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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-23993
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0480482
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY,
IRVINE, CALIFORNIA 92618-3616
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 450-8700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price on the Nasdaq National Market(R) on March
23, 2001, the aggregate market value of the voting stock held by nonaffiliates
of the registrant was approximately $6,434,550,000. For the purposes of this
calculation, shares owned by officers, directors and 10% stockholders known to
the registrant have been deemed to be owned by affiliates. This determination of
affiliate status is not a determination for other purposes.
The registrant has two classes of common stock authorized, the Class A
common stock and the Class B common stock. The rights, preferences and
privileges of each class of common stock are substantially identical in all
respects except for voting rights. Each share of Class A common stock entitles
its holder to one vote and each share of Class B common stock entitles its
holder to ten votes. In addition, holders of Class B common stock are entitled
to vote separately on the proposed issuance of additional shares of Class B
common stock in certain circumstances. As of March 23, 2001 there were
179,717,391 shares of Class A common stock outstanding and 79,738,302 shares of
Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
registrant's definitive proxy statement (the "Proxy Statement") for the Annual
Meeting of Shareholders to be held on May 29, 2001.
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Broadcom(R), the pulse logo, QAMLink(R), Blutonium(TM), CALISTO(TM),
Digi-A(TM), Grand Champion(TM), iLine10(TM), Mercurian(TM), Open VoIP(TM),
ROBOswitch(TM), ServerWorks(TM), StrataSwitch(TM), and System I/O(TM) are
trademarks of Broadcom Corporation and/or its affiliates in the United States
and certain other countries. All other trademarks mentioned are the property of
their respective owners.
(C)2001 Broadcom Corporation. All rights reserved.
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BROADCOM CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 44
Item 8. Financial Statements and Supplementary Data................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
OTHER INFORMATION
Glossary of Technical Terms................................. 48
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CAUTIONARY STATEMENT
This Report contains forward-looking statements which include, but are not
limited to, statements concerning projected revenues, expenses, gross profit and
income, market acceptance of our products, our ability to consummate
acquisitions and integrate their operations successfully, the competitive nature
of and anticipated growth in our markets, our ability to achieve further product
integration, the status of evolving technologies and their growth potential, the
timing of new product introductions, the adoption of future industry standards,
our production capacity, our ability to migrate to smaller process geometries,
the need for additional capital, and the success of pending litigation. These
forward-looking statements are based on our current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by us. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," "will" and variations of these words or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. These statements are not guarantees
of future performance and are subject to risks, uncertainties and assumptions
that are difficult to predict. Therefore, our actual results could differ
materially and adversely from those expressed in any forward-looking statements
as a result of various factors, some of which are listed under the section "Risk
Factors" at the end of Item 7 of this Report. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
All share numbers and per share amounts in this Report have been
retroactively adjusted to reflect our 2-for-1 stock splits, each in the form of
a 100% stock dividend, effective February 17, 1999 and February 11, 2000,
respectively.
PART I.
ITEM 1. BUSINESS
Broadcom Corporation is the leading provider of highly integrated silicon
solutions that enable broadband communications and networking of voice, video
and data services. Using proprietary technologies and advanced design
methodologies, Broadcom designs, develops and supplies system-on-a-chip
solutions for applications in digital cable set-top boxes and cable modems,
high-speed local, metropolitan and wide area and optical networks, home
networking, Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial digital
broadcast, digital subscriber line (xDSL), wireless communications,/O(TM) server
solutions and network processing.
The desire of equipment manufacturers and service providers to develop and
expand the broadband communications markets has created the need for new
generations of semiconductor solutions. Broadband transmission of digital
information over existing infrastructures requires highly integrated
mixed-signal semiconductor solutions to perform critical systems functions such
as complex signal processing and converting digital data to and from analog
signals. Broadband communications equipment requires substantially higher levels
of system performance, in terms of both speed and precision, that typically
cannot be adequately addressed by traditional semiconductor solutions developed
for low speed transmission applications. Moreover, solutions that are based on
multiple discrete analog and digital chips generally cannot achieve the
cost-effectiveness, performance and reliability required by the broadband
communications markets. These requirements are best addressed by new generations
of highly integrated mixed-signal devices that combine complex analog and
digital functions with high performance circuitry that can be manufactured in
high volumes using cost-effective semiconductor technologies.
MARKETS
Cable Modems
Cable television operators have been upgrading their systems to hybrid
fiber coaxial cable, commonly known as HFC in the telecommunications industry.
These upgraded HFC networks are able to support two-way communications,
high-speed Internet access and telecommuting through the use of a cable modem.
The cable industry's adoption of the Data Over Cable Service Interface
Specification (DOCSIS) in 1997
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made possible interoperability between different manufacturers' cable modems and
head-end equipment across different cable networks. This standard enables the
cost-effective deployment of cable modems via retail channels. High-speed
Internet access services use cable modems to connect PCs to the cable network.
The modems were designed to achieve downstream transmission speeds of up to 43
Mbps (North American standard) or 56 Mbps (international standard), and upstream
(to the network) transmission speeds of up to 10 Mbps, nearly 1,000 times faster
than the fastest analog telephone modems (56 kbps downstream and 28.8 kbps
upstream). The high speeds of cable modems can enable an entirely new generation
of multimedia-rich content over the Internet and allow cable operators to expand
their traditional video product offerings to include data and telephone
services.
Digital Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity of
television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide higher picture quality, cable service providers began offering digital
programming in 1996 through the use of new digital cable set-top boxes. These
digital cable set-top boxes facilitate high-speed digital communications between
a subscriber's television and the cable network. Digital cable set-top boxes are
currently able to support downstream (to the subscriber) transmission speeds of
up to 43 Mbps (North American standard) or 56 Mbps (international standard), and
several hundred MPEG-2 compressed digital television channels to be delivered to
the consumer. Additional applications for digital cable set-top boxes include
Internet access, Personal Video Recording (PVR), interactive television, high
definition television, 3-D gaming, audio players and cable telephony. A new
generation of digital cable set-top boxes is being introduced to facilitate
television Internet access, to support high definition television and to provide
a gateway for the distribution of voice, video and data throughout the home and
business.
Enterprise Networking
Local area networks (LANs) are comprised of different types of equipment
interconnected by cables (copper, fiber and coax) over a computer networking
protocol called Ethernet. As communications bottlenecks have appeared in
corporate LANs, new technologies such as Fast Ethernet and Gigabit Ethernet are
being employed to replace older technologies such as 10Base-T Ethernet (10 Mbps)
and Token Ring (16 Mbps). As most desktop connections have migrated to Fast
Ethernet, we believe that Gigabit Ethernet is emerging as the predominant
technology for servers and backbone infrastructures that support LANs, and will
eventually migrate to the desktop itself. As Gigabit Ethernet gets deployed to
the desktop, server and backbone connections will eventually migrate to the new
10 Gigabit standard. We anticipate that a significant portion of the installed
base of 10Base-T and 10/100Base-T Ethernet repeater/hub ports, switches and
network interface cards (NICs) will be upgraded to the faster technologies. In
addition, the need for dedicated and predictable bandwidth to the desktop is
driving a transition from legacy repeater to switch connections. Switches will
not only have the ability to provide dedicated bandwidth to each connection, but
will also provide routing functionality and possess the intelligence to deal
with differentiated traffic such as voice, video and data.
Most corporations today utilize the Internet for the transmission of data
between corporate offices and remote sites, and for a variety of e-commerce and
business-to-business applications. In order to secure corporate networks from
intrusive attacks and provide for secure communication between corporate sites,
an increasing amount of networking equipment will include technology to
establish virtual private networks (VPNs). In addition to VPNs which use the
IPSec protocol, secure socket layer (SSL) is used to secure sensitive
information between users and service providers for e-commerce applications.
Servers
With the proliferation of data being accessed and sorted by the Internet
and corporate intranets, the demand for servers has increased substantially. As
an integral piece of the overall communications market, servers are
multiprocessor-based computers that are used to support users' PCs and to
perform basic PC
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transactions, such as updating databases. The Internet has created a new market
for servers as users access data and entertainment stored on servers from their
PCs, handheld computers and wireless handsets.
We acquired ServerWorks Corporation in January 2001. ServerWorks' SystemI/O
silicon solutions act as the essential conduits for delivering high-bandwidth
data in and out of servers, and coordinating all I/O transactions within the
server platform including between external Input/Output devices, the main system
memory and the CPUs.
To date, ServerWorks' chips are found in servers sold by the major server
OEMs, such as Compaq, Dell, IBM, HP and motherboard manufacturers such as Intel,
ASUSTeK and Acer. The server market is growing rapidly, and ServerWorks has
successfully leveraged its technology over the past year into faster growing
markets such as storage and networking through design wins with OEMs such as
Network Appliance and Cisco. As a first step, Broadcom's communications products
are being sold through ServerWorks' OEM channel, and in upcoming quarters,
ServerWorks plans to integrate Broadcom's technologies into its product line
thereby accelerating the combined companies' revenues.
Home Networking and Consumer Networking
The proliferation of multi-PC households and Internet appliances increases
the need for home networking solutions and lays the foundation for extending the
reach of the shared broadband Internet access, video transfer and voice at high
speeds throughout the home and small office. The industry's adoption of the Home
Phoneline Networking Alliance's (HomePNA(TM)) 2.0 standard for 32 Mbps home
networking technology has met this need by enabling the development of
affordable, easy-to-use networking solutions for the consumer. We believe
HomePNA 2.0 will enable the delivery of voice, video and data concurrently to
any network-enabled appliance, PC or consumer electronic device over ordinary
phone lines at speeds of 32 Mbps.
Wireless technologies based upon the IEEE 802.11 and Bluetooth(TM)
standards allow consumers to have mobile flexibility around their homes and
offices. Bluetooth provides a low cost wire replacement technology enabling
invisible connectivity between consumers' cell phones, PDAs, PCs, and MP3
players. This industry standard is supported by over 1,000 companies to date,
and we anticipate the adoption of this standard will increase in the next 12 to
18 months to become the defacto wireless standard in consumer products. 802.11B
is the wireless equivalent of 10 Mbps Ethernet, and has already penetrated the
corporate campus as the wireless technology of choice.
xDSL
Digital subscriber line technologies, commonly known as xDSL, represent a
family of broadband technologies that use the copper twisted pair wiring in the
existing local telephone network to deliver high speed data transmission. DSL
speeds range from 128 kbps to 52 Mbps depending on the distance between the
central office and the subscriber. These data rates are enabling a wide range of
new services, including high-speed Internet access and multi-line voice and
digital television delivery.
