========= ======== ========
Diluted earnings (loss) per share............... $ (3.13) $ .31 $ .10
========= ======== ========
Approximately 41.3 million common share equivalents have been excluded from
the diluted loss per share calculation for the year ended December 31, 2000, as
they would have been antidilutive. The effect of the performance-based warrants
assumed by the Company and other contingent equity consideration paid by the
Company in connection with certain acquisitions will be included in the
calculation of basic and diluted earnings (loss) per share as of the beginning
of the period in which they are earned. See Note 2.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on most products and records a
related provision for estimated warranty costs at the date of sale. The
estimated warranty liability at December 31, 2000 and 1999 was $3.4 million and
$3.7 million, respectively.
ADVERTISING EXPENSE
Advertising costs are expensed in the period incurred.
INTEREST EXPENSE
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
$332,000, $751,000 and $480,000, respectively.
COMPREHENSIVE INCOME
FASB Statement No. 130, Reporting Comprehensive Income, establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. Other
F-10
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accumulated comprehensive loss includes foreign currency translation adjustments
and unrealized loss on investment. The components of comprehensive income (loss)
are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- -------------- -------
(IN THOUSANDS)
Net income (loss)............................... $(687,822) $72,471 $21,389
Other comprehensive income (loss):
Change in net unrealized loss on investment... (3,799) -- --
Change in accumulated translation
adjustments................................ (1) 106 (117)
--------- ------- -------
Total comprehensive income (loss)............... $(691,622) $72,577 $21,272
========= ======= =======
SEGMENTS OF A BUSINESS ENTERPRISE
FASB Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information ("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 Company
operates in one segment, broadband communications.
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:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- -------- ------
(IN THOUSANDS)
Purchase of equipment through capital leases............. $ 168 $ 2,275 $1,519
Note payable issued for strategic investment............. 21,051 -- --
Notes receivable from employees issued in connection with
exercise of stock options.............................. -- 394 191
Non-interest bearing notes payable converted to common
stock.................................................. -- 3,142 --
Tax benefit from exercise of stock options and stock
purchase plan.......................................... 344,256 102,450 --
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 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 ("Statement No 133"). Statement No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and to measure
those instruments at fair value. The Company is required to and will adopt
Statement 133 in the first quarter of 2001. Management does not expect the
initial adoption of Statement 133 to have a significant effect on the Company's
consolidated results of operations or financial position.
F-11
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1999 the FASB issued EITF Topic No. D-83, Accounting for
Payroll Taxes Associated with Stock Option Exercises ("EITF D-83"). EITF D-83
requires that payroll tax paid on the difference between the exercise price and
the fair value of acquired stock in association with an employee's exercise of
stock options be recorded as an operating expense. Payroll tax on stock option
exercises for the years ended December 31, 2000, 1999 and 1998 was $16.9
million, $5.0 million and $0.8 million, respectively.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition policies
comply with SAB 101.
2. BUSINESS COMBINATIONS
During 2000 the Company completed eight acquisitions that were accounted
for using the purchase method of accounting. The consolidated financial
statements include the results of operations of these acquired companies
incurred after their respective acquisition dates.
In addition, the Company completed nine acquisitions accounted for as
poolings of interests in 2000 and 1999. The restated consolidated financial
statements give effect to these transactions as if they had occurred prior to
the beginning of each period presented and reflect adjustments made to (i)
conform the accounting policies of the combined companies and (ii) eliminate
intercompany accounts and transactions.
PURCHASE TRANSACTIONS
A summary of transactions accounted for using the purchase method of
accounting is outlined below:
SHARES SHARES
SHARES RESERVED FOR RESERVED FOR
RESERVED PERFORMANCE- CERTAIN TOTAL
FOR BASED FUTURE SHARES
DATE SHARES OPTIONS WARRANTS PERFORMANCE ISSUED OR
COMPANY ACQUIRED ACQUIRED BUSINESS ISSUED ASSUMED ASSUMED GOALS RESERVED
---------------- ---------- -------- --------- --------- ------------ ------------ ----------
Innovent Systems, Inc........ July 2000 RF integrated 2,339,149 605,925 -- -- 2,945,074
circuits for
wireless
Puyallup Integrated Circuit Aug. 2000 ASIC design 148,539 139,993 -- -- 288,532
Company, Inc............... services
Altima Communications, Sept. 2000 Ethernet physical 1,661,784 875,036 2,889,664 -- 5,426,484
Inc........................ layer transceivers
NewPort Communications, Oct. 2000 Integrated circuits 5,211,050 411,069 -- -- 5,622,119
Inc........................ for optical
communications
equipment
Silicon Spice Inc............ Oct. 2000 Communications 3,864,050 1,087,215 39,604 -- 4,990,869
processors
Element 14, Inc.............. Nov. 2000 Integrated circuits 1,792,433 947,333 -- -- 2,739,766
used in DSL
Allayer Communications....... Dec. 2000 Integrated circuits 839,467 426,961 756,900 300,000 2,323,328
for wide area and
Ethernet switching
applications
SiByte, Inc.................. Dec. 2000 Network processors 5,042,601 585,140 1,841,679 3,751,878 11,221,298
Allocation of Purchase Consideration
For each of the eight purchase transactions, the Company obtained
independent appraisals of the fair value of the tangible and intangible assets
acquired in order to allocate the purchase price in accordance with
F-12
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APB Opinion No. 16, Business Combinations ("APB 16"). Based upon those
appraisals, the purchase price was allocated as follows (in thousands):
ASSETS GOODWILL AND DEFERRED TAX
(LIABILITIES) PURCHASED DEFERRED ASSETS TOTAL
ASSUMED INTANGIBLES COMPENSATION (LIABILITIES) IPR&D CONSIDERATION
------------- ------------ ------------ ------------- -------- -------------
Innovent.................. $ 7,297 $ 267,636 $ 273,740 $ (67,996) $ 41,690 $ 522,367
Puyallup.................. (460) 37,982 35,934 (8,767) -- 64,689
Altima.................... 1,955 393,047 159,490 (27,954) 3,970 530,508
NewPort................... 11,977 894,535 261,002 (80,396) 198,460 1,285,578
Silicon Spice............. 26,346 635,941 258,274 (14,796) 219,300 1,125,065
Element 14................ (18,805) 383,819 70,646 4,835 64,630 505,125
Allayer................... 9,808 170,326 8,451 (6,013) 11,620 194,192
SiByte.................... 23,447 617,683 174,106 (81,054) 173,380 907,562
-------- ---------- ---------- --------- -------- ----------
Total..................... $ 61,565 $3,400,969 $1,241,643 $(282,141) $713,050 $5,135,086
======== ========== ========== ========= ======== ==========
The consideration for each of the purchase transactions was calculated as
follows: a) common shares issued were valued based upon the Company's stock
price for a short period just before and after the companies reached agreement
and the proposed transactions were announced and b) restricted common stock and
employee stock options were valued in accordance with FIN 44. Assets
(liabilities) assumed in connection with the purchase transactions include the
acquisition costs incurred by the Company.
Accounting for Performance-Based Warrants
In each of the acquisitions of Altima, Silicon Spice, Allayer and SiByte,
the Company reserved additional shares of its Class A common stock for future
issuance to customers upon exercise of outstanding performance-based warrants of
the acquired company that were assumed by the Company and become exercisable
upon the satisfaction by customers of their obligations under certain purchase
and development agreements. In allocating the purchase price for Altima, Silicon
Spice, Allayer and SiByte, no value has been assigned to the purchase and
development agreements under which performance-based warrants were issued
because they were executory contracts and their terms were at fair value.
