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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92618-3616
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(949) 450-8700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
The number of shares of the registrant's common stock, $0.0001 par value,
outstanding as of October 31, 2001: 185,764,631 shares of Class A common stock
and 76,553,720 shares of Class B common stock.
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Broadcom(R), the pulse logo(R), StrataSwitch(TM) and SystemI/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.
BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2001 (unaudited) and
December 31, 2000 1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2001 and 2000 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 403,898 $ 523,904
Short-term marketable securities 116,117 77,682
Accounts receivable, net 83,516 172,314
Inventory 28,785 52,137
Deferred taxes 38,511 10,397
Prepaid expenses 36,168 39,220
------------ ------------
Total current assets 706,995 875,654
Property and equipment, net 165,453 132,870
Long-term marketable securities 133,315 1,984
Deferred taxes 249,711 351,937
Goodwill and purchased intangible assets, net 2,372,904 3,260,464
Other assets 40,874 54,913
------------ ------------
Total assets $ 3,669,252 $ 4,677,822
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 89,844 $ 78,163
Wages and related benefits 39,468 34,720
Accrued liabilities 172,061 66,030
Notes payable 21,051 21,051
Current portion of long-term debt 32,991 2,598
------------ ------------
Total current liabilities 355,415 202,562
Long-term debt, less current portion 60,478 --
Shareholders' equity:
Common stock 25 24
Additional paid-in capital 7,371,984 6,236,968
Notes receivable from employees (14,760) (14,575)
Deferred compensation (1,086,445) (1,135,555)
Accumulated deficit (3,020,253) (607,791)
Accumulated other comprehensive income (loss) 2,808 (3,811)
------------ ------------
Total shareholders' equity 3,253,359 4,475,260
------------ ------------
Total liabilities and shareholders' equity $ 3,669,252 $ 4,677,822
============ ============
See accompanying notes.
1
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenue $ 213,591 $ 319,155 $ 735,000 $ 755,923
Cost of revenue(a) 129,832 136,938 425,348 318,535
------------ ------------ ------------ ------------
Gross profit 83,759 182,217 309,652 437,388
Operating expense:
Research and development(b) 111,406 67,945 337,010 163,350
Selling, general and administrative(b) 35,599 30,148 113,823 72,097
Stock-based compensation 106,941 27,000 356,915 29,965
Amortization of goodwill 209,551 15,399 616,921 15,399
Amortization of purchased
intangible assets 7,162 201 20,161 201
Impairment of goodwill 1,181,649 -- 1,181,649 --
In-process research and development -- 45,660 109,710 45,660
Restructuring costs 16,046 -- 34,281 --
Litigation settlement costs -- -- 3,000 --
Merger-related costs -- -- -- 4,745
------------ ------------ ------------ ------------
Income (loss) from operations (1,584,595) (4,136) (2,463,818) 105,971
Interest income, net 4,228 6,985 18,863 15,150
Other expense, net (32,849) (2,051) (34,236) (2,166)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,613,216) 798 (2,479,191) 118,955
Provision (benefit) for income taxes 6,000 14,876 (66,729) 38,507
------------ ------------ ------------ ------------
Net income (loss) $ (1,619,216) $ (14,078) $ (2,412,462) $ 80,448
============ ============ ============ ============
Basic earnings (loss) per share $ (6.36) $ (.06) $ (9.57) $ .37
============ ============ ============ ============
Diluted earnings (loss) per share $ (6.36) $ (.06) $ (9.57) $ .31
============ ============ ============ ============
Weighted average shares (basic) 254,524 220,510 252,204 215,444
============ ============ ============ ============
Weighted average shares (diluted) 254,524 220,510 252,204 257,111
============ ============ ============ ============
------------
(a) Cost of revenue includes the following:
Stock-based compensation expense $ 3,436 $ 615 $ 12,551 $ 690
Amortization of purchased intangible
assets 13,387 415 38,353 415
------------ ------------ ------------ ------------
$ 16,823 $ 1,030 $ 50,904 $ 1,105
============ ============ ============ ============
(b) Stock-based compensation expense is excluded from the following:
Research and development expense $ 69,680 $ 20,636 $ 233,493 $ 22,789
Selling, general and administrative
expense 37,261 6,364 123,422 7,176
------------ ------------ ------------ ------------
$ 106,941 $ 27,000 $ 356,915 $ 29,965
============ ============ ============ ============
Amortization of purchased intangible assets is excluded from the following:
Research and development expense $ 6,939 $ 201 $ 19,505 $ 201
Selling, general and administrative
expense 223 -- 656 --
------------ ------------ ------------ ------------
$ 7,162 $ 201 $ 20,161 $ 201
============ ============ ============ ============
See accompanying notes.
2
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $(2,412,462) $ 80,448
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 41,064 15,752
Stock-based compensation expense 380,536 31,289
Amortization of goodwill and purchased
intangible assets 675,435 16,015
Impairment of goodwill 1,181,649 --
In-process research and development 109,710 45,660
Tax benefit from stock plans -- 77,544
Deferred taxes (61,745) (65,857)
Loss on strategic investments 32,736 --
Change in operating assets and liabilities:
Accounts receivable 128,189 (59,520)
Inventory 24,457 (23,072)
Prepaid expenses and other assets (11,782) (37,243)
Accounts payable (12,282) 40,162
Other accrued liabilities (17,927) 20,227
----------- -----------
Net cash provided by operating activities 57,578 141,405
INVESTING ACTIVITIES
Purchases of property and equipment, net (63,584) (47,085)
Net cash received from purchase transactions 41,008 10,658
Proceeds from sales of marketable securities 107,785 8,508
Purchases of marketable securities (277,551) (13,668)
----------- -----------
Net cash used in investing activities (192,342) (41,587)
FINANCING ACTIVITIES
Proceeds from debt obligations -- 250
Payments on debt obligations (44,725) (4,626)
Net proceeds from issuances of common stock 40,313 100,726
Proceeds from warrants earned by customers 18,599 --
Proceeds from repayment of notes receivable 571 829
----------- -----------
Net cash provided by financing activities 14,758 97,179
----------- -----------
Increase (decrease) in cash and cash equivalents (120,006) 196,997
Cash and cash equivalents at beginning of year 523,904 180,816
----------- -----------
Cash and cash equivalents at end of period $ 403,898 $ 377,813
=========== ===========
See accompanying notes.
3
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited; however, they contain all normal recurring accruals and adjustments
that, in the opinion of management, are necessary to present fairly the
consolidated financial position of Broadcom Corporation and its wholly owned
subsidiaries (collectively, the "Company") at September 30, 2001 and the
consolidated results of the Company's operations and cash flows for the three
and nine months ended September 30, 2001 and 2000. All intercompany accounts and
transactions have been eliminated.
It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. Significant
estimates made in preparing the financial statements include, but are not
limited to, the allowance for doubtful accounts, sales returns and allowances,
inventory reserves, warranty reserves and income tax valuation allowances. The
results of operations for the three and nine months ended September 30, 2001 are
not necessarily indicative of the results to be expected for the full fiscal
year.
The accompanying unaudited condensed consolidated financial statements do
not include certain footnotes and other financial presentations normally
required under generally accepted accounting principles. Therefore, these
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 2000, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 2, 2001.
Certain amounts in the unaudited condensed consolidated financial
statements for prior periods have been reclassified to conform to the current
period's presentation.
Marketable Securities
The Company defines marketable securities as income yielding securities
that can be readily converted into cash. Examples of marketable securities
include money market funds, commercial paper, corporate notes and federal,
state, municipal and county government bonds.
Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS No. 142"), effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with SFAS Nos. 141 and 142. Other intangible
assets will continue to be amortized over their estimated useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is estimated to result in a decrease
in amortization of goodwill of approximately $544.5 million per year (or $2.16
per share based on basic shares outstanding for the nine months ended September
30, 2001). The Company will perform the first of the required impairment tests
of goodwill and indefinite-lived intangible assets under the new rules during
fiscal 2002. The Company has not yet determined what the effect of these tests
will be on the results of operations and financial condition of the Company.
4
2. BUSINESS COMBINATIONS
In January 2001 the Company completed the acquisitions of Visiontech Ltd.,
a supplier of digital video/audio MPEG-2 compression and decompression chips,
and ServerWorks Corporation, a supplier of high-performance system input/output
(I/O) integrated circuits for servers. The Company completed two additional
purchase transactions in July 2001. A summary of these transactions follows:
SHARES RESERVED
SHARES FOR ACHIEVING
RESERVED FOR SHARES CERTAIN FUTURE
OPTIONS AND RESERVED FOR INTERNAL TOTAL SHARES
COMPANY DATE SHARES OTHER RIGHTS PERFORMANCE-BASED PERFORMANCE ISSUED AND
ACQUIRED ACQUIRED ISSUED ASSUMED WARRANTS ASSUMED GOALS RESERVED
----------- ------------- ------------- ------------- ----------------- --------------- ------------
Visiontech Jan. 2001 1,459,975 790,027 5,714,270 -- 7,964,272
ServerWorks Jan. 2001 7,225,031 3,774,969 -- 9,000,000 20,000,000
Others July 2001 68,175 205,425 -- -- 273,600
Portions of the shares issued will be held in escrow pursuant to the terms
of the acquisition agreements as well as various employee share repurchase
agreements.
The unaudited condensed consolidated financial statements include the
results of operations of these acquired companies incurred after their
respective dates of acquisition.
Allocation of Purchase Consideration
These acquisitions have been accounted for under the purchase method of
accounting. The Company obtained independent appraisals or performed internal
appraisals of the fair value of the tangible and intangible assets acquired in
order to allocate the purchase price in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations ("APB 16"). Based upon those
appraisals, the purchase price for each of the acquisitions was allocated as
follows (in thousands):
NET ASSETS GOODWILL AND DEFERRED TAX
(LIABILITIES) PURCHASED DEFERRED ASSETS TOTAL
ASSUMED INTANGIBLES COMPENSATION (LIABILITIES) IPR&D CONSIDERATION
------------- ------------- ------------- ------------- ------------- -------------
Visiontech $ (14,826) $ 105,404 $ 100,530 $ -- $ 30,400 $ 221,508
ServerWorks (171,252) 802,591 244,971 (147,860) 79,310 807,760
Others (625) 3,567 7,563 -- -- 10,505
------------- ------------- ------------- ------------- ------------- -------------
Total $ (186,703) $ 911,562 $ 353,064 $ (147,860) $ 109,710 $ 1,039,773
============= ============= ============= ============= ============= =============
The consideration for each of the purchase transactions was calculated as
follows: (a) common shares issued were valued based upon the Company's stock
price for a short period just before and after the companies reached agreement
and the proposed transaction was announced and (b) restricted common stock and
employee stock options were valued in accordance with FASB Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation - An
Interpretation of APB Opinion No. 25 ("FIN 44"). Acquisition costs incurred by
the Company have been included as part of the net assets (liabilities) assumed
in connection with the purchase transactions.
Accounting for Performance-Based Warrants
Prior to the Company's acquisition of Visiontech, Visiontech entered into a
number of purchase and development agreements whereby certain of its customers
were granted performance-based warrants that vest upon the satisfaction by the
customers of certain purchase or development requirements. The warrants issued
by Visiontech were immediately exercisable (and all but one customer did in fact
exercise the warrants prior to the Company's acquisition of Visiontech), but
were subject to Visiontech's right to repurchase unvested shares for the
original exercise price paid per share. These shares were to vest and the
repurchase right would lapse with respect to such shares as the purchase or
development performance commitments in the warrant agreements were met. The
shares underlying the unexercised performance-based warrants and the shares
subject to repurchase that were issued pursuant to the exercise of the
performance-based warrants are collectively referred to herein as the "Warrant
Shares." The
5
purchase and development agreements and the Warrant Shares were assumed by the
Company upon consummation of its acquisition of Visiontech.
The Company originally issued or reserved for future issuance 5,714,270
additional shares of Class A common stock to customers for the Warrant Shares of
Visiontech that were assumed by the Company. The Company will account for the
Warrant Shares under Emerging Issues Task Force ("EITF") Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with, Selling Goods or Services, and EITF Topic
D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity
Instruments Granted to a Nonemployee. Accordingly, the Warrant Shares will be
accounted for as reductions of revenue, with a corresponding increase in
shareholders' equity, in future periods if, as and when the Warrant Shares vest.
These Warrant Shares will be accounted for using their fair value at such future
vesting dates. The Warrant Shares generally vest quarterly over the period from
January 2001 through December 2004, subject to satisfaction by customers of the
applicable purchase or development requirements, and are generally exercisable
for an exercise price of $0.002 per share.
In connection with the Company's previous acquisitions in fiscal 2000 of
Altima Communications, Inc., Silicon Spice Inc., Allayer Communications and
SiByte, Inc., the Company assumed outstanding performance-based warrants that
those companies had issued to certain of their customers. The Company also
assumed the related purchase and development agreements under which the warrants
were issued.
Customers earned performance-based warrants and Warrant Shares for an
aggregate of 176,025 and 568,221 shares of the Company's Class A common stock
for the three and nine months ended September 30, 2001, respectively. The fair
value of the warrants and Warrant Shares earned by the customers for the three
and nine months ended September 30, 2001 was $3.6 million and $18.6 million,
respectively.
