Broadcom Corporation
Filed 3/30/00
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER 000-23993
BROADCOM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 33-0480482
(State or Other Jurisdiction (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 Nasdaq National Market(R) on March 24, 2000, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was $33,682,304,551. For the purposes of this calculation, shares owned by
officers, directors and 10% stockholders known to the registrant have been deemed to be owned by affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
The Company has two classes of common stock authorized, the Class A common stock and the Class B common stock. The
rights, preferences and privileges of each class of common stock are substantially identical in all respects except for voting
rights. Each share of Class A common stock entitles its holder to one vote and each share of Class B common stock entitles its
holder to ten votes. 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 24, 2000 there were 117,890,115 shares of
Class A common stock outstanding and 95,760,736 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's definitive proxy statement (the "Proxy Statement") for
the Annual Meeting of Shareholders to be held on April 27, 2000.
Broadcom Corporation (BRMC) NASDAQ
Indexed 10-K for the fiscal year ended December 31, 1999
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PART I
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PART II
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PART III
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PART IV
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FINANCIAL STATEMENTS
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BROADCOM CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business........................................................1
ITEM 2. Properties......................................................15
ITEM 3. Legal Proceedings...............................................15
ITEM 4. Submission of Matters to a Vote of Security Holders.............17
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.....................................................18
ITEM 6. Selected Consolidated Financial Data............................19
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Risk Factors..................20
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk......40
ITEM 8. Financial Statements and Supplementary Data.....................41
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................41
PART III.
ITEM 10. Directors and Executive Officers of the Registrant..............41
ITEM 11. Executive Compensation..........................................41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..41
ITEM 13. Certain Relationships and Related Transactions..................41
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................41
OTHER INFORMATION.
Glossary of Technical Terms.....................................43
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Broadcom(R), QAMLink(R), Digi-(PHI)(TM), iLine10(TM) and the Broadcom pulse logo are trademarks of Broadcom
Corporation and/or its subsidiaries in the United States and certain other countries. All other trademarks mentioned are the
property of their respective owners.
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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, THE
NEED FOR ADDITIONAL CAPITAL, YEAR 2000 COMPLIANCE, MARKET ACCEPTANCE OF OUR
PRODUCTS, OUR ABILITY TO CONSUMMATE ACQUISITIONS AND INTEGRATE THEIR OPERATIONS
SUCCESSFULLY, OUR ABILITY TO ACHIEVE FURTHER PRODUCT INTEGRATION, THE STATUS OF
EVOLVING TECHNOLOGIES AND THEIR GROWTH POTENTIAL, OUR PRODUCTION CAPACITY, OUR
ABILITY TO MIGRATE TO SMALLER PROCESS GEOMETRIES, AND THE SUCCESS OF PENDING
LITIGATION. 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 CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE
DIFFICULT TO PREDICT. THEREFORE, OUR ACTUAL RESULTS COULD DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS. THE SECTION ENTITLED "RISK FACTORS" SET FORTH IN PART II, ITEM 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," OF THIS REPORT, AND SIMILAR DISCUSSIONS IN OUR OTHER SECURITIES AND
EXCHANGE COMMISSION ("SEC") FILINGS, DISCUSS SOME OF THE IMPORTANT RISK FACTORS THAT
MAY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. YOU SHOULD
CAREFULLY CONSIDER THOSE RISKS, IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT
AND IN OUR OTHER FILINGS WITH THE SEC, BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO
MAINTAIN OR INCREASE YOUR INVESTMENT. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.
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.
PART I.
ITEM 1. BUSINESS
Broadcom Corporation is the leading provider of highly integrated silicon solutions that enable broadband digital transmission of
voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost
effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not
originally designed for the transmission of broadband digital content. Using proprietary technologies and advanced design
methodologies, we design, develop and supply integrated circuits for a number of the most significant broadband
communications markets, including the markets for digital cable set-top boxes, cable modems, high-speed office networks,
home networking, direct broadcast satellite and terrestrial digital broadcast, and digital subscriber lines. Although the
communications infrastructures of these markets are very different, we have leveraged our core technologies and introduced
integrated circuits for each of these markets that deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. Our broadband transmission products consist primarily of high-performance
digital signal processing circuits that implement complex communications algorithms, surrounded by precision high-speed
analog-to-digital and digital-to-analog converter circuits. Our products integrate comprehensive systems solutions into single
chips or chipsets, which:
o eliminate costly external components;
o reduce board space;
o simplify our customer's manufacturing process;
o lower our customer's system costs; and
o enable higher performance.
Customers currently shipping broadband communications equipment incorporating our products include 3Com, Cisco Systems,
General Instrument (which was acquired by Motorola in January 2000), Hewlett-Packard, Motorola, Nortel Networks, Pace,
Samsung, Scientific-Atlanta and Thomson CE, among others.
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INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and consumer demand for high-speed access to multimedia
information and entertainment content, consisting of voice, video and data. This demand is being driven by the growth of
desirable information and entertainment content accessible via the Internet and cable and data networks. The improved
availability and affordability of access devices such as digital set-top boxes, PCs and other consumer appliances have also
stimulated demand for high-speed transmissions. Computer processor speeds have increased dramatically over the last decade
and, as a result, have significantly improved the rate at which multimedia data can be processed. However, the rate at which
such data can be transmitted has not kept pace. This disparity has become known as the "bandwidth gap" and has frustrated
users and challenged solutions providers in a number of markets.
The bandwidth gap has emerged in a variety of commercial and consumer applications. Businesses are constantly seeking new
ways to access and analyze larger amounts of information to improve the quality of management decisions and enhance
customer and employee communications. Many businesses have deployed local area networks, commonly known as LANs,
which are principally based upon the Ethernet standard. Ethernet is the predominant networking protocol used in LANs for
connecting devices at data rates of 10, 100 and 1000 Megabits per second ("Mbps") by means of copper twisted pair cabling.
Emerging trends such as the convergence of voice, video and data along with the ever-increasing volumes of electronic traffic
are placing new demands on legacy LAN technologies and infrastructures. Businesses would prefer to address these new
demands without incurring the cost of installing new cabling or switching network technologies. In order to accommodate the
need for more bandwidth, much of the installed base of 10 Mbps Ethernet ports will need to be upgraded to higher speed 100
and 1000 Mbps connections. Furthermore, real-time traffic such as voice and video will not only place additional demands on
network bandwidth, but will also require intelligence and deterministic behavior provided by devices referred to as switches.
Switches provide dedicated bandwidth to each end-user, versus repeaters, which share the bandwidth among end-users.
Individuals are also increasingly using their home PCs to access the Internet and to telecommute. Consumer online usage is
expected to increase rapidly with the availability and market acceptance of low cost PCs (sub $1,000) and the increased
availability and improving quality of content. In addition, the increasing number of next generation television set-top boxes, PCs
and other devices that feature integrated Internet access will contribute to the surging demand for rapid access to information.
As the volume of traffic continues to grow, consumers are becoming increasingly frustrated with the low performance of "last
mile" remote access connections that are typically limited to data rates of only 28.8 kbps to 56 kbps and require several
minutes or hours to download large multimedia-intensive files.
Business and residential PC users have not been the only ones affected by the bandwidth gap. Cable television subscribers
seeking more entertainment options, including Internet access, and cable service providers seeking higher revenue services
beyond basic cable, have generally been frustrated by the limited amount of programming that can be provided over the existing
cable infrastructure. The cable infrastructure historically also has not been able to deliver interactive multimedia content. With
the advent of digital television and digital compression technologies such as MPEG, the conversion from analog transmission to
digital transmission enables a dramatic increase in the number of channels available to the subscriber. In late 1996, cable
television service providers began offering expanded services, including digital programming through new digital set-top boxes,
as well as high-speed Internet access and telecommuting through cable modems. A cable modem is a device that allows a cable
subscriber to transmit and receive data over coaxial cable. In order to satisfy customer demand for increased programming and
other entertainment options, and to capitalize on the revenue growth opportunities associated with these expanded services,
service providers will have to deploy a new generation of digital set-top boxes and headend equipment. A headend is the
central distribution point in a cable television system.
Much of the bandwidth gap is a result of the existing "last mile" communications infrastructure, which was originally designed for
lower speed analog transmission rather than high-speed digital transmission. This infrastructure consists primarily of copper
twisted pair wiring, coaxial cable and wireless communication connections. Copper twisted pair wiring was originally intended
for the transmission of narrowband analog voice while coaxial cable was intended for delivery of one-way analog video signals.
These analog infrastructures have numerous impairments, which make broadband transmission of digital data very difficult.
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Because it is impractical to replace these communications infrastructures with entirely new infrastructures that are optimized for
digital data transmission, the fundamental challenge for service and equipment providers is to enable broadband
communications over existing infrastructures. These providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace.
MARKETS
The principal broadband communications markets include:
Digital Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity in television programming. Despite ongoing efforts to
upgrade the existing cable infrastructure, an inadequate number of channels exist to provide the content demanded by
consumers. In an effort to increase the number of channels and to provide 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 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, interactive television,
high definition television, 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.
Cable Modems
Cable television operators have been upgrading their systems to hybrid fiber coaxial cable, commonly known as HFC in the
telecommunications industry. These upgraded HFC networks are able to support two-way communications, high-speed
Internet access and telecommuting through the use of a cable modem. High-speed Internet access services, including @Home
and RoadRunner, were introduced in 1996 in conjunction with several cable system operators. These services use cable
modems to connect PCs to the cable network and have been designed to achieve downstream transmission speeds of up to 43
Mbps (North American standard) or 56 Mbps (international standard), and upstream (to the network) transmission speeds of
up to 10 Mbps. These transmission rates are nearly 1,000 times faster than the fastest analog telephone modems (56 kbps
downstream and 28.8 kbps upstream) currently available. We believe the high speeds of cable modems should enable an
entirely new generation of multimedia-rich content over the Internet and make telecommuting a productive and effective means
for work at home. Cable modems will allow cable operators to expand their traditional video product offerings to include data
and telephone services. The cable industry's adoption of the Data Over Cable Service Interface Specification, commonly
known as DOCSIS, in 1997 made possible interoperability between different manufacturers' cable modems and headend
equipment across different cable networks. The standard enables the cost-effective deployment of cable modems via retail
channels.
High-Speed Networking
A LAN is comprised of different types of equipment interconnected by cables. Computers and servers via Network Interface
Cards ("NICs"), repeaters, switches and routers are all examples of networking equipment. Ethernet is a computer networking
protocol that describes a set of rules by which devices connected to a LAN may communicate. Ethernet physical layer
standards have been established for different data rates (10, 100 and 1000 Mbps) and transmission mediums (copper, fiber
and coax cabling). 100 Mbps Ethernet is sometimes referred to as Fast Ethernet, and 1000 Mbps is referred to as Gigabit
Ethernet.
As communications bottlenecks have appeared in corporate LANs, new technologies such as Fast Ethernet and Gigabit
Ethernet are being employed to replace older technologies such as 10Base-T Ethernet (10 Mbps) and Token Ring (16 Mbps).
As desktop connections continue to migrate to Fast Ethernet, we believe that Gigabit Ethernet will emerge as the predominant
technology for servers and backbone infrastructures that support LANs, and will eventually migrate to the desktop itself. We
anticipate that a significant portion of the installed base of 10Base-T
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Ethernet repeater/hub ports, switches and NICs will be upgraded to the faster technologies. In addition, the need for dedicated
and predictable bandwidth to the desktop 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.
Home Networking
The proliferation of multi-PC households 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 10
Mbps home networking technology has met this need by enabling the development of affordable, easy-to-use networking
solutions for the consumer. This standard delivers a 10 Mbps data rate for home phoneline networking while maintaining full
backward compatibility and interoperability with existing HomePNA 1 Mbps technology. We believe this standard will enable
the ubiquitous delivery of voice, video and data concurrently to any network-enabled appliance, PC or consumer electronic
device over ordinary phone lines at speeds of 10 Mbps and higher and provides a complete, standards-based silicon platform
for a host of new consumer devices and applications.
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 can be used to transmit information at speeds of up to 90 Mbps. 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:
o Terrestrial Digital Broadcast Television, the upgrade of analog broadcast television to digital, which enables the delivery of
high definition television;
o Multichannel Multipoint Distribution System, commonly known as 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 modems; and
o Local Multipoint Distribution System, commonly known as LMDS, which uses even 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.
We are currently developing products specifically for the MMDS and LMDS (broadband fixed wireless) markets as part of an
agreement with Cisco Systems that we announced in October 1999.
Beginning in 1999, the FCC has mandated that the top four affiliated television stations begin digital broadcasting and has
required that all current television broadcasters and their affiliates return the old analog spectrum by the year 2006 for FCC
auction. ABC, CBS and NBC have announced that they are transmitting high definition television signals in some markets and
will continue to expand that offering in 2000 and in the future. We believe this conversion to digital broadcasting will also
require new digital set-top boxes and television receivers.
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xDSL
Digital Subscriber Lines, commonly known as xDSL, represent a family of broadband technologies that use the copper twisted
pair wiring in the existing telephone local loops to deliver high speed data transmission. xDSL speeds range from 128 kbps to
52 Mbps depending on the distance between the central office and the subscriber. These data rates are enabling a wide range
of new services, including high-speed Internet access, multi-line voice and digital television delivery. Most major North
American and European telephone operating companies are deploying asymmetric DSL (ADSL) and symmetric DSL (SDSL)
in selected areas in their networks. There has also been a significant increase in the amount of xDSL deployed in the Far East,
notably in Korea. For the most part, ADSL is targeted towards residential customers, while SDSL is offered to business
customers. The major Internet service providers are also embracing xDSL technologies.
While ADSL and SDSL can provide high-speed Internet access and multi-line voice, neither of these technologies is well suited
for transmission of entertainment quality video. Very High Bit-Rate DSL (VDSL) is the latest technology in the DSL family to
address this need. VDSL is now in volume deployment in the U.S. and Canada. Capable of transmission rates four to five times
faster than the highest ADSL rates and leveraging increased fiber build-outs by the operators, this technology enables telephone
companies to offer complete broadband service offerings delivering voice, video and data services to the home over their
existing wiring infrastructure.
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These broadband communications markets are at different phases in their evolution. High-speed networking is an established
market that is currently being upgraded, cable modems, digital cable and DBS set-top boxes are, on a global basis, in an early
growth phase, and the home networking and xDSL markets are emerging.
The desire by equipment manufacturers and service providers to develop these markets has created the need for new
generations of semiconductor solutions. Broadband transmission of digital information over existing infrastructures requires
highly integrated mixed-signal semiconductor solutions to perform critical systems functions such as complex signal processing
and converting digital data to and from analog signals. Broadband communications equipment requires substantially higher levels
of system performance, in terms of both speed and precision, that typically cannot be adequately addressed by traditional
semiconductor solutions developed for low speed transmission applications. Moreover, solutions that are based on multiple
discrete analog and digital chips generally cannot achieve the cost-effectiveness, performance and reliability required by the
broadband communications markets. These requirements are best addressed by new generations of highly integrated
mixed-signal devices that combine complex analog and digital functions with high performance circuitry that can be
manufactured in high volumes using cost-effective semiconductor technologies.
THE BROADCOM SOLUTION
Broadcom Corporation is the leading provider of highly integrated silicon solutions that enable broadband digital data
transmission of voice, video and data to and throughout the home and within the business enterprise. Using our proprietary
communications algorithms and protocols, advanced DSP architectures, silicon compiler design methodologies and full-custom,
mixed-signal circuit design techniques, we have designed and developed integrated circuits for some of the most significant
broadband communications markets. Our expertise in communications algorithms and our detailed understanding of
transmission media enable us to integrate complex systems incorporating signal processing functions such as digital
demodulation, adaptive equalization and error correction in a single device. In addition, our broad knowledge of advanced
communications protocols enables us to design protocol processing integrated circuits that seamlessly interface our mixed-signal
transceiver integrated circuits with higher-level networking layers for communications applications.
We develop all of our products using low-cost, highly-manufacturable complementary metal oxide semiconductor technologies,
commonly known as CMOS, that enable us to integrate comprehensive systems solutions into single chips, thereby eliminating
costly external components, reducing board space, simplifying the customer's equipment manufacturing process, lowering
customer system costs and enabling higher performance. Our proprietary technology and advanced design methodologies
facilitate a high likelihood of first pass silicon success, accelerated time-to-market, and ease of porting to multiple foundries.
Our design methodologies also allow us to rapidly and cost-effectively incorporate proprietary features or intellectual property
from our key strategic customers into products that are exclusive to those customers, thereby enabling them to differentiate their
products.
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STRATEGY
Our objective is to be the leading provider of highly integrated silicon solutions to the worldwide broadband communications
markets. Key elements of our strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. Our strategy is to identify rapidly growing broadband
digital communications markets and to develop highly integrated silicon solutions for applications in those markets. Our initial
products were designed for the digital cable set-top box, cable modem and high-speed networking markets, which require
high-performance, feature-rich and highly integrated semiconductor solutions. We have recently leveraged our core
technologies to design and develop semiconductor solutions for the home networking, DBS, terrestrial digital broadcast,
broadband wireless and xDSL markets, which we believe have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. We have established strategic relationships with key
equipment manufacturers, including 3Com, Cisco Systems, General Instrument, Hewlett-Packard, Motorola, Nortel Networks
and Pace, which are market and technology leaders within the broadband communications markets. While we design products
that can be used by multiple customers, our proprietary design methodologies allow us to design custom features rapidly based
on either our own or our customers' intellectual property. This capability enables our customers to improve their
time-to-market, differentiate their products and address new market opportunities. We believe that these strategic relationships
are essential to our continued growth and to the further development and acceptance of our technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. We are aggressively building on our technology
leadership by investing substantial research and development resources in all of our key technology areas. We work closely
with leading communications systems companies to develop new and enhanced algorithms that address next generation
broadband market opportunities. Our strategy is to continue to implement these algorithms in highly integrated, full-custom
integrated circuits using DSP architectures that optimize performance, efficiency and cost. During product development, we
leverage our silicon compiler technologies and proprietary circuit libraries and layouts of high-performance analog and digital
chip building blocks, to accelerate time-to-market for new products. Our silicon solutions for each of these markets benefit
from the same underlying core technologies, providing us significant leverage in our ability to address a diverse set of end user
markets with a relatively focused investment in research and development.
Drive Industry Standards. We actively participate in the formulation of critical standards for the broadband communications
markets. We believe such participation provides us with several significant benefits, including accelerating and expanding the
development of markets for our products by encouraging all market participants to focus their efforts on developing products
compliant with the standards. We also believe our participation in the formulation of industry standards provides us with
valuable insight and relationships, which assists us to be early to market with products incorporating the standards. We have
established strategic relationships with major networking equipment and cable modem vendors and were a principal participant
in formulating and writing DOCSIS. These standards govern the end-to-end delivery of high-speed data services over HFC
cable networks and facilitate the development of interoperable networking products, including cable modems. Our active
participation in this process helped us to be the first provider of transmission and protocol chips to equipment manufacturers
developing DOCSIS compliant products. We are also currently participating in the formulation and evolution of standards for
next generation cable modems, voice-over-cable, Gigabit Ethernet, broadband fixed wireless, home networking systems and
xDSL.
Focus on Highly Integrated Solutions. We believe our analog mixed-signal technology and advanced design methodologies
enable us to offer silicon solutions that are more highly integrated than competitive alternatives. High levels of integration and
aggressive product development roadmaps allow us to enhance the value-added benefits of our products in our customers'
systems. We believe integration, which reduces the total component count in the system, provides many fundamental benefits
for our customers, including streamlining their production flow, improving yields, saving board space, shortening
time-to-market, reducing production costs and improving performance and reliability. These benefits have often helped our
customers to achieve faster and broader penetration within their respective markets.
Engage in Strategic Acquisitions. To accelerate our time-to-market for particular products and technologies, to facilitate and
expedite our entry into new or related broadband communications markets, and to meet engineering staffing requirements, we
engage in selective acquisitions of other companies. Since January 1999 we have completed eight such acquisitions, and we
expect to undertake additional acquisitions in 2000 and in the future.
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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 technology 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,
General Instrument, Hewlett-Packard, Motorola, Nortel Networks, Pace, Samsung, Scientific-Atlanta and Thomson CE,
among others.
As part of our business strategy, we periodically establish strategic relationships with certain key customers. In September
1997, we entered into a Development, Supply and License Agreement with General Instrument. This agreement provides that
we will develop chips for General Instrument's digital cable set-top boxes and supply these chips to General Instrument for four
years. General Instrument agreed to purchase 100% of its requirements for components containing transmission,
communications or video decompression (MPEG) functions for its digital cable set-top box subscriber products from us in the
first year of this agreement. General Instrument's purchase requirements are subject to our good faith efforts to maintain our
competitive position with respect to these components. The percentage of its product requirements that General Instrument
must purchase from us declines each year over the term of the agreement to 45% of General Instrument's requirements in 2001.
