e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-23993
Broadcom Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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California
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33-0480482
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer
Identification No.
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)
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5300
California Avenue
Irvine, California
92617-3038
(Address
of Principal Executive Offices) (Zip Code)
(949) 926-5000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
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þ
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Large accelerated
filer o Accelerated
filer o Non-accelerated
filer
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of September 30, 2007 the registrant had
470.6 million shares of Class A common stock,
$0.0001 par value, and 70.2 million shares of
Class B common stock, $0.0001 par value, outstanding.
BROADCOM
CORPORATION
QUARTERLY
REPORT ON
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
TABLE OF
CONTENTS
Broadcom®,
the pulse logo and
SystemI/Otm
are among the trademarks of Broadcom Corporation
and/or its
affiliates in the United States, certain other countries and/or
the EU. Any other trademarks or trade names mentioned are the
property of their respective owners.
©
2007 Broadcom Corporation. All rights reserved.
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2007
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2006
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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2,037,214
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$
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2,158,110
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Short-term marketable securities
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308,932
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522,340
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Accounts receivable, net
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395,732
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382,823
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Inventory
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213,160
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202,794
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Prepaid expenses and other current assets
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127,940
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85,721
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Total current assets
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3,082,978
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3,351,788
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Property and equipment, net
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226,079
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164,699
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Long-term marketable securities
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84,107
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121,148
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Goodwill
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1,365,764
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1,185,145
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Purchased intangible assets, net
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50,725
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29,029
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Other assets
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31,387
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24,957
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Total assets
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$
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4,841,040
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$
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4,876,766
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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349,759
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$
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307,972
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Wages and related benefits
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159,132
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104,940
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Deferred revenue
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6,371
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1,873
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Accrued liabilities
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241,894
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263,916
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Total current liabilities
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757,156
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678,701
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Commitments and contingencies
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Long-term deferred revenue
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5,990
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Other long-term liabilities
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33,094
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6,399
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Shareholders equity:
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Common stock
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54
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55
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Additional paid-in capital
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11,673,858
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11,948,908
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Accumulated deficit
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(7,629,459
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)
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(7,757,202
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)
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Accumulated other comprehensive income (loss)
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347
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(95
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)
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Total shareholders equity
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4,044,800
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4,191,666
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Total liabilities and shareholders equity
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$
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4,841,040
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$
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4,876,766
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See accompanying notes.
2
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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(In thousands, except per share data)
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Net revenue
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$
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949,959
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$
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902,586
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$
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2,749,360
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$
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2,744,364
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Cost of revenue
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465,970
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450,164
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1,343,956
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1,341,747
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Gross profit
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483,989
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452,422
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1,405,404
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1,402,617
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Operating expense:
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Research and development
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352,283
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272,565
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985,223
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804,283
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Selling, general and administrative
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124,907
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125,281
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373,413
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360,162
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Amortization of purchased intangible assets
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314
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329
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843
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2,017
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In-process research and development
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4,970
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15,470
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5,200
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Impairment of other intangible assets
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1,500
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Income from operations
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1,515
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54,247
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28,955
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230,955
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Interest income, net
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31,443
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31,826
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101,355
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83,758
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Other income (expense), net
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(1,670
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)
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|
299
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(2,437
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)
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3,518
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Income before income taxes
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31,288
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86,372
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127,873
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318,231
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Provision (benefit) for income taxes
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3,528
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(23,809
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)
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4,866
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(15,734
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)
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Net income
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$
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27,760
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$
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110,181
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$
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123,007
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$
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333,965
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Net income per share (basic)
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$
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.05
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$
|
.20
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$
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.23
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$
|
.61
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Net income per share (diluted)
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$
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.05
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$
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.19
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$
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.21
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$
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.57
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Weighted average shares (basic)
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539,931
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547,927
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542,881
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544,895
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Weighted average shares (diluted)
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577,583
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572,597
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579,479
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589,449
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The following table presents details of total stock-based
compensation expense included in each functional line
item in the unaudited condensed consolidated statements of
income above:
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|
|
|
|
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Three Months Ended
|
|
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Nine Months Ended
|
|
|
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September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
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(In thousands)
|
|
|
|
|
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Cost of revenue
|
|
$
|
7,214
|
|
|
$
|
5,742
|
|
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$
|
19,889
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|
|
$
|
19,133
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Research and development
|
|
|
94,619
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|
|
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78,191
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|
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263,882
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|
|
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234,616
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Selling, general and administrative
|
|
|
37,023
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|
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37,595
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|
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106,256
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108,230
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See accompanying notes.
3
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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|
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|
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Nine Months Ended
|
|
|
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September 30,
|
|
|
|
2007
|
|
|
2006
|
|
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(In thousands)
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Operating activities
|
|
|
|
|
|
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Net income
|
|
$
|
123,007
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$
|
333,965
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Adjustments to reconcile net income to net cash provided by
operating activities:
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|
|
|
|
|
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Depreciation and amortization
|
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|
44,736
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|
|
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35,205
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Stock-based compensation expense:
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|
|
|
|
|
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|
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Stock options and other awards
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|
249,326
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268,388
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Restricted stock units issued by the Company
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140,701
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|
93,591
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Acquisition-related items:
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|
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|
|
|
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Amortization of purchased intangible assets
|
|
|
10,394
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|
|
|
10,056
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|
In-process research and development
|
|
|
15,470
|
|
|
|
5,200
|
|
Impairment of other intangible assets
|
|
|
1,500
|
|
|
|
|
|
Loss (gain) on strategic investments, net
|
|
|
4,769
|
|
|
|
(700
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,330
|
)
|
|
|
(116,899
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)
|
Inventory
|
|
|
(8,929
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)
|
|
|
(28,332
|
)
|
Prepaid expenses and other assets
|
|
|
(41,610
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)
|
|
|
13,938
|
|
Accounts payable
|
|
|
55,149
|
|
|
|
(52,875
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)
|
Accrued settlement liabilities
|
|
|
(2,000
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)
|
|
|
(2,000
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)
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Other accrued and long-term liabilities
|
|
|
30,800
|
|
|
|
47,320
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
614,983
|
|
|
|
606,857
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Net purchases of property and equipment
|
|
|
(123,318
|
)
|
|
|
(57,155
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)
|
Net cash paid for acquisitions and other purchased intangible
assets
|
|
|
(219,324
|
)
|
|
|
(70,125
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)
|
Net proceeds from sales (cash paid for purchases) of strategic
investments
|
|
|
(3,194
|
)
|
|
|
137
|
|
Purchases of marketable securities
|
|
|
(570,643
|
)
|
|
|
(674,195
|
)
|
Proceeds from maturities of marketable securities
|
|
|
821,092
|
|
|
|
485,814
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(95,387
|
)
|
|
|
(315,524
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Repurchases of Class A common stock
|
|
|
(811,822
|
)
|
|
|
(275,733
|
)
|
Net proceeds from issuance of common stock
|
|
|
171,330
|
|
|
|
475,770
|
|
Repayment of notes receivable by employees
|
|
|
|
|
|
|
3,439
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
338
|
|
Payments on assumed debt and other obligations
|
|
|
|
|
|
|
(4,625
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(640,492
|
)
|
|
|
199,189
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(120,896
|
)
|
|
|
490,522
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,158,110
|
|
|
|
1,437,276
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,037,214
|
|
|
$
|
1,927,798
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
|
|
1.
|
Summary
of Significant Accounting Policies
|
The
Company
Broadcom Corporation (the Company) is a major
technology innovator and global leader in semiconductors for
wired and wireless communications. The Companys products
enable the delivery of voice, video, data and multimedia to and
throughout the home, the office and the mobile environment. The
Company provides one of the industrys broadest portfolios
of state-of-the-art
system-on-a-chip
and software solutions to manufacturers of computing and
networking equipment, digital entertainment and broadband access
products, and mobile devices. Its diverse product portfolio
includes solutions for digital cable, satellite and Internet
Protocol (IP) set-top boxes and media servers; high definition
television (HDTV); high definition DVD players and personal
video recording (PVR) devices; cable and DSL modems and
residential gateways; high-speed transmission and switching for
local, metropolitan, wide area and storage networking;
SystemI/Otm
server solutions; broadband network and security processors;
wireless and personal area networking; cellular communications;
global positioning system (GPS) applications; mobile multimedia
and applications processors; mobile power management; and Voice
over Internet Protocol (VoIP) gateway and telephony systems.
Basis
of Presentation
The interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Securities
and Exchange Commission (SEC)
Form 10-Q
and Article 10 of SEC
Regulation S-X.
They do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. Therefore, these financial
statements should be read in conjunction with the Companys
audited consolidated financial statements and notes thereto for
the year ended December 31, 2006, included in the
Companys Annual Report on
Form 10-K
filed February 20, 2007 with the SEC.
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 Companys consolidated
financial position at September 30, 2007 and
December 31, 2006, and the consolidated results of its
operations for the three and nine months ended
September 30, 2007 and 2006, and its consolidated cash
flows for the nine months ended September 30, 2007 and
2006. The results of operations for the three and nine months
ended September 30, 2007 are not necessarily indicative of
the results to be expected for future quarters or the full year.
Use of
Estimates
The preparation of financial statements in accordance with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of net revenue and
expenses in the reporting periods. The Company regularly
evaluates estimates and assumptions related to allowances for
doubtful accounts, sales returns and allowances, warranty
reserves, inventory reserves, stock-based compensation expense,
goodwill and purchased intangible asset valuations, strategic
investments, deferred income tax asset valuation allowances,
uncertain tax positions, tax contingencies, restructuring costs,
litigation and other loss contingencies. The Company bases its
estimates and assumptions on current facts, historical
experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities and the accrual of costs and expenses
that are not readily apparent from other sources. The actual
results experienced by the Company may differ materially and
adversely from the Companys estimates. To the extent there
are material differences between the estimates and the actual
results, future results of operations will be affected.
5
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
The Companys net revenue is generated principally by sales
of its semiconductor products. The Company derives the remaining
balance of its net revenue predominantly from software licenses,
development agreements, support and maintenance agreements, data
services and cancellation fees. The majority of the
Companys sales occur through the efforts of its direct
sales force. The remaining balance of its sales occurs through
distributors.
The following table presents details of the Companys
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Sales of semiconductor products
|
|
|
99.2
|
%
|
|
|
99.7
|
%
|
|
|
99.1
|
%
|
|
|
99.2
|
%
|
Other
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Sales made through direct sales force
|
|
|
83.9
|
%
|
|
|
87.5
|
%
|
|
|
84.8
|
%
|
|
|
84.2
|
%
|
Sales made through distributors
|
|
|
16.1
|
|
|
|
12.5
|
|
|
|
15.2
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements (SAB 101), and
SAB No. 104, Revenue Recognition
(SAB 104), the Company recognizes product
revenue when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the price to the
customer is fixed or determinable, and (iv) collection of
the resulting receivable is reasonably assured. These criteria
are usually met at the time of product shipment. However, the
Company does not recognize revenue until all customer acceptance
requirements have been met and no significant obligations
remain, when applicable. A portion of the Companys sales
are made through distributors under agreements allowing for
pricing credits
and/or
rights of return. Product revenue on sales made through these
distributors is not recognized until the distributors ship the
product to their customers. The Company records reductions to
revenue for estimated product returns and pricing adjustments,
such as competitive pricing programs and rebates, in the same
period that the related revenue is recorded. The amount of these
reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate
agreements, and other factors known at the time. The Company
also maintains inventory (hubbing) arrangements with certain of
its customers. Pursuant to these arrangements the Company
delivers products to a customer or a designated third party
warehouse based upon the customers projected needs, but
does not recognize product revenue unless and until the customer
reports that it has removed the Companys product from the
warehouse to incorporate into its end products.
For a limited number of arrangements that include multiple
deliverables, such as sales of semiconductor products and
related services, the Company allocates revenue based on the
relative fair values of the individual components as determined
in accordance with Financial Accounting Standards Board
(FASB) Emerging Issues Task Force (EITF)
Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
If there is no established fair value for an undelivered
element, the entire arrangement is accounted for as a single
unit of accounting, resulting in a deferral of revenue and costs
for the delivered element until the undelivered element has been
fulfilled. In the case that the undelivered element is a
service, the revenue and costs applicable to both the delivered
and undelivered elements are recorded ratably over the
respective service period. If the undelivered element is
essential to the functionality of the delivered element, no
revenue or costs are recognized until the undelivered element is
delivered.
6
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In arrangements that include a combination of hardware and
software products that are also sold separately, where software
is more than incidental and essential to the functionality of
the product being sold, the Company follows the guidance in EITF
Issue
No. 03-5,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software, and accounts for the entire
arrangement as a sale of software and software-related items,
and follows the revenue recognition criteria in accordance with
the American Institute of Certified Public Accountants Statement
of Position (SOP)
97-2,
Software Revenue Recognition
(SOP 97-2),
and related interpretations.
Revenue under development agreements is recognized when
applicable contractual milestones have been met, including
deliverables, and in any case, does not exceed the amount that
would be recognized using the percentage-of-completion method in
accordance with
SOP 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. The costs associated with
development agreements are included in cost of revenue. Revenue
from software licenses and maintenance agreements is recognized
in accordance with the provisions of
SOP 97-2
and related interpretations. Royalty revenue is recognized based
upon reports received from licensees during the period, unless
collectibility is not reasonably assured, in which case revenue
is recognized when payment is received from the licensee.
Revenue from cancellation fees is recognized when cash is
received from the customer.
Inventory
Inventory consists of work in process and finished goods and is
stated at the lower of cost
(first-in,
first-out) or market. The Company establishes inventory reserves
for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and the estimated
realizable value based upon assumptions about future demand and
market conditions. Shipping and handling costs are classified as
a component of cost of revenue in the consolidated statements of
income.
Rebates
The Company accounts for rebates in accordance with EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), and,
accordingly, records reductions to revenue for rebates in the
same period that the related revenue is recorded. The amount of
these reductions is based upon the terms included in the
Companys various rebate agreements.
Warranty
The Companys products typically carry a one to three year
warranty. The Company establishes reserves for estimated product
warranty costs at the time revenue is recognized based upon its
historical warranty experience, and additionally for any known
product warranty issues.