According to industry analysts, Global DSL subscribers in 2000 grew from
under 700,000 to over 6,000,000 as telecommunications service providers began
the mass roll-out of DSL services to end-users. Industry analysts are
forecasting a continued rapid roll-out of DSL, with near-term growth primarily
in Korea, Japan, Taiwan, Germany and the U.S.
Optical Networking
In order to cope with the increasing volume of data traffic emanating from
the rising number of broadband connections in homes and businesses, metropolitan
area networks (MANs) will have to evolve at both the transport and switching
layers. One significant obstacle preventing this evolution has been the high
cost of optical modules and next generation network elements.
We believe that the complementary metal oxide semiconductor (CMOS)
fabrication process is the key technology that will significantly reduce the
cost of deploying higher transport speeds in MANs, such OC-48, OC-192 and 10
Gigabit Ethernet, by enabling the development of smaller optical modules that
cost less and
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consume less power. Furthermore, we anticipate that the ability to achieve high
degrees of IC integration using CMOS will enable MANs to evolve from
time-division multiplex (TDM) to Internet Protocol (IP) packet switching, by
enabling hybrid network elements that combine cost-effectively TDM functionality
with IP and Ethernet.
Wireless Communications -- DBS, Terrestrial Digital Broadcast and Broadband
Fixed Wireless
Digital Broadcast Satellite, commonly known as DBS, is the primary
alternative to cable for providing digital television programming. DBS
broadcasts video and audio data from satellites directly to digital set-top
boxes in the home via dish antennas. Due to the ability of DBS to provide
television programming where no cable infrastructure is in place, we believe
that the U.S. market for DBS may eventually be surpassed by the international
market where the cable infrastructure is generally less extensive.
Other broadband wireless technologies include:
- Terrestrial Digital Broadcast Television, the upgrade of analog broadcast
television to digital, which enables the delivery of high definition
television
- Multichannel Multipoint Distribution System (MMDS), which uses microwave
frequencies (below 10 GHz) to transmit voice, video and data over two-way
terrestrial digital microwave channels to digital set-top boxes and
wireless modem
- Local Multipoint Distribution System (LMDS), which uses higher microwave
frequencies (above 10 GHz) to transmit voice, video and data to digital
set-top boxes and wireless modems over a shorter distance via a
cellular-like network
MMDS and LMDS are wireless systems that are currently being tested in
limited deployments. In the U.S. market, the MMDS and LMDS industry has
experienced significant license holder consolidation, which may lead to greater
investment in equipment and service for these markets. These new networks, which
are able to provide programming in areas that do not have cable, will also
require a digital set-top box or wireless modem.
Beginning in 1999, the FCC has mandated that the top four affiliated
television stations begin digital broadcasting. We believe this conversion to
digital broadcasting will also require new digital set-top boxes and television
receivers.
Carrier Access
Voice over Internet Protocol (VoIP) is stimulating dramatic changes in the
traditional public switched and enterprise telephone networks. With the
significant growth in data traffic for Internet and other data services, long
distance deregulation and local deregulation, packet-based bandwidth-on-demand
networks provide significant economic advantages over traditional
circuit-switched circuit-on-demand voice networks.
Carrier class media gateways and access concentrators provide packet-based
CLASS 4 and CLASS 5 interface or replacement solutions. Multi-service access
concentrators are transitioning from dial-up data access to full multi-service
voice-enabled solutions. Our high-density communications processors that employ
programmable digital signal processing are designed specifically for these
markets.
The PBX and systems markets are being radically affected by the convergence
of circuit switched and IP packet-based technologies. LAN-based solutions that
use the network infrastructure as the backbone for routing and switching of
packet-voice within a business enable IP phones in the enterprise or enterprise
telephony. Our IP phone silicon solutions integrate the essential packet
processing, voice processing and switching technologies to provide Quality of
Service (QoS), high fidelity and reliablity necessary for enterprise telephony
applications.
Our broadband access devices and residential gateways provide last-mile
telephony services over a broadband packet infrastructure such as cable, xDSL or
wireless.
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Broadband Processors
The continued growth of IP traffic coupled with the increased demand for
new services/applications such as VoIP, VPNs and high-speed Web access (e.g.
xDSL and cable) are placing great processing demands on next-generation LAN, MAN
and WAN equipment. We believe that today's networking/telecom platforms,
especially at the access and service provider edge, must scale in performance
from current OC-12 and OC-48 to OC-192 and soon OC-768 (40 Gigabits/second)
bandwidth rates.
We believe that a new generation of broadband processors that balance
aggressive performance requirements with power and die-size constraints are
required to meet the needs of current and next generation networks. These
processors must be easily programmable so that new services and features can be
upgraded with minimal hassle. We believe that leveraging a standard Instruction
Set Architecture such as MIPS that is well established in the networking market
and supported by a large host of third-party tools and software developers is
key to providing customers familiar, easy-to-use development environment.
CUSTOMERS AND STRATEGIC RELATIONSHIPS
We sell our products to leading manufacturers of broadband communications
equipment in each of our target markets. Because we leverage our technologies
across different markets, certain of our integrated circuits may be incorporated
into equipment used in several different markets.
Customers currently shipping broadband communications equipment
incorporating our products include 3Com, Cisco Systems, Hewlett-Packard,
Motorola, Nortel Networks, Pace, Pioneer, Samsung, Ericsson, Gateway and Thomson
CE, among others. In order to meet the current and future technical needs of the
market, we have established strategic relationships with multi-service operators
(MSOs) that provide broadband communications services to consumers and
businesses. We have also formalized a technical advisory board that includes
MSOs such as Comcast, AOL/Time Warner, Charter Communications, Cox
Communications, AT&T Broadband and Rogers Communications.
As part of our business strategy, we periodically establish strategic
relationships with certain key customers. In September 1997 we entered into a
development, supply and license agreement with General Instrument (now a wholly
owned subsidiary of Motorola), which provides that we will develop and supply
chips for General Instrument's digital cable set-top boxes. In November 2000 we
modified this agreement to amend the minimum purchase requirements. In November
2000 we also entered into a new supply agreement with General Instrument
covering our sale of cable modem chips to General Instrument.
From time to time, we have also entered into development agreements with
3Com, Cisco Systems, Nortel Networks, Sony and others. We have worked closely
with these customers to co-develop products.
A small number of customers have historically accounted for a substantial
portion of our revenue. Sales to Motorola (including General Instrument, which
was acquired by Motorola in January 2000, and sales to Motorola's manufacturing
subcontractors) represented approximately 23.2% of our net revenue in 2000 and
approximately 30.3% of our net revenue in 1999. Sales to 3Com (including sales
to its manufacturing subcontractors) represented approximately 15.1% of our net
revenue in 2000 and approximately 18.0% of our net revenue in 1999. Sales to
Cisco (including sales to its manufacturing subcontractors) represented
approximately 14.1% of our net revenue in 2000 and approximately 10.6% of our
net revenue in 1999. Sales to our five largest customers decreased to
approximately 61.8% of our net revenue in 2000 from approximately 66.6% of our
net revenue in 1999. The loss of any key customer could materially and adversely
affect our business, financial condition and results of operations.
PRODUCTS
Our core technologies combine for a "system-on-a-chip" design methodology
that we use across all of our product lines. This proven design methodology has
enabled us to be first to market with advanced chips that are highly integrated
and cost-effective, and that facilitate the easy integration of our customers'
intellectual property. Broadcom's design methodology leverages
industry-standard, state-of-the-art electronic design
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automation tools, and generally migrates easily to new silicon processes and
technology platforms. Our design methodology also allows for the easy
integration of acquired or licensed technology, providing customers with a broad
range of silicon options with differentiating networking and performance
features.
Cable Products
Our cable-TV product line consists of integrated silicon solutions for
digital cable-TV set-top boxes, cable modems and cable modem termination
systems. We currently have a leading market position in all three equipment
areas, with an extensive product offering for the high-speed, two-way
transmission and display of digital information for the delivery of voice, video
and data services to residential customers over existing hybrid-fiber cable.
Broadcom offers its customers a complete system level solution which not only
includes chips, but also reference design hardware and a full software suite in
order to support the customer's needs and accelerate time to market.
Cable Modems. All of our cable modems chips are built around the Broadcom
QAMLink(R) DOCSIS-compliant transceiver and media access controller (MAC)
silicon technology, which enables downstream data rates up to 56 Mbps and
upstream data rates up to 20 Mbps and is compliant with DOCSIS versions 1.0 and
1.1. These devices provide all the real-time DOCSIS component capabilities in
silicon, enabling Quality of Service to support constant bit rate services like
VoIP and video streaming.
The level of integration and performance that we continue to accomplish in
these devices is reducing the cost and size of cable modems while providing
consumers with easy to use features and seamless integration to other
transmission mediums. As a result, cable modem functionality is evolving into a
small silicon core that can be incorporated into other consumer devices for
broader distribution of IP-based services throughout the home. Broadcom's cable
modem technology is being incorporated into personal computers for high-speed
Internet access, cable-TV set-top boxes for high-speed Internet access through
the television, and residential broadband gateways for receiving and
distributing IP-based voice and data services in the home over existing phone
lines.
Cable Modem Termination Systems. Broadcom is the only company with a
complete end-to-end DOCSIS compliant cable modem silicon solution for both
head-end and subscriber locations. Broadcom's cable modem termination system
chipset consists of the downstream and upstream physical layer devices and the
DOCSIS MAC. This cable modem termination system enables the exchange of
information to and from the subscriber location, making it a key element in the
delivery of broadband access over cable.
Cable-TV Set-Top Boxes. We have a complete silicon platform for the
digital, cable-TV set-top box market. These highly integrated chips give
manufacturers a complete range of features and capabilities for building
standard digital, cable-TV boxes for digital video broadcasting, as well as
high-end interactive set-top boxes that merge high-speed cable modem
functionality with studio-quality graphics, text and video for both SDTV and
HDTV formats.