During the nine months ended September 30, 2001, a total of 139,482 shares
of common stock were issued upon exercise of performance-based warrants and
6,953,902 performance-based warrants and Warrant Shares were cancelled or
repurchased in connection with the termination of certain of the assumed
purchase and development agreements. At September 30, 2001, 562,071 Warrant
Shares were vested and 1,705,379 Warrant Shares remained unvested. At September
30, 2001 performance-based warrants to purchase 1,871,382 shares of common stock
were unvested and outstanding. There were no vested performance-based warrants
outstanding at September 30, 2001. Performance-based warrants to purchase
2,889,667 shares of common stock were outstanding and unvested at September 30,
2000. The Company is in the process of renegotiating or terminating certain of
the remaining purchase and development agreements as well as cancelling or
repurchasing the related warrants and Warrant Shares. The accounting for any
warrants or Warrant Shares earned in prior periods will not be affected by such
terminations.
Accounting for Contingent Consideration
In connection with the Company's acquisition of ServerWorks, if certain
future internal performance goals are satisfied, the aggregate consideration for
the acquisition will be increased. Such additional consideration, if earned,
will be paid in the form of additional shares of the Company's Class A common
stock, which have been reserved for that purpose, and will be accounted for in
accordance with APB 16, FIN 44 and EITF Issue No. 95-8, Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination. Any additional consideration paid will be
allocated to goodwill and deferred compensation and amortized over the remaining
useful life of goodwill and the remaining vesting periods of the applicable
equity instruments.
In connection with its acquisition of Allayer in fiscal 2000, the Company
reserved shares of its Class A common stock for future issuance upon the
attainment of certain future internal performance goals. These performance goals
were met during the three and nine months ended September 30, 2001. As a
result, during the three months ended September 30, 2001 the Company issued or
reserved for future issuance 144,518 shares of its Class A common stock and
recorded an additional $1.7 million of goodwill, $0.4 million for immediate
stock-based compensation charges and $2.1 million of deferred compensation
related to the satisfaction of the Allayer performance goals. During the nine
months ended September 30, 2001 the Company issued or reserved for future
issuance 234,042 shares of its Class A common stock and recorded an additional
$6.5 million of goodwill, $0.4 million for immediate stock-based compensation
charges and $3.2 million of deferred compensation related to the satisfaction of
the Allayer performance goals.
6
In connection with its acquisition of SiByte in fiscal 2000, the Company
reserved shares of its Class A common stock for future issuance upon the
attainment of certain future internal performance goals. Three of these
performance goals were met during the nine months ended September 30, 2001. As a
result, the Company issued or reserved for future issuance approximately
2,344,991 shares of its Class A common stock and recorded an additional $51.4
million of goodwill, $3.9 million for immediate stock-based compensation charges
and $16.7 million of deferred compensation related to the satisfaction of the
SiByte performance goals.
As of September 30, 2001 an aggregate of 10,406,955 shares of Class A
common stock remained reserved for future issuance if certain internal
performance goals are met in connection with the Company's acquisitions of
SiByte and ServerWorks.
Outstanding stock options assumed in the ServerWorks, Allayer and SiByte
acquisitions are subject to variable accounting and will be periodically
revalued over their vesting periods until all performance goals are satisfied or
expire unearned.
In-Process Research and Development
In-process research and development ("IPR&D") totaled $109.7 million for
purchase transactions completed during the nine months ended September 30, 2001.
The amounts allocated to IPR&D were determined through established valuation
techniques in the high-technology industry and were expensed upon acquisition as
it was determined that the projects had not reached technological feasibility
and no alternative future uses existed.
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D performed to date.
The fair value of developed technology is included in identifiable purchased
intangible assets, and the fair values of IPR&D to-be-completed and future
research and development are included in goodwill. The Company believes the
amounts recorded as IPR&D, as well as developed technology, represent the fair
value of, and approximate the amounts an independent party would pay for, these
projects.
As of the acquisition dates of Visiontech and ServerWorks, development
projects were in process. Research and development costs to bring the products
from these acquired companies to technological feasibility are not expected to
have a material impact on the Company's future results of operations or
financial condition.
Goodwill and Deferred Stock-Based Compensation
Goodwill is recorded as the difference, if any, between the aggregate
consideration paid for an acquisition and the fair value of the net tangible and
intangible assets acquired. Beginning in the third quarter of 2001, goodwill
related to acquisitions completed after June 30, 2001 is not amortized in
accordance with SFAS No. 141. For acquisitions completed on or before June 30,
2001, goodwill is currently being amortized on a straight-line basis over the
estimated useful life of five years. Reviews are regularly performed to
determine whether the carrying value of the goodwill asset is impaired.
Impairment is based on the excess of the carrying amount over the fair value of
those assets. Beginning in the first quarter of 2002, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with SFAS
Nos. 141 and 142. See Note 1 and Note 6.
Deferred stock-based compensation has been valued in accordance with FIN
44. This amount is being amortized over the remaining vesting period (generally
three to four years) of the underlying restricted stock and stock options
assumed.
7
Pro Forma Data
The unaudited pro forma statement of operations data below gives effect to
the 12 purchase acquisitions that were completed during 2000 and through
September 30, 2001 as if they had occurred at the beginning of fiscal 2000. The
following data includes amortization of goodwill, purchased intangible assets
and stock-based compensation expense, but excludes the charge for acquired
IPR&D. This pro forma data is presented for informational purposes only and does
not purport to be indicative of the results of future operations or of the
results that would have occurred had the acquisitions taken place at the
beginning of fiscal 2000.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2001 2000
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net revenue $ 738,929 $ 920,926
Pro forma net loss (2,322,898) (346,498)
Pro forma net loss per share (9.13) (1.46)
3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of earnings (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator: Net income (loss) $ (1,619,216) $ (14,078) $ (2,412,462) $ 80,448
============ ============ ============ ============
Denominator:
Weighted-average shares
outstanding 260,736 223,078 259,366 218,470
Less: nonvested common shares
outstanding (6,212) (2,568) (7,162) (3,026)
------------ ------------ ------------ ------------
Denominator for basic earnings (loss)
per common share 254,524 220,510 252,204 215,444
Effect of dilutive securities:
Nonvested common shares -- -- -- 3,007
Stock options -- -- -- 38,660
------------ ------------ ------------ ------------
Denominator for diluted earnings (loss)
per common share 254,524 220,510 252,204 257,111
============ ============ ============ ============
Basic earnings (loss) per share $ (6.36) $ (.06) $ (9.57) $ .37
============ ============ ============ ============
Diluted earnings (loss) per share $ (6.36) $ (.06) $ (9.57) $ .31
============ ============ ============ ============
Approximately 25.3 million, 44.3 million and 27.5 million common share
equivalents have been excluded from the diluted loss per share calculation for
the three months ended September 30, 2001 and 2000 and for the nine months ended
September 30, 2001, respectively, as they would have been antidilutive. The
effects of performance-based warrants assumed by the Company, and other
contingent equity consideration obligations of the Company, in connection with
certain acquisitions will be included in the calculation of basic and diluted
earnings (loss) per share as of the beginning of the period in which such
warrants or contingent equity consideration are earned.
4. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market,
and consists of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Work in process $ 8,711 $ 18,513
Finished goods 20,074 33,624
------------ ------------
$ 28,785 $ 52,137
============ ============
8
5. DEBT AND OTHER OBLIGATIONS
The following is a summary of the Company's long-term debt, including debt
and loans assumed in connection with acquisitions:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Credit facility $ 85,586 $ --
Capitalized lease obligations payable in varying monthly
installments at rates from 7.8% to 14.7% 7,883 2,598
------------ ------------
93,469 2,598
Less current portion of long-term debt (32,991) (2,598)
------------ ------------
$ 60,478 $ --
============ ============
In connection with its acquisition of ServerWorks, the Company assumed a
financing arrangement for a credit facility of up to $125.0 million. The Company
may choose the rate at which the credit facility bears interest in one or three
month periods as either (a) the higher of (i) 1.5% plus the Federal Reserve
overnight rate and (ii) 1% plus the Bank of America prime rate or (b) 3% plus
LIBOR. The credit facility is repayable in quarterly installments through
December 2003. The credit facility is secured by a pledge of substantially all
of the assets of ServerWorks as well as other security.
At September 30, 2001 the Company had a note payable of $21.1 million that
bears interest at LIBOR plus 1% and is classified as a current liability. The
holder of the note has asserted that the entire principal amount of the note and
all interest accrued thereon is currently due and payable; however, the Company
disputes that assertion.
In connection with the acquisition of ServerWorks, the Company assumed a
$35.0 million non-interest bearing obligation to a third party. This amount was
paid in April 2001.
6. GOODWILL AND PURCHASED INTANGIBLE ASSETS
During the three months ended September 30, 2001 the Company performed an
assessment of the carrying values of purchased intangible assets recorded in
connection with its various acquisitions. The assessment was performed in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, due to the recent significant
economic slowdown and reduction in near-term demand in the technology sector and
the semiconductor industry. As a result of the assessment, the Company concluded
the decline in market conditions within the industry was significant and other
than temporary. Based on this assessment and an independent valuation, the
Company recorded a charge of $1.2 billion for the three months ended September
30, 2001 to write down the value of goodwill associated with certain of its
purchase acquisitions. Impairment was based on the excess of the carrying amount
of the goodwill over its fair value. Fair value was determined using a weighted
average of the "market approach" and the discounted future cash flows for the
businesses that had separately distinguishable asset balances and cash flows.
The cash flow period used was five years, with a discount rate ranging from 33%
to 40%, and estimated terminal values based on a terminal growth rate of 5%. The
assumptions supporting the estimated future cash flows, including the discount
rate and estimated terminal values, reflect management's best estimates. The
discount rate was based upon the Company's weighted average cost of capital
adjusted for the risks associated with the operations.
7. INVESTMENTS
The Company has certain strategic investments in publicly traded and
privately held companies for the promotion of business and strategic objectives.
These investments are included in other assets on the Company's balance sheet
and are carried at fair value or cost, as appropriate. The Company periodically
reviews these investments for other-than-temporary declines in fair value and
writes down these investments to their fair value when an other-than-temporary
decline has occurred. The Company generally believes an other-than-temporary
decline has occurred when the fair value of the investment is below the carrying
value for two consecutive quarters, absent evidence to the contrary. For the
three months ended September 30, 2001 the Company recorded an impairment charge
of approximately $32.7 million representing an other-than-temporary decline in
the value of these strategic
9
investments. This charge was included in other expense, net, in the unaudited
condensed consolidated statements of operations.
8. RESTRUCTURING COSTS
In the second quarter of 2001 the Company announced and began implementing
a plan to restructure its operations in response to the current challenging
economic climate. This restructuring plan will result in certain business unit
realignments, workforce reductions and consolidation of excess facilities. For
the nine months ended September 30, 2001 the Company recorded restructuring
costs totaling $34.3 million, which are classified as operating expense in the
unaudited condensed consolidated statements of operations.
Through September 30, 2001 the restructuring plan had resulted in the
termination of approximately 160 employees across all business functions and
geographic regions. The Company recorded workforce reduction charges of
approximately $16.1 million related to severance and fringe benefits. Included
in this amount are stock-based compensation charges in the amount of $11.1
million associated with the extension of the exercise period for stock options
that were vested at the termination date. In addition, the number of temporary
and contract workers employed by the Company was also reduced.
For the nine months ended September 30, 2001 the Company recorded charges
of approximately $18.2 million for the consolidation of excess facilities,
relating primarily to lease terminations and non-cancelable lease costs.
A summary of the restructuring costs is as follows (in thousands):
RESTRUCTURING
NON-CASH CASH LIABILITIES AT
TOTAL COSTS COSTS PAYMENTS SEPTEMBER 30, 2001
------------- ------------- ------------- ------------------
Workforce reductions $ 16,100 $ (11,070) $ (4,749) $ 281
Consolidation of excess facilities 18,181 (1,638) (4,369) 12,174
------------- ------------- ------------- -------------
Total $ 34,281 $ (12,708) $ (9,118) $ 12,455
============= ============= ============= =============
Approximately $12.2 million related to the net lease expense due to the
consolidation of facilities will be paid over the respective lease terms through
fiscal 2006.
9. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. Other comprehensive income (loss) includes
foreign currency translation adjustments and net unrealized losses on
investments. The components of comprehensive income (loss), net of taxes, are as
follows:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001 2000
-------------- -------------
(IN THOUSANDS)
Net income (loss) $ (2,412,462) $ 80,448
Other comprehensive income (loss):
Change in net unrealized gain (loss) on investment 6,627 --
Change in accumulated translation adjustments (8) (17)
------------- -------------
Total comprehensive income (loss) $ (2,405,843) $ 80,431
============= =============
The components of accumulated other comprehensive income (loss), net of
tax, are as follows (in millions):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
(IN THOUSANDS)
Accumulated net unrealized gain (loss) on investment $ 2,828 $ (3,799)
Accumulated translation adjustments (20) (12)
------------- -------------
Total accumulated other comprehensive income (loss) $ 2,808 $ (3,811)
============= =============
10
10. STOCK OPTION EXCHANGE OFFER
On June 23, 2001 the Company completed an offering to Company employees of
the opportunity to voluntarily exchange certain stock options or receive
supplemental option grants. Under this program, employees holding options to
purchase the Company's Class A or Class B common stock were given the
opportunity to exchange certain of their existing options, with exercise prices
at or above $45.00 per share, for new options to purchase an equal number of
shares of the Company's Class A common stock. Approximately 18.7 million options
with a weighted-average exercise price of $128.35 were tendered pursuant to this
program. On June 23, 2001 those options were accepted and cancelled by the
Company. The Company undertook to grant new stock options on a one-for-one
basis, in lieu of the tendered options, to the affected employees. The new
options will not be granted until at least six months and one day after
acceptance of the old options for exchange and cancellation. The exercise price
of the new options will be the last reported trading price of the Company's
Class A common stock on the grant date.