Guarantees
and Indemnifications
In some agreements to which the Company is a party, it has
agreed to indemnify the other party for certain matters such as
product liability. The Company includes intellectual property
indemnification provisions in its standard terms and conditions
of sale for its products and has also included such provisions
in certain agreements with third parties. To date, there have
been no known events or circumstances that have resulted in any
material costs related to these indemnification provisions, and
as a result, no liabilities have been recorded in the
accompanying condensed financial statements. However, the
maximum potential amount of the future payments the Company
could be required to make under these indemnification
obligations could be significant.
The Company also has obligations to indemnify certain of its
present and former employees, officers and directors to the
maximum extent permitted by law. The maximum potential amount of
the future payments the Company could be required to make under
these indemnification obligations could be significant; however,
the
7
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company maintains directors and officers insurance
policies that should limit the Companys exposure and
enable it to recover a portion of amounts paid with respect to
such obligations.
Stock-Based
Compensation
The Company has in effect stock incentive plans under which
incentive stock options have been granted to employees and
restricted stock units and non-qualified stock options have been
granted to employees and non-employee members of the Board of
Directors. The Company also has an employee stock purchase plan
for all eligible employees. Effective January 1, 2006 the
Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which requires all
share-based payments to employees, including grants of employee
stock options, restricted stock units and employee stock
purchase rights, to be recognized in the financial statements
based upon their respective grant date fair values, and does not
allow the previously permitted pro forma disclosure-only method
as an alternative to financial statement recognition.
SFAS 123R supersedes Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations and amends
SFAS No. 95, Statement of Cash Flows.
SFAS 123R also requires the benefits of tax deductions
in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as
required under previous literature. In March 2005 the SEC issued
SAB No. 107, Share-Based Payment
(SAB 107), which provides guidance
regarding the interaction of SFAS 123R and certain SEC
rules and regulations. The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123R.
SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense ratably
over the requisite service periods. The Company has estimated
the fair value of stock options and stock purchase rights as of
the date of grant or assumption using the Black-Scholes option
pricing model, which was developed for use in estimating the
value of traded options that have no vesting restrictions and
that are freely transferable. The Black-Scholes model considers,
among other factors, the expected life of the award and the
expected volatility of the Companys stock price. Although
the Black-Scholes model meets the requirements of SFAS 123R
and SAB 107, the fair values generated by the model may not
be indicative of the actual fair values of the Companys
equity awards, as it does not consider other factors important
to those awards to employees, such as continued employment,
periodic vesting requirements and limited transferability.
In November 2005 the FASB issued Staff Position
No. SFAS 123R-3,
Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards
(SFAS 123R-3).
The Company has elected to adopt the alternative transition
method provided in
SFAS 123R-3
for calculating the tax effects of stock-based compensation
pursuant to SFAS 123R. The alternative transition method
includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC Pool)
related to the tax effects of employee stock-based compensation
expense, and to determine the subsequent impact on the APIC Pool
and unaudited condensed consolidated statements of cash flows of
the tax effects of employee stock-based compensation awards that
were outstanding at the Companys adoption of
SFAS 123R. In addition, in accordance with SFAS 123R,
SFAS No. 109, Accounting for Income Taxes
(SFAS 109), and EITF Topic D-32,
Intraperiod Tax Allocation of the Tax Effect of Pretax Income
from Continuing Operations, the Company has elected to
recognize excess income tax benefits from stock option exercises
in additional paid-in capital only if an incremental income tax
benefit would be realized after considering all other tax
attributes presently available to the Company.
Income
Taxes
In July 2006 the FASB issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 provides
detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized
in an enterprises financial statements in accordance with
SFAS 109. Income tax positions must meet a
more-likely-than-not recognition threshold at the effective
8
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date to be recognized upon the adoption of FIN 48 and in
subsequent periods. The Company adopted FIN 48 effective
January 1, 2007, and the provisions of FIN 48 have
been applied to all income tax positions commencing from that
date. The Company recognizes potential accrued interest and
penalties related to unrecognized tax benefits within operations
as income tax expense. The cumulative effect of applying the
provisions of FIN 48 has been reported as an adjustment to
the opening balance of retained earnings as of January 1,
2007.
Net
Income Per Share
Net income per share (basic) is calculated by dividing net
income by the weighted average number of common shares
outstanding during the period. Net income per share (diluted) is
calculated by adjusting outstanding shares, assuming any
dilutive effects of options, employee stock purchase rights and
restricted stock units calculated using the treasury stock
method. Under the treasury stock method, the exercise of
employee stock options, employee stock purchases and the vesting
of restricted stock units result in a greater dilutive effect on
net income per share. Additionally, an increase in the fair
market value of the Companys Class A common stock
results in a greater dilutive effect from outstanding options,
employee stock purchase rights and unvested restricted stock
units.
Business
Enterprise Segments
The Company operates in one reportable operating segment, wired
and wireless broadband communications. SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), establishes
standards for the way public business enterprises report
information about operating segments in annual consolidated
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic
areas and major customers. Although the Company had four
operating segments at September 30, 2007, under the
aggregation criteria set forth in SFAS 131 the Company
operates in only one reportable operating segment, wired and
wireless broadband communications.
Under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS 131, if the segments
have similar economic characteristics, and if the segments are
similar in each of the following areas:
|
|
|
|
|
the nature of products and services;
|
|
|
|
the nature of the production processes;
|
|
|
|
the type or class of customer for their products and
services; and
|
|
|
|
the methods used to distribute their products or provide their
services.
|
The Company meets each of the aggregation criteria for the
following reasons:
|
|
|
|
|
the sale of integrated circuits is the only material source of
revenue for each of its four operating segments;
|
|
|
|
the integrated circuits sold by each of its operating segments
use the same standard CMOS manufacturing processes;
|
|
|
|
the integrated circuits marketed by each of its operating
segments are sold to one type of customer: manufacturers of
wired and wireless communications equipment, which incorporate
the Companys integrated circuits into their electronic
products; and
|
|
|
|
all of its integrated circuits are sold through a centralized
sales force and common wholesale distributors.
|
All of the Companys operating segments share similar
economic characteristics as they have a similar long term
business model, operate at gross margins similar to the
Companys consolidated gross margin, and have similar
research and development expenses and similar selling, general
and administrative expenses. The causes for
9
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
variation among each of the operating segments are the same and
include factors such as (i) life cycle and price and cost
fluctuations, (ii) number of competitors,
(iii) product differentiation and (iv) size of market
opportunity. Additionally, each operating segment is subject to
the overall cyclical nature of the semiconductor industry. The
number and composition of employees and the amounts and types of
tools and materials required are similar for each operating
segment. Finally, even though the Company periodically
reorganizes its operating segments based upon changes in
customers, end markets or products, acquisitions, long-term
growth strategies, and the experience and bandwidth of the
senior executives in charge, the common financial goals for each
operating segment remain constant.
Because the Company meets each of the criteria set forth in
SFAS 131 and its four operating segments as of
September 30, 2007 share similar economic
characteristics, the Company has aggregated its results of
operations into one reportable operating segment.
|
|
2.
|
Supplemental
Financial Information
|
Inventory
The following table presents details of the Companys
inventory:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Work in process
|
|
$
|
79,539
|
|
|
$
|
71,506
|
|
Finished goods
|
|
|
133,621
|
|
|
|
131,288
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,160
|
|
|
$
|
202,794
|
|
|
|
|
|
|
|
|
|
|
Purchased
Intangible Assets
The following table presents details of the Companys
purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Completed technology
|
|
$
|
218,769
|
|
|
$
|
(170,283
|
)
|
|
$
|
48,486
|
|
|
$
|
186,799
|
|
|
$
|
(160,732
|
)
|
|
$
|
26,067
|
|
Customer relationships
|
|
|
49,266
|
|
|
|
(47,216
|
)
|
|
|
2,050
|
|
|
|
49,266
|
|
|
|
(46,766
|
)
|
|
|
2,500
|
|
Customer backlog
|
|
|
3,436
|
|
|
|
(3,436
|
)
|
|
|
|
|
|
|
3,316
|
|
|
|
(3,316
|
)
|
|
|
|
|
Other
|
|
|
7,614
|
|
|
|
(7,425
|
)
|
|
|
189
|
|
|
|
7,614
|
|
|
|
(7,152
|
)
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
279,085
|
|
|
$
|
(228,360
|
)
|
|
$
|
50,725
|
|
|
$
|
246,995
|
|
|
$
|
(217,966
|
)
|
|
$
|
29,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the business combinations discussed in
Note 3, the Company acquired purchased intangible assets
that did not meet the definition of a business as defined in
SFAS No. 141, Business Combinations
(SFAS 141), for $3.9 million during
the three months ended September 30, 2007.
10
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents details of the amortization of
purchased intangible assets by expense category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,935
|
|
|
$
|
2,314
|
|
|
$
|
9,551
|
|
|
$
|
8,039
|
|
Operating expense
|
|
|
314
|
|
|
|
329
|
|
|
|
843
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,249
|
|
|
$
|
2,643
|
|
|
$
|
10,394
|
|
|
$
|
10,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of the Companys
future amortization of purchased intangible assets. Should the
Company acquire additional purchased intangible assets in the
future, its cost of revenue or operating expenses will increase
by the amortization of those assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets Amortization by Year
|
|
|
|
Remainder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of 2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,936
|
|
|
$
|
15,738
|
|
|
$
|
15,263
|
|
|
$
|
12,527
|
|
|
$
|
1,023
|
|
|
$
|
|
|
|
$
|
48,487
|
|
Operating expense
|
|
|
183
|
|
|
|
733
|
|
|
|
622
|
|
|
|
600
|
|
|
|
100
|
|
|
|
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,119
|
|
|
$
|
16,471
|
|
|
$
|
15,885
|
|
|
$
|
13,127
|
|
|
$
|
1,123
|
|
|
$
|
|
|
|
$
|
50,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Liabilities
The following table presents details of the Companys
accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued rebates
|
|
$
|
121,596
|
|
|
$
|
131,028
|
|
Warranty reserve
|
|
|
22,256
|
|
|
|
19,222
|
|
Accrued taxes
|
|
|
12,026
|
|
|
|
45,885
|
|
Accrued payments on repurchases of Class A common stock
|
|
|
6,535
|
|
|
|
|
|
Restructuring liabilities
|
|
|
4,715
|
|
|
|
6,324
|
|
Other
|
|
|
74,766
|
|
|
|
61,457
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241,894
|
|
|
$
|
263,916
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
The following table presents details of the Companys other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued taxes
|
|
$
|
29,564
|
|
|
$
|
|
|
Restructuring liabilities
|
|
|
3,530
|
|
|
|
4,399
|
|
Accrued settlement liabilities
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,094
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
|
|
11
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Rebate Activity
The following table summarizes the activity related to accrued
rebates during the nine months ended September 30, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
131,028
|
|
|
$
|
99,645
|
|
Charged as a reduction to revenue
|
|
|
157,816
|
|
|
|
180,513
|
|
Payments
|
|
|
(156,708
|
)
|
|
|
(131,711
|
)
|
Reversal of unclaimed rebates
|
|
|
(10,540
|
)
|
|
|
(5,544
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
121,596
|
|
|
$
|
142,903
|
|
|
|
|
|
|
|
|
|
|
Warranty
Reserve Activity
The following table summarizes the activity related to warranty
reserves during the nine months ended September 30, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
19,222
|
|
|
$
|
14,131
|
|
Charged to costs and expenses
|
|
|
7,237
|
|
|
|
6,939
|
|
Acquired through acquisition
|
|
|
|
|
|
|
878
|
|
Payments
|
|
|
(4,203
|
)
|
|
|
(3,957
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,256
|
|
|
$
|
17,991
|
|
|
|
|
|
|
|
|
|
|
Restructuring
Activity
The following table summarizes the activity related to the
Companys current and long-term restructuring liabilities
during the nine months ended September 30, 2007:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
Beginning balance
|
|
$
|
10,723
|
|
Liabilities assumed in acquisitions(1)
|
|
|
749
|
|
Cash payments(2)
|
|
|
(3,227
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
8,245
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded additional restructuring costs of
$0.7 million in connection with its acquisition of Global
Locate, Inc. for the consolidation of excess facilities,
relating to non-cancelable lease costs. These costs were
accounted for under EITF
95-3,
Recognition of Liabilities in Connection with Purchase
Business Combinations, recognized as a liability assumed in
the purchase business combination, and offset by a corresponding
increase in goodwill. The liabilities related to this
acquisition have been classified as restructuring liabilities
for presentation in the unaudited consolidated balance sheet. |
|
(2) |
|
These cash payments relate to net lease payments on excess
facilities and non-cancelable lease costs. The consolidation of
excess facilities costs will be paid over the respective lease
terms through 2010. |
12
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Computation
of Net Income Per Share
The following table presents the computation of net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator: Net income
|
|
$
|
27,760
|
|
|
$
|
110,181
|
|
|
$
|
123,007
|
|
|
$
|
333,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares outstanding
|
|
|
540,013
|
|
|
|
548,065
|
|
|
|
542,947
|
|
|
|
545,081
|
|
Less: Unvested common shares outstanding
|
|
|
(82
|
)
|
|
|
(138
|
)
|
|
|
(66
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (basic)
|
|
|
539,931
|
|
|
|
547,927
|
|
|
|
542,881
|
|
|
|
544,895
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested common shares outstanding
|
|
|
|
|
|
|
26
|
|
|
|
7
|
|
|
|
111
|
|
Stock awards
|
|
|
37,652
|
|
|
|
24,644
|
|
|
|
36,591
|
|
|
|
44,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (diluted)
|
|
|
577,583
|
|
|
|
572,597
|
|
|
|
579,479
|
|
|
|
589,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
.05
|
|
|
$
|
.20
|
|
|
$
|
.23
|
|
|
$
|
.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted)
|
|
$
|
.05
|
|
|
$
|
.19
|
|
|
$
|
.21
|
|
|
$
|
.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007 common share equivalents were
calculated based on (i) stock options to purchase
130.5 million shares of Class A or Class B common
stock outstanding with a weighted average exercise price of
$24.64 per share and (ii) 18.0 million restricted
stock units that entitle the holder to receive a like number of
freely transferable shares of Class A common stock as the
awards vest.
