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