As an alternative, the eligible employees were given the opportunity to
retain their existing eligible options and receive a supplemental grant of
options to acquire the Company's Class A common stock. The supplemental option
grant size depended on the number of shares underlying and the exercise price of
the holder's existing eligible options, with larger grants going to those
holding higher-priced options. Under this alternative, new options to purchase
approximately 3.9 million shares of common stock were granted on June 24, 2001
at an exercise price of $33.68. Supplemental options to purchase an additional
159,000 shares of common stock will be granted at least six months and one day
after acceptance of the old options for exchange and cancellation, at an
exercise price equal to the last reported trading price of the Company's Class A
common stock on the grant date.
Certain of the Company's employees hold options that were assumed by the
Company in connection with its acquisitions of the businesses that previously
employed those individuals; in the business combinations that have been
accounted for as purchases, the Company has recorded deferred compensation with
respect to those options. To the extent those employees tendered, and the
Company accepted for exchange and cancellation, such assumed eligible options in
exchange for new options, the Company was required to immediately accelerate the
amortization of the related deferred compensation previously recorded. The
Company recorded approximately $8.9 million of accelerated deferred compensation
expense related to these acquisitions for the nine months ended September 30,
2001.
11. LITIGATION
In August 2000 Intel Corporation filed a complaint in the United States
District Court for the District of Delaware against the Company asserting that
the Company (i) infringes five Intel patents relating to video compression,
high-speed networking and semiconductor packaging, (ii) induces the infringement
of such patents, and (iii) contributorily infringes such patents. The complaint
sought a preliminary and permanent injunction against the Company as well as the
recovery of monetary damages, including treble damages for willful infringement.
The Company denied Intel's allegations of infringement and asserted related
defenses and counterclaims in its October 2001 answer to the complaint. A patent
claims construction hearing was held on September 24 - 25, 2001 and the Court
issued a claims construction order on November 6, 2001. The first phase of the
trial regarding only two of the five patents in the suit is scheduled to
commence on November 28, 2001. The Court has not yet set a date to try claims
relating to Intel's remaining three patents or the Company's counterclaims.
In October 2000 the Company filed a complaint for declaratory judgment in
the United States District Court for the Northern District of California against
Intel asserting that the patents asserted by Intel in the Delaware action are
not infringed.
In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a
complaint in the United States District Court for the Eastern District of Texas
against the Company asserting that (i) the Company's BCM3415 silicon tuner chip
infringes a single Microtune patent relating to tuner technology, (ii) the
Company induces the infringement of such patent, and (iii) the Company
contributorily infringes such patent. The complaint sought a preliminary and
permanent injunction against the Company as well as the recovery of monetary
damages, including treble damages for willful infringement. In March 2001, the
Company answered the complaint and filed counterclaims seeking a declaratory
judgment that Microtune's patent is invalid, unenforceable and not infringed.
The parties are currently in the initial stages of discovery in the action, and
the Court has scheduled a hearing on patent claims construction to commence in
March 2002 and a trial to begin in October 2002.
11
Although the Company believes that it has strong defenses to Intel's claims
in the Delaware action and to Microtune's claims in the Texas action and is
defending both actions vigorously, a finding of infringement by the Company as
to one or more patents in either of these actions could lead to liability for
monetary damages (which could be trebled in the event that the infringement were
found to have been willful), the issuance of an injunction requiring that the
Company withdraw various products from the market, and indemnification claims by
the Company's customers or strategic partners, each of which events could have a
material and adverse effect on the Company's business, results of operations and
financial condition.
In the period March through May 2001 the Company and its Chief Executive
Officer, Chief Technical Officer and Chief Financial Officer were served with a
number of complaints, filed primarily in the United States District Court for
the Central District of California,1 alleging violations of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). On June 21, 2001, the Court
consolidated all thirty-one lawsuits into a single action entitled In re:
Broadcom Corp. Securities Litigation, Master File No. SACV 01-275 GLT(Eex) (C.D.
Cal.), and appointed a lead plaintiff and lead plaintiffs' counsel. A
consolidated amended complaint was filed on October 1, 2001. The consolidated
amended complaint names the Company, its Chief Executive Officer, Chief
Technical Officer and Chief Financial Officer as defendants, and purports to
state claims against them on behalf of all persons who purchased Broadcom public
securities, or bought or sold options on Broadcom stock, between July 31, 2000
and February 26, 2001. The alleged claims are brought under Sections 10(b) and
20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder. The essence of the
allegations in the consolidated amended complaint is that the defendants
intentionally failed to properly account for the financial impact of
performance-based warrants assumed in connection with its acquisitions of
Altima, Silicon Spice, Allayer, SiByte and Visiontech, which plaintiffs allege
had the effect of materially overstating the Company's reported financial
results. Plaintiffs allege that the defendants intentionally engaged in this
alleged improper accounting practice in order to inflate the value of the
Company's stock and thereby obtain alleged illegal insider trading proceeds, as
well as to facilitate the use of the Company's stock as consideration in
acquisitions. Plaintiffs also allege generally that there was inadequate
disclosure regarding the warrants and the terms of the particular agreements at
issue. The Company has not answered the consolidated amended complaint and
intends to file a motion to dismiss under the Private Securities Litigation
Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil
Procedure. Discovery has not yet commenced in the consolidated action. The
Company believes that the allegations in this purported securities class action
are without merit and intends to defend the action vigorously.
In the period March through June 2001 the Company, along with its
directors, and in one case certain officers of the Company, was also sued in
five purported shareholder derivative actions, identified in the footnote
below,2 based upon the same general set of facts and circumstances outlined
above in connection with the purported shareholder class actions. These lawsuits
were filed as purported shareholder derivative actions under California law and
allege that certain of the individual defendants sold shares while in possession
of material inside information (and that other individual defendants aided and
abetted this activity) in purported breach of their fiduciary duties to the
Company. The complaints also allege breaches of fiduciary duties and "gross
mismanagement, waste of corporate
----------
1 One complaint was originally filed in the United States District Court for
the Southern District of California, and was subsequently transferred to
the Central District of California.
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. 01-CC-03930 (filed March 22, 2001);
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 01-CC-04065 (filed March
27, 2001); Lester v. Henry T. Nicholas III, William J. Ruehle, Henry
Samueli, Myron S. Eichen, Alan E. Ross, Werner F. Wolfen, and Broadcom
Corporation, Orange County Superior Court Case No. 01-CC-06029 (filed May
9, 2001); Schumann v. Henry T. Nicholas III, Henry Samueli, Werner F.
Wolfen, Alan E. Ross, William J. Ruehle, Timothy M. Lindenfelser, Vahid
Manian, Aurelio E. Fernandez, Martin J. Colombatto, David A. Dull, Ernst &
Young LLP, and Does 1-50, inclusive, and Broadcom Corporation, Orange
County Superior Court Case No. 01-CC-07282 (filed June 5, 2001); and Aiken
v. Henry T. Nicholas III, Henry Samueli, Myron S. Eichen, Werner F. Wolfen,
Alan E. Ross, and Broadcom Corporation, U.S.D.C. C.D. Cal. Case No.
SACV-01-407 AHS (EEx) (filed April 11, 2001).
12
assets and abuse of control" based upon the same general set of facts and
circumstances. The four derivative lawsuits filed in Orange County Superior
Court were consolidated by order of the Court dated June 21, 2001, and the
plaintiffs have been ordered to file a consolidated derivative complaint on or
before November 30, 2001. The parties have agreed to stay the Aiken lawsuit
filed in federal court, while the consolidated derivative lawsuit proceeds in
California state court. The Company has not answered any of the complaints. The
Company believes the allegations in these purported derivative actions are also
without merit and intends to defend the actions vigorously.
In December 1999 Level One Communications, Inc., a subsidiary of Intel,
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 seeking
an exclusion order and a 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, all proceedings in the three
District Court actions have been stayed while the ITC investigation is pending.
In December 2000 Intel and Level One withdrew one of the patents asserted
against Altima in the ITC investigation.
An evidentiary hearing was held before the ITC Administrative Law Judge in
April 2001. On July 19, 2001, the Administrative Law Judge issued an Initial
Determination ("ID") that found that all of the asserted claims of Level One's
patent concerning reset configurable devices are invalid, that 14 of 18 asserted
claims in Intel's packaging patent are invalid while the remaining 4 claims are
valid and infringed by Altima's AC105R and AC108 products, and that 8 out of 10
claims in Level One's repeater management patent are valid and infringed by
Altima's AC105R and AC108R products while the remaining two claims are not
infringed. As part of the ID, the Judge recommended to the ITC that further
importation into the United States of these two products, as well as "circuit
boards" containing these products, be prohibited. Altima filed with the ITC a
petition for review of the portions of the ID that are adverse to Altima and
Intel/Level One filed a petition for review of the portions of the ID that are
adverse to Intel and Level One. On September 5, 2001, the ITC denied those
petitions for review.
On October 24, 2001, the ITC issued a Limited Exclusion Order (Order) that
excludes from importation into the United States integrated repeaters, such as
Altima's AC105R and AC108R devices, and circuit boards and carriers containing
such devices, that are manufactured abroad and/or imported by or on behalf of
Altima or any of its affiliates, parents, subsidiaries or other related entities
and that are covered by Level One's U.S. Patent No. 5,742,603. The Order also
excludes from importation integrated repeaters, switches, and other products in
plastic ball grid array packages, such as Altima's AC105R and AC108 devices, and
circuit boards and carriers containing such devices, that are manufactured
abroad and/or imported by or on behalf of Altima or any of its affiliates,
parents, subsidiaries or other related entities and that are covered by Intel's
U.S. Patent No. 5,894,410. The Order does not prohibit importation of any
downstream products, such as finished hubs, that contain those devices.
Altima and its customers are entitled to continue importation of the AC105R
and AC108 devices under a 100% bond during the 60 day Presidential review period
that commenced on October 24, 2001. Any AC105R and AC108 devices that are
imported in finished products, such as hubs, are not subject to the Order.
Moreover, there has been no determination that the Order covers any other Altima
devices. The Company believes that the exclusion of the AC105R and AC108 devices
will not have a material impact on the businesses of Altima or Broadcom.
Although the scope of the Order includes affiliates of Altima, in briefs
that were filed in September 2001 concerning the appropriate remedy, both Altima
and Intel indicated that any exclusion order should not apply to Broadcom
products. Altima and Broadcom will vigorously contest through available
13
procedures any attempt to apply the Order to any Broadcom products, since such
orders are statutorily limited to persons found in violation of the statute,
Broadcom was not a party to the ITC investigation, Broadcom products were not
considered in the investigation and a petition by Broadcom to intervene in the
investigation was denied.
The Order is subject to disapproval by the President for policy reasons and
also is subject to interpretation by the U.S. Customs Service. In addition, the
Order is subject to appeal to the United States Court of Appeals for the Federal
Circuit on both procedural and substantive grounds.
Upon conclusion of the ITC action, the pending action in the Eastern
District Court of California may resume, and a finding there of infringement by
Altima 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 adverse to Altima in any of these actions could also
result in indemnification claims by Altima's customers or strategic partners.
Any of the foregoing events could have a material and adverse effect on
Altima's, and possibly the Company's, business, results of operations and
financial condition.
The Company and its subsidiaries are also involved in other legal
proceedings, claims and litigation arising in the ordinary course of business.
The pending lawsuits involve complex questions of fact and law and likely
will require the expenditure of significant funds and the diversion of other
resources to defend. Although management currently believes the outcome of
outstanding legal proceedings, claims and litigation involving the Company or
its subsidiaries will not have a material adverse effect on the Company's
business, results of operations or financial condition, the results of
litigation are inherently uncertain, and an adverse outcome is at least
reasonably possible. The Company is unable to estimate the range of possible
loss from outstanding litigation, and no amounts have been provided for such
matters in the accompanying consolidated financial statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
You should read the following discussion and analysis in conjunction with
the Unaudited Condensed Consolidated Financial Statements and related Notes
thereto contained elsewhere in this Report. The information contained in this
Quarterly Report on Form 10-Q is not a complete description of our business or
the risks associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in this Report
and in our other reports filed with the SEC, including our Annual Report on Form
10-K for the year ended December 31, 2000, and our subsequent reports on Forms
10-Q, 8-K and 8-K/A, that discuss our business in greater detail.
The section entitled "Risk Factors" set forth below, and similar
discussions in our other SEC filings, discuss some of the important risk factors
that may affect our business, results of operations and financial condition. You
should carefully consider those risks, in addition to the other information in
this Report and in our other filings with the SEC, before deciding to invest in
our company or to maintain or increase your investment.
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact are statements that could be deemed
forward-looking statements, including, but not limited to, statements concerning
projected revenues, expenses, gross profit and net income, results of the future
application of new rules on accounting for goodwill and other intangible assets,
the effectiveness of our expense and product cost control and reduction efforts,
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,
our 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, and reflect management's beliefs and certain
assumptions made by us based upon information available to us at the time of
this Report. 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 speak only as of
the date of this Report, 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,
including those set forth in "Risk Factors," below. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason.
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 complete system-on-a-chip solutions and related
applications for digital cable set-top boxes and cable modems, high-speed local,
metropolitan and wide area and optical networks, home networking, Voice over
Internet Protocol ("VoIP"), carrier access, residential broadband gateways,
direct broadcast satellite and terrestrial digital broadcast, digital subscriber
lines ("xDSL"), wireless communications, SystemI/O(TM) server solutions and
network processing. 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.
15
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 revenue, and as a corresponding
increase in shareholders' equity, the fair value of performance-based warrants
earned by certain customers of five companies acquired in 2000 and 2001 in
connection with purchase and development agreements assumed in those business
combinations.
The percentage of our net revenue derived from independent customers
located outside of the United States was approximately 20.3% for the nine months
ended September 30, 2001 as compared with 13.8% for the nine months ended
September 30, 2000. All of our revenue to date has been denominated in U.S.
dollars.