General Instrument also granted us a royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG and related
technology.
From time to time, we have also entered into development agreements with 3Com, Cisco Systems, Hewlett-Packard, Nortel
Networks, Sony and others. We have worked closely with these customers to co-develop products for these customers.
A small number of customers have historically accounted for a substantial portion of our revenue. Sales to General Instrument
(including sales to its manufacturing subcontractors) represented approximately 27.5% of our revenue in 1999 and
approximately 35.5% of our revenue in 1998. Sales to 3Com (including sales to its manufacturing subcontractors) represented
approximately 18.1% of our revenue in 1999 and approximately 26.8% of our revenue in 1998. Sales to Cisco (including sales
to its manufacturing subcontractors) represented approximately 10.6% of our revenue in 1999. Sales to our five largest
customers represented approximately 67.0% of our revenue in 1999 and approximately 74.2% of our revenue in 1998.
General Instrument was acquired by Motorola, Inc. in January 2000. The loss of any key customer could materially and
adversely affect our business, financial condition and results of operations.
PRODUCTS
Our six primary product lines encompass:
o high-speed communications and MPEG video/audio/graphics devices for the digital cable television set-top box market;
o high-speed data transmission and media access control devices for the cable modem market;
o 10/100/1000Base-T Ethernet transceivers, integrated repeater controllers, integrated switch controllers and proprietary
application specific integrated circuits ("ASICs") for the high-speed networking market;
o controllers and integrated transceivers and v.90 soft modem software for the home networking market;
o receivers and MPEG video/audio/graphics devices for the DBS and terrestrial digital broadcast markets; and
o broadband transceivers for the xDSL market.
We also develop and sell reference platforms designed around our integrated circuit products that represent application
examples for incorporation into our customers' equipment. By providing these reference platforms, we can assist our customers
in achieving easier and faster transitions from initial prototype designs through final production releases. These reference
platforms enhance the customer's confidence that our products will meet their market requirements and product introduction
schedules.
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Digital Cable Set-Top Boxes
We offer a suite of silicon solutions for digital cable set-top boxes and cable headends which encompass the high-speed
transmission, reception and decompression of digital audio and video multimedia signals. These products are also applicable to
the terrestrial digital broadcast markets. Our QAMLink(R) transmission products integrate the core functionality required of
advanced communications transceiver devices including modulators and demodulators for quadrature amplitude modulation,
commonly known as QAM, and quadrature phase shift keying, commonly known as QPSK. QAM is a digital modulation
technique that allows very efficient transmission of data over media with limited available bandwidth. QSPK is a digital
modulation technique that is widely employed in DBS transmission systems. Our QAMLink transmission products also
integrate adaptive equalization, which corrects for distortion in the transmission media, forward error correction, which corrects
for errors that occur in the transmitted data, and high-speed analog-to-digital and digital-to-analog conversion. We have
designed these products to meet both international and North American communications standards for cable networks. Several
of these products also incorporate additional set-top box functionality such as cable network protocol processing for
entitlement and tiered programming access and input/output device control.
In the fourth quarter of 1999, we introduced our first single-chip High Definition (HD) MPEG-2 video and graphics multimedia
device. This device incorporates all of the processing capabilities necessary to decode and display a MPEG-2 digital television
data stream and subsequently reconstruct an analog HD studio quality television signal that can be displayed on a standard or
HD television receiver. This chip integrates MPEG-2 video decompression, Dolby AC3 audio compression, MPEG-2
transport processing, studio quality 2D and 3D graphics, analog video reconstruction and other necessary video-graphics
related functions required to deliver video and audio to a television. We believe our combination of transmission and MPEG
silicon solutions, licensed MIPS microprocessor cores and graphics technology will provide all of the significant silicon
functionality of most existing digital cable set-top boxes with the exceptions of the security functions and memory.
Our principal products for digital cable set-top boxes include the BCM3116 (downstream QAM receiver), BCM3120
(universal set-top box transceiver), BCM3125 (universal set-top box transceiver), BCM3300 (integrated DOCSIS cable
modem chip) and the BCM7010 (MPEG system on a chip).
Cable Modems
We have leveraged our core transmission technologies that were developed for the cable set-top box market and adapted them
to the development of a family of products that enable digital data to be delivered over an HFC cable network at downstream
speeds of up to 56 Mbps and upstream speeds of up to 10 Mbps. These products incorporate modulation, adaptive
equalization and error correction technologies similar to those of our digital set-top box products and thereby achieve robust
and reliable transmission, especially in the noisy and interference-prone upstream direction. The cable modem product family
includes solutions for both the cable headend and subscriber. We have also expanded our core technology offerings in this area
to include a DOCSIS Media Access Controller, commonly known as a MAC, which controls the upstream and downstream
data flow over the cable network as well as a RISC central processing unit (CPU), Universal Serial Bus (USB) interface, and
Ethernet and IP security functions. In December 1999 we introduced the BCM3350 single-chip cable modem, which integrates
all the essential functions of a DOCSIS cable modem into a single chip, including the DOCSIS-based upstream and
downstream physical layers, DOCSIS MAC, 10/100BaseT Ethernet physical layer and Ethernet MAC, a USB transceiver, a
RISC CPU and IP security functions. This device allows cable modems to provide data telephony services over the cable
network using the Internet Protocol. With our comprehensive offering of silicon solutions for both the cable modem and cable
headend, designed to the DOCSIS specification, we are capable of supplying our customers with complete end-to-end silicon
solutions for their DOCSIS products.
Our principal products for cable modems include the BCM3037 (universal QPSK/QAM burst modulator), BCM3116
(downstream QAM receiver), BCM3118 (downstream QAM receiver), BCM3137 (headend QPSK/QAM burst receiver),
BCM3220 (DOCSIS media access controller) and the BCM3300 (single chip DOCSIS cable modem)
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High-Speed Networking
Our networking products provide the core functionality required for building Ethernet NICs, repeater/hubs and switches which
support the Ethernet, Fast Ethernet and Gigabit Ethernet standards. Our Digi-(PHI)(TM) transceivers are the basic elements
required to implement an Ethernet connection. The Digi-(PHI) architecture incorporates our patent-pending DSP processing
algorithms combined with high-speed analog-to-digital and digital-to-analog converters to create a highly-robust and
cost-effective solution. In addition to the DSP-based architecture, the family of Digi-(PHI) transceiver products feature low
power and low voltage (2.5 Volts) operation, making them suitable for high port density switches and hubs, as well as PCI2.2
compliant mobile and desktop adapter cards and computer motherboards. We also offer a variety of integrated repeater and
switch controller devices, to provide a broad suite of Fast Ethernet products to meet the demands of the adapter card,
repeater/hub, switch, network peripheral and router markets. In addition, we develop and produce proprietary ASICs
combining our customer's intellectual property with our advanced Digi-(PHI) transceiver and other communication cores.
Our principal high-speed networking products include the BCM5208 (quad 10/100Base-T transceiver), BCM5308 (nine port
10/100Base-T switch), BCM 5903 (single chip 10/100Base-T transceiver with integrated MAC) and BCM5904 (single chip
10/100Base-T transceiver with integrated MAC ASIC).
Home Networking
Our home networking products are built around the iLine10(TM) chipset family, which networks data and multi-media
applications at rates of 10 Mbps over the ordinary phone lines found in any home. iLine10 products use QAM modulation to
send Ethernet data frames over ordinary phone wires in the home, without disturbing the ability to use the same phone wires for
both regular phone service and ADSL broadband Internet access simultaneously. iLine10 enabled products include adapter
cards and dongles for personal computers, add-in modules for home broadband gateways, and specialized chipsets and drivers
for Internet appliances. Our principal home networking products include the BCM4100 (integrated iLine10 analog front-end
transceiver) and the BCM4210 (fully-integrated iLine10 MAC/PHY device).
Additionally our AltoCom subsidiary licenses v.90 soft modem technology. The AltoCom software is very efficient in its
modulation algorithms, resulting in lower CPU utilization and lower power consumption compared to competitive alternatives.
As a result, over 20 companies have licensed the AltoCom software for use in Internet appliances, xDSL gateways and other
devices.
DBS and Terrestrial Digital Broadcast
Our products for the DBS market are designed to meet the needs of satellite set-top box providers and incorporate the
functionality necessary to receive, demodulate and decode a broadband QPSK signal, including advanced forward error
correction. These products can be programmed to accommodate satellite standards such as DSS, the DIRECTV standard;
DVB, the international standard; and Primestar. These products can operate at any data rate from 2 to 90 Mbps. Our MPEG
system on a chip, the BCM7010, employs the MPEG-2 standard, which enables it to be used in either digital cable set-top
boxes or DBS set-top boxes. Our principal DBS and terrestrial digital broadcast product is the BCM4200 (QSPK receiver
for DSS and DVB digital satellite reception).
xDSL
Our product for DSL transmission incorporates the functionality to enable data to be transmitted and received at high speed
over the existing copper twisted pair wiring in the telephone local loops. Our BCM6010 currently offers the industry's only
single-chip mixed-signal silicon solution that can be configured to operate at data rates spanning ISDN (128 kbps) to VDSL
(52 Mbps), thereby accommodating the needs of a wide variety of xDSL market segments in a single chip. This solution offers
network operators the ability to initially install high-speed ADSL data services on the existing local loop plant and subsequently
offer higher data rates for video-related services on an upgraded plant. We have leveraged our mixed-signal and DSP
processing design expertise developed for cable television and wireless products to develop the BCM6010 (scalable xDSL
QAM transceiver for twisted-pair applications).
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Our future success will depend upon our ability to develop new silicon solutions for existing and new markets, introduce such
products in a timely and cost-effective manner, and achieve design wins. We may not be able to develop or introduce new
products in a timely and cost-effective manner or in sufficient quantities to meet customer demand. In addition, it is possible that
new products may not satisfy customer requirements or achieve market acceptance.
CORE TECHNOLOGIES
We believe that one of our key competitive advantages is our broad base of core technologies encompassing the complete
design space from systems to silicon. We have developed and continue to build on four primary technology foundations:
o proprietary communications systems algorithms and protocols;
o advanced DSP hardware architectures;
o silicon compiler design methodologies and advanced cell library development for both standard cell and full-custom integrated
circuit design; and
o high performance analog and mixed-signal circuit design using industry standard CMOS processes.
Communications Algorithms and Protocols
We have been an innovator in developing advanced modulation and coding systems and integrating them onto a single chip.
These include QAM, VSB and QPSK receivers incorporating digital demodulation, adaptive equalization and sophisticated
forward error correction techniques. These receivers incorporate novel signal processing algorithms to facilitate robust
performance in severely distorted channels. These core transmission algorithms are broadly applicable to our products in the
areas of satellite, terrestrial wireless, digital cable set-top box, cable modem, xDSL and home networking. We introduced the
industry's first DOCSIS physical layer and media access control chips for cable modems, the industry's first 52 Mbps VDSL
transceiver, as well as the industry's first 10 Mbps home phoneline networking solution. We have also developed the world's
first all-DSP based transceiver chips for Fast Ethernet LAN applications. This Digi-(PHI) transceiver core has been used in a
number of our single, quad, hex and octal channel transceiver products for Ethernet (10/100Base-TX) applications. Our DSP
algorithmic expertise has also been extended and applied to the development of the world's first Gigabit copper twisted pair
transceiver. In addition to data transmission algorithms, we have developed significant expertise in networking protocols which
we have applied to the development of MAC devices for cable modems and interactive set-top box applications as well as
Ethernet MAC controllers and switching and packet filtering techniques for Fast Ethernet and Gigabit Ethernet Internet
Protocol (IP) networks. We have also developed innovative techniques for digital video processing in the areas of standard
definition and high definition MPEG decompression, digital audio decoding, advanced 2D and 3D graphics for set-top boxes,
and NTSC digital video encoders and decoders. Next generation IP networks have very demanding Quality of Service (QoS)
requirements for supporting low latency transport of voice traffic, and we have incorporated our substantial algorithm, protocol
and software expertise for voice processing into a wide variety of Voice over IP (VoIP) products.
Digital Signal Processing Hardware Architectures
We have developed cost-effective, single-chip broadband transceivers by mapping complex communications algorithms into
low-complexity DSP hardware architectures. We are a technology leader in the area of low-complexity, high-performance
silicon embedded algorithms. We have individually implemented these communications algorithms in full-custom logic rather
than the conventional approach of running all of the algorithms in firmware on a single general purpose programmable DSP
architecture. This design approach is combined with silicon compiler-based design methodologies which generate the custom
logic functions. This results in chips that are less complex and less expensive to manufacture than conventional implementations.
One particular area where we have developed leading DSP technology is in digital adaptive equalization. Equalizers are key
components in all of our transceiver products. We believe that the speed and density of our equalizers help to distinguish our
products in the marketplace. Our single-chip, mixed-signal adaptive DSP transceiver for Gigabit Ethernet achieves an
unprecedented throughput of over 250 billion operations per second.
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Silicon Compiler Design Methodologies
We have developed proprietary silicon compiler technologies that enable designers to implement chips using a high level of
abstraction yet produce area-efficient integrated circuit layouts and achieve short design cycles. The cells that are synthesized
from this process can be individually optimized for functionality, performance, topology, electrical characteristics and
manufacturing process portability. We have designed compilers for standard cells, arithmetic processing, memories and analog
building blocks. In addition, we have created compilers to manage the implementation of higher level functions such as digital
filters, adaptive equalizers, modulators, demodulators and numerically controlled oscillators/direct digital frequency synthesizers.
We believe that these silicon compiler capabilities accelerate time-to-market by improving designer productivity and by
providing functional blocks that can be reused in multiple products. In addition, these compiler techniques significantly reduce
errors, thereby frequently resulting in first pass silicon success. We have also developed, and continue to improve and expand,
our own proprietary set of circuit and layout libraries for both standard cell and full-custom integrated circuits.
Full-Custom Analog and Mixed-Signal Circuit Design
We have developed significant analog and mixed-signal circuit expertise. We have achieved a level of circuit performance in
standard CMOS process technologies that is normally associated with more expensive special purpose silicon fabrication
technologies. All of our high-performance analog building blocks are implemented in the same low-cost single poly CMOS
technologies as the digital semiconductor circuitry. In addition to achieving high performance, our analog-to-digital and
digital-to-analog converters are among the lowest die area devices in the industry, which makes them well suited for integration
into high volume mixed-signal products. Virtually all of our transmission products incorporate a mixed-signal analog front-end.
In addition to our baseband mixed-signal circuit expertise, we have developed a substantial base of expertise in CMOS RF
design. We have introduced the world's first all-CMOS RF tuner for cable TV receivers. This device incorporates a wide
variety of sophisticated RF building blocks, including low noise amplifiers, highly linear amplifiers and mixers, wideband
phase-locked loop frequency synthesizers, low phase noise oscillators and on-chip RF filters.
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 1, 2000 approximately two-thirds of our 744 research and development employees had advanced
degrees. Our work force includes approximately 100 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 2000. We have
established additional design centers in Tempe, Arizona, San Diego, Sunnyvale and San Jose, California, Atlanta, Georgia,
Bunnik, the Netherlands, and Singapore. As a result of our 1999 acquisitions of Armedia, Inc. and HotHaus Technologies Inc.,
we also undertake design and development activities in India and software design and development in Canada, respectively.
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.
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Our Operations and Quality Engineering Group closely manages the interface between manufacturing and design engineering.
While our design methodology typically creates smaller than average die for a given function, it also generates full-custom
integrated circuit designs. As a result, we are responsible for the complete functional and parametric performance testing of our
devices, including quality. We employ a fully staffed operations and quality organization similar to a vertically integrated
semiconductor manufacturer. We also arrange with our foundries to have online work-in-progress control, making the
manufacturing subcontracting process transparent to our customers.
Our key silicon foundries are Taiwan Semiconductor Manufacturing Corporation in Taiwan and Chartered Semiconductor
Manufacturing in Singapore. While we primarily use two independent foundries, few of our components are manufactured at
both foundries at any given time. Any inability of one of our foundries to provide the necessary capacity or output could result in
significant production delays and could materially and adversely affect our business, financial condition and results of
operations. While we currently believe we have adequate capacity to support our current sales levels, we continue to work with
our existing foundries to obtain more production capacity and we intend to qualify new foundries to provide additional
production capacity. It is possible 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, and .22 micron, five layer
metal, feature sizes. We continuously evaluate the benefits, on a product by product basis, of migrating to a smaller geometry
process technology in order to reduce costs. Our experience to date with the migration of products to smaller geometry
processes has been favorable, but we could experience difficulties in future process migration. Other companies in our industry
have experienced difficulty transitioning to new manufacturing processes and, consequently, have suffered reduced yields or
delays in product deliveries. We believe that the transition of our products to smaller geometries will be important for us to
remain competitive. Our business, financial condition and results of operations could be materially and adversely affected if any
such transition is substantially delayed or inefficiently implemented.
Assembly and Test
One of our independent foundries or independent wafer probe test subcontractors conducts our wafer probe testing. Following
completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by one of our
three key subcontractors: ASAT Ltd. in Hong Kong, ST Assembly Test Services in Singapore and Amkor Technology in the
Philippines and South Korea. 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.
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.
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As part of our total quality program, we have applied for and received ISO 9000 certification, a comprehensive International
Standards Organization specified quality system. All of our principal independent foundries and package assembly facilities are
also ISO 9000 certified.
Product Distribution
Historically we had distributed products to our customer through an operations and distribution center located in Irvine,
California. In 1999, we established an international distribution center in Singapore. This new facility puts us closer to our
suppliers and certain key customers and improves our ability to meet our customers' needs. While our Irvine facility will
continue to ship product to U.S. destinations, the transition of our international customers to the Singapore facility was
essentially completed by the end of 1999.
SALES AND MARKETING
Our sales and marketing strategy is to achieve design wins with technology leaders in each of the our targeted broadband
communications markets by, among other things, providing superior field application and engineering support. We market and
sell our products in the United States through a direct sales force, which has largely been established within the last three years.
Our direct sales force is based out of offices located in Irvine and San Jose, California, Houston and Plano, Texas, Canton and
Needham, Massachusetts, Chicago, Illinois, Scarborough, Maine and Atlanta, Georgia.
We dedicate sales managers to principal customers to promote close cooperation and communication. We also provide our
customers with reference platform designs, which enable our customers to achieve easier and faster transitions from the initial
prototype designs through final production releases. We believe these reference platform designs also significantly enhance our
customer's confidence that our products will meet their market requirements and product introduction schedules.
We also market and sell our products internationally through a direct sales force based out of regional sales offices located in
Japan, The Netherlands, Singapore, France and United Kingdom, as well as through a network of independent distributors and
representatives in Germany, Israel, Japan, Korea and Taiwan. We select these independent entities based on their ability to
provide effective field sales, marketing communications and technical support to our customers. All international sales to date
have been denominated in U.S. dollars.
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:
o product capabilities;
o level of integration;
o reliability;
o price;
o time-to-market;
o standards compliance;
o system cost;
o intellectual property;
o customer support; and
o reputation.
We believe that we compete favorably with respect to each of these factors.
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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 11 United States patents and have filed over 250 United States patent applications. We may not receive any
additional patents as a result of these applications or future applications. Even if additional patents are issued, any claims
allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents could be challenged,
invalidated or circumvented, and any right granted under such patents may not provide us with meaningful protection. The
failure of any patents to adequately protect our technology would make it easier for our competitors to offer similar products. In
connection with our participation in the development of various industry standards, we may be required to license certain of our
patents to other parties, including 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
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infringed upon, misappropriated or misused other parties' proprietary rights. In March 2000 Intel Corporation and its subsidiary
Level One Communications Inc. filed a lawsuit against us alleging misappropriation of trade secrets, unfair competition and
tortious interference with existing contractual relations in connection with our recent 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. Our subsidiary, AltoCom, is the
defendant in patent litigation brought by Motorola, Inc. relating to software modem technology. 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.
EMPLOYEES
As of March 1, 2000 we had 1,120 full-time employees and 27 contract and temporary employees, including 744 employees
engaged in research and development, 134 engaged in sales and marketing, 115 engaged in manufacturing operations and 154
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 three adjacent buildings in Irvine, California that comprise our corporate headquarters and include our administration,
sales and marketing, research and development, and operations departments. In addition, we have leases for engineering design
centers in San Diego, California and Tempe, Arizona. We also lease facilities in Atlanta, Georgia which house our Residential
Broadband Group, and various facilities in Santa Clara County, California for our Digital Video Technology Group, Enterprise
Switching Group and Home Networking Group.
Internationally, we lease a design center in the Netherlands and an international distribution and design center in Singapore, as
well as facilities in Vancouver and Toronto, Canada for our Packet Telephony Group and in Bangalore, India for our Digital
Video Technology Group.
