<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 1, 2000
BROADCOM CORPORATION
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
California 000-23993 33-0480482
---------- --------- ----------
(State or Other Jurisdiction of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
16215 Alton Parkway, Irvine, California 92618
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 450-8700
Not Applicable
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Broadcom Corporation ("Broadcom" or the "Company") filed a Current Report on
Form 8-K dated March 1, 2000 to report its acquisitions of Digital Furnace
Corporation ("Digital Furnace"), BlueSteel Networks, Inc. ("BlueSteel") and
Stellar Semiconductor, Inc. ("Stellar") and a Current Report on Form 8-K dated
May 23, 2000 to report its acquisition of Pivotal Technologies Corporation
("Pivotal"). These business combinations are being accounted for using the
pooling-of-interests method of accounting. We are amending the referenced
Reports to restate our historical consolidated financial statements to reflect
the pooled operations of Digital Furnace, BlueSteel, Stellar and Pivotal. There
are no other changes to the Reports as filed.
The following consolidated financial statements of Broadcom, as restated to
reflect the business combinations using the pooling-of-interests method, are
filed as part of this Report:
1. Selected Consolidated Financial Data for the five years ended December 31,
1999
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1999, 1998 and 1997
3. Report of Independent Auditors
4. Consolidated Balance Sheets as of December 31, 1999 and 1998
5. Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
6. Consolidated Statements of Shareholders' Equity for the years ended December
31, 1999, 1998 and 1997
7. Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
8. Notes to Consolidated Financial Statements
9. Financial Statement Schedule of Consolidated Valuation and Qualifying
Accounts
The restated consolidated financial statements give effect to each of the
business combinations as if it had occurred prior to the beginning of each
period presented and reflect adjustments made to (i) conform the accounting
policies of the combined companies and (ii) eliminate intercompany accounts and
transactions. No adjustments have been made to give effect to expenses related
to the business combinations, which expenses have been recorded in the fiscal
year ending December 31, 2000. The restated consolidated financial statements
also include the pooled operations of Broadcom's prior acquisitions.
ITEM 7. EXHIBITS
(a) Not Applicable.
(b) Not Applicable.
(c) Exhibits
23.1 Consent of Independent Auditors.
1
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue .................................... $521,225 $216,729 $ 42,341 $23,874 $ 6,624
Cost of revenue ............................ 211,991 91,403 15,563 8,175 1,572
-------- -------- -------- ------- -------
Gross profit ............................... 309,234 125,326 26,778 15,699 5,052
Operating expense:
Research and development ................ 121,733 55,544 22,822 7,541 3,807
Selling, general and administrative ..... 62,602 34,122 11,886 4,364 2,295
Merger-related costs .................... 15,210 -- -- -- --
Litigation settlement costs ............. 17,036 -- -- -- --
-------- -------- -------- ------- -------
Income (loss) from operations .............. 92,653 35,660 (7,930) 3,794 (1,050)
Interest and other income, net ............. 8,648 4,180 107 165 98
-------- -------- -------- ------- -------
Income (loss) before income taxes .......... 101,301 39,840 (7,823) 3,959 (952)
Provision (benefit) for income taxes ....... 28,830 18,451 (852) 1,514 3
-------- -------- -------- ------- -------
Net income (loss) .......................... $ 72,471 $ 21,389 $ (6,971) $ 2,445 $ (955)
======== ======== ======== ======= =======
Basic earnings (loss) per share (1) ........ $ .36 $ .13 $ (.06) $ .02 $ (.01)
======== ======== ======== ======= =======
Diluted earnings (loss) per share (1) ...... $ .31 $ .10 $ (.06) $ .02 $ (.01)
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents .................. $180,816 $ 77,555 $ 34,512 $ 9,780 $ 2,688
Working capital ............................ 313,700 136,341 35,349 9,920 2,276
Total assets ............................... 609,753 271,147 63,708 21,575 7,021
Long-term debt, including current portion .. 4,862 12,784 4,743 1,476 1,336
Convertible preferred stock ................ -- -- 28,617 6,084 3,150
Total shareholders' equity ................. 516,872 224,424 45,872 15,483 4,326
</TABLE>
----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the calculation of earnings (loss) per share. Adjusted to reflect our
2-for-1 stock 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., AltoCom, Inc., Digital Furnace Corporation,
BlueSteel Networks, Inc., Stellar Semiconductor, Inc. and Pivotal Technologies
Corporation 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 Securities and Exchange Commission
("SEC"), as well as the section of this Report and our other reports titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO CONTAINED
ELSEWHERE IN THIS REPORT. THE INFORMATION CONTAINED IN THIS CURRENT REPORT ON
FORM 8-K IS NOT A COMPLETE DESCRIPTION OF OUR BUSINESS OR THE RISKS ASSOCIATED
WITH AN INVESTMENT IN OUR COMMON STOCK. WE URGE YOU TO CAREFULLY REVIEW AND
CONSIDER THE VARIOUS DISCLOSURES MADE BY US IN THIS REPORT AND IN OUR OTHER
REPORTS FILED WITH THE SEC, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1999, AND OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K,
THAT DISCUSS OUR BUSINESS IN GREATER DETAIL.
THE SECTION ENTITLED "RISK FACTORS" SET FORTH BELOW, AND SIMILAR DISCUSSIONS
IN OUR OTHER SEC FILINGS, DISCUSS SOME OF THE IMPORTANT RISK FACTORS THAT MAY
AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. YOU SHOULD
CAREFULLY CONSIDER THOSE RISKS, IN ADDITION TO THE OTHER INFORMATION IN THIS
REPORT AND IN OUR OTHER FILINGS WITH THE SEC, BEFORE DECIDING TO INVEST IN OUR
COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT.
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, THE COMPETITIVE NATURE OF OUR MARKETS, 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 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. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.
ALL SHARE NUMBERS AND PER SHARE AMOUNTS IN THIS REPORT HAVE BEEN
RETROACTIVELY ADJUSTED TO REFLECT OUR 2-FOR-1 STOCK SPLITS, EACH IN THE FORM OF
A 100% STOCK DIVIDEND, EFFECTIVE FEBRUARY 17, 1999 AND FEBRUARY 11, 2000,
RESPECTIVELY, AS WELL AS AN EARLIER 3-FOR-2 STOCK SPLIT EFFECTIVE MARCH 9, 1998.
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, Voice over Internet Protocol ("VoIP"),
residential broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, optical networking, digital subscriber lines ("xDSL") and
wireless communications. 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.
3
<PAGE> 5
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 66.6%
of our revenue in 1999, 74.1% 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:
- our product mix;
- the position of our products in their respective life cycles;
- competitive pricing strategies;
- the mix of product revenue and development revenue; and
- manufacturing cost efficiencies and inefficiencies.
For example, newly-introduced products generally have higher average selling
prices and gross margins, both of which typically decline over product life
cycles due to competitive pressures and volume pricing agreements. Our gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors.
The sales cycle for the test and evaluation of our products can range from
three to six months or more, with an additional three to six months or more
before a customer commences volume production of equipment incorporating our
products. Due to these lengthy sales cycles, we may experience a significant
delay between increasing expenses for research and development and selling,
general and administrative efforts, and the generation of corresponding revenue,
if any. Furthermore, during 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.
4
<PAGE> 6
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenue 40.7 42.2 36.8
----- ----- -----
Gross profit 59.3 57.8 63.2
Operating expense:
Research and development 23.3 25.6 53.9
Selling, general and administrative 12.0 15.7 28.1
Merger-related costs 2.9 -- --
Litigation settlement costs 3.3 -- --
----- ----- -----
Income (loss) from operations 17.8 16.5 (18.8)
Interest and other income, net 1.6 1.9 .3
----- ----- -----
Income (loss) before income taxes 19.4 18.4 (18.5)
Provision (benefit) for income taxes 5.5 8.5 (2.0)
----- ----- -----
Net income (loss) 13.9% 9.9% (16.5)%
===== ===== =====
</TABLE>
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. On February 29 and March 1, 2000 we completed the acquisitions of Digital
Furnace Corporation, BlueSteel Networks, Inc. and Stellar Semiconductor, Inc. On
May 31, 2000 we completed the acquisition of Pivotal Technologies Corporation.
Each of the acquisitions has been 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 nine 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 $11.3 million and $19.6 million, respectively, from these nine
acquisitions 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 $521.2 million, an increase
of $304.5 million or 140.5% as compared with revenue of $216.7 million in 1998.
The growth in revenue resulted mainly from increases in volume shipments of our
semiconductor products for the high-speed networking market, digital cable
set-top boxes and cable modems.
Gross Profit. Gross profit represents revenue less the cost of revenue. Cost
of revenue includes the cost of purchasing the finished silicon wafers processed
by independent foundries, and costs associated with assembly, test and quality
assurance for those products, as well as costs of personnel and equipment
associated with manufacturing support and contracted development work. Gross
profit for 1999 was $309.2 million or 59.3% of revenue, an increase of $183.9
million or 146.7% from gross profit of $125.3 million or 57.8% of revenue in
1998. The increase in gross profit was mainly attributable to the significant
increase in the volume of semiconductor product shipments. The increase in gross
profit as a percentage of revenue was driven by cost reductions from our
suppliers as well as lower than expected rates of price erosion in our major
markets. 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 $121.7
million or 23.3% of
5
<PAGE> 7
revenue, an increase of $66.2 million or 119.2% as compared with research and
development expense of $55.5 million or 25.6% 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 decrease in research and development
expense as a percentage of revenue reflected the significant increase in revenue
during 1999 as compared with 1998. We expect that research and development
expense in absolute dollars will continue to increase for the foreseeable future
as a result of indigenous growth and acquisitions.
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 $62.6 million or 12.0% of revenue, an
increase of $28.5 million or 83.5% as compared with selling, general and
administrative expense of $34.1 million or 15.7% of revenue in 1998. The
increase in absolute dollars reflected higher personnel-related costs resulting
from the hiring of sales and marketing personnel, senior management and
administrative personnel, and increased occupancy, legal and other professional
fees, including increased expenses for litigation. The decline in selling,
general and administrative expense as a percentage of revenue reflected the
significant increase in revenue during 1999 as compared with 1998. 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 through indigenous growth and acquisitions and as a
result of 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 1998.
Litigation Settlement Costs. Litigation settlement costs consist primarily
of settlement fees and associated attorneys' fees, expenses and court costs.
Litigation settlement costs of approximately $17.0 million were incurred in
1999. No comparable litigation settlement costs were incurred in 1998.
Deferred Compensation. We recorded approximately $9.3 million and $8.9
million of deferred compensation in 1999 and 1998, respectively. Of these
amounts, approximately $9.3 million in 1999 and $3.6 million in 1998 represent
deferred compensation related to the grant of stock options to certain employees
of acquired companies. Deferred compensation represents the difference between
the fair value of the common stock for accounting purposes and the exercise
price of such options at the date of grant. We have presented these amounts as a
reduction of shareholders' equity and are amortizing these amounts ratably over
the respective vesting periods of the applicable options. We amortized to
expense an aggregate of $4.7 million of deferred compensation in 1999 and $1.9
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 $8.6 million as compared with $4.2 million in
1998. This increase was principally due to increased cash balances available to
invest resulting from the consummation of our initial public offering and sale
of shares to Cisco Systems, Inc. in April 1998, a follow-on offering in October
1998, and cash generated by operations.
Provision for Income Taxes. Our effective tax rate was 28.5% for 1999 and
46.3% for 1998. The federal statutory rate was 35% for both periods. Our 1999
effective tax rate was reduced by tax benefits associated with research and
development credits. Our 1998 effective tax rate was increased by our inability
to recognize the tax benefits of Epigram, Armedia and HotHaus net operating
losses incurred during 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
6
<PAGE> 8
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 $216.7 million, an increase of $174.4 million
or 411.9% 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 $125.3 million or 57.8% of revenue,
an increase of $98.5 million or 368.0% 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 $55.5 million or 25.6% of revenue, an increase of $32.7 million or 143.4% as
compared with research and development expense of $22.8 million or 53.9% 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 $34.1 million or 15.7% of revenue, an
increase of $22.2 million or 187.1% as compared with selling, general and
administrative expense of $11.9 million or 28.1% 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 $8.9 million and $1.2
million of deferred compensation in 1998 and 1997, respectively. Of the 1998
amount, approximately $3.6 million represents deferred compensation related to
the grant of stock options to certain employees of acquired companies. Deferred
compensation represents the difference between the fair value of the common
stock for accounting purposes and the exercise price of such options at the date
of grant. We have presented these amounts as a reduction of shareholders' equity
and are amortizing these amounts ratably over the respective vesting periods of
the applicable options. We amortized to expense an aggregate of $1.9 million of
deferred compensation in 1998 and $66,000 in 1997.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents and investment balances,
less interest on our long-term debt and capital lease obligations. Interest and
other income, net for 1998 was $4.2 million compared to $107,000 in 1997. This
increase was principally due to increased cash balances available to invest
resulting from the consummation of our initial public offering and sale of
shares to Cisco Systems, Inc. in April 1998, and a follow-on offering in October
1998.
Provision (Benefit) for Income Taxes. Our effective tax rate (benefit) was
46.3% in 1998 and (10.9)% in 1997. The federal statutory tax rates were 35% in
1998 and 34% in 1997. Our effective tax rate was increased in 1998, and our
benefit was reduced in 1997, by our inability to recognize the tax benefit of
Epigram, Armedia and HotHaus net operating losses incurred during both periods.
See Note 4 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through a combination
of sales of equity securities and cash generated by operations. At December 31,
1999 we had $313.7 million in working capital, $270.9 million in cash, cash
equivalents and short-term investments, and $9.4 million in long-term
investments.