From time to time, our key customers have placed, modified or rescheduled
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 49.8% of our net revenue for the nine months ended
September 30, 2001 as compared to 63.9% of our net revenue for the nine months
ended September 30, 2000. We expect that our five largest customers will
continue to account for a significant portion of our net revenue for 2001 and in
the foreseeable 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;
- amortization of purchased intangible assets;
- stock-based compensation expense; and
- the fair value of performance-based warrants earned by certain
customers.
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
margins 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. Moreover, in light of the recent significant economic slowdown in the
technology sector, it may take significantly longer than three to six months
before customers commence volume production of equipment incorporating some of
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, in the future, we may continue to increase our investment
in research and development, selling, general and administrative functions and
inventory. 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.
16
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.
Due to the recent significant economic slowdown in the technology sector
and semiconductor industry in fiscal 2001, we experienced a significant slowdown
in customer orders, as well as cancellations and rescheduling of backlog, in the
first half of the year.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The following table sets forth certain statement of operations data
expressed as a percentage of revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 60.8 42.9 57.9 42.1
--------- --------- --------- ---------
Gross profit 39.2 57.1 42.1 57.9
Operating expense:
Research and development 52.2 21.3 45.9 21.6
Selling, general and administrative 16.6 9.4 15.5 9.5
Stock-based compensation 50.1 8.5 48.6 4.1
Amortization of goodwill 98.1 4.8 83.9 2.1
Amortization of purchased intangible assets 3.4 0.1 2.7 --
Impairment of goodwill 553.2 -- 160.8 --
In-process research and development -- 14.3 14.9 6.0
Restructuring costs 7.5 -- 4.7 --
Litigation settlement costs -- -- 0.4 --
Merger-related costs -- -- -- 0.6
--------- --------- --------- ---------
Income (loss) from operations (741.9) (1.3) (335.3) 14.0
Interest income, net 2.0 2.2 2.6 2.0
Other expense, net (15.4) (0.6) (4.7) (0.3)
--------- --------- --------- ---------
Income (loss) before income taxes (755.3) 0.3 (337.4) 15.7
Provision (benefit) for income taxes 2.8 4.7 (9.2) 5.1
--------- --------- --------- ---------
Net income (loss) (758.1)% (4.4)% (328.2)% 10.6%
========= ========= ========= =========
NET REVENUE. Net 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 is
revenue less the fair value of performance-based warrants earned by certain
customers. Net revenue for the three months ended September 30, 2001 was $213.6
million, a decrease of $105.6 million or 33.1% as compared with net revenue of
$319.2 million for the three months ended September 30, 2000. Net revenue for
the nine months ended September 30, 2001 was $735.0 million, a decrease of $20.9
million or 2.8% as compared with net revenue of $755.9 million for the nine
months ended September 30, 2000. Net revenue for the three and nine months ended
September 30, 2001 was reduced by $3.6 million and $18.6 million, respectively,
which represents the fair value of the performance-based warrants to purchase
shares of Class A common stock earned by certain customers in connection with
purchase and development agreements assumed in prior acquisitions.
The decline in net revenue for the three and nine months ended September
30, 2001 as compared with the three and nine months ended September 30, 2000
primarily resulted from a decrease in volume shipments of our semiconductor
products for the high-speed networking market, digital cable set-top boxes and
cable modems, as our customers continued to work through their inventory issues,
offset in part by shipments of SystemI/O server applications. In the future, net
revenue may be reduced by the effect of the fair value of outstanding
performance-based warrants earned by certain customers. Due to the recent
significant economic slowdown in the technology sector and semiconductor
industry in fiscal 2001, in the first half of the year we experienced a
significant slowdown in customer orders, as well
17
as cancellations and rescheduling of backlog. While we have recently achieved
additional design wins and are beginning to see signs of stability in certain of
our target markets, as a result of the uncertainties due to the events of
September 11 and continuing international conflicts, we anticipate that revenue
will continue to be adversely impacted for as long as the current economic
slowdown continues.
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 the three months ended September
30, 2001 was $83.8 million or 39.2% of net revenue, a decrease of $98.5 million
or 54.0% from gross profit of $182.2 million or 57.1% of net revenue for the
three months ended September 30, 2000. Gross profit for the nine months ended
September 30, 2001 was $309.7 million or 42.1% of net revenue, a decrease of
$127.7 million or 29.2% from gross profit of $437.4 million or 57.9% of net
revenue for the nine months ended September 30, 2000.
The decrease in gross profit was mainly attributable to the decrease in the
volume of semiconductor product shipments and non-cash acquisition related
charges, including the amortization of purchased intangible assets, stock-based
compensation expense and the impact of performance-based warrants earned by
certain customers. This decrease was offset in part by cost reductions in the
three months ended September 30, 2001, particularly on our StrataSwitch(TM)
product line. The decrease in gross profit as a percentage of net revenue for
the three and nine months ended September 30, 2001 compared to corresponding
prior year period was primarily a result of the non-cash acquisition related
charges and, to a lesser extent, decreased absorption of manufacturing overhead
due to lower shipment volumes and shifts in product mix.
Gross profit will continue to be impacted by the non-cash amortization of
acquisition related charges. In addition, gross profit may be impacted in the
future by competitive pricing strategies, fluctuations in silicon wafer costs
and the future introduction of certain lower margin products.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, costs related to engineering design tools, and
subcontracting costs. Research and development expense for the three months
ended September 30, 2001 was $111.4 million or 52.2% of net revenue, an increase
of $43.5 million or 64.0% as compared with research and development expense of
$67.9 million or 21.3% of net revenue for the three months ended September 30,
2000. Research and development expense for the nine months ended September 30,
2001 was $337.0 million or 45.9% net revenue, an increase of $173.7 million or
106.3% as compared with research and development expense of $163.4 million or
21.6% of net revenue for the nine months ended September 30, 2000. This increase
was primarily due to the addition of personnel through acquisitions and internal
hiring and the investment in design tools for the development of new products
and the enhancement of existing products. Research and development expense in
both absolute dollars and as a percentage of net revenue is expected to be
relatively unchanged in the fourth quarter of 2001 as compared to the third
quarter of 2001 due to the anticipated savings from headcount reductions and
other cost saving measures, partially offset by certain strategic new hires. Due
to the recent significant economic slowdown in the technology sector and current
market conditions, we are not currently able to assess the trend of research and
development expense thereafter. However, based upon past experience, we
anticipate that research and development expense in absolute dollars will
continue to increase over the long term as a result of the growth and
diversification of the markets we serve, new product opportunities and our
expansion into new markets and technologies. We will continue to periodically
assess our cost structure and product programs in the future in order to improve
our operational efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense consists primarily of personnel-related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for the three months ended September 30, 2001 was
$35.6 million or 16.6% of net revenue, an increase of $5.5 million or 18.1% as
compared with selling, general and administrative expense of $30.1 million or
9.4% of net revenue for the three months ended September 30, 2000. Selling,
general and administrative expense for the nine months ended September 30, 2001
was $113.8 million or 15.5% of net revenue, an increase of $41.7 million or
57.9% as compared with selling, general and administrative expense of $72.1
million or 9.5% of net revenue for the nine months ended September 30, 2000. The
increase in absolute dollars reflected higher personnel-related costs resulting
from the hiring of sales and marketing personnel, senior management and
administrative
18
personnel, increased facilities expenses and legal and other professional fees.
Selling, general and administrative expense in both absolute dollars and as a
percentage of net revenue is expected to be relatively unchanged in the fourth
quarter of 2001 as compared to the third quarter of 2001 due to the anticipated
savings from headcount reductions and other cost saving measures implemented in
the second and third quarter of 2001. Due to the recent significant economic
slowdown in the technology sector and current market conditions, we are not
currently able to assess the trend of selling, general and administrative
expense thereafter. However, based upon past experience, we expect that over the
long term selling, general and administrative expense in absolute dollars will
continue to increase to support the planned continued expansion of our
operations through indigenous growth and acquisitions, as a result of periodic
changes in our infrastructure to support increased headcount, acquisition and
integration activities, and international operations, and in view of the volume
of current litigation. We will continue to periodically assess our cost
structure and product programs in the future in order to improve our operational
efficiencies.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
generally represents the amortization of deferred compensation. We recorded
approximately $377.2 million of deferred compensation for the nine months ended
September 30, 2001 and a total of $1.2 billion of deferred compensation in
fiscal 2000, primarily in connection with stock options assumed in our
acquisitions. Deferred compensation primarily represents the difference between
the fair value of our common stock at the measurement date of each acquisition
and the exercise price of the unvested stock options assumed in the acquisition.
Additional deferred compensation related to earned contingent consideration is
measured and recorded at the date the internal performance goals are met.
Deferred compensation is presented as a reduction of shareholders' equity and is
amortized ratably over the respective vesting periods of the applicable options,
generally three to four years. Stock-based compensation expense for the three
months ended September 30, 2001 was $106.9 million or 50.1% of net revenue, an
increase of $79.9 million, as compared with stock-based compensation expense of
$27.0 million or 8.5% of net revenue for the three months ended September 30,
2000. In addition, approximately $3.4 million and $0.6 million of stock-based
compensation expenses have been classified as cost of revenue for the three
months ended September 30, 2001 and 2000, respectively. Stock-based compensation
expense for the nine months ended September 30, 2001 was $356.9 million or 48.6%
of net revenue, an increase of $327.0 million as compared with stock-based
compensation expense of $30.0 million or 4.1% of net revenue for the nine months
ended September 30, 2000. In addition, approximately $12.6 million and $0.7
million of stock-based compensation expenses have been classified as cost of
revenue for the nine months ended September 30, 2001 and 2000, respectively.
Approximately $1.0 million and $11.1 million of additional stock-based
compensation expense was classified as restructuring costs for the three and
nine months ended September 30, 2001, respectively. Approximately $0.3 million
of additional stock-based compensation expense was classified as merger-related
costs in the nine months ended September 30, 2000.
The significant increase in stock-based compensation expense for the three
and nine months ended September 30, 2001 relates primarily to stock options
assumed in the four purchase transactions completed during the nine months ended
September 30, 2001 and the eight purchase transactions completed during fiscal
2000, that were accounted for in accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25. We
expect to record additional stock-based compensation expense in future periods
as a result of the continued amortization of deferred compensation related to
these purchase transactions.
In connection with our acquisition of ServerWorks and our previous
acquisitions of Allayer and SiByte in fiscal 2000, at the time these
acquisitions were consummated we agreed to increase the aggregate consideration
for the acquisitions if certain future internal performance goals were
satisfied. Such additional consideration, if earned, would be paid in the form
of additional shares of our Class A common stock. Any additional consideration
paid that would be allocated to deferred compensation would be amortized over
the remaining vesting periods of the underlying options and restricted stock
assumed in the acquisitions. In addition, outstanding options assumed in these
transactions would be subject to variable accounting and periodically revalued
over their applicable vesting periods until all performance goals are satisfied.
We recorded an additional $2.5 million and $24.2 million of deferred
compensation during the three and nine months ended September 30, 2001,
respectively, in connection with certain Allayer and SiByte performance goals,
that were met during the period. Approximately $4.3 million of these amounts was
expensed immediately. See Note 2 of Notes to Unaudited Condensed Consolidated
Financial Statements.
19
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. In connection
with the four purchase transactions completed during the nine months ended
September 30, 2001, we recorded approximately $969.5 million of additional
goodwill and purchased intangible assets, including contingent consideration
earned from previous acquisitions. For the eight purchase transactions completed
during the second half of fiscal 2000, we recorded approximately $3.4 billion of
goodwill and purchased intangible assets. Goodwill is recorded as the
difference, if any, between the aggregate consideration paid for an acquisition
and the fair value of the net tangible and intangible assets acquired. Goodwill
and purchased intangible assets are amortized on a straight-line basis over the
economic lives of the respective assets, generally two to five years. The
amortization of goodwill and purchased intangible assets for the three months
ended September 30, 2001 was $216.7 million or 101.5% of net revenue, an
increase of $201.1 million, as compared with $15.6 million or 4.9% of net
revenue in the three months ended September 30, 2000. In addition, approximately
$13.4 million and $0.4 million of amortization of purchased intangible assets
have been classified as cost of revenue for the three months ended September 30,
2001 and 2000, respectively. The amortization of goodwill and purchased
intangible assets for the nine months ended September 30, 2001 was $637.1
million or 86.6% of net revenue, an increase of $621.5 million, as compared with
$15.6 million or 2.1% of net revenue for the nine months ended September 30,
2000. In addition, approximately $38.4 million and $0.4 million of amortization
of purchased intangible assets has been classified as cost of revenue for the
nine months ended September 30, 2001 and 2000, respectively.
In connection with our acquisitions of ServerWorks, Allayer and SiByte, at
the time these acquisitions were consummated we agreed to increase the aggregate
consideration for the acquisitions if certain internal future performance goals
were satisfied. Such additional consideration, if earned, would be paid in the
form of additional shares of our Class A common stock. Any additional
consideration paid that would be allocated to goodwill for these acquisitions
would be amortized over the remaining useful lives of the respective goodwill.
We recorded $1.7 million and $58.0 million of additional goodwill during the
three and nine months ended September 30, 2001, respectively, in connection with
certain Allayer and SiByte internal performance goals that were met during the
period. We expect to incur additional amortization of goodwill and purchased
intangible assets in future periods as a result of these purchase transactions.
See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements.
In June 2001 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations ("SFAS No. 141"), and SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with SFAS Nos. 141
and 142. Other intangible assets will continue to be amortized over their useful
lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is estimated to result in a decrease
in amortization of goodwill of approximately $544.5 million per year (or $2.16
per share based on the number of basic shares outstanding at September 30,
2001). We will perform the first of the required impairment tests of goodwill
and indefinite-lived intangible assets under the new rules as of January 1,
2002. We have not yet determined the effect these tests will have on our results
of operations and financial position.