These leases comprise an aggregate of 414,934 square feet and have terms expiring on or prior to December 2005. 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 December 1996 Stanford Telecommunications, Inc. ("STI") filed an action against the Company in the United States District
Court for the Northern District of California. STI alleged that several of the Company's cable modem products infringed one of
STI's patents. In May 1999 the Company brought a separate action against STI and an STI subsidiary in California Superior
Court for misappropriation of certain Company trade secrets. In June 1999 the parties entered into a settlement agreement and
agreed to dismiss with prejudice all claims and counterclaims in both actions. Under the terms of the settlement agreement, STI
granted to the Company a worldwide, non-exclusive, royalty-free license to STI's rights in patents and patent applications, and
all inventions conceived, through the date of the agreement, relating to any transmitter or receiver technology, or design or
invention capable of use over a coaxial cable transmission medium, excluding patent claims specifically claiming Code Division
Multiple Access ("CDMA") inventions. The Company also obtained the option to acquire licenses on commercially reasonable
terms to STI's patent claims based upon CDMA inventions capable of use over a coaxial cable transmission
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medium, and STI agreed not to bring any future action against the Company, its suppliers or customers for patent infringement
or trade secret misappropriation resulting from commercial use of any of the Company's existing technology, designs or
products. In connection with the settlement, the Company made a one-time payment to STI and the parties exchanged mutual
releases. Neither party admitted any liability in connection with the various actions.
In April 1997 Sarnoff Corporation and Sarnoff Digital Communications, Inc., now known as NxtWave Communications, Inc.,
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against the Company and five former Sarnoff
employees now employed by the Company asserting claims against the former employees for breach of contract,
misappropriation of trade secrets, and breach of the covenant of good faith and fair dealing, and against the Company for
inducing such actions. The complaint also asserted claims against the Company and the former employees for unfair
competition, misappropriation and misuse of trade secrets and confidential, proprietary information of Sarnoff, and tortious
interference with present and prospective economic advantage, as well as a claim against the Company alleging that it "illegally
pirated" Sarnoff's employees. In early 1999 the Court found in the Company's favor on all liability, causation and damages
issues. Sarnoff appealed the Court's orders but the appeal was later dismissed at Sarnoff's request.
In July 1997 the Company commenced an action against Sarnoff in the California Superior Court alleging breach of contract,
fraud, misappropriation of trade secrets, false advertising, trade libel, intentional interference with prospective economic
advantage and unfair competition. The claims center on Sarnoff's violation of a non-disclosure agreement entered into with the
Company with respect to limited use of certain of the Company's technology and on inaccurate comparisons that the Company
believes Sarnoff has made in its product advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of California, and was stayed pending resolution of the New
Jersey action described in the preceding paragraph. Following the decision in the New Jersey action, Sarnoff filed a motion for
summary judgment in the California case on the basis that the issues therein had been or should have been previously litigated in
the New Jersey action under the New Jersey "entire controversy" doctrine. Following oral argument in August 1999, the
California District Court granted Sarnoff's motion and dismissed the Company's claims on the grounds that they should have
been brought as part of the New Jersey action. The Company believes that the California action involves facts, circumstances
and claims unrelated to those at issue in the New Jersey action, and has filed an appeal of the District Court's ruling. No
discovery has yet occurred in the case.
In March 1998 Scott O. Davis, the Company's former Chief Financial Officer, filed a complaint in California Superior Court
against the Company and its Chief Executive Officer, Henry T. Nicholas III, alleging claims for fraud and deceit, negligent
misrepresentation, breach of contract, breach of fiduciary duty, constructive fraud, conversion, breach of the implied covenant
of good faith and fair dealing, and declaratory relief. The claims related to Mr. Davis' alleged ownership of 26,000 shares of
Series D preferred stock originally purchased by Mr. Davis in March 1996 (which shares would have converted into 312,000
shares of Class B common stock upon consummation of the Offering). The purchase agreement between the Company and
Mr. Davis contained a provision permitting the Company to repurchase the shares in the event that Mr. Davis did not continue
to be employed by the Company for a certain period of time. After Mr. Davis resigned in June 1997, the Company exercised
its repurchase right. Mr. Davis' complaint alleged that the repurchase right should not be enforceable under several legal
theories and sought unspecified damages and declaratory relief. The Company asserted certain counterclaims against Mr.
Davis. In March 1999 the parties entered into a settlement agreement and agreed to dismiss with prejudice all of the claims and
counterclaims in the case. The settlement was approved by the Court in April 1999. The terms of the settlement are confidential
but the Company believes that they do not have a material effect on its business, results of operations, financial condition or
equity.
In September 1998 Motorola, Inc. ("Motorola") filed a complaint in United States District Court for the District of
Massachusetts against AltoCom (and co-defendant, PC-Tel, Inc.), asserting that (i) AltoCom's V.34 and V.90 compliant
software modem technology infringes several patents owned by Motorola,
(ii) AltoCom induces its V.34 and V.90 licensees to infringe such patents, and
(iii) AltoCom contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against
AltoCom as well as the recovery of monetary damages, including treble damages for willful infringement. In October 1998
Motorola affirmatively dismissed its case in the District of Massachusetts and filed a substantially similar complaint in the United
States District Court for the District of Delaware. AltoCom has filed an answer and affirmative defenses to the District of
Delaware complaint.
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AltoCom has also asserted a counterclaim requesting declaratory relief that AltoCom has not infringed the Motorola patents
and that such patents are invalid and/or unenforceable as well as a counterclaim requesting declaratory and injunctive relief
based on breach of contract theory. AltoCom believes that it has strong defenses to Motorola's claims on invalidity,
noninfringement and inequitable conduct grounds. The parties are currently engaged in discovery in the action. A hearing on
patent claims construction is scheduled to commence in June 2000 and a three-week trial is scheduled to begin in February
2001. AltoCom became a subsidiary of the Company on August 31, 1999. In September 1999 PC-Tel, Inc., the co-defendant
in the case, reached a settlement with Motorola.
Although AltoCom believes that it has strong defenses and is defending the action vigorously, a finding of infringement by
AltoCom as to at least one of the patents in this action could lead to liability for monetary damages (which could be trebled in
the event that the infringement were found to have been willful), the issuance of an injunction requiring that AltoCom withdraw
various products from the market, and indemnification claims by AltoCom's customers or strategic partners, each of which
events could have a material adverse effect on AltoCom's, and possibly the Company's, business, results of operations and
financial condition.
On March 8, 2000 Intel Corporation and its subsidiary Level One Communications, Inc. (collectively, "Intel") 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 seeks injunctive relief, damages, exemplary damages and attorneys' fees. The litigation is in its early
stages. A preliminary injunction hearing is currently scheduled for April 28, 2000. The Company has asserted and believes that
Intel's claims are meritless and is vigorously defending the action.
The Company is also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.
The Company's pending lawsuits involve complex questions of fact and law and could require the expenditure of significant
costs and diversion of resources to defend. Although management currently believes the outcome of the Company's outstanding
legal proceedings, claims and litigation will not have a material adverse effect on the Company's business, results of operations
or financial condition, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible.
The Company is unable to estimate the range of possible loss from outstanding litigation, and no amounts have been provided
for such matters in the accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Shareholders of the Company was held on November 22, 1999.
(b) Not applicable.
(c) (1) To approve the amendment of the Company's Amended and Restated Articles of Incorporation to increase the
aggregate number of authorized shares of Class A common stock thereunder from 200,000,000 shares to 400,000,000 shares
and to increase the aggregate number of authorized shares of Class B common stock thereunder from 100,000,000 to
200,000,000 shares.
Class A Shares Class B Shares Class B Votes Total Votes
-------------- -------------- ------------- -----------
For 62,038,060 86,968,114 869,681,140 931,719,200
Against 14,624,750 3,000 30,000 14,654,750
Abstain 97,182 12,770 127,700 224,882
(2) To approve the amendment of the Company's Amended and Restated Articles of Incorporation to permit the issuance of
additional shares of Class B common stock upon the approval of at least two-thirds of the members of the Board of Directors
then in office.
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Class A Shares Class B Shares Class B Votes Total Votes
-------------- -------------- ------------- -----------
For 25,012,576 86,599,696 865,996,960 891,009,536
Against 16,591,988 227,280 2,272,800 18,864,788
Abstain 205,096 48,770 487,700 692,796
Broker non-votes 34,950,332 108,138 -- --
(3) To approve an amendment of the Company's 1998 Stock Incentive Plan:
(a) to increase the number of shares of Class A common stock reserved for issuance under this plan by an additional
20,000,000 shares; and
(b) to revise the automatic share increase provisions of this plan so that the number of shares of Class A common stock by
which the share reserve is to increase automatically on the first trading day in January each year will be increased to 4.5% of the
total number of shares of Class A common stock and Class B common stock outstanding on the last trading day of December
in the immediately preceding calendar year, beginning with the January 3, 2000 annual increase, subject to an annual share limit.
Class A Shares Class B Shares Class B Votes Total Votes
-------------- -------------- ------------- -----------
For 22,890,812 86,603,480 866,034,800 888,925,612
Against 18,665,762 259,432 2,594,320 21,260,082
Abstain 189,560 12,770 127,700 317,260
Broker non-votes 35,013,858 108,202 -- --
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Class A common stock is traded on the Nasdaq National Market 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:
Fiscal Year 1998 High Low
---------------- ------- ------
First Quarter
Second Quarter $ 19.16 $ 11.75
Third Quarter 22.44 11.75
Fourth Quarter 33.75 14.50
Fiscal Year 1999 High Low
---------------- ------- -------
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 (through March 3, 2000) $235.69 $110.88
As of March 3, 2000 there were approximately 895 record holders of the Company's Class A common stock and
approximately 720 record holders of the Company's Class B common stock. On March 3, 2000 the last reported sale price of
the Class A common stock on the Nasdaq National Market was $232.88 per share.
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The Company's Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time
at the option of the holder into one share of Class A common stock and is automatically converted upon sale and most other
transfers.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its capital stock. The Company currently intends to
retain all of its earnings, if any, for use in its business and in acquisitions of other businesses, products or technologies and does
not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue $518,183 $216,456 $ 42,341 $23,874 $ 6,624
Cost of revenue 209,837 91,403 15,563 8,175 1,572
-------- -------- -------- ------- -------
Gross profit 308,346 125,053 26,778 15,699 5,052
Operating expense:
Research and development 108,579 51,090 21,545 7,541 3,807
Selling, general and administrative 56,601 32,939 11,410 4,364 2,295
Merger-related costs 15,210 -- -- -- --
Litigation settlement costs 17,036 -- -- -- --
-------- -------- -------- ------- -------
Income (loss) from operations 110,920 41,024 (6,177) 3,794 (1,050)
Interest and other income, net 8,402 4,154 91 165 98
-------- -------- -------- ------- -------
Income (loss) before income taxes 119,322 45,178 (6,086) 3,959 (952)
Provision (benefit) for income taxes 36,035 20,586 (157) 1,514 3
-------- -------- -------- ------- -------
Net income (loss) $ 83,287 $ 24,592 $ (5,929) $ 2,445 $ (955)
======== ======== ======== ======= =======
Basic earnings (loss) per share (1) $ .42 $ .15 $ (.05) $ .02 $ (.01)
======== ======== ======== ======= =======
Diluted earnings (loss) per share (1) $ .36 $ .12 $ (.05) $ .02 $ (.01)
======== ======== ======== ======= =======
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents $173,966 $ 72,511 $33,031 $ 9,780 $2,688
Working capital 305,265 131,666 35,734 9,920 2,276
Total assets 585,309 260,581 60,890 21,575 7,021
Long-term debt, including current
portion 1,056 11,352 4,743 1,476 1,336
Convertible preferred stock -- -- 28,617 6,084 3,150
Total shareholders' equity 498,699 215,503 45,010 15,483 4,326
(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 Corporation for the five years ended December 31, 1999, which have been restated to
include the operations of Maverick Networks, Epigram, Inc., Armedia, Inc., HotHaus Technologies Inc., and AltoCom, Inc.
on a pooling-of-interests basis as if they had combined with Broadcom prior to the beginning of each period presented.
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 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 digital transmission of voice, video and
data to and throughout the home and within the business enterprise. These integrated circuits permit the cost effective delivery
of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the
transmission of broadband digital content. Using proprietary technologies and advanced design methodologies, we design,
develop and supply integrated circuits for a number of the most significant broadband communications markets, including the
markets for digital cable set-top boxes, cable modems, high-speed office networks, home networking, direct broadcast satellite
and terrestrial digital broadcast, and digital subscriber lines. From our inception in 1991 through 1994, we were primarily
engaged in product development and the establishment of strategic customer and foundry relationships. During 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 sales of software
and software support and sales of system-level reference designs.
We recognize product revenue at the time of shipment. Provision is concurrently made for estimated product returns, which
historically have been immaterial. Our products typically carry a one-year warranty. We recognize development revenue when
earned. Revenue from licensed software is recognized at the time of shipment, provided that we have vendor-specific objective
evidence of the fair value of each element of the software offering. 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.
The percent of our revenue derived from independent customers located outside of the United States was approximately
17.2% in 1999, 17.2% in 1998 and 19.6% in 1997. All of our revenue to date has been denominated in U.S. dollars. See
Note 10 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 67.0% of our revenue in 1999, 74.2% of our revenue in 1998 and
56.2% of our revenue in 1997. We expect that our key customers will continue to account for a significant portion of our
revenue for 2000 and in the future.
Our gross margin has been affected in the past, and may continue to be affected in the future, by various factors, including, but
not limited to, the following:
o our product mix;
o the position of our products in their respective life cycles;
o competitive pricing strategies;
o the mix of product revenue and development revenue; and
o manufacturing cost efficiencies and inefficiencies.
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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 increasing expenses for research and development
and selling, general and administrative efforts, and the generation of corresponding revenue, if any. Furthermore, during 2000
and thereafter, we intend to continue to increase our investment in research and development, selling, general and administrative
functions and inventory as we expand our operations. We anticipate that the rate of new orders may vary significantly from
month to month. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and
inventory levels could be disproportionately high, and our operating results for that quarter and, potentially future quarters,
would be materially and adversely affected.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data expressed as a percentage of revenue for the periods
indicated:
YEARS ENDED DECEMBER 31,
1999 1998 1997
------ ------ -----
Revenue ................................ 100.0% 100.0% 100.0%
Cost of revenue ........................ 40.5 42.2 36.8
----- ----- -----
Gross profit ........................... 59.5 57.8 63.2
Operating expense:
Research and development .......... 21.0 23.6 50.9
Selling, general and administrative 10.9 15.2 26.9
Merger-related costs .............. 2.9 -- --
Litigation settlement costs ....... 3.3 -- --
----- ----- -----
Income (loss) from operations .......... 21.4 19.0 (14.6)
Interest and other income, net ......... 1.6 1.9 .2
----- ----- -----
Income (loss) before income taxes ...... 23.0 20.9 (14.4)
Provision (benefit) for income taxes ... 6.9 9.5 (.4)
----- ----- -----
Net income (loss) ...................... 16.1% 11.4% (14.0)%
===== ===== =====
YEARS ENDED DECEMBER 31, 1999 AND 1998
Effects of Pooling-of-Interests Transactions. On May 31, 1999 we completed the acquisitions of Maverick Networks,
Epigram, Inc. and Armedia, Inc. On August 31, 1999 we completed the acquisitions of HotHaus Technologies Inc. and
AltoCom, Inc. Each of the acquisitions was accounted for as a pooling of interests. Accordingly, our historical consolidated
financial statements and the discussion and analysis of financial condition and results of operations for prior periods have been
restated to include the operations of these five companies as if they had combined with our company at the beginning of the first
period presented. Included in revenue and net income for 1999 were revenue and net losses aggregating $8.3 million and $8.8
million, respectively, from Maverick, Epigram, Armedia, HotHaus and AltoCom incurred prior to the respective closings of the
transactions.
Revenue. Revenue consists of product revenue generated principally by sales of our semiconductor products and, to a lesser
extent, from sales of software and software support and development revenue generated under development contracts with our
customers. Revenue for 1999 was $518.2 million, an increase of $301.7 million or 139.4% as compared with revenue of
$216.5 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 represents revenue less the cost of revenue. Cost of revenue includes the cost of purchasing the
finished silicon wafers processed by independent foundries, and costs associated with assembly, test and quality assurance for
those products, as well as costs of personnel and equipment associated with manufacturing
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support and contracted development work. Gross profit for 1999 was $308.3 million or 59.5% of revenue, an increase of
$183.3 million or 146.6% from gross profit of $125.1 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. We expect that gross profit as a percentage of revenue will decline in future periods due to higher
anticipated silicon wafer costs and as volume-pricing agreements and competitive pricing strategies continue to take effect. 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 1999 was $108.6 million or 21.0% of revenue, an increase of $57.5 million or
112.5% as compared with research and development expense of $51.1 million or 23.6% 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 decline in research and development expense as a percentage of
revenue reflected a significant increase in revenue during 1999. We expect that research and development expense in absolute
dollars will continue to increase for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of personnel-related
expenses, professional fees, trade show expenses and facilities expenses. Selling, general and administrative expense for 1999
was $56.6 million or 10.9% of revenue, an increase of $23.7 million or 71.8% as compared with selling, general and
administrative expense of $32.9 million or 15.2% 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 a significant increase in revenue during 1999.
We expect that selling, general and administrative expense in absolute dollars will continue to increase for the foreseeable future
to support the planned continued expansion of our operations and periodic changes in our infrastructure to support increased
headcount, acquisition and integration activities, and international operations.
Merger-Related Costs. Merger-related costs consist primarily of transaction costs, such as fees for investment bankers,
attorneys, accountants and other related fees and expenses, and certain restructuring costs related to the disposal of duplicative
facilities and assets and the write-down of unutilized assets. Merger-related costs of approximately $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 the year-earlier period.
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.
Deferred Compensation. We recorded approximately $5.0 million and $7.6 million of deferred compensation in 1999 and
1998, respectively. Of these amounts, approximately $5.0 million in 1999 and $2.3 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. We amortized to expense an aggregate of $3.8
million of deferred compensation in 1999 and $1.8 million in 1998.
Interest and Other Income, Net. Interest and other income, net reflects interest earned on average cash and cash equivalents
and investment balances, less interest on our long-term debt and capital lease obligations. Interest and other income, net for
1999 was $8.4 million as compared with $4.2 million in 1998. This increase was principally due to increased cash balances
available to invest resulting from the consummation of our initial public offering and sale of shares to Cisco Systems, Inc. in
April 1998, a follow-on offering in October 1998, and cash generated by operations.
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Provision for Income Taxes. Our effective tax rate was 30.2% for 1999 and 45.6% 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 Epigram, Armedia and
HotHaus net operating losses incurred during 1997 and 1998. We utilize the liability method of accounting for income taxes as
set forth in Financial Accounting Standards Board ("FASB") Statement No. 109, Accounting for Income Taxes. See Note 4 of
Notes to Consolidated Financial Statements.
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 on 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, 1998 AND 1997
Revenue. Revenue for 1998 was $216.5 million, an increase of $174.1 million or 411.2% as compared with revenue of $42.3
million in 1997. This growth in revenue was derived mainly from increases in volume shipments of our semiconductor products
for the high-speed networking market, digital cable set-top boxes and cable modems.
Gross Profit. Gross profit for 1998 was $125.1 million or 57.8% of revenue, an increase of $98.3 million or 367% from gross
profit of $26.8 million or 63.2% of revenue in 1997. The increase in gross profit was mainly attributable to the significant
increase in the volume of product shipments. The decrease in gross profit as a percentage of revenue was largely driven by
volume pricing agreements on products for the high-speed networking market.
Research and Development Expense. Research and development expense for 1998 was $51.1 million or 23.6% of revenue, an
increase of $29.5 million or 137.1% as compared with research and development expense of $21.5 million or 50.9% of
revenue in 1997. 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 decline in research and development
expense as a percentage of revenue reflected a significant increase in revenue during 1998.
Selling, General and Administrative Expense. Selling, general and administrative expense for 1998 was $32.9 million or 15.2%
of revenue, an increase of $21.5 million or 188.7% as compared with selling, general and administrative expense of $11.4
million or 26.9% of revenue in 1997. The increase in absolute dollars reflected higher personnel-related costs resulting from the
hiring of sales and marketing personnel, senior management and administrative personnel, and increased occupancy, legal and
other professional fees, including increased expenses for litigation. The decline in selling, general and administrative expense as a
percentage of revenue reflected a significant increase in revenue during 1998.
Deferred Compensation. We recorded approximately $7.6 million and $1.2 million of deferred compensation in 1998 and
1997, respectively. Of the 1998 amount, approximately $2.3 million represents 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. We amortized to expense an aggregate of $1.8 million of deferred compensation in
1998 and $66,000 in 1997.
Interest and Other Income, Net. Interest and other income, net reflects interest earned on average cash and cash equivalents
and investment balances, less interest on our long-term debt and capital lease obligations. Interest and other income, net for
1998 was $4.2 million compared to $91,000 in 1997. This increase was principally due to increased cash balances available to
invest resulting from the consummation of our initial public offering and sale of shares to Cisco Systems, Inc. in April 1998, and
a follow-on offering in October 1998.