7
<PAGE> 9
Operating activities provided cash of $54.2 million in 1999. This was
primarily the result of net income, the non-cash impact of depreciation and
amortization, and increases in accounts payable and other accrued liabilities,
partially offset by increases in accounts receivable, inventory, deferred tax
assets and prepaid expenses and other assets. Operating activities used cash of
$11.7 million in 1998 and $6.5 million in 1997.
Cash used in operating activities in 1998 was primarily the result of
increases in accounts receivable, inventory, deferred tax assets and prepaids
and other assets, partially offset by net income, the non-cash impact of
depreciation and amortization and growth in accounts payable and other accrued
liabilities. Cash used in operating activities in 1997 was primarily
attributable to a net loss, growth in accounts receivable, inventory, and a
decrease in income taxes payable, which more than offset increases in accounts
payable and the non-cash impact of depreciation and amortization.
Investing activities used cash in the amount of $22.2 million in 1999 for
the net purchase of held-to-maturity investments and $31.3 million for the
purchase of capital equipment to support our expanding operations. Investing
activities used cash of $107.0 million in 1998 for the net purchase of
held-to-maturity investments and the purchase of capital equipment to support
our expanding operations. Investing activities used cash of $8.8 million in
1997, primarily for the purchase of capital equipment.
Cash provided by financing activities was $102.6 million in 1999, which was
primarily the result of $51.7 million in tax benefits related to stock option
exercises and $56.7 million in net proceeds from issuances of common stock,
partially offset by $8.4 million in payments on long-term obligations of
acquired companies. Cash provided by financing activities in 1998 was $161.8
million, primarily the result of $79.2 million in aggregate net proceeds from
our initial public offering and sale of Class A common stock to Cisco Systems in
April 1998, $30.5 million in net proceeds from our follow-on offering in October
1998, $25.8 million in net proceeds from other issuances of common stock, and
$25.2 million in tax benefits related to stock option exercises. Cash provided
by financing activities was $40.0 million in 1997, primarily from the sale of
convertible preferred stock and common stock and the establishment of a
revolving credit facility and term loan.
We believe that our existing cash, cash equivalents and investments on hand,
together with cash that we expect to generate from our operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need to raise additional funds to fund our
activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We could raise such funds by selling more
stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We may not be able to obtain additional funds on terms that would be favorable
to our shareholders and us, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of
existing shareholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock.
We had commitments totaling approximately $4.0 million as of December 31,
1999 primarily for the purchase of engineering design tools, computer hardware
and information systems infrastructure. During 1999 we spent $33.6 million on
capital equipment to support our expanding operations. We expect that we will
spend more than that amount during 2000 to purchase additional engineering
design tools, computer hardware, test equipment, information systems and
leasehold improvements, as our operations continue to expand and as we integrate
and upgrade the capital equipment and facilities of acquired companies. We may
finance these purchases from our cash and cash equivalents and investments on
hand, cash generated from our operations, borrowings, equity offerings, or a
combination thereof. See Note 6 of Notes to Consolidated Financial Statements.
Although we believe we have sufficient capital to fund our activities for at
least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to launch
our new products and achieve and maintain a competitive position in the
marketplace;
- volume price discounts;
8
<PAGE> 10
- our business, product, capital expenditure and research and development
plans and product and technology roadmaps;
- the levels of inventory and accounts receivable that we maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products; and
- our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
YEAR 2000 COMPLIANCE
To date we have not experienced any known material Year 2000 problems in our
products, our internal systems or facilities, or the products, systems and
services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly. We did not incur material costs to identify and address specific Year
2000 compliance issues. We could however incur additional costs in addressing
any residual Year 2000 issues, which could have a material and adverse effect on
our business.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH
THE SEC, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1999 AS WELL AS OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF
THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE FOR OUR
CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly revenues and operating results have fluctuated significantly
in the past and may continue to vary from quarter to quarter due to a number of
factors, many of which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors, our stock price
may decline. Fluctuations in our operating results may be due to a number of
factors, including the following:
- the volume of our product sales and pricing concessions on volume sales;
- the timing, rescheduling or cancellation of significant customer orders;
- the gain or loss of a key customer;
- the qualification, availability and pricing of competing products and
technologies and the resulting effect on sales and pricing of our
products;
- silicon wafer pricing and the availability of foundry and assembly
capacity and raw materials;
- our ability to specify, develop or acquire, complete, introduce, market
and transition to volume production new products and technologies in a
timely manner;
- the timing of customer-industry qualification and certification of our
products and the risks of non-qualification or non-certification;
- the rate at which our present and future customers and end users adopt
Broadcom technologies in our target markets;
- the rate of adoption and acceptance of new industry standards in our
target markets;
9
<PAGE> 11
- the effects of new and emerging technologies;
- intellectual property disputes and customer indemnification claims;
- the risks inherent in our acquisitions of technologies and businesses,
including the timing and successful completion of technology and product
development through volume production, integration issues, costs and
unanticipated expenditures, changing relationships with customers,
suppliers and strategic partners, potential contractual, intellectual
property or employment issues, accounting treatment and charges, and the
risks that the acquisition cannot be completed successfully or that
anticipated benefits are not realized;
- the effectiveness of our product cost reduction efforts;
- fluctuations in the manufacturing yields of our semiconductor foundries
and other problems or delays in the fabrication, assembly, testing or
delivery of our products;
- the risks of producing products with new suppliers and at new fabrication
and assembly facilities;
- the risks and uncertainties associated with our international operations;
- problems or delays that we may face in shifting our products to smaller
geometry process technologies and in achieving higher levels of design
integration;
- our ability to retain and hire key executives, technical personnel and
other employees in the numbers, with the capabilities, and at the
compensation levels that we need to implement our business and product
plans;
- changes in our product or customer mix;
- the quality of our products and any remediation costs;
- the effects of natural disasters and other events beyond our control;
- the level of orders received that we can ship in a fiscal quarter;
- potential business disruptions, claims, expenses and other difficulties
resulting from residual "Year 2000" problems in computer-based systems
used by us, our suppliers or our customers;
~ economic and market conditions in the semiconductor industry and the
broadband communications markets; and
- general economic and market conditions.
We intend to continue to increase our operating expenses in 2000 and in the
future. A large portion of our operating expenses, including rent, salaries and
capital lease expenditures, is fixed and difficult to reduce or change.
Accordingly, if our total revenue does not meet our expectations, we probably
would not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenue. In that event, our business, financial condition and
results of operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this
report, you should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance.
BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. IN
ADDITION, IF WE ARE UNABLE TO CONTINUE TO SELL EXISTING AND NEW PRODUCTS TO OUR
KEY CUSTOMERS IN SIGNIFICANT QUANTITIES OR TO ATTRACT NEW SIGNIFICANT CUSTOMERS,
OUR FUTURE OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We have derived a substantial portion of our revenues in the past from sales
to a relatively small number of customers. As a result, the loss of any
significant customer could materially and adversely affect our financial
condition and results of operations. Sales to General Instrument (which was
acquired by Motorola in January 2000), 3Com, and Cisco, including sales to their
respective manufacturing subcontractors, accounted for approximately 27.4%,
18.0% and 10.6%, respectively, of our revenue in the year ended December 31,
1999. Sales to our five largest customers, including sales to their respective
manufacturing subcontractors, represented approximately 66.6% of our revenue in
1999, 74.1% of our revenue in 1998 and 56.2% of our revenue in 1997. We expect
that our key customers will continue to account for a substantial portion of our
revenues for 2000 and in the future. Accordingly, our future operating results
will continue to depend on the success of our largest customers and on our
ability to sell existing and new products to these customers in significant
quantities.
10
<PAGE> 12
We may not be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:
- Most of our customers can stop incorporating our products into their own
products with limited notice to us and suffer little or no penalty.
- Our agreements with our customers typically do not require them to
purchase a minimum amount of our products.
- Many of our customers have pre-existing relationships with our current or
potential competitors that may affect their decision to purchase our
products.
- Our customers face intense competition from other manufacturers that do
not use our products.
- Some of our customers offer or may offer products that compete with our
products.
- Our longstanding relationships with some of our larger customers may also
deter other potential customers who compete with these customers from
buying our products.
In addition, in order to attract new customers or retain existing customers,
we may offer certain customers favorable prices on our products. If these prices
are lower than the prices paid by our existing customers, we would have to offer
the same lower prices to certain of our customers who have contractual "most
favored nation" pricing arrangements. In that event, our average selling prices
and gross margins would decline. The loss of a key customer, a reduction in our
sales to any key customer or our inability to attract new significant customers
could materially and adversely affect our business, financial condition or
results of operations.
WE FACE INTENSE COMPETITION IN THE BROADBAND COMMUNICATIONS MARKETS AND
SEMICONDUCTOR INDUSTRY, WHICH COULD REDUCE OUR MARKET SHARE IN EXISTING MARKETS
AND AFFECT OUR ENTRY INTO NEW MARKETS.
The broadband communications markets and semiconductor industry are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We currently compete with a number of major domestic and
international suppliers of integrated circuits in the markets for digital cable
set-top boxes, cable modems, high-speed office networks, home networking, Voice
over Internet Protocol ("VoIP"), residential broadband gateways, direct
broadcast satellite and terrestrial digital satellite, optical networking,
digital subscriber lines ("xDSL") and wireless communications. This competition
has resulted and may continue to result in declining average selling prices for
our products. In all of our target markets, we also may face competition from
newly established competitors and suppliers of products based on new or emerging
technologies. We also expect to encounter further consolidation in the markets
in which we compete.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, technical and other resources than
we do. As a result, these competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements. They may also be
able to devote greater resources to the promotion and sale of their products. In
addition, current and potential competitors have established or may establish
financial or strategic relationships among themselves or with existing or
potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Existing or new competitors may also
develop technologies in the future that more effectively address the
transmission of digital information through existing analog infrastructures or
through new digital infrastructures at lower costs than our technologies.
Increased competition has in the past and is likely to continue to result in
price reductions, reduced gross margins and loss of market share. We cannot
assure you that we will be able to continue to compete successfully or that
competitive pressures will not materially and adversely affect our business,
financial condition and results of operations.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO UNDERTAKE SIGNIFICANT CAPITAL
INFUSIONS, BE DILUTIVE TO OUR EXISTING SHAREHOLDERS, AND RESULT IN DIFFICULTIES
IN ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES,
PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to complement
our existing product offerings, expand our market coverage, increase our
engineering workforce or enhance our technological capabilities. Since January
1999 we have acquired Maverick
11
<PAGE> 13
Networks, Epigram, Inc., Armedia, Inc., HotHaus Technologies Inc., AltoCom,
Inc., Digital Furnace Corporation, BlueSteel Networks, Inc., Stellar
Semiconductor, Inc. and Pivotal Technologies Corporation. We plan to continue
to pursue acquisition opportunities in 2000 and in the future. Acquisitions may
require significant capital infusions, typically entail many risks and could
result in difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of the acquired
company. We may also encounter delays in the timing and successful completion
of the acquired company's technology and product development through volume
production, costs and unanticipated expenditures, changing relationships with
customers, suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, the key personnel of the acquired
company may decide not to work for us. The acquisition of another company or
its products and technologies may also require us to enter into a geographic or
business market in which we have little or no prior experience. These
challenges could disrupt our ongoing business, distract our management and
employees and increase our expenses. In addition, acquisitions may materially
and adversely affect our results of operations because they may require large
one-time write-offs, increased debt or contingent liabilities, substantial
depreciation or deferred compensation charges or the amortization of expenses
related to goodwill and other intangible assets. We may seek to account for
acquisitions under the pooling-of-interests accounting method, but that method
may not be available. Any of these events could cause the price of our Class A
common stock to decline. Furthermore, if we issue equity or convertible debt
securities in connection with an acquisition, as in the case of our recent
acquisitions, the issuance may be dilutive to our existing shareholders. In
addition, the equity or debt securities that we may issue could have rights,
preferences or privileges senior to those of the holders of our common stock.
Thus, for example, as a consequence of the pooling-of-interest rules, the
securities issued in each of the nine acquisitions described above were Class
B common stock, which has voting rights superior to our publicly-traded Class A
common stock.
We cannot assure you that we will be able to consummate any pending or
future acquisitions or that we will realize the benefits anticipated from these
acquisitions. In the future, we may not be able to find other suitable
acquisition opportunities that are available at attractive valuations. Even if
we do find suitable acquisition opportunities, we may not be able to consummate
the acquisitions on commercially acceptable terms. Moreover, due to our limited
acquisition experience, it may be difficult for us to successfully integrate any
acquired businesses, products, technologies or personnel, which could materially
and adversely affect our business, financial condition and results of
operations.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKETS IN ORDER TO REMAIN COMPETITIVE.
Our future success will depend on our ability to anticipate and adapt to
changes in technology and industry standards. We will also need to continue to
develop and introduce new and enhanced products to meet our customers' changing
demands. Substantially all of our product revenue in recent fiscal quarters has
been derived from sales of products for the high-speed office network, digital
cable set-top box and cable modem markets. These markets are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and short product life cycles. In addition, these markets continue
to undergo rapid growth and consolidation. A significant slowdown in any of
these markets or other broadband communications markets could materially and
adversely affect our business, financial condition and results of operations.
Our success will also depend on the ability of our customers to develop new
products and enhance existing products for the broadband communications markets
and to introduce and promote those products successfully. The broadband
communications markets may not continue to develop to the extent or in the
timeframes that we anticipate. If new markets do not develop as we anticipate,
or if our products do not gain widespread acceptance in these markets, our
business, financial condition and results of operations could be materially and
adversely affected.