IMPAIRMENT OF GOODWILL. During the three months ended September 30, 2001 we
performed an assessment of the carrying values of intangible assets recorded in
connection with our various acquisitions. The assessment was performed in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, due to the recent significant
economic slowdown and reduction in near-term demand in the technology sector and
the semiconductor industry. As a result of the assessment, we concluded that the
decline in market conditions within the industry was significant and other than
temporary. Based on this assessment and an independent valuation, we recorded a
charge of $1.2 billion for the three months ended September 30, 2001 to write
down the value of goodwill associated with certain of our purchase acquisitions.
See Note 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements.
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
("IPR&D") totaled $109.7 million for the purchase transactions completed in the
nine months ended September 30, 2001, as compared to $45.7 million for the
purchase transactions completed for the nine months ended September 30, 2000.
The amounts allocated to IPR&D were determined through established valuation
techniques in the high-technology industry and
20
were expensed upon acquisition as it was determined that the underlying projects
had not reached technological feasibility and no alternative future uses
existed.
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D performed to date.
The fair value of completed technology is included in identifiable purchased
intangible assets, and the fair values of IPR&D to be completed and future
research and development are included in goodwill. We believe the amounts
recorded as IPR&D, as well as developed technology, represent fair values and
approximate the amounts an independent party would pay for these projects.
As of the closing date of each purchase transaction, development projects
were in process. Although the costs to bring the products from the acquired
companies to technological feasibility are not expected to have a material
impact on our future results of operations or financial condition, the
development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products, and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging
markets and could have a material and adverse impact on our business and
operating results.
The following table summarizes the significant assumptions underlying the
valuations for our significant purchase acquisitions completed in the nine
months ended September 30, 2001:
AVERAGE ESTIMATED RISK
AVERAGE ESTIMATED COST TO ADJUSTED
PURCHASE PERCENT TIME TO COMPLETE DISCOUNT IPR&D
TRANSACTION DEVELOPMENT PROJECTS COMPLETE COMPLETE (IN MILLIONS) RATE (IN MILLIONS)
----------- -------------------- -------- ----------- ------------- --------- ------------
Visiontech Video compression integrated circuits 60% 1 year $ 5.2 30-35% $ 30.4
ServerWorks High-performance SystemI/O
integrated circuits 45% 1.5 years 21.2 29-34% 79.3
Actual results to date have been consistent, in all material respects, with
our assumptions at the time of the above acquisitions. The assumptions primarily
consist of expected completion dates for the in-process projects, estimated
costs to complete the projects, and revenue and expense projections once the
products have entered the market. Shipment volumes of products from the
above-acquired technologies are not material to our overall financial results at
the present time. It is difficult to determine the accuracy of overall revenue
projections early in the technology life cycle. Failure to achieve the expected
levels of revenue and net income from these products will negatively impact the
return on investment expected at the time that the acquisitions were completed
and may potentially result in impairment of goodwill and other long-lived
assets.
RESTRUCTURING COSTS. In the second quarter of 2001 we announced and began
implementing a plan to restructure our operations in response to the current
challenging economic climate. This restructuring plan will result in certain
business unit realignments, workforce reductions and consolidation of excess
facilities. For the nine months ended September 30, 2001 we recorded
restructuring costs totaling $34.3 million, which are classified as operating
expense in the unaudited condensed consolidated statements of operations.
21
Through September 30, 2001 the restructuring plan had resulted in the
termination of approximately 160 employees across all business functions and
geographic regions. We recorded workforce reduction charges of approximately
$16.1 million related to severance and fringe benefits. Included in this amount
are stock-based compensation charges in the amount of $11.1 million associated
with the extension of the exercise period for stock options that were vested at
the termination date. In addition, the number of temporary and contract workers
employed by us was also reduced.
For the nine months ended September 30, 2001 we recorded charges of
approximately $18.2 million for the consolidation of excess facilities relating
primarily to lease terminations and non-cancelable lease costs.
LITIGATION SETTLEMENT COSTS. Litigation settlement costs of approximately
$3.0 million were incurred for the nine months ended September 30, 2001. No
comparable litigation settlement costs were incurred the nine months ended
September 30, 2000.
MERGER-RELATED COSTS. Merger-related costs consist primarily of transaction
costs, such as fees for investment bankers, attorneys, accountants and other
related fees and expenses, and certain restructuring costs related to the
disposal of duplicative facilities and assets and the write-down of unutilized
assets. In connection with the pooling-of-interests transactions for the nine
months ended September 30, 2000, merger-related costs of approximately $4.7
million were incurred. No merger-related costs were incurred for the three and
nine months ended September 30, 2001.
INTEREST INCOME, NET. Interest income, net reflects interest earned on
average cash and cash equivalents and investment balances, less interest on our
debt and capital lease obligations. Interest income, net for the three months
ended September 30, 2001 was $4.2 million as compared with $7.0 million for the
three months ended Septmeber 30, 2000. The decrease for the three months ended
September 30, 2001 was the result of a combination of interest expense incurred
on debt assumed from our ServerWorks acquisition and an overall decline in
interest rates. Interest income, net for the nine months ended September 30,
2001 was $18.9 million as compared with $15.1 million for the nine months ended
September 30, 2000. The increase for the nine months ended September 30, 2001
was principally due to increased cash balances available to invest resulting
from the cash generated by operations, cash balances assumed in acquisitions,
and cash received from the exercise of employee stock options, partially offset
by interest expense incurred on debt assumed in our ServerWorks acquisition.
OTHER EXPENSE, NET. Other expense, net primarily includes losses on
strategic investments as well as gains and losses on foreign currency
transactions and the disposals of property and equipment. For the three months
ended September 30, 2001, other expense, net was $32.8 million as compared with
$2.1 million for the three months ended September 30, 2000. Other expense, net
for the nine months ended September 30, 2001 was $34.2 million as compared with
$2.2 million for the nine months ended September 30, 2000. For the three and
nine months ended September 30, 2001 we recorded an impairment charge of
approximately $32.7 million representing an other-than-temporary decline in the
value of our strategic investments.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rates were (0.4%)
and 2.7% for the three and nine months ended September 30, 2001, respectively.
Our effective tax rates for the three and nine months ended September 30, 2000
were 1864.2% and 32.4%, respectively. The change in the effective tax rates for
the three and nine months ended September 30, 2001 from the three and nine
months ended September 30, 2000 was primarily the result of nondeductible
acquisition related items and losses incurred for which no tax benefit was
provided. Excluding the impact of nondeductible IPR&D and acquisition related
expenses, such as goodwill amortization, and before the effects of payroll tax
expenses relating to certain stock option exercises, our effective tax rate
would have been 20% for each of the three and nine months ended September 30,
2001 and September 30, 2000.
We have recorded deferred tax assets, which we believe will more likely
than not be realized in accordance with SFAS No. 109, Accounting for Income
Taxes. The primary basis for this conclusion is the expectation of future income
from our recurring operations.
22
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have financed our operations through a combination
of sales of equity securities and cash generated by operations. At September 30,
2001 we had $351.6 million in working capital, $520.0 million in cash, cash
equivalents and short-term marketable securities and $133.3 million in long-term
marketable securities. Marketable securities are defined as income yielding
securities that can be readily converted into cash. At December 31, 2000 we had
$673.1 million in working capital, $601.6 million in cash, cash equivalents and
short-term marketable securities and $2.0 million in long-term marketable
securities.
In connection with our acquisition of ServerWorks, we assumed a secured
credit facility of up to $125.0 million, of which $85.6 million was outstanding
as of September 30, 2001. The credit facility is repayable in quarterly
installments through 2003.
Cash and cash equivalents decreased from $523.9 million at December 31,
2000 to $403.9 million at September 30, 2001. During the nine months ended
September 30, 2001, operating activities provided $57.6 million in cash. This
was primarily the result of the net loss of $2.4 billion for the nine months
ended September 30, 2001, which was more than offset by the non-cash impact of
depreciation and amortization, stock-based compensation expense, amortization of
goodwill and purchased intangible assets, impairment of goodwill, IPR&D, losses
on strategic investments and a decrease in accounts receivable and inventory.
Operating activities provided cash in the amount of $141.4 million for the nine
months ended September 30, 2000. This was primarily the result of net income,
the non-cash impact of depreciation and amortization, stock-based compensation
expense, IPR&D, tax benefit from stock plans and an increase in accounts
payable, offset in part by increases in accounts receivable, inventory, deferred
tax assets, and prepaid expenses and other assets.
Investing activities used cash in the amount of $192.3 million for the nine
months ended September 30, 2001, primarily as a result of $169.8 million of net
purchases of marketable securities and the purchase of $63.6 million of capital
equipment to support our expanding operations offset in part by $41.0 million of
net cash received from purchase acquisitions. For the nine months ended
September 30, 2000 our investing activities used $5.2 million in cash for the
net purchases of marketable securities and $47.1 million in cash for the
purchase of capital equipment, offset in part by $10.7 million of net cash
received from purchase acquisitions.
Cash provided by financing activities was $14.8 million for the nine months
ended September 30, 2001, which primarily was the result of $40.3 million in net
proceeds received from issuances of common stock upon exercises of stock options
and the proceeds of $18.6 million from performance-based warrants earned by
customers, partially offset by $44.7 million in payments on debt obligations
primarily of acquired companies. Cash provided by financing activities was $97.2
million for the nine months ended September 30, 2000, primarily from $100.7
million in net proceeds from the issuances of common stock upon the exercises of
stock options, partially offset by $4.4 million in net payments on debt
obligations of acquired companies.
We believe that our existing cash, cash equivalents and marketable
securities on hand, together with cash that we expect to generate from our
operations, will be sufficient to meet our capital needs for at least the next
twelve months. However, it is possible that we may need to raise additional
funds to fund our activities beyond the next twelve months or to consummate
acquisitions of other businesses, products or technologies. We could raise such
funds by selling more equity or debt securities to the public or to selected
investors, or by borrowing money. In addition, even though we may not need
additional funds, we may still elect to sell additional equity or debt
securities or obtain credit facilities for other reasons. We may not be able to
obtain additional funds on terms that would be favorable to our shareholders and
us, or at all. If we raise additional funds by issuing additional equity or
convertible debt securities, the ownership percentages of existing shareholders
would be reduced. In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of the holders of our
common stock.
We had outstanding capital commitments totaling approximately $2.1 million
as of September 30, 2001, primarily for the purchase of engineering design
tools, computer hardware and information systems infrastructure. During 2000 we
spent approximately $80.8 million on capital equipment to support our expanding
operations. We expect that we will continue to spend substantial amounts during
2001 to purchase additional engineering design tools, computer hardware, test
equipment, information systems and leasehold improvements, to support our
23
operations and as we integrate and upgrade the capital equipment and facilities
of acquired companies. We may finance these purchases from our cash and cash
equivalents and investments on hand, cash generated from our operations,
borrowings, equity offerings, or a combination thereof.
Although we believe that we have sufficient capital to fund our activities
for at least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:
- the overall levels of sales of our products and gross profit margins;
- the market acceptance of our products;
- the levels of promotion and advertising that will be required to launch
our new products and achieve and maintain a competitive position in the
marketplace;
- volume price discounts;
- our business, product, capital expenditure and research and development
plans and product and technology roadmaps;
- the levels of inventory and accounts receivable that we maintain;
- capital improvements to new and existing facilities;
- technological advances;
- our competitors' response to our products;
- our relationships with suppliers and customers; and
- general economic conditions and specific conditions in the semiconductor
industry and the broadband communications markets, including the effects
of the current economic slowdown and related uncertainties.
In addition, we may require additional capital to accommodate planned
future growth, hiring, infrastructure and facility needs or to consummate
acquisitions of other businesses, products or technologies.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH
THE SEC, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2000 AS WELL AS OUR SUBSEQUENT REPORTS ON FORMS 10-Q, 8-K AND 8-K/A. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF
THESE RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE SERIOUSLY HARMED. IN THAT EVENT, THE MARKET PRICE FOR OUR
CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH THE RECENT WORLDWIDE ECONOMIC
SLOWDOWN AND RELATED UNCERTAINTIES.
Concerns about inflation, decreased consumer confidence, reduced corporate
profits and capital spending, and recent international conflicts and terrorist
and military actions have resulted in a downturn in worldwide economic
conditions, particularly in the United States. As a result of these unfavorable
economic conditions, in the first half of fiscal 2001 we experienced a
significant slowdown in customer orders, cancellations and rescheduling of
backlog and higher overhead costs, as a percentage of revenues. In addition,
recent political and social turmoil related to
24
international conflicts and terrorist acts can be expected to put further
pressure on economic conditions in the U.S. and worldwide. These political,
social and economic conditions make it extremely difficult for our customers,
our vendors and us to accurately forecast and plan future business activities.
If such conditions continue or worsen, our business, financial condition and
results of operations will likely be materially and adversely affected.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR CLASS A COMMON STOCK.