Our cable-TV box silicon consists of front-end transceivers with
downstream, upstream and MAC functions, single-chip cable modems that operate up
to 56 Mbps downstream and 20 Mbps upstream, advanced 2D/3D video-graphics
encoders and decoders, and CMOS-based RF television tuners. These cable-TV chips
support industry transmission and television standards, such as ITU-T J.83 Annex
A/B/C, OpenCable, DOCSIS/EuroDOCSIS, DVB/DAVIC, NTSC and PAL and Point of
Deployment, ensuring universal interoperability and easy retail channel
distribution. Peripheral modules incorporated into front-end devices also
provide support for common set-top box peripheral devices, such as IR remotes,
IR keyboards, LEDs and keypads.
Our chips provide a comprehensive silicon platform for high-end interactive
set-top boxes, supporting the simultaneous viewing of television programming
with Internet content capability in either HDTV or SDTV format. This capability
provides consumers with a true interactive environment, allowing them to access
Internet content while watching television. With the addition of our home
networking and VoIP technologies, these set-top boxes can also support the
functions of a broadband residential gateway for receiving and distributing
digital voice and data services throughout the home over the phone line.
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Enterprise Network Products
Our 10/100/1000 Ethernet transceivers and switches are integrated,
low-power silicon solutions that enable the high-speed transmission of voice,
video, and data over the widely deployed Category 5 unshielded twisted-pair
copper wiring in enterprise and small office network connections. These
high-speed connections are enabling users to share Internet access, exchange
graphics and video presentations, receive VoIP services and share peripheral
equipment, such as printers and scanners. We also incorporate intelligent
networking functionality into our devices, enabling system vendors to deploy an
enhanced class of services and applications, typically found only in the core of
the network, out to every corporate desktop.
Digital Signal Processing (DSP) Communication Architecture. Our complex
Ethernet transceivers are built upon a proprietary DSP communication
architecture optimized for high-speed enterprise network connections. Our
Digi-A(TM) DSP silicon core enables interoperability and robust performance over
a wide range of cable lengths and operating conditions, and delivers performance
of greater than 250 billion operations per second (GOPS). This proprietary DSP
architecture facilitates the migration path to smaller process geometries and
minimizes the development schedule and cost of our transceivers. It has been
successfully implemented in 0.5, 0.35, 0.25, 0.18 and 0.13 micron CMOS, and
implemented in chips with one, four, six and eight ports.
Ethernet Transceivers. Our 10/100 Ethernet transceiver product line ranges
from single-chip 10/100 Ethernet transceivers up to single-chip Octal 10/100
Ethernet transceivers. These devices allow information to travel over standard
Category 5 cable at rates of 10 Mbps and 100 Mbps. Additionally, we were the
first company to market a Gigabit Ethernet transceiver for copper cabling and
have a broad portfolio of 10/100/1000 Mbps Ethernet transceivers. Our Gigabit
transceivers are enabling manufacturers to develop equipment that delivers data
at Gigabit speeds (1000 Mbps) over Category 5 cabling. This equipment can
significantly upgrade the performance of existing networks without having to
rewire the network infrastructure with fiber or enhanced copper cabling.
We believe our transceivers are driving the market toward lower power,
smaller footprint solutions, making it easier and less expensive to build
10/100/1000 Ethernet LAN on Motherboards (LOMs), NICs, switches, hubs and
routers. We plan to continue to incorporate additional functionality into all of
our transceivers, providing customers with advanced networking features and
higher performance capabilities that we believe will make it easier to bring
10/100/1000 Ethernet to the desktop.
Ethernet Switches. We offer a broad "switch-on-a-chip" product line,
ranging from low-cost, unmanaged and managed, Layer 2 eight-port switches, up to
the high-end managed, Layer 3 through Layer 7 enterprise class 24-port switches.
The ROBOswitch(TM)-plus product family comprises of five- and eight-port
Layer 2 switch chips supporting 5-, 8-, 16- and 24-port 10/100 Ethernet
switches. Our switch chips are making it economical for the remote office
business office and small office home office network markets to have the same
high-speed local connectivity as the large corporate office market. Our highly
integrated family of switch products integrate the switching fabric, MACs,
10/100 Ethernet transceivers, Media Independent Interface and packet buffer
memory onto single-chip solutions. These chips give manufacturers multiple
switch design options that combine plug and play ease-of-use, scalability,
network management features and non-blocking switching performance at optimal
price points for the Remote Office/Branch Office user.
Our high-end switch product, StrataSwitch(TM), is a wire-speed multi-layer
switch chip that combines switching, routing and traffic classification
functionality into single-monolithic integrated circuits. Replacing up to as
many as 10 chips, StrataSwitch incorporates 24 Fast Ethernet and two Gigabit
Ethernet ports with advanced Layer 3 switching and multi-layer packet
classification. The multi-layer switch is capable of receiving, prioritizing,
and forwarding packets of voice, video and data at full speed over existing
corporate networks.
The StrataSwitch core is also being incorporated into a family of
copper-based Gigabit Ethernet switches. The G-Switch family is comprised of
multi-port switching devices supporting 10/100/1000 Mbps with all of the same
switching functions as StrataSwitch. Achieving a new level of integration, the
G-Switch products are
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making it cost effective to bring Gigabit connectivity to the desktop computer,
thereby enabling businesses to exchange larger graphics and imaging files,
increase voice, video, and data/Internet traffic and conduct online business
meetings and transactions. The StrataSwitch core improves the QoS of voice/video
transmission and other applications, such as IP multicasting.
We recently sampled our first switch device that is targeted at the MAN
market and incorporates 12 Gigabit Ethernet and one 10 Gigabit Ethernet ports
into a single chip solution.
We introduced a Gigabit Ethernet MAC chip in December 2000 that supports
PIC and PIC-X local bus interfaces for use in NICs and on LAN-on-Motherboard
implementations. This device includes an advanced software suite and complements
our broad family of Gigabit Ethernet transceiver products.
10-Gigabit Ethernet Transceiver. We developed the world's first 10-Gigabit
Ethernet CMOS transceiver. When combined with Coarse Wave Division Multiplexes
fiber optic modules, this device can simultaneously transmit and receive 10
Gigabit per second data rates over 50 kilometers of existing single-mode fiber.
A 10-Gigabit Ethernet link over such distances extends the reach of Ethernet
into local, regional and metropolitan fiber optic networks. We believe that
significant cost, performance and latency advantages can be realized when the
Ethernet protocol and other associated QoS capabilities are extended into these
network domains. Convergence around 10 Gigabit Ethernet should allow massive
data flow from remote storage sites, across the country, over the MAN and into
the corporate LAN, without unnecessary delays, costly buffering for speed
mis-matches or latency, or breaks in the QoS protocol.
Network Security. Our family of high-speed security processors for
enterprise networks are enabling companies to guard against Internet attacks
without compromising the speed and performance of their network. Our chips are
built upon a proprietary, scalable silicon architecture that performs
standard-compliant cryptographic functions at data rates ranging from a few
Megabits per second to multi-Gigabits per second. This scalable architecture is
being deployed across all of our product lines, addressing the entire broadband
security network spectrum from residential applications to
enterprise-networking-equipment. Using this scalable architecture, we believe
that we will be able to develop stand-alone products for very high-speed
networking applications and integrate the IP security processor core into lower
speed consumer-based silicon, such as cable and DSL modem applications.
Server Input/Output Products
A wholly owned subsidiary of Broadcom since January 2001, ServerWorks
offers products that are used to design low-end (one and two CPUs), and
mid-range (two and four CPUs) servers, storage, workstation and networking
platforms. The bandwidth of our SystemI/O solutions, both from CPU to memory and
memory to Input/Output (I/O) subsystems, such as disk drives or networks, lead
the industry. ServerWorks also provides reliability, availability and
scalability features. The current generation of SystemI/O products, the LE and
the HE, support Intel Pentium(R) III processors that run at speeds of up to 1
GHz and provide memory bandwidth of up to 3 Gigabytes per second and I/O
bandwidth of up to 1 Gigabyte per second. In February 2001, we announced our
Grand Champion(TM) SystemI/O product line that will support Intel's next
generation server CPU and will offer memory bandwidth of up to 6.4 Gigabytes per
second and I/O bandwidth of up to 5.0 Gigabytes per second.
Home Networking Products
Our home networking technology is enabling the distribution of digital
voice, video and data content over the home phone line. Our home networking
technology is the conduit for sharing IP-based broadband services, such as
Internet access and voice IP connections, throughout the home using PCs,
entertainment equipment and other intelligent devices. This technology also
enables consumers to stream digital audio/video locally or off the Internet as
well as share printers and other PC-based peripheral equipment.
Based on the HomePNA 2.0 standard, our initial home networking silicon
technology, called iLine10(TM), supports data rates up to 10 Mbps, expanding the
bandwidth capacity of the phone line by as much as 10 times. We accomplish this
by using a patented variation of Quadrature amplitude modulation (QAM), called
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Frequency-Diverse QAM (FD-QAM), which enables the high-speed transmission of
digital data reliably across degraded home phone lines, overcoming the random
topologies and varying noise conditions commonly found in these types of
networking environments.
Our HomePNA 2.0 chipset is targeted at OEMs producing equipment for
residential and small office/home office use and is being incorporated into
cable, xDSL and V.90 modems, personal computers, set-top boxes, residential
gateways and consumer electronic equipment. This chipset features a highly
integrated MAC/PHY communications engine that delivers transmission speeds up to
32 Mbps.
Residential Broadband Gateways. Leveraging our core technologies in cable
modems, home networking, VoIP and high-speed Internet security, we are
developing residential broadband gateway chips. These silicon solutions will
enable OEMs to build gateway equipment for operators to economically deliver
multiple lines of residential broadband services -- digital IP voice, video and
data for telephone, fax and Internet connections, to and throughout the home
using one telephone line.
xDSL Products
We are developing rate-adaptable DSL chips. Our DSL technology is enabling
local exchange carriers and enterprise networking vendors to deliver bundled
broadband services, such as digital video, high-speed Internet access, video
teleconferencing and IP data business services, over existing copper telephone
lines.
Broadcom is the only company with a single-chip rate-adaptable DSL solution
that supports both asymmetric DSL (ADSL) and very-high-bit rate DSL (VDSL) data
rates ranging from 0 to 52 Mbps in either asymmetric or fully symmetric modes.