IF WE DO NOT ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS IN THE
SEMICONDUCTOR INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS, OUR PRODUCTS COULD
BECOME OBSOLETE AND WE COULD LOSE MARKET SHARE.
Products for broadband communications applications generally are based on
industry standards that are continually evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards. Our past sales and profitability have resulted, to a
large extent, from our ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products. Our ability to
adapt to these changes and to anticipate future standards, and the rate of
adoption and acceptance of those standards, will be a
12
<PAGE> 14
significant factor in maintaining or improving our competitive position and
prospects for growth. We have in the past invested substantial resources in
emerging technologies that did not achieve the market acceptance that we had
expected. Our inability to anticipate the evolving standards in the
semiconductor industry and, in particular the broadband communications markets,
or to develop and introduce new products successfully into these markets could
materially and adversely affect our business, financial condition and results of
operations.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY AND IN A
COST-EFFECTIVE AND TIMELY MANNER OR TO ACHIEVE MARKET ACCEPTANCE OF OUR NEW
PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
Our future success will depend on our ability to develop new silicon
solutions for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to
select these products for design into their own new products. Our quarterly
results in the past have been, and are expected in the future to continue to be,
dependent on the introduction of a relatively small number of new products and
the timely completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from time to time we
have experienced delays in completing the development and introduction of new
products. Our ability to develop and deliver new products successfully will
depend on various factors, including our ability to:
- accurately predict market requirements and evolving industry standards;
- accurately define new products;
- timely complete and introduce new product designs;
- timely qualify and obtain industry interoperability certification of our
products and our customers' products into which our products will be
incorporated;
- obtain sufficient foundry capacity;
- achieve high manufacturing yields; and
- gain market acceptance of our products and our customers' products.
If we are not able to develop and introduce new products successfully and in
a cost-effective and timely manner, our business, financial condition and
results of operations would be materially and adversely affected.
Our new products generally are incorporated into our customers' products at
the design stage. We have often incurred significant expenditures on the
development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product. The value
of our products largely depends on the commercial success of our customers'
products and on the extent to which those products accommodate components
manufactured by our competitors. We cannot assure you that we will continue to
achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.
WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT FOUNDRY CAPACITY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We do not own or operate a fabrication facility. Two outside foundries,
Taiwan Semiconductor Manufacturing Corporation, or TSMC, in Taiwan and Chartered
Semiconductor Manufacturing, or Chartered, in Singapore, currently manufacture
substantially all of our semiconductor devices in current production. In
September 1999 TSMC's principal facility was affected by a significant
earthquake in Taiwan. As a consequence of this earthquake, TSMC suffered power
outages and equipment damage that impaired TSMC's wafer deliveries and, together
with strong demand, could result in wafer shortages and higher wafer pricing
industrywide.
Because we rely on outside foundries with limited capacity, we face several
significant risks, including:
- a lack of ensured wafer supply and potential wafer shortages and higher
wafer prices;
- limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs; and
- the unavailability of or potential delays in obtaining access to key
process technologies.
13
<PAGE> 15
In addition, the manufacture of integrated circuits is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries have
from time to time experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the installation and
start-up of new process technologies.
The ability of each foundry to provide us with semiconductor devices is
limited by its available capacity. Although we have entered into contractual
commitments to supply specified levels of products to certain of our customers,
we do not have a long-term volume purchase agreement or a guaranteed level of
production capacity with either TSMC or Chartered. Foundry capacity may not be
available when we need it or at reasonable prices. Availability of foundry
capacity has recently been reduced due to strong demand. We place our orders on
the basis of our customers' purchase orders, and TSMC and Chartered can allocate
capacity to the production of other companies' products and reduce deliveries to
us on short notice. It is possible that foundry customers that are larger and
better financed than we are, or that have long-term agreements with TSMC or
Chartered, may induce our foundries to reallocate capacity to them. Such a
reallocation could impair our ability to secure the supply of components that we
need. Although we primarily use two independent foundries, most of our
components are not manufactured at both foundries at any given time and some of
our products may be designed to be manufactured at only one. Accordingly, if one
of our foundries is unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of those
components. Any of these delays would likely materially and adversely affect our
business, financial condition and results of operations. In addition, if either
TSMC or Chartered experiences financial difficulties, if either foundry suffers
any damage to its facilities or in the event of any other disruption of foundry
capacity, we may not be able to qualify an alternative foundry in a timely
manner. Even our current foundries would need to have new manufacturing
processes qualified if there is a disruption in an existing process. If we
choose to use a new foundry or process, it would typically take us several
months to qualify the new foundry or process before we can begin shipping
products from it. If we cannot accomplish this qualification in a timely manner,
we may still experience a significant interruption in supply of the affected
products. We cannot assure you that any of our existing or new foundries would
be able to produce integrated circuits with acceptable manufacturing yields.
Furthermore, our foundries may not be able to deliver enough semiconductor
devices to us on a timely basis, or at reasonable prices.
Certain of our acquired companies have established relationships with
foundries other than TSMC and Chartered, and we are using these other foundries
to produce the initial products of these acquired companies. We may utilize such
foundries for other products in the future. In using these new foundries, we
will be subject to all of the same risks described in the foregoing paragraphs
with respect to TSMC and Chartered.
WE MAY BE UNABLE TO RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL AND
ATTRACT ADDITIONAL KEY EMPLOYEES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel, in particular, our
co-founder, President and Chief Executive Officer, Dr. Henry T. Nicholas III,
and our co-founder, Vice President of Research & Development and Chief Technical
Officer, Dr. Henry Samueli. We do not have employment agreements with these
executives or any other key employees that govern the length of their service.
The loss of the services of Dr. Nicholas or Dr. Samueli, or certain other key
employees, would likely materially and adversely affect our business, financial
condition and results of operations. Our future success also depends on our
ability to continue to attract, retain and motivate qualified personnel,
particularly digital circuit designers, mixed-signal circuit designers and
systems applications engineers. Competition for these employees is intense. Our
inability to attract and retain additional key employees could have an adverse
effect on our business, financial condition and results of operations.
OUR INABILITY TO MANAGE OUR SIGNIFICANT RECENT AND ANTICIPATED FUTURE GROWTH
COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES, AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
During the past year, we have continued to significantly increase the scope of
our operations and expand our workforce, growing from 436 employees in December
31, 1998 to 1,459 employees as of June 30, 2000, including contract and
temporary employees and employees who joined us as the result of acquisitions.
This growth has placed, and our anticipated future growth of operations is
expected to continue to place, a significant strain on our management personnel,
systems and resources. We anticipate that we will need to implement a variety of
new and
14
<PAGE> 16
upgraded operational and financial systems, procedures and controls, including
the ongoing improvement of our accounting and other internal management systems.
We also will need to continue to expand, train, manage and motivate our
workforce. All of these endeavors will require substantial management effort. In
the future, we may need to expand our facilities or relocate some or all of our
employees or operations from time to time to support our growth. These
relocations could result in temporary disruptions of our operations or a
diversion of management's attention and resources. If we are unable to
effectively manage expanding operations, our business, financial condition and
results of operations could be materially and adversely affected.
THE LOSS OF ANY OF THE THREE THIRD-PARTY SUBCONTRACTORS THAT ASSEMBLE AND TEST
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS COULD DISRUPT OUR SHIPMENTS, HARM OUR
CUSTOMER RELATIONSHIPS AND ADVERSELY AFFECT OUR NET SALES.
Three third-party subcontractors, ASAT Ltd. in Hong Kong, ST Assembly Test
Services, STATS, in Singapore, and Amkor Technology in the Philippines and South
Korea, assemble and test almost all of our current products. Because we rely on
third-party subcontractors to assemble and test our products, we cannot directly
control our product delivery schedules and quality assurance and control. This
lack of control has in the past, and could in the future, result in product
shortages or quality assurance problems that could increase our manufacturing,
assembly or testing costs. We do not have long-term agreements with ASAT, STATS
or Amkor. We typically procure services from these suppliers on a per order
basis. If either ASAT, STATS or Amkor experiences capacity constraints or
financial difficulties, if any subcontractor suffers any damage to its
facilities or in the event of any other disruption of assembly and testing
capacity, we may not be able to obtain alternative assembly and testing services
in a timely manner. Due to the amount of time that it usually takes us to
qualify assemblers and testers, we could experience significant delays in
product shipments if we are required to find alternative assemblers or testers
for our components. Any problems that we may encounter with the delivery,
quality or cost of our products could materially and adversely affect our
business, financial condition or results of operations.
We are continuing to develop relationships with additional third-party
subcontractors to assemble and test our products. In using these new
subcontractors, we will be subject to all of the same risks described in the
foregoing paragraph with respect to ASAT, STATS and Amkor.
AS OUR INTERNATIONAL BUSINESS EXPANDS, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGAL, BUSINESS AND
ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS.
We currently obtain substantially all of our manufacturing, assembly and
testing services from suppliers located outside of the United States. In
addition, approximately 17.2% of our revenue in each of the years ended December
31, 1999 and 1998 was derived from sales to independent customers outside the
United States. We also frequently ship products to our domestic customers'
international manufacturing divisions and subcontractors. In 1999 we established
an international distribution center in Singapore and a design center in The
Netherlands. As a result of our acquisition of HotHaus in August 1999, we now
undertake software design, development and marketing activities in Canada.
Furthermore, as a result of our acquisition of Armedia in May 1999, we also
undertake design and development activities in India. In the future, we intend
to continue to expand these international business activities and also to open
other design and operational centers abroad. International operations are
subject to many inherent risks, including:
- political, social and economic instability;
- trade restrictions;
- the imposition of governmental controls;
- exposure to different legal standards, particularly with respect to
intellectual property;
- burdens of complying with a variety of foreign laws;
- import and export license requirements and restrictions of the United
States and each other country in which we operate;
- unexpected changes in regulatory requirements;
- foreign technical standards;
- changes in tariffs;
- difficulties in staffing and managing international operations;
15
<PAGE> 17
- fluctuations in currency exchange rates;
- difficulties in collecting receivables from foreign entities; and
- potentially adverse tax consequences.
VARIOUS EXPORT LICENSING REQUIREMENTS, THE SEASONALITY OF INTERNATIONAL
SALES OR AN INCREASE IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO FOREIGN
CURRENCIES COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS OR REQUIRE US
TO MODIFY OUR CURRENT BUSINESS PRACTICES SIGNIFICANTLY.
Various government export regulations apply to the encryption or other
features contained in some of our products. We have applied for and received
several export licenses under these regulations, but we cannot assure you that
we will obtain any licenses for which we have currently applied or any licenses
that we may apply for in the future. If we do not receive the required licenses,
we may be unable to manufacture the affected products at our foreign foundries
or to ship these products to certain customers located outside the United
States. Moreover, the seasonality of international sales and economic conditions
in our primary overseas markets may negatively impact the demand for our
products abroad. All of our international sales to date have been denominated in
U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative
to foreign currencies could make our products less competitive in international
markets. Any one or more of the foregoing factors could materially and adversely
affect our business, financial condition or results of operations or require us
to modify our current business practices significantly. We anticipate that these
factors will impact our business to a greater degree as we further expand our
international business activities.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD
OF BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
In the past, we have relied on our strategic relationships with certain
customers who are technology leaders in our target markets. We intend to pursue
and continue to form these strategic relationships in the future. These
relationships often require us to develop new products that typically involve
significant technological challenges. Our partners frequently place considerable
pressure on us to meet their tight development schedules. Accordingly, we may
have to devote a substantial amount of our limited resources to our strategic
relationships, which could detract from or delay our completion of other
important development projects. Delays in development could impair our
relationships with our strategic partners and negatively impact sales of the
products under development. Moreover, it is possible that our customers may
develop their own solutions or adopt a competitor's solution for products that
they currently buy from us. If that happens, our business, financial condition
and results of operations could be materially and adversely affected.
WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY
RESULT IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND
INCREASED EXPENSES.
In order to remain competitive, we expect to transition our products to
increasingly smaller geometries. This transition will require us to redesign
certain products and modify the manufacturing processes for our products. We
continually evaluate the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce our costs, and we
have begun shifting certain products from .50 micron to .35 micron, .22 micron
and smaller geometry processes. In the past, we have experienced some
difficulties in shifting to smaller geometry process technologies or new
manufacturing processes. These difficulties resulted in reduced manufacturing
yields, delays in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to
smaller geometry processes. We are dependent on our relationships with our
foundries to transition to smaller geometry processes successfully. We cannot
assure you that our foundries will be able to effectively manage the transition
or that we will be able to maintain our relationships with our foundries. If our
foundries or we experience significant delays in this transition or fail to
efficiently implement this transition, our business, financial condition and
results of operations could be materially and adversely affected. As smaller
geometry processes become more prevalent, we expect to integrate greater levels
of functionality, as well as customer and third party intellectual property,
into our products. However, we may not be able to achieve higher levels of
design integration or deliver new integrated products on a timely basis, or at
all.
16
<PAGE> 18
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We primarily rely on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
methods, to protect our proprietary technologies and processes. Despite our
efforts to protect our proprietary technologies and processes, it is possible
that certain of our competitors or other parties may obtain, use or disclose our
technologies and processes. We currently hold 13 issued United States patents
and have filed over 300 United States patent applications. We cannot assure you
that any additional patents will be issued. Even if a new patent is issued, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, any of our existing or future patents may be challenged, invalidated
or circumvented. Moreover, any rights granted under these patents may not
provide us with meaningful protection. If our patents do not adequately protect
our technology, then our competitors may be able to offer products similar to
ours. Our competitors may also be able to develop similar technology
independently or design around our patents. Moreover, because we have
participated in developing various industry standards, we may be required to
license some of our technology and patents to others, including competitors, who
develop products based on the adopted standards.