We operate in the semiconductor industry, which is cyclical and subject to
rapid technological change. From time to time, including during the first nine
months of 2001, the semiconductor industry has experienced significant downturns
characterized by diminished product demand, accelerated erosion of prices and
excess production capacity. The current downturn and future downturns in the
semiconductor industry may be severe and prolonged. Future downturns in the
semiconductor industry, or any failure of this industry to fully recover from
its recent downturn, could seriously impact our revenues and harm our business,
financial condition and results of operations. This industry also periodically
experiences increased demand and production capacity constraints, which may
affect our ability to ship products in future periods. Accordingly, our
quarterly results may vary significantly as a result of the general conditions
in the semiconductor industry, which could cause our stock price to decline.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly revenues and operating results have fluctuated significantly
in the past and may continue to vary from quarter to quarter due to a number of
factors, many of which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors, our stock price
may decline. Fluctuations in our operating results may be due to a number of
factors, including the following:
- economic and market conditions in the semiconductor industry and the
broadband communications equipment markets, including the effects of the
current significant economic slowdown;
- international conflicts and acts of terrorism;
- the timing, rescheduling or cancellation of significant customer orders;
- the gain or loss of a key customer;
- the effectiveness of our expense and product cost control and reduction
efforts;
- changes in our product or customer mix;
- the volume of our product sales and pricing concessions on volume sales;
- our ability to specify, develop or acquire, complete, introduce, market
and transition to volume production new products and technologies in a
timely manner;
- the timing of customer-industry qualification and certification of our
products and the risks of non-qualification or non-certification;
- the rate at which our present and future customers and end users adopt
Broadcom technologies and products in our target markets;
- the qualification, availability and pricing of competing products and
technologies and the resulting effects on the sales and pricing of our
products;
- the rate of adoption and acceptance of new industry standards in our
target markets;
- intellectual property disputes, customer indemnification claims and
other types of litigation risk;
25
- the availability and pricing of foundry and assembly capacity and raw
materials;
- the risks inherent in our acquisitions of technologies and businesses;
- fluctuations in the manufacturing yields of our third party
semiconductor foundries and other problems or delays in the fabrication,
assembly, testing or delivery of our products;
- the risks of producing products with new suppliers and at new
fabrication and assembly facilities;
- problems or delays that we may face in shifting our products to smaller
geometry process technologies and in achieving higher levels of design
integration;
- the effects of new and emerging technologies;
- the risks and uncertainties associated with our international
operations;
- our ability to retain and hire key executives, technical personnel and
other employees in the numbers, with the capabilities, and at the
compensation levels that we need to implement our business and product
plans;
- the quality of our products and any remediation costs;
- the effects of natural disasters and other events beyond our control;
and
- the level of orders received that we can ship in a fiscal quarter.
We expect to continue to increase our operating expenses in the future. A
large portion of our operating expenses, including rent, salaries and capital
lease expenditures, is fixed and difficult to reduce or change. Accordingly, if
our total revenue does not meet our expectations, we probably would not be able
to adjust our expenses quickly enough to compensate for the shortfall in
revenue. In that event, our business, financial condition and results of
operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this
Report, you should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance.
BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUE, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. IN
ADDITION, IF WE ARE UNABLE TO CONTINUE TO SELL EXISTING AND NEW PRODUCTS TO OUR
KEY CUSTOMERS IN SIGNIFICANT QUANTITIES OR TO ATTRACT NEW SIGNIFICANT CUSTOMERS,
OUR FUTURE OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. As a result, the loss of any
significant customer could materially and adversely affect our financial
condition and results of operations. Sales to Motorola, including sales to its
manufacturing subcontractors, accounted for approximately 18.2% of our net
revenue for the nine months ended September 30, 2001. Sales to our five largest
customers, including sales to their respective manufacturing subcontractors,
decreased to 49.8% of our net revenue for the nine months ended September 30,
2001 compared to 61.8% of our net revenue for the year ended December 31, 2000.
Nonetheless, we expect that our key customers will continue to account for a
substantial portion of our revenues for 2001 and in the foreseeable future.
Accordingly, our future operating results will continue to depend on the success
of our largest customers and on our ability to sell existing and new products to
these customers in significant quantities.
We may not be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:
- Most of our customers can stop incorporating our products into their own
products with limited notice to us and suffer little or no penalty.
26
- Our agreements with our customers typically do not require them to
purchase a minimum amount of our products.
- Many of our customers have pre-existing relationships with our current
or potential competitors that may affect their decision to purchase our
products.
- Our customers face intense competition from other manufacturers that do
not use our products.
- Some of our customers offer or may offer products that compete with our
products.
- Our longstanding relationships with some of our larger customers may
also deter other potential customers who compete with these customers
from buying our products.
In addition, in order to attract new customers or retain existing
customers, we may offer certain customers favorable prices on our products. If
these prices are lower than the prices paid by our existing customers, we would
have to offer the same lower prices to certain of our customers who have
contractual "most favored nation" pricing arrangements. In that event, our
average selling prices and gross margins would decline. The loss of a key
customer, a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.
BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically sell products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals could materially and
adversely affect our business, financial condition and results of operations. In
addition, cancellations or deferrals could cause us to hold excess inventory,
which could reduce our profit margins and restrict our ability to fund our
operations. We recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely pay for these
products, we could incur significant charges against our income, which could
materially and adversely affect our operating results.
WE FACE INTENSE COMPETITION IN THE BROADBAND COMMUNICATIONS MARKETS AND
SEMICONDUCTOR INDUSTRY, WHICH COULD REDUCE OUR MARKET SHARE IN EXISTING MARKETS
AND AFFECT OUR ENTRY INTO NEW MARKETS.
The broadband communications markets and semiconductor industry are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We currently compete with a number of major domestic and
international suppliers of integrated circuits and related applications in the
markets for digital cable set-top boxes, 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, digital subscriber lines, wireless
communications, SystemI/O server solutions and network processing. We also
compete with suppliers of system-level and motherboard-level solutions
incorporating integrated circuits that are proprietary or sourced from
manufacturers other than Broadcom. This competition has resulted and may
continue to result in declining average selling prices for some of our products.
In all of our target markets, we also may face competition from newly
established competitors, suppliers of products based on new or emerging
technologies, and customers who choose to develop their own silicon solutions.
We also expect to encounter further consolidation in the markets in which we
compete.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, technical and other resources than
we do. As a result, these competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements. They may also be
able to devote greater resources to the promotion and sale of their products. In
addition, current and potential competitors have established or may establish
financial or strategic relationships among themselves or with existing or
potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Existing or new competitors may
27
also develop technologies in the future that more effectively address the
transmission of digital information through existing analog infrastructures or
through new digital infrastructures at lower costs than our technologies.
Increased competition has in the past and is likely to continue to result in
price reductions, reduced gross margins and loss of market share. We cannot
assure you that we will be able to continue to compete successfully or that
competitive pressures will not materially and adversely affect our business,
financial condition and results of operations.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO UNDERTAKE SIGNIFICANT CAPITAL
INFUSIONS, BE DILUTIVE TO OUR EXISTING SHAREHOLDERS, RESULT IN UNANTICIPATED
ACCOUNTING CHARGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, AND
RESULT IN DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS,
PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES.
A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to complement
our existing product offerings, expand our market coverage, increase our
engineering workforce or enhance our technological capabilities. Between January
1, 1999 and September 30, 2001, we acquired 21 companies, including four
acquisitions that were completed in fiscal 2001. We plan to continue to pursue
acquisition opportunities in the future.
Acquisitions may require significant capital infusions, typically entail
many risks and could result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of the
acquired company. We have in the past and may in the future experience delays in
the timing and successful completion of the acquired company's technologies and
product development through volume production, unanticipated costs and
expenditures, changing relationships with customers, suppliers and strategic
partners, or contractual, intellectual property or employment issues. In
addition, the key personnel of the acquired company may decide not to work for
us. The acquisition of another company or its products and technologies may also
require us to enter into a geographic or business market in which we have little
or no prior experience. These challenges could disrupt our ongoing business,
distract our management and employees, harm our reputation and increase our
expenses. In addition, acquisitions may materially and adversely affect our
results of operations because they may require large one-time charges or could
result in increased debt or contingent liabilities, adverse tax consequences,
substantial depreciation or deferred compensation charges, or the amortization
of amounts related to deferred compensation, goodwill and other intangible
assets. In connection with our 21 acquisitions to date, we recorded goodwill in
the aggregate amount of approximately $4.2 billion. The portion of such goodwill
attributable to each acquisition generally has been amortized over a 60-month
period from the date that such acquisition closed. In accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, we recorded a goodwill impairment charge of $1.2
billion for the three months ended September 30, 2001 to write down the value of
goodwill associated with certain of our purchase acquisitions. Beginning in the
first quarter of 2002, goodwill will no longer be amortized but will be subject
to annual impairment tests in accordance with SFAS Nos. 141 and 142. In
addition, in connection with these acquisitions we incurred deferred
compensation charges in the aggregate amount of approximately $1.6 billion,
which will be amortized over the period of time for which the relevant options
or restricted stock may continue to vest. We anticipate recording additional
goodwill and deferred compensation charges in connection with future
acquisitions. Any of these events could cause the price of our Class A common
stock to decline. Acquisitions made entirely or partially for cash may reduce
our cash reserves. Furthermore, if we issue equity or convertible debt
securities in connection with an acquisition, as in the case of our recent
acquisitions, the issuance may be dilutive to our existing shareholders. In
addition, the equity or debt securities that we may issue could have rights,
preferences or privileges senior to those of our common stock. For example, as a
consequence of the pooling-of-interests rules, the securities issued in nine of
the completed acquisitions described above were shares of Class B common stock,
which has voting rights superior to our publicly-traded Class A common stock.
We cannot assure you that we will be able to consummate any pending or
future acquisitions or that we will realize the benefits anticipated from these
acquisitions. In the future, we may not be able to find other suitable
acquisition opportunities that are available at attractive valuations, if at
all. Even if we do find suitable acquisition opportunities, we may not be able
to consummate the acquisitions on commercially acceptable terms as the recent
decline in the price of our Class A common stock may make it significantly more
difficult and expensive to complete any additional acquisitions. Moreover, it
may be difficult for us to successfully integrate any acquired businesses,
products, technologies or personnel, which could materially and adversely affect
our business, financial condition and results of operations.
28
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKETS IN ORDER TO REMAIN COMPETITIVE.
Our future success will depend on our ability to anticipate and adapt to
changes in technology and industry standards. We will also need to continue to
develop and introduce new and enhanced products to meet our customers' changing
demands. Substantially all of our product revenue in recent fiscal quarters has
been derived from sales of products for the cable modem, digital cable set-top
box, high-speed office network and network server markets. These markets are
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions, short product life cycles and increasing
demand for higher levels of integration and smaller geometries. In addition,
these markets continue to undergo rapid growth and consolidation. A significant
slowdown in any of these markets or other broadband communications markets could
materially and adversely affect our business, financial condition and results of
operations. Our success will also depend on the ability of our customers to
develop new products and enhance existing products for the broadband
communications markets and to introduce and promote those products successfully.
The broadband communications markets may not continue to develop to the extent
or in the time periods that we anticipate. If new markets do not develop as we
anticipate, or if our products do not gain widespread acceptance in these
markets, our business, financial condition and results of operations could be
materially and adversely affected.
IF WE DO NOT ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS IN THE
SEMICONDUCTOR INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS, OUR PRODUCTS COULD
BECOME OBSOLETE AND WE COULD LOSE MARKET SHARE.
Products for broadband communications applications generally are based on
industry standards that are continually evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards. Our past sales and profitability have resulted, to a
large extent, from our ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products incorporating
the new standards. Our ability to adapt to these changes and to anticipate
future standards, and the rate of adoption and acceptance of those standards,
will be a significant factor in maintaining or improving our competitive
position and prospects for growth. We have in the past invested substantial
resources in emerging technologies that did not achieve the market acceptance
that we had expected. Our inability to anticipate the evolving standards in the
semiconductor industry and, in particular the broadband communications markets,
or to develop and introduce new products successfully into these markets could
materially and adversely affect our business, financial condition and results of
operations.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY AND IN A
COST-EFFECTIVE AND TIMELY MANNER OR TO ACHIEVE MARKET ACCEPTANCE OF OUR NEW
PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
Our future success will depend on our ability to develop new silicon
solutions for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to
select these products for design into their own new products. Our quarterly
results in the past have been, and are expected in the future to continue to be,
dependent on the introduction of a relatively small number of new products and
the timely completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from time to time we
have experienced delays in completing the development and introduction of new
products. Our ability to develop and deliver new products successfully will
depend on various factors, including our ability to:
- accurately predict market requirements and evolving industry standards;
- accurately define new products;
- timely complete and introduce new product designs;
29
- timely qualify and obtain industry interoperability certification of our
products and our customers' products into which our products will be
incorporated;
- obtain sufficient foundry capacity;
- achieve high manufacturing yields;
- shift our products to smaller geometry process technologies and to
achieve higher levels of design integration; and
- gain market acceptance of our products and our customers' products.
If we are not able to develop and introduce new products successfully and
in a cost-effective and timely manner, our business, financial condition and
results of operations would be materially and adversely affected.
Our new products generally are incorporated into our customers' products at
the design stage. We have often incurred significant expenditures on the
development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product. The value
of our products largely depends on the commercial success of our customers'
products and on the extent to which those products accommodate components
manufactured by our competitors. We cannot assure you that we will continue to
achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.
OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD
OF BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.
In the past, we have relied on our strategic relationships with certain
customers who are technology leaders in our target markets. We intend to pursue
and continue to form these strategic relationships in the future but we cannot
assure you that we will be able to do so. These relationships often require us
to develop new products that typically involve significant technological
challenges. Our partners frequently place considerable pressure on us to meet
their tight development schedules. Accordingly, we may have to devote a
substantial amount of our limited resources to our strategic relationships,
which could detract from or delay our completion of other important development
projects. Delays in development could impair our relationships with our
strategic partners and negatively impact sales of the products under
development. Moreover, it is possible that our customers may develop their own
solutions or adopt a competitor's solution for products that they currently buy
from us. If that happens, our business, financial condition and results of
operations could be materially and adversely affected.