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Provision (Benefit) for Income Taxes. Our effective tax rate (benefit) was 45.6% in 1998 and (2.6)% in 1997. The federal
statutory tax rates were 35% in 1998 and 34% in 1997. Our effective tax rate was increased in 1998, and our benefit was
reduced in 1997, by our inability to recognize the tax benefit of Epigram, Armedia and HotHaus net operating losses incurred
during both periods. See Note 4 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through a combination of sales of equity securities and cash generated by
operations. At December 31, 1999 we had $305.3 million in working capital, $260.2 million in cash and cash equivalents and
short-term investments, and $9.4 million in long-term investments.
Operating activities provided cash of $66.1 million in 1999. This was primarily the result of net income, the non-cash impact of
depreciation and amortization, growth in accounts payable and other accrued liabilities, partially offset by increases in accounts
receivable, inventory, deferred tax assets and prepaids and other assets. Operating activities used cash of $4.0 million in 1998
and $6.7 million in 1997.
Cash used in operating activities in 1998 was primarily the result of increases in accounts receivable, inventory, deferred tax
assets and prepaids and other assets, partially offset by net income, the non-cash impact of depreciation and amortization and
growth in accounts payable. Cash used in operating activities in 1997 was primarily attributable to a net loss, growth in
accounts receivable, inventory, and a decrease in income taxes payable, which more than offset growth in accounts payable
and the non-cash impact of depreciation and amortization.
Investing activities used cash in the amount of $18.4 million in 1999 for the net purchase of held-to-maturity investments and
$29.2 million for the purchase of capital equipment to support our expanding operations. Investing activities used cash of
$106.2 million in 1998 for the net purchase of held-to-maturity investments and the purchase of capital equipment to support
our expanding operations. Investing activities used cash of $8.1 million in 1997, primarily for the purchase of capital equipment.
Cash provided by financing activities was $83.0 million in 1999, which was primarily the result of $51.7 million in tax benefits
related to stock option exercises and $37.6 million in net proceeds from issuances of common stock. Cash provided by
financing activities in 1998 was $149.7 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, $25.2 million in tax benefits related to stock option exercises and $14.7 million in net
proceeds from other issuances of common stock. Cash provided by financing activities was $38.1 million in 1997, primarily
from the sale of convertible preferred stock and common stock and the establishment of a revolving credit facility and term
loan.
We believe that cash and cash equivalents and investments on hand, together with cash that we generate from our operations,
will be sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need to raise
additional funds to fund our activities beyond the next year 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 commitments totaling approximately $4.0 million as of December 31, 1999 primarily for the purchase of engineering
design tools, computer hardware and information systems infrastructure. During 1999 we spent $29.5 million on capital
equipment to support our expanding operations. We expect that we will spend more than this amount during 2000 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 6 of Notes to Consolidated Financial Statements.
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Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital
requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on
many factors, including:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a
competitive position in the marketplace;
o volume price discounts;
o our business, product, capital expenditure and research and development plans and product and technology roadmaps;
o the levels of inventory and accounts receivable that we maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products; and
o our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to
consummate acquisitions of other businesses, products or technologies.
YEAR 2000 COMPLIANCE
Many existing computer systems, software applications and embedded computer chips, software and firmware in control
devices use only two digits to identify a year in the date field. These systems, applications and control devices need to accept
four digit entries to distinguish 21st Century dates from 20th Century dates. In addition, they may not correctly process "leap
year" dates or may fail to recognize February 29, 2000 as a leap year date as a result of an exception to the calculation of leap
years that will occur in the Year 2000 and otherwise occurs only once every 400 years. As a result, these systems and
applications had to be upgraded to comply with the Year 2000 requirements or risk system failure, miscalculations or other
disruptions to normal business activities.
To date we have not experienced any Year 2000 problems in our computer systems or operations. However, we cannot yet
assess the extent of the Year 2000 impact and cannot be sure that we will not experience unanticipated residual consequences
from latent Year 2000 problems.
We have assessed the impact that the Year 2000 problem may have on our operations and have identified the following four
key areas of our business that may be affected:
Products. We have evaluated each of our current products and believe that they do not contain date sensitive functionality.
However, we cannot determine whether any of our customers' products into which our products are incorporated contain latent
Year 2000 problems because we have little or no control over the design, production and testing of our customers' products.
Internal Infrastructure. We have completed a full review of the systems, transaction processing computer applications and
devices used by us to operate and monitor all major aspects of our business, including financial systems (such as general ledger,
accounts payable and payroll), security systems, customer services, infrastructure, materials requirement planning, master
production scheduling, networks and telecommunications systems and other systems with embedded computer chips, and
believe that our internal infrastructure is Year 2000 compliant.
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However, we may experience latent Year 2000 problems as a result of the interaction between our own systems and products
and the systems and products of third parties.
Third-Party Suppliers. We rely, directly and indirectly, on external systems utilized by our third-party suppliers for the
management and control of fabrication and the assembly and testing of substantially all of our products. We have completed
surveys and on-site visits of the two independent foundries, Taiwan Semiconductor Manufacturing Corporation and Chartered
Semiconductor Manufacturing, that fabricate substantially all of our semiconductor devices in current production. In addition,
we have completed surveys and on-site visits of the three subcontractors, ASAT Ltd., ST Assembly Test Services and Amkor
Technology, that assemble and test substantially all of our current products. These key suppliers have responded to us that their
systems are Year 2000 compliant. However, any failure of these or other third parties to resolve any residual Year 2000
problems in a timely manner could materially disrupt our business. Any such disruption could negatively impact our sales, harm
our relationships with our customers, and materially and adversely affect our business, results of operations and financial
condition.
We also rely on the external systems of other third parties such as creditors, financial institutions, governmental entities and
other suppliers, both domestic and international, to provide us with services and accurate data. Our business could be
materially and adversely affected if any of these third parties experience disruptions in their operations or if an economic crisis
or general widespread problems result from systems that are not Year 2000 compliant.
Facility and Laboratory Related Systems. We have reviewed systems such as heating, sprinklers, elevators, test equipment and
security at our facilities and labs and believe that these systems are Year 2000 compliant. However, these systems may also be
affected by latent Year 2000 problems.
To date, we have incurred approximately $80,000 in expenditures in connection with identifying and addressing specific Year
2000 compliance issues, excluding the cost of routine upgrades to systems, software applications and control devices. We
could incur additional costs in addressing any residual Year 2000 issues, which could have a material and adverse effect on our
business.
We have developed contingency plans to address those Year 2000 issues that may pose a significant risk to our on-going
operations. These plans include buffer inventories for certain products, implementation of manual procedures to compensate for
system deficiencies, and contract IS resources to immediately address issues should they arise. However, any contingency
plans we implement may not succeed or may not be adequate to meet our needs without materially impacting our operations. In
addition, the delays and inefficiencies inherent in conducting operations in an alternative manner could materially and adversely
affect our business, results of operations and financial condition. More specifically, if we or our third party suppliers were to
lose the ability to manufacture, assemble, test and ship product as a result of Year 2000 related issues, we would be exposed
to missing customer shipments and potentially losing revenues and profits.
ACQUISITIONS
On February 29 and March 1, 2000 we completed the acquisitions of Digital Furnace Corporation, BlueSteel Networks, Inc.
and Stellar Semiconductor, Inc. These merger transactions will be accounted for as poolings-of-interests, and we will take a
charge for merger-related expenses in the fiscal year ending December 31, 2000. We do not anticipate that the merger-related
expenses will have a significant impact on our consolidated financial position and results of operations. Our consolidated
financial statements presented in the future will be restated to include the financial position and results of operations of the
acquired companies. See Note 13 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 AND 8-K. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES
NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT
OUR BUSINESS OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY
HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE
MARKET PRICE FOR OUR CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY FAIL
TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD
CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to
quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the
expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to
a number of factors, including the following:
o the volume of our product sales and pricing concessions on volume sales;
o the timing, rescheduling or cancellation of significant customer orders;
o the gain or loss of a key customer;
o the qualification, availability and pricing of competing products and technologies and the resulting effect on sales and pricing of
our products;
o silicon wafer pricing and the availability of foundry and assembly capacity and raw materials;
o our ability to specify, develop, complete, introduce, market and transition to volume production new products and
technologies in a timely manner;
o the timing of customer-industry qualification and certification of our products and the risks of non-qualification or
non-certification;
o the rate at which our present and future customers and end users adopt Broadcom technologies in our target markets;
o the rate of adoption and acceptance of new industry standards in our target markets;
o the effects of new and emerging technologies;
o intellectual property disputes and customer indemnification claims;
o 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;
o the effectiveness of our product cost reduction efforts;
o fluctuations in our manufacturing yields and other problems or delays in the fabrication, assembly, testing or delivery of our
products;
o the risks of producing products with new suppliers and at new fabrication and assembly facilities;
o risks and uncertainties associated with our international operations;
o problems or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher
levels of design integration;
o our ability to retain and hire key executives, technical personnel and other employees in the numbers, with the capabilities and
at the compensation levels that we need to implement our business and product plans;
o changes in our product or customer mix;
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o the quality of our products and any remediation costs;
o the effects of natural disasters and other events beyond our control;
o the level of orders received that we can ship in a fiscal quarter;
o potential business disruptions, claims, expenses and other difficulties resulting from "Year 2000" problems in computer-based
systems used by us, our suppliers or our customers;
o economic and market conditions in the semiconductor industry and the broadband communications markets; and
o general economic and market conditions.
We intend to continue to increase our operating expenses in 2000 and 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 General Instrument, 3Com, and Cisco including sales to their respective manufacturing subcontractors, accounted for
approximately 27.5%, 18.1% and 10.6%, respectively, of our revenue in the year ended December 31, 1999. Sales to our five
largest customers, including sales to their respective manufacturing subcontractors, represented approximately 67.0% of our
revenue in 1999, 74.2% of our revenue in 1998 and 56.2% of our revenue in 1997. We expect that our key customers will
continue to account for a substantial portion of our revenues for 1999 and in the future. Accordingly, our future operating
results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to
these customers in significant quantities.
We may not be able to maintain or increase sales to certain of our key customers for a variety of reasons, including the
following:
o Most of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or
no penalty.
o Our agreements with our customers typically do not require them to purchase a minimum amount of our products.
o Many of our customers have pre-existing relationships with our current or potential competitors that may affect their decision
to purchase our products.
o Our customers face intense competition from other manufacturers that do not use our products.
o Some of our customers offer or may offer products that compete with our products.
o 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
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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 office networks, home networking, direct broadcast satellite and
terrestrial digital satellite, and digital subscriber lines. This competition has resulted and may continue to result in declining
average selling prices for our products. 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. 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 at lower costs than our technologies. Increased competition has in the past
and is likely to continue to result in price reductions, reduced gross margins and loss of market share. We cannot assure you
that we will be able to continue to compete successfully or that competitive pressures will not materially and adversely affect
our business, financial condition and results of operations.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO MAKE SIGNIFICANT CAPITAL INFUSIONS, BE
DILUTIVE TO OUR EXISTING SHAREHOLDERS, AND RESULT IN DIFFICULTIES IN ASSIMILATING AND
INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION
SYSTEMS OF ACQUIRED COMPANIES.
A key element of our business strategy involves expansion through the acquisition of businesses, products or technologies that
would allow us to complement our existing product offerings, expand our market coverage or enhance our technological
capabilities. Since January 1999 we have acquired Maverick Networks, Epigram, Inc., Armedia, Inc., HotHaus Technologies
Inc., AltoCom, Inc., Digital Furnace Corporation, BlueSteel Networks, Inc. and Stellar Semiconductor, Inc. We plan to
continue to pursue acquisition opportunities in 2000 and in the future. Acquisitions may require significant capital infusions,
typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies,
products and information systems of the acquired company. We may also encounter delays in the timing and successful
completion of the acquired company's technology and product development 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 write-offs, increased debt or contingent liabilities, substantial
depreciation or deferred compensation charges or the amortization of expenses related to goodwill and other intangible assets.
We may seek to account for acquisitions under the pooling-of-interests accounting method, but that method may not be
available. Any of these events could cause the price of our Class A common stock to decline. Furthermore, if we issue equity
or convertible debt securities in connection with an acquisition, as in the case of our
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recent acquisitions, the issuance may be dilutive to our existing shareholders. In addition, the equity or debt securities that we
may issue could have rights, preferences or privileges senior to those of the holders of our common stock. Thus, for example,
as a consequence of the pooling-of-interest rules, the securities issued in each of the eight acquisitions described above were
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. Even if we do find suitable acquisition opportunities, we may not be able to consummate the
acquisitions on commercially acceptable terms. Moreover, due to our limited acquisition experience, it may be difficult for 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 high-speed
office network, digital cable set-top box and cable modem markets. These markets are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and short product life cycles. In addition, these
markets continue to undergo rapid growth and consolidation. A significant slowdown in any of these markets or other
broadband communications markets could materially and adversely affect our business, financial condition and results of
operations. Our success will also depend on the ability of our customers to develop new products and enhance existing
products for the broadband communications markets and to introduce and promote those products 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. Our ability to adapt to these changes and to anticipate future standards, and the rate of
adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and
prospects for growth. We have in the past invested substantial resources in emerging technologies, such as 100Base-T4 for
high-speed networking, 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:
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o accurately predict market requirements and evolving industry standards;
o accurately define new products;
o timely complete and introduce new product designs;
o timely qualify and obtain industry interoperability certification of our products and our customers' products into which our
products will be incorporated;
o obtain sufficient foundry capacity;
o achieve high manufacturing yields; and
o gain market acceptance of our products and our customers' products.
If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, our business,
financial condition and results of operations would be materially and adversely affected.
Our new products generally are incorporated into our customers' products at the design stage. We have often incurred
significant expenditures on the development of a new product without any assurance that an equipment manufacturer will select
our product for design into its own product. The value of our products largely depends on the commercial success of our
customers' products and on the extent to which those products accommodate components manufactured by our competitors.
We cannot assure you that we will continue to achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.
WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT FOUNDRY CAPACITY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We do not own or operate a fabrication facility. Two outside foundries, Taiwan Semiconductor Manufacturing Corporation, or
TSMC, in Taiwan and Chartered Semiconductor Manufacturing, or Chartered, in Singapore, currently manufacture
substantially all of our semiconductor devices in current production. In September 1999 TSMC's principal facility was affected
by a significant earthquake in Taiwan. As a consequence of this earthquake, TSMC suffered power outages and equipment
damage that impaired TSMC's wafer deliveries and, together with strong demand, could result in wafer shortages and higher
wafer pricing industrywide.
Because we rely on outside foundries with limited capacity, we face several significant risks, including:
o a lack of ensured wafer supply and potential wafer shortages and higher wafer prices;
o limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and
o the unavailability of or potential delays in obtaining access to key process technologies.
In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process. Although we
work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries have from time to time
experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the
installation and start-up of new process technologies.
The ability of each foundry to provide us with semiconductor devices is limited by its available capacity. Although we have
entered into contractual commitments to supply specified levels of products to certain of our customers, we do not have a
long-term volume purchase agreement or a guaranteed level of production capacity with either TSMC or Chartered. Foundry
capacity may not be available when we need it or at reasonable prices. Availability of foundry capacity has recently been
reduced due to strong demand. We place our orders on the basis of our customers' purchase orders, and TSMC and
Chartered can allocate capacity to the production of other companies' products and reduce deliveries to us on short notice. It is
possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with TSMC
or Chartered, may induce our foundries to reallocate capacity to them. Such a reallocation could impair our ability to
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secure the supply of components that we need. Although we primarily use two independent foundries, most of our components
are not manufactured at both foundries at any given time and some of our products may be designed to be manufactured at only
one. Accordingly, if one of our foundries is unable to provide us with components as needed, we could experience significant
delays in securing sufficient supplies of those components. Any of these delays would likely materially and adversely affect our
business, financial condition and results of operations. In addition, if either TSMC or Chartered experiences financial difficulties,
if either foundry suffers any damage to its facilities or in the event of any other disruption of foundry capacity, we may not be
able to qualify an alternative foundry in a timely manner. Even our current foundries would need to have new manufacturing
processes qualified if there is a disruption in an existing process. If we choose to use a new foundry or process, it would
typically take us several months to qualify the new foundry or process before we can begin shipping products from it. If we
cannot accomplish this qualification in a timely manner, we may still experience a significant interruption in supply of the affected
products. We cannot assure you that any of our existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields. Furthermore, our foundries may not be able to deliver enough semiconductor devices to us on
a timely basis, or at reasonable prices.
Maverick and Broadcom HomeNetworking, Inc., formerly known as Epigram, Inc., have established relationships with
foundries other than TSMC and Chartered, and we are using these other foundries to produce the initial products of Maverick
and Broadcom HomeNetworking. 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 599 employees in December 1998 to 1,147 employees as of March 1, 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 may 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.
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THE LOSS OF ANY OF THE THREE 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.
Three third-party subcontractors, ASAT Ltd. in Hong Kong, ST Assembly Test Services, STATS, in Singapore, and Amkor
Technology in the Philippines and Taiwan, assemble and test almost all of our current products. Because we rely on third-party
subcontractors to assemble and test our products, we cannot directly control our product delivery schedules and quality
assurance and control. This lack of control has in the past, and could in the future, result in product shortages or quality
assurance problems that could increase our manufacturing, assembly or testing costs. We do not have long-term agreements
with ASAT, STATS or Amkor. We typically procure services from these suppliers on a per order basis. If either ASAT,
STATS or Amkor experiences capacity constraints or financial difficulties, if any subcontractor suffers any damage to its
facilities or in the event of any other disruption of assembly and testing capacity, we may not be able to obtain alternative
assembly and testing services in a timely manner. Due to the amount of time that it usually takes us to qualify assemblers and
testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers
for our components. Any problems that we may encounter with the delivery, quality or cost of our products could materially
and adversely affect our business, financial condition or results of operations.
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 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 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 17.2% of our revenue in each of the years ended December 31, 1999 and 1998 was
derived from sales to independent customers outside the United States. We also frequently ship products to our domestic
customers' international manufacturing divisions and subcontractors. In 1999 we established an international distribution center
in Singapore and a design center in The Netherlands. As a result of our acquisition of HotHaus in August 1999, we now
undertake software design, development and marketing activities in Canada. Furthermore, as a result of our acquisition of
Armedia in May 1999, we also undertake design and development activities in India. In the future, we intend to continue to
expand these international business activities and also to open other design and operational centers abroad. International
operations are subject to many inherent risks, including:
o political, social and economic instability;
o trade restrictions;
o the imposition of governmental controls;
o exposure to different legal standards, particularly with respect to intellectual property;
o burdens of complying with a variety of foreign laws;
o import and export license requirements and restrictions of the United States and each other country in which we operate;
o unexpected changes in regulatory requirements;
o foreign technical standards;
o changes in tariffs;
o difficulties in staffing and managing international operations;
o fluctuations in currency exchange rates;
o difficulties in collecting receivables from foreign entities; and
o potentially adverse tax consequences.
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VARIOUS EXPORT LICENSING REQUIREMENTS, THE SEASONALITY OF INTERNATIONAL SALES OR AN
INCREASE IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO FOREIGN CURRENCIES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS OR REQUIRE US TO MODIFY OUR CURRENT
BUSINESS PRACTICES SIGNIFICANTLY.
Various government export regulations apply to the encryption or other features contained in some of our products. We have
applied for and received several export licenses under these regulations, but we cannot assure you that we will obtain any
licenses for which we have currently applied or any licenses that we may apply for in the future. If we do not receive the
required licenses, we may be unable to manufacture the affected products at our foreign foundries or to ship these products to
certain customers located outside the United States. Moreover, the seasonality of international sales and economic conditions in
our primary overseas markets may negatively impact the demand for our products abroad. All of our international sales to date
have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies
could make our products less competitive in international markets. Any one or more of the foregoing factors could materially
and adversely affect our business, financial condition or results of operations or require us to modify our current business
practices significantly. We anticipate that these factors will impact our business to a greater degree as we further expand our
international business activities.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD OF
BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
In the past, we have relied on our strategic relationships with certain customers who are technology leaders in our target
markets. We intend to pursue and continue to form these strategic relationships in the future. These relationships often require
us to develop new products that typically involve significant technological challenges. Our partners frequently 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 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 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 continually evaluate the
benefits, on a product-by-product basis, of migrating to smaller geometry process technologies in order to reduce our costs,
and we have begun shifting 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.
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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
11 issued United States patents and have filed over 250 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 under those agreements, including product supply obligations, and do not
correct this failure within a specified time period. Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or disclose their intellectual property without their
authorization. We cannot assure you that our efforts to prevent the misappropriation or infringement of our intellectual property
or the intellectual property of our customers will succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others,
including our customers. This litigation may be very expensive, divert management's attention and materially and adversely affect
our business, financial condition and results of operations.
INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM THIRD
PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.
Companies in the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to
time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated
or misused other parties' proprietary rights. In March 2000 Intel Corporation and its subsidiary Level One Communications,
Inc. filed a lawsuit against us alleging misappropriation of trade secrets, unfair competition and tortious interference with existing
contractual relations in connection with our recent 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. Our subsidiary, AltoCom, is the defendant in patent litigation
brought by Motorola, Inc. relating to software modem technology. 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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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 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. These charges could materially and adversely affect our operating results.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND IN
UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF
NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH 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, we cannot assure you that our new products will not contain defects or
bugs. If any of these problems are not found until after we have commenced commercial production of a new product, we may
be required to incur additional development costs and product recall, repair or replacement costs. These problems may also
result in claims
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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 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, the
semiconductor industry has experienced significant economic downturns, characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. This industry also periodically experiences increased demand
and production capacity constraints. Accordingly, our quarterly results may vary significantly as a result of the general
conditions in the semiconductor industry.
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF ONE OF THE TWO INDEPENDENT FOUNDRIES
UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS ARE
LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities, including our principal executive offices, are located near major earthquake fault lines. If there is a
major earthquake or any other natural disaster in a region where one of our facilities is located, our business could be materially
and adversely affected. In addition, TSMC, one of the two outside foundries upon which we rely to manufacture substantially
all of our semiconductor devices, is located in Taiwan, a country that is also subject to earthquakes. Any earthquake or other
natural disaster in Taiwan could materially 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 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 March 3, 2000 our directors and executive officers beneficially owned approximately 34.7% of our outstanding common
stock and 67.1% of the total voting control held by our shareholders. In particular, as of March 3, 2000 our two founders, Dr.
Henry T. Nicholas III and Dr. Henry Samueli, beneficially owned a total of approximately 32.9% of our outstanding common
stock and 64.3% 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
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of any significant corporate transaction, including a merger, consolidation or sale of substantially all of our assets. In addition,
these insiders currently also control the management of our business. Because of their significant stock ownership, we will not
be able to engage in certain transactions without the approval of these shareholders. These transactions include proxy contests,
mergers, tender offers, open market purchase programs or other purchases of our Class A common stock that could give our
shareholders the opportunity to receive a higher price for their shares than the prevailing market price at the time of 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 our initial public offering in April 1998, our Class A common stock has traded at
prices as low as $11.75 and as high as $253.00 per share. These fluctuations have occurred and may continue to occur in
response to various factors, many of which we cannot control, including:
o quarter-to-quarter variations in our operating results;
o announcements of technological innovations or new products by our competitors, customers or us;
o general conditions in the semiconductor industry and telecommunications and data communications equipment markets;
o changes in earnings estimates or investment recommendations by analysts;
o changes in investor perceptions; or
o changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.
In addition, the market prices of securities of Internet-related and other high technology companies have been especially
volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons
frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your
shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market
price of their securities have been the subject of securities class action litigation. If we were the object of a securities class
action litigation, it could result in substantial losses and divert management's attention and resources from other matters.
OUR PRODUCTS AND INTERNAL INFORMATION SYSTEMS AND THE PRODUCTS AND SYSTEMS OF OUR
CUSTOMERS AND THE THIRD PARTY SUPPLIERS WHO FABRICATE, TEST AND ASSEMBLE OUR
PRODUCTS MAY BE NEGATIVELY IMPACTED BY YEAR 2000 COMPLIANCE PROBLEMS.
Many existing computer systems, software applications and embedded computer chips, software and firmware in control
devices use only two digits to identify a year in the date field. These systems, applications and control devices need to accept
four digit entries to distinguish 21st Century dates from 20th Century dates. In addition, they may not correctly process "leap
year" dates or may fail to recognize February 29, 2000 as a leap year date as a result of an exception to the calculation of leap
years that will occur in the Year 2000 and otherwise occurs only once every 400 years. As a result, these systems and
applications had to be upgraded to comply with the Year 2000 requirements or risk system failure, miscalculations or other
disruptions to normal business activities.
We have evaluated our Year 2000 readiness, both in terms of the compliance of our products and the compliance of our
information systems and applications which monitor all aspects of our business, including financial systems, customer services,
marketing information, infrastructure and telecommunications equipment. We believe that our products and internal information
systems are Year 2000 compliant. To date we have not experienced any Year 2000 problems in our computer systems or
operations. However, we cannot yet assess the extent of the Year 2000 impact and cannot be sure that we will not experience
unanticipated residual consequences of the change in centuries due to the interaction between our own systems and products
and the systems and products of third parties. We believe our greatest exposure to residual Year 2000 risks relates to the
readiness of the third party suppliers who fabricate, assemble and test our products and of our customers, who incorporate our
products
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into their own products. Any failure of these third parties to resolve any residual Year 2000 problems in a timely manner could
materially disrupt our business and affect the marketability of our products. Any such disruption could negatively impact our
sales, harm our relationships with our customers, and materially and adversely affect our business, results of operations and
financial condition.
We also rely on the external systems of other third parties such as creditors, financial organizations, governmental entities and
other suppliers, both domestic and international, to provide us with services and accurate data. Our business could be
materially and adversely affected if any of these third parties experience disruptions in their operations or if an economic crisis
or general widespread problems result from systems that are not Year 2000 compliant.
Our contingency plans to address these issues may not be adequate to meet our needs without disrupting our business or
without causing delays and inefficiencies inherent in conducting operations in an alternative manner. If we fail to adequately
address any Year 2000 problems that do emerge, our business, financial condition and results of operations may be materially
and adversely affected.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES OR BY BORROWING MONEY, AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that the cash, cash equivalents and investments on hand and the cash we expect to generate from operations will be
sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need to raise
additional funds to fund our activities beyond the next year. We could raise these funds by selling more stock to the public or to
selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell
additional equity securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on
favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to
obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain
technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the
ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of the holders of our common stock.
It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we
will need in the future will depend on many factors, including:
o the market acceptance of our products;
o the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive
position in the marketplace;
o volume price discounts;
o our business, product, capital expenditure and research and development plans and product and technology roadmaps;
o the levels of inventory and accounts receivable that we maintain;
o capital improvements to new and existing facilities;
o technological advances;
o our competitors' response to our products; and
o our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to
consummate acquisitions of other businesses, products or technologies.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even
if the acquisition would be beneficial to our shareholders. In addition, we have in the past issued and will in the future issue
shares of Class B common stock 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
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votes for each share held on matters that we submit to a shareholder vote (as compared with one vote per share in the case of
our publicly-held Class A common stock). Our Board of Directors also has the authority to fix the rights and preferences of
shares of our preferred stock and to issue 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 do not use derivative financial instruments in our non-trading investment portfolio. We place our investments in instruments
that meet high credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit
exposure to any one issue, issuer or type of instrument. We do not expect any material loss with respect to our investment
portfolio.
The table below provides information about our non-trading investment portfolio. For investment securities, the table presents
principal cash flows and related weighted average fixed interest rates by expected maturity dates. Our investment policy
requires that all investments mature in three years or less, with a weighted average maturity of no longer than one year.
Principal (notional) amounts by expected maturity (at December 31, 1999):
FAIR VALUE
2000 2001 TOTAL 1999
-------- ------ -------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash and cash equivalents............ $ 22,514 $ -- $ 22,514 $ 22,517
Weighted average rate............. 5.93% -- 5.93%
Investments ......................... $ 86,215 $9,351 $ 95,566 $ 95,293
Weighted average rate............. 4.59% 3.33% 4.47%
Total portfolio ..................... $108,729 $9,351 $118,080 $117,810
Weighted average rate............. 4.87% 3.33% 4.75%
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included in Part IV, Item 14 of this Form 10-K and
are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption "Election of Directors," appearing in the Proxy Statement, is
incorporated herein by reference.
(b) Identification of Executive Officers. The information under the caption "Executive Officers and Key Employees," appearing
in the Proxy Statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information under the caption "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, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
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2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of the Company is filed as part of this Form 10-K. All other schedules have been
omitted because they are not applicable, not required, or the information is included in the consolidated financial statements or
notes thereto.
Page
----
Report of Independent Auditors on Financial Statement Schedule S-1
Schedule II - Consolidated Valuation and Qualifying Accounts S-2
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.
On November 24, 1999 the Company filed a report on Form 8-K/A to provide restated historical consolidated financial
statements to reflect the pooled operations of HotHaus and AltoCom.
42
46
GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization.............. Receiver technique for compensating for distortions in a transmission media.
ADSL............................... Asymmetric Digital Subscriber Line. Twisted-pair modem technology that
achieves data rates up to 8 Mbps downstream to the subscriber and 1 Mbps
upstream to the network at distances up to 18,000 feet.
Bandwidth.......................... A range of signal frequencies, measured in cycles per second or Hertz (Hz).
Also refers to the speed at which data is transmitted, measured in bits per
second (bps).
Broadband Communications........... Data transmission at speeds of greater than 1.5 Mbps.
CMOS............................... Complementary Metal Oxide Semiconductor. Technology used to manufacture
silicon integrated circuits.
DBS................................ Digital Broadcast Satellite. A broadband communications technology that
broadcasts digital television programming from satellites directly to dish
antennas.
DOCSIS............................. Data Over Cable Service Interface Specifications. Industry specification that
defines the technical equipment for high-speed cable modem and headend
equipment.
DSP................................ Digital Signal Processing.
Ethernet (10Base-T)................ Networking protocol widely used in LANs for connecting devices by means of
copper twisted pair wiring at speeds of 10 Mbps.
Fast Ethernet (100Base-T).......... An extension to the 10Base-T Ethernet network access method which operates at
100 Mbps.
FEC................................ Forward Error Correction. A receiver technique for correcting errors in the
received data.
GHz................................ GigaHertz. One billion cycles per second.
Gigabit Ethernet (1000Base-T)...... An extension to the 100Base-T Ethernet network access method which operates
at 1,000 Mbps or equivalently 1 Gbps.
Headend............................ The central distribution point in a cable television system. Typically serves
tens to hundreds of thousands of homes.
HFC................................ Hybrid Fiber Coax. Upgraded cable plant which uses a combination of fiber
optic cable in the backbone and coaxial cable in the subscriber feeder plant.
IC................................. Integrated Circuit.
kbps............................... Kilobits per second.
LAN................................ Local Area Network. A private data communications network linking a variety
of data devices such as computers and printers within an office or home
environment.
LMDS............................... Local Multipoint Distribution System. A broadband wireless communications
network that uses microwave frequencies above 10 GHz to transmit video and
data to residences over a cellular-like network at distances under a few
miles.
43
47
MAC................................ Media Access Control. Protocol for controlling the upstream and downstream
traffic flow in a local or wide area network.
Mbps............................... Megabits per second. Million bits per second.
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.
QPSK............................... Quadrature Phase Shift Keying. A digital technique which is widely employed
in direct broadcast satellite transmission systems.
RISC............................... Reduced Instruction Set Computer.
RF................................. Radio Frequency.
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.
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
technology spanning data rates from 128 kbps to 52 Mbps depending on the
distance between the central office and subscriber.
44
48
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, 1999 and
1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Broadcom Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Orange County, California
January 18, 2000, except for
Note 13, as to which the
date is March 8, 2000
F-1
49
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 173,966 $ 72,511
Short-term investments ................................. 86,215 34,344
Accounts receivable (net of allowances for doubtful
accounts and sales returns and allowances of
$7,673 in 1999 and $5,167 in 1998) .................. 91,457 42,279
Inventory .............................................. 19,177 7,325
Deferred taxes ......................................... 8,380 6,184
Income taxes receivable ................................ -- 3,069
Prepaid expenses ....................................... 12,132 6,932
--------- ---------
Total current assets ........................... 391,327 172,644
Property and equipment, net .............................. 47,099 31,600
Long-term investments .................................... 9,351 42,826
Deferred taxes ........................................... 127,740 6,721
Other assets ............................................. 9,792 6,790
--------- ---------
Total assets ................................... $ 585,309 $ 260,581
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................. $ 44,860 $ 22,374
Wages and related benefits ............................. 14,571 3,135
Accrued liabilities .................................... 26,123 8,217
Current portion of long-term debt ...................... 508 7,252
--------- ---------
Total current liabilities ...................... 86,062 40,978
Long-term debt, less current portion ..................... 548 4,100
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.0001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none in 1999 and 1998 -- --
Class A common stock, $.0001 par value:
Authorized shares--400,000,000
Issued and outstanding shares-- 110,402,852 in 1999
and 53,982,780 in 1998 ............................. 11 6
Class B common stock, $.0001 par value:
Authorized shares--200,000,000
Issued and outstanding shares-- 98,861,666 in 1999
and 143,855,302 in 1998 ............................. 10 14
Additional paid-in capital ............................. 413,218 206,912
Notes receivable from employees ........................ (1,543) (2,743)
Deferred compensation .................................. (8,089) (6,926)
Retained earnings ...................................... 95,092 18,240
--------- ---------
Total shareholders' equity ..................... 498,699 215,503
--------- ---------
Total liabilities and shareholders' equity ..... $ 585,309 $ 260,581
========= =========
See accompanying notes.
F-2
50
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
-------- -------- ---------
Revenue ............................. $518,183 $216,456 $ 42,341
Cost of revenue ..................... 209,837 91,403 15,563
-------- -------- ---------
Gross profit ........................ 308,346 125,053 26,778
Operating expense:
Research and development .......... 108,579 51,090 21,545
Selling, general and administrative 56,601 32,939 11,410
Merger-related costs .............. 15,210 -- --
Litigation settlement costs ....... 17,036 -- --
-------- -------- ---------
Income (loss) from operations ....... 110,920 41,024 (6,177)
Interest and other income, net ...... 8,402 4,154 91
-------- -------- ---------
Income (loss) before income taxes ... 119,322 45,178 (6,086)
Provision (benefit) for income taxes 36,035 20,586 (157)
-------- -------- ---------
Net income (loss) ................... $ 83,287 $ 24,592 $ (5,929)
======== ======== =========
Basic earnings (loss) per share ..... $ .42 $ .15 $ (.05)
======== ======== =========
Diluted earnings (loss) per share ... $ .36 $ .12 $ (.05)
======== ======== =========
Weighted average shares (basic) ..... 198,512 168,885 116,341
======== ======== =========
Weighted average shares (diluted) ... 232,285 204,631 116,341
======== ======== =========
See accompanying notes.
F-3
51
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- ----------- ------ ----------
Balance at December 31, 1996 .... 2,093,839 $ 6,084 124,963,788 $12 $ 8,396
Shares issued in business
combinations ................. -- -- 6,968,036 1 10,660
Issuance of preferred stock,
net of issuance costs
of $36 ..................... 1,500,000 22,689 -- -- --
Repurchases of preferred stock (26,000) (156) -- -- --
Issuance of Class B common
Stock ...................... -- -- 1,140,000 -- 1,050
Exercise of stock options,
net of repurchases .......... -- -- 7,251,168 1 3,568
Tax benefit from exercise
of stock options ............ -- -- -- -- 191
Deferred compensation
related to grant of stock
options ..................... -- -- -- -- 1,156
Amortization of deferred
Compensation ............... -- -- -- -- --
Net loss ...................... -- -- -- -- --
---------- -------- ----------- --- --------
Balance at December 31, 1997 .... 3,567,839 28,617 140,322,992 14 25,021
Shares issued in business
combinations ................. -- -- 3,390,358 -- 7,158
Conversion of preferred
stock into Class B common
stock ...................... (3,567,839) (28,617) 33,814,068 3 28,614
Issuance of Class A common
stock in initial public
offering, net of offering
costs of $1,628 ............ -- -- 14,480,000 2 79,168
Issuance of Class A common
stock in follow-on
offering, net of offering
costs of $584 .............. -- -- 1,880,000 -- 30,548
Exercise of stock options,
net of Repurchases .......... -- -- 3,612,408 1 1,885
Employee stock purchase plan .. -- -- 338,256 -- 1,725
Repayment of notes receivable
from employees .............. -- -- -- -- --
Tax benefit from exercise
of stock options and
stock purchase .............. -- -- -- -- 25,171
Deferred compensation
related to grant of
stock options ............... -- -- -- -- 7,622
Amortization of deferred
compensation ............... -- -- -- -- --
Net income .................... -- -- -- -- --
---------- -------- ----------- --- --------
Balance at December 31, 1998 .... -- -- 197,838,082 20 206,912
Shares issued in business
combinations ................. -- -- 1,743,676 -- 18,179
Exercise of stock options,
net of repurchases .......... -- -- 8,945,672 1 24,015
Employee stock purchase plan .. -- -- 737,088 -- 5,016
Repayment of notes receivable
from employees ............. -- -- -- -- --
Tax benefit from exercise
of stock options and stock
purchase plan ............... -- -- -- -- 154,103
Deferred compensation related
related to grant of stock
options ..................... -- -- -- -- 4,993
Amortization of deferred
compensation ............... -- -- -- -- --
Net income .................... -- -- -- -- --
---------- -------- ----------- --- --------
Balance at December 31, 1999 .... -- $ -- 209,264,518 $21 $413,218
========== ======== =========== === ========
NOTES
RECEIVABLE TOTAL
FROM DEFERRED RETAINED SHAREHOLDERS'
EMPLOYEES COMPENSATION EARNINGS EQUITY
---------- ------------ -------- -------------
Balance at December 31, 1996 .... $ (748) $ -- $ 1,739 $ 15,483
Shares issued in business
combinations ................. -- -- -- 10,661
Issuance of preferred stock,
net of issuance costs
of $36 ..................... -- -- -- 22,689
Repurchases of preferred stock -- -- -- (156)
Issuance of Class B common
Stock ...................... -- -- -- 1,050
Exercise of stock options,
net of repurchases .......... (2,614) -- -- 955
Tax benefit from exercise
of stock options ............ -- -- -- 191
Deferred compensation
related to grant of stock
options ..................... -- (1,156) -- --
Amortization of deferred
Compensation ............... -- 66 -- 66
Net loss ...................... -- -- (5,929) (5,929)
-------- ------- -------- ---------
Balance at December 31, 1997 .... (3,362) (1,090) (4,190) 45,010
Shares issued in business
combinations ................. -- -- (2,162) 4,996
Conversion of preferred
stock into Class B common
stock ...................... -- -- -- --
Issuance of Class A common
stock in initial public
offering, net of offering
costs of $1,628 ............ -- -- -- 79,170
Issuance of Class A common
stock in follow-on
offering, net of offering
costs of $584 .............. -- -- -- 30,548
Exercise of stock options,
net of Repurchases .......... (191) -- -- 1,695
Employee stock purchase plan .. -- -- -- 1,725
Repayment of notes receivable
from employees .............. 810 -- -- 810
Tax benefit from exercise
of stock options and
stock purchase .............. -- -- -- 25,171
Deferred compensation
related to grant of
stock options ............... -- (7,622) -- --
Amortization of deferred
compensation ............... -- 1,786 -- 1,786
Net income .................... -- -- 24,592 24,592
------- ------- -------- ---------
Balance at December 31, 1998 .... (2,743) (6,926) 18,240 215,503
Shares issued in business
combinations ................. -- -- (6,435) 11,744
Exercise of stock options,
net of repurchases .......... -- -- -- 24,016
Employee stock purchase plan .. -- -- -- 5,016
Repayment of notes receivable
from employees ............. 1,200 -- -- 1,200
Tax benefit from exercise
of stock options and stock
purchase plan ............... -- -- -- 154,103
Deferred compensation related
related to grant of stock
options ..................... -- (4,993) -- --
Amortization of deferred
compensation ............... -- 3,830 -- 3,830
Net income .................... -- -- 83,287 83,287
------- ------- -------- ---------
Balance at December 31, 1999 .... $(1,543) $(8,089) $ 95,092 $ 498,699
======= ======= ======== =========
See accompanying notes.