We generally enter into confidentiality agreements with our employees and
strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, parties may attempt to copy, disclose, obtain or use our products,
services or technology without our authorization. As a result, our technologies
and processes may be misappropriated, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.
In addition, some of our customers have entered into agreements with us that
grant them the right to use our proprietary technology if we ever fail to
fulfill our obligations under those agreements, including product supply
obligations, and do not correct this failure within a specified time period.
Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization. We cannot
assure you that our efforts to prevent the misappropriation or infringement of
our intellectual property or the intellectual property of our customers will
succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others, including our customers.
This litigation may be very expensive, divert management's attention and
materially and adversely affect our business, financial condition and results of
operations.
INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM
THIRD PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.
Companies in the semiconductor industry often aggressively protect and pursue
their intellectual property rights. From time to time, we have received, and may
continue to receive in the future, notices that claim we have infringed upon,
misappropriated or misused other parties' proprietary rights. In March 2000
Intel Corporation and its subsidiary Level One Communications, Inc. filed a
lawsuit against us alleging misappropriation of trade secrets, unfair
competition and tortious interference with existing contractual relations
related to 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
17
<PAGE> 19
or misused another party's proprietary rights. Even if claims against us are not
valid or successfully asserted, these claims could result in significant costs
and a diversion of management and personnel resources to defend. In that event,
our business, financial condition and results of operations would likely be
materially and adversely affected. If any claims or actions are asserted against
us, we may seek to obtain a license under a third party's intellectual property
rights. However, we may not be able to obtain a license on commercially
reasonable terms, if at all.
OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES. A CUSTOMER MAY DECIDE TO
CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED
SALES. IN ADDITION, OUR AVERAGE PRODUCT CYCLES TEND TO BE SHORT AND, AS A
RESULT, WE MAY HOLD EXCESS OR OBSOLETE INVENTORY WHICH COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
After we have developed and delivered a product to a customer, our customer
will often test and evaluate our product prior to designing its own equipment to
incorporate our product. Our customer may need three to six months or longer to
test and evaluate our product and an additional three to six months or more to
begin volume production of equipment that incorporates our product. Due to this
lengthy sales cycle, we may experience delays from the time we increase our
operating expenses and our investments in inventory until the time that we
generate revenues for these products. It is possible that we may never generate
any revenues from these products after incurring such expenditures. Even if a
customer selects our product to incorporate into its equipment, we have no
assurances that such customer will ultimately market and sell their equipment or
that such efforts by our customer will be successful. The delays inherent in our
lengthy sales cycle increase the risk that a customer will decide to cancel or
change its product plans. Such a cancellation or change in plans by a customer
could cause us to lose sales that we had anticipated. In addition, our business,
financial condition and results of operations could be materially and adversely
affected if a significant customer curtails, reduces or delays orders during our
sales cycle or chooses not to release equipment that contains our products.
While our sales cycles are typically long, our average product life cycles
tend to be short as a result of the rapidly changing technology environment in
which we operate. As a result, the resources devoted to product sales and
marketing may not generate material revenues for us, and from time to time, we
may need to write off excess and obsolete inventory. If we incur significant
marketing and inventory expenses in the future that we are not able to recover,
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions, and we still have higher cost
products in inventory, our operating results would be harmed.
BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically sell products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals could materially and
adversely affect our business, financial condition and results of operations. In
addition, cancellations or deferrals could cause us to hold excess inventory,
which could reduce our profit margins and restrict our ability to fund our
operations. We recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely pay for these
products, we could incur significant charges against our income. These charges
could materially and adversely affect our operating results.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH CURRENT OR PROSPECTIVE
CUSTOMERS.
Highly complex products such as the products that we offer frequently contain
defects and bugs when they are first introduced or as new versions are released.
We have in the past experienced, and may in the future experience, these defects
and bugs. If any of our products contain defects or bugs, or have reliability,
quality or compatibility problems, our reputation may be damaged and customers
may be reluctant to buy our products, which could materially and adversely
affect our ability to retain existing customers or attract new customers. In
addition, these defects or bugs could interrupt or delay sales to our customers.
In order to alleviate these problems, we may have to invest significant capital
and other resources. Although our products are tested by our suppliers, our
customers and ourselves, we cannot assure you that our new products will not
contain defects or bugs. If any of these problems are not found until after we
have commenced commercial production of a new product, we may be required to
incur
18
<PAGE> 20
additional development costs and product recall, repair or replacement costs.
These problems may also result in claims against us by our customers or others.
In addition, these problems may divert our technical and other resources from
other development efforts. Moreover, we would likely lose, or experience a delay
in, market acceptance of the affected product or products, and we could lose
credibility with our current and prospective customers.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
We operate in the semiconductor industry, which is cyclical and subject to
rapid technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, accelerated erosion of prices and excess production capacity. This
industry also periodically experiences increased demand and production capacity
constraints. Accordingly, our quarterly results may vary significantly as a
result of the general conditions in the semiconductor industry.
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF ONE OF THE TWO INDEPENDENT
FOUNDRIES UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT
PRODUCTS ARE LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER
NATURAL DISASTERS.
Our California facilities, including our principal executive offices, are
located near major earthquake fault lines. If there is a major earthquake or any
other natural disaster in a region where one of our facilities is located, our
business could be materially and adversely affected. In addition, TSMC, one of
the two outside foundries upon which we rely to manufacture substantially all of
our semiconductor devices, is located in Taiwan, a country that is also subject
to earthquakes. Any earthquake or other natural disaster in Taiwan could
materially disrupt TSMC's production capabilities and could result in our
experiencing a significant delay in delivery, or substantial shortage, of wafers
and possibly in higher wafer prices.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
The Federal Communications Commission has broad jurisdiction over each of
our target markets. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly applicable to
our products, they do apply to much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. For example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions specifications. We
and our customers may also be subject to regulation by countries other than the
United States. Foreign governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic suppliers and may
impose export restrictions on products that we sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our
business, financial condition and results of operations. Changes in current laws
or regulations or the imposition of new laws and regulations in the United
States or elsewhere could also materially and adversely affect our business.
CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES CAN CONTROL
THE OUTCOME OF MATTERS THAT REQUIRE THE APPROVAL OF OUR SHAREHOLDERS, AND
ACCORDINGLY WE WILL NOT BE ABLE TO ENGAGE IN CERTAIN TRANSACTIONS WITHOUT THEIR
APPROVAL.
As of June 30, 2000 our directors and executive officers beneficially owned
approximately 33.3% of our outstanding common stock and 68.4% of the total
voting control held by our shareholders. In particular, as of June 30, 2000 our
two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially
owned a total of approximately 31.7% of our outstanding common stock and 65.6%
of the total voting control held by our shareholders. Accordingly, these
shareholders currently have enough voting power to control the outcome of
matters that require the approval of our shareholders. These matters include the
election of a majority of our Board of Directors, the issuance of additional
shares of Class B common stock, and the approval of any significant corporate
19
<PAGE> 21
transaction, including a merger, consolidation or sale of substantially all of
our assets. In addition, these insiders currently also control the management of
our business. Because of their significant stock ownership, we will not be able
to engage in certain transactions without the approval of these shareholders.
These transactions include proxy contests, mergers, tender offers, open market
purchase programs or other purchases of our Class A common stock that could give
our shareholders the opportunity to receive a higher price for their shares than
the prevailing market price at the time of such purchases.
OUR STOCK PRICE IS HIGHLY VOLATILE. ACCORDINGLY, YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES OF COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.
The market price of our Class A common stock has fluctuated substantially in
the past and is likely to continue to be highly volatile and subject to wide
fluctuations. Since our initial public offering in April 1998, our Class A
common stock has traded at prices as low as $11.75 and as high as $253.00 per
share. These fluctuations have occurred and may continue to occur in response to
various factors, many of which we cannot control, including:
- quarter-to-quarter variations in our operating results;
- announcements of technological innovations or new products by our
competitors, customers or us;
- general conditions in the semiconductor industry and telecommunications
and data communications equipment markets;
- changes in earnings estimates or investment recommendations by analysts;
- changes in investor perceptions; or
- changes in expectations relating to our products, plans and strategic
position or those of our competitors or customers.
In addition, the market prices of securities of Internet-related and other
high technology companies have been especially volatile. This volatility has
significantly affected the market prices of securities of many technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. Accordingly, you may not be able to resell your shares of
common stock at or above the price you paid. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of securities class action litigation. If we were the object of a
securities class action litigation, it could result in substantial losses and
divert management's attention and resources from other matters.
OUR PRODUCTS AND INTERNAL INFORMATION SYSTEMS AND THE PRODUCTS AND SYSTEMS OF
OUR CUSTOMERS AND THE THIRD PARTY SUPPLIERS WHO FABRICATE, TEST AND ASSEMBLE OUR
PRODUCTS MAY BE NEGATIVELY IMPACTED BY YEAR 2000 COMPLIANCE PROBLEMS.
Many existing computer systems, software applications and embedded computer
chips, software and firmware in control devices use only two digits to identify
a year in the date field. These systems, applications and control devices need
to accept four digit entries to distinguish 21st Century dates from 20th Century
dates. In addition, they may not correctly process "leap year" dates or may fail
to recognize February 29, 2000 as a leap year date as a result of an exception
to the calculation of leap years that will occur in the Year 2000 and otherwise
occurs only once every 400 years. As a result, these systems and applications
had to be upgraded to comply with the Year 2000 requirements or risk system
failure, miscalculations or other disruptions to normal business activities.
To date we have not experienced any known material Year 2000 problems in our
products, our internal systems or facilities, or the products, systems and
services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly. We did not incur material costs to identify and address specific Year
2000 compliance issues. We could however incur additional costs in addressing
any residual Year 2000 issues, which could have a material and adverse effect on
our business.
20
<PAGE> 22
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES OR BY BORROWING MONEY, AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that our existing cash, cash equivalents and investments on hand,
together with the cash that we expect to generate from our operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need to raise additional funds to fund our
activities beyond the next year or to consummate acquisitions of other
businesses, products, or technologies. We could raise these funds by selling
more stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We may not be able to obtain additional funds on favorable terms, or at all. If
adequate funds are not available, we may be required to curtail our operations
significantly or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain technologies or
potential markets. If we raise additional funds by issuing additional equity or
convertible debt securities, the ownership percentages of existing shareholders
would be reduced. In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of the holders of our
common stock.
It is possible that our future capital requirements may vary materially from
those now planned. The amount of capital that we will need in the future will
depend on many factors, including:
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to launch
our new products and achieve and maintain a competitive position in the
marketplace;
- volume price discounts;
- our business, product, capital expenditure and research and development
plans and product and technology roadmaps;
- the levels of inventory and accounts receivable that we maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products; and
- our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain provisions that may prevent
or discourage a third party from acquiring us, even if the acquisition would be
beneficial to our shareholders. In addition, we have in the past issued and will
in the future issue shares of Class B common stock in connection with certain
acquisitions, upon exercise of certain stock options, and for other purposes.
Class B shares have superior voting rights entitling the holder to ten votes for
each share held on matters that we submit to a shareholder vote (as compared
with one vote per share in the case of our publicly-held Class A common stock).
Our Board of Directors also has the authority to fix the rights and preferences
of shares of our preferred stock and to issue such shares without a shareholder
vote. It is possible that the provisions in our charter documents, the existence
of supervoting rights by holders of our Class B common stock, our officers'
ownership of a majority of the Class B common stock and the ability of our Board
of Directors to issue preferred stock may prevent parties from acquiring us. In
addition, these factors may discourage third parties from bidding for our Class
A common stock at a premium over the market price for this stock. Finally, these
factors may also materially and adversely affect the market price of our Class A
common stock, and the voting and other rights of the holders of our common
stock.
21
<PAGE> 23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
We do not use derivative financial instruments in our non-trading investment
portfolio. We place our investments in instruments that meet high credit quality
standards, as specified in our investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer or type of
instrument. We do not expect any material loss with respect to our investment
portfolio.
The table below provides information about our non-trading investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average fixed interest rates by expected maturity dates.
Our investment policy requires that all investments mature in three years or
less, with a weighted average maturity of no longer than one year.