Patent
License Agreement
In July 2007 the Company entered into a patent license agreement
with a wireless network operator. Under the agreement, royalty
payments will be made to the Company at a rate of $6.00 per unit
for each applicable unit sold by the operator on or after the
date of the agreement, subject to certain conditions, including
without limitation a maximum payment of $40 million per
calendar quarter and a lifetime maximum of $200 million. No
royalty revenue under this agreement has been recognized for the
periods ended September 30, 2007, as no report on the
manufacture
and/or sale
of licensed products was due or received from the licensee
during that time.
Supplemental
Cash Flow Information
The Company repurchased $6.5 million of its Class A
common stock in one or more transactions that had not been
settled by September 30, 2007. In addition, billings of
$3.8 million for capital equipment were accrued but not yet
paid as of September 30, 2007. There were no comparable
amounts in 2006. These amounts have been excluded from the
unaudited condensed consolidated statements of cash flows.
From January 1, 2007 through September 30, 2007 the
Company completed three business acquisitions. The unaudited
condensed consolidated financial statements for the nine months
ended September 30, 2007 include the results of operations
of these acquired companies commencing as of their respective
acquisition dates.
13
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the transactions as of their respective acquisition
dates is outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Date
|
|
|
|
|
Consideration
|
|
Company Acquired
|
|
Acquired
|
|
|
Business
|
|
Paid
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
LVL7 Systems, Inc.
|
|
|
Jan. 2007
|
|
|
Networking software.
|
|
$
|
62,459
|
|
Octalica, Inc.
|
|
|
May 2007
|
|
|
Networking technologies based on the
MoCAtm
standard
|
|
|
30,753
|
|
Global Locate, Inc.
|
|
|
Jul. 2007
|
|
|
GPS and assisted GPS semiconductor products, software and
services
|
|
|
139,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquisitions
|
|
|
|
|
|
|
|
$
|
232,943
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company issued 93,750 restricted shares of
Class A common stock in connection with the acquisition of
Global Locate. Certain of the cash consideration in the above
acquisitions is currently held in escrow pursuant to the terms
of the acquisition agreements.
Additional cash consideration of up to $80.0 million will
be paid to the former holders of Global Locate capital stock and
other rights upon satisfaction of certain future performance
goals. In accordance with SFAS 141, contingent
consideration is recorded when a contingency is satisfied and
additional consideration is issued or becomes issuable. In
accordance with EITF Issue
No. 95-8,
Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business
Combination, the additional consideration issuable to
holders of unrestricted common stock and fully vested options as
of the acquisition date is recorded as additional purchase
price, as the consideration is unrelated to any employment
requirement with the Company. If additional consideration is
recorded, such amount will be allocated to goodwill.
The Companys primary reasons for the above acquisitions
were to enter into or expand its market share in the relevant
wired and wireless communications markets, reduce the time
required to develop new technologies and products and bring them
to market, incorporate enhanced functionality into and
complement the Companys existing product offerings,
augment its engineering workforce, and enhance its technological
capabilities. The significant factors that resulted in
recognition of goodwill were: (a) the purchase price was
based on cash flow projections assuming integration with the
Companys products; and (b) there were very few
tangible and identifiable intangible assets that qualified for
recognition.
Allocation
of Initial Purchase Consideration
The Company calculated the fair value of the tangible and
intangible assets acquired to allocate the purchase prices in
accordance with SFAS 141. Based upon those calculations,
the purchase price for each of the acquisitions in 2007 was
allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
Goodwill and
|
|
|
In-Process
|
|
|
|
|
|
|
(Liabilities
|
|
|
Purchased
|
|
|
Research &
|
|
|
Total Cash
|
|
|
|
Assumed)
|
|
|
Intangibles
|
|
|
Development
|
|
|
Consideration
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
LVL7
|
|
$
|
1,290
|
|
|
$
|
60,869
|
|
|
$
|
300
|
|
|
$
|
62,459
|
|
Octalica
|
|
|
(1,235
|
)
|
|
|
21,788
|
|
|
|
10,200
|
|
|
|
30,753
|
|
Global Locate
|
|
|
(6,617
|
)
|
|
|
141,378
|
|
|
|
4,970
|
|
|
|
139,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquisitions
|
|
$
|
(6,562
|
)
|
|
$
|
224,035
|
|
|
$
|
15,470
|
|
|
$
|
232,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company recorded $3.0 million of unearned
stock-based compensation relating to restricted shares issued in
connection with the acquisition of Global Locate. This amount
will be recognized as expense ratably over the service period of
three years.
14
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Balance Sheets
The following table presents the combined details of the
unaudited condensed balance sheets of the acquired companies at
the respective dates of acquisition:
|
|
|
|
|
|
|
2007
|
|
|
|
Acquisitions
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,519
|
|
Accounts receivable, net
|
|
|
4,579
|
|
Inventory
|
|
|
1,437
|
|
Prepaid expenses and other current assets
|
|
|
900
|
|
|
|
|
|
|
Total current assets
|
|
|
10,435
|
|
Property and equipment, net
|
|
|
2,051
|
|
Other assets
|
|
|
11
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,497
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
5,891
|
|
Wages and related benefits
|
|
|
1,746
|
|
Accrued liabilities
|
|
|
8,430
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,067
|
|
Long-term liabilities
|
|
|
389
|
|
Total shareholders deficit
|
|
|
(3,959
|
)
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
12,497
|
|
|
|
|
|
|
In connection with these acquisitions, the Company incurred
acquisition costs of $2.6 million in 2007.
Goodwill
and Purchased Intangible Assets
The following table presents the combined details of the total
goodwill and purchased intangible assets of the acquired
companies at the respective dates of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
2007
|
|
|
|
Life
|
|
|
Acquisitions
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Goodwill
|
|
|
N/A
|
|
|
$
|
195,845
|
|
Purchased intangible assets (finite lives):
|
|
|
|
|
|
|
|
|
Completed technology
|
|
|
3 to 4
|
|
|
|
28,070
|
|
Other
|
|
|
0.25
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
224,035
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007 the Company
received $14.0 million in connection with an escrow
settlement from its prior acquisition of Siliquent Technologies
Inc., which resulted in a corresponding reduction of goodwill.
15
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In-Process
Research and Development
In-process research and development (IPR&D)
totaled $5.0 million and $15.5 million in the three
and nine months ended September 30, 2007, respectively. The
amounts allocated to IPR&D were determined through
established valuation techniques used in the high technology
industry and were expensed upon acquisition as it was determined
that the underlying projects had not reached technological
feasibility and no alternative future uses existed. In
accordance with SFAS No. 2, Accounting for Research
and Development Costs, as clarified by FIN No. 4,
Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, an
Interpretation of FASB Statement No. 2, amounts
assigned to IPR&D meeting the above-stated criteria were
charged to expense as part of the allocation of the purchase
price.
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
values 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 on 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 on forecasted revenue 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 as of the respective acquisition dates. The fair value
of developed technology is included in identifiable purchased
intangible assets. The Company believes the amounts recorded as
IPR&D, as well as developed technology, represent the fair
values and approximate the amounts an independent party would
pay for these projects as of the respective acquisition dates.
The following table summarizes the significant assumptions
underlying the valuations of IPR&D at the acquisition dates
for the acquisitions completed in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Risk
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Time to
|
|
|
Cost to
|
|
|
Discount
|
|
|
|
|
Company Acquired
|
|
Development Projects
|
|
Complete
|
|
|
Complete
|
|
|
Complete
|
|
|
Rate
|
|
|
IPR&D
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
LVL7
|
|
Enhancements to FASTPATH application platform
|
|
|
31
|
%
|
|
|
1.0
|
|
|
$
|
7.8
|
|
|
|
21
|
%
|
|
$
|
0.3
|
|
Octalica
|
|
High performance communication controller
|
|
|
52
|
|
|
|
1.0
|
|
|
|
6.8
|
|
|
|
29
|
|
|
|
10.2
|
|
Global Locate
|
|
Single-chip GPS device
|
|
|
62
|
|
|
|
1.5
|
|
|
|
5.6
|
|
|
|
20
|
|
|
|
5.0
|
|
As of the respective acquisition dates of these companies,
certain ongoing development projects were in process. Research
and development costs to bring the products of the acquired
companies to technological feasibility are not expected to have
a material impact on the Companys results of operations or
financial condition.
16
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Pro Forma Data (Unaudited)
The pro forma data of the Company set forth below gives effect
to acquisitions completed in 2006 and 2007 as if they had
occurred at the beginning of 2006 and includes amortization of
purchased intangible assets, 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 of the Company or
of the results that would have actually been attained had the
acquisitions taken place at the beginning of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Pro forma net revenue
|
|
$
|
950,107
|
|
|
$
|
905,604
|
|
|
$
|
2,751,771
|
|
|
$
|
2,756,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
32,050
|
|
|
$
|
100,742
|
|
|
$
|
121,799
|
|
|
$
|
306,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (basic)
|
|
$
|
.06
|
|
|
$
|
.18
|
|
|
$
|
.22
|
|
|
$
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (diluted)
|
|
$
|
.06
|
|
|
$
|
.18
|
|
|
$
|
.21
|
|
|
$
|
.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded tax provisions of $3.5 million and
$4.9 million for the three and nine months ended
September 30, 2007, respectively, and tax benefits of
$23.8 million and $15.7 million for the three and nine
months ended September 30, 2006, respectively. The
effective tax rates for the Company were 11.3% and 3.8% for the
three and nine months ended September 30, 2007,
respectively, and (27.6)% and (4.9)% for the three and nine
months ended September 30, 2006, respectively. The
difference between the Companys effective tax rates and
the 35% federal statutory rate resulted primarily from domestic
losses recorded without income tax benefit and foreign earnings
taxed at rates lower than the federal statutory rate for the
three and nine months ended September 30, 2007 and
September 30, 2006. Included in the foregoing amounts and
percentages, the Company recorded $4.6 million of tax
benefits for the nine months ended September 30, 2007
resulting primarily from the expiration of the statutes of
limitations for the assessment of taxes in various foreign
jurisdictions. For the three and nine months ended
September 30, 2006, the Company recorded income tax
benefits of $27.9 million and $29.6 million,
respectively, resulting primarily from the expiration of the
statutes of limitations for the assessment of taxes for certain
foreign subsidiaries.
The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS 109. The Company records
net deferred tax assets to the extent it believes these assets
will more likely than not be realized. In making such
determination, the Company considers all available positive and
negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies and recent financial performance. SFAS 109
further states that forming a conclusion that a valuation
allowance is not required is difficult when there is negative
evidence such as cumulative losses in recent years. As a result
of the Companys recent cumulative losses in the
U.S. and certain foreign jurisdictions, and the full
utilization of its loss carryback opportunities, the Company has
concluded that a full valuation allowance should be recorded in
such jurisdictions. In certain other foreign jurisdictions where
the Company does not have cumulative losses, the Company had net
deferred tax assets of $2.9 million and $1.8 million,
at September 30, 2007 and December 31, 2006,
respectively, in accordance with SFAS 109.
As a result of applying the provisions of FIN 48, the
Company recognized a decrease of $3.9 million in the
liability for unrecognized tax benefits, and a $4.7 million
increase in retained earnings, as of January 1, 2007. The
Companys unrecognized tax benefits totaled
$36.5 million at January 1, 2007 and related to
various foreign jurisdictions. This amount included
$14.5 million of potential penalties and $1.1 million
of interest. Included in the balance at January 1, 2007 was
$34.3 million of tax benefits that, if recognized, would
reduce the Companys
17
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annual effective income tax rate. The Company does not expect
its unrecognized tax benefits to change significantly over the
next 12 months.
The Company files U.S., state and foreign income tax returns in
jurisdictions with varying statutes of limitations. The 2003
through 2007 tax years generally remain subject to examination
by federal and most state tax authorities. In significant
foreign jurisdictions, the 2001 through 2007 tax years generally
remain subject to examination by tax authorities.
Share
Repurchase Program
In February 2007 the Companys Board of Directors
authorized a program to repurchase shares of the Companys
Class A common stock. The Board approved the repurchase of
shares having an aggregate market value of up to
$1.0 billion, depending on market conditions and other
factors. Repurchases under the program may be made at any time
and from time to time during the 18 month period that
commenced February 12, 2007. From the time the new program
was implemented through September 30, 2007, the Company
repurchased a total of 24.7 million shares at a weighted
average price of $33.12 per share, of which $811.8 million
was settled in cash during the nine months ended
September 30, 2007 and the remaining $6.5 million was
included in accrued liabilities. At September 30, 2007,
$181.6 million remained available to repurchase shares
under the authorized program.
Comprehensive
Income
The components of comprehensive income, net of taxes, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
123,007
|
|
|
$
|
333,965
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
442
|
|
|
|
(897
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
123,449
|
|
|
$
|
333,068
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) reflected on the
unaudited condensed consolidated balance sheets at
September 30, 2007 and December 31, 2006 represents
accumulated translation adjustments.
|
|
6.
|
Employee
Benefit Plans
|
Equity
Awards
The Company granted options to purchase 20.3 million shares
of its Class A common stock and awarded 11.3 million
restricted stock units during the nine months ended
September 30, 2007. As a result of employee terminations,
the Company cancelled options to purchase 2.8 million
shares of its Class A common stock and 0.9 million
restricted stock units during the nine months ended
September 30, 2007.
Stock-Based
Compensation Expense
The amount of unearned stock-based compensation currently
estimated to be expensed from 2007 through 2011 related to
unvested share-based payment awards at September 30, 2007
is $1.037 billion. Of this amount, $128.1 million,
$405.2 million, $293.5 million, $165.5 million
and $45.1 million are currently estimated to be recorded in
the remainder of 2007, and in 2008, 2009, 2010 and 2011,
respectively. The weighted-average period
18
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over which the unearned stock-based compensation is expected to
be recognized is approximately 1.5 years. Approximately 96%
of the total unearned stock-based compensation at
September 30, 2007 will be expensed by the end of 2010. If
there are any modifications or cancellations of the underlying
unvested awards, the Company may be required to accelerate,
increase or cancel any remaining unearned stock-based
compensation expense. Future stock-based compensation expense
and unearned stock-based compensation will increase to the
extent that the Company grants additional equity awards or
assumes unvested equity awards in connection with acquisitions.