This fully integrated solution allows manufacturers to build single-platform
systems capable of supporting data rates up to 52 Mbps in Fiber-to-the-Curb
networks and data rates up to 26 Mbps in Fiber-to-the-Node networks. Our DSL
chip can deliver broadband services over ATM and support framed-based services.
The latter feature enables Ethernet traffic to be easily bridged across
telephony grade wiring for workgroup-to-workgroup LAN extensions and for use in
premises where Category 5 wiring is not generally available, such as hotels and
apartments.
With our acquisition of Element 14, we now have the technology to develop
high-port density, low-power ADSL transceiver solutions for central office and
customer premise applications. We believe this technology will enable equipment
vendors of DSL access multiplexers (DSLAMs) and digital loop carriers to offer a
significant increase in the number of DSL-enabled copper twisted pairs that can
be supported within their tight heat, power and space constraints.
Optical Networking Products
Our optical communications chips are a natural extension of our large
portfolio of high-speed LAN chips, which we anticipate will enable us to provide
end-to-end IC solutions that increase the performance, intelligence and
cost-effectiveness of broadband communication networks. These chips are
providing a new class of high-speed optical communications equipment that can
support more network traffic in a much smaller form factor, decreasing the cost
and space restraints facing companies as bandwidth demands increase in corporate
network backbones, MANs and WANs.
Synchronous Optical Networks (SONET). Through our acquisition of NewPort
Communications, we acquired a large portfolio of CMOS OC-48 (2.5 Gigabit per
second) and OC-192 (10 Gigabits per second) transceiver chips for SONET
applications. Our CMOS-based solutions offer substantially higher levels of
integration and lower power than competitive Gallium Arsenide, Bipolar or
Silicon Germanium solutions. The unique implementation of these high speed
transceivers in standard CMOS processes results in low power and low
cost-per-port, this enables higher port density systems, such as Dense
Wavelength Division Multiplexing, and integration of the transceiver into the
laser module, as well as higher levels of silicon integration of the transceiver
with large ASICs, such as framers, intelligent routers, and packet processors.
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Wireless Products
Through internal engineering efforts and acquisitions, we continue to
develop silicon for fixed and short-range wireless, direct broadcast satellite
and terrestrial digital broadcast markets.
Satellite and HDTV. Broadcom has front-end receiver chips for digital
broadcast satellite and HDTV set-top boxes. We believe that we are the only
company with a complete end-to-end chipset for receiving and displaying HDTV.
This chipset provides television and set-top box manufacturers with a high
performance Vestigial Side Band receiver and a 2D/3D video-graphics subsystem
for SDTV and HDTV displays.
Fixed-Wireless Communications. We currently have a strategic relationship
with Cisco Systems to develop fixed-wireless chips for high-speed Internet
services for voice, video and data. The relationship is intended to result in a
fully custom CMOS single-chip wireless modem application specific integrated
circuit (ASIC), containing both a MAC Layer and an advanced wireless Physical
Layer based on Vector Orthogonal Frequency Division Multiplexing (VOFDM). VOFDM
is a new radio frequency technology being supported by Broadcom, Cisco Systems
and nine other industry leaders. We plan to make this chip available on the open
market, giving multiple equipment vendors a robust, cost-effective broadband
fixed wireless solution that minimizes the line-of-sight limitations and
installation problems faced by other proposed broadband fixed wireless
technologies.
Short-Range Wireless Communication. The acquisitions of Innovent and
Pivotal add patent-pending implementations of radio frequency (RF) technology in
a standard digital CMOS process to our product portfolio. We believe that this
advanced RF technology will be the foundation for a series of new products
specifically targeted for the short-range wireless communication market. Our
Blutonium(TM) product line combines RF baseband, systems and software expertise
into single-chip CMOS solutions specifically targeted for Bluetooth
applications.
Carrier Access Products
Communications Processors. Through our acquisition of Silicon Spice, we
now have the semiconductor technology, software and development tools to develop
the core-processing engine for gateway and access devices, which connect the
traditional public-switched-telephone network to packet-based networks such as
the Internet. This innovative communication processor technology will enable
Internet service providers, Internet telephony service providers,
competitive/incumbent local exchange carriers and inter-exchange carriers to
deliver voice and data services simultaneously over a unified data network with
the highest density of voice channel in the industry.
The cornerstone of our carrier access technology is CALISTO(TM). Developed
by Silicon Spice, CALISTO is the world's first single-chip communications
processor for carrier-class voice gateways and access concentrators. This
advanced silicon architecture provides increased signal processing throughput in
a more efficient silicon implementation. CALISTO provides over 3.3 GMACs of
signal processing horsepower and 1.4 Mbytes of high-speed memory, which
translates into 240 packet telephony channels on a single chip. The chip
replaces up to 10 traditional DSP discrete components with a power consumption
of less than 10 milliwatts per channel.
Voice Internet Protocol (VoIP) Software. We are developing advanced
embedded DSP technology for VoIP applications in both the residential and
business markets. VoIP refers to the transmission of telephony -- voice, data,
analog modems and signaling -- over a packet-based network. The delivery of
voice, fax and analog data over LANs and WANs with inherently unpredictable
routings requires complex DSP technology to preserve voice fidelity, fax
reliability and telephone quality of service. Our VoIP DSP software provides the
core voice, fax relay, data relay and telephony signaling for VoIP in gateways,
cable modems, DSL modems, remote access servers, LAN PBXs and Internet
appliances. Our VoIP software operates on programmable DSPs in conjunction with
our cable, home networking, LAN, DSL and carrier access chips and we anticipate
will eventually be embedded into our advanced silicon devices.
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Broadband Processors
Leveraging our expertise in high-performance, low-power very large scale
integration (VLSI) design, we are developing a family of high-performance,
low-power processor solutions designed specifically to meet the needs of
next-generation networks. Our Mercurian(TM) family of processors deliver four
key ingredients essential for today's embedded broadband network processors:
very high performance, low power, high integration of network-centric functions,
and programmability based on an industry standard instruction set architecture.
At the heart of the Mercurian family of processors is the SB-1 core, a MIPS
64-bit superscalar CPU capable of operating at frequencies up to 1 GigaHertz
(GHz). All Mercurian processors are based on the industry-standard MIPS64
architecture, our products will enable equipment vendors to immediately leverage
the large installed base of tools and software available for the MIPS
architecture, thereby shortening development time.
These processors provide customers with a solution for high-speed network
processing, including packet classification, queuing, forwarding and exception
processing. They also enable complex decisions such as routing and load
balancing to be performed at wire speed, at line rates between OC-3 (100 Mbps)
and OC-48 (2.5 Gbps).
REFERENCE PLATFORMS
We also develop and sell reference platforms designed around our integrated
circuit products that represent application examples for incorporation into our
customers' equipment. By providing these reference platforms, we can assist our
customers in achieving easier and faster transitions from initial prototype
designs through final production releases. These reference platforms enhance the
customer's confidence that our products will meet their market requirements and
product introduction schedules.
CORE TECHNOLOGIES
We believe that one of our key competitive advantages is our broad base of
core technologies encompassing the complete design space from systems to
silicon. We have developed and continue to build on five primary technology
foundations:
- proprietary communications systems algorithms and protocols;
- advanced DSP hardware architectures;
- silicon compiler design methodologies and advanced cell library
development for both standard cell and full-custom integrated circuit
design;
- high-performance RF, analog and mixed-signal circuit design using
industry-standard CMOS processes; and
- high-performance custom microprocessor architecture and circuit design.
RESEARCH AND DEVELOPMENT
We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. As of March
31, 2001 a majority of our 1,917 research and development employees had advanced
degrees. Our work force includes approximately 228 employees with Ph.D.s. These
employees are involved in advancing our core technologies, as well as applying
these core technologies to our product development activities in the areas of
broadband communications in our target markets. The transmission solutions for
each of these markets benefit from the same underlying core technologies, which
enables us to leverage our ability to address various broadband communications
markets with a relatively focused investment in research and development.
We believe that the achievement of higher levels of integration and the
introduction of new products in our target markets is essential to our growth.
As a result, we plan to continue to increase research and development staffing
levels in 2001. We have established additional design centers in Tempe, Arizona;
San
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Diego, Sunnyvale and San Jose, California; Atlanta, Georgia; Bunnik, the
Netherlands; and Singapore. As a result of acquisitions, we also undertake
software design and development in Canada and design and development activities
in Belgium, England, India, Israel and Taiwan. We anticipate establishing
additional design centers in the United States and other countries in the
future.
MANUFACTURING
Wafer Fabrication
We manufacture our products using standard CMOS process techniques. The
standard nature of these processes permits us to engage independent silicon
foundries to fabricate our integrated circuits. By subcontracting our
manufacturing requirements, we are able to focus our resources on design and
test applications where we believe we have greater competitive advantages. This
strategy also eliminates the high cost of owning and operating a semiconductor
wafer fabrication facility.
Our Operations and Quality Engineering Group closely manages the interface
between manufacturing and design engineering. While our design methodology
typically creates smaller than average die for a given function, it also
generates full-custom integrated circuit designs. As a result, we are
responsible for the complete functional and parametric performance testing of
our devices, including quality. We employ a fully staffed operations and quality
organization similar to a vertically integrated semiconductor manufacturer. We
also arrange with our foundries to have online work-in-progress control, making
the manufacturing subcontracting process transparent to our customers.
Our key silicon foundries are Taiwan Semiconductor Manufacturing
Corporation in Taiwan and Chartered Semiconductor Manufacturing in Singapore.
Any inability of one of these foundries to provide the necessary capacity or
output could result in significant production delays and could materially and
adversely affect our business, financial condition and results of operations.
While we currently believe we have adequate capacity to support our current
sales levels, we continue to work with our existing foundries to obtain more
production capacity and we intend to qualify new foundries to provide additional
production capacity. It is possible that adequate foundry capacity may not be
available on acceptable terms, if at all. In the event a foundry experiences
financial difficulties, or if a foundry suffers any damage or destruction to its
facilities, or in the event of any other disruption of foundry capacity, we may
not be able to qualify alternative manufacturing sources for existing or new
products in a timely manner.