Principal (notional) amounts by expected maturity (at December 31, 1999):
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 TOTAL 1999
-------- ------ -------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C>
Cash equivalents .......... $ 27,383 $ -- $ 27,383 $ 27,386
Weighted average rate .. 5.86% -- 5.86%
Investments ............... $ 90,059 $9,351 $ 99,410 $ 99,137
Weighted average rate .. 4.63% 3.33% 4.52%
Total portfolio ........... $117,442 $9,351 $126,793 $126,523
Weighted average rate .. 4.92% 3.33% 4.81%
</TABLE>
22
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying consolidated balance sheets of Broadcom
Corporation (formed as a result of the business combinations of Broadcom
Corporation and Digital Furnace Corporation, BlueSteel Networks, Inc., Stellar
Semiconductor, Inc. and Pivotal Technologies Corporation), as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. The consolidated financial statements give retroactive
effect to the business combinations of Broadcom Corporation and Digital Furnace
Corporation on February 29, 2000, BlueSteel Networks, Inc. and Stellar
Semiconductor, Inc. on March 1, 2000, and Pivotal Technologies Corporation on
May 31, 2000, which have been accounted for using the pooling of interests
method as described in the notes to the consolidated financial statements. Our
audits also included the financial statement schedule listed in Item 5. These
financial statements and schedule are the responsibility of the management of
Broadcom Corporation. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of Stellar Semiconductor, Inc., which statements reflect
aggregate total assets constituting $4.9 million for 1999 and $4.9 million for
1998 of the related consolidated financial statement totals, and which
contributed aggregate net losses of $3.5 million, $2.8 million and $1.0 million
for the three years ended December 31, 1999, 1998 and 1997, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for Stellar
Semiconductor, Inc., is based solely on the reports of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Broadcom Corporation at December 31, 1999
and 1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, after giving
retroactive effect to the business combinations of Broadcom Corporation and
Digital Furnace Corporation, BlueSteel Networks, Inc., Stellar Semiconductor,
Inc. and Pivotal Technologies Corporation, as described in the notes to the
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 18, 2000, except for
Note 2, as to which the date is
May 31, 2000, and Notes 9 and 13, as to
which the date is June 29, 2000
23
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 180,816 $ 77,555
Short-term investments ....................................... 90,059 34,344
Accounts receivable (net of allowances for doubtful
accounts and sales returns and allowances of
$7,673 in 1999 and $5,167 in 1998) ........................ 92,124 42,463
Inventory .................................................... 19,177 7,325
Deferred taxes ............................................... 8,380 6,184
Income taxes receivable ...................................... -- 3,069
Prepaid expenses ............................................. 12,950 7,075
--------- ---------
Total current assets ................................. 403,506 178,015
Property and equipment, net .................................... 51,151 32,899
Long-term investments .......................................... 9,351 42,826
Deferred taxes ................................................. 137,779 9,552
Other assets ................................................... 7,966 7,855
--------- ---------
Total assets ......................................... $ 609,753 $ 271,147
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ....................................... $ 46,458 $ 22,506
Wages and related benefits ................................... 15,430 3,201
Accrued liabilities .......................................... 26,131 8,232
Current portion of long-term debt ............................ 1,787 7,735
--------- ---------
Total current liabilities ............................ 89,806 41,674
Long-term debt, less current portion ........................... 3,075 5,049
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- none in 1999 and 1998 .... -- --
Class A common stock, $.0001 par value:
Authorized shares -- 400,000,000
Issued and outstanding shares -- 110,402,852 in 1999
and 53,982,780 in 1998 .................................... 11 6
Class B common stock, $.0001 par value:
Authorized shares -- 200,000,000
Issued and outstanding shares -- 102,596,638 in 1999
and 145,927,079 in 1998 ................................... 10 14
Additional paid-in capital ................................... 451,273 221,230
Notes receivable from employees .............................. (1,821) (2,743)
Deferred compensation ........................................ (12,632) (8,078)
Retained earnings ............................................ 80,031 13,995
--------- ---------
Total shareholders' equity ........................... 516,872 224,424
--------- ---------
Total liabilities and shareholders' equity ........... $ 609,753 $ 271,147
========= =========
</TABLE>
See accompanying notes.
24
<PAGE> 26
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue .................................. $ 521,225 $ 216,729 $ 42,341
Cost of revenue .......................... 211,991 91,403 15,563
--------- --------- ---------
Gross profit ............................. 309,234 125,326 26,778
Operating expense:
Research and development ............... 121,733 55,544 22,822
Selling, general and administrative .... 62,602 34,122 11,886
Merger-related costs ................... 15,210 -- --
Litigation settlement costs ............ 17,036 -- --
--------- --------- ---------
Income (loss) from operations ............ 92,653 35,660 (7,930)
Interest and other income, net ........... 8,648 4,180 107
--------- --------- ---------
Income (loss) before income taxes ........ 101,301 39,840 (7,823)
Provision (benefit) for income taxes ..... 28,830 18,451 (852)
--------- --------- ---------
Net income (loss) ........................ $ 72,471 $ 21,389 $ (6,971)
========= ========= =========
Basic earnings (loss) per share .......... $ .36 $ .13 $ (.06)
========= ========= =========
Diluted earnings (loss) per share ........ $ .31 $ .10 $ (.06)
========= ========= =========
Weighted average shares (basic) .......... 201,667 169,716 116,508
========= ========= =========
Weighted average shares (diluted) ........ 235,651 205,511 116,508
========= ========= =========
</TABLE>
See accompanying notes.
25
<PAGE> 27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ......... 2,093,839 $ 6,084 124,963,788 $ 12 $ 8,396
Shares issued in business
combinations .................... -- -- 7,321,441 1 12,564
Issuance of preferred stock,
net of issuance costs of $36 .... 1,500,000 22,689 -- -- --
Repurchases of preferred stock ..... (26,000) (156) -- -- --
Issuance of Class B common
stock ........................... -- -- 1,140,000 -- 1,050
Exercise of stock options, net
of repurchases .................. -- -- 7,251,168 1 3,568
Tax benefit from exercise of
stock options ................... -- -- -- -- 191
Deferred compensation related
to grant of stock options ....... -- -- -- -- 1,156
Amortization of deferred
compensation .................... -- -- -- -- --
Net loss ........................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ......... 3,567,839 28,617 140,676,397 14 26,925
Shares issued in business
combinations .................... -- -- 5,108,730 -- 18,306
Conversion of preferred stock
into Class B common stock ....... (3,567,839) (28,617) 33,814,068 3 28,614
Issuance of Class A common
stock in initial public
offering, net of offering
costs of $1,628 ................. -- -- 14,480,000 2 79,168
Issuance of Class A common
stock in follow-on
offering, net of offering
costs of $584 ................... -- -- 1,880,000 -- 30,548
Exercise of stock options, net
of repurchases .................. -- -- 3,612,408 1 1,885
Employee stock purchase plan ....... -- -- 338,256 -- 1,725
Repayment of notes receivable
from employees .................. -- -- -- -- --
Tax benefit from exercise of
stock options and stock
purchase plan ................... -- -- -- -- 25,171
Deferred compensation related
to grant of stock options ....... -- -- -- -- 8,888
Amortization of deferred
compensation .................... -- -- -- -- --
Net income ......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ......... -- -- 199,909,859 20 221,230
Shares issued in business
combinations .................... -- -- 3,406,871 -- 37,642
Exercise of stock options, net
of repurchases .................. -- -- 8,945,672 1 24,015
Employee stock purchase plan ....... -- -- 737,088 -- 5,016
Repayment of notes receivable
from employees .................. -- -- -- -- --
Tax benefit from exercise of
stock options and stock
purchase plan ................... -- -- -- -- 154,103
Deferred compensation related
to grant of stock options ....... -- -- -- -- 9,267
Amortization of deferred
compensation .................... -- -- -- -- --
Net income ......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ......... -- $ -- 212,999,490 $ 21 $ 451,273
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM DEFERRED RETAINED SHAREHOLDERS'
EMPLOYEES COMPENSATION EARNINGS EQUITY
---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ......... $ (748) $ -- $ 1,739 $ 15,483
Shares issued in business
combinations .................... -- -- -- 12,565
Issuance of preferred stock,
net of issuance costs of $36 .... -- -- -- 22,689
Repurchases of preferred stock ..... -- -- -- (156)
Issuance of Class B common
stock ........................... -- -- -- 1,050
Exercise of stock options, net
of repurchases .................. (2,614) -- -- 955
Tax benefit from exercise of
stock options ................... -- -- -- 191
Deferred compensation related
to grant of stock options ....... -- (1,156) -- --
Amortization of deferred
compensation .................... -- 66 -- 66
Net loss ........................... -- -- (6,971) (6,971)
----------- ----------- ----------- -----------
Balance at December 31, 1997 ......... (3,362) (1,090) (5,232) 45,872
Shares issued in business
combinations .................... -- -- (2,162) 16,144
Conversion of preferred stock
into Class B common stock ....... -- -- -- --
Issuance of Class A common
stock in initial public
offering, net of offering
costs of $1,628 ................. -- -- -- 79,170
Issuance of Class A common
stock in follow-on
offering, net of offering
costs of $584 ................... -- -- -- 30,548
Exercise of stock options, net
of repurchases .................. (191) -- -- 1,695
Employee stock purchase plan ....... -- -- -- 1,725
Repayment of notes receivable
from employees .................. 810 -- -- 810
Tax benefit from exercise of
stock options and stock
purchase plan ................... -- -- -- 25,171
Deferred compensation related
to grant of stock options ....... -- (8,888) -- --
Amortization of deferred
compensation .................... -- 1,900 -- 1,900
Net income ......................... -- -- 21,389 21,389
----------- ----------- ----------- -----------
Balance at December 31, 1998 ......... (2,743) (8,078) 13,995 224,424
Shares issued in business
combinations .................... -- -- (6,435) 31,207
Exercise of stock options, net
of repurchases .................. (394) -- -- 23,622
Employee stock purchase plan ....... -- -- -- 5,016
Repayment of notes receivable
from employees .................. 1,316 -- -- 1,316
Tax benefit from exercise of
stock options and stock
purchase plan ................... -- -- -- 154,103
Deferred compensation related
to grant of stock options ....... -- (9,267) -- --
Amortization of deferred
compensation .................... -- 4,713 -- 4,713
Net income ......................... -- -- 72,471 72,471
----------- ----------- ----------- -----------
Balance at December 31, 1999 ......... $ (1,821) $ (12,632) $ 80,031 $ 516,872
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
26
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ....................................... $ 72,471 $ 21,389 $ (6,971)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................... 16,070 9,718 3,524
Amortization of deferred compensation .............. 4,713 1,900 66
Deferred taxes ..................................... (27,973) (13,815) (1,402)
Change in operating assets and liabilities:
Accounts receivable .............................. (49,661) (31,798) (6,789)
Inventory ........................................ (11,852) (4,613) (1,805)
Income taxes ..................................... 9,248 (2,636) (2,245)
Prepaid expenses and other assets ................ (6,755) (12,673) (1,117)
Accounts payable ................................. 23,952 12,753 7,431
Other accrued liabilities ........................ 23,949 8,093 2,858
--------- --------- ---------
Net cash provided by (used in) operating activities ..... 54,162 (11,682) (6,450)
INVESTING ACTIVITIES
Purchases of property and equipment, net ................ (31,278) (29,890) (8,796)
Proceeds from sale of investments ....................... -- 8,808 --
Purchases of investments ................................ (22,240) (85,978) --
--------- --------- ---------
Net cash used in investing activities ................... (53,518) (107,060) (8,796)
FINANCING ACTIVITIES
Proceeds from long-term obligations ..................... 1,367 5,440 3,779
Payments on long-term obligations ....................... (7,768) (4,873) (647)
Payments on capital lease obligations ................... (654) (329) (448)
Proceeds from issuance of preferred stock ............... -- -- 22,689
Payments on repurchase of preferred stock ............... -- -- (156)
Net proceeds from initial public offering of
Class A common stock .................................. -- 79,170 --
Net proceeds from follow-on offering of
Class A common stock .................................. -- 30,548 --
Net proceeds from issuance of common stock .............. 56,703 25,848 14,570
Tax benefit from exercise of stock options and stock
purchase plan ......................................... 51,653 25,171 191
Proceeds from repayment of notes receivable from
employees ............................................. 1,316 810 --
--------- --------- ---------
Net cash provided by financing activities ............... 102,617 161,785 39,978
--------- --------- ---------
Increase in cash and cash equivalents ................... 103,261 43,043 24,732
Cash and cash equivalents at beginning of year .......... 77,555 34,512 9,780
--------- --------- ---------
Cash and cash equivalents at end of year ................ $ 180,816 $ 77,555 $ 34,512
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ........................................... $ 625 $ 506 $ 274
========= ========= =========
Income taxes paid ....................................... $ 2,401 $ 9,890 $ 1,850
========= ========= =========
</TABLE>
See accompanying notes.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom Corporation (the "Company") is the leading provider of highly
integrated silicon solutions that enable broadband digital transmission of
voice, video and data to and throughout the home and within the business
enterprise. These integrated circuits permit the cost effective delivery of
high-speed, high-bandwidth networking using existing communications
infrastructures that were not originally designed for the transmission of
broadband digital content. Using proprietary technologies and advanced design
methodologies, the Company designs, develops and supplies integrated circuits
for a number of the most significant broadband communications markets, including
the markets for digital cable set-top boxes, cable modems, high-speed office
networks, home networking, Voice over Internet Protocol ("VoIP"), residential
broadband gateways, direct broadcast satellite and terrestrial digital
broadcast, optical networking, digital subscriber lines ("xDSL") and wireless
communications.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
In 1999 the Company established an international distribution center in
Singapore and a design center in the Netherlands and, as a result of
acquisitions, has software design, development and marketing activities in
Canada and design and development activities in India. At December 31, 1999
approximately $73.0 million of the Company's net assets were located outside of
the United States, primarily in Singapore.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, sales returns and allowances, inventory
reserves, warranty reserves and income tax valuation allowances.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Provision
is concurrently made for estimated product returns. Development revenue is
recognized when earned. Revenue from licensed software is recognized at the time
of shipment, provided the Company has vendor-specific objective evidence of the
fair value of each element of the software offering. Revenue from post-contract
customer support and any other future deliverables is deferred and earned over
the support period or as contract elements are delivered.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products throughout North America,
Europe and Asia. Sales to the Company's recurring customers are generally made
on open account while sales to occasional customers are typically made on a
prepaid or letter of credit basis. The Company performs periodic credit
evaluations of its ongoing customers and generally does not require collateral.
Reserves are maintained for potential credit losses, and such losses have been
minimal and within management's expectations.