F-4
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
--------- --------- --------
OPERATING ACTIVITIES
Net income (loss) ................................... $ 83,287 $ 24,592 $ (5,929)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .................. 14,042 9,143 3,364
Amortization of deferred compensation .......... 3,830 1,786 66
Deferred taxes ................................. (20,765) (11,679) (707)
Change in operating assets and liabilities:
Accounts receivable .......................... (49,178) (31,614) (6,789)
Inventory .................................... (11,852) (4,613) (1,805)
Income taxes ................................. 9,248 (2,636) (2,245)
Prepaid expenses and other assets ............ (8,202) (11,571) (1,011)
Accounts payable ............................. 22,486 14,474 5,578
Other accrued liabilities .................... 23,163 8,115 2,755
--------- --------- --------
Net cash provided by (used in) operating activities . 66,059 (4,003) (6,723)
INVESTING ACTIVITIES
Purchases of property and equipment, net ............ (29,244) (29,079) (8,100)
Proceeds from sale of investments ................... -- 8,808 --
Purchases of investments ............................ (18,396) (85,978) --
--------- --------- --------
Net cash used in investing activities ............... (47,640) (106,249) (8,100)
FINANCING ACTIVITIES
Proceeds from long-term obligations ................. -- 4,535 3,779
Payments on long-term obligations ................... (6,797) (4,873) (647)
Payments on capital lease obligations ............... (654) (329) (448)
Proceeds from issuance of preferred stock ........... -- -- 22,689
Payments on repurchase of preferred stock ........... -- -- (156)
Net proceeds from initial public offering of
Class A common stock .............................. -- 79,170 --
Net proceeds from follow-on offering of
Class A common stock .............................. -- 30,548 --
Net proceeds from issuance of common stock .......... 37,634 14,700 12,666
Tax benefit from exercise of stock options and stock
purchase plan ..................................... 51,653 25,171 191
Proceeds from repayment of notes receivable from
employees ......................................... 1,200 810 --
--------- --------- --------
Net cash provided by financing activities ........... 83,036 149,732 38,074
--------- --------- --------
Increase in cash and cash equivalents ............... 101,455 39,480 23,251
Cash and cash equivalents at beginning of year ...... 72,511 33,031 9,780
--------- --------- --------
Cash and cash equivalents at end of year ............ $ 173,966 $ 72,511 $ 33,031
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ....................................... $ 420 $ 493 $ 274
========= ========= ========
Income taxes paid ................................... $ 2,397 $ 9,890 $ 1,850
========= ========= ========
See accompanying notes.
F-5
53
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
digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated
circuits permit the cost effective delivery of high-speed, high-bandwidth networking using existing communications
infrastructures that were not originally designed for the transmission of broadband digital content. Using proprietary
technologies and advanced design methodologies, the Company designs, develops and supplies integrated circuits for a number
of the most significant broadband communications markets, including the markets for digital cable set-top boxes, cable
modems, high-speed office networks, home networking, direct broadcast satellite and terrestrial digital broadcast, and digital
subscriber lines.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
In 1999 the Company established an international distribution center in Singapore and a design center in the Netherlands and,
as a result of acquisitions, has software design, development and marketing activities in Canada and design and development
activities in India. At December 31, 1999 approximately $73.0 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 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
Revenue from product sales is recognized at the time of shipment. Provision is concurrently made for estimated product returns.
Development revenue is recognized when earned. Revenue from licensed software is recognized at the time of shipment,
provided the Company has vendor-specific objective evidence of the fair value of each element of the software offering.
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.
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 been minimal and within management's
expectations.
The Company invests its excess cash in deposits with major banks, in U.S. Treasury and U.S. agency obligations and in debt
securities of corporations with strong credit ratings and in a variety of industries. It is the Company's policy to invest in
instruments that have a final maturity of no longer than three years, with a portfolio weighted average maturity of not more than
one year.
F-6
54
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 securities under FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Management determines the appropriate classification of such securities at the time
of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of
premiums and discounts to maturity and such amortization is included in interest income. Realized gains and losses and declines
in value judged to be other than temporary are determined based on the specific identification method and are reported in the
statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market and consists of the following:
DECEMBER 31,
1999 1998
------- ------
(IN THOUSANDS)
Work in process...................... $11,878 $3,546
Finished goods....................... 7,299 3,779
------- ------
$19,177 $7,325
======= ======
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,
1999 1998
--------- --------
(IN THOUSANDS)
Leasehold improvements.................................. $ 5,982 $ 744
Office furniture and equipment.......................... 6,413 4,064
Machinery and equipment................................. 17,404 8,228
Computer software and equipment......................... 37,794 25,445
Construction in progress................................ 4,478 5,330
--------- --------
72,071 43,811
Less accumulated depreciation and amortization.......... (24,972) (12,211)
-------- --------
$ 47,099 $ 31,600
======== ========
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.
F-7
55
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and has adopted the disclosure-only alternative of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Options granted to non-employees, as defined, have been accounted for at fair
market value in accordance with Statement No. 123.
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.
The following table sets forth the computation of earnings (loss) per share:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator: net income (loss) ........................... $ 83,287 $ 24,592 $ (5,929)
========= ========= =========
Denominator:
Weighted average shares outstanding .................. 204,546 180,438 131,386
Less: nonvested common shares outstanding ............ (6,034) (11,553) (15,045)
--------- --------- ---------
Denominator for basic earnings (loss) per common share . 198,512 168,885 116,341
Effect of dilutive securities:
Nonvested common shares .............................. 4,798 7,156 --
Stock options ........................................ 28,967 20,123 --
Convertible preferred stock .......................... -- 8,453 --
Warrants ............................................. 8 14 --
--------- --------- ---------
Denominator for diluted earnings (loss) per common share 232,285 204,631 116,341
========= ========= =========
Basic earnings (loss) per share ...................... $ .42 $ .15 $ (.05)
========= ========= =========
Diluted earnings (loss) per share .................... $ .36 $ .12 $ (.05)
========= ========= =========
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, 1999 and 1998 was $3.7 million and $2.0 million,
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. For the years ended December 31, 1999,
1998 and 1997, the Company did not have any components of comprehensive income as defined in Statement No. 130.
F-8
56
SEGMENTS OF A BUSINESS ENTERPRISE
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, 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,
----------------------------
1999 1998 1997
-------- ---- ------
(IN THOUSANDS)
Purchase of equipment through capital leases ....... $ 297 $992 $ 583
Notes receivable from employees issued in
connection with exercise of stock options ........ -- 191 2,614
Non-interest bearing notes payable converted
to common stock .................................. 3,142 -- --
Tax benefit from exercise of stock options and stock
purchase plan ................................... 102,450 -- --
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes new standards for recording derivatives in interim and annual financial statements. This statement requires recording
all derivative instruments as assets or liabilities, measured at fair value. Statement No. 133 is effective for fiscal years beginning
after June 15, 2000. Management does not anticipate that the adoption of the new statement will have a significant impact on
the consolidated results of operations or financial position of the Company.
2. BUSINESS COMBINATIONS
Pooling-of-Interests Transactions
On May 31, 1999 the Company completed the acquisitions of Maverick Networks ("Maverick"), Epigram, Inc. ("Epigram"),
and Armedia, Inc. ("Armedia"). Maverick develops highly integrated silicon for multi-layer switching equipment in enterprise
networks, Epigram makes advanced semiconductor products for high-speed home networking, and Armedia is a developer of
high performance digital video decoders. In connection with the acquisitions, the Company issued 12,727,644 shares of its
Class B common stock and reserved an additional 1,332,924 shares of its Class B common stock for issuance upon exercise
of outstanding employee stock options, warrants and other rights assumed by the Company.
On August 31, 1999 the Company completed the acquisitions of HotHaus Technologies Inc. ("HotHaus") and AltoCom, Inc.
("AltoCom"). HotHaus is a provider of OpenVoIP(TM) (Voice over Internet Protocol) embedded
F-9
57
communications software that enables transmission of digital voice, fax and data packets over data networks, including the
Internet. AltoCom offers complete software data/fax modem implementations for general purpose embedded processors, PC
CPUs and digital signal processors. In connection with the acquisitions, the Company issued 6,723,142 shares of its Class B
common stock and reserved an additional 516,526 shares of its Class B common stock for issuance upon exercise of
outstanding employee stock options and other rights assumed by the Company.
Each of the 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, and AltoCom
(collectively, the "Acquired Companies"). A reconciliation of revenue, net income (loss) and diluted earnings (loss) per share
originally reported for the years ended December 31, 1998 and 1997 to the restated amounts presented in the accompanying
Consolidated Statements of Operations is as follows:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenue
Broadcom (as originally reported).......... $ 203,095 $ 36,955
Maverick, Epigram and Armedia ............. 200 913
HotHaus and AltoCom ....................... 13,161 4,473
--------- --------
Total ................................ $ 216,456 $ 42,341
========= ========
Net income (loss)
Broadcom (as originally reported).......... $ 36,398 $ (1,173)
Maverick, Epigram and Armedia ............. (14,774) (5,379)
HotHaus and AltoCom ....................... 2,968 623
--------- --------
Total ................................ $ 24,592 $ (5,929)
========= ========
Diluted earnings (loss) per share
Broadcom (as originally reported).......... $ .19 $ (.01)
Maverick, Epigram and Armedia ............. (.08) (.05)
HotHaus and AltoCom ....................... .01 .01
--------- --------
Total ................................ $ .12 $ (.05)
========= ========
The restated consolidated financial statements give effect to the business combinations 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.
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 Acquired Company on the respective acquisition dates.
Included in revenue for the year ended December 31, 1999 were aggregate revenues of $8.3 million from the Acquired
Companies incurred prior to the respective closings of the acquisitions. Included in net income for the year ended December
31, 1999 were aggregate net losses of $8.8 million from the Acquired 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 acquisitions of the Acquired Companies, the Company recorded approximately $15.2 million in charges
during the year ended December 31, 1999 for direct and other merger-related costs and certain restructuring programs.
Merger transaction costs of approximately $11.9 million consisted primarily of fees for
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58
investment bankers, attorneys, accountants and other related charges. Restructuring costs of approximately $3.3 million
included provisions for the disposal of duplicative facilities and assets, write-down of unutilized assets, and adjustments to
conform accounting policies to those of the Company.
3. INVESTMENTS
At December 31, 1999 all of the Company's investments were in commercial paper and state, municipal and county
government bonds, and were classified as held-to-maturity. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity investments are stated at cost,
adjusted for amortization of premiums and discounts to maturity. A summary of held-to-maturity securities by balance sheet
caption at December 31, 1999 is as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Cash equivalents ....... $ 22,514 $3 $ -- $ 22,517
Short-term investments . 86,215 1 (185) 86,031
Long-term investments .. 9,351 - (89) 9,262
-------- -- ----- --------
Securities classified as
held-to-maturity ..... $118,080 $4 $(274) $117,810
======== == ===== ========
Scheduled maturities of held-to-maturity investments at December 31, 1999 were as follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Debt securities maturing within:
One year ..................... $108,729 $108,548
Two years .................... 9,351 9,262
-------- --------
$118,080 $117,810
======== ========
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,
-----------------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
Statutory federal provision (benefit) for income taxes $ 41,763 $ 15,812 $(2,069)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit ................ (174) 783 40
Benefit of research and development tax credits .... (14,906) (3,640) (229)
Losses of acquired companies not benefited ......... -- 4,326 2,041
Tax rate differential on foreign earnings .......... 7,736 3,068 --
Non-deductible expenses ............................ 2,495 -- --
Tax exempt interest ................................ (845) (458) --
Other .............................................. (34) 695 60
-------- -------- -------
Total provision (benefit) for income taxes ........... $ 36,035 $ 20,586 $ (157)
======== ======== =======
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59
The income tax provision (benefit) consisted of the following components:
YEARS ENDED DECEMBER 31,
1999 1998 1997
--------- -------- -----
(IN THOUSANDS)
Current:
Federal............... $ 131,297 $ 27,182 $ 413
State................. 23,574 5,216 1
Foreign............... 4,379 -- --
--------- -------- -----
159,250 32,398 414
Deferred:
Federal............... (99,374) (9,169) (631)
State................. (23,841) (2,643) 60
--------- -------- -----
(123,215) (11,812) (571)
--------- -------- -----
$ 36,035 $ 20,586 $(157)
========= ======== =====
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,
--------------------------
1999 1998
--------- --------
(IN THOUSANDS)
Deferred tax assets:
Book depreciation in excess of tax depreciation .......... $ 566 $ 1,376
Research and development tax credit carryforwards ........ 25,994 3,710
Net operating loss carryforwards ......................... 104,817 7,926
Reserves and accruals not currently deductible
for tax purposes ...................................... 10,567 6,216
California manufacturer's investment credit carryforward . 1,056 479
Other .................................................... 9 87
Valuation allowance ...................................... (6,889) (6,889)
--------- --------
Net deferred tax assets .................................... $ 136,120 $ 12,905
========= ========
At December 31, 1999 the Company had federal and state net operating loss carryforwards of $277.1 million and $145.9
million, respectively, which begin to expire in 2010 and 2003, respectively. These net operating losses are primarily the result of
tax deductions related to employee stock option exercises. At December 31, 1999 the Company had federal and state
research and development credit carryforwards of $18.3 million and $12.7 million, respectively, which begin to expire in 2010.
Additionally, at December 31, 1999, the Company had California manufacturer's investment credit carryforwards of $1.1
million, which begin to expire in 2006.
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. LONG-TERM DEBT
In August 1999 the Company entered into a revolving line of credit arrangement with a bank which can be renewed annually
through August 2003 and whereby the Company may borrow up to $1.2 million at an interest rate based on the bank's cost of
funds plus 75 basis points. No amounts were borrowed under this line of credit during the year ended December 31, 1999.
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The following is a summary of the Company's long-term debt and other loans, including debt and loans assumed upon
acquisition of the Acquired Companies:
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Long-term notes at rates from 10.75% to 12.25% secured by
certain of the Company's assets ...................... $ -- $ 3,512
Non-interest bearing notes payable ...................... -- 6,427
Capitalized lease obligations payable in varying monthly
installments at rates from 8.8% to 14.7% ............. 1,056 1,413
-------- --------
1,056 11,352
Less current portion of long-term debt .................. (508) (7,252)
-------- --------
$ 548 $ 4,100
======== ========
Interest expense for the years ended December 31, 1999, 1998 and 1997 was $546,000, $467,000, and $261,000,
respectively.
6. COMMITMENTS
The Company leases its facilities and certain engineering design tools and information systems equipment under operating lease
agreements expiring through 2005. Future minimum payments under noncancelable operating leases with initial terms of one
year or more were as follows: $30.3 million in 2000; $28.9 million in 2001; $23.5 million in 2002; $8.3 million in 2003; $4.5
million in 2004; and $4.2 million thereafter.
The Company had commitments totaling approximately $4.0 million as of December 31, 1999 primarily for the purchase of
engineering design tools and computer hardware and for information systems infrastructure.
Rent expense for the years ended December 31, 1999, 1998 and 1997 aggregated $6.1 million, $2.9 million and $1.1 million,
respectively.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
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. This increase was approved by the shareholders on November 22, 1999. 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 SPLIT
The Company effected a 2-for-1 split of its Class A common stock and Class B common stock, in the form of a 100% stock
dividend, on February 17, 1999. 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.
SALE OF SHARES TO CISCO SYSTEMS, INC.
In February 1998 Cisco Systems, Inc. ("Cisco Systems") 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 on February 3, 1998.
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61
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, 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 (the "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 1999 and 1998, 737,088 and 338,256 shares, respectively, were issued under the plan at average
prices of $6.81 and $5.10, respectively. At December 31, 1999, 1,924,656 shares were available for future issuance.
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 Company's 1994 Stock Option Plan (the "1994 Plan") and the
Company's 1998 Special Stock Option Plan (together, the "Predecessor Plans").
The Board of Directors or the Plan Administrator determines eligibility, vesting schedules and exercise prices for options
granted under the plans. Options generally have a term of 10 years and 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
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62
purchase price. At December 31, 1999 there were 10,858,342 unvested options outstanding 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. The Company did not make any loans to option holders during 1999. During 1998 and
1997, the Company loaned $191,000 and $2,614,000, respectively, 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 5.6% to
6.5%, 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, 1999, 74,044,490 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 will be 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. 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 of Maverick, Epigram, Armedia, HotHaus and AltoCom, the Company assumed
stock options granted under stock option plans established by each Acquired Company (collectively, the "Acquired Company
Plans"). In accordance with its general practice, the Company also granted options under the Broadcom Plans to employees
hired from the Acquired Companies. As of December 31, 1999, 1,307,674 shares of Class B common stock were reserved
for issuance upon exercise of outstanding options assumed under the Acquired Company Plans.
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63
COMBINED OPTION PLAN ACTIVITY
Activity under the Broadcom Plans and the Acquired Company Plans during 1999, 1998 and 1997 is set forth below:
OPTIONS OUTSTANDING
--------------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
----------- ----------- ------------- ------
Balance at December 31, 1996 ................. 5,733,000 8,304,554 $ .02-$ .28 $ .21
Additional shares reserved ................. 38,400,000 -- -- --
Options granted under Broadcom Plans ....... (21,321,600) 21,321,600 .29- 2.00 .63
Options granted under Acquired Company Plans -- 1,562,210 .02- 6.96 .26
Options canceled ........................... 44,244 (69,458) .08- .29 .15
Options exercised .......................... -- (9,009,168) .02- 2.00 .42
----------- ----------- ------------- ------
Balance at December 31, 1997 ................. 22,855,644 22,109,738 .02- 6.96 .54
Additional shares reserved ................. 20,000,000 -- -- --
Options granted under Broadcom Plans ....... (27,788,700) 27,788,700 2.50- 30.19 11.34
Options granted under Acquired Company Plans -- 1,551,350 .02- 10.44 .93
Options canceled ........................... 1,586,300 (1,602,792) .08- 12.25 1.89
Option shares repurchased .................. 12,000 -- -- --
Options exercised .......................... -- (3,947,302) .02- 15.53 .61
----------- ----------- ------------- ------
Balance at December 31, 1998 ................. 16,665,244 45,899,694 .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 granted under Acquired Company Plans -- 502,558 .02- 49.76 8.11
Options canceled ........................... 504,086 (524,546) .02- 89.53 25.39
Option shares repurchased .................. 2,750 -- -- --
Options exercised .......................... -- (9,316,790) .02- 54.50 2.67
----------- ----------- ------------- ------
Balance at December 31, 1999 ................. 16,775,296 59,576,868 $ .02-$122.84 $25.05
=========== =========== ============= ======
The weighted average remaining contractual life and weighted average exercise price of options outstanding and of options
exercisable as of December 31, 1999 were as follows:
OUTSTANDING
------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
REMAINING -------------------------------
RANGE OF NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------------- ---------- ---------------- ---------------- ----------- ---------------
$ .02 to $ .28 6,792,488 7.07 $ .26 6,792,488 $ .26
$ .31 to $ 2.50 15,032,796 8.04 $ 1.74 8,355,234 $ 1.23
$ 2.80 to $ 20.45 12,982,032 8.73 $17.10 1,473,114 $ 10.76
$ 20.73 to $ 46.53 13,354,444 9.27 $38.04 867,204 $ 33.40
$ 46.78 to $ 122.84 11,415,108 9.75 $64.32 98,298 $ 53.00
Additional information relating to the Broadcom Plans and the Acquired Company Plans was as follows:
DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Nonvested common shares subject to repurchase 3,962,528 9,045,838 16,399,550
Weighted average repurchase price ........... $.53 $.35 $.25
Unvested options outstanding ................ 52,848,872 42,458,970 20,334,650
Vested options outstanding .................. 6,727,996 3,440,724 1,775,088
Total reserved common stock shares for
stock option plans ........................ 76,352,164 62,564,938 44,965,382
The Company recorded approximately $5.0 million and $7.6 million of net deferred compensation in the years ended
December 31, 1999 and 1998, respectively, for the difference between the exercise price of certain stock
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64
options granted and the fair value of the underlying common stock. Of these amounts, approximately $5.0 million in 1999 and
$2.3 million in 1998 represent deferred compensation related to the grant of stock options to certain employees of the
Acquired Companies. 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 amortized an aggregate of $3.8 million and $1.8 million
of deferred compensation in 1999 and 1998, respectively.
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 FASB 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 significantly from assumptions used in calculating the value of options granted prior to the initial public offering
under the minimum value method.
The fair value of the Company's stock-based awards granted to employees prior to the initial public offering was estimated
assuming no expected dividends, a weighted average expected life of 3.5 years, a weighted average risk-free interest rate of
6.0% and no expected volatility. The fair value of options granted after the initial public offering was estimated assuming no
expected dividends, a weighted average expected life of one year from vest date in 1999 and 1.5 years from vest date in 1998,
a weighted average risk-free interest rate of 6.0% in 1999 and 5.0% in 1998, and an expected volatility of .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 17 months in 1999 and 15 months in 1998, a weighted average risk-free interest rate of 6.0% in 1999 and
5.0% in 1998, and an expected volatility of .80 in 1999 and .74 in 1998.
The weighted average fair value of options granted during 1999, 1998 and 1997 was $31.35, $6.26 and $.18, respectively.
The weighted average fair value of employee stock purchase rights granted in 1999 and 1998 was $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,
----------------------------------
1999 1998 1997
--------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)
As reported............................. $ 83,287 $24,592 $(5,929)
Pro forma............................... (105,566) 7,263 (6,548)
Basic earnings (loss) per share
As reported............................. $ .42 $ .15 $ (.05)
Pro forma............................... (.53) .04 (.06)
Diluted earnings (loss) per share
As reported............................. $ .36 $ .12 $ (.05)
Pro forma............................... (.53) .04 (.06)
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65
8. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment Plan, which was established in 1996, covering
substantially all of the Company's employees, subject to certain eligibility requirements. At its discretion, the Company may
make contributions to the plan. The Company made no contributions to this plan in 1999, 1998 and 1997.