However, pursuant to the provisions of EITF 96-18, the related warrants have
been assigned fixed values. Under EITF 96-18, a performance-based warrant is
accounted for using its value at its date of issuance if a significant
disincentive to the customer exists that makes the customer's performance
probable ("fixed accounting"). At the time the Company assumed the warrants and
related purchase and development agreements, the Company determined, in
consultation with its independent auditors, that fixed accounting, with the date
of acquisition as the valuation measurement date, was required. With respect to
the purchase agreements, this determination was based on the fact that the
customers are subject to substantial penalties, which include cash penalties if
there are shortfalls in meeting the minimum purchase requirements on a periodic
basis throughout the term of the agreements and in some cases further cash
penalties payable at the end of the agreements if aggregate purchase commitments
are not met. With respect to the development agreements, this determination was
based on the fact that the customers are subject to substantial cash penalties
if the customers fail to fulfill their obligations. In its evaluation, the
Company considered the significance of the cash penalties in relation to both
the amounts in each purchase and development agreement and the financial
statements of the customers, the effect of forfeiture of the value of the
warrants, and the intent and ability of customers to purchase the required
products and development services under the agreements.
These warrants will be accounted for in the Company's financial statements
pursuant to EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested,
Forfeitable Equity Instruments Granted to a Nonemployee ("EITF D-90"). EITF D-90
announces an SEC Staff position that an issuer of a performance-based warrant
should treat it as unissued for accounting purposes until the issuer has
received benefit and the warrant vests. Accordingly, the warrants assumed in the
Altima, Silicon Spice, Allayer and SiByte acquisitions
F-13
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will be recorded as a reduction of revenue, based on the per share warrant fair
values at the dates of the respective acquisitions, only as and to the extent
any warrants are earned and vest in future periods.
Customers earned performance-based warrants to purchase 162,280 shares of
the Company's Class A common stock in the twelve months ended December 31, 2000.
Revenue was reduced by $38.6 million for the fair value of the warrants earned
by customers.
The fair value, weighted average remaining contractual life and exercise
price of the assumed performance-based warrants outstanding and exercisable as
of December 31, 2000 were as follows:
OUTSTANDING
----------------------------------
WEIGHTED
AVERAGE
REMAINING EXERCISABLE
CONTRACTUAL ----------------------
PER SHARE NUMBER OF LIFE EXERCISE SHARES EXERCISE
ACQUISITION FAIR VALUE SHARES (YEARS) PRICE EXERCISABLE PRICE
----------- ---------- --------- ----------- -------- ----------- --------
Altima............................. $238.56 2,889,664 2.57 $0.0143 -- $0.0143
Silicon Spice...................... $227.31 29,703 1.58 $0.0111 -- $0.0111
Allayer............................ $142.81 756,900 2.97 $0.0328 -- $0.0328
SiByte............................. $123.13 1,841,679 3.79 $0.0039 -- $0.0039
The warrants generally vest quarterly over the period from October 2000
through July 2004, subject to satisfaction by customers of the applicable
purchase and development requirements, and are generally exercisable for one
year after the vesting date. The performance-based warrants assumed in the
Altima, Silicon Spice, Allayer and SiByte acquisitions have been assigned fixed
values based on the per share warrant fair values using the Black-Scholes
pricing model at the date they were assumed by the Company. The fair value of
the warrants was estimated assuming no expected dividends, a weighted average
expected life of approximately three years, a weighted average risk-free
interest rate of 6.2% and an expected volatility of .90. The weighted average
fair value and exercise price of warrants assumed during 2000 were $186.91 and
$0.0133, respectively. A total of 9,901 warrants were vested and exercised, and
no warrants were cancelled, forfeited or expired, during the year ended December
31, 2000. Additionally, warrants to purchase 152,379 shares of common stock were
vested and warrants to purchase 5,365,567 shares of common stock were unvested
at December 31, 2000.
Accounting for Contingent Consideration
In connection with the acquisitions of Allayer and SiByte, if certain
future performance goals are satisfied, the consideration for these acquisitions
will be increased. Such additional consideration will be accounted for in
accordance with APB 16, FIN 44 and EITF 95-8, Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination. Any additional consideration paid will be allocated to
goodwill and deferred compensation and amortized over the remaining useful life
of goodwill and the remaining vesting periods of the applicable equity
instruments. In addition, outstanding options assumed in these transactions are
subject to variable accounting and will be periodically revalued over the
vesting period until all performance goals are satisfied.
In-Process Research and Development
In-process research and development ("IPR&D") aggregated $713.1 million for
purchase transactions completed in 2000. The amounts allocated to IPR&D were
determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition as it was determined that the
projects had not reached technological feasibility and no alternative future
uses existed.
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
F-14
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D performed to date.
The fair value of completed technology is included in identifiable intangible
assets, and the fair values of IPR&D to be completed and future research and
development are included in goodwill. The Company believes the amounts recorded
as IPR&D, as well as developed technology, represent fair values and approximate
the amounts an independent party would pay for these projects.
As of the closing date of each purchase transaction, development projects
were in process. Research and development costs to bring the products from the
acquired companies to technological feasibility are not expected to have a
material impact on the Company's future results of operations or financial
condition.
Pro Forma Data
The pro forma statements of operations data of the Company set forth below
gives effect to the eight purchase transactions as if they had occurred at the
beginning of fiscal 1999. The following unaudited pro forma statements of
operations data includes amortization of goodwill, purchased intangible assets
and stock-based compensation but excludes the charge for acquired IPR&D. This
pro forma data is presented for informational purposes only and does not purport
to be indicative of the results of future operations of the Company or of the
results that would have actually occurred had the acquisitions taken place at
the beginning of fiscal 1999.
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
---------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Pro forma net revenue.............................. $1,127,603 $ 538,974
Pro forma net loss................................. (933,210) (1,063,633)
Pro forma loss per share........................... (3.94) (4.86)
POOLING-OF-INTERESTS TRANSACTIONS
In 2000 the Company acquired Digital Furnace Corporation, BlueSteel
Networks, Inc., Stellar Semiconductor, Inc. and Pivotal Technologies
Corporation. In connection with these acquisitions, the Company issued an
aggregate of 3,911,130 shares of its Class B common stock in exchange for all
shares of the acquired companies' preferred stock and common stock and reserved
an additional 373,713 shares of its Class B common stock for issuance upon
exercise of outstanding employee stock options and other rights assumed by the
Company.
In 1999 the Company acquired Maverick Networks, Epigram, Inc., Armedia,
Inc., HotHaus Technologies Inc. and AltoCom, Inc. In connection with these
acquisitions, the Company issued an aggregate of 19,450,786 shares of its Class
B common stock in exchange for all shares of the acquired companies' preferred
stock and common stock and reserved an additional 1,849,450 shares of its Class
B common stock for issuance upon exercise of outstanding employee stock options,
warrants and other rights assumed by the Company.
Each of the foregoing acquisitions was accounted for as a pooling of
interests. Accordingly, the Company's consolidated financial statements have
been restated to include the pooled operations of Maverick, Epigram, Armedia,
HotHaus, AltoCom, Digital Furnace, BlueSteel, Stellar and Pivotal. A
reconciliation of
F-15
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenue, net income (loss) and diluted earnings (loss) per share originally
reported for the years ended December 31, 1999 and 1998 to the restated amounts
presented in the accompanying Consolidated Statements of Operations is set forth
below:
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenue
Broadcom (as originally reported on Form 10-K)............ $518,183 $203,095
Pooling-of-interests transactions......................... 3,042 13,634
-------- --------
Total............................................. $521,225 $216,729
======== ========
Net income (loss)
Broadcom (as originally reported on Form 10-K)............ $ 83,287 $ 36,398
Pooling-of-interests transactions......................... (10,816) (15,009)
-------- --------
Total............................................. $ 72,471 $ 21,389
======== ========
Diluted earnings (loss) per share
Broadcom (as originally reported on Form 10-K)............ $ .36 $ .18
Pooling-of-interests transactions......................... (.05) (.08)
-------- --------
Total............................................. $ .31 $ .10
======== ========
The historical numbers of shares of the acquired companies' respective
common stock and common stock equivalents have been converted to equivalent
shares of the Company's common stock based on the applicable exchange ratios
used to convert the respective outstanding shares of each of these companies on
the respective acquisition dates.