The Company invests its excess cash in deposits with major banks, in U.S.
Treasury and U.S. agency obligations and in debt securities of corporations with
strong credit ratings and in a variety of industries. It is the Company's policy
to invest in instruments that have a final maturity of no longer than three
years, with a portfolio weighted average maturity of not more than one year.
28
<PAGE> 30
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term and long-term investments, accounts receivable, accounts
payable, and borrowings. The Company believes all of the financial instruments'
recorded values approximate current values.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
original maturities of ninety days or less.
INVESTMENTS
The Company accounts for its investments in debt securities under FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Management determines the appropriate classification of such
securities at the time of purchase and reevaluates such classification as of
each balance sheet date. The investments are adjusted for amortization of
premiums and discounts to maturity and such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary are determined based on the specific identification method and are
reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market and
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Work in process .................................. $11,878 $ 3,546
Finished goods ................................... 7,299 3,779
------- -------
$19,177 $ 7,325
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are provided using the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment are comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements ............................. $ 5,999 $ 774
Office furniture and equipment ..................... 6,999 4,574
Machinery and equipment ............................ 20,027 9,524
Computer software and equipment .................... 40,614 25,643
Construction in progress ........................... 4,478 5,330
-------- --------
78,117 45,845
Less accumulated depreciation and amortization ..... (26,966) (12,946)
-------- --------
$ 51,151 $ 32,899
======== ========
</TABLE>
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present.
29
<PAGE> 31
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in FASB Statement No. 109, Accounting for Income Taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and has adopted the disclosure-only alternative of FASB Statement No.
123, Accounting for Stock-Based Compensation. Options granted to non-employees,
as defined, have been accounted for at fair market value in accordance with
Statement No. 123.
EARNINGS PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is calculated by adjusting outstanding shares,
assuming any dilutive effects of options, warrants and convertible securities.
The following table sets forth the computation of earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator: net income (loss) ................................ $ 72,471 $ 21,389 $ (6,971)
========= ========= =========
Denominator:
Weighted average shares outstanding ....................... 207,701 181,269 131,553
Less: nonvested common shares outstanding ................. (6,034) (11,553) (15,045)
--------- --------- ---------
Denominator for basic earnings (loss) per common share ...... 201,667 169,716 116,508
Effect of dilutive securities:
Nonvested common shares ................................... 4,798 7,156 --
Stock options ............................................. 29,178 20,172 --
Convertible preferred stock ............................... -- 8,453 --
Warrants .................................................. 8 14 --
--------- --------- ---------
Denominator for diluted earnings (loss) per common share .... 235,651 205,511 116,508
========= ========= =========
Basic earnings (loss) per share ........................... $ .36 $ .13 $ (.06)
========= ========= =========
Diluted earnings (loss) per share ......................... $ .31 $ .10 $ (.06)
========= ========= =========
</TABLE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on most products and records a
related provision for estimated warranty costs at the date of sale. The
estimated warranty liability at December 31, 1999 and 1998 was $3.7 million and
$2.0 million, respectively.
COMPREHENSIVE INCOME
FASB Statement No. 130, Reporting Comprehensive Income, establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. For the years ended December 31, 1999,
1998 and 1997, the Company did not have any components of comprehensive income
as defined in Statement No. 130.
30
<PAGE> 32
SEGMENTS OF A BUSINESS ENTERPRISE
FASB Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, establishes standards for the way that public business
enterprises report information about operating segments in annual consolidated
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement No.
131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company operates in one
segment, broadband communications.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of ninety days or less to be cash
equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase of equipment through capital leases ............ $ 2,275 $ 1,519 $ 583
Notes receivable from employees issued in
connection with exercise of stock options ............. 394 191 2,614
Non-interest bearing notes payable converted
to common stock ....................................... 3,142 -- --
Tax benefit from exercise of stock options and stock
purchase plan ......................................... 102,450 -- --
</TABLE>
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements have
been reclassified to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
recording derivatives in interim and annual financial statements. This statement
requires recording all derivative instruments as assets or liabilities, measured
at fair value. Statement No. 133 is effective for fiscal years beginning after
June 15, 2000. Management does not anticipate that the adoption of the new
statement will have a significant impact on the consolidated results of
operations or financial position of the Company.
2. BUSINESS COMBINATIONS
Pooling-of-Interests Transactions
On May 31, 1999 the Company completed the acquisitions of Maverick Networks
("Maverick"), Epigram, Inc. ("Epigram"), and Armedia, Inc. ("Armedia"). Maverick
develops highly integrated silicon for multi-layer switching equipment in
enterprise networks, Epigram makes advanced semiconductor products for
high-speed home networking, and Armedia is a developer of high performance
digital video decoders. In connection with the acquisitions, the Company issued
12,727,644 shares of its Class B common stock and reserved an additional
1,332,924 shares of its Class B common stock for issuance upon exercise of
outstanding employee stock options, warrants and other rights assumed by the
Company.
On August 31, 1999 the Company completed the acquisitions of HotHaus
Technologies Inc. ("HotHaus") and AltoCom, Inc. ("AltoCom"). HotHaus is a
provider of OpenVoIP(TM) ("Voice over Internet Protocol") embedded
communications software that enables transmission of digital voice, fax and data
packets over data networks,
31
<PAGE> 33
including the Internet. AltoCom offers complete software data/fax modem
implementations for general purpose embedded processors, PC CPUs and digital
signal processors. In connection with the acquisitions, the Company issued
6,723,142 shares of its Class B common stock and reserved an additional 516,526
shares of its Class B common stock for issuance upon exercise of outstanding
employee stock options and other rights assumed by the Company.
On February 29 and March 1, 2000 the Company completed the acquisitions of
Digital Furnace Corporation ("Digital Furnace"), BlueSteel Networks, Inc.
("BlueSteel"), and Stellar Semiconductor, Inc. ("Stellar"). Digital Furnace
develops communications algorithms and software that increase the capacity of
existing broadband networks for interactive services, BlueSteel develops
high-performance Internet security processors for e-commerce and VPN ("Virtual
Private Network") applications, and Stellar develops 3D graphics technology. In
connection with the acquisitions, the Company issued 2,015,307 shares of its
Class B common stock in exchange for all shares of the acquired companies'
preferred stock and common stock and reserved an additional 330,294 shares of
its Class B common stock for issuance upon exercise of outstanding employee
stock options and other rights assumed by the Company.
On May 31, 2000 the Company completed the acquisition of Pivotal
Technologies Corporation ("Pivotal"). Pivotal develops high-performance
communications links for both wired and wireless environments. In connection
with the acquisition, the Company issued 1,895,823 shares of its Class B common
stock in exchange for all shares of Pivotal's preferred stock and common stock
and reserved 43,419 shares of its Class B common stock for issuance upon
exercise of outstanding employee stock options and other rights assumed by the
Company.
Each of the acquisitions was accounted for as a pooling of interests.
Accordingly, the Company's consolidated financial statements have been restated
to include the pooled operations of Maverick, Epigram, Armedia, HotHaus,
AltoCom, Digital Furnace, BlueSteel, Stellar and Pivotal (collectively, the
"Acquired Companies"). A reconciliation of revenue, net income (loss) and
diluted earnings (loss) per share originally reported for the years ended
December 31, 1998 and 1997 to the restated amounts presented in the accompanying
Consolidated Statements of Operations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue
Broadcom (as originally reported) ......... $ 203,095 $ 36,955
Maverick, Epigram and Armedia ............. 200 913
HotHaus and AltoCom ....................... 13,161 4,473
Digital Furnace, BlueSteel, Stellar
and Pivotal.............................. 273 --
--------- ---------
Total ................................ $ 216,729 $ 42,341
========= =========
Net income (loss)
Broadcom (as originally reported) ......... $ 36,398 $ (1,173)
Maverick, Epigram and Armedia ............. (14,774) (5,379)
HotHaus and AltoCom ....................... 2,968 623
Digital Furnace, BlueSteel, Stellar
and Pivotal.............................. (3,203) (1,042)
--------- ---------
Total ................................ $ 21,389 $ (6,971)
========= =========
Diluted earnings (loss) per share
Broadcom (as originally reported) ......... $ .18 $ (.01)
Maverick, Epigram and Armedia ............. (.07) (.05)
HotHaus and AltoCom ....................... .01 .01
Digital Furnace, BlueSteel, Stellar
and Pivotal.............................. (.02) (.01)
--------- ---------
Total ................................ $ .10 $ (.06)
========= =========
</TABLE>
The restated consolidated financial statements give effect to the business
combinations as if they had occurred prior to the beginning of each period
presented and reflect adjustments made to (i) conform the accounting policies of
the combined companies and (ii) eliminate intercompany accounts and
transactions.
32
<PAGE> 34
The historical numbers of shares of the Acquired Companies' respective
common stock and common stock equivalents have been converted to equivalent
shares of the Company's common stock based on the applicable exchange ratios
used to convert the respective outstanding shares of each Acquired Company on
the respective acquisition dates.
Included in revenue for the year ended December 31, 1999 were aggregate
revenues of $11.3 million from the Acquired Companies incurred prior to the
respective closings of the acquisitions. Included in net income for the year
ended December 31, 1999 were aggregate net losses of $19.6 million from the
Acquired Companies incurred prior to the respective closings of the
acquisitions.
AltoCom recorded approximately $6.4 million and $2.2 million in the years
ended December 31, 1999 and 1998, respectively, representing accretion to
redemption value of its preferred stock. Such amounts have been presented as
reductions to retained earnings in the accompanying Consolidated Statements of
Shareholders' Equity.
Merger-Related Costs
In connection with the acquisitions that occurred during 1999, the Company
recorded approximately $15.2 million in charges during the year ended December
31, 1999 for direct and other merger-related costs and certain restructuring
programs. Merger transaction costs of approximately $11.9 million consisted
primarily of fees for investment bankers, attorneys, accountants and other
related charges. Restructuring costs of approximately $3.3 million included
provisions for the disposal of duplicative facilities and assets, write-down of
unutilized assets, and adjustments to conform accounting policies to those of
the Company.
3. INVESTMENTS
At December 31, 1999 all of the Company's investments were in commercial
paper and state, municipal and county government bonds, and were classified as
held-to-maturity. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity investments are stated at cost, adjusted for amortization of
premiums and discounts to maturity. A summary of held-to-maturity securities by
balance sheet caption at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents ........... $ 27,383 $ 3 $ -- $ 27,386
Short-term investments ..... 90,059 1 (185) 89,875
Long-term investments ...... 9,351 -- (89) 9,262
-------- -------- -------- --------
Securities classified as
held-to-maturity ........... $126,793 $ 4 $ (274) $126,523
======== ======== ======== ========
</TABLE>
Scheduled maturities of held-to-maturity investments at December 31, 1999
were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Debt securities maturing within:
One year .......................... $117,442 $117,261
Two years ......................... 9,351 9,262
-------- --------
$126,793 $126,523
======== ========
</TABLE>
33
<PAGE> 35
4. INCOME TAXES
A reconciliation of the provision (benefit) for income taxes at the federal
statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income taxes .... $ 35,455 $ 13,944 $ (2,660)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit ..................... (1,071) 516 (64)
Benefit of research and development tax credits ......... (14,906) (3,640) (229)
Losses of acquired companies not benefited .............. -- 4,326 2,041
Tax rate differential on foreign earnings ............... 7,736 3,068 --
Non-deductible expenses ................................. 2,495 -- --
Tax exempt interest ..................................... (845) (458) --
Other ................................................... (34) 695 60
-------- -------- --------
Total provision (benefit) for income taxes ................ $ 28,830 $ 18,451 $ (852)
======== ======== ========
</TABLE>
The income tax provision (benefit) consisted of the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .... $ 131,300 $ 27,050 $ 413
State ...... 23,574 5,216 1
Foreign .... 4,379 -- --
--------- --------- ---------
159,253 32,266 414
Deferred:
Federal .... (105,779) (10,966) (1,239)
State ...... (24,644) (2,849) (27)
--------- --------- ---------
(130,423) (13,815) (1,266)
--------- --------- ---------
$ 28,830 $ 18,451 $ (852)
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Book depreciation in excess of tax depreciation ...... $ 566 $ 1,376
Research and development tax credit carryforwards .... 25,994 3,710
Net operating loss carryforwards ..................... 114,856 10,757
Reserves and accruals not currently deductible
for tax purposes .................................. 10,567 6,216
California manufacturer's investment credit
carryforward ...................................... 1,056 479
Other ................................................ 9 87
Valuation allowance .................................. (6,889) (6,889)
--------- ---------
Net deferred tax assets ................................ $ 146,159 $ 15,736
========= =========
</TABLE>
At December 31, 1999 the Company had federal and state net operating loss
carryforwards of $302.2 million and $171 million, respectively, which begin to
expire in 2010 and 2003, respectively. These net operating losses are primarily
the result of tax deductions related to employee stock option exercises. At
December 31, 1999 the Company had federal and state research and development
credit carryforwards of $18.3 million and $12.7 million,
34
<PAGE> 36
respectively, which begin to expire in 2010. Additionally, at December 31, 1999,
the Company had California manufacturer's investment credit carryforwards of
$1.1 million, which begin to expire in 2006.
The Company maintains a valuation allowance against certain of its acquired
net operating losses from Epigram, Armedia and HotHaus, incurred in 1998 and
1997, due to uncertainty regarding their future realization. The utilization of
such losses is subject to stringent limitations under the Internal Revenue Code.
The Company has not provided a valuation allowance against the remainder of its
deferred tax assets as management believes these assets will be realized against
income in future years. Any future reductions in the valuation allowance will
reduce tax expense in future years.