Charges
Related to the Voluntary Review of the Companys Equity
Award Practices
In connection with the Companys equity award review, the
results of which were reported in January 2007, the Company
determined that the accounting measurement dates for most of its
options granted between June 1998 and May 2003, covering options
to purchase 232.9 million shares of its Class A or
Class B common stock, differed from the measurement dates
previously used for such awards. As a result, there are
potential adverse tax consequences that may apply to holders of
affected options. By amending or replacing these options, the
potential adverse tax consequences could be eliminated.
In March 2007 the Company offered to amend or replace affected
options by adjusting the exercise price for each such option to
the lower of (i) the fair market value per share of its
Class A common stock on the revised measurement date
applied to that option as a result of its equity award review or
(ii) the closing selling price per share of its
Class A common stock on the date on which the option would
be amended. If the adjusted exercise price for an affected
option was lower than the original exercise price, that
option was not amended but instead was replaced with a new
option that had the same exercise price, vesting schedule and
expiration date as the affected option, but a new grant date.
The offer expired April 20, 2007. Participants whose
affected options were amended pursuant to the offer are entitled
to a special cash payment with respect to those options. The
amount payable will be determined by multiplying (i) the
amount of the increase in exercise price by (ii) the number
of shares for which a participants options were amended.
As a result, the Company will make payments of
$29.6 million in January 2008 to reimburse affected
employees for the increases in their exercise prices. A
liability has been recorded for these payments and is included
in the liability for wages and related benefits as of
September 30, 2007.
In accordance with SFAS 123R, the Company recorded total
estimated charges of $3.4 million in the nine months ended
September 30, 2007 and a reduction of additional paid-in
capital in the amount of $26.2 million in connection with
the offer. Charges of $0.1 million, $1.5 million and
$1.8 million are included in cost of revenue, research and
development expense and selling, general and administrative
expense, respectively, as wages and related benefits for the
nine months ended September 30, 2007.
Intellectual Property Proceedings. In May 2005
the Company filed a complaint with the U.S. International
Trade Commission (ITC) asserting that Qualcomm
Incorporated (Qualcomm) engaged in unfair trade
practices by importing integrated circuits and other products
that infringe, both directly and indirectly, five of the
Companys patents relating generally to wired and wireless
communications. The complaint sought an exclusion order to bar
importation of those Qualcomm products into the United States
and a cease and desist order to bar further sales of infringing
Qualcomm products that have already been imported. In June 2005
the ITC instituted an investigation of Qualcomm based upon the
allegations made in the Companys complaint. The
investigation was later limited to asserted infringement of
three Broadcom patents. At Qualcomms request, the
U.S. Patent and Trademark Office (USPTO) is
reexamining one of the patents. In December 2006 the full
Commission upheld the ITC administrative law judges
October 2006 Initial Determination finding all three patents
valid and one infringed. In June 2007 the Commission issued an
exclusion order banning the importation into the United States
of infringing Qualcomm chips and certain cellular phone models
incorporating those chips. The Commission also issued a cease
and desist order prohibiting Qualcomm from engaging in certain
activities related to the infringing
19
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
chips. The ITCs orders were subject to a
60-day
Presidential review period, which involved extensive review by
the United States Trade Representative, who the President
designated to decide whether to let the ITC orders stand or to
overturn them through a statutory disapproval. In August 2007
the United States Trade Representative declined to disapprove
the orders. In September 2007 the United States Court of Appeals
for the Federal Circuit stayed the orders as to certain third
parties pending appeal, but not as to Qualcomm. A hearing date
on the appeal has not been set.
In May 2005 the Company filed two complaints against Qualcomm in
the United States District Court for the Central District of
California. The first complaint asserts that Qualcomm has
infringed, both directly and indirectly, the same five patents
asserted by Broadcom in the ITC complaint. The District Court
complaint seeks preliminary and permanent injunctions against
Qualcomm and the recovery of monetary damages, including treble
damages for willful infringement, and attorneys fees. In
July 2005 Qualcomm answered the complaint and asserted
counterclaims seeking a declaratory judgment that the
Companys patents are invalid and not infringed. In
December 2005 the court transferred the causes of action
relating to two of the patents to the United States District
Court for the Southern District of California. Pursuant to
statute, the court has stayed the remainder of this action
pending the outcome of the ITC action.
A second District Court complaint asserts that Qualcomm has
infringed, both directly and indirectly, five other Broadcom
patents relating generally to wired and wireless communications
and multimedia processing technologies. The complaint seeks
preliminary and permanent injunctions against Qualcomm and the
recovery of monetary damages, including treble damages for
willful infringement, and attorneys fees. In July 2005
Qualcomm answered the second complaint and asserted
counterclaims seeking a declaratory judgment that the
Companys patents are invalid and not infringed. In
November 2006 Broadcom withdrew one of the patents from the
case. In December 2006 the court granted a motion to stay
proceedings on a second patent pending the outcome of a USPTO
reexamination of that patent initiated at Qualcomms
request. In May 2007 a jury returned a verdict that Qualcomm
willfully infringed the three remaining patents and awarded the
Company $19.6 million in compensatory damages. In August
2007 the court also awarded Broadcom enhanced damages and its
attorneys fees in the case. Qualcomm has filed a motion
challenging that ruling and the jurys verdict in light of
subsequent changes in law by the United States Court of Appeals
for the Federal Circuit in an unrelated case. The foregoing
amounts have not been recognized in the Companys unaudited
condensed consolidated income statement. The Company has
petitioned the court to have Qualcomm enjoined from future
infringement.
In July 2005 Qualcomm filed a complaint against the Company in
the United States District Court for the Southern District of
California alleging that certain Broadcom products infringed,
both directly and indirectly, seven Qualcomm patents relating
generally to the transmission, reception and processing of
communication signals, including radio signals
and/or
signals for wireless telephony. The Company filed an answer in
September 2005 denying the allegations in Qualcomms
complaint and asserting counterclaims. The counterclaims sought
a declaratory judgment that the seven Qualcomm patents were
invalid and not infringed, and asserted that Qualcomm had
infringed, both directly and indirectly, six Broadcom patents
relating generally to wired and wireless communications. In
March 2007 the court granted the parties joint motion to
dismiss this case.
In August 2005 Qualcomm filed a second complaint against the
Company in the United States District Court for the Southern
District of California alleging that Broadcom breached a
contract relating to Bluetooth development and seeking a
declaration that two of the Companys patents relating to
Bluetooth®
technology were invalid and not infringed. The Company filed an
answer in April 2006 denying the allegations in the complaint
and asserting counterclaims. The counterclaims asserted that
Qualcomm had infringed, both directly and indirectly, the same
two Broadcom patents, and also alleged breach of the Bluetooth
contract by Qualcomm. In February 2007 the court granted the
parties joint motion to dismiss this case.
In October 2005 Qualcomm filed a third complaint against the
Company in the United States District Court for the Southern
District of California alleging that certain Broadcom products
infringe, both directly and indirectly, two Qualcomm patents
relating generally to the processing of digital video signals.
The complaint seeks
20
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
preliminary and permanent injunctions against the Company as
well as the recovery of monetary damages and attorneys
fees. The Company filed an answer in December 2005 denying the
allegations in Qualcomms complaint and asserting
counterclaims seeking a declaratory judgment that the two
Qualcomm patents are invalid and not infringed. In January 2007
a jury returned a verdict that the Company did not infringe
either patent, and rendered advisory verdicts that Qualcomm
committed inequitable conduct before the U.S. Patent and
Trademark Office and waived its patent rights in connection with
its conduct before an industry standards body. In March 2007 the
court adopted the jurys finding that Qualcomm waived its
patent rights. In August 2007 the court held that
Qualcomms asserted patents were unenforceable due to
Qualcomms conduct, declared the case exceptional, and
awarded the Company its attorneys fees and costs. The
Company has also moved for sanctions against Qualcomm for
litigation misconduct. Qualcomm has appealed the case.
In March 2006 Qualcomm filed a fourth complaint against the
Company in the United States District Court for the Southern
District of California alleging that the Company had
misappropriated certain Qualcomm trade secrets and that certain
Broadcom products infringed, both directly and indirectly, a
patent related generally to orthogonal frequency division
multiplexing technology. The Company filed an answer in May 2006
denying the allegations in Qualcomms complaint and
asserting counterclaims. The counterclaims sought a declaratory
judgment that the Qualcomm patent was invalid and not infringed,
and asserted that Qualcomm had infringed, both directly and
indirectly, two Broadcom patents relating generally to video
technology. The Company amended its answer to add a counterclaim
asserting that Qualcomm had misappropriated certain Broadcom
trade secrets, and Qualcomm amended its complaint to add three
individual Broadcom employees as defendants and include
additional allegations of trade secret misappropriation. In
March 2007 the court granted the parties joint motion to
dismiss this case.
In December 2006 SiRF Technology, Inc. (SiRF) filed
a complaint in the United States District Court for the Central
District of California against Global Locate, Inc., a
wholly-owned subsidiary of the Company acquired in July 2007
(see Note 3), alleging that certain Global Locate products
infringe four SiRF patents relating generally to GPS technology.
In January 2007 Global Locate filed an answer denying the
allegations in SiRFs complaint and asserting
counterclaims. The counterclaims seek a declaratory judgment
that the four SiRF patents are invalid and not infringed, assert
that SiRF has infringed four Global Locate patents relating
generally to GPS technology, and assert unfair competition and
antitrust violations related to the filing of sham litigation.
In May 2007 the court granted Global Locates motion to
stay the case until the ITC actions between Global Locate and
SiRF, discussed below, become final.
In February 2007 SiRF filed a complaint in the ITC asserting
that Global Locate engaged in unfair trade practices by
importing integrated circuits and other products that infringe,
both directly and indirectly, four of SiRFs patents
relating generally to GPS technology. The complaint seeks an
exclusion order to bar importation of those Global Locate
products into the United States and a cease and desist order to
bar further sales of infringing Global Locate products that have
already been imported. In March 2007 the ITC instituted an
investigation of Global Locate based upon the allegations made
in the SiRF complaint. The ITC has set a target date for
completion of the investigation in October 2008.
In April 2007 Global Locate filed a complaint in the ITC against
SiRF and four of its customers,
e-TEN
Corporation, Pharos Science & Applications, Inc.,
MiTAC International Corporation and Mio Technology Limited
(collectively, the SiRF Defendants), asserting that
the SiRF Defendants engaged in unfair trade practices by
importing GPS devices, including integrated circuits and
embedded software, and products containing such products, such
as personal navigation devices and GPS-enabled cellular
telephones, that infringe, both directly and indirectly, six of
Global Locates patents relating generally to GPS
technology. The complaint seeks an exclusion order to bar
importation of the SiRF Defendants products into the
United States and a cease and desist order to bar further sales
of infringing products that have already been imported. In May
2007 the ITC instituted an investigation of the SiRF Defendants
based upon the allegations made in the Global Locates
complaint. The ITC has set a target date for completion of the
investigation in December 2008.
21
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Antitrust and Unfair Competition
Proceedings. In July 2005 the Company filed a
complaint against Qualcomm in the United States District Court
for the District of New Jersey asserting that Qualcomms
licensing and other practices related to cellular technology and
products violate federal and state antitrust laws. The complaint
also asserts causes of action based on breach of contract,
promissory estoppel, fraud, and tortious interference with
prospective economic advantage. In September 2005 the Company
filed an amended complaint in the action also challenging
Qualcomms proposed acquisition of Flarion Technologies,
Inc. under the antitrust laws and asserting violations of
various state unfair competition and unfair business practices
laws. In August 2006 the court granted Qualcomms motion to
dismiss the complaint. In September 2007 the United States Court
of Appeals for the Third Circuit reversed the dismissal in part
and returned the case to the district for further proceedings. A
trial date in district court has not yet been set.
In October 2005 the Company and five other leading mobile
wireless technology companies filed complaints with the European
Commission requesting that the Commission investigate
Qualcomms anticompetitive conduct related to the licensing
of its patents and the sale of its chipsets for mobile wireless
devices and systems. In October 2007 the Commission announced
that it has instituted a formal investigation, of Qualcomm.
In June 2006 the Company and another leading mobile wireless
technology company filed complaints with the Korean Fair Trade
Commission requesting that the Commission investigate
Qualcomms anticompetitive conduct related to the licensing
of its patents and the sale of its chipsets for mobile wireless
devices and systems. The Commission has instituted a formal
investigation of Qualcomm.
In April 2007 the Company filed a complaint in the Superior
Court for Orange County, California alleging that
Qualcomms conduct before various industry standards
organizations constitutes unfair competition, fraud and breach
of contract. The complaint seeks an injunction against Qualcomm
as well as the recovery of monetary damages. In October 2007 the
court stayed the case pending final resolution of the
Companys case against Qualcomm in the United States
District Court for the District of New Jersey.
Securities Litigation. From March through
August 2006 a number of purported Broadcom shareholders filed
putative shareholder derivative actions (the Options
Derivative Actions) against the Company, each of the
members of its Board of Directors, certain current or former
officers, and Henry T. Nicholas III, its co-founder, alleging,
among other things, that the defendants improperly dated certain
Broadcom employee stock option grants. Four of those cases,
Murphy v. McGregor, et al. (Case
No. CV06-3252
R (CWx)), Shei v. McGregor, et al. (Case
No. SACV06-663
R (CWx)), Ronconi v. Dull, et al. (Case
No. SACV
06-771 R
(CWx)) and Jin v. Broadcom Corporation, et al. (Case
No. 06CV00573) have been consolidated in the United States
District Court for the Central District of California. The
plaintiffs filed a consolidated amended complaint in November
2006. In addition, two putative shareholder derivative actions,
Pirelli Armstrong Tire Corp. Retiree Med. Benefits
Trust v. Samueli, et al. (Case No. 06CC0124) and
Servais v. Samueli, et al. (Case No. 06CC0142),
were filed in the California Superior Court for the County of
Orange. The Superior Court consolidated the state court
derivative actions in August 2006, and the plaintiffs filed a
consolidated amended complaint in September 2006. The plaintiffs
in the Options Derivative Actions contend, among other things,
that the defendants conduct violated United States and
California securities laws, breached defendants fiduciary
duties, wasted corporate assets, unjustly enriched the
defendants, and caused errors in the Companys financial
statements. The plaintiffs seek, among other things, unspecified
damages and disgorgement of profits from the alleged conduct, to
be paid to Broadcom.