Included in revenue for the year ended December 31, 2000 were aggregate
revenues of $0.3 million incurred by acquired companies prior to the respective
closings of the four pooling-of-interests acquisitions that were consummated in
2000. Included in net loss for the year ended December 31, 2000 were aggregate
net losses of $8.8 million from these companies incurred prior to the respective
closings of the acquisitions.
AltoCom recorded approximately $6.4 million and $2.2 million in the years
ended December 31, 1999 and 1998, respectively, representing accretion to
redemption value of its preferred stock. Such amounts have been presented as
reductions to retained earnings in the accompanying Consolidated Statements of
Shareholders' Equity.
Merger-Related Costs
In connection with the pooling-of-interests transactions that occurred in
2000 and 1999, the Company recorded approximately $4.7 million and $15.2 million
in charges during the respective years for direct and other merger-related costs
and certain restructuring programs. Merger transaction costs aggregated
approximately $4.7 million and $11.9 million for 2000 and 1999, respectively,
and consisted primarily of fees for investment bankers, attorneys, accountants
and other related charges. Restructuring costs of approximately $3.3 million
were incurred in 1999 and include provisions for the disposal of duplicative
facilities and assets, write-downs of unutilized assets, and adjustments to
conform accounting policies to those of the Company. No restructuring costs were
incurred in 2000.
3. INVESTMENTS
At December 31, 2000 all of the Company's held-to-maturity investments
consisted of commercial paper and federal, state, municipal and county
government bonds. 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
F-16
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments are stated at cost, adjusted for amortization of premiums and
discounts to maturity. The Company's investments in equity securities are
classified as available-for-sale. Available-for-sale investments are initially
recorded at cost and periodically adjusted through comprehensive income. A
summary of the Company's investments held at December 31, 2000 by balance sheet
caption is as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
Cash equivalents........................ $ 60,750 $-- $ (29) $ 60,721
Short-term investments.................. 77,682 25 (34) 77,673
Long-term investments................... 1,984 11 -- 1,995
-------- --- ------- --------
Securities classified as
held-to-maturity...................... 140,416 36 (63) 140,389
Equity securities (Note 9).............. 21,051 -- (3,799) 17,252
-------- --- ------- --------
Total securities.............. $161,467 $36 $(3,862) $157,641
======== === ======= ========
Scheduled maturities of held-to-maturity investments at December 31, 2000
were as follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Debt securities maturing within:
One year............................................. $138,432 $138,394
Two years............................................ 1,984 1,995
-------- --------
$140,416 $140,389
======== ========
Equity securities consist of warrants to purchase shares of a public
company and have been valued using the Black-Scholes option pricing model.
4. 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:
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- -------- -------
(IN THOUSANDS)
Statutory federal provision (benefit) for income
taxes............................................ $(242,121) $ 35,455 $13,944
Increase (decrease) in taxes resulting from:
Non-deductible goodwill amortization............. 47,945 -- --
In-process research and development.............. 249,568 -- --
State taxes, net of federal benefit.............. (16,821) (1,071) 516
Benefit of research and development tax
credits....................................... (41,999) (14,906) (3,640)
Losses of acquired companies not benefited....... -- -- 4,326
Tax rate differential on foreign earnings........ (3,187) 7,736 3,068
Other non-deductible expenses.................... 2,712 2,495 --
Tax exempt interest.............................. (319) (845) (458)
Other............................................ 269 (34) 695
--------- -------- -------
Total provision (benefit) for income
taxes.................................. $ (3,953) $ 28,830 $18,451
========= ======== =======
F-17
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The income tax provision (benefit) consisted of the following components:
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
Current:
Federal........................................ $ 394,061 $ 131,300 $ 27,050
State.......................................... 86,571 23,574 5,216
Foreign........................................ 12,938 4,379 --
--------- --------- --------
493,570 159,253 32,266
Deferred:
Federal........................................ (385,074) (105,779) (10,966)
State.......................................... (112,449) (24,644) (2,849)
--------- --------- --------
(497,523) (130,423) (13,815)
--------- --------- --------
$ (3,953) $ 28,830 $ 18,451
========= ========= ========
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 were as follows:
DECEMBER 31,
---------------------
2000 1999
--------- --------
(IN THOUSANDS)
Deferred tax assets:
Research and development tax credit carryforwards......... $ 117,577 $ 25,994
Depreciation.............................................. -- 566
Capitalized research and development costs................ 11,003 --
Net operating loss carryforwards.......................... 504,901 114,856
Reserves and accruals not currently deductible for tax
purposes............................................... 12,060 10,567
California manufacturer's investment credit
carryforwards.......................................... 747 1,056
Other..................................................... 445 9
--------- --------
Gross deferred tax assets................................... 646,733 153,048
Valuation allowance......................................... (6,889) (6,889)
--------- --------
Deferred tax assets, net.................................... 639,844 146,159
Deferred tax liabilities:
Depreciation.............................................. (2,083) --
Purchased intangible assets and deferred compensation..... (275,427) --
--------- --------
Total deferred tax liabilities.............................. (277,510) --
--------- --------
Net deferred tax assets..................................... $ 362,334 $146,159
========= ========
The domestic and foreign components of income (loss) from operations before
income taxes for 2000 were a loss of $749.4 million and income of $57.6 million,
respectively. The Company operates under a tax holiday in Singapore, which is
effective until April 2004 and may be extended if certain additional
requirements are met. The Company recognized a net tax benefit of approximately
$7.3 million from this holiday in 2000. No net U.S. tax savings resulted from
the tax holiday or the Company's foreign operations in 1999.
The Company has not provided for U.S. taxes or foreign withholding taxes on
approximately $31.0 million of undistributed earnings from non-U.S. subsidiaries
because such earnings are intended to be reinvested indefinitely. If these
earnings were distributed, foreign tax credits may become available under
current law to reduce the resulting U.S. income tax liability.
F-18
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000 the Company had federal and state net operating loss
carryforwards of $1.3 billion and $731.3 million, respectively, which begin to
expire in 2006 and 2003, respectively. These net operating losses are primarily
the result of tax deductions related to employee stock option exercises. At
December 31, 2000 the Company had federal and state research and development
credit carryforwards of $80.9 million and $56.4 million, respectively, which
begin to expire in 2009. Additionally, at December 31, 2000, the Company had
California manufacturer's investment credit carryforwards of $1.1 million, which
begin to expire in 2005.
The Company maintains a valuation allowance against certain of its acquired
net operating losses from Epigram, Armedia and HotHaus, incurred in 1998 and
1997, due to uncertainty regarding their future realization. The utilization of
such losses is subject to stringent limitations under the Internal Revenue Code.
The Company has not provided a valuation allowance against the remainder of its
deferred tax assets as management believes these assets will be realized against
income in future years. Any future reductions in the valuation allowance will
reduce tax expense in future years.
5. COMMITMENTS
The Company leases its facilities and certain engineering design tools and
information systems equipment under operating lease agreements expiring through
2010. Future minimum payments under noncancelable operating leases with initial
terms of one year or more are as follows: $76.3 million in 2001; $74.3 million
in 2002; $51.1 million in 2003; $34.5 million in 2004; $29.4 million in 2005;
and $85.0 million thereafter.
The Company had outstanding commitments totaling approximately $18.7
million as of December 31, 2000, primarily for the purchase of engineering
design tools and computer hardware and for information systems infrastructure.
Facilities rent expense for the years ended December 31, 2000, 1999 and
1998 aggregated $16.6 million, $6.6 million and $3.1 million, respectively.
6. SHAREHOLDERS' EQUITY
Common Stock
In January 2000 the Board of Directors approved an increase in the number
of authorized shares of Class A common stock from 400,000,000 to 800,000,000 and
in the number of authorized shares of Class B common stock from 200,000,000 to
400,000,000. In September 1999 the Board of Directors approved an increase in
the number of authorized shares of Class A common stock from 200,000,000 to
400,000,000 and in the number of authorized shares of Class B common stock from
100,000,000 to 200,000,000. The shares of Class A common stock 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 common stock in certain circumstances. The Class A common
stock and Class B common stock are sometimes collectively referred to herein as
the "common stock."