9. LITIGATION
In December 1996 Stanford Telecommunications, Inc. ("STI") filed an action against the Company in the United States District
Court for the Northern District of California. STI alleged that several of the Company's cable modem products infringed one of
STI's patents. In May 1999 the Company brought a separate action against STI and an STI subsidiary in California Superior
Court for misappropriation of certain Company trade secrets. In June 1999 the parties entered into a settlement agreement and
agreed to dismiss with prejudice all claims and counterclaims in both actions. Under the terms of the settlement agreement, STI
granted to the Company a worldwide, non-exclusive, royalty-free license to STI's rights in patents and patent applications, and
all inventions conceived, through the date of the agreement, relating to any transmitter or receiver technology, or design or
invention capable of use over a coaxial cable transmission medium, excluding patent claims specifically claiming Code Division
Multiple Access ("CDMA") inventions. The Company also obtained the option to acquire licenses on commercially reasonable
terms to STI's patent claims based upon CDMA inventions capable of use over a coaxial cable transmission medium, and STI
agreed not to bring any future action against the Company, its suppliers or customers for patent infringement or trade secret
misappropriation resulting from commercial use of any of the Company's existing technology, designs or products. In
connection with the settlement, the Company made a one-time payment to STI and the parties exchanged mutual releases.
Neither party admitted any liability in connection with the various actions.
In April 1997 Sarnoff Corporation and Sarnoff Digital Communications, Inc., now known as NxtWave Communications, Inc.,
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against the Company and five former Sarnoff
employees now employed by the Company asserting claims against the former employees for breach of contract,
misappropriation of trade secrets, and breach of the covenant of good faith and fair dealing, and against the Company for
inducing such actions. The complaint also asserted claims against the Company and the former employees for unfair
competition, misappropriation and misuse of trade secrets and confidential, proprietary information of Sarnoff, and tortious
interference with present and prospective economic advantage, as well as a claim against the Company alleging that it "illegally
pirated" Sarnoff's employees. In early 1999 the Court found in the Company's favor on all liability, causation and damages
issues. Sarnoff appealed the Court's orders but the appeal was later dismissed at Sarnoff's request.
In July 1997 the Company commenced an action against Sarnoff in the California Superior Court alleging breach of contract,
fraud, misappropriation of trade secrets, false advertising, trade libel, intentional interference with prospective economic
advantage and unfair competition. The claims center on Sarnoff's violation of a non-disclosure agreement entered into with the
Company with respect to limited use of certain of the Company's technology and on inaccurate comparisons that the Company
believes Sarnoff has made in its product advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of California, and was stayed pending resolution of the New
Jersey action described in the preceding paragraph. Following the decision in the New Jersey action, Sarnoff filed a motion for
summary judgment in the California case on the basis that the issues therein had been or should have been previously litigated in
the New Jersey action under the New Jersey "entire controversy" doctrine. Following oral argument in August 1999, the
California District Court granted Sarnoff's motion and dismissed the Company's claims on the grounds that they should have
been brought as part of the New Jersey action. The Company believes that the California action involves facts, circumstances
and claims unrelated to those at issue in the New Jersey action, and has filed an appeal of the District Court's ruling. No
discovery has yet occurred in the case.
In March 1998 Scott O. Davis, the Company's former Chief Financial Officer, filed a complaint in California Superior Court
against the Company and its Chief Executive Officer, Henry T. Nicholas III, alleging claims for fraud and deceit, negligent
misrepresentation, breach of contract, breach of fiduciary duty, constructive fraud, conversion, breach of the implied covenant
of good faith and fair dealing, and declaratory relief. The claims related
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66
to Mr. Davis' alleged ownership of 26,000 shares of Series D preferred stock originally purchased by Mr. Davis in March
1996 (which shares would have converted into 312,000 shares of Class B common stock upon consummation of the Offering).
The purchase agreement between the Company and Mr. Davis contained a provision permitting the Company to repurchase
the shares in the event that Mr. Davis did not continue to be employed by the Company for a certain period of time. After Mr.
Davis resigned in June 1997, the Company exercised its repurchase right. Mr. Davis' complaint alleged that the repurchase right
should not be enforceable under several legal theories and sought unspecified damages and declaratory relief. The Company
asserted certain counterclaims against Mr. Davis. In March 1999 the parties entered into a settlement agreement and agreed to
dismiss with prejudice all of the claims and counterclaims in the case. The settlement was approved by the Court in April 1999.
The terms of the settlement are confidential but the Company believes that they do not have a material effect on its business,
results of operations, financial condition or equity.
In September 1998 Motorola, Inc. ("Motorola") filed a complaint in United States District Court for the District of
Massachusetts against AltoCom (and co-defendant, PC-Tel, Inc.), asserting that (i) AltoCom's V.34 and V.90 compliant
software modem technology infringes several patents owned by Motorola,
(ii) AltoCom induces its V.34 and V.90 licensees to infringe such patents, and
(iii) AltoCom contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against
AltoCom as well as the recovery of monetary damages, including treble damages for willful infringement. In October 1998
Motorola affirmatively dismissed its case in the District of Massachusetts and filed a substantially similar complaint in the United
States District Court for the District of Delaware. AltoCom has filed an answer and affirmative defenses to the District of
Delaware complaint. AltoCom has also asserted a counterclaim requesting declaratory relief that AltoCom has not infringed the
Motorola patents and that such patents are invalid and/or unenforceable as well as a counterclaim requesting declaratory and
injunctive relief based on breach of contract theory. AltoCom believes that it has strong defenses to Motorola's claims on
invalidity, noninfringement and inequitable conduct grounds. The parties are currently engaged in discovery in the action. A
hearing on patent claims construction is scheduled to commence in June 2000 and a three-week trial is scheduled to begin in
February 2001. AltoCom became a subsidiary of the Company on August 31, 1999. In September 1999 PC-Tel, Inc., the
co-defendant in the case, reached a settlement with Motorola.
Although AltoCom believes that it has strong defenses and is defending the action vigorously, a finding of infringement by
AltoCom as to at least one of the patents in this action could lead to liability for monetary damages (which could be trebled in
the event that the infringement were found to have been willful), the issuance of an injunction requiring that AltoCom withdraw
various products from the market, and indemnification claims by AltoCom's customers or strategic partners, each of which
events could have a material adverse effect on AltoCom's, and possibly the Company's, business, results of operations and
financial condition.
The Company is also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.
The Company's pending lawsuits involve complex questions of fact and law and could require the expenditure of significant
costs and diversion of resources to defend. Although management currently believes the outcome of the Company's outstanding
legal proceedings, claims and litigation will not have a material adverse effect on the Company's business, results of operations
or financial condition, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible.
The Company is unable to estimate the range of possible loss from outstanding litigation, and no amounts have been provided
for such matters in the accompanying consolidated financial statements.
10. SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
During 1999, 1998 and 1997, the Company had a total of three customers whose revenue represented a significant portion of
the Company's revenue in certain or all years. Revenue from one customer represented approximately 27.5% in 1999, 35.5%
in 1998 and 27.9% in 1997 of the Company's revenue for the respective year. Revenue from a second customer was
approximately 18.1% in 1999, 26.8% in 1998 and 12.8% in 1997 of the Company's revenue for the respective year. Revenue
from a third customer accounted for approximately 10.6% of the Company's revenue in 1999.
No other customer represented more than 10% of the Company's annual revenue in these years.
F-19
67
Export revenue to all foreign customers as a percent of total revenue was as follows:
YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
Europe...................................... 5.4% 4.4% 6.3%
Asia........................................ 11.7 7.3 8.9
Other....................................... 0.1 5.5 4.4
---- ---- ----
17.2% 17.2% 19.6%
==== ==== ====
The Company does not own or operate a fabrication facility. Two outside 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 two third-party subcontractors in Asia. The Company does not have long-term agreements with any of these
suppliers. Any problems associated with the fabrication facilities 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.
11. RELATED PARTY TRANSACTIONS
ISSUANCE OF COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company issued and sold an aggregate of 900,000 shares of
Class B common stock to Irell & Manella LLP for an aggregate purchase price of $1.1 million. Werner F. Wolfen, a director
of the Company, served until December 31, 1998 as a Senior Partner of Irell & Manella LLP, and currently is Senior Partner
Emeritus of that firm. David A. Dull, the Company's Vice President of Business Affairs, General Counsel and Secretary, was a
Partner of Irell & Manella LLP until March 1998. Irell & Manella LLP has represented and continues to represent the
Company in various legal matters.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA LLP
Irell & Manella LLP has represented and continues to represent the Company in various legal matters pursuant to an
engagement agreement dated as of January 1, 1997, and amended as of January 1, 1998. Under the engagement agreement,
the Company agreed to pay Irell & Manella LLP a fixed fee plus costs for the firm's legal services rendered from and after
January 1, 1998 with respect to certain litigation matters. Irell & Manella LLP has agreed to render legal services to the
Company on most other matters at reduced rates from the firm's standard rates for the two-year period commencing January 1,
1998. During 1999, 1998 and 1997, the Company paid approximately $2.0 million, $2.9 million and $1.2 million, respectively,
to Irell & Manella LLP for legal services rendered by that firm. At December 31, 1999, approximately $869,000 was due to
Irell & Manella LLP.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
We have prepared the following summarized unaudited quarterly financial data using the consolidated financial statements of
Broadcom, which have been restated to include the operations of Maverick, Epigram, Armedia, HotHaus, and AltoCom, on a
pooling-of-interests basis as if they had combined with Broadcom prior to the beginning of each period presented:
DILUTED
GROSS NET EARNINGS
REVENUE PROFIT INCOME PER SHARE
-------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR 1999
First Quarter....................... $ 99,980 $59,165 $16,494 $.07
Second Quarter...................... 119,027 71,298 2,723 .01
Third Quarter....................... 138,353 82,835 27,200 .12
Fourth Quarter...................... 160,823 95,048 36,870 .15
FISCAL YEAR 1998
First Quarter....................... $37,120 $23,037 $5,310 $.03
Second Quarter...................... 49,244 27,817 6,096 .03
Third Quarter....................... 55,474 30,576 5,172 .02
Fourth Quarter...................... 74,618 43,623 8,014 .04
F-20
68
13. SUBSEQUENT EVENTS
STOCK SPLIT
In January 2000 the Board of Directors approved a 2-for-1 split of the Company's common stock, effected in the form of a
100% stock dividend. Holders of the Company's Class A common stock received one additional share of Class A common
stock for each share held on the record date of January 31, 2000. The additional shares were distributed on February 11,
2000. A comparable stock dividend was distributed to holders of the Company's Class B common stock. All share and per
share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect this change in
the Company's capital structure.
INCREASES IN AUTHORIZED COMMON STOCK AND IN COMMON STOCK RESERVED FOR STOCK
OPTIONS
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 February 2000 the Board of Directors approved an amendment to the Company's 1998 Stock Incentive
Plan, as 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. These matters will be submitted to a vote of the shareholders at the Annual Meeting of
Shareholders.
ACQUISITIONS
On February 29 and March 1, 2000 the Company completed the acquisitions of Digital Furnace Corporation, BlueSteel
Networks, Inc., and Stellar Semiconductor, Inc. Digital Furnace develops communications algorithms and software that
increase the capacity of existing broadband networks for interactive services, BlueSteel develops high-performance Internet
security processors for e-commerce and VPN (Virtual Private Network) applications, and Stellar develops 3D graphics
technology.
The Company issued in aggregate 2,015,307 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 330,294 shares of its Class B common stock for
issuance upon exercise of employee stock options and other rights assumed by the Company. These merger transactions will
be accounted for as poolings-of-interests, and the Company will take a charge for merger-related expenses in the fiscal year
ending December 31, 2000. The Company's consolidated financial statements presented in the future will be restated to include
the financial position and results of operations of the acquired companies.
LITIGATION
On March 8, 2000 Intel Corporation and its subsidiary Level One Communications, Inc. (collectively, "Intel") 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 seeks injunctive relief, damages, exemplary damages and attorneys' fees. The litigation is in its early
stages. A preliminary injunction hearing is currently scheduled for April 28, 2000. The Company has asserted and believes that
Intel's claims are meritless and is vigorously defending the action.
F-21
69
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 (8) Strategic Alliance Agreement and Plan of Merger by and between
Broadcom Corporation, Mavnet Acquisition Corp. and Maverick
Networks.
2.2 (5) Merger Agreement and Plan of Reorganization by and among
Broadcom Corporation, Epic Acquisition Corp. and Epigram, Inc.
2.3 (6) Acquisition Agreement by and among Broadcom Corporation,
Broadcom (BVI) Limited, HH Acquisition (formerly 585573 B.C.
LTD.), HH Acquisition II (formerly 3030814 Nova Scotia ULC)
and HotHaus Technologies Inc.
3.1 (1) Amended and Restated Articles of Incorporation of the
Registrant.
3.2 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 (7) 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.
10.14+ (1) Engagement Agreement dated January 1, 1997, as amended,
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.
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.
27.1 Financial Data Schedule.
27.2 Restated 1998 and 1997 Financial Data Schedule.
----------
(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).
70
(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 Exhibit 2.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(6) Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(7) 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.
(8) Incorporated by reference to Exhibit 2.1 to the Annual Report on Form 10-K for the year ended December 31, 1998.
+ Confidential treatment has previously been granted by the Commission for certain portions of the referenced exhibit pursuant
to Rule 406.
FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial 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.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on
March 30, 2000.
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 Officer and March 30, 2000
/s/ Henry T. Nicholas III Co-Chairman (principal executive officer)
-----------------------------------------
Henry T. Nicholas III, Ph.D.
/s/ Henry Samueli Vice President of Research & Development, March 30, 2000
----------------------------------------- Chief Technical Officer and Co-Chairman
Henry Samueli, Ph.D.
/s/ Myron S. Eichen Director March 30, 2000
-----------------------------------------
Myron S. Eichen
/s/ Alan E. Ross Director March 30, 2000
-----------------------------------------
Alan E. Ross
/s/ Werner F. Wolfen Director March 30, 2000
-----------------------------------------
Werner F. Wolfen
/s/ William J. Ruehle Vice President and Chief Financial Officer March 30, 2000
----------------------------------------- (principal accounting officer)
William J. Ruehle
72
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, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, and have issued our report thereon dated January 18, 2000
(except for Note 13, as to which the date is March 8, 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 18, 2000
S-1
73
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, 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
======= ======= ===== ====== =======
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and sales
returns and allowances ................ $ 147 $ 574 $ -- $ -- $ 721
Reserve for excess and obsolete inventory 749 1,028 -- 91 1,686
Reserve for warranty ....................... -- 150 -- -- 150
------- ------- ----- ------ -------
Total .............................. $ 896 $ 1,752 $ -- $ 91 $ 2,557
======= ======= ===== ====== =======
S-2
74
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 (8) Strategic Alliance Agreement and Plan of Merger by and between
Broadcom Corporation, Mavnet Acquisition Corp. and Maverick
Networks.
2.2 (5) Merger Agreement and Plan of Reorganization by and among
Broadcom Corporation, Epic Acquisition Corp. and Epigram, Inc.
2.3 (6) Acquisition Agreement by and among Broadcom Corporation,
Broadcom (BVI) Limited, HH Acquisition (formerly 585573 B.C.
LTD.), HH Acquisition II (formerly 3030814 Nova Scotia ULC)
and HotHaus Technologies Inc.
3.1 (1) Amended and Restated Articles of Incorporation of the
Registrant.
3.2 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 (7) 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.
10.14+ (1) Engagement Agreement dated January 1, 1997, as amended,
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.
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.
27.1 Financial Data Schedule.
27.2 Restated 1998 and 1997 Financial Data Schedule.
----------
(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).
75
(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 Exhibit 2.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(6) Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(7) 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.
(8) Incorporated by reference to Exhibit 2.1 to the Annual Report on Form 10-K for the year ended December 31, 1998.
+ Confidential treatment has previously been granted by the Commission for certain portions of the referenced exhibit pursuant
to Rule 406.
1
BYLAWS
OF
BROADCOM CORPORATION
(FORMERLY: BROADBAND TELECOM)
As Amended through February 29, 2000
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside
the State of California. If the principal executive office is located outside California and the corporation has one or more
business offices in California, then the Board of Directors shall fix and designate a principal business office in California.
1.2 OTHER OFFICES
The Board of Directors may at any time establish branch or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of
Directors. In the absence of any such designation, shareholders meetings shall be held at the principal executive office of the
corporation or any place consented to in writing by all persons entitled to vote at such meeting, given before or after the
meeting and filed with the Secretary of the corporation.
2.2 ANNUAL MEETING
An annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At that
meeting, directors shall be elected. Any other proper business may be transacted at the annual meeting of shareholders.
2.3 SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time, subject to the provisions of Sections 2.4 and 2.5 of these
Bylaws, by the board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less
than ten percent (10%) of the votes at that meeting.
1
2
If a special meeting is called by anyone other than the Board of Directors or the President or the Chairman of the Board, then
the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by other written communication to the Chairman of
the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving the request shall cause
notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these
Bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not
less than thirty-five
(35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt
of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of
this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the
Board of Directors may be held.
2.4 NOTICE OF SHAREHOLDERS MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less
than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less than thirty (30)) nor more than
sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place,
date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no
business other than that specified in the notice may be transacted, or (ii) in the case of the annual meeting, those matters which
the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to
the provisions of the next paragraph of this Section 2.4, any proper matter may be presented at the meeting for such action.
The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the
notice to be presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the California Corporations Code (the "Code"), (ii) an amendment of the
Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of any outstanding
preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of a shareholders meeting shall be given either personally or by first-class mail, or, if the corporation has outstanding
shares held or record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the
record date for the shareholders meeting, notice may be sent by third-class mail, or other means of written communication,
addressed to the shareholder at the address of the shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the
principal executive office of the
2
3
corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal
executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in
the mail or sent by other means of written communication.
If any notice (or any report referenced in Article VII of these Bylaws) addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the
shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1)
year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the provisions of this Section 2.5, executed by the Secretary,
Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report.
2.6 QUORUM
Unless otherwise provided in the Articles of Incorporation of the corporation, shares entitled to vote and holding a majority of
the voting power, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The shareholders
present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by shares holding at least a majority of the voting power required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the
shares represented either in person or by proxy, but no their business may be transacted, except as provided in the last
sentence of the preceding paragraph.
2.7 ADJOURNED MEETING NOTICE
Any shareholders meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the
shares entitled to vote and holding a majority of the voting power, represented in person or by proxy, at that meeting.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of
the adjourned meeting if its time and place are announced at the meeting at which the adjournment is taken. However, if the
adjournment is for more than forty-five
(45) days from the date set for the original meeting or if a new record date for the adjourned meeting is fixed, a notice of the
adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting.
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2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of
Section 2.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held
by a fiduciary, in the name of a corporation, or in joint ownership).
Elections for directors and voting on any other matter at a shareholders meeting need not be by ballot unless a shareholder
demands election by ballot at the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as may e otherwise provided in the Articles of Incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders.
Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting
the remaining shares or may vote them against the proposal other than elections to office, but, if the shareholder fails to specify
the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving
vote is with respect to all shares which the shareholder is entitled to vote.
The affirmative vote of shares holding a majority of the voting power, represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute at least a majority of the voting power required to constitute
a quorum), shall be the act of the shareholders, unless the vote of a greater number of voting by classes is required by the Code
or by the Articles of Incorporation.
At a shareholders meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes either (i) by
giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to
which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among
as many candidates as the shareholder thinks fit, if the candidate or candidates' names have been placed in nomination prior to
the voting and the shareholder has given notice prior to the voting of the shareholder's intention to cumulate the shareholder's
votes. If any one shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates
in nomination. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected,
shall be elected; votes against any candidate and votes withheld shall have no legal effect. Notwithstanding the foregoing, at
such time as the corporation becomes a listed corporation (as such term is defined in Section 301.5 of the California
Corporations Code), shareholders shall no longer be entitled to cumulate their votes for candidates in an election of directors.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, are
as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in
person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by
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proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Neither
the business to be transacted at nor the purpose of any annual or special meeting of shareholders need be specified in any
written waiver of notice or consent to the holding of the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these Bylaws,
the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and
approval shall be filed with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of and presence at that meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business because the meting is not lawfully called or convened
and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the
code to be included in the notice of such meeting but not so included, if such objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without
prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having
not less than the minimum number of notes that would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors, provided
that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of shares
holding a majority of the voting power that are entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's
proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders,
may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of
shares required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been solicited in writing, the Secretary shall give prompt notice of
any corporate action approved by the shareholders without a meeting by less than unanimous written consent to those
shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner specified in Section
2.5 of these Bylaws. In the case of approval of (i) a contract or transaction ins which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code,
(iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized
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by that approval, unless the consents of all shareholders entitled to vote have been solicited in writing. Notwithstanding the
foregoing, at such time as the corporation becomes a listed corporation (as such term is defined in Section 301.5 of the
California Corporations Code), shareholders shall no longer be entitled to cumulate their votes for candidates in an election of
directors.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten
(10) days prior to the date of such meeting nor more than sixty (60) days before any other action. Shareholders at the close of
business on the record date are entitled to notice and to vote, as the case may be, notwithstanding any transfer of any shares on
the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders or record entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of
Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the
original meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the
close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of
business on the business day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i)
when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given, or
(ii) when prior action by the Board of Directors has been taken, shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Section
8.1 of these Bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall
be deemed signed if the shareholder's name or other authorization is placed on the proxy (whether by manual signature,
typewriting, telegraphic or electronic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who
executed the proxy
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revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing
a subsequent proxy and presenting it to the meeting or by attendance at such meeting and voting in person, or (ii) written notice
of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless
otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face
that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
In advance of any meeting of shareholders, the Board of Directors may appoint inspectors of election to act at the meeting and
any adjournment thereof. If inspectors of election are not so appointed or designed or if any persons so appointed fail to
appear or refuse to act, then the Chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail to appear) at the meeting. The number of
inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one (1) or more shareholders or
proxies, shares holding a majority of the voting power, represented in person or by proxy, shall determine whether one (1) or
three (3) inspectors are to be appointed.