5. LONG-TERM DEBT
The following is a summary of the Company's long-term debt and other loans,
including debt and loans assumed upon acquisition of the Acquired Companies:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term notes at rates from 3.0% to 12.25% secured by
certain of the Company's assets .......................... $ 531 $ 4,418
Line of credit at a 12.0% rate secured by certain of
the Company's assets ..................................... 770 --
Non-interest bearing notes payable .......................... -- 6,427
Capitalized lease obligations payable in varying monthly
installments at rates from 7.8% to 14.7% ................. 3,561 1,939
-------- --------
4,862 12,784
Less current portion of long-term debt ...................... (1,787) (7,735)
-------- --------
$ 3,075 $ 5,049
======== ========
</TABLE>
Interest expense for the years ended December 31, 1999, 1998 and 1997 was
$751,000, $480,000, and $261,000, respectively.
In August 1999 the Company entered into a revolving line of credit
arrangement with a bank which can be renewed annually through August 2003 and
whereby the Company may borrow up to $1.2 million at an interest rate based on
the bank's cost of funds plus 75 basis points. No amounts were borrowed under
this line of credit during the year ended December 31, 1999.
6. COMMITMENTS
The Company leases its facilities and certain engineering design tools and
information systems equipment under operating lease agreements expiring through
2005. Future minimum payments under noncancelable operating leases with initial
terms of one year or more were as follows: $31.5 million in 2000; $29.9 million
in 2001; $24.5 million in 2002; $9.0 million in 2003; $5.2 million in 2004; and
$4.6 million thereafter.
The Company had commitments totaling approximately $4.0 million as of
December 31, 1999 primarily for the purchase of engineering design tools and
computer hardware and for information systems infrastructure.
Rent expense for the years ended December 31, 1999, 1998 and 1997 aggregated
$6.6 million, $3.1 million and $1.2 million, respectively.
35
<PAGE> 37
7. SHAREHOLDERS' EQUITY
COMMON STOCK
In September 1999 the Board of Directors approved an increase in the number
of authorized shares of Class A common stock from 200,000,000 to 400,000,000 and
in the number of authorized shares of Class B common stock from 100,000,000 to
200,000,000. This increase was approved by the shareholders on November 22,
1999. The shares of Class A common stock and Class B common stock are
substantially identical, except that holders of Class A common stock are
entitled to one vote for each share held, and holders of Class B common stock
are entitled to ten votes for each share held on all matters submitted to a vote
of the shareholders. In addition, holders of Class B common stock are entitled
to vote separately on the proposed issuance of additional shares of Class B
common stock in certain circumstances. The Class A common stock and Class B
common stock are sometimes collectively referred to herein as the "common
stock."
STOCK SPLIT
The Company effected a 2-for-1 split of its Class A common stock and Class B
common stock, in the form of a 100% stock dividend, on February 17, 1999. The
Company previously effected a 3-for-2 split of its common stock on March 9,
1998. All share numbers and per share amounts contained in these notes and in
the accompanying consolidated financial statements have been retroactively
restated to reflect these changes in the Company's capital structure.
SALE OF SHARES TO CISCO SYSTEMS, INC.
In February 1998 Cisco Systems, Inc. ("Cisco Systems") exercised its option
to purchase 2,000,000 shares of Class A common stock upon consummation of the
Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco Systems in connection with the Development and
License Agreement entered into between the Company and Cisco Systems effective
in September 1996, as amended on February 3, 1998.
INITIAL PUBLIC OFFERING AND FOLLOW-ON OFFERING
In April 1998 the Company completed its initial public offering (the
"Offering") of 16,100,000 shares of its Class A common stock. Of these shares,
the Company sold 12,480,000 shares and selling shareholders sold 3,620,000
shares, at a price of $6.00 per share. In addition, the Company sold 2,000,000
shares of Class A common stock to Cisco Systems, in a concurrent registered
offering that was not underwritten, at a price of $5.58 per share. The Company
received aggregate net proceeds from the Offering and the sale of shares to
Cisco Systems of approximately $79.2 million in cash (net of underwriting
discounts and commissions and offering costs). Upon consummation of the
Offering, all outstanding shares of the Company's convertible preferred stock
were automatically converted into an aggregate of 33,814,068 shares of Class B
common stock.
In October 1998 the Company completed a follow-on public offering. Of the
13,800,000 shares of Class A common stock offered, the Company sold 1,880,000
shares and selling shareholders sold 11,920,000 shares, at a price of $17.25 per
share. The Company received net aggregate proceeds of approximately $30.5
million after deducting underwriting discounts and commissions and offering
costs.
CONVERTIBLE PREFERRED STOCK
Upon consummation of the Offering in April 1998, each outstanding share of
Series A, B, C and D preferred stock was converted into twelve shares of Class B
common stock, and each outstanding share of Series E preferred stock was
converted into six shares of Class B common stock. As of December 31, 1999 and
1998, no shares of preferred stock were outstanding. The Company is authorized
to issue up to 10,000,000 shares of preferred stock.
36
<PAGE> 38
ISSUANCE OF WARRANTS
In April 1998 the Company issued a Class A common stock Purchase Warrant
(the "Warrant") to Brobeck, Phleger & Harrison LLP, counsel to the Company, to
purchase up to 40,000 shares of the Company's Class A common stock at an
exercise price of $6.00 per share. In May 1999 Brobeck, Phleger & Harrison LLP
exercised the Warrant, which resulted in the net issuance of 34,184 shares of
Class A common stock.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan for all eligible employees.
Under the plan, employees may purchase shares of the Company's Class A common
stock at six-month intervals at 85% of fair market value (calculated in the
manner provided under the plan). Employees purchase such stock using payroll
deductions, which may not exceed 15% of their total cash compensation. In fiscal
1999 and 1998, 737,088 and 338,256 shares, respectively, were issued under the
plan at average prices of $6.81 and $5.10, respectively. At December 31, 1999,
1,924,656 shares were available for future issuance.
STOCK OPTION PLANS
The Company has in effect several stock-based plans under which
non-qualified and incentive stock options have been granted to employees,
non-employee board members and other non-employees. The Company's 1998 Stock
Incentive Plan (the "1998 Plan") is the successor equity incentive program to
the Company's 1994 Stock Option Plan (the "1994 Plan") and the Company's 1998
Special Stock Option Plan (together, the "Predecessor Plans").
The Board of Directors or the Plan Administrator determines eligibility,
vesting schedules and exercise prices for options granted under the plans.
Options generally have a term of 10 years and vest and become exercisable at the
rate of 25% after one year and ratably on a monthly basis for three years
thereafter.
Options granted under the 1994 Plan were exercisable immediately upon
issuance. The Company has reserved the right to repurchase all unvested shares
held by a participant upon the participant's termination, at the original
purchase price. At December 31, 1999 there were 10,858,342 unvested options
outstanding under the 1994 Plan that were exercisable.
At the discretion of the Board of Directors or the Plan Administrator, the
Company may make secured loans to option holders in amounts up to the exercise
price of their options plus related taxes or permit the option holder to pay the
exercise price in installments over a determined period. During 1999, 1998 and
1997, the Company loaned $394,000, $191,000 and $2,614,000, respectively, to
employees for the exercise of options. These notes are full-recourse, are
secured by the shares of stock issued upon exercise, are interest bearing with
rates ranging from 4.8% to 6.5%, are due between three and five years from the
exercise date, and must be ratably repaid upon sale of the issued shares of
stock.
As of December 31, 1999, 74,044,490 shares of common stock were reserved for
issuance under the 1998 Plan, including outstanding options granted under
Predecessor Plans. The number of shares of Class A common stock reserved for
issuance under the 1998 Plan automatically increases in January each year.
Beginning in 2000, the increase will be equal to 4.5% of the total number of
shares of common stock outstanding on the last trading day of the preceding
year, subject to an annual share limit.
In October 1999 the Board of Directors approved the 1999 Special Stock
Option Plan (the "1999 Plan") and reserved an aggregate of 1,000,000 shares of
Class A common stock for issuance under that plan. Employees, independent
consultants and advisors in the service of the Company or any of its
subsidiaries who are neither officers of the Company nor members of the Board at
the time of the option grant are eligible to participate in the plan. The
exercise price of options granted under the 1999 Plan can be less than the fair
market value of the underlying common stock on the grant date. In 1999, 40,542
options were granted under the 1999 Plan, to certain employees of acquired
companies in connection with assumed employment agreements, at a
weighted-average exercise price of $2.84. The 1998 Plan, 1999 Plan and
Predecessor Plans are collectively referred to herein as the "Broadcom Plans".
37
<PAGE> 39
As a result of the Company's acquisitions of the Acquired Companies,
the Company assumed stock options granted under stock option plans established
by each acquired company (collectively, the "Acquired Company Plans"). The
Company also granted options under the Broadcom Plans to employees hired from
the Acquired Companies. As of December 31, 1999, 1,739,248 shares of Class B
common stock were reserved for issuance upon exercise of outstanding options
assumed under the Acquired Company Plans.
COMBINED OPTION PLAN ACTIVITY
Activity under the Broadcom Plans and the Acquired Company Plans during
1999, 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
------------ ----------- -------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ...................... 5,733,000 8,304,554 $ .02 -$ .28 $ .21
Additional shares reserved ...................... 38,400,000 -- -- --
Options granted under Broadcom Plans ............ (21,321,600) 21,321,600 .29 - 2.00 .63
Options granted under Acquired Company Plans .... -- 1,728,462 .02 - 6.96 .44
Options canceled ................................ 44,244 (73,666) .08 - 2.14 .27
Options exercised ............................... -- (9,009,168) .02 - 2.00 .42
----------- ----------- -------------- --------
Balance at December 31, 1997 ...................... 22,855,644 22,271,782 .02 - 6.96 .55
Additional shares reserved ...................... 20,000,000 -- -- --
Options granted under Broadcom Plans ............ (27,788,700) 27,788,700 2.50 - 30.19 11.34
Options granted under Acquired Company Plans .... -- 1,638,310 .02 - 10.44 1.26
Options canceled ................................ 1,586,300 (1,622,359) .08 - 12.25 1.90
Option shares repurchased ....................... 12,000 -- -- --
Options exercised ............................... -- (4,046,196) .02 - 15.53 .65
----------- ----------- -------------- --------
Balance at December 31, 1998 ...................... 16,665,244 46,030,237 .02 - 30.19 7.03
Additional shares reserved ...................... 22,619,168 -- -- --
Options granted under Broadcom Plans ............ (23,015,952) 23,015,952 2.80 - 122.84 52.31
Options granted under Acquired Company Plans .... -- 1,432,387 .02 - 56.33 5.69
Options canceled ................................ 504,086 (552,827) .02 - 89.53 24.42
Option shares repurchased ....................... 2,750 -- -- --
Options exercised ............................... -- (9,917,307) .02 - 54.50 2.53
----------- ----------- -------------- --------
Balance at December 31, 1999 ...................... 16,775,296 60,008,442 $ .02 -$122.84 $ 24.94
=========== =========== ============== ========
</TABLE>
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1999 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL LIFE AVERAGE SHARES AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------- ---------- ----------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ .02 to $ .28 6,792,488 7.07 $ .26 6,792,488 $ .26
$ .31 to $ 2.50 15,301,528 8.06 $ 1.73 8,603,420 $ 1.23
$ 2.80 to $ 20.45 13,087,034 8.73 $17.03 1,578,138 $10.55
$ 20.73 to $ 46.53 13,354,445 9.27 $38.04 865,729 $33.38
$ 46.78 to $ 122.84 11,472,947 9.75 $64.28 99,401 $53.03
</TABLE>
38
<PAGE> 40
Additional information relating to the Broadcom Plans and the Acquired
Company Plans was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase .... 4,382,839 9,100,773 16,399,550
Weighted average repurchase price ................ $ .53 $ .36 $ .25
Unvested options outstanding ..................... 53,214,648 42,543,768 20,481,666
Vested options outstanding ....................... 6,793,794 3,486,469 1,790,116
Total reserved common stock shares for
stock option plans ............................. 76,783,738 62,695,481 45,127,426
</TABLE>
The Company recorded approximately $9.3 million and $8.9 million of net
deferred compensation in the years ended December 31, 1999 and 1998,
respectively, for the difference between the exercise price of certain stock
options granted and the fair value of the underlying common stock. Of these
amounts, approximately $9.3 million in 1999 and $3.6 million in 1998 represent
deferred compensation related to the grant of stock options to certain employees
of the Acquired Companies. Deferred compensation is presented as a reduction to
shareholders' equity and is amortized ratably over the respective vesting
periods of the applicable options. The Company amortized an aggregate of $4.7
million and $1.9 million of deferred compensation in 1999 and 1998,
respectively.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income (loss)
per share is required by FASB Statement No. 123 for stock-based awards to
employees as if the Company had accounted for such awards using a valuation
method permitted under Statement No. 123.
The value of the Company's stock-based awards granted to employees prior to
the Company's initial public offering in April 1998 was estimated using the
minimum value method, which does not consider stock price volatility.
Stock-based awards granted subsequent to the initial public offering have been
valued using the Black-Scholes option pricing model. Among other things, the
Black-Scholes model considers the expected volatility of the Company's stock
price, determined in accordance with Statement No. 123, in arriving at an option
valuation. Estimates and other assumptions necessary to apply the Black-Scholes
model may differ significantly from assumptions used in calculating the value of
options granted prior to the initial public offering under the minimum value
method.