Stock Splits
The Company effected 2-for-1 stock splits of its Class A common stock and
Class B common stock, in the form of 100% stock dividends, on February 11, 2000
and February 17, 1999, respectively. The Company previously effected a 3-for-2
split of its common stock on March 9, 1998. All share numbers and per share
amounts contained in these notes and in the accompanying consolidated financial
statements have been retroactively restated to reflect these changes in the
Company's capital structure.
F-19
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sale of Shares to Cisco Systems, Inc.
In February 1998 Cisco Systems, Inc. exercised its option to purchase
2,000,000 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 in February 1998.
Initial Public Offering and Follow-On Offering
In April 1998 the Company completed its initial public offering (the
"Offering") of 16,100,000 shares of its Class A common stock. Of these shares,
the Company sold 12,480,000 shares and selling shareholders sold 3,620,000
shares, at a price of $6.00 per share. In addition, the Company sold 2,000,000
shares of Class A common stock to Cisco Systems, in a concurrent registered
offering that was not underwritten, at a price of $5.58 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 33,814,068 shares of Class B
common stock.
In October 1998 the Company completed a follow-on public offering. Of the
13,800,000 shares of Class A common stock offered, the Company sold 1,880,000
shares and selling shareholders sold 11,920,000 shares, at a price of $17.25 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
Upon consummation of the Offering in April 1998, each outstanding share of
Series A, B, C and D preferred stock was converted into twelve shares of Class B
common stock, and each outstanding share of Series E preferred stock was
converted into six shares of Class B common stock. As of December 31, 2000, 1999
and 1998, no shares of preferred stock were outstanding. The Company is
authorized to issue up to 10,000,000 shares of preferred stock.
Issuance of Warrants
In April 1998 the Company issued a Class A common stock purchase warrant to
Brobeck, Phleger & Harrison LLP, counsel to the Company, to purchase up to
40,000 shares of the Company's Class A common stock at an exercise price of
$6.00 per share. In May 1999 Brobeck, Phleger & Harrison LLP exercised the
warrant, which resulted in the net issuance of 34,184 shares of Class A common
stock.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees.
Under the plan, employees may purchase shares of the Company's Class A common
stock at six-month intervals at 85% of fair market value (calculated in the
manner provided under the plan). Employees purchase such stock using payroll
deductions, which may not exceed 15% of their total cash compensation. In fiscal
2000, 1999 and 1998, 479,715, 737,088 and 338,256 shares, respectively, were
issued under this plan at average prices of $24.54, $6.81 and $5.10,
respectively. At December 31, 2000, 1,444,941 shares were available for future
issuance under this plan.
Stock Option Plans
The Company has in effect several stock-based plans under which
non-qualified and incentive stock options have been granted to employees,
non-employee board members and other non-employees. The Company's 1998 Stock
Incentive Plan (the "1998 Plan") is the successor equity incentive program to
the
F-20
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's 1994 Stock Option Plan (the "1994 Plan") and the Company's 1998
Special Stock Option Plan (together, the "Predecessor Plans").
In February 2000 the Board of Directors approved an amendment to the 1998
Plan, as previously amended, to increase the number of shares of Class A common
stock reserved for issuance under this plan by an additional 15,000,000 shares.
The amendment was approved by the shareholders at the Annual Meeting of
Shareholders held in April 2000.
The Board of Directors or the Plan Administrator determines eligibility,
vesting schedules and exercise prices for options granted under the plans.
Options granted generally have a term of 10 years and generally vest and become
exercisable at the rate of 25% after one year and ratably on a monthly basis for
three years thereafter.
Options granted under the 1994 Plan were exercisable immediately upon
issuance. The Company has reserved the right to repurchase all unvested shares
held by a participant upon the participant's termination, at the original
purchase price. At December 31, 2000 there were unvested options outstanding to
purchase 8,523,285 shares of common stock under the 1994 Plan that were
exercisable.
At the discretion of the Board of Directors or the Plan Administrator, 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 the Company
loaned $191,000 to employees for the exercise of options. These notes are
full-recourse, are secured by the shares of stock issued upon exercise, are
interest bearing with rates ranging from 4.8% to 6.5% per annum, are due between
three and five years from the exercise date, and must be ratably repaid upon
sale of the issued shares of stock.
As of December 31, 2000, 89,305,805 shares of common stock were reserved
for issuance under the 1998 Plan, including outstanding options granted under
Predecessor Plans. The number of shares of Class A common stock reserved for
issuance under the 1998 Plan automatically increases in January each year.
Beginning in 2000, the increase is equal to 4.5% of the total number of shares
of common stock outstanding on the last trading day of the preceding year,
subject to an annual share limit.
In October 1999 the Board of Directors approved the 1999 Special Stock
Option Plan (the "1999 Plan") and reserved an aggregate of 1,000,000 shares of
Class A common stock for issuance under that plan. Employees, independent
consultants and advisors in the service of the Company or any of its
subsidiaries who are neither officers of the Company nor members of the Board at
the time of the option grant are eligible to participate in the plan. The
exercise price of options granted under the 1999 Plan can be less than the fair
market value of the underlying common stock on the grant date. In 1999, 40,542
options were granted under the 1999 Plan, to certain employees of acquired
companies in connection with assumed employment agreements, at a
weighted-average exercise price of $2.84. As of December 31, 2000, 989,948
shares of common stock were reserved for issuance under the 1999 Plan. The 1998
Plan, 1999 Plan and Predecessor Plans are collectively referred to herein as the
"Broadcom Plans".
As a result of the Company's acquisitions, the Company assumed stock
options granted under stock option plans established by each acquired company;
no additional options will be granted under those plans. As of December 31,
2000, 4,930,809 and 1,090,735 shares of Class A and Class B common stock,
respectively, were reserved for issuance upon exercise of outstanding options
assumed under these stock option plans. In addition, in 2000 and 1999 the
Company assumed loans from option holders of acquired companies of approximately
$13.7 million and $394,000, respectively, related to stock options that were
exercised prior to the acquisition.