In January 2007 the Superior Court granted defendants
motion to stay the state derivative action pending resolution of
the prior-filed federal derivative action. In March 2007 the
court in the federal derivative action denied the Companys
motion to dismiss, which motion was based on the ground that the
shareholder plaintiffs lack standing to assert claims on behalf
of Broadcom. Motions to dismiss filed by the individual
defendants were heard, and mostly denied, in May 2007.
Additionally, in May 2007 the Board of Directors established a
special litigation committee (the SLC) to decide
what course of action the Company should pursue in respect of
the claims asserted in the Options Derivative Actions. The SLC
is currently engaged in its review. Awaiting the
22
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outcome of the SLCs review, the Company intends to
continue to vigorously oppose each of the Options Derivative
Actions.
From August through October 2006 several plaintiffs filed
purported shareholder class actions in the United States
District Court for the Central District of California against
the Company and certain of its current or former officers and
directors, entitled Bakshi v. Samueli, et al. (Case
No. 06-5036
R (CWx)), Mills v. Samueli, et al. (Case
No. SACV
06-9674 DOC
R(CWx)), and Minnesota Bakers Union Pension Fund, et
al. v. Broadcom Corp., et al. (Case No. SACV
06-970 CJC R
(CWx)) (the Options Class Actions). The essence
of the plaintiffs allegations is that Broadcom improperly
backdated stock options, resulting in false or misleading
disclosures concerning, among other things, Broadcoms
business and financial condition. Plaintiffs also allege that
Broadcom failed to account for and pay taxes on stock options
properly, that the individual defendants sold Broadcom common
stock while in possession of material nonpublic information, and
that the defendants conduct caused artificial inflation in
Broadcoms stock price and damages to the putative
plaintiff class. The plaintiffs assert claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and
Rule 10b-5
promulgated thereunder. In November 2006 the Court consolidated
the Options Class Actions and appointed the New Mexico
State Investment Council as lead class plaintiff. In October
2007 the federal appeals court resolved a dispute regarding the
appointment of lead class counsel. The lead plaintiffs
consolidated class action complaint will be due 45 days
after the district judge enters a revised order appointing lead
class counsel. The Company intends to defend the consolidated
action vigorously.
The Company has entered into indemnification agreements with
each of its present and former directors and officers. Under
these agreements, Broadcom is required to indemnify each such
director or officer against expenses, including attorneys
fees, judgments, fines and settlements, paid by such individual
in connection with the Options Derivative Actions, the Options
Class Actions and the pending SEC and
U.S. Attorneys Office investigations described below
(other than indemnified liabilities arising from willful
misconduct or conduct that is knowingly fraudulent or
deliberately dishonest).
SEC Formal Order of Investigation and United States
Attorneys Office Investigation. In June
2006 the Company received an informal request for information
from the staff of the Los Angeles regional office of the SEC
regarding its historical option granting practices. In December
2006 the SEC issued a formal order of investigation and a
subpoena for the production of documents. The SEC continues to
depose present and former Company employees, officers and
directors as part of its investigation. In July 2007 the Company
received a Wells Notice from the SEC in connection
with this investigation. The Chairman of the Board of Directors
and Chief Technical Officer of the Company, Dr. Henry
Samueli, also received a Wells Notice at that time. In August
2007 the Senior Vice President, Business Affairs and General
Counsel of the Company, David A. Dull, also received a Wells
Notice. The Wells Notices provide notification that the staff of
the SEC intends to recommend to the Commission that it bring a
civil action against the recipients for possible violations of
the securities laws. Based on discussions with the SEC staff,
the Company believes that the issues the staff intends to pursue
relate to the Companys historical option granting
processes and the accounting relating to those option grants.
Under the process established by the SEC, recipients have the
opportunity to respond in writing to a Wells Notice before the
SEC staff makes any formal recommendation to the Commission
regarding what action, if any, should be brought by the SEC. In
response to its Wells Notice, the Company has communicated with
the SEC staff in an effort to explore possible resolution, and
is awaiting further communication. The Company is continuing to
cooperate with the SEC, but does not know when the investigation
will be resolved or what, if any, actions the SEC may require
it, Dr. Samueli
and/or
Mr. Dull to take as part of that resolution.
In August 2006 the Company was informally contacted by the
U.S. Attorneys Office for the Central District of
California and asked to produce documents. In 2006 the Company
voluntarily provided documents and data to the U.S
Attorneys Office. In 2007 the Company has continued to
provide substantial amounts of documents and information to the
U.S. Attorneys Office on a voluntary basis. In
addition, the Company has produced documents pursuant to grand
jury subpoenas. The U.S. Attorneys Office continues
to interview present and former Company
23
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees, officers and directors as part of its investigation.
The Company is continuing to cooperate with the
U.S. Attorneys Office in its investigation. Any
action by the SEC, the U.S. Attorneys Office or other
governmental agency could result in civil or criminal sanctions
and/or fines
against the Company
and/or
certain of its current or former officers, directors
and/or
employees.
United States Attorneys Office Investigation and
Prosecution. In June 2005 the United States
Attorneys Office for the Northern District of California
commenced an investigation into the possible misuse of
proprietary competitor information by certain Broadcom
employees. In December 2005 one former employee was indicted for
fraud and related activity in connection with computers and
trade secret misappropriation. The former employee had been
immediately suspended in June 2005, after just two months
employment, when the Company learned about the government
investigation. Following an internal investigation, his
employment was terminated, nearly two months prior to the
indictment. The indictment does not allege any wrongdoing by
Broadcom, which is cooperating fully with the ongoing
investigation and the prosecution.
General. The foregoing discussion includes
material developments that occurred during the three and nine
months ended September 30, 2007 or thereafter in material
legal proceedings in which the Company
and/or its
subsidiaries are involved. For additional information regarding
certain of these legal proceedings, see Note 11 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2006.
The Company and its subsidiaries are also involved in other
legal proceedings, claims and litigation arising in the ordinary
course of business.
The pending proceedings involve complex questions of fact and
law and will require the expenditure of significant funds and
the diversion of other resources to prosecute and defend. The
results of legal proceedings are inherently uncertain, and
material adverse outcomes are possible. The resolution of
intellectual property litigation may require the Company to pay
damages for past infringement or to obtain a license under the
other partys intellectual property rights that could
require one-time license fees or running royalties, which could
adversely impact gross profit and gross margins in future
periods, or could prevent Broadcom from manufacturing or selling
some of its products or limit or restrict the type of work that
employees involved in such litigation may perform for Broadcom.
From time to time the Company may enter into confidential
discussions regarding the potential settlement of pending
litigation or other proceedings; however, there can be no
assurance that any such discussions will occur or will result in
a settlement. The settlement of any pending litigation or other
proceeding could require Broadcom to incur substantial
settlement payments and costs. In addition, the settlement of
any intellectual property proceeding may require the Company to
grant a license to certain of the Companys intellectual
property rights to the other party under a cross-license
agreement. If any of those events were to occur, Broadcoms
business, financial condition and results of operations could be
materially and adversely affected.
24
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement
You should read the following discussion and analysis in
conjunction with our Unaudited Condensed Consolidated Financial
Statements and the related Notes thereto contained in
Part I, Item 1 of 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
Securities and Exchange Commission, or SEC, including our Annual
Report on
Form 10-K
for the year ended December 31, 2006 and subsequent reports
on
Forms 10-Q
and 8-K,
which discuss our business in greater detail.
As a reminder, you should not rely on financial information
included in the reports on
Form 10-K,
Form 10-Q
and
Form 8-K
previously filed by Broadcom, the related opinions of our
independent registered public accounting firm, or earnings press
releases and similar communications issued by us, for periods
ended on or before March 31, 2006, all of which have been
superseded in their entirety by the information contained in our
amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and our amended
Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed
January 23, 2007.
The section entitled Risk Factors contained in
Part II, Item 1A of this Report, and similar
discussions in our other SEC filings, describe some of the
important risk factors that may affect our business, financial
condition, results of operations
and/or
liquidity. 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 purchase, hold or
sell our common stock.
All statements included or incorporated by reference in this
Report, other than statements or characterizations of historical
fact, are forward-looking statements. Examples of
forward-looking statements include, but are not limited to,
statements concerning projected net revenue, costs and expenses
and gross margin; our accounting estimates, assumptions and
judgments; the impact of the January 2007 restatement of our
financial statements for prior periods; estimates related to the
amount
and/or
timing of the expensing of unearned stock-based compensation
expense; our success in pending litigation; the demand for our
products; the effect that seasonality and volume fluctuations in
the demand for our customers consumer-oriented products
will have on our quarterly operating results; our dependence on
a few key customers for a substantial portion of our revenue;
our ability to scale operations in response to changes in demand
for existing products and services or the demand for new
products requested by our customers; the competitive nature of
and anticipated growth in our markets; our ability to migrate to
smaller process geometries; manufacturing, assembly and test
capacity; our ability to consummate acquisitions and integrate
their operations successfully; our potential needs for
additional capital; inventory and accounts receivable levels;
and the level of accrued rebates. These forward-looking
statements are based on our current expectations, estimates and
projections about our industry and business, managements
beliefs, and certain assumptions made by us, all of which are
subject to change. Forward-looking statements can often be
identified by words such as anticipates,
expects, intends, plans,
predicts, believes, seeks,
estimates, may, will,
should, would, could,
potential, continue,
ongoing, similar expressions, and variations or
negatives of these words. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual
results could differ materially and adversely from those
expressed in any forward-looking statements as a result of
various factors, some of which are listed under the section
Risk Factors contained in Part II, Item 1A
of this Report. These forward-looking statements speak only as
of the date of this Report. We undertake no obligation to revise
or update publicly any forward-looking statement for any reason,
except as otherwise required by law.
Overview
Broadcom Corporation is a major technology innovator and global
leader in semiconductors for wired and wireless communications.
Our products enable the delivery of voice, video, data and
multimedia to and throughout the home, the office and the mobile
environment. Broadcom provides the industrys broadest
portfolio of state-of-the-art
system-on-a-chip
and software solutions to manufacturers of computing and
networking equipment, digital entertainment and broadband access
products, and mobile devices. Our diverse product portfolio
includes solutions for digital cable, satellite and Internet
Protocol (IP) set-top boxes and media servers; high definition
television (HDTV); high definition DVD players and personal
video recording (PVR) devices;
25
cable and DSL modems and residential gateways; high-speed
transmission and switching for local, metropolitan, wide area
and storage networking; SystemI/O server solutions; broadband
network and security processors; wireless and personal area
networking; cellular communications; global positioning system
(GPS) applications; mobile multimedia and applications
processors; mobile power management; and Voice over Internet
Protocol (VoIP) gateway and telephony systems.
Net Revenue. We sell our products to leading
manufacturers of wired and wireless communications equipment in
each of our target markets. Because we leverage our technologies
across different markets, certain of our integrated circuits may
be incorporated into equipment used in multiple markets. We
utilize independent foundries and third-party subcontractors to
manufacture, assemble and test all of our semiconductor products.
Our net revenue is generated principally by sales of our
semiconductor products. We derive the remainder of our net
revenue predominantly from software licenses, development
agreements, support and maintenance agreements, data services
and cancellation fees. The majority of our sales occur through
the efforts of our direct sales force. The remaining balance of
our sales occurs through distributors.
The following table presents details of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Sales of semiconductor products
|
|
|
99.2
|
%
|
|
|
99.7
|
%
|
|
|
99.1
|
%
|
|
|
99.2
|
%
|
Other
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Sales made through direct sales force
|
|
|
83.9
|
%
|
|
|
87.5
|
%
|
|
|
84.8
|
%
|
|
|
84.2
|
%
|
Sales made through distributors
|
|
|
16.1
|
|
|
|
12.5
|
|
|
|
15.2
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The demand for our products 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:
|
|
|
|
|
general economic and market conditions in the semiconductor
industry and wired and wireless communications markets;
|
|
|
|
the timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory;
|
|
|
|
our ability to specify, develop or acquire, complete, introduce,
market and transition to volume production new products and
technologies in a cost effective and timely manner;
|
|
|
|
seasonality in the demand for consumer products into which our
products are incorporated;
|
|
|
|
the rate at which our present and future customers and end-users
adopt our products and technologies in our target
markets; and
|
|
|
|
the qualification, availability and pricing of competing
products and technologies and the resulting effects on sales and
pricing of our products.
|
For these and other reasons, our net revenue and results of
operations for the three months ended September 30, 2007
and prior periods may not necessarily be indicative of future
net revenue and results of operations.
26
From time to time, our key customers place large orders causing
our quarterly net revenue to fluctuate significantly. We expect
that these fluctuations will continue and that they may be
exaggerated by the increasing volume of our products that are
incorporated into consumer products, sales of which are
typically subject to greater seasonality and greater volume
fluctuations than non-consumer OEM products. We also maintain
inventory, or hubbing, arrangements with certain of our
customers. Pursuant to these arrangements we deliver products to
a customer or a designated third party warehouse based upon the
customers projected needs, but do not recognize product
revenue unless and until the customer reports that it has
removed our product from the warehouse to incorporate into its
end products. Historically we have had good visibility into
customer requirements and shipments within a quarter. However,
if a customer does not take our products under a hubbing
arrangement in accordance with the schedule it originally
provided to us, our predicted future revenue stream could vary
substantially from our forecasts and our results of operations
could be materially and adversely affected. Additionally, since
we own inventory that is physically located in a third
partys warehouse, our ability to effectively manage
inventory levels may be impaired, causing our total inventory
turns to decrease, which could increase expenses associated with
excess and obsolete product and negatively impact our cash flow.