Our products are currently fabricated with .5 micron, triple layer metal;
.35 micron, quad layer metal; .22 micron, five layer metal; and .18 micron five
and six layer metal, feature sizes. We are currently sampling products with .13
micron feature sizes. We continuously evaluate the benefits, on a product by
product basis, of migrating to a smaller geometry process technology in order to
reduce costs. Our experience to date with the migration of products to smaller
geometry processes has been favorable, but we could experience difficulties in
future process migration. Other companies in our industry have experienced
difficulty transitioning to new manufacturing processes and, consequently, have
suffered reduced yields or delays in product deliveries. We believe that the
transition of our products to smaller geometries will be important for us to
remain competitive. Our business, financial condition and results of operations
could be materially and adversely affected if any such transition is
substantially delayed or inefficiently implemented.
Assembly and Test
One of our independent foundries or independent wafer probe test
subcontractors conducts our wafer probe testing. Following completion of the
wafer probe tests, the die are assembled into packages and the finished products
are tested by one of our four key subcontractors: ASAT Ltd. in Hong Kong, ST
Assembly Test Services in Singapore, Amkor Technology in the Philippines and
South Korea, and Siliconware Precision in Taiwan. While we have not experienced
any material disruption in supply from assembly subcontractors to date, we could
experience assembly problems in the future. The availability of assembly and
testing services from these subcontractors could be materially and adversely
affected in the event a subcontractor experiences financial difficulties, if a
subcontractor suffers any damage or destruction to its respective facilities, or
in the event of any other disruption of assembly and testing capacity.
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Quality Assurance
The broadband communications industry demands high-quality and reliability
of the semiconductors incorporated into their equipment. We focus on product
reliability from the initial stage of the design cycle through each specific
design process, including layout and production test design. In addition, we
subject our designs to in-depth circuit simulation at temperature, voltage and
processing extremes before initiating the manufacturing process.
We prequalify each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. We also participate in quality and
reliability monitoring through each stage of the production cycle by reviewing
electrical and parametric data from our wafer foundry and assembly
subcontractors. We closely monitor wafer foundry production to ensure consistent
overall quality, reliability and yield levels. In cases where we purchase wafers
on a fixed cost basis, any improvement in yields can reduce our cost per chip.
As part of our total quality program, we received ISO 9002 certification
for our Singapore facility, a comprehensive International Standards Organization
specified quality system. All of our principal independent foundries and package
assembly facilities are currently ISO 9001 certified.
Product Distribution
Historically we had distributed products to our customers through an
operations and distribution center located in Irvine, California. In 1999, we
established an international distribution center in Singapore. This facility
puts us closer to our suppliers and certain key customers and improves our
ability to meet our customers' needs. Our Irvine facility ships products to U.S.
destinations. Our Singapore facility distributes products to our international
customers. As a result of our acquisition of ServerWorks, we also ship products
from its Los Angeles Facility.
SALES AND MARKETING
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by providing
superior sales, field application and engineering support. We market and sell
our products in the United States through a direct sales force, distributors and
manufacturer's representatives. The majority of our sales occur through our
direct sales force, while distributors and manufacturer's representatives have
been utilized in the last year with plans to increase these resources. Our
direct sales force is based out of offices located in California, Florida,
Georgia, Illinois, Maine, Massachusetts, New York, North Carolina and Texas.
Independent distributors Arrow Electronics and Insight Electronics are servicing
the North American and South American market.
We dedicate sales managers to principal customers to promote close
cooperation and communication. We also provide our customers with reference
platform designs, which we believe enables our customers to achieve easier and
faster transitions from the initial prototype designs through final production
releases. We believe these reference platform designs also significantly enhance
our customer's confidence that our products will meet their market requirements
and product introduction schedules.
We also market and sell our products internationally through a direct sales
force based out of regional sales offices located in Canada, France, Germany,
Israel, Japan, the Netherlands, Singapore, France, Sweden and United Kingdom, as
well as through a network of independent distributors and representatives in
Canada, Germany, Hong Kong, India, Israel, Japan, Korea, Singapore and Taiwan.
We select these independent entities based on their ability to provide effective
field sales, marketing communications and technical support to our customers.
All international sales to date have been denominated in U.S. dollars.
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BACKLOG
Our sales are made primarily pursuant to standard purchase orders for
delivery of products. Due to industry practice which allows customers to cancel
or change orders with limited advance notice prior to shipment, we believe that
backlog is not a reliable indicator of future revenue levels.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. We believe that
the principal factors of competition for integrated circuit providers to these
industries include:
- product capabilities
- level of integration
- reliability
- price
- time-to-market
- standards compliance
- system cost
- intellectual property
- customer support
- reputation
We believe that we compete favorably with respect to each of these factors.
We compete with a number of major domestic and international suppliers of
equipment in our target broadband communications markets, which competition has
resulted and may continue to result in declining average selling prices for our
products. In all of our target markets, we also may face competition from newly
established competitors and suppliers of products based on new or emerging
technologies. We also expect to encounter further consolidation in the markets
in which we compete.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, technical and other resources than
we do. As a result, these competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the promotion and sale of their products. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, competitors may develop technologies in
the future that more effectively address the transmission of digital information
through existing analog infrastructures at a lower cost. Increased competition
could result in pricing pressures, decreased gross margins and loss of market
share and may materially and adversely affect our business, financial condition
and results of operations.
INTELLECTUAL PROPERTY
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely primarily on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
methods, to protect our proprietary technologies and processes. These measures
may not provide meaningful protection for our intellectual property. We have
received 33 United States patents and have filed over 500 United States patent
applications. We may not receive any additional patents as a result of these
applications or future applications. Even if additional patents are issued, any
claims allowed may not be
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sufficiently broad to protect our technology. In addition, any existing or
future patents could be challenged, invalidated or circumvented, and any right
granted under such patents may not provide us with meaningful protection. The
failure of any patents to adequately protect our technology would make it easier
for our competitors to offer similar products. In connection with our
participation in the development of various industry standards, we may be
required to license certain of our patents to other parties, including
competitors, that develop products based upon the adopted industry standards. We
also generally enter into confidentiality agreements with our employees and
strategic partners, and typically control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, to develop similar
technology independently or to design around our patents. In addition, effective
copyright, trademark and trade secret protection may not be available or may be
limited in certain foreign countries. We have also entered into agreements with
certain of our customers and granted these customers the right to use our
proprietary technology in the event we default in our contractual obligations,
including product supply obligations, and fail to cure the default within a
specified period of time. Moreover, we often incorporate the intellectual
property of our strategic customers into our designs, and we have certain
obligations with respect to the non-use and non-disclosure of their intellectual
property. It is possible that the steps taken by us to prevent misappropriation
or infringement of our intellectual property or our customers' intellectual
property may not be successful. Moreover, we may need to engage in litigation in
the future to enforce our intellectual property rights or the rights of our
customers, to protect our trade secrets or to determine the validity and scope
of proprietary rights of others, including our customers. Such litigation could
result in substantial costs and diversion of our resources and could materially
and adversely affect our business, financial condition and results of
operations.
Companies in the semiconductor industry often aggressively protect and
pursue their intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties' proprietary rights. In January
2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a lawsuit against
us alleging infringement of a single patent relating to tuner technology. In
August 2000 Intel filed a lawsuit against us alleging infringement of five Intel
patents. In November 2000 we settled litigation with Intel Corporation and its
subsidiary Level One Communications, Inc. regarding the alleged misappropriation
of trade secrets, unfair competition and tortious interference with existing
contractual relations related to our hiring of three former Intel employees. In
1999 we settled litigation with Stanford Telecommunications, Inc. that related
to the alleged infringement of one of Stanford's patents by several of our cable
modem products. In 1999 we prevailed in litigation with Sarnoff Corporation and
NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
which alleged that we misappropriated and misused certain of their trade secrets
in connection with our hiring of five former Sarnoff employees. In January 2000
our subsidiary, AltoCom, settled patent litigation with Motorola, Inc. relating
to software modem technology. Our subsidiary, Altima, is the defendant in patent
litigation and International Trade Commission proceedings brought by Intel and
Level One. Although we are defending the pending litigation vigorously, it is
possible that we will not prevail in pending or future lawsuits. In addition, we
may be sued in the future by other parties who claim that we have infringed
their patents or misappropriated or misused their trade secrets, or who may seek
to invalidate one of our patents. Any of these claims may materially and
adversely affect our business, financial condition and results of operations.
For example, in a patent or trade secret action, a court could issue an
injunction against us that would require us to withdraw or recall certain
products from the market or redesign certain products offered for sale or under
development. In addition, we may be liable for damages for past infringement and
royalties for future use of the technology. We may also have to indemnify
certain customers and strategic partners under our agreements with such parties
if a third party alleges or if a court finds that we have infringed upon,
misappropriated or misused another party's proprietary rights. Even if claims
against us are not valid or successfully asserted, these claims could result in
significant costs and a diversion of management and personnel resources to
defend. In that event, our business, financial condition and results of
operations would likely be materially and adversely affected. If any claims or
actions are asserted against us, we may seek to obtain a license under a third
party's intellectual property rights. However, we may not be able to obtain a
license on commercially reasonable terms, if at all.
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EMPLOYEES
As of March 31, 2001 we had 2,706 full-time employees and 91 contract and
temporary employees, including 1,917 employees engaged in research and
development, 332 engaged in sales and marketing, 199 engaged in manufacturing
operations and 349 engaged in finance, legal and general administration
activities. Our employees are not represented by any collective bargaining
agreement, and we have never experienced a work stoppage. We believe our
employee relations are good.
ITEM 2. PROPERTIES
We lease buildings in Irvine, California that comprise our corporate
headquarters and include administration, sales and marketing, research and
development, and operations functions. We also lease engineering design centers
in Tempe, Arizona; Los Angeles County, Pleasanton, San Diego, and Santa Clara
County, California; Duluth, Georgia; Dallas, Texas; and Seattle, Washington.
Internationally, we lease a distribution center which includes engineering
design facilities in Singapore. We also lease engineering design facilities in
Belgium, Canada, India, Israel, the Netherlands, Taiwan, and the United Kingdom.
In addition, we lease various sales and marketing facilities in the United
States and several other countries.
The foregoing leases comprise an aggregate of 1.3 million square feet and
have terms expiring in or prior to December 2010. We believe that our current
facilities, together with planned expansions, will be adequate for at least the
next twelve months.