F-21
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Combined Option Plan Activity
Activity under the stock option plans during 2000, 1999 and 1998 is set
forth below:
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE RANGE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
----------- ----------- ---------------- --------
Balance at December 31, 1997............... 22,855,644 22,271,782 $ .02 - $ 6.96 $ .55
Additional shares reserved............... 20,000,000 -- -- --
Options granted under Broadcom Plans..... (27,788,700) 27,788,700 2.50 - 30.19 11.34
Options assumed under pooling-of-interest
plans................................. -- 1,638,310 .02 - 10.44 1.26
Options canceled......................... 1,586,300 (1,622,359) .08 - 12.25 1.90
Option shares repurchased................ 12,000 -- -- --
Options exercised........................ -- (4,046,196) .02 - 15.53 .65
----------- ----------- ---------------- -------
Balance at December 31, 1998............... 16,665,244 46,030,237 .02 - 30.19 7.03
Additional shares reserved............... 22,619,168 -- -- --
Options granted under Broadcom Plans..... (23,015,952) 23,015,952 2.80 - 122.84 52.31
Options assumed under pooling-of-interest
plans................................. -- 1,432,387 .02 - 56.33 5.69
Options canceled......................... 504,086 (552,827) .02 - 89.53 24.42
Option shares repurchased................ 2,750 -- -- --
Options exercised........................ -- (9,917,307) .02 - 54.50 2.53
----------- ----------- ---------------- -------
Balance at December 31, 1999............... 16,775,296 60,008,442 .02 - 122.84 24.94
Additional shares reserved............... 24,416,902 -- -- --
Options granted under Broadcom Plans..... (25,957,719) 25,957,719 77.50 - 213.06 133.57
Options assumed under pooling-of-interest
plans................................. -- 139,404 4.13 - 140.60 70.96
Options assumed in purchase
transactions.......................... -- 5,078,672 .02 - 219.48 49.25
Options canceled......................... 1,542,472 (1,629,274) .02 - 213.06 63.54
Options exercised........................ -- (10,014,617) .02 - 155.50 13.00
----------- ----------- ---------------- -------
Balance at December 31, 2000............... 16,776,951 79,540,346 $ .02 - $219.48 $ 62.70
=========== ===========
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 2000 were as follows:
OUTSTANDING EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL LIFE AVERAGE SHARES AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ ---------- ---------------- -------------- ----------- --------------
$ .02 to
$ 6.00......... 18,593,789 6.94 $ 1.71 12,810,060 $ 1.22
$ 6.06 to
$ 20.45......... 10,213,303 7.88 $ 19.27 1,634,572 $ 17.13
$ 20.74 to
$ 56.63......... 20,924,686 8.54 $ 45.21 5,504,914 $ 43.57
$ 63.91 to
$122.25......... 19,545,896 9.46 $104.29 1,603,565 $ 89.19
$122.56 to
$219.48......... 10,262,672 9.25 $172.85 293,466 $156.26
F-22
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information relating to the stock option plans was as follows:
DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Nonvested common shares subject to
repurchase................................ 4,091,270 4,382,839 9,100,773
Weighted average repurchase price........... $ 4.54 $ .53 $ .36
Unvested options outstanding................ 66,217,054 53,214,648 42,543,768
Vested options outstanding.................. 13,323,292 6,793,794 3,486,469
Total reserved common stock shares for stock
option plans.............................. 96,317,297 76,783,738 62,695,481
The Company recorded approximately $1.2 billion and $9.3 million of net
deferred compensation in the years ended December 31, 2000 and 1999,
respectively, for restricted common stock and employee stock options assumed in
acquisitions in accordance with FIN 44. The components of net deferred
compensation are as follows:
DECEMBER 31,
--------------------
2000 1999
---------- ------
(IN THOUSANDS)
Pooling-of-interests transactions...................... $ 605 $9,267
Purchase transactions.................................. 1,241,643 --
Terminations........................................... (6,235) --
---------- ------
$1,236,013 $9,267
========== ======
Net deferred compensation is presented as a reduction to shareholders'
equity and is amortized ratably over the respective vesting periods of the
applicable options. The Company recorded approximately $120.2 million, $4.7
million and $1.9 million of stock-based compensation expense in the years ended
December 31, 2000, 1999 and 1998, respectively. These amounts included
approximately $0.3 million and $1.0 million of stock-based compensation for 2000
and 1999 classified as merger-related costs. The components of stock-based
compensation are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------ ------
(IN THOUSANDS)
Broadcom............................................... $ 1,612 $1,619 $1,315
Pooling-of-interests transactions...................... 3,557 3,094 585
Purchase transactions.................................. 107,921 -- --
Non-employees.......................................... 7,119 -- --
-------- ------ ------
$120,209 $4,713 $1,900
======== ====== ======
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 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
F-23
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 options granted after the initial public offering was
estimated assuming no expected dividends, a weighted average expected life of
one-half year from vest date in 2000, one year from vest date in 1999 and 1.5
years from vest date in 1998, a weighted average risk-free interest rate of 6.2%
in 2000, 6.0% in 1999 and 5.0% in 1998, and an expected volatility of .90 in
2000, .80 in 1999 and .74 in 1998. The fair value of employee stock purchase
rights was estimated assuming no expected dividends, a weighted average expected
life of 21 months in 2000, 17 months in 1999 and 15 months in 1998, a weighted
average risk-free interest rate of 6.2% in 2000, 6.0% in 1999 and 5.0% in 1998,
and an expected volatility of .90 in 2000, .80 in 1999 and .74 in 1998.
The weighted average fair value of options granted during 2000, 1999 and
1998 was $93.31, $30.25 and $6.25, respectively. The weighted average fair value
of employee stock purchase rights granted in 2000, 1999 and 1998 was $37.36,
$4.60 and $3.08, respectively. For pro forma purposes, the estimated value of
the Company's stock-based awards to employees is amortized over the vesting
period of the underlying instruments. The results of applying Statement No. 123
to the Company's stock-based awards to employees would approximate the
following:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
------------ ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)
As reported.................................... $ (687,822) $ 72,471 $21,389
Pro forma...................................... (1,101,751) (116,765) 3,978
Basic earnings (loss) per share
As reported.................................... $ (3.13) $ .36 $ .13
Pro forma...................................... (5.01) (.58) .02
Diluted earnings (loss) per share
As reported.................................... $ (3.13) $ .31 $ .10
Pro forma...................................... (5.01) (.50) .02
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 this plan. The Company made no contributions
to this plan in 2000, 1999 or 1998.
8. LITIGATION
In March 2000 Intel Corporation and its subsidiary Level One
Communications, Inc. filed a complaint in California Superior Court asserting
claims against the Company for misappropriation of trade secrets, unfair
competition, and tortious interference with existing contractual relations by
the Company in connection with its recent hiring of three former Intel
employees. The complaint sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel/Level One filed a first amended
complaint in April 2000 seeking additional relief and containing certain
additional allegations, but asserting the same causes of action as the original
complaint. In June 2000 the Company filed a cross-complaint against Intel/Level
One, and in September 2000, amended that cross-complaint. The Company's amended
cross-complaint included causes of action against Intel/Level One for unfair
competition, trade secret misappropriation, and tortious interference with
contractual relations. In November 2000 the parties reached a confidential
settlement pursuant to which all claims and cross-claims in the litigation were
dismissed in their entirety.
F-24
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 2000 Intel filed a complaint in the United States District Court
for the District of Delaware against the Company asserting that the Company (i)
infringes five Intel patents relating to video compression, high-speed
networking and semiconductor packaging, (ii) induces the infringement of such
patents, and (iii) contributorily infringes such patents. The complaint sought a
preliminary and permanent injunction against the Company as well as the recovery
of monetary damages, including treble damages for willful infringement. The
Company has not yet answered the complaint. In October 2000 the Company filed a
motion to dismiss, or in the alternative, to transfer venue; that motion is
currently pending before the court. The Company believes that it has strong
defenses to Intel's claims. The parties are currently in the initial stages of
discovery in the action. The Court has tentatively scheduled a hearing on patent
claims construction to commence in September 2001 and a trial to begin in
October 2001.
In October 2000 the Company filed a complaint for declaratory judgment in
the United States District Court for the Northern District of California against
Intel asserting that the patents asserted by Intel in the Delaware action are
not infringed.
In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a
complaint in the United States District Court for the Eastern District of Texas
against the Company asserting that (i) the Company's BCM3415 silicon tuner chip
infringes a single Microtune patent relating to tuner technology, (ii) the
Company induces the infringement of such patent, and (iii) the Company
contributorily infringes such patent. The complaint sought a preliminary and
permanent injunction against the Company as well as the recovery of monetary
damages, including treble damages for willful infringement. The Company answered
the complaint in March 2001. Discovery has not commenced in the action, and a
trial date has not been set. The Company believes that it has strong defenses to
Microtune's claims.
Although the Company believes that it has strong defenses to Intel's claims
in the Delaware action and to Microtune's claims in the Texas action and is
defending both actions vigorously, a finding of infringement by the Company as
to one or more patents in either of these actions 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, 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, results of operations and
financial condition.
In March 2001 the Company and its Chief Executive Officer, Chief Technical
Officer and Chief Financial Officer were served with a number of complaints,
separately identified in the footnote below,(1) that were filed in the United
States District Court for the Central District of California alleging violations
of the Securities Exchange Act of 1934, as amended (the "1934 Act"). These
complaints were brought as purported shareholder class actions under Sections
10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder, and in
general allege that the defendants improperly accounted for performance-based
warrants assumed in connection with the Company's acquisitions of Altima
Communications, Inc., Silicon Spice, Inc., Allayer Communications, SiByte, Inc.
and Visiontech Ltd. (collectively, the "Acquired Companies").