Sales to our five largest customers, including sales to their
manufacturing subcontractors, as a percentage of net revenue
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Five largest customers as a group
|
|
|
37.6
|
%
|
|
|
47.6
|
%
|
|
|
41.5
|
%
|
|
|
46.5
|
%
|
Net revenue derived from all independent customers located
outside the United States, excluding foreign subsidiaries or
manufacturing subcontractors of customers that are headquartered
in the United States, as a percentage of total net revenue was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Asia (primarily in Japan, Korea, China and Taiwan)
|
|
|
30.0
|
%
|
|
|
20.2
|
%
|
|
|
26.4
|
%
|
|
|
19.7
|
%
|
Europe (primarily in France, Finland and the United Kingdom)
|
|
|
8.4
|
|
|
|
5.7
|
|
|
|
7.8
|
|
|
|
8.5
|
|
Other
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.8
|
%
|
|
|
26.3
|
%
|
|
|
34.7
|
%
|
|
|
28.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from shipments to international
destinations, as a percentage of total net revenue was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Asia (primarily in China, Hong Kong, Japan, Singapore and Taiwan)
|
|
|
81.9
|
%
|
|
|
79.7
|
%
|
|
|
81.7
|
%
|
|
|
78.9
|
%
|
Europe (primarily in Hungary, Sweden and Germany)
|
|
|
2.5
|
|
|
|
3.2
|
|
|
|
2.7
|
|
|
|
3.4
|
|
Other
|
|
|
3.8
|
|
|
|
2.6
|
|
|
|
3.7
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.2
|
%
|
|
|
85.5
|
%
|
|
|
88.1
|
%
|
|
|
86.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recently entered into arrangements that include multiple
deliverables, such as the sale of semiconductor products and
related data services. Under these arrangements, the services
may be provided without having a separate fair value
under Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or EITF
00-21. In that event, we will only recognize a portion of the
total revenue we receive from the customer during a quarter, and
will recognize the remaining revenue on a ratable basis over the
expected life of the service being provided. As we enter into
future multiple element arrangements, where we do
27
not have fair value of each deliverable, the portion of revenue
we recognize on a deferred basis may vary significantly in any
given quarter, which could cause even greater fluctuations in
our quarterly operating results.
All of our revenue to date has been denominated in
U.S. dollars.
Gross Margin. Our gross margin, or gross
profit as a percentage of net revenue, 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 and volume of product sales (including sales to
high volume customers);
|
|
|
|
the positions of our products in their respective life cycles;
|
|
|
|
the effects of competition;
|
|
|
|
the effects of competitive pricing programs;
|
|
|
|
manufacturing cost efficiencies and inefficiencies;
|
|
|
|
fluctuations in direct product costs such as wafer pricing and
assembly, packaging and testing costs, and overhead costs;
|
|
|
|
product warranty costs;
|
|
|
|
provisions for excess or obsolete inventories;
|
|
|
|
amortization of purchased intangible assets;
|
|
|
|
licensing and royalty arrangements; and
|
|
|
|
stock-based compensation expense.
|
Net Income (Loss). Our net income (loss) 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:
|
|
|
|
|
stock-based compensation expense;
|
|
|
|
required levels of research and development and other operating
costs;
|
|
|
|
in-process research and development, or IPR&D;
|
|
|
|
litigation costs;
|
|
|
|
settlement costs;
|
|
|
|
the loss of interest income resulting from expenditures on
repurchases of our Class A common stock;
|
|
|
|
impairment of goodwill and other intangible assets;
|
|
|
|
income tax benefits from adjustments to tax reserves of foreign
subsidiaries;
|
|
|
|
gain (loss) on strategic investments; and
|
|
|
|
restructuring costs or reversals thereof.
|
In the three months ended September 30, 2007 our net income
was $27.8 million as compared to $110.2 million in the
three months ended September 30, 2006, a difference of
$82.4 million. This decrease in profitability was the
direct result of an $84.3 million increase in operating
expenses due principally to an increase in the number of
employees engaged in research and development activities,
resulting from both direct hiring and acquisitions since
September 30, 2006, as well as a charge for IPR&D in
the amount of $5.0 million. This was partially offset by
additional gross profit as a result of the $47.4 million
increase in net revenue in the three months ended September 30,
2007 as compared to the three months ended September 30,
2006.
In the nine months ended September 30, 2007 our net income
was $123.0 million as compared to $334.0 million in
the nine months ended September 30, 2006, a difference of
$211.0 million. This decrease in profitability was the
direct result of a $204.8 million increase in operating
expenses due principally to an increase in the number of
employees engaged in research and development activities,
resulting from both direct hiring and
28
acquisitions since September 30, 2006, as well as an
increase in charges for IPR&D in the amount of
$10.3 million.
Product Cycles. The cycle for test, evaluation
and adoption of our products by customers can range from three
to more than nine months, with an additional three to more than
twelve months before a customer commences volume production of
equipment incorporating our products. Due to this lengthy sales
cycle, we may experience significant delays from the time we
incur expenses for research and development, selling, general
and administrative efforts, and investments in inventory, to the
time we generate corresponding revenue, if any. The rate of new
orders may vary significantly from month to month and quarter to
quarter. If anticipated sales or shipments in any quarter do not
occur when expected, expenses and inventory levels could be
disproportionately high, and our results of operations for that
quarter, and potentially for future quarters, would be
materially and adversely affected.
Acquisition Strategy. An element of our
business strategy involves the acquisition of businesses,
assets, products or technologies that allow us to reduce the
time required to develop new technologies and products and bring
them to market, incorporate enhanced functionality into and
complement our existing product offerings, augment our
engineering workforce, and enhance our technological
capabilities. We plan to continue to evaluate strategic
opportunities as they arise, including acquisitions and other
business combination transactions, strategic relationships,
capital infusions and the purchase or sale of assets. See
Note 3 of Notes to Unaudited Condensed Consolidated
Financial Statements for information related to the acquisitions
made during the three and nine months ended September 30,
2007.
Business Enterprise Segments. We operate in
one reportable operating segment, wired and wireless broadband
communications. Statement of Financial Accounting Standards, or
SFAS, No. 131, Disclosures about Segments of an
Enterprise and Related Information, or SFAS 131,
establishes standards for the way public business enterprises
report information about operating segments in annual
consolidated financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Although we had four
operating segments at September 30, 2007, under the
aggregation criteria set forth in SFAS 131 we operate in
only one reportable operating segment, wired and wireless
broadband communications.
Under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS 131, if the segments
have similar economic characteristics, and if the segments are
similar in each of the following areas:
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the nature of products and services;
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the nature of the production processes;
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the type or class of customer for their products and
services; and
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the methods used to distribute their products or provide their
services.
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We meet each of the aggregation criteria for the following
reasons:
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the sale of integrated circuits is the only material source of
revenue for each of our four operating segments;
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the integrated circuits sold by each of our operating segments
use the same standard CMOS manufacturing processes;
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the integrated circuits marketed by each of our operating
segments are sold to one type of customer: manufacturers of
wired and wireless communications equipment, which incorporate
our integrated circuits into their electronic products; and
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all of our integrated circuits are sold through a centralized
sales force and common wholesale distributors.
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All of our operating segments share similar economic
characteristics as they have a similar long term business model,
operate at gross margins similar to our consolidated gross
margin, and have similar research and development expenses and
similar selling, general and administrative expenses. The causes
for variation among each of our operating segments are the same
and include factors such as (i) life cycle and price and
cost fluctuations,
29
(ii) number of competitors, (iii) product
differentiation and (iv) size of market opportunity.
Additionally, each operating segment is subject to the overall
cyclical nature of the semiconductor industry. The number and
composition of employees and the amounts and types of tools and
materials required are similar for each operating segment.
Finally, even though we periodically reorganize our operating
segments based upon changes in customers, end markets or
products, acquisitions, long- term growth strategies, and the
experience and bandwidth of the senior executives in charge, the
common financial goals for each operating segment remain
constant.
Because we meet each of the criteria set forth in SFAS 131
and our four operating segments as of September 30,
2007 share similar economic characteristics, we have
aggregated our results of operations into one reportable
operating segment.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses
in the reporting period. We regularly evaluate our estimates and
assumptions related to allowances for doubtful accounts, sales
returns and allowances, warranty reserves, inventory reserves,
stock-based compensation expense, goodwill and purchased
intangible asset valuations, strategic investments, deferred
income tax asset valuation allowances and uncertain tax
positions, restructuring costs, litigation and other loss
contingencies. We base our estimates and assumptions on current
facts, historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The
actual results experienced by us may differ materially and
adversely from our estimates. To the extent there are material
differences between our estimates and the actual results, our
future results of operations will be affected.
We believe the following either are (i) critical accounting
policies that require us to make significant judgments and
estimates in the preparation of our consolidated financial
statements or (ii) other key accounting policies, such as
revenue recognition, that generally do not require us to make
estimates or judgments that are difficult or subjective:
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Net Revenue. We recognize product revenue when
the following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has
occurred, (iii) our price to the customer is fixed or
determinable and (iv) collection of the resulting accounts
receivable is reasonably assured. These criteria are usually met
at the time of product shipment. However, we do not recognize
revenue until all customer acceptance requirements have been met
and no significant obligations remain, when applicable. Customer
purchase orders
and/or
contracts are generally used to determine the existence of an
arrangement. Shipping documents and the completion of any
customer acceptance requirements, when applicable, are used to
verify product delivery or that services have been rendered. We
assess whether a price is fixed or determinable based upon the
payment terms associated with the transaction and whether the
sales price is subject to refund or adjustment. We assess the
collectibility of our accounts receivable based primarily upon
the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customers payment
history.
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For a limited number of arrangements that include multiple
deliverables, such as sales of semiconductor products and
services, we allocate revenue based on the relative fair values
of the individual components. In the absence of fair value for
an undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a deferral of revenue
and costs for the delivered element until the undelivered
element has been fulfilled. In the case that the undelivered
element is a service, the revenue and costs applicable to both
the delivered and undelivered elements are recorded ratably over
the respective service period. If the undelivered element is
essential to the functionality of the delivered element, no
revenue or costs are recognized until the undelivered element is
delivered.
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A portion of our sales are made through distributors under
agreements allowing for pricing credits
and/or
rights of return. Product revenue on sales made through these
distributors is not recognized until the distributors ship the
product to their customers. We also maintain inventory, or
hubbing, arrangements
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with certain of our customers. Pursuant to these arrangements we
deliver products to a customer or a designated third party
warehouse based upon the customers projected needs, but do
not recognize product revenue unless and until the customer
reports that it has removed our product from the warehouse to
incorporate into its end products. Historically we have had good
visibility into customer requirements and shipments within a
quarter. However, if a customer does not take our products under
a hubbing arrangement in accordance with the schedule it
originally provided to us, our future revenue stream could vary
substantially from our forecasts and our results of operations
could be materially and adversely affected.
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Sales Returns and Allowance for Doubtful
Accounts. We record reductions to revenue for
estimated product returns and pricing adjustments, such as
competitive pricing programs and rebates, in the same period
that the related revenue is recorded. The amount of these
reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate
agreements, and other factors known at the time. Additional
reductions to revenue would result if actual product returns or
pricing adjustments exceed our estimates. We also maintain an
allowance for doubtful accounts for estimated losses resulting
from the inability of customers to make required payments. If
the financial condition of any of our customers were to
deteriorate, resulting in an impairment of its ability to make
payments, additional allowances could be required.
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Inventory and Warranty Reserves. We establish
inventory reserves for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost
of inventory and its estimated realizable value based upon
assumptions about future demand and market conditions. If actual
demand and market conditions are less favorable than those
projected by management, additional inventory reserves could be
required. Under the hubbing arrangements that we maintain with
certain customers, we own inventory that is physically located
in a third partys warehouse. As a result, our ability to
effectively manage inventory levels may be impaired, which would
cause our total inventory turns to decrease. In that event, our
expenses associated with excess and obsolete inventory could
increase and our cash flow could be negatively impacted. Our
products typically carry a one to three year warranty. We
establish reserves for estimated product warranty costs at the
time revenue is recognized. Although we engage in extensive
product quality programs and processes, our warranty obligation
has been and may in the future be affected by product failure
rates, product recalls, repair or field replacement costs and
additional development costs incurred in correcting any product
failure, as well as possible claims for consequential costs.
Should actual product failure rates, use of materials or service
delivery costs differ from our estimates, additional warranty
reserves could be required. In that event, our gross profit and
gross margins would be reduced.
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Stock-Based Compensation Expense. Effective
January 1, 2006 we adopted SFAS 123R, which requires
all share-based payments, including grants of stock options,
restricted stock units and employee stock purchase rights, to be
recognized in our financial statements based upon their
respective grant date fair values. Under this standard, the fair
value of each employee stock option and employee stock purchase
right is estimated on the date of grant using an option pricing
model that meets certain requirements. We currently use the
Black-Scholes option pricing model to estimate the fair value of
our stock options and stock purchase rights. The Black-Scholes
model meets the requirements of SFAS 123R but the fair
values generated by the model may not be indicative of the
actual fair values of our equity awards as it does not consider
certain factors important to those awards to employees, such as
continued employment and periodic vesting requirements as well
as limited transferability. The determination of the fair value
of share-based payment awards utilizing the Black-Scholes model
is affected by our stock price and a number of assumptions,
including expected volatility, expected life, risk-free interest
rate and expected dividends. We use the implied volatility for
traded options on our stock as the expected volatility
assumption required in the Black-Scholes model. Our selection of
the implied volatility approach is based on the availability of
data regarding actively traded options on our stock as we
believe that implied volatility is more representative than
historical volatility. The expected life of the stock options is
based on historical and other economic data trended into the
future. The risk-free interest rate assumption is based on
observed interest rates appropriate for the terms of our stock
options and stock purchase rights. The dividend yield assumption
is based on our history and expectation of dividend payouts. The
fair value of our restricted stock units is
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31
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based on the closing market price of our Class A common
stock on the date of grant. Stock-based compensation expense
recognized in our financial statements in 2006 and thereafter is
based on awards that are ultimately expected to vest. We will
evaluate the assumptions used to value stock awards on a
quarterly basis. If factors change and we employ different
assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past. If there
are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase
or cancel any remaining unearned stock-based compensation
expense. To the extent that we grant additional equity
securities to employees or we assume unvested securities in
connection with any acquisitions, our stock-based compensation
expense will be increased by the additional unearned
compensation resulting from those additional grants or
acquisitions.