ITEM 3. LEGAL PROCEEDINGS
In March 2000 Intel Corporation and its subsidiary Level One
Communications, Inc. filed a complaint in California Superior Court asserting
claims against Broadcom for misappropriation of trade secrets, unfair
competition, and tortious interference with existing contractual relations by
the company in connection with our recent hiring of three former Intel
employees. The complaint sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel/Level One filed a first amended
complaint in April 2000 seeking additional relief and containing certain
additional allegations, but asserting the same causes of action as the original
complaint. In June 2000 we filed a cross-complaint against Intel/Level One, and
in September 2000, amended that cross-complaint. Our amended cross-complaint
included causes of action against Intel/Level One for unfair competition, trade
secret misappropriation, and tortious interference with contractual relations.
In November 2000 the parties reached a confidential settlement pursuant to which
all claims and cross-claims in the litigation were dismissed in their entirety.
In August 2000 Intel filed a complaint in the United States District Court
for the District of Delaware against Broadcom asserting that we (i) infringe
five Intel patents relating to video compression, high-speed networking and
semiconductor packaging, (ii) induce the infringement of such patents, and (iii)
contributorily infringe such patents. The complaint sought a preliminary and
permanent injunction against Broadcom as well as the recovery of monetary
damages, including treble damages for willful infringement. We have not yet
answered the complaint. In October 2000 we filed a motion to dismiss, or in the
alternative, to transfer venue; that motion is currently pending before the
Court. The parties are currently in the initial stages of discovery in the
action. The Court has tentatively scheduled a hearing on patent claims
construction to commence in September 2001 and a trial to begin in October 2001.
In October 2000 Broadcom filed a complaint for declaratory judgment in the
United States District Court for the Northern District of California against
Intel asserting that the patents asserted by Intel in the Delaware action are
not infringed.
In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a
complaint in the United States District Court for the Eastern District of Texas
against Broadcom asserting that (i) Broadcom's BCM3415 silicon tuner chip
infringes a single Microtune patent relating to tuner technology, (ii) we induce
the
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infringement of such patent, and (iii) we contributorily infringe such patent.
The complaint sought a preliminary and permanent injunction against us as well
as the recovery of monetary damages, including treble damages. We answered the
complaint in March 2001. Discovery has not commenced in the action, and a trial
date has not been set. We believe that we have strong defenses to Microtune's
claims.
Although Broadcom believes that it has strong defenses to Intel's claims in
the Delaware action and to Microtune's claims in the Texas action and is
defending both actions vigorously, a finding of infringement by Broadcom as to
one or more patents in either of these actions could lead to liability for
monetary damages (which could be trebled in the event that the infringement were
found to have been willful), the issuance of an injunction requiring that we
withdraw various products from the market, and indemnification claims by our
customers or strategic partners, each of which events could have a material
adverse effect on our business, results of operations and financial condition.
In March 2001 Broadcom and its Chief Executive Officer, Chief Technical
Officer and Chief Financial Officer were served with a number of complaints,
separately identified in the footnote below,(1) that were filed in the United
States District Court for the Central District of California alleging violations
of the Securities Exchange Act of 1934 (the "1934 Act"). These complaints were
brought as purported shareholder class actions under Sections 10(b) and 20(a) of
the 1934 Act and Rule 10b-5 promulgated thereunder, and in general allege that
the defendants improperly accounted for certain performance-based warrants
assumed by Broadcom in connection with our acquisitions of Altima
Communications, Inc., Silicon Spice Inc., Allayer Communications, SiByte, Inc.
and Visiontech Ltd.
While there is some variation in their specific allegations and their
purported class periods (the broadest of which runs from July 31, 2000 to March
6, 2001), the essence of each of these complaints is that the defendants
intentionally failed to properly account for the performance-based warrants
assumed in connection with the acquisitions, which plaintiffs allege had the
effect of materially overstating Broadcom's reported financial results.
Plaintiffs allege that the defendants intentionally engaged in this alleged
improper accounting practice in order to inflate the value of Broadcom's stock
and thereby obtain alleged illegal insider trading proceeds, as well as to
facilitate the use of our stock as consideration in acquisitions. Plaintiffs
also allege generally that there was inadequate disclosure regarding the
warrants and the terms of the particular agreements at issue.
The enumerated complaints have only recently been filed. Broadcom is
informed that additional complaints substantially similar to those described
above have been filed but as of March 30, 2001 Broadcom had not been served in
the additional purported lawsuits. We anticipate that all of these actions will
ultimately be consolidated into one action. As of March 30, 2001 Broadcom had
not yet answered any of the complaints, and discovery had not yet commenced. We
believe that the allegations are without merit and intend to defend the actions
vigorously.
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1 Kurtz v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal. Case No.
SACV-01-275-GLT (EEx) (filed March 5, 2001); Pond Equities v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01- 285-GLT (ANx) (filed
March 7, 2001); Blasser v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-289-AHS (EEx) (filed March 8, 2001); Green v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SACV-01-298-DOC (EEx) (filed
March 9, 2001); DiMaggio v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-299-GLT (EEx) (filed March 9, 2001); Mandel v. Broadcom
Corporation, et al., U.S.D.C. C.D. Cal. Case No. SAVC-01-317-GLT(Anx)(filed
March 12, 2001); Garfinkel v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-327-DOC (Anx) (filed March 14, 2001); Olson v. Broadcom
Corporation, et al. U.S.D.C. C.D. Cal. Case No. SACV-01-346-AHS (Anx) (filed
March 20, 2001); Skubella v. Broadcom Corporation, et al., U.S.D.C. C.D. Cal.
Case No. SACV-01-352-GLT (EEx) (filed March 21, 2001).
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Broadcom, along with each of its directors, has also been sued in two
derivative actions, identified in the footnote below,(2) based upon the same
general set of facts and circumstances outlined above in connection with the
shareholder class actions. These lawsuits were purportedly filed as shareholder
derivative actions under California law and allege that certain of the
individual defendants sold shares while in possession of material inside
information (and that other individual defendants aided and abetted this
activity) in purported breach of their fiduciary duties to Broadcom. The
complaints also allege "gross mismanagement, waste of corporate assets and abuse
of control" based upon the same general set of facts and circumstances. We
believe the allegations are without merit and intend to defend the actions
vigorously.
In October 1998 Motorola, Inc. filed a complaint in the United States
District Court for the District of Delaware against AltoCom, Inc. (and
co-defendant, PC-Tel, Inc.) asserting that (i) AltoCom's V.34 and V.90 compliant
software modem technology infringed several patents owned by Motorola, (ii)
AltoCom induced its V.34 and V.90 licensees to infringe such patents, and (iii)
AltoCom contributorily infringed such patents. In May 2000 Motorola filed an
amended complaint alleging that AltoCom's technology infringed an additional
Motorola patent. In its complaints, Motorola sought an injunction against
AltoCom as well as the recovery of monetary damages. AltoCom filed an answer and
affirmative defenses to the complaint and asserted certain counterclaims.
AltoCom became a subsidiary of Broadcom in August 1999. In January 2001 Motorola
and AltoCom entered into a settlement agreement and cross-license pursuant to
which they agreed to dismiss and release with prejudice all claims and
counterclaims in this action. Under the terms of the patent cross-license,
Motorola and AltoCom granted to each other and their respective affiliates
(including, in the case of AltoCom, its parent Broadcom) licenses with respect
to certain technology. Neither party admitted any liability in connection with
the action. The settlement terms are confidential, but the settlement did not
have a material effect on our business, financial condition or results of
operations.
In December 1999 Level One filed a complaint in the United States District
Court for the Eastern District of California against Altima Communications,
Inc., asserting that Altima's AC108R repeater products infringe a U.S. patent
owned by Level One. The complaint sought an injunction against Altima as well as
the recovery of monetary damages, including treble damages for willful
infringement. Altima filed an answer and affirmative defenses to the complaint.
In March 2000 Level One filed a related complaint in the U.S. International
Trade Commission ("ITC") seeking an exclusion order and cease and desist order
based on alleged infringement of the same patent. Monetary damages are not
available in the ITC. The ITC instituted an investigation in April 2000. Altima
filed an answer and affirmative defenses to the ITC complaint. In July 2000
Intel and Level One filed a second complaint in the ITC asserting that certain
of Altima's repeater, switch and transceiver products infringe three additional
U.S. patents owned by Level One or Intel. The ITC instituted a second
investigation in August 2000, and the Administrative Law Judge issued an order
consolidating the two investigations. In September 2000 Altima filed declaratory
judgment actions against Intel and Level One, respectively, in the United States
District Court for the Northern District of California asserting that Altima has
not infringed the three additional Intel and Level One patents and that such
patents are invalid or unenforceable. Pursuant to statute, Altima is entitled to
a stay of all proceedings in the three District Court actions while the ITC
investigation is pending, and all three actions have been stayed. In December
2000 Intel and Level One withdrew one of the patents asserted against Altima in
the ITC investigation.
Altima believes it has strong defenses to the claims of Level One and Intel
on noninfringement, invalidity, and inequitable conduct grounds. The parties are
currently completing discovery in the consolidated ITC action, and a hearing on
the merits before the ITC Administrative Law Judge is scheduled to begin in
April 2001. Altima became a subsidiary of Broadcom in September 2000.
- ---------------
2 David v. Werner F. Wolfen, Henry T. Nicholas, III, Henry Samueli, Myron S.
Eichen, Alan E. Ross and Does 1-25, inclusive, and Broadcom Corporation,
Orange County Superior Court Case No. 01CC03930, and Bollinger v. Henry T.
Nicholas, III, Henry Samueli, Werner F. Wolfen, Alan E. Ross, Myron S. Eichen,
and Does 1-25, inclusive, and Broadcom Corporation, Orange County Superior
Court Case No 01CC04065.
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Although Altima believes that it has strong defenses and is defending the
actions vigorously, a finding of infringement by Altima as to the patent in the
Eastern District of California action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful) and the issuance of an injunction requiring that Altima
withdraw various products from the market. A finding against Altima in the
consolidated ITC action could result in the exclusion of certain Altima
products, and possibly certain Broadcom products, from entering the United
States. Any finding adverse to Altima in these actions could also result in
indemnification claims by Altima's customers or strategic partners. Any of the
foregoing events could have a material adverse effect on Altima's, and possibly
Broadcom's, business, results of operations and financial condition.
We and our subsidiaries are also involved in other legal proceedings,
claims and litigation arising in the ordinary course of business.