- ---------------
1 Kurtz v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal. Case No.
SACV-01-275-GLT (EEx) (filed March 5, 2001); Pond Equities v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01- 285-GLT (ANx) (filed
March 7, 2001); Blasser v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-289-AHS (EEx) (filed March 8, 2001); Green v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01-298-DOC (EEx) (filed
March 9, 2001); DiMaggio v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-299-GLT (EEx) (filed March 9, 2001); Mandel v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SAVC-01-317-GLT(Anx)(filed
March 12, 2001); Garfinkel v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-327-DOC (Anx) (filed March 14, 2001); Olson v. Broadcom
Corporation, et al. U.S.D.C. C.D. Cal. Case No. SACV-01-346-AHS (Anx) (filed
March 20, 2001); Skubella v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-352-GLT (EEx) (filed March 21, 2001).
F-25
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
While there is some variation in their specific allegations and their
purported class periods (the broadest of which runs from July 31, 2000 to March
6, 2001), the essence of each of these complaints is that the defendants
intentionally failed to properly account for warrants assumed in connection with
the acquisitions, which plaintiffs allege had the effect of materially
overstating the Company's reported financial results. Plaintiffs allege that the
defendants intentionally engaged in this alleged improper accounting practice in
order to inflate the value of the Company's stock and thereby obtain alleged
illegal insider trading proceeds, as well as to facilitate the use of the
Company's stock as consideration in acquisitions. Plaintiffs also allege
generally that there was inadequate disclosure regarding the warrants and the
terms of the particular agreements at issue.
The enumerated complaints have only recently been filed. The Company is
informed that additional complaints substantially similar to those described
above have been filed, however, as of March 30, 2001 the Company has not been
served in the additional purported lawsuits. The Company anticipates that all of
these actions will ultimately be consolidated into one action. As of March 30,
2001 Broadcom had not yet answered these complaints and discovery had not yet
commenced. The Company believes that the allegations are without merit and
intends to defend the actions vigorously.
The Company, along with each of its directors, has also been sued in two
derivative actions, separately identified in the footnote below(2) based upon
the same general set of facts and circumstances outlined above in connection
with the shareholder class actions. These lawsuits were purportedly filed as
shareholder derivative actions under California law and allege that certain of
the individual defendants sold shares while in possession of material inside
information (and that other individual defendants aided and abetted this
activity) in purported breach of their fiduciary duties to the Company. The
complaints also allege "gross mismanagement, waste of corporate assets and abuse
of control" based upon the same general set of facts and circumstances. The
Company believes the allegations are without merit and intends to defend the
actions vigorously.
In October 1998 Motorola, Inc. ("Motorola") filed a complaint in the United
States District Court for the District of Delaware against AltoCom, Inc.
("AltoCom") (and co-defendant, PC-Tel, Inc.) asserting that (i) AltoCom's V.34
and V.90 compliant software modem technology infringed several patents owned by
Motorola, (ii) AltoCom induced its V.34 and V.90 licensees to infringe such
patents, and (iii) AltoCom contributorily infringed such patents. In May 2000
Motorola filed an amended complaint alleging that AltoCom's technology infringed
an additional Motorola patent. In its complaints, Motorola sought an injunction
against AltoCom as well as the recovery of monetary damages. AltoCom filed an
answer and affirmative defenses to the complaint and asserted certain
counterclaims. AltoCom became a subsidiary of the Company on August 31, 1999. In
January 2001 Motorola and AltoCom entered into a settlement agreement and
cross-license pursuant to which they agreed to dismiss and release with
prejudice all claims and counterclaims in this action. Under the terms of the
patent cross-license, Motorola and AltoCom granted to each other and their
respective affiliates (including, in the case of AltoCom, the Company) licenses
with respect to certain technology. Neither party admitted any liability in
connection with the action. The settlement terms are confidential, but the
settlement did not have a material effect on the Company's business, results of
operations or financial condition.
In December 1999 Level One filed a complaint in the United States District
Court for the Eastern District of California against Altima Communications,
Inc., asserting that Altima's AC108R repeater products infringe a U.S. patent
owned by Level One. The complaint sought an injunction against Altima as well as
the recovery of monetary damages, including treble damages for willful
infringement. Altima filed an
- ---------------
2 The actions are entitled David v. Werner F. Wolfen, Henry T. Nicholas, III,
Henry Samueli, Myron S. Eichen, Alan E. Ross and Does 1-25, inclusive, and
Broadcom Corporation, Orange County Superior Court Case No. 01CC03930, and
Bollinger v. Henry T. Nicholas, III, Henry Samueli, Werner F. Wolfen, Alan E.
Ross, Myron S. Eichen, and Does 1-25, inclusive, and Broadcom Corporation,
Orange County Superior Court Case No 01CC04065.
F-26
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
answer and affirmative defenses to the complaint. In March 2000 Level One filed
a related complaint in the U.S. International Trade Commission ("ITC") seeking
an exclusion order and cease and desist order based on alleged infringement of
the same patent. Monetary damages are not available in the ITC. The ITC
instituted an investigation in April 2000. Altima filed an answer and
affirmative defenses to the ITC complaint. In July 2000 Intel and Level One
filed a second complaint in the ITC asserting that certain of Altima's repeater,
switch and transceiver products infringe three additional U.S. patents owned by
Level One or Intel. The ITC instituted a second investigation in August 2000,
and the Administrative Law Judge issued an order in August 2000 granting a
motion to consolidate the two investigations. In September 2000 Altima filed
declaratory judgment actions against Intel and Level One, respectively, in the
United States District Court for the Northern District of California asserting
that Altima has not infringed the three additional Intel and Level One patents
and that such patents are invalid or unenforceable. Pursuant to statute, Altima
is entitled to a stay of all proceedings in the three District Court actions
while the ITC investigation is pending, and all these actions have been stayed.
In December 2000 Intel and Level One withdrew one of the patents asserted
against Altima in the ITC investigation.
Altima believes it has strong defenses to the claims of Level One and Intel
on noninfringement, invalidity, and inequitable conduct grounds. The parties are
currently completing discovery in the consolidated ITC action, and a hearing on
the merits before the ITC Administrative Law Judge is scheduled to begin in
April 2001. Altima became a subsidiary of the Company on September 7, 2000.
Although Altima believes that it has strong defenses and is defending the
actions vigorously, a finding of infringement by Altima as to the patent in the
Eastern District of California action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful) and the issuance of an injunction requiring that Altima
withdraw various products from the market. A finding against Altima in the
consolidated ITC action could result in the exclusion of certain Altima
products, and possibly certain products of the Company, from entering the United
States. Any finding adverse to Altima in these actions could also result in
indemnification claims by Altima's customers or strategic partners. Any of the
foregoing events could have a material adverse effect on Altima's, and possibly
the Company's, business, results of operations and financial condition.
The Company and its subsidiaries are also involved in other legal
proceedings, claims and litigation arising in the ordinary course of business.
The pending lawsuits involve complex questions of fact and law and likely
will require the expenditure of significant funds and the diversion of other
resources to defend. Although management currently believes the outcome of
outstanding legal proceedings, claims and litigation involving the Company or
its subsidiaries will not have a material adverse effect on the Company's
business, results of operations or financial condition, the results of
litigation are inherently uncertain, and an adverse outcome is at least
reasonably possible. The Company is unable to estimate the range of possible
loss from outstanding litigation, and no amounts have been provided for such
matters in the accompanying consolidated financial statements.
9. SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
During 2000, 1999 and 1998, the Company had a total of three customers
whose net revenue represented a significant portion of the Company's net revenue
in certain or all years. Net revenue from one customer represented approximately
23.2% in 2000, 30.3% in 1999 and 35.5% in 1998 of the Company's net revenue for
the respective year. Net revenue from a second customer was approximately 15.1%
in 2000, 18.0% in 1999 and 26.7% in 1998 of the Company's net revenue for the
respective year. Net revenue from a third customer accounted for approximately
14.1% in 2000 and 10.6% in 1999 of the Company's net revenue for the respective
year. No other customer represented more than 10% of the Company's annual net
revenue in these years.