WE DEPEND ON FOUR INDEPENDENT FOUNDRY SUBCONTRACTORS TO MANUFACTURE
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT
FOUNDRY CAPACITY COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We do not own or operate a fabrication facility. Four outside foundry
subcontractors located in Asia manufacture substantially all of our
semiconductor devices in current production. In September 1999 two of the
foundries' principal facilities were affected by a significant earthquake in
Taiwan. As a consequence of this earthquake, they suffered power outages and
equipment damage that impaired their wafer deliveries which, together with
strong demand, resulted in wafer shortages and higher wafer pricing
industrywide. If any of our foundries suffers any damage to its facilities,
experiences power outages, encounters financial difficulties or in the event of
any other disruption of foundry capacity, we may not be able to qualify an
alternative foundry in a timely manner. Even our current foundries would need to
have new manufacturing processes qualified if there is a disruption in an
existing process. If we choose to use a new foundry or process, it would
typically take us several months to qualify the new foundry or process before we
can begin shipping products from it. If we cannot accomplish this qualification
in a timely manner, we may still experience a significant interruption in supply
of the affected products.
Because we rely on outside foundries with limited capacity, we face several
significant risks, including:
- a lack of ensured wafer supply and potential wafer shortages and higher
wafer prices;
30
- limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs; and
- the unavailability of or potential delays in obtaining access to key
process technologies.
In addition, the manufacture of integrated circuits is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries have
from time to time experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the installation and
start-up of new process technologies.
The ability of each foundry to provide us with semiconductor devices is
limited by its available capacity and existing obligations. Although we have
entered into contractual commitments to supply specified levels of products to
certain of our customers, we do not have a long-term volume purchase agreement
or a guaranteed level of production capacity with any of our foundries. Foundry
capacity may not be available when we need it or at reasonable prices.
Availability of foundry capacity has in the recent past been reduced due to
strong demand. We place our orders on the basis of our customers' purchase
orders, and the foundries can allocate capacity to the production of other
companies' products and reduce deliveries to us on short notice. It is possible
that foundry customers that are larger and better financed than we are, or that
have long-term agreements with our four main foundries, may induce our foundries
to reallocate capacity to them. Such a reallocation could impair our ability to
secure the supply of components that we need. Although we primarily use four
independent foundries, most of our components are not manufactured at more than
one foundry at any given time and some of our products may be designed to be
manufactured at only one of these foundries. Accordingly, if one of our
foundries is unable to provide us with components as needed, we could experience
significant delays in securing sufficient supplies of those components. Any of
these delays would likely materially and adversely affect our business,
financial condition and results of operations. We cannot assure you that any of
our existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields. Furthermore, our foundries may not be able to
deliver enough semiconductor devices to us on a timely basis, or at reasonable
prices.
Certain of our acquired companies have established relationships with
foundries other than our four main foundries, and we are using these other
foundries to produce the initial products of these acquired companies. We may
utilize such foundries for other products in the future. In using these new
foundries, we will be subject to all of the same risks described in the
foregoing paragraphs with respect to our current foundries.
WE MAY BE UNABLE TO RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL AND
ATTRACT ADDITIONAL KEY EMPLOYEES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel, in particular, our
co-founder, President and Chief Executive Officer, Dr. Henry T. Nicholas III,
and our co-founder, Vice President of Research & Development and Chief Technical
Officer, Dr. Henry Samueli. We do not have employment agreements with these
executives or any other key employees that govern the length of their service.
The loss of the services of Dr. Nicholas or Dr. Samueli, or certain other key
employees, would likely materially and adversely affect our business, financial
condition and results of operations. Our future success also depends on our
ability to continue to attract, retain and motivate qualified personnel,
particularly senior managers, digital circuit designers, mixed-signal circuit
designers and systems applications engineers. Competition for these employees is
intense and the recent decline in the price of our Class A common stock may make
it more difficult to retain such key employees, all of who have been granted
stock options. In June 2001 we completed a stock option exchange offering for
the purpose of improving our ability to retain key employees. However, we cannot
be certain that the stock option exchange program will result in increased
retention of such employees. Our inability to attract and retain additional key
employees could have an adverse effect on our business, financial condition and
results of operations.
31
OUR INABILITY TO MANAGE OUR SIGNIFICANT RECENT AND ANTICIPATED FUTURE GROWTH
COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES, AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
During the past few years, we have continued to significantly increase the
scope of our operations and expand our workforce, growing from 1,069 employees
as of December 31, 1999 to 2,748 employees as of September 30, 2001, including
contract and temporary employees and employees who joined us as the result of
acquisitions. This growth has placed, and any future growth is expected to
continue to place, a significant strain on our management personnel, systems and
resources. We anticipate that we will need to implement a variety of new and
upgraded operational and financial systems, procedures and controls, and other
internal management systems. We also will need to continue to expand, train,
manage and motivate our workforce. All of these endeavors will require
substantial management effort. In the future, we will likely need to expand our
facilities or relocate some or all of our employees or operations from time to
time to support our growth. These relocations could result in temporary
disruptions of our operations or a diversion of management's attention and
resources. If we are unable to effectively manage expanding operations, our
business, financial condition and results of operations could be materially and
adversely affected.
THE LOSS OF ANY OF OUR THIRD-PARTY SUBCONTRACTORS THAT ASSEMBLE AND TEST
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS COULD DISRUPT OUR SHIPMENTS, HARM OUR
CUSTOMER RELATIONSHIPS AND ADVERSELY AFFECT OUR NET SALES.
We do not own or operate an assembly or test facility. Five third-party
subcontractors located in Asia assemble and test substantially all of our
current products. Because we rely on third-party subcontractors to assemble and
test our products, we cannot directly control our product delivery schedules and
quality assurance and control. This lack of control has in the past resulted,
and could in the future result, in product shortages or quality assurance
problems that could increase our manufacturing, assembly or testing costs. We do
not have long-term agreements with any of these subcontractors and typically
procure services from these suppliers on a per order basis. If any of these
subcontractors experiences capacity constraints or financial difficulties,
suffers any damage to its facilities, experiences power outages or in the event
of any other disruption of assembly and testing capacity, we may not be able to
obtain alternative assembly and testing services in a timely manner. Due to the
amount of time that it usually takes us to qualify assemblers and testers, we
could experience significant delays in product shipments if we are required to
find alternative assemblers or testers for our components. Any problems that we
may encounter with the delivery, quality or cost of our products could
materially and adversely affect our business, financial condition or results of
operations.
We are continuing to develop relationships with additional third-party
subcontractors to assemble and test our products. In using these new
subcontractors, we will be subject to all of the same risks described in the
foregoing paragraph.
AS OUR INTERNATIONAL BUSINESS EXPANDS, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGAL, BUSINESS AND
ECONOMIC RISKS SPECIFIC TO OUR INTERNATIONAL OPERATIONS.
We currently obtain substantially all of our manufacturing, assembly and
testing services from suppliers located outside of the United States. In
addition, approximately 20.3% of our net revenue for the nine months ended
September 30, 2001 was derived from sales to independent customers outside the
United States. We also frequently ship products to our domestic customers'
international manufacturing divisions and subcontractors. In 1999 we established
an international distribution center in Singapore and a design center in the
Netherlands. Furthermore, as a result of various acquisitions, we also currently
undertake design and development activities in India, Canada, Taiwan, the United
Kingdom, Belgium and Israel. In the future, we intend to continue to expand our
international business activities and also to open other design and operational
centers abroad. The recent terrorist attacks in the United States and heightened
security may adversely impact our international sales and could make our
international operations more expensive. International operations are subject to
many inherent risks, including:
- political, social and economic instability;
- acts of terrorism and international conflicts;
32
- trade restrictions;
- the imposition of governmental controls and restrictions;
- exposure to different legal standards, particularly with respect to
intellectual property;
- burdens of complying with a variety of foreign laws;
- import and export license requirements and restrictions of the United
States and each other country in which we operate;
- unexpected changes in regulatory requirements;
- foreign technical standards;
- changes in tariffs;
- difficulties in staffing and managing international operations;
- fluctuations in currency exchange rates;
- difficulties in collecting receivables from foreign entities; and
- potentially adverse tax consequences.
Moreover, the seasonality of international sales and economic conditions in
our primary overseas markets may negatively impact the demand for our products
abroad. All of our international sales to date have been denominated in U.S.
dollars. Accordingly, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Any one or more of the foregoing factors could materially
and adversely affect our business, financial condition or results of operations
or require us to modify our current business practices significantly. We
anticipate that these factors will impact our business to a greater degree as we
further expand our international business activities.
WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY
RESULT IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND
INCREASED EXPENSES.
In order to remain competitive, we expect to continue to transition our
products to increasingly smaller geometries. This transition will require us to
modify the manufacturing processes for our products and redesign certain
products. We periodically evaluate the benefits, on a product-by-product basis,
of migrating to smaller geometry process technologies in order to reduce our
costs, and we have designed certain products to be manufactured in .35 micron,
.22 micron, .18 micron and smaller geometry processes. In the past, we have
experienced some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes. These difficulties resulted in
reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
relationships with our foundries. If our foundries or we experience significant
delays in this transition or fail to efficiently implement this transition, our
business, financial condition and results of operations could be materially and
adversely affected. As smaller geometry processes become more prevalent, we
expect to continue to integrate greater levels of functionality, as well as
customer and third party intellectual property, into our products. However, we
may not be able to achieve higher levels of design integration or deliver new
integrated products on a timely basis, or at all.
33
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We primarily rely on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
methods, to protect our proprietary technologies and processes. Despite our
efforts to protect our proprietary technologies and processes, it is possible
that certain of our competitors or other parties may obtain, use or disclose our
technologies and processes. We currently hold 70 issued United States patents
and have filed over 700 United States patent applications. We cannot assure you
that any additional patents will be issued. Even if a new patent is issued, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, any of our existing or future patents may be challenged, invalidated
or circumvented. Moreover, any rights granted under these patents may not
provide us with meaningful protection. If our patents do not adequately protect
our technology, then our competitors may be able to offer products similar to
ours. Our competitors may also be able to develop similar technology
independently or design around our patents. Moreover, because we have
participated in developing various industry standards, we may be required to
license some of our technology and patents to others, including competitors, who
develop products based on the adopted standards.
We generally enter into confidentiality agreements with our employees and
strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, parties may attempt to copy, disclose, obtain or use our products,
services or technology without our authorization. As a result, our technologies
and processes may be misappropriated, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.
In addition, some of our customers have entered into agreements with us
that grant them the right to use our proprietary technology if we ever fail to
fulfill our obligations, including product supply obligations, under those
agreements, and do not correct this failure within a specified time period.
Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization. We cannot
assure you that our efforts to prevent the misappropriation or infringement of
our intellectual property or the intellectual property of our customers will
succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others, including our customers.
This litigation may be very expensive and time consuming, divert management's
attention and materially and adversely affect our business, financial condition
and results of operations.
INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM
THIRD PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.
Companies in the semiconductor industry often aggressively protect and
pursue their intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties' proprietary rights. In January
2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a lawsuit against
us alleging infringement of a single patent relating to tuner technology. In
August 2000 Intel filed a lawsuit against us alleging infringement of five Intel
patents. In November 2000 we settled litigation with Intel Corporation and its
subsidiary Level One Communications, Inc. regarding the alleged misappropriation
of trade secrets, unfair competition and tortious interference with existing
contractual relations related to our hiring of three former Intel employees. In
1999 we settled litigation with Stanford Telecommunications, Inc. that related
to the alleged infringement of one of Stanford's patents by several of our cable
modem products. In 1999 we prevailed in litigation with Sarnoff Corporation and
NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
which alleged that we misappropriated and misused certain of their trade secrets
in connection with our hiring of five former Sarnoff employees. In January 2001
our subsidiary, AltoCom, settled patent litigation with Motorola, Inc. relating
to software modem technology. Our subsidiary, Altima, is the defendant in patent
litigation and International Trade Commission proceedings brought by Intel and
Level One. Although we are defending the pending litigation vigorously, it is
possible that we will not prevail in pending or future lawsuits. In addition, we
may be sued in the future by other parties who claim that we have infringed
their patents or misappropriated or misused their trade secrets, or who may seek
to invalidate one of our patents. Any of these claims may materially and
adversely affect our business, financial condition and results of
34
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.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR DEBT SECURITIES OR BY BORROWING MONEY, AND ADDITIONAL FUNDS
MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that our existing cash, cash equivalents and investments on
hand, together with the cash that we expect to generate from our operations,
will be sufficient to meet our capital needs for at least the next 12 months.
However, it is possible that we may need to raise additional funds to fund our
activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We could raise these funds by selling more
equity or debt securities to the public or to selected investors, or by
borrowing money. In addition, even though we may not need additional funds, we
may still elect to sell additional equity or debt securities or obtain credit
facilities for other reasons. We may not be able to obtain additional funds on
favorable terms, or at all. If adequate funds are not available, we may be
required to curtail our operations significantly or to obtain funds through
arrangements with strategic partners or others that may require us to relinquish
rights to certain technologies or potential markets. If we raise additional
funds by issuing additional equity or convertible debt securities, the ownership
percentages of existing shareholders would be reduced. In addition, the equity
or debt securities that we issue may have rights, preferences or privileges
senior to those of our Class A common stock.
OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES. A CUSTOMER MAY DECIDE TO
CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED
SALES. IN ADDITION, OUR AVERAGE PRODUCT CYCLES TEND TO BE SHORT AND, AS A
RESULT, WE MAY HOLD EXCESS OR OBSOLETE INVENTORY WHICH COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
After we have developed and delivered a product to a customer, our customer
will often test and evaluate our product prior to designing its own equipment to
incorporate our product. Our customer may need three to six months or longer to
test and evaluate our product and an additional three to six months or more to
begin volume production of equipment that incorporates our product. Moreover, in
light of the recent significant economic slowdown in the technology sector, it
may take significantly longer than three to six months before customers commence
volume production of equipment incorporating some of our products. Due to this
lengthy sales cycle, we may experience delays from the time we increase our
operating expenses and our investments in inventory until the time that we
generate revenues for these products. It is possible that we may never generate
any revenues from these products after incurring such expenditures. Even if a
customer selects our product to incorporate into its equipment, we have no
assurances that such customer will ultimately market and sell their equipment or
that such efforts by our customer will be successful. The delays inherent in our
lengthy sales cycle increase the risk that a customer will decide to cancel or
change its product plans. Such a cancellation or change in plans by a customer
could cause us to lose sales that we had anticipated. In addition, our business,
financial condition and results of operations could be materially and adversely
affected if a significant customer curtails, reduces or delays orders during our
sales cycle or chooses not to release equipment that contains our products.
While our sales cycles are typically long, our average product life cycles
tend to be short as a result of the rapidly changing technology environment in
which we operate. As a result, the resources devoted to product sales and
marketing may not generate material revenues for us, and from time to time, we
may need to write off excess and obsolete inventory. If we incur significant
marketing and inventory expenses in the future that we are not able to recover,
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions and we still have higher cost products
in inventory, our operating results would be harmed.
35
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH CURRENT OR PROSPECTIVE
CUSTOMERS.
Highly complex products such as the products that we offer frequently
contain defects and bugs when they are first introduced or as new versions are
released. We have in the past experienced, and may in the future experience,
these defects and bugs. If any of our products contain defects or bugs, or have
reliability, quality or compatibility problems, our reputation may be damaged
and customers may be reluctant to buy our products, which could materially and
adversely affect our ability to retain existing customers or attract new
customers. In addition, these defects or bugs could interrupt or delay sales to
our customers. In order to alleviate these problems, we may have to invest
significant capital and other resources. Although our products are tested by our
suppliers, our customers and ourselves, it is possible that our new products
will contain defects or bugs. If any of these problems are not found until after
we have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF TWO OF THE FOUR INDEPENDENT
FOUNDRIES UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT
PRODUCTS ARE LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER
NATURAL DISASTERS.
Our California facilities, including our principal executive offices, are
located near major earthquake fault lines. If there is a major earthquake or any
other natural disaster in a region where one of our facilities is located, our
business could be materially and adversely affected. In addition, two of the
four outside foundries upon which we rely to manufacture substantially all of
our semiconductor devices, are located in Taiwan, a country that recently
experienced a significant earthquake and could be subject to additional
earthquakes in the future. Any earthquake or other natural disaster in Taiwan
could materially disrupt our foundries' production capabilities and could result
in our experiencing a significant delay in delivery, or substantial shortage, of
wafers and possibly in higher wafer prices.
DISRUPTIONS IN ENERGY SUPPLIES COULD NEGATIVELY AFFECT OUR RESULTS OF
OPERATIONS.
Earlier in 2001, California experienced prolonged energy alerts and
blackouts caused by disruption in energy supplies and has experienced
substantially increased costs of electricity and natural gas. We are unsure
whether these alerts and blackouts will reoccur or how severe they may become.
Several of our facilities, including our principal executive offices, are
located, and we conduct research, development and engineering activities, in
California. Many of our customers are also headquartered or have substantial
operations in California. If we, or any of our major customers located in
California, experience a sustained disruption in energy supplies, our results of
operations could be materially and adversely affected.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
The Federal Communications Commission has broad jurisdiction over each of
our target markets. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly applicable to
our products, they do apply to much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. For example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions specifications. We
and our customers may also be subject to regulation by countries other than the
United States. Foreign governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic suppliers and may
impose export restrictions on products that we sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our
business, financial
36
condition and results of operations. Changes in current laws or regulations or
the imposition of new laws and regulations in the United States or elsewhere
could also materially and adversely affect our business.
VARIOUS EXPORT LICENSING REQUIREMENTS COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS OR REQUIRE US TO MODIFY OUR CURRENT BUSINESS PRACTICES SIGNIFICANTLY.
Various government export regulations apply to the encryption or other
features contained in some of our products. We have applied for and received
several export licenses under these regulations, but we cannot assure you that
we will obtain any licenses for which we have currently applied or any licenses
that we may apply for in the future. If we do not receive the required licenses,
we may be unable to manufacture the affected products at our foreign foundries
or to ship these products to certain customers located outside of the United
States.
CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES CAN CONTROL
THE OUTCOME OF MATTERS THAT REQUIRE THE APPROVAL OF OUR SHAREHOLDERS, AND
ACCORDINGLY WE WILL NOT BE ABLE TO ENGAGE IN CERTAIN TRANSACTIONS WITHOUT THEIR
APPROVAL.
As of October 31, 2001 our directors and executive officers beneficially
owned approximately 26.1% of our outstanding common stock and 70.8% of the total
voting control held by our shareholders. In particular, as of October 31, 2001
our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially
owned a total of approximately 24.9% of our outstanding common stock and 68.5%
of the total voting control held by our shareholders. Accordingly, these
shareholders currently have enough voting power to control the outcome of
matters that require the approval of our shareholders. These matters include the
election of a majority of our Board of Directors, the issuance of additional
shares of Class B common stock, and the approval of most significant corporate
transactions, including a merger, consolidation or sale of substantially all of
our assets. In addition, these insiders currently also control the management of
our business. Because of their significant stock ownership, we will not be able
to engage in certain transactions without the approval of these shareholders.
These transactions include proxy contests, mergers, tender offers, open market
purchase programs or other purchases of our Class A common stock that could give
our shareholders the opportunity to receive a higher price for their shares than
the prevailing market price at the time of such purchases.
OUR STOCK PRICE IS HIGHLY VOLATILE. ACCORDINGLY, YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES OF COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.
The market price of our Class A common stock has fluctuated substantially
in the past and is likely to continue to be highly volatile and subject to wide
fluctuations. Since August 1, 2000 our Class A common stock has traded at prices
as low as $18.40 and as high as $274.75 per share. These fluctuations have
occurred and may continue to occur in response to various factors, many of which
we cannot control, including:
- quarter-to-quarter variations in our operating results;
- announcements of technological innovations or new products by our
competitors, customers or us;
- general economic and political conditions and specific conditions in the
semiconductor industry and the broadband communications equipment
markets;
- international conflicts and acts of terrorism;
- changes in earnings estimates or investment recommendations by analysts;
- changes in investor perceptions; or
- changes in expectations relating to our products, plans and strategic
position or those of our competitors or customers.
In addition, the market prices of securities of Internet-related,
semiconductor and other high technology companies have been especially volatile.
This volatility has significantly affected the market prices of securities of
37
many technology companies for reasons frequently unrelated to the operating
performance of the specific companies. Accordingly, you may not be able to
resell your shares of common stock at or above the price you paid. In the past,
companies that have experienced volatility in the market price of their
securities have been the subject of securities class action litigation, and as
noted in Note 11 of Notes to Unaudited Condensed Consolidated Financial
Statements we have recently been sued in several purported securities class
action lawsuits, which have been consolidated into a single action. We and our
directors have also been sued in purported shareholder derivative actions.
Although we believe that those lawsuits are without merit, an adverse
determination could have a very significant effect upon our business and results
of operations, and could materially affect the price of our stock. Moreover,
regardless of the ultimate result, it is likely that the lawsuits will divert
management's attention and resources from other matters, which could also
adversely affect the price of our stock.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain provisions that may
prevent or discourage a third party from acquiring us, even if the acquisition
would be beneficial to our shareholders. In addition, we have in the past issued
and may in the future issue shares of Class B common stock in connection with
certain acquisitions, upon exercise of certain stock options, and for other
purposes. Class B shares have superior voting rights entitling the holder to ten
votes for each share held on matters that we submit to a shareholder vote (as
compared with one vote per share in the case of our Class A common stock). Our
Board of Directors also has the authority to fix the rights and preferences of
shares of our preferred stock and to issue such shares without a shareholder
vote. It is possible that the provisions in our charter documents, the existence
of supervoting rights by holders of our Class B common stock, our officers'
ownership of a majority of the Class B common stock and the ability of our Board
of Directors to issue preferred stock or additional shares of Class B common
stock may prevent parties from acquiring us. In addition, these factors may
discourage third parties from bidding for our Class A common stock at a premium
over the market price for this stock. Finally, these factors may also materially
and adversely affect the market price of our Class A common stock, and the
voting and other rights of the holders of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain an investment portfolio of various holdings, types and
maturities. We do not use derivative financial instruments in our non-trading
investment portfolio. We place our cash investments in instruments that meet
high credit quality standards, as specified in our investment policy guideline;
the guideline also limits the amount of credit exposure to any one issue, issuer
or type of instrument.
Debt securities are generally classified as held-to-maturity and are stated
at cost, adjusted for amortization of premiums and discounts to maturity. Our
investment policy for held-to-maturity investments requires that all investments
mature in three years or less, with a weighted average maturity of no longer
than one year. Primarily, these investments are sensitive to changes in interest
rates.
Equity securities are generally classified as available-for-sale and are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive loss.
Included in our portfolio are equity investments in three publicly traded
companies. As a result of recent market price volatility, we recorded a $22.0
million loss for the nine months ended September 30, 2001 related to these
investments. As of September 30, 2001 the fair value of these publicly traded
equity investments was $8.9 million. We have also invested in several privately
held companies, many of which can still be considered to be in the start-up or
development stage, or in funds that invest in such companies. We make
investments in key business partners and other industry participants in order to
establish important strategic relationships, expand existing relationships and
achieve a return on our investment. These investments are inherently risky as
the markets for the technologies or products these companies have under
development are typically in the early stages and may never materialize. As
such, we could lose our entire investment in these companies. We recorded a
$10.7 million loss for the nine months ended September 30, 2001 related to these
investments. As of September 30, 2001 the fair value of these investments was
$15.6 million.
Our debt currently consists of a financing arrangement for a credit
facility of up to $125.0 million and a note payable in the amount of $21.1
million. With respect to the credit facility, we may choose the rate at which
the credit facility bears interest in one or
38
three month periods as either (a) the higher of (i) 1.5% plus the Federal
Reserve overnight rate and (ii) 1% plus the Bank of America prime rate or (b) 3%
plus LIBOR. The credit facility is repayable in quarterly installments through
December 2003.
The note payable bears interest at a rate of LIBOR plus 1% per year,
adjusted quarterly, and is due in December 2002. The note becomes immediately
due and payable upon the occurrence of certain events. The holder of the note
has asserted that the entire principal amount of the note and all interest
accrued thereon is currently due and payable; however, we dispute that
assertion.
The fair value of our debt fluctuates based upon changes in interest rates.
The following table presents principal cash flows and related weighted
average fixed interest rates by expected maturity dates.
Principal (notional) amounts by expected maturity (at September 30, 2001):
CURRENT LONG-TERM TOTAL FAIR VALUE
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash equivalents $ 36,942 $ -- $ 36,942 $ 36,977
Weighted average rate 3.38% -- 3.38%
Marketable securities $ 116,117 $ 133,315 $ 249,432 $ 252,944
Weighted average rate 4.04% 5.06% 4.58%
Total portfolio $ 153,059 $ 133,315 $ 286,374 $ 289,921
Weighted average rate 3.88% 5.06% 4.43%
Credit facility and other obligations $ 32,991 $ 60,478 $ 93,469 $ 93,469
September 30, 2001 interest rate 7.00% 7.00% 7.00%
Note payable $ 21,051 $ -- $ 21,051 $ 21,051
September 30, 2001 interest rate 3.64% -- 3.64%
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Note 11 contained in the "Notes to
Unaudited Condensed Consolidated Financial Statements" of this Quarterly Report
on Form 10-Q is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 2, 2001 in connection with our acquisition of KimaLink, we issued
an aggregate of 52,800 shares of our Class A common in exchange for all
outstanding shares of KimaLink common stock and reserved 85,800 additional
shares of our Class A common stock for issuance upon exercise of outstanding
employee stock options and other rights assumed by us.
On July 3, 2001 in connection with our acquisition of PortaTec Corporation,
we issued an aggregate of 15,375 shares of our Class A common in exchange for
all outstanding shares of PortaTec common stock and reserved 119,625 additional
shares of our Class A common stock for issuance upon exercise of outstanding
employee stock options and other rights assumed by us.
The offer and sale of the securities described above were effected without
registration in reliance on the exemption afforded by section 3(a)(10) of the
Securities Act of 1933, as amended. The foregoing issuances were approved, after
a hearing upon the fairness of the terms and conditions of the transaction, by
the California Department of Corporations under authority to grant such approval
as expressly authorized by the laws of the State of California.
On November 8, 2000, January 30, 2001 and May 6, 2001, in connection with
the exercise of warrants assumed in various purchase transactions, we issued
9,901, 126,940 and 12,525 shares, respectively, of our Class A common stock.
These transactions were exempt from registration under Section 4 (2) of the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
(i) Form 8-K filed on July 19, 2001 reporting first quarter earnings
press release (Item 9).
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADCOM CORPORATION,
A CALIFORNIA CORPORATION
(Registrant)
November 14, 2001 /s/ WILLIAM J. RUEHLE
------------------------------------
William J. Ruehle
Vice President and Chief
Financial Officer (Principal
Financial Officer)
/s/ SCOTT J. POTERACKI
------------------------------------
Scott J. Poteracki
Corporate Controller and
Senior Director of Finance
(Principal Accounting Officer)
41