The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies, receive totes, ballots
or consents, bear and determine all challenges and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine the result and do any other acts that may be
proper to conduct the election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code, any limitations in the Articles of Incorporation, and these Bylaws, relating to action
required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the business of the corporation to a management
company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers
shall be exercised under the ultimate direction of the Board of Directors.
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3.2 NUMBER OF DIRECTORS
The authorized number of directors of the corporation shall be not less than four (4) nor more than seven (7) (which in no event
shall be greater than two times the stated minimum minus one), and the exact number of directors shall be five (5) until changed
within the limits specified above, by a resolution amending such exact number, duly adopted by the Board of Directors or by
the shareholders. The minimum and maximum number of directors may be changed, or a definite number may be fixed without
provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this
Bylaw duly adopted by vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided,
however, that an amendment reducing the fixed number or minimum number of directors to a number less than five (5) cannot
be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written
consent, are equal to more than sixteen and two-third percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of
office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting. Each director,
including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified, except in the case of the death, resignation, or removal of such a director.
3.4 REMOVAL
The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of
shares holding a majority of the voting power that are entitled to vote on such removal; provided, however, that unless the
entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not
consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the
same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the same time of such director's most recent election were then being elected.
3.5 RESIGNATION AND VACANCIES
Any director may resign effective upon giving oral or written notice to the Chairman of the Board, the President, the Secretary,
or the Board of directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a
director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes
effective.
Vacancies on the Board of Directors may be filled by a majority of the remaining directors, or if the number of directors then in
office is less than a quorum by (i) unanimous
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written consent of the directors then in office, (ii) the affirmative vote of a majority of directors then in office at a meeting held
pursuant to notice or waiver of notice, or (iii) a sole remaining director; however, a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of shares
holding a majority of the voting power represented and voting at a duly held meeting at which a quorum is present (which
shares voting affirmatively also constitute at least a majority of the voting power required to constitute a quorum), or by the
unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual
meeting of the shareholders and until a successor has been elected and qualified, or until his or her death, resignation or
removal.
A vacancy or vacancies in the Board of Directors shall be deemed to exist (i) in the event of the death, resignation or removal
of any director,
(ii) if the Board of Directors resolution declares vacant the office of a director who has been declared of unsound mind by an
order of court of convicted or a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at
any meeting of shareholders at which any director or directors are elected, to elect the full number of directors to be elected at
that meeting.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any
such election by written consent, other than to fill a vacancy created by removal, shall require the consent of shares holding a
majority of the voting power that are entitled to vote thereon. A director may not be elected by written consent to fill a vacancy
created by removal except by unanimous consent of all shares entitled to vote for the election of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been
designated from time to time by resolution of the Board of Directors. In the absence of such a designation , regular meetings
shall be held at the principal executive office of the corporation. Special meetings of the Board of Directors may be held at any
place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice
or if there is no notice, at the principal executive office of the corporation.
Members of the Board of Directors may participate in a meeting through the use of a conference telephone or similar
communications equipment, so long as all directors participating in such meeting can hear one another. Participation in a meeting
pursuant to this paragraph constitutes presence in person at such meeting.
3.7 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice if the time and place of such meetings are fixed by the
Board of Directors.
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3.8 SPECIAL MEETINGS; NOTICE
Subject to the provisions of the following paragraph, special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or any two (2)
directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first
class mail, telegram, charges prepaid, or facsimile, in each case addressed to each director at the director's address or facsimile
telephone number as it is shown on the records of the corporation, or by electronic mail or other electronic means to the
director at the director's electronic address as it is shown on the records of the corporation. If the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered
personally or by telephone, facsimile, telegram, electronic mail or other electronic means, it shall be delivered personally or by
telephone, by facsimile, to the telegraph company or by electronic mail or other electronic means at least twenty-four (24)
hours before the time of the holding of the meeting. An oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the person giving the notice has reason to believe will
promptly communicate it to the director. The notice need not specify the purpose of the meeting.
3.9 QUORUM
A majority of the authorized number of directors shall constitute a quorum of the transaction of business, except to adjourn as
provided in Section
3.10 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which
a quorum is present is the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to the
approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the
Code (as to the appointment of committees), Section 317(a) of the Code (as to the indemnification of directors), the Articles of
Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if
any action taken is approved by at least a majority of the required quorum for such meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior
thereto or at its commencement, the lack or notice to such director. All such waivers, consents, and approval shall be filed with
the corporate records or be made a part of the minutes of the meeting. A waiver of notice need not specify the purpose of any
regular or special meeting of the Board of Directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place.
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3.12 NOTICE OF ADJOURNMENT
If the meeting is adjourned for over twenty-four (24) hours, notice of any adjournment to another time and place shall be given
prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the
Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed
with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and
effect as a unanimous vote of the Board of Directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of
expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.14 shall not be construed to
preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and
receiving compensation for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
If these Bylaws have been approved by the corporation's shareholders in accordance with the Code, the corporation may,
upon the approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any
officer of the corporation or of its parent, if any, whether or not a director, or adopt an employee benefit plan or plans
authorizing such loans or guaranties provided that (i) the Board of Directors determines that such a loan or guaranty or plan
may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares of record by 100 or more
persons (determined as provided in Section 605 of the Code) on the date of approval of the Board of Directors, and (iii) the
approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors.
Notwithstanding the foregoing, the corporation shall have the power to make loans permitted by the Code.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more
committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of
Directors may designate one or more directors as alternate members of any committee, who may replace any absent member
at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a
majority of the authorized number of the
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directors. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board
of Directors and may have all the authority of the Board of Directors, except with respect to:
(a) The approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding
shares.
(b) The filling of vacancies of the Board of Directors or of any committee.
(c) The fixing of compensation of the directors for serving on the Board of Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new Bylaws.
(e) The amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or
repealable.
(f) A distribution to the shareholders of the corporation, except at a rate, in a periodic amount or within a price range set forth
in the Articles of Incorporation or determined by the Board of Directors.
(g) The appointment of any other committee of the Board of Directors or the members thereof.
4.2 MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committee shall be governed by, and held and taken in accordance with, the provisions of Article III of
these Bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee
and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special
meetings of the Committees may also be called by resolution of the Board of Directors, and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The
Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of a corporation shall be a President, a Secretary, and a Chief Financial officer. The corporation may also have, at
the discretion of the Board of Directors, a Chairman
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of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of officers
may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 of
these Bylaws, shall be chosen by the Board and serve at the pleasure of the Board of Directors, subject to the rights, if any, of
an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or may empower the Chairman of the Board or the President to appoint, such other
officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and
perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine.
5.4 REMOVAL OR RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of employment, all officers serve at the pleasure of the Board of
Directors and any officer may be removed, either with or without cause, by the Board of Directors at any regular or special
meeting of the Board of Directors or, except in case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the
receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of
the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party.
5.5 VACANCY IN OFFICES
A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner
prescribed by these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and
exercise and perform such other powers and duties as may from time to time be assigned by the Board of Directors or as may
be prescribed by these Bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer
of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws.
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5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there
be such an officer, the President shall be the chief executive officer of the corporation and shall, subject to the control of the
Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. The
President shall preside over all meetings of the shareholders and, in the absence or nonexistence of a Chairman of the Board, at
all meetings of the Board of Directors. The President shall have the general powers and duties of management usually vested in
the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of
Directors or these Bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors
or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when
so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have
such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of
Directors, these Bylaws, the President or the Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive office of the corporation or other such place as the
Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and
shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate
share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the
number and dates of certificates evidencing such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meeting of shareholders and of the Board of Directors required to
be given by law or by these Bylaws. The Secretary shall keep the seal of the corporation, if one be adopted, in safe custody
and shall have such other powers and perform other such duties as may be prescribed by the Board of Directors or by these
Bylaws.
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5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times
be open to inspection by any director.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS
The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors against
expenses (as defined in Section 317(a) of the Code), judgment, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was a director of the corporation. For purposes of this Article VI, a "director" of the corporation includes any
person (i) who is or was a director of the corporation, (ii) who is or was serving at the request of the corporation as a director
of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a
corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its
employees, officers, and agents (other than directors) against expenses (as defined in Section 317(a) of the Code), judgements,
fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an employee, officer, or agent of the corporation.
For purposes of this Article VI, for an "employee" or "officer" or "agent" of the corporation (other than a director) includes any
person (i) who is or was an employee, officer, or agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee, officer, or agent of another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was an employee, officer, or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses and attorneys' fees incurred in defending any civil or criminal action or proceeding for which indemnification is
required pursuant to
Section 6.1, or if otherwise authorized by the Board of Directors, shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the
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indemnified party to repay such an amount if it shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by the Article VI shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote of shareholders or directors or otherwise, both as to action in
an official capacity and as to action in another capacity while holding such office. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or
arising out of that person's status as such, whether or not the corporation would have the power to indemnify that person
against such liability under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated
by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears:
(1) That it would be inconsistent with the provisions of the Articles of Incorporation, these Bylaws, a resolution of the
shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
6.7 RIGHT TO BRING SUIT
If a claim under this Article VI is not paid in full by the corporation within 90 days after a written claim has been received by the
corporation (either because the claim is denied or because no determination is made), the claimant may at any time thereafter
bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant
shall also be entitled to be paid the expenses of prosecuting such claim. The corporation shall be entitled to raise as a defense to
any such action that the claimant has not met the standards of conduct that make it permissible under the Code for the
corporation to indemnify the claimant for the claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that
indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of
conduct, if any, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel, or
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its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to such action or create a
presumption for the purposes of such action that the claimant has not met the applicable standard of conduct.
6.8 INDEMNITY AGREEMENTS
The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the corporation, or
any person who is or was serving at the request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, or any person who was a
director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation, providing for indemnification rights equivalent to or, if the Board of
Directors so determines and to the extent permitted by applicable law, greater than, those provided for in this Article VI.
6.9 AMENDMENT, REPEAL OR MODIFICATION
Any amendment, repeal or modification of any provision of this Article VI shall not adversely affect any right or protection of a
director, employee, officer or agent of the corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be
appointed), as determined by resolution of the Board of Directors, a record of its shareholders listing the names and addresses
of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting
shares of the corporation who held at least one percent (1%) of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names, addresses, and shareholdings during usual
business hours upon five (5) days' prior written demand upon the corporation, or (ii) obtain from the transfer agent of the
corporation, upon written demand and upon the tender of such transfer agent's usual charges for such list (the amount of which
charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses
who are entitled to vote for the election of the directors, and their shareholdings, as of the most recent record date for which it
has been compiled or as of the date specified by the shareholder subsequent to the date of demand. The list shall be made
available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as
of which the list is to be compiled.
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The record of shareholders shall also be open to inspection or copying by any shareholder or holder of a voting trust certificate
at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to the
holder's interests as a shareholder or holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or
holder of a voting trust certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at
its principal business office in California, the original or a copy of these Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during business hours. If the principal executive office is outside the State
of California and the corporation has no principal business office in such state, then it shall, upon the written request of any
shareholder, furnish to such shareholder a copy of these Bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the shareholders and the Board of Directors, and
committees of the Board of Directors shall be kept at such place or places as are designated by the Board of Directors or, in
absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon the written demand on the corporation of any
shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as a holder of a voting trust certificate. Such inspection by a shareholder or
a holder of a voting trust certificate may be made in person or by an agent or attorney and the right of inspection includes the
right to copy and make extracts. Such rights of inspections shall extend to the records of each subsidiary corporation of the
corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of
every kind and to inspect the physical properties of the corporation and each of its subsidiary corporations, domestic or
foreign. Such inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the
right to copy and make extracts.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120)
days after the close of the fiscal year adopted by the corporation. Such report shall be sent to the shareholders at least fifteen
(15) (or, if sent by third class mail, thirty-five
(35)) days prior to the annual meeting of shareholders to be held in the next
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fiscal year and in the manner specified in Section 2.5 of these Bylaws for giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of
changes in financial position for the fiscal year, accompanied by any report thereon of independent accountants or, if there is no
such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the
books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than
one hundred (100) holders of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any
shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person
making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may
make a written request to the corporation for an income statement of the corporation for the three-month, six-month or
nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the corporation as of the end of that period. The statements
shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of the statements shall
be kept on file in the principal office of the corporation for twelve (12) months and it shall be exhibited at all reasonable times to
any shareholder demanding an examination of the statements or a copy shall be mailed to the shareholder. If the corporation
has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this
section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if
any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation
that the financial statements were prepared without audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Secretary or Assistant Secretary
of this corporation, or any other person authorized by the Board of Directors or the President or a Vice President, is authorized
to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or
corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person
directly or by any other person authorized to do so by proxy or by power of attorney duly executed by such person having the
authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of
any rights or entitled to exercise any rights in respect of any other lawful action (other than with respect to notice or voting at a
shareholders meeting or action by shareholders by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to any such action. Only shareholders of record at
the close of business on the record date are entitled to receive the dividend, distribution or allotment of rights, or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date,
except as otherwise provided for in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose
shall be at the close of business on the day on which the Board adopts the resolution relating thereto or the sixtieth (60th) day
prior to the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCE OF INDEBTEDNESS
From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all
checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or
payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of or on behalf of the corporation; such authority may
be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATE FOR SHARES
A certificate or certificates for shares of the corporation shall be issued to each shareholder when any such shares are fully paid.
The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall
state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the
name of the corporation by the Chairman of the Board or the Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of
shares
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and the class and series of shares owned by the shareholder. Any or all of the signatures on the certificates may be by facsimile.
In case any officer, transfer agent or registrar has signed or whose facsimile signature has been placed on a certificate has
ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with
the same effect as if that person were an officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificate for shares shall be issued to replace a previously issued certificate
unless the later is surrendered to the corporation or its transfer agent or registrar and cancelled at the same time. The Board of
Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed (as evidenced by a
written affidavit or affirmation of such fact), authorize the issuance of replacement certificates on such terms and conditions as
the Board of Directors may require; the Board of Directors may require indemnification of the corporation secured by a bond
or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement
certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the code shall govern the
construction of these Bylaws. Without limiting the generality of the provision, the singular number includes the plural, the plural
number includes the singular, and the term "person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New Bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a
majority of outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set
forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an
amendment of the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided by Section 9.1 of these Bylaws, Bylaws, other than a Bylaw or an
amendment of a Bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant
to a Bylaw providing for a variable number of directors), may be adopted, amended or repealed by the Board of Directors.
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9.3 RECORD OF AMENDMENTS
Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of minutes with the original Bylaws. If any
Bylaw is repealed, the face of repeal, with the date of the meeting at which the repeal was enacted or written consent was filed,
shall be stated in said book of minutes.
ARTICLE X
INTERPRETATION
Reference in the Bylaws to any provision of the California Corporations Code shall be deemed to include all amendments
thereof.
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EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
State or Other Jurisdiction of
Name of Entity Incorporation or Organization
-------------- ------------------------------
AltoCom, Inc. California
Armedia, Inc. Delaware
Broadcom (BVI) Limited British Virgin Islands
Broadcom Canada Ltd. British Columbia
Broadcom HomeNetworking, Inc. California
Broadcom India Private Limited India
Broadcom Netherlands B.V. The Netherlands
Broadcom Singapore Pte Ltd. Singapore
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-60763) pertaining to the
Broadcom Corporation 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan; the Registration Statement
(Form S-8 No. 333-80317) pertaining to the Epigram, Inc. 1996 Stock Plan, the Maverick Networks 1998 Stock Plan and
stock option grants to three employees of Armedia, Inc.; the Registration Statement (Form S-8 No. 333-87673) pertaining to
the AltoCom, Inc. 1997 Stock Plan and the HotHaus Technologies Inc. Incentive Stock Option Plan; the Registration
Statement (Form S-3 No. 333-90903) and related Prospectus pertaining to the registration of 653,159 shares of Class A
common stock and 653,159 shares of Class B common stock; the Registration Statement (Form S-8 No. 333-93457)
pertaining to the Broadcom Corporation 1999 Special Stock Option Plan and Broadcom Corporation 1998 Stock Incentive
Plan; and the Registration Statement (Form S-8 No. 333-33170) pertaining to the Broadcom Corporation 1998 Stock
Incentive Plan, BlueSteel Networks, Inc. 1999 Stock Incentive Plan, BlueSteel Networks, Inc. 1999 Non-Employee Stock
Plan, Digital Furnace Corporation Amended and Restated Stock Incentive Plan, Stellar Semiconductor, Inc. 1999 Equity
Incentive Plan and Stellar Semiconductor, Inc. 1997 Stock Option/Stock Issuance Plan, of our report dated January 18, 2000
(except for Note 13, as to which the date is March 8, 2000), with respect to the consolidated financial statements and financial
statement schedule of Broadcom Corporation included in the Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ Ernst & Young LLP
Orange County, California
March 30, 2000
ARTICLE 5
MULTIPLIER: 1000
PERIOD TYPE
YEAR
FISCAL YEAR END
DEC 31 1999
PERIOD START
JAN 01 1999
PERIOD END
DEC 31 1999
CASH
173,966
SECURITIES
86,215
RECEIVABLES
99,130
ALLOWANCES
7,673
INVENTORY
19,177
CURRENT ASSETS
391,327
PP&E
72,071
DEPRECIATION
24,972
TOTAL ASSETS
585,309
CURRENT LIABILITIES
86,062
BONDS
0
PREFERRED MANDATORY
0
PREFERRED
0
COMMON
21
OTHER SE
498,678
TOTAL LIABILITY AND EQUITY
585,309
SALES
518,183
TOTAL REVENUES
518,183
CGS
209,837
TOTAL COSTS
209,837
OTHER EXPENSES
196,950
LOSS PROVISION
476
INTEREST EXPENSE
(8,402)
INCOME PRETAX
119,322
INCOME TAX
36,035
INCOME CONTINUING
83,287
DISCONTINUED
0
EXTRAORDINARY
0
CHANGES
0
NET INCOME
83,287
EPS BASIC
0.42
EPS DILUTED
0.36
ARTICLE 5
RESTATED:
MULTIPLIER: 1000
PERIOD TYPE
YEAR
YEAR
FISCAL YEAR END
DEC 31 1998
DEC 31 1997
PERIOD START
JAN 01 1998
JAN 01 1997
PERIOD END
DEC 31 1998
DEC 31 1997
CASH
72,511
33,031
SECURITIES
34,344
0
RECEIVABLES
47,446
11,386
ALLOWANCES
5,167
721
INVENTORY
7,325
2,712
CURRENT ASSETS
172,644
48,601
PP&E
43,811
15,431
DEPRECIATION
12,211
5,321
TOTAL ASSETS
260,581
60,890
CURRENT LIABILITIES
40,978
12,867
BONDS
0
0
PREFERRED MANDATORY
0
0
PREFERRED
0
28,617
COMMON
20
14
OTHER SE
215,483
16,379
TOTAL LIABILITY AND EQUITY
260,581
60,890
SALES
216,456
42,341
TOTAL REVENUES
216,456
42,341
CGS
91,403
15,563
TOTAL COSTS
91,403
15,563
OTHER EXPENSES
83,078
32,955
LOSS PROVISION
951
0
INTEREST EXPENSE
(4,154)
(91)
INCOME PRETAX
45,178
(6,086)
INCOME TAX
20,586
(157)
INCOME CONTINUING
24,592
(5,929)
DISCONTINUED
0
0
EXTRAORDINARY
0
0
CHANGES
0
0
NET INCOME
24,592
(5,929)
EPS BASIC
0.15
(0.05)
EPS DILUTED
0.12
(0.05)