In December 2000 the Company entered into a 21 month agreement with a
significant customer. This agreement contains a provision affording either party
the ability to extend the agreement an additional 12 months. In the event that
one party wishes to extend the agreement and the other party does not, the party
F-27
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
who does not extend the agreement must pay the other party a $20 million license
fee for the continued use of any intellectual property cross-licensed under the
agreement. In connection with this agreement the Company acquired vested
warrants to purchase up to 7.1 million shares of the customer's common stock at
a price of $9.31 per share, which warrants expire on December 4, 2002. In
exchange for the warrants, the Company executed a $21.1 million note, which
bears interest at the rate of LIBOR plus 1% per year, adjusted quarterly, and is
due on December 4, 2002. The note becomes immediately due and payable on a pro
rata basis should the Company exercise and sell shares under the warrant
agreement. The warrants are classified as long-term available-for-sale
securities included in other assets (see Note 3) and the related note payable is
classified as a current liability.
Export revenue to all foreign customers as a percent of total net revenue
was as follows:
YEARS ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Europe......................................... 8.3% 5.4% 4.4%
Asia........................................... 11.8 11.7 7.3
Other.......................................... 0.2 0.1 5.5
---- ---- ----
20.3% 17.2% 17.2%
==== ==== ====
The Company does not own or operate a fabrication facility. Two independent
third-party foundries in Asia currently supply substantially all of the
Company's semiconductor devices in current production. 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
four independent 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 or the delivery, quality or cost of the Company's
products could have a material adverse effect on the Company's business, results
of operations and financial condition.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarized unaudited quarterly financial data has been
prepared using the consolidated financial statements of Broadcom, which have
been restated to include the operations of each of the companies acquired in
pooling-of-interests transactions as if they had combined with the Company prior
to the beginning of each period presented:
BASIC DILUTED
EARNINGS EARNINGS
NET GROSS NET INCOME (LOSS) (LOSS)
REVENUE PROFIT (LOSS) PER SHARE PER SHARE
-------- -------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR 2000
First Quarter............... $191,591 $112,514 $ 38,629 $ .18 $ .15
Second Quarter.............. 245,177 142,657 55,897 .26 .22
Third Quarter (restated).... 319,155 182,217 (14,078) (.06) (.06)
Fourth Quarter.............. 340,237 174,553 (768,270) (3.28) (3.28)
FISCAL YEAR 1999
First Quarter............... $100,214 $ 59,208 $ 14,729 $ .08 $ .07
Second Quarter.............. 119,452 71,375 159 -- --
Third Quarter............... 139,561 83,216 24,594 .12 .10
Fourth Quarter.............. 161,998 95,435 32,989 .16 .13
F-28
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS
COMPLETED PURCHASE TRANSACTIONS
On January 3, 2001 the Company completed the acquisition of Visiontech
Ltd., a supplier of digital video/audio MPEG-2 compression and decompression
chips enabling Personal Video Recording (PVR), interactive videoconferencing and
Internet Protocol (IP) video streaming for the consumer electronics market. In
connection with the acquisition, the Company issued or reserved for future
issuance an aggregate of 2,250,002 shares of its Class A common stock in
exchange for substantially all of the assets of Visiontech and upon exercise of
outstanding employee stock options and other rights of Visiontech. Prior to the
Company's acquisition of Visiontech, Visiontech entered into a number of
purchase and development agreements whereby certain of its customers were
granted performance-based warrants that vest upon the satisfaction by the
customers of certain purchase or development requirements. The warrants issued
by Visiontech were immediately exercisable (and all but one customer did in fact
exercise the warrants prior to the Company's acquisition of Visiontech). The
shares issued upon exercise of the Visiontech warrants were subject to
Visiontech's right to repurchase the shares for the original exercise price paid
per share until the shares have vested. The unexercised performance-based
warrants and the shares issued pursuant to the performance-based warrants that
are subject to repurchase are collectively referred to herein as the "warrant
shares." In addition to the purchase consideration, the Company has issued or
reserved for future issuance 5,714,270 shares of Class A common stock to these
customers for the warrant shares of Visiontech assumed by the Company. The share
issuances were exempt from registration pursuant to section 3(a)(10) of the
Securities Act of 1933, as amended. Portions of the shares issued will be held
in escrow pursuant to the terms of the acquisition agreement as well as various
employee share repurchase agreements. In connection with the acquisition, the
Company will record a one-time charge for purchased IPR&D expenses related to
the acquisition in its first fiscal quarter ending March 31, 2001.
On January 16, 2001 the Company completed the acquisition of ServerWorks
Corporation, a supplier of high-performance system input/output (I/O) integrated
circuits for servers. In connection with the acquisition, the Company issued or
reserved for future issuance an aggregate of 11 million shares of its Class A
common stock in exchange for all outstanding shares of ServerWorks common stock
and upon exercise of outstanding employee stock options, warrants and other
rights of ServerWorks. If certain internal performance goals are satisfied,
certain stockholders and option and warrant holders of ServerWorks will receive
up to nine million additional shares of the Company's Class A common stock. The
share issuances were exempt from registration pursuant to section 3(a)(10) of
the Securities Act of 1933, as amended. Portions of the shares issued will be
held in escrow pursuant to the terms of the acquisition agreement as well as
various employee share repurchase agreements. In connection with the
acquisition, the Company will record a one-time charge for purchased IPR&D
expenses related to the acquisition in its first fiscal quarter ending March 31,
2001.
STATUS OF PERFORMANCE-BASED WARRANTS AND RELATED AGREEMENTS
In connection with the Company's acquisitions of Altima, Silicon Spice,
Allayer, SiByte and Visiontech, the Company assumed outstanding
performance-based warrants and warrant shares that these companies had issued to
certain of their customers. In addition, the Company assumed the related
purchase and development agreements under which the warrants and warrant shares
were issued. At the time the Company acquired each of these companies, the
Company expected each acquired company and its customers to perform under the
respective purchase and development agreements and for the assumed warrants and
warrant shares to be earned. However, on February 28, 2001 one of the five
customers that had entered into a purchase agreement with Altima gave notice to
the Company that it was terminating its purchase agreement. Additionally, based
on the recent significant economic slowdown in the technology sector and current
market conditions, the Company has concluded that the remaining purchase and
development agreements may no longer be desirable.
F-29
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result, effective March 30, 2001 the Company terminated additional
purchase agreements with two of the customers of Altima, the customer of Allayer
and two of the customers of Visiontech and cancelled the warrants and warrant
shares related to the terminated agreements. At March 30, 2001, the Company was
also in the process of negotiating termination of the two remaining purchase
agreements with customers of Altima, the development agreements with the
customers of Silicon Spice and SiByte, and a purchase and development agreement
with one of the Visiontech customers, as well as cancellation of the related
warrants and warrant shares. In addition, in the future the Company may consider
revising or terminating any of the remaining purchase and development agreements
that it assumed in connection with these acquisitions, which could result in
cancellation of the related warrants and warrant shares. The accounting for any
warrants or warrant shares earned in prior periods will not be affected by such
terminations.
F-30
83
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
2.1(7) Merger Agreement and Plan of Reorganization by and between
the Registrant and Innovent Systems, Inc. dated as of June
10, 2000.
2.2+(8) Amended and Restated Merger Agreement and Plan of
Reorganization by and among the Registrant, AC Acquisition
Corp., and Altima Communications, Inc. dated as of July 28,
2000.
2.3(9) Merger Agreement and Plan of Reorganization by and among the
Registrant, NewPort Communications, Inc. and the Other
Parties Signatory Thereto dated as of August 9, 2000.