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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. The amounts and useful lives
assigned to intangible assets acquired, other than goodwill,
impact the amount and timing of future amortization, and the
amount assigned to in-process research and development is
expensed immediately. The value of our intangible assets,
including goodwill, could be impacted by future adverse changes
such as: (i) any future declines in our operating results,
(ii) a decline in the valuation of technology company
stocks, including the valuation of our common stock,
(iii) another significant slowdown in the worldwide economy
or the semiconductor industry, or (iv) any failure to meet
the performance projections included in our forecasts of future
operating results. We evaluate these assets, including purchased
intangible assets deemed to have indefinite lives, on an annual
basis in the fourth quarter or more frequently if we believe
indicators of impairment exist. In the process of our annual
impairment review, we primarily use the income approach
methodology of valuation that includes the discounted cash flow
method, as well as other generally accepted valuation
methodologies, to determine the fair value of our intangible
assets. Significant management judgment is required in the
forecasts of future operating results that are used in the
discounted cash flow method of valuation. The estimates we have
used are consistent with the plans and estimates that we use to
manage our business. It is possible, however, that the plans may
change and estimates used may prove to be inaccurate. If our
actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used
to assess the recoverability of these assets, we could incur
additional impairment charges.
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Deferred Taxes and Uncertain Tax Positions. We
utilize the liability method of accounting for income taxes. We
record a valuation allowance to reduce our deferred tax assets
to the amount that we believe is more likely than not to be
realized. In assessing the need for a valuation allowance, we
consider all positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies, and recent financial
performance. Forming a conclusion that a valuation allowance is
not required is difficult when there is negative evidence such
as cumulative losses in recent years. As a result of our
cumulative losses in the U.S. and certain foreign
jurisdictions and the full utilization of our loss carryback
opportunities, we have concluded that a full valuation allowance
against our net deferred tax assets is appropriate in such
jurisdictions. In certain other foreign jurisdictions where we
do not have cumulative losses, we record valuation allowances to
reduce our net deferred tax assets to the amount we believe is
more likely than not to be realized. In the future, if we
realize a deferred tax asset that currently carries a valuation
allowance, we may record a reduction to income tax expense in
the period of such realization. In July 2006 the Financial
Accounting Standards Board, or FASB, issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, or
FIN 48, which requires income tax positions to meet a
more-likely-than-not recognition threshold to be recognized in
the financial statements. Under FIN 48, tax positions that
previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not threshold
should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. As a
multinational corporation, we are subject to taxation in many
jurisdictions, and the calculation of our tax liabilities
involves dealing with uncertainties in the application of
complex tax laws and regulations in various tax jurisdictions.
The application of tax laws and regulations is subject to legal
and factual interpretation, judgment and uncertainty. Tax laws
and regulations themselves are subject to
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32
change as a result of changes in fiscal policy, changes in
legislation, the evolution of regulations and court rulings.
Therefore, the actual liability for U.S. or foreign taxes
may be materially different from our estimates, which could
result in the need to record additional tax liabilities or
potentially to reverse previously recorded tax liabilities.
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Litigation and Settlement Costs. From time to
time, we are involved in disputes, litigation and other legal
proceedings. We prosecute and defend these matters aggressively.
However, there are many uncertainties associated with any
litigation, and we cannot assure you that these actions or other
third party claims against us will be resolved without costly
litigation
and/or
substantial settlement charges. In addition, the resolution of
intellectual property litigation may require us to pay damages
for past infringement or to obtain a license under the other
partys intellectual property rights that could require
one-time license fees or running royalties, which could
adversely impact gross profit and gross margins in future
periods, or could prevent us from manufacturing or selling some
of our products or limit or restrict the type of work that
employees involved in such litigation may perform for Broadcom.
If any of those events were to occur, our business, financial
condition and results of operations could be materially and
adversely affected. We record a charge equal to at least the
minimum estimated liability for a loss contingency when both of
the following conditions are met: (i) information available
prior to issuance of the financial statements indicates that it
is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and
(ii) the range of loss can be reasonably estimated.
However, the actual liability in any such litigation may be
materially different from our estimates, which could result in
the need to record additional costs.
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Results
of Operations for the Three and Nine Months Ended
September 30, 2007 Compared to the Three and Nine Months
Ended September 30, 2006
The following table sets forth certain condensed consolidated
statements of income data expressed as a percentage of net
revenue for the periods indicated:
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Three Months
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Nine Months
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Ended
|
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Ended
|
|
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September 30,
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September 30,
|
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2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
|
100.0
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%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
49.1
|
|
|
|
49.9
|
|
|
|
48.9
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50.9
|
|
|
|
50.1
|
|
|
|
51.1
|
|
|
|
51.1
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
37.1
|
|
|
|
30.2
|
|
|
|
35.8
|
|
|
|
29.3
|
|
Selling, general and administrative
|
|
|
13.1
|
|
|
|
13.9
|
|
|
|
13.6
|
|
|
|
13.1
|
|
Amortization of purchased intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
In-process research and development
|
|
|
0.5
|
|
|
|
|
|
|
|
0.6
|
|
|
|
0.2
|
|
Impairment of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
0.2
|
|
|
|
6.0
|
|
|
|
1.1
|
|
|
|
8.4
|
|
Interest income, net
|
|
|
3.3
|
|
|
|
3.6
|
|
|
|
3.7
|
|
|
|
3.1
|
|
Other income (expense), net
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3.3
|
|
|
|
9.6
|
|
|
|
4.7
|
|
|
|
11.6
|
|
Provision (benefit) for income taxes
|
|
|
0.4
|
|
|
|
(2.6
|
)
|
|
|
0.2
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.9
|
%
|
|
|
12.2
|
%
|
|
|
4.5
|
%
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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33
The following table presents details of total stock-based
compensation expense as a percentage of net revenue included
in each functional line item in the condensed consolidated
statements of income data above:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Cost of revenue
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
Research and development
|
|
|
10.0
|
|
|
|
8.7
|
|
|
|
9.6
|
|
|
|
8.5
|
|
Selling, general and administrative
|
|
|
3.9
|
|
|
|
4.2
|
|
|
|
3.9
|
|
|
|
3.9
|
|
Net
Revenue, Cost of Revenue and Gross Profit
The following tables present net revenue, cost of revenue and
gross profit for the three and nine months ended
September 30, 2007 and 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
949,959
|
|
|
|
100.0
|
%
|
|
$
|
902,586
|
|
|
|
100.0
|
%
|
|
$
|
47,373
|
|
|
|
5.2
|
%
|
Cost of revenue
|
|
|
465,970
|
|
|
|
49.1
|
|
|
|
450,164
|
|
|
|
49.9
|
|
|
|
15,806
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
483,989
|
|
|
|
50.9
|
%
|
|
$
|
452,422
|
|
|
|
50.1
|
%
|
|
$
|
31,567
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
2,749,360
|
|
|
|
100.0
|
%
|
|
$
|
2,744,364
|
|
|
|
100.0
|
%
|
|
$
|
4,996
|
|
|
|
0.2
|
%
|
Cost of revenue
|
|
|
1,343,956
|
|
|
|
48.9
|
|
|
|
1,341,747
|
|
|
|
48.9
|
|
|
|
2,209
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,405,404
|
|
|
|
51.1
|
%
|
|
$
|
1,402,617
|
|
|
|
51.1
|
%
|
|
$
|
2,787
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue. Our revenue is generated
principally by sales of our semiconductor products. Our
broadband communications products include solutions for cable
modems, DSL applications, digital cable, direct broadcast
satellite and IP set-top boxes, digital TVs and high definition
DVD and personal video recording devices. Our enterprise
networking products include Ethernet transceivers, controllers,
switches, broadband network and security processors and server
chipsets. Our mobile and wireless products include wireless LAN,
cellular, GPS, Bluetooth, mobile multimedia and applications
processors, mobile power management and VoIP solutions.
Net revenue is revenue less reductions for rebates and
provisions for returns and allowances.
The following table presents net revenue from each of our major
target markets and its respective contribution to net revenue in
the three months ended September 30, 2007 as compared to
the three months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
361,171
|
|
|
|
38.0
|
%
|
|
$
|
358,865
|
|
|
|
39.8
|
%
|
|
$
|
2,306
|
|
|
|
0.6
|
%
|
Enterprise networking
|
|
|
285,896
|
|
|
|
30.1
|
|
|
|
287,754
|
|
|
|
31.8
|
|
|
|
(1,858
|
)
|
|
|
(0.6
|
)
|
Mobile and wireless
|
|
|
302,892
|
|
|
|
31.9
|
|
|
|
255,967
|
|
|
|
28.4
|
|
|
|
46,925
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
949,959
|
|
|
|
100.0
|
%
|
|
$
|
902,586
|
|
|
|
100.0
|
%
|
|
$
|
47,373
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The increase in net revenue from our broadband communications
target market resulted primarily from an increase in net revenue
for our products for direct broadcast satellite set-top boxes
and digital TVs, offset in part by a decrease in net revenue for
our products for digital cable set-top boxes. The decrease in
net revenue from our enterprise networking target market
resulted primarily from a decrease in net revenue attributable
to our controller and broadband processor products, offset in
part by an increase in net revenue attributable to our Ethernet
switch products. The increase in net revenue from our mobile and
wireless target market resulted primarily from an increase in
demand for our Bluetooth and wireless LAN product offerings,
offset in part by a decrease in demand for our mobile multimedia
product offerings.
The following table presents net revenue from each of our major
target markets and its respective contribution to net revenue in
the nine months ended September 30, 2007 as compared to the
nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
1,058,461
|
|
|
|
38.5
|
%
|
|
$
|
1,047,120
|
|
|
|
38.2
|
%
|
|
$
|
11,341
|
|
|
|
1.1
|
%
|
Enterprise networking
|
|
|
847,577
|
|
|
|
30.8
|
|
|
|
898,557
|
|
|
|
32.7
|
|
|
|
(50,980
|
)
|
|
|
(5.7
|
)
|
Mobile and wireless
|
|
|
843,322
|
|
|
|
30.7
|
|
|
|
798,687
|
|
|
|
29.1
|
|
|
|
44,635
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,749,360
|
|
|
|
100.0
|
%
|
|
$
|
2,744,364
|
|
|
|
100.0
|
%
|
|
$
|
4,996
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue in our broadband communications
target market resulted from an increase in net revenue for our
products for digital TVs and direct broadcast satellite set-top
boxes, offset by a decrease in net revenue from our products for
digital cable set-top boxes and DSL applications. The decrease
in net revenue from our enterprise networking target market
resulted primarily from a decrease in net revenue from our
controller products. The increase in net revenue from our mobile
and wireless target market resulted primarily from an increase
in demand for our Bluetooth and wireless LAN product offerings,
offset in part by a decrease in demand for our mobile multimedia
and cellular product offerings.
The following table presents net revenue from each of our major
target markets and its respective contribution to net revenue in
the three months ended September 30, 2007 as compared to
the three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
361,171
|
|
|
|
38.0
|
%
|
|
$
|
347,995
|
|
|
|
38.8
|
%
|
|
$
|
13,176
|
|
|
|
3.8
|
%
|
Enterprise networking
|
|
|
285,896
|
|
|
|
30.1
|
|
|
|
283,733
|
|
|
|
31.6
|
|
|
|
2,163
|
|
|
|
0.8
|
|
Mobile and wireless
|
|
|
302,892
|
|
|
|
31.9
|
|
|
|
266,192
|
|
|
|
29.6
|
|
|
|
36,700
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
949,959
|
|
|
|
100.0
|
%
|
|
$
|
897,920
|
|
|
|
100.0
|
%
|
|
$
|
52,039
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue in our broadband communications
target market resulted primarily from an increase in net revenue
for our products for digital TVs and broadband modems, offset in
part by a decrease in net revenue from our products for digital
set-top boxes. The slight increase in net revenue from our
enterprise networking target market resulted primarily from an
increase in net revenue from our controller products as a result
of increased customer orders due to delays at a particular
competitor, offset in part by a decrease in net revenue
attributable to our Ethernet switch products as a result of the
normalization of a large purchase in the prior quarter. The
increase in net revenue from our mobile and wireless target
market resulted primarily from strong growth driven by new
products and customer ramps for our Bluetooth solutions and
strength in wireless LAN product offerings, offset in part by a
decrease in demand for our mobile multimedia product offerings.
35
We currently anticipate that total net revenue in the three
months ending December 31, 2007 will be approximately
$960.0 million to $990.0 million, as compared to the
$950.0 million achieved in the three months ended
September 30, 2007. This projection does not include any
revenue that we may record as a result of the patent license
agreement with a wireless network operator that we entered into
in July 2007. We believe growth will come primarily from our
broadband communications and mobile and wireless target markets.
We recorded rebates to certain customers in the amounts of
$42.1 million and $69.4 million in the three months
ended September 30, 2007 and 2006, respectively, and
$157.8 million and $180.5 million in the nine months
ended September 30, 2007 and 2006, respectively. We account
for rebates in accordance with Emerging Issues Task Force Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), and,
accordingly, record reductions to revenue for rebates in the
same period that the related revenue is recorded. The amount of
these reductions is based upon the terms included in our various
rebate agreements. We anticipate that accrued rebates will vary
in future periods based upon the level of overall sales to
customers that participate in our rebate programs and as
specific rebate programs contractually end and unclaimed rebates
are no longer subject to payment.
Cost of Revenue and Gross Profit. Cost of
revenue includes the cost of purchasing finished silicon wafers
manufactured by independent foundries, costs associated with our
purchase of assembly, test and quality assurance services and
packaging materials for semiconductor products, amortization of
purchased technology, and manufacturing overhead, including
costs of personnel and equipment associated with manufacturing
support, product warranty costs, provisions for excess or
obsolete inventories, and stock-based compensation expense for
personnel engaged in manufacturing support.