The fair value of the Company's stock-based awards granted to employees
prior to the initial public offering was estimated assuming no expected
dividends, a weighted average expected life of 3.5 years, a weighted average
risk-free interest rate of 6.0% and no expected volatility. The fair value of
options granted after the initial public offering was estimated assuming no
expected dividends, a weighted average expected life of one year from vest date
in 1999 and 1.5 years from vest date in 1998, a weighted average risk-free
interest rate of 6.0% in 1999 and 5.0% in 1998, and an expected volatility of
.80 in 1999 and .74 in 1998. The fair value of employee stock purchase rights
was estimated assuming no expected dividends, a weighted average expected life
of 17 months in 1999 and 15 months in 1998, a weighted average risk-free
interest rate of 6.0% in 1999 and 5.0% in 1998, and an expected volatility of
.80 in 1999 and .74 in 1998.
The weighted average fair value of options granted during 1999, 1998 and
1997 was $30.25, $6.25 and $ .19, respectively. The weighted average fair value
of employee stock purchase rights granted in 1999 and 1998 was $4.60 and $3.08,
respectively. For pro forma purposes, the estimated value of the Company's
stock-based awards to employees is amortized over the vesting period of the
underlying instruments. The results of applying Statement No. 123 to the
Company's stock-based awards to employees would approximate the following:
39
<PAGE> 41
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported .......................... $ 72,471 $ 21,389 $ (6,971)
Pro forma ............................ (116,765) 3,978 (7,614)
Basic earnings (loss) per share
As reported .......................... $ .36 $ .13 $ (.06)
Pro forma ............................ (.58) .02 (.07)
Diluted earnings (loss) per share
As reported .......................... $ .31 $ .10 $ (.06)
Pro forma ............................ (.50) .02 (.07)
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment
Plan, which was established in 1996, covering substantially all of the Company's
employees, subject to certain eligibility requirements. At its discretion, the
Company may make contributions to the plan. The Company made no contributions to
this plan in 1999, 1998 and 1997.
9. LITIGATION
In December 1996 Stanford Telecommunications, Inc. ("STI") filed an action
against the Company in the United States District Court for the Northern
District of California. STI alleged that several of the Company's cable modem
products infringed one of STI's patents. In May 1999 the Company brought a
separate action against STI and an STI subsidiary in California Superior Court
for misappropriation of certain Company trade secrets. In June 1999 the parties
entered into a settlement agreement and agreed to dismiss with prejudice all
claims and counterclaims in both actions. Under the terms of the settlement
agreement, STI granted to the Company a worldwide, non-exclusive, royalty-free
license to STI's rights in patents and patent applications, and all inventions
conceived, through the date of the agreement, relating to any transmitter or
receiver technology, or design or invention capable of use over a coaxial cable
transmission medium, excluding patent claims specifically claiming Code Division
Multiple Access ("CDMA") inventions. The Company also obtained the option to
acquire licenses on commercially reasonable terms to STI's patent claims based
upon CDMA inventions capable of use over a coaxial cable transmission medium,
and STI agreed not to bring any future action against the Company, its suppliers
or customers for patent infringement or trade secret misappropriation resulting
from commercial use of any of the Company's existing technology, designs or
products. In connection with the settlement, the Company made a one-time payment
to STI and the parties exchanged mutual releases. Neither party admitted any
liability in connection with the various actions.
In April 1997 Sarnoff Corporation and Sarnoff Digital Communications, Inc.,
now known as NxtWave Communications, Inc., (collectively, "Sarnoff") filed a
complaint in New Jersey Superior Court against the Company and five former
Sarnoff employees now employed by the Company asserting claims against the
former employees for breach of contract, misappropriation of trade secrets, and
breach of the covenant of good faith and fair dealing, and against the Company
for inducing such actions. The complaint also asserted claims against the
Company and the former employees for unfair competition, misappropriation and
misuse of trade secrets and confidential, proprietary information of Sarnoff,
and tortious interference with present and prospective economic advantage, as
well as a claim against the Company alleging that it "illegally pirated"
Sarnoff's employees. In early 1999 the Court found in the Company's favor on all
liability, causation and damages issues. Sarnoff appealed the Court's orders but
the appeal was later dismissed at Sarnoff's request.
In July 1997 the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Following the decision in the New Jersey action,
Sarnoff filed a motion for summary judgment
40
<PAGE> 42
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. Briefing of the appeal
in the Ninth Circuit Court of Appeals is now complete and the parties await a
date for oral argument 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. 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. In May
2000 Motorola filed an amended complaint alleging that AltoCom's technology
infringes an additional Motorola patent. The parties are currently engaged in
discovery in the action. A hearing on patent claims construction is scheduled to
commence in December 2000 and a three-week trial is scheduled to begin in June
2001. AltoCom became a subsidiary of the Company on August 31, 1999. In
September 1999 PC-Tel, Inc., the co-defendant in the case, reached a settlement
with Motorola.
Although AltoCom believes that it has strong defenses and is defending the
action vigorously, a finding of infringement by AltoCom as to at least one of
the patents in this action could lead to liability for monetary damages (which
could be trebled in the event that the infringement were found to have been
willful), the issuance of an injunction requiring that AltoCom withdraw various
products from the market, and indemnification claims by AltoCom's customers or
strategic partners, each of which events could have a material adverse effect on
AltoCom's, and possibly the Company's, business, results of operations and
financial condition.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The Company's pending lawsuits involve complex questions of fact and law and
could require the expenditure of significant costs and diversion of resources to
defend. Although management currently believes the outcome of the
41
<PAGE> 43
Company's outstanding legal proceedings, claims and litigation will not have a
material adverse effect on the Company's business, results of operations or
financial condition, the results of litigation are inherently uncertain, and an
adverse outcome is at least reasonably possible. The Company is unable to
estimate the range of possible loss from outstanding litigation, and no amounts
have been provided for such matters in the accompanying consolidated financial
statements.
10. SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
During 1999, 1998 and 1997, the Company had a total of three customers whose
revenue represented a significant portion of the Company's revenue in certain or
all years. Revenue from one customer represented approximately 27.4% in 1999,
35.5% in 1998 and 27.9% in 1997 of the Company's revenue for the respective
year. Revenue from a second customer was approximately 18.0% in 1999, 26.7% in
1998 and 12.8% in 1997 of the Company's revenue for the respective year. Revenue
from a third customer accounted for approximately 10.6% of the Company's revenue
in 1999. No other customer represented more than 10% of the Company's annual
revenue in these years.
Export revenue to all foreign customers as a percent of total revenue was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Europe ....... 5.4% 4.4% 6.3%
Asia ......... 11.7 7.3 8.9
Other ........ .1 5.5 4.4
------ ------ ------
17.2% 17.2% 19.6%
====== ====== ======
</TABLE>
The Company does not own or operate a fabrication facility. Two outside
foundries in Asia currently supply substantially all of the Company's
semiconductor devices in current production. Any sudden demand for an increased
amount of semiconductor devices or sudden reduction or elimination of any
existing source or sources of semiconductor devices could result in a material
delay in the shipment of the Company's products. In addition, substantially all
of the Company's products are assembled and tested by one of three third-party
subcontractors in Asia. The Company does not have long-term agreements with any
of these suppliers. Any problems associated with the fabrication facilities or
the delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, results of operations and financial
condition.
11. RELATED PARTY TRANSACTIONS
ISSUANCE OF COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company issued
and sold an aggregate of 900,000 shares of Class B common stock to Irell &
Manella LLP for an aggregate purchase price of $1.1 million. Werner F. Wolfen, a
director of the Company, served until December 31, 1998 as a Senior Partner of
Irell & Manella LLP, and currently is Senior Partner Emeritus of that firm.
David A. Dull, the Company's Vice President of Business Affairs, General Counsel
and Secretary, was a Partner of Irell & Manella LLP until March 1998. Irell &
Manella LLP has represented and continues to represent the Company in various
legal matters.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA LLP
Irell & Manella LLP has represented and continues to represent the Company
in various legal matters pursuant to an engagement agreement dated as of January
1, 1997, and amended as of January 1, 1998. Under the engagement agreement, the
Company agreed to pay Irell & Manella LLP a fixed fee plus costs for the firm's
legal services rendered from and after January 1, 1998 with respect to certain
litigation matters. Irell & Manella LLP has agreed to render legal services to
the Company on most other matters at reduced rates from the firm's standard
rates for the two-year period commencing January 1, 1998. During 1999, 1998 and
1997, the Company paid approximately $2.0 million, $2.9 million and $1.2
million, respectively, to Irell & Manella LLP for legal services rendered by
that firm. At December 31, 1999, approximately $869,000 was due to Irell &
Manella LLP.
42
<PAGE> 44
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarized unaudited quarterly financial data has been
prepared using the consolidated financial statements of Broadcom, which have
been restated to include the operations of the Acquired Companies, on a
pooling-of-interests basis as if they had combined with Broadcom prior to the
beginning of each period presented:
<TABLE>
<CAPTION>
DILUTED
GROSS NET EARNINGS
REVENUE PROFIT INCOME PER SHARE
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR 1999
First Quarter ....... $100,214 $ 59,208 $ 14,729 $.07
Second Quarter ...... 119,452 71,375 159 --
Third Quarter ....... 139,561 83,216 24,594 .10
Fourth Quarter ...... 161,998 95,435 32,989 .13
FISCAL YEAR 1998
First Quarter ....... $ 37,190 $ 23,107 $ 4,528 $.03
Second Quarter ...... 49,244 27,817 5,487 .03
Third Quarter ....... 55,474 30,576 4,535 .02
Fourth Quarter ...... 74,821 43,826 6,839 .03
</TABLE>
13. SUBSEQUENT EVENTS
STOCK SPLIT
In January 2000 the Board of Directors approved a 2-for-1 split of the
Company's common stock, effected in the form of a 100% stock dividend. Holders
of the Company's Class A common stock received one additional share of Class A
common stock for each share held on the record date of January 31, 2000. The
additional shares were distributed on February 11, 2000. A comparable stock
dividend was distributed to holders of the Company's Class B common stock. All
share and per share amounts in the accompanying consolidated financial
statements have been retroactively restated to reflect this change in the
Company's capital structure.
INCREASES IN AUTHORIZED COMMON STOCK AND IN COMMON STOCK RESERVED FOR STOCK
OPTIONS
In January 2000 the Board of Directors approved an increase in the number of
authorized shares of Class A common stock from 400,000,000 to 800,000,000 and in
the number of authorized shares of Class B common stock from 200,000,000 to
400,000,000. In February 2000 the Board of Directors approved an amendment to
the Company's 1998 Stock Incentive Plan, as amended, to increase the number of
shares of Class A common stock reserved for issuance under this plan by an
additional 15,000,000 shares. These matters were approved by the shareholders at
the Annual Meeting of Shareholders held in April 2000.
LITIGATION
In March 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 sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel filed a first amended complaint on
April 28, 2000 seeking additional relief and containing certain additional
allegations, but asserting the same causes of action as the original complaint.
The litigation is in its early stages. On May 25, 2000, the Court concluded a
preliminary injunction hearing in the matter. The Court denied Intel's request
for injunctive relief restricting the positions in which the three employees
could work for the Company, but issued an order granting certain other
preliminary injunctive relief. The matter has not yet been set for trial. The
Company has denied any wrongdoing or liability and has instructed its attorneys
to vigorously defend the action.
43
<PAGE> 45
ACQUISITION OF INNOVENT SYSTEMS
On June 13, 2000 the Company announced that it had signed a definitive
agreement to acquire Innovent Systems, Inc., a developer of high-performance
systems for short-range wireless data communications. In connection with the
acquisition, the Company will issue an aggregate of up to approximately 3.0
million shares of Class A common stock in exchange for all outstanding shares of
Innovent preferred and common stock that the Company does not already own and
upon exercise of outstanding employee stock options and other rights of
Innovent. The merger transaction will be accounted for under the purchase method
of accounting. The boards of directors of both companies have approved the
merger, which awaits approval by Innovent shareholders and the satisfaction of
regulatory requirements and other customary closing conditions. In connection
with the transaction, the Company will take a one-time write-off for purchased
in-process research and development expenses in the third quarter of its fiscal
year ending December 31, 2000.
44
<PAGE> 46
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts and sales
returns and allowances ..................... $ 5,167 $ 7,973 $-- $ 5,467 $ 7,673
Reserve for excess and obsolete inventory .... 4,783 233 -- 1,741 3,275
Reserve for warranty ............................ 2,022 1,856 -- 217 3,661
------- ------- --- ------- -------
Total ................................... $11,972 $10,062 $-- $ 7,425 $14,609
======= ======= === ======= =======
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts and sales
returns and allowances .................... $ 721 $ 7,923 $-- $ 3,477 $ 5,167
Reserve for excess and obsolete inventory .... 1,686 4,154 -- 1,057 4,783
Reserve for warranty ............................ 150 1,872 -- -- 2,022
------- ------- --- ------- -------
Total ................................... $ 2,557 $13,949 $-- $ 4,534 $11,972
======= ======= === ======= =======
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and sales
returns and allowances ..................... $ 147 $ 574 $-- $-- $ 721
Reserve for excess and obsolete inventory .... 749 1,028 -- 91 1,686
Reserve for warranty ............................ -- 150 -- -- 150
------- ------- --- ------- -------
Total ................................... $ 896 $ 1,752 $-- $ 91 $ 2,557
======= ======= === ======= =======
</TABLE>
45
<PAGE> 47
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BROADCOM CORPORATION,
a California corporation
July 10, 2000 By: /s/ WILLIAM J. RUEHLE
------------------------------------
William J. Ruehle
Vice President and Chief Financial
Officer
46
<PAGE> 48
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
23.1 Consent of Independent Auditors