2.4(10) Merger Agreement and Plan or Reorganization by and among the
Registrant, Silicon Spice Inc. and the Other Parties
Signatory Thereto dated as of August 3, 2000.
2.5(11) Amended and Restated Merger Agreement and Plan of
Reorganization by and among the Registrant, SiByte, Inc.,
and the Other Parties Signatory Thereto dated as of December
6, 2000.
2.6(12) Asset Purchase Agreement by and among the Registrant,
Visiontech Ltd. and the Other Parties Signatory Thereto
dated as of November 23, 2000.
2.7(13) Merger Agreement and Plan of Reorganization by and among the
Registrant, RCC Acquisition Corp., Reliance Computer Corp.,
and the Other Parties Signatory Thereto dated as of January
5, 2001.
3.1(1) Amended and Restated Articles of Incorporation of the
Registrant.
3.1.1 Certificate of Amendment of Amended and Restated Articles of
Incorporation dated June 26, 2000.
3.2(5) Bylaws of the Registrant, as amended through February 29,
2000.
10.1(1) Form of Indemnification Agreement for the Directors and
Officers of the Registrant.
10.3(1) 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(3) 1998 Stock Incentive Plan, together with forms of Stock
Option Agreements, Notice of Grant, Stock Issuance
Agreement, Stock Purchase Agreement and related Addenda.
10.4.1(6) 1998 Stock Incentive Plan, as amended and restated through
February 29, 2000.
10.5(4) 1998 Employee Stock Purchase Plan, form of ESPP Stock
Purchase Agreement and Enrollment/Change Form.
10.8+(1) Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9(1) Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10(1) Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.12(1) 1998 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13(1) Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.15(2) Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
10.16++ Amendment to Development, Supply and License Agreement dated
November 22, 2000 between the Registrant and General
Instrument Corporation.
84
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
11.1 Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Consolidated Financial
Statements).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
- ---------------
(1) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
(2) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-65117).
(3) 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).
(4) 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).
(5) Incorporated by reference to the similarly numbered exhibit to the Annual
Report on Form 10-K for the year ended December 31, 1999.
(6) Incorporated by reference to the Appendix to the definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2000, filed
by the Registrant on March 27, 2000.
(7) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on August 2, 2000.
(8) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on September 22, 2000.
(9) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on October 18, 2000.
(10) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on October 23, 2000.
(11) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on December 29, 2000.
(12) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on January 18, 2001.
(13) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on January 31, 2001.
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
++ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule......S-1
(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.
85
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 April 2, 2001.
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:
SIGNATURE TITLE DATE
--------- ----- ----
President, Chief Executive
/s/ HENRY T. NICHOLAS III Officer
- ----------------------------------------------------- and Co-Chairman
Henry T. Nicholas III, Ph.D. (Principal Executive Officer) April 2, 2001
/s/ HENRY SAMUELI Vice President of Research &
- ----------------------------------------------------- Development, Chief Technical
Henry Samueli, Ph.D. Officer and Co-Chairman April 2, 2001
/s/ MYRON S. EICHEN
- -----------------------------------------------------
Myron S. Eichen Director April 2, 2001
/s/ ALAN E. ROSS
- -----------------------------------------------------
Alan E. Ross Director April 2, 2001
/s/ WERNER F. WOLFEN
- -----------------------------------------------------
Werner F. Wolfen Director April 2, 2001
/s/ WILLIAM J. RUEHLE Vice President and
- ----------------------------------------------------- Chief Financial Officer
William J. Ruehle (Principal Financial Officer) April 2, 2001
/s/ SCOTT J. POTERACKI Corporate Controller and Senior
- ----------------------------------------------------- Director of Finance
Scott J. Poteracki (Principal Accounting Officer) April 2, 2001
86
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, 2000 and 1999, and for each of the three years in
the period ended December 31, 2000, and have issued our report thereon dated
January 23, 2001 (except for Notes 2, 8 and 11, as to which the date is March
30, 2000). 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 23, 2001, except for
Notes 2, 8 and 11 as to which
the date is March 30, 2001
S-1
87
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts
and sales returns and
allowances...................... $ 7,673 $18,402 $2,337 $ 9,502 $18,910
Reserve for excess and obsolete
inventory....................... 3,275 7,772 2,069 -- 13,116
Reserve for warranty................. 3,661 796 -- 1,105 3,352
------- ------- ------ ------- -------
Total........................ $14,609 $26,970 $4,406 $10,607 $35,378
======= ======= ====== ======= =======
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts
and sales returns and
allowances...................... $ 5,167 $ 7,973 $ -- $ 5,467 $ 7,673
Reserve for excess and obsolete
inventory....................... 4,783 233 -- 1,741 3,275
Reserve for warranty................. 2,022 1,856 -- 217 3,661
------- ------- ------ ------- -------
Total........................ $11,972 $10,062 $ -- $ 7,425 $14,609
======= ======= ====== ======= =======
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts
and sales returns and
allowances...................... $ 721 $ 7,923 $ -- $ 3,477 $ 5,167
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 $13,949 $ -- $ 4,534 $11,972
======= ======= ====== ======= =======
S-2
88
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
2.1(7) Merger Agreement and Plan of Reorganization by and between
the Registrant and Innovent Systems, Inc. dated as of June
10, 2000.
2.2+(8) Amended and Restated Merger Agreement and Plan of
Reorganization by and among the Registrant, AC Acquisition
Corp., and Altima Communications, Inc. dated as of July 28,
2000.
2.3(9) Merger Agreement and Plan of Reorganization by and among the
Registrant, NewPort Communications, Inc. and the Other
Parties Signatory Thereto dated as of August 9, 2000.
2.4(10) Merger Agreement and Plan or Reorganization by and among the
Registrant, Silicon Spice Inc. and the Other Parties
Signatory Thereto dated as of August 3, 2000.
2.5(11) Amended and Restated Merger Agreement and Plan of
Reorganization by and among the Registrant, SiByte, Inc.,
and the Other Parties Signatory Thereto dated as of December
6, 2000.
2.6(12) Asset Purchase Agreement by and among the Registrant,
Visiontech Ltd. and the Other Parties Signatory Thereto
dated as of November 23, 2000.
2.7(13) Merger Agreement and Plan of Reorganization by and among the
Registrant, RCC Acquisition Corp., Reliance Computer Corp.,
and the Other parties Signatory Thereto dated as of January
5, 2001.
3.1(1) Amended and Restated Articles of Incorporation of the
Registrant.
3.1.1 Certificate of Amendment of Amended and Restated Articles of
Incorporation dated June 26, 2000.
3.2(5) Bylaws of the Registrant, as amended through February 29,
2000.
10.1(1) Form of Indemnification Agreement for the Directors and
Officers of the Registrant.
10.3(1) 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(3) 1998 Stock Incentive Plan, together with forms of Stock
Option Agreements, Notice of Grant, Stock Issuance
Agreement, Stock Purchase Agreement and related Addenda.
10.4.1(6) 1998 Stock Incentive Plan, as amended and restated through
February 29, 2000.
10.5(4) 1998 Employee Stock Purchase Plan, form of ESPP Stock
Purchase Agreement and Enrollment/Change Form.
10.8+(1) Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9(1) Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10(1) Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.12(1) 1998 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13(1) Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.15(2) Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
10.16++ Amendment to Development, Supply and License Agreement dated
November 22, 2000 between the Registrant and General
Instrument Corporation.
89
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
11.1 Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Consolidated Financial
Statements).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
- ---------------
(1) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
(2) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-65117).
(3) 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).
(4) 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).
(5) Incorporated by reference to the similarly numbered exhibit to the Annual
Report on Form 10-K for the year ended December 31, 1999.
(6) Incorporated by reference to the Appendix to the definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2000, filed
by the Registrant on March 27, 2000.
(7) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on August 2, 2000.
(8) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on September 22, 2000.
(9) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on October 18, 2000.
(10) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on October 23, 2000.
(11) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on December 29, 2000.
(12) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on January 18, 2001.
(13) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Registrant on January 31, 2001.
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
++ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.