The pending lawsuits involve complex questions of fact and law and likely
will require the expenditure of significant funds and the diversion of other
resources to defend. Although management currently believes the outcome of
outstanding legal proceedings, claims and litigation involving Broadcom or its
subsidiaries will not have a material adverse effect on our business, results of
operations or financial condition, the results of litigation are inherently
uncertain, and an adverse outcome is at least reasonably possible. We are unable
to estimate the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Broadcom's Class A common stock is traded on the Nasdaq National Market
under the symbol "BRCM." The following table sets forth, for the periods
indicated, the high and low sale prices for the Class A common stock on the
Nasdaq National Market, adjusted to reflect our 2-for-1 stock splits effective
February 17, 1999 and February 11, 2000, respectively:
HIGH LOW
------- -------
FISCAL YEAR 1999
First Quarter............................................ $ 47.81 $ 23.13
Second Quarter........................................... 72.63 29.00
Third Quarter............................................ 74.75 50.75
Fourth Quarter........................................... 144.50 53.50
FISCAL YEAR 2000
First Quarter............................................ $253.00 $110.88
Second Quarter........................................... 235.75 113.00
Third Quarter............................................ 274.75 203.50
Fourth Quarter........................................... 256.19 74.75
FISCAL YEAR 2001
First Quarter............................................ $139.50 $ 27.09
As of March 29, 2001 there were approximately 3,035 record holders of
Broadcom's Class A common stock and approximately 806 record holders of
Broadcom's Class B common stock. On March 30, 2001 the last reported sale price
of the Class A common stock on the Nasdaq National Market was $28.90 per share.
Broadcom's Class B common stock is not publicly traded. Each share of Class
B common stock is convertible at any time at the option of the holder into one
share of Class A common stock and is automatically converted upon sale and most
other transfers.
DIVIDEND POLICY
Broadcom has never declared or paid cash dividends on shares of its capital
stock. Broadcom currently intends to retain all of its earnings, if any, for use
in its business and in acquisitions of other businesses, products or
technologies and does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Gross revenue................................. $1,134,763 $521,225 $216,729 $42,341 $23,874
Less: fair value of warrants earned by
customers................................... (38,603) -- -- -- --
---------- -------- -------- ------- -------
Net revenue................................... 1,096,160 521,225 216,729 42,341 23,874
Cost of revenue............................... 484,219 211,991 91,403 15,563 8,175
---------- -------- -------- ------- -------
Gross profit.................................. 611,941 309,234 125,326 26,778 15,699
Operating expense:
Research and development.................... 250,676 119,300 54,285 22,776 7,541
Selling, general and administrative......... 103,305 61,475 33,595 11,871 4,364
Stock-based compensation.................... 115,307 3,560 1,786 61 --
Amortization of goodwill.................... 136,984 -- -- -- --
Amortization of purchased intangible
assets................................... 1,255 -- -- -- --
In-process research and development......... 713,050 -- -- -- --
Merger-related costs........................ 4,745 15,210 -- -- --
Litigation settlement costs................. -- 17,036 -- -- --
---------- -------- -------- ------- -------
Income (loss) from operations................. (713,381) 92,653 35,660 (7,930) 3,794
Interest and other income, net................ 21,606 8,648 4,180 107 165
---------- -------- -------- ------- -------
Income (loss) before income taxes............. (691,775) 101,301 39,840 (7,823) 3,959
Provision (benefit) for income taxes.......... (3,953) 28,830 18,451 (852) 1,514
---------- -------- -------- ------- -------
Net income (loss)............................. $ (687,822) $ 72,471 $ 21,389 $(6,971) $ 2,445
========== ======== ======== ======= =======
Basic earnings (loss) per share(1)............ $ (3.13) $ .36 $ .13 $ (.06) $ .02
========== ======== ======== ======= =======
Diluted earnings (loss) per share(1).......... $ (3.13) $ .31 $ .10 $ (.06) $ .02
========== ======== ======== ======= =======
DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents..................... $ 523,904 $180,816 $ 77,555 $34,512 $ 9,780
Working capital............................... 673,092 310,625 136,341 35,349 9,920
Goodwill and purchased intangible assets,
net......................................... 3,260,464 -- -- -- --
Total assets.................................. 4,677,822 609,753 271,147 63,708 21,575
Convertible preferred stock................... -- -- -- 28,617 6,084
Total shareholders' equity.................... 4,475,260 516,872 224,424 45,872 15,483
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the calculation of earnings (loss) per share. Adjusted to reflect our
2-for-1 stock splits, each in the form of a 100% stock dividend, effective
February 17, 1999 and February 11, 2000, respectively.
The table above sets forth our selected consolidated financial data. We
prepared this information using the consolidated financial statements of
Broadcom for the five years ended December 31, 2000, which have been restated to
include the operations of acquisitions accounted for on a pooling-of-interests
basis as if they had been combined with Broadcom prior to the beginning of each
period presented. See Note 2 of Notes to Consolidated Financial Statements.
You should read this selected consolidated financial data along with the
Consolidated Financial Statements and related Notes contained in this Report and
in our subsequent reports filed with the Securities and Exchange Commission
("SEC"), as well as the section of this Report and our other reports titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements and related Notes thereto, contained
elsewhere in this Report, before deciding to invest in our company or to
maintain or increase your investment. In this Report, all share numbers and per
share amounts have been retroactively adjusted to reflect our 2-for-1 stock
splits, each in the form of a 100% stock dividend, effective February 17, 1999
and February 11, 2000, respectively.
OVERVIEW
We are the leading provider of highly integrated silicon solutions that
enable broadband communications and networking of voice, video and data
services. Using proprietary technologies and advanced design methodologies, we
design, develop and supply system-on-a-chip solutions for applications in
digital cable set-top boxes and cable modems, high-speed local, metropolitan and
wide area and optical networks, home networking, VoIP, carrier access,
residential broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, xDSL, wireless communications, SystemI/O(TM) server solutions
and network processing. From our inception in 1991 through 1994, we were
primarily engaged in product development and the establishment of strategic
customer and foundry relationships. During that period, we generated the
majority of our revenue from development work performed for key customers. We
began shipping our products in 1994, and subsequently our revenue has grown
predominately through sales of our semiconductor products. We intend to continue
to enter into development contracts with key customers, but expect that
development revenue will constitute a decreasing percentage of our total
revenue. We also generate a small percentage of our product revenue from the
sale of software and the provision of software support services and sales of
system-level reference designs.
We recognize product revenue at the time of shipment, except for shipments
to stocking distributors whereby revenue is recognized upon sale to the end
customer. Provision is concurrently made for estimated product returns, which
historically have been immaterial. Our products typically carry a one-year
warranty. Development revenue is generally recognized under the
percentage-of-completion method. Revenue from licensed software is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided that the fee is fixed and determinable and collectibility is probable.
Revenue from post-contract customer support and any other future deliverables is
deferred and earned over the support period or as contract elements are
delivered. We also recognize as a reduction of gross revenue the fair value of
assumed performance-based warrants earned by certain customers in connection
with purchase and development agreements.
The percentage of our net revenue derived from independent customers
located outside of the United States was approximately 20.3% in 2000 and 17.2%
in both 1999 and 1998. All of our revenue to date has been denominated in U.S.
dollars. See Note 9 of Notes to Consolidated Financial Statements.
From time to time, our key customers have placed large orders causing our
quarterly revenue to fluctuate significantly. We expect these fluctuations will
continue in the future. Sales to our five largest customers, including sales to
their respective manufacturing subcontractors, represented approximately 61.8%
of our net revenue in 2000, 66.6% of our revenue in 1999 and 74.1% of our
revenue in 1998. We expect that our key customers will continue to account for a
significant portion of our revenue for 2001 and in the future.
Our gross margin has been affected in the past, and may continue to be
affected in the future, by various factors, including, but not limited to, the
following:
- our product mix;
- the position of our products in their respective life cycles;
- competitive pricing strategies;
- the mix of product revenue and development revenue;
- manufacturing cost efficiencies and inefficiencies;
- stock-based compensation; and
- the fair value of performance-based warrants earned by certain customers.
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For example, newly-introduced products generally have higher average selling
prices and gross margins, both of which typically decline over product life
cycles due to competitive pressures and volume pricing agreements. Our gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors.
The sales cycle for the test and evaluation of our products can range from
three to six months or more, with an additional three to six months or more
before a customer commences volume production of equipment incorporating our
products. Due to these lengthy sales cycles, we may experience a significant
delay between incurring expenses for research and development and selling,
general and administrative efforts, and the generation of corresponding revenue,
if any. Furthermore, during 2001 and thereafter, we may continue to increase our
investment in research and development, selling, general and administrative
functions and inventory as we expand our operations. We anticipate that the rate
of new orders may vary significantly from month to month. Consequently, if
anticipated sales and shipments in any quarter do not occur when expected,
expenses and inventory levels could be disproportionately high, and our
operating results for that quarter and, potentially future quarters, would be
materially and adversely affected.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to reduce the
time required to develop new technologies and products and bring them to market,
complement our existing product offerings, expand our market coverage, increase
our engineering workforce or enhance our technological capabilities. We will
continue to evaluate opportunities for strategic acquisitions from time to time,
and may make additional acquisitions in the future.
During 2000 we completed eight acquisitions that were accounted for as
purchase transactions, for aggregate consideration of $5.1 billion. These
acquisitions included Innovent Systems, Inc., a developer of radio frequency
integrated circuits for wireless data communications; Puyallup Integrated
Circuit Company, Inc., a provider of integrated circuit design services,
including full chip designs and embedded macro blocks for microprocessors,
system-on-a-chip and ASIC designs; Altima Communications, Inc., a supplier of
networking integrated circuits for the small-to-medium sized business networking
market; NewPort Communications, Inc., a supplier of mixed-signal integrated
circuits for the high-speed communications infrastructure market; Silicon Spice
Inc., a developer of communications processors and other technology for
high-density voice, fax and data packet transmission over wide area networks;
Element 14, Inc., a developer of high-port density, low-power digital subscriber
line chipsets, software and communications processor technology; Allayer
Communications, a developer of high-performance enterprise and optical
networking communications chips; and SiByte, Inc., a developer of
high-performance microprocessor solutions for broadband networking. Because each
of these acquisitions was accounted for as a purchase transaction, the
accompanying consolidated financial statements include the results of operations
of the acquired companies incurred after their respective acquisition dates. See
Note 2 of Notes to Consolidated Financial Statements.
In addition, we completed nine pooling-of-interests transactions in 2000
and 1999. In 2000 we completed the acquisitions of Digital Furnace Corporation,
a developer of communications algorithms and software that increase the capacity
of existing broadband networks for interactive services; BlueSteel Networks,
Inc., a developer of high-performance Internet security processors for
e-commerce and VPN applications; Stellar Semiconductor, Inc., a developer of 3D
graphics technology; and Pivotal Technologies Corporation, a developer of
high-performance communications links for both wired and wireless environments.
In 1999 we completed the acquisitions of Maverick Networks, a developer of
highly integrated silicon for multi-layer switching equipment in enterprise
networks; Epigram, Inc., a developer of advanced semiconductor products for
high-speed home networking; Armedia, Inc., a developer of high performance
digital video decoders; HotHaus Technologies Inc., a provider of OpenVoIP(TM)
embedded communications software that enables transmission of digital voice, fax
and data packets over data networks, including the Internet; and AltoCom, Inc.,
a provider of complete software data/fax modem implementations for general
purpose embedded processors, PC CPUs and digital signal processors. Because each
of these acquisitions was accounted for as a pooling of interests transaction,
our historical consolidated financial statements and the discussion and analysis
of financial condition and results of operations for prior periods have been
restated to include the operations of these nine companies as if they had been
combined with our company at the beginning of the first period presented.
Included in revenue and net loss for 2000 were revenue and net losses from the
four pooling-of-interests transactions completed in that year and incurred prior
to the respective closings of those transactions, aggregating $0.3 million and
$8.8 million, respectively. Included in restated revenue and net income for 1999
were revenue and net losses incurred prior to the respective closings of the
nine pooling-of-interests transactions, aggregating $11.3 million and $19.6
million, respectively.
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During the course of negotiating the acquisitions of Altima, Silicon Spice,
Allayer and SiByte, we challenged each company's management to substantiate its
assertions regarding the value and market acceptance of the company's
technologies and products by securing significant purchase and development
commitments from key or strategic industry customers. We presented these
companies with the concept of issuing performance-based warrants to obtain
long-term commitments from customers. The companies were able to secure such
commitments from several significant customers. The agreements negotiated by the
acquired companies required their customers to purchase minimum quantities of
the respective company's products on a quarterly basis during the term or
required payments for development services in accordance with a specified
schedule, contained substantial cash penalties if the customers failed to
purchase the contractually specified minimum levels of product or to fulfill
their obligations under the development agreements, and required the acquired
companies to issue performance-based warrants to purchase the company's stock to
the customers, which warrants would vest only if and to the extent the minimum
purchase provisions of the purchase agreements and obligations under the
development agreements were met. At the time the warrants were issued, we were
under no obligation to purchase the respective companies, but the companies and
their customers were obligated to fulfill their contractual commitments under
the purchase and development agreements and the warrants. With these customer
relationships and agreements in place, each of the acquired companies, in our
assessment, had a higher value than it had prior to entering into the
agreements. Because the performance-based warrants would be assumed by us if an
acquisition were to occur, we provided technical assistance and advice to each
company's management to assure that the performance-based warrants would be
structured to qualify for fixed accounting under Emerging Issues Task Force
("EITF") Issue 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services("EITF 96-18").
In allocating the purchase price for Altima, Silicon Spice, Allayer and
SiByte, no value has been assigned to the purchase and development agreements
because they were executory contracts and their terms were at fair value.
However, pursuant to the provisions of EITF 96-18, the related warrants have
been assigned fixed values of approximately $238.56, $227.31, $142.81 and
$123.13 per share, respectively, the warrant fair values determined using the
Black-Scholes pricing model at the respective dates that we acquired Altima,
Silicon Spice, Allayer and SiByte. Under EITF 96-18, a performance-based warrant
is accounted for using its value at its date of issuance if a significant
disincentive to the customer exists that makes the customer's performance
probable ("fixed accounting"). At the time we assumed the warrants and related
purchase and development agreements, we determined, in consultation with our
independent auditors, that fixed accounting, with the date of acquisition as the
valuation measurement date, was required. With respect to the purchase
agreements, this determination was based on the fact that the customers are
subject to substantial penalties, which include cash penalties if there are
shortfalls in meeting the minimum purchase requirements on a periodic basis
throughout the term of the agreements and in some cases further cash penalties
payable at the end of the agreements if aggregate purchase commitments are not
met. With respect to the development agreements, this determination was based on
the fact that the customers are subject to substantial cash penalties if the
customers fail to fulfill their obligations. In our evaluation, we considered
the significance of the cash penalties in relation to both the amounts in each
purchase and development agreement and the financial statements of the
customers, the effect of forfeiture of the value of the warrants, and the intent
and ability of customers to purchase the required products and development
services under the agreements.
These warrants will be accounted for in our financial statements pursuant
to EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable
Equity Instruments Granted to a Nonemployee ("EITF D-90"). EITF D-90 announces
an SEC Staff position that an issuer of a performance-based warrant should treat
it as unissued for accounting purposes until the issuer has received benefit and
the warrant vests. Accordingly, the warrants assumed in the Altima, Silicon
Spice, Allayer and SiByte acquisitions will be recorded as a reduction of
revenue, in the amounts of $238.56, $227.31, $142.81 and $123.13 per share,
respectively, only as and to the extent any warrants are earned and vest in
future periods. The warrants generally vest quarterly over the period from
October 2000 through July 2004, subject to satisfaction by customers of the
applicable purchase and development requirements, and are generally exercisable
for one year after the vesting date at a weighted average exercise price per
share of approximately $0.01. The effect of the warrants will be included in our
calculation of basic and diluted earnings (loss) per share as of the beginning
of the period in which they are earned by the customers. During the twelve
months ended December 31, 2000, certain customers earned performance-based
warrants to purchase 162,280 shares of our Class A common stock, with an
aggregate fair value of $38.6 million.
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We and the managements of Altima, Silicon Spice, Allayer and SiByte viewed
the purchase and development agreements and related warrants as a means of
solidifying each of the acquired company's relationships with key customers. In
addition, the purchase and development agreements allowed us to gain confidence
in the acceptance of each of the companies' products by such key customers.
At the time we acquired Altima, Silicon Spice, Allayer and SiByte, we
expected these companies and their customers to perform under the purchase and
development agreements and for the assumed warrants to be earned. However, on
February 28, 2001 one of the five customers that had entered into a purchase
agreement with Altima gave notice to us that it was terminating its purchase
agreement. Additionally, based on the recent significant economic slowdown in
the technology sector and current market conditions, we have concluded that
certain of the remaining purchase and development agreements may no longer be
desirable. Therefore, we have terminated or are in the process of negotiating
termination of certain of these purchase and development agreements and have
cancelled or are in the process of negotiating cancellation of the related
warrants. In addition, we may in the future consider revising or terminating any
of the remaining purchase and development agreements, which could result in
cancellation of the related warrants. See Note 11 of Notes to Consolidated
Financial Statements. The accounting for any warrants earned in prior periods
will not be affected by such terminations.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net revenue for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Gross revenue............................................... 103.5% 100.0% 100.0%
Less: fair value of warrants earned by customers............ (3.5) -- --
----- ----- -----
Net revenue................................................. 100.0 100.0 100.0
Cost of revenue............................................. 44.2 40.7 42.2
----- ----- -----
Gross profit................................................ 55.8 59.3 57.8
Operating expense:
Research and development.................................. 22.9 22.9 25.0
Selling, general and administrative....................... 9.4 11.8 15.5
Stock-based compensation.................................. 10.5 0.6 0.8
Amortization of goodwill.................................. 12.5 -- --
Amortization of purchased intangible assets............... 0.1 -- --
In-process research and development....................... 65.1 -- --
Merger-related costs...................................... 0.4 2.9 --
Litigation settlement costs............................... -- 3.3 --
----- ----- -----
Income (loss) from operations............................... (65.1) 17.8 16.5
Interest and other income, net.............................. 2.0 1.6 1.9
----- ----- -----
Income (loss) before income taxes........................... (63.1) 19.4 18.4
Provision (benefit) for income taxes........................ (0.4) 5.5 8.5
----- ----- -----
Net income (loss)........................................... (62.7)% 13.9% 9.9%
===== ===== =====
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenue. Gross revenue consists of product revenue generated principally by
sales of our semiconductor products, and to a lesser extent, from the sales of
software and the provision of software support services and development revenue
generated under development contracts with our customers. Net revenue represents
gross revenue less the fair value of performance-based warrants earned by
customers. Gross revenue for 2000 was $1.135 billion, an increase of $613.5
million or 117.7% as compared with gross revenue of $521.2 million in 1999.
Gross revenue for 2000 was reduced by $38.6 million representing the fair value
of the performance-based warrants to purchase 162,280 shares of Class A common
stock earned by certain customers in connection with purchase and development
agreements. Net revenue for
25
29
2000 was $1.096 billion, an increase of $574.9 million or 110.3% as compared
with net revenue of $521.2 million in 1999. The growth in revenue resulted
mainly from increases in volume shipments of our semiconductor products for the
high-speed networking market, digital cable set-top boxes and cable modems. In
the future, net revenue may be reduced by the effect of the fair value of
outstanding performance-based warrants earned by certain customers. Also, due to
the recent significant economic slowdown in the technology sector and current
market conditions, we are not currently able to assess the likely trend of
revenue in future periods.
Gross Profit. Gross profit represents net revenue less the cost of revenue.
Cost of revenue includes the cost of purchasing the finished silicon wafers
processed by independent foundries, costs associated with assembly, test and
quality assurance for those products, amortization of purchased technology and
costs of personnel and equipment associated with manufacturing support and
contracted development work. Gross profit for 2000 was $611.9 million or 55.8%
of net revenue, an increase of $302.7 million or 97.9% from gross profit of
$309.2 million or 59.3% of net revenue in 1999. The increase in gross profit was
mainly attributable to the significant increase in the volume of semiconductor
product shipments. The decrease in gross profit as a percentage of revenue was
largely driven by volume-pricing agreements and competitive pricing strategies
on certain high volume products. Included in cost of revenue were approximately
$4.6 mill