The increase in absolute dollars of gross profit in the three
months ended September 30, 2007 as compared to the three
months ended September 30, 2006 resulted primarily from the
5.2% increase in net revenue and an increase in gross margin.
Gross margin increased from 50.1% in the three months ended
September 30, 2006 to 50.9% in the three months ended
September 30, 2007. The primary factors that contributed to
the increase in gross margin in the three months ended
September 30, 2007 were: (i) an increase in product
margin due to a reduction in product costs, (ii) a shift in
product mix and (iii) the reversal of rebates in the amount
of $6.5 million related to unclaimed rebates. Gross profit
and gross margin were relatively flat in the nine months ended
September 30, 2007 and 2006. For a discussion of
stock-based compensation included in cost of revenue, see
Stock-Based Compensation Expense, below.
Gross margin has been and will likely continue to be impacted by
our product mix and volume of product sales, including sales to
high volume customers, competitive pricing programs,
fluctuations in silicon wafer costs and assembly, packaging and
testing costs, competitive pricing requirements, product
warranty costs, provisions for excess and obsolete inventories,
the position of our products in their respective life cycles,
and the introduction of products with lower margins, among other
factors. We anticipate that our gross margin in the three months
ending December 31, 2007 will decrease slightly as compared
to the three months ended September 30, 2007 as we continue
to ramp a number of new products to new and existing customers.
This gross margin does not include any revenue that we may
record as a result of the patent license agreement that we
entered into in July 2007. Typically our new products have lower
gross margins until we commence volume production and launch
lower cost revisions of such products enabling us to benefit
from economies of scale and more efficient designs. Our gross
margin may also be impacted by additional stock-based
compensation expense and changes therein, as discussed below,
and the amortization of purchased intangible assets related to
future acquisitions.
36
Research
and Development and Selling, General and Administrative
Expenses
The following tables present research and development and
selling, general and administrative expenses for the three and
nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and development
|
|
$
|
352,283
|
|
|
|
37.1
|
%
|
|
$
|
272,565
|
|
|
|
30.2
|
%
|
|
$
|
79,718
|
|
|
|
29.2
|
%
|
Selling, general and administrative
|
|
|
124,907
|
|
|
|
13.1
|
|
|
|
125,281
|
|
|
|
13.9
|
|
|
|
(374
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and development
|
|
$
|
985,223
|
|
|
|
35.8
|
%
|
|
$
|
804,283
|
|
|
|
29.3
|
%
|
|
$
|
180,940
|
|
|
|
22.5
|
%
|
Selling, general and administrative
|
|
|
373,413
|
|
|
|
13.6
|
|
|
|
360,162
|
|
|
|
13.1
|
|
|
|
13,251
|
|
|
|
3.7
|
|
Research and Development Expense. Research and
development expense consists primarily of salaries and related
costs of employees engaged in research, design and development
activities, including stock-based compensation expense. Research
and development expense also includes costs related to
engineering design tools and computer hardware, mask and
prototyping costs, subcontracting costs and facilities expenses.
The increase in research and development expense in the three
and nine months ended September 30, 2007 as compared to the
three and nine months ended September 30, 2006 resulted
primarily from an increase of $32.9 million and
$89.7 million, respectively, in personnel-related expenses
and an increase of $16.4 million and $29.3 million,
respectively, in stock-based compensation expense. These
increases are primarily attributable to an increase in the
number of employees engaged in research and development
activities since September 30, 2006, resulting from both
direct hiring and acquisitions. Employees engaged in research
and development activities at September 30, 2007 increased
to 4,512, or by 24.2% over the previous twelve months. We also
had increases in facilities expense and costs related to
engineering design tools and computer hardware that were both
attributable to the increase in headcount. In addition,
facilities costs increased due to the 2007 build-out and
relocation of our Irvine facilities. There were also additional
mask and prototyping costs during the three and nine months
ended September 30, 2007 due to the transition to 65 nm
products. These costs usually vary from period to period
depending on the timing of development and tape-out of various
products. For a further discussion of stock-based compensation
included in research and development expense, see
Stock-Based Compensation Expense, below.
Based upon past experience, we anticipate that research and
development expense will continue to increase in 2008 as we
ready a number of design wins to become production ready and
over the long term as a result of growth in, and the
diversification of, the markets we serve, new product
opportunities, changes in our compensation policies, and any
expansion into new markets and technologies. We anticipate that
research and development expense in the three months ending
December 31, 2007 will increase from the
$352.3 million incurred in the three months ended
September 30, 2007 due to our continued investment in new
products and 65 nanometer process technology, as well as
additional expenses related to the hiring of additional
personnel.
We remain committed to significant research and development
efforts to extend our technology leadership in the wired and
wireless communications markets in which we operate. We
currently hold more than 2,300 U.S. and 1,000 foreign
patents, and we maintain an active program of filing for and
acquiring additional U.S. and foreign patents in wired and
wireless communications and other fields.
Selling, General and Administrative
Expense. Selling, general and administrative
expense consists primarily of personnel-related expenses,
including stock-based compensation expense, legal and other
professional fees, facilities expenses and communications
expenses.
37
The slight decrease in selling, general and administrative
expense in the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006
resulted primarily from a decrease of $9.4 million in legal
fees, offset in part by a $7.1 million increase in
personnel-related expenses. The increase in selling, general and
administrative expense in the nine months ended
September 30, 2007 as compared to the nine months ended
September 30, 2006 resulted primarily from an increase of
$16.7 million in personnel-related expenses, offset in part
by a $9.2 million decrease in legal fees. This increase in
personnel-related expenses is primarily attributable to an
increase in the number of employees engaged in selling, general
and administrative activities since September 30, 2006,
resulting from both direct hiring and acquisitions. Employees
engaged in selling, general and administrative activities
increased to 1,184, or by 12.9% over the previous twelve months.
In addition, facilities costs increased due to the 2007
build-out and relocation of our Irvine facilities. For a
discussion of stock-based compensation included in selling,
general and administrative expense, see Stock-Based
Compensation Expense, below. For further discussion of
litigation matters, see Note 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
Based upon past experience, we anticipate that selling, general
and administrative expense will continue to increase over the
long term resulting from any expansion of our operations through
periodic changes in our infrastructure, changes in our
compensation policies, acquisition and integration activities,
international operations, and current and future litigation. We
anticipate that selling, general and administrative expense in
the three months ending December 31, 2007 will be slightly
higher as compared to the $124.9 million incurred in the
three months ended September 30, 2007.
Stock-Based
Compensation Expense
The following table presents details of total stock-based
compensation expense that is included in each functional
line item in our unaudited condensed consolidated statements of
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
7,214
|
|
|
$
|
5,742
|
|
|
$
|
19,889
|
|
|
$
|
19,133
|
|
Research and development
|
|
|
94,619
|
|
|
|
78,191
|
|
|
|
263,882
|
|
|
|
234,616
|
|
Selling, general and administrative
|
|
|
37,023
|
|
|
|
37,595
|
|
|
|
106,256
|
|
|
|
108,230
|
|
The amount of unearned stock-based compensation currently
estimated to be expensed from 2007 through 2011 related to
unvested share-based payment awards at September 30, 2007
is $1.037 billion. Of this amount, $128.1 million,
$405.2 million, $293.5 million, $165.5 million
and $45.1 million are currently estimated to be recorded in
the remainder of 2007, and in 2008, 2009, 2010 and 2011,
respectively. The weighted-average period over which the
unearned stock-based compensation is expected to be recognized
is approximately 1.5 years. Approximately 96% of the total
unearned stock-based compensation at September 30, 2007
will be expensed by the end of 2010. The increase in unearned
stock-based compensation of $207.1 million at
September 30, 2007 from the $829.9 million balance at
December 31, 2006 was primarily the result of the grant of
employee stock options to purchase 20.3 million shares of
our common stock, the award of 11.3 million restricted
stock units, and the accumulation of rights to purchase
6.3 million shares of our common stock by employees
participating in our employee stock purchase program, offset in
part by stock-based compensation of $390.0 million expensed
during the nine months ended September 30, 2007. If there
are any modifications or cancellations of the underlying
unvested awards, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense.
Future stock-based compensation expense and unearned stock-based
compensation will increase to the extent that we grant
additional equity awards to employees or assume unvested equity
awards in connection with acquisitions.
Charges
Related to the Voluntary Review of our Equity Award
Practices
In connection with our equity award review, the results of which
were reported in January 2007, we determined the accounting
measurement dates for most of our options granted between June
1998 and May 2003 covering options to purchase
232.9 million shares of our Class A or Class B
common stock, differed from the
38
measurement dates previously used for such awards. As a result,
there are potential adverse tax consequences that may apply to
holders of affected options. By amending or replacing those
options, the potential adverse tax consequences could be
eliminated.
In March 2007 we offered to amend or replace affected options by
adjusting the exercise price of each such option to the lower of
(i) the fair market value per share of our Class A
common stock on the revised measurement date applied to that
option as a result of our equity award review or (ii) the
closing selling price per share of our Class A common stock
on the date on which the option would be amended. If the
adjusted exercise price for an affected option was lower than
the original exercise price, that option was not amended but
instead was replaced with a new option that had the same
exercise price, vesting schedule and expiration date as the
affected option, but a new grant date. The offer expired
April 20, 2007. Participants whose options were amended
pursuant to the offer are entitled to a special cash payment
with respect to those options. The amount payable will be
determined by multiplying (i) the amount of the increase in
exercise price by (ii) the number of shares for which
options were amended. We will make payments of approximately
$29.6 million in January 2008 to reimburse the affected
optionholders for the increases in their exercise prices. A
liability has been recorded for these payments and is included
in wages and related benefits as of September 30, 2007.
In accordance with SFAS 123R, we recorded total estimated
charges of $3.4 million in the nine months ended
September 30, 2007 and a reduction of additional paid-in
capital in the amount of $26.2 million in connection with
the offer. Charges of $0.1 million, $1.5 million and
$1.8 million are included in cost of revenue, research and
development expense and selling, general and administrative
expense, respectively, as wages and related benefits for the
nine months ended September 30, 2007.
Amortization
of Purchased Intangible Assets
The following table presents details of the amortization of
purchased intangible assets included in each expense
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,935
|
|
|
$
|
2,314
|
|
|
$
|
9,551
|
|
|
$
|
8,039
|
|
Operating expense
|
|
|
314
|
|
|
|
329
|
|
|
|
843
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,249
|
|
|
$
|
2,643
|
|
|
$
|
10,394
|
|
|
$
|
10,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of the Companys
future amortization of purchased intangible assets. If we
acquire additional purchased intangible assets in the future,
our cost of revenue or operating expenses will be increased by
the amortization of those assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets Amortization by Year
|
|
|
|
Remainder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of 2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
3,936
|
|
|
$
|
15,738
|
|
|
$
|
15,263
|
|
|
$
|
12,527
|
|
|
$
|
1,023
|
|
|
$
|
|
|
|
$
|
48,487
|
|
Operating expense
|
|
|
183
|
|
|
|
733
|
|
|
|
622
|
|
|
|
600
|
|
|
|
100
|
|
|
|
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,119
|
|
|
$
|
16,471
|
|
|
$
|
15,885
|
|
|
$
|
13,127
|
|
|
$
|
1,123
|
|
|
$
|
|
|
|
$
|
50,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Process
Research and Development
In the nine months ended September 30, 2007 and 2006, we
recorded IPR&D of $15.5 million and $5.2 million,
respectively. The amounts allocated to IPR&D were
determined through established valuation techniques used in the
high technology industry and were expensed upon acquisition as
it was determined that the underlying projects had not reached
technological feasibility and no alternative future uses
existed. In accordance with SFAS No. 2, Accounting
for Research and Development Costs, as clarified by
FIN No. 4, Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the
Purchase Method, an Interpretation of FASB Statement
39
No. 2, amounts assigned to IPR&D meeting the
above-stated criteria were charged to expense as part of the
allocation of the purchase price. For further discussion of
amounts allocated to IPR&D, see Note 3 of Notes to
Unaudited Condensed Consolidated Financial Statements.
Interest
and Other Income (Expense), Net
The following tables present interest and other income
(expense), net, for the three and nine months ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Decrease
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
$
|
31,443
|
|
|
|
3.3
|
%
|
|
$
|
31,826
|
|
|
|
3.6
|
%
|
|
$
|
(383
|
)
|
|
|
(1.2
|
)%
|
|
|
|
|
Other income (expense), net
|
|
|
(1,670
|
)
|
|
|
(0.2
|
)
|
|
|
299
|
|
|
|
|
|
|
|
(1,969
|
)
|
|
|
(658.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Interest income, net
|
|
$
|
101,355
|
|
|
|
3.7
|
%
|
|
$
|
83,758
|
|
|
|
3.1
|
%
|
|
$
|
17,597
|
|
|
|
21.0
|
%
|
Other income (expense), net
|
|
|
(2,437
|
)
|
|
|
(0.1
|
)
|
|
|
3,518
|
|
|
|
0.1
|
|
|
|
(5,955
|
)
|
|
|
(169.3
|
)
|
Interest income, net, reflects interest earned on cash and cash
equivalents and marketable securities balances. Other income
(expense), net, primarily includes recorded gains and losses on
strategic investments as well as gains and losses on foreign
currency transactions and dispositions of property and
equipment. The decrease in interest income, net, for the three
months ended September 30, 2007 was the result of the
overall decrease in our average cash and marketable securities
balances, as well as a slight decrease in market interest rates.
The increase in interest income, net, for the nine months ended
September 30, 2007 was the result of the overall increase
in our average cash and marketable securities balances, as well
as an increase in market interest rates. Our cash and marketable
securities balances decreased from $2.554 billion at
September 30, 2006 to $2.430 billion at
September 30, 2007, resulting principally from repurchases
of our Class A common stock and cash used for acquisitions.
The weighted average interest rates earned for the three months
ended September 30, 2007 and 2006 were 5.20% and 5.21%,
respectively. The weighted average interest rates earned for the
nine months ended September 30, 2007 and 2006 were 5.21%
and 4.80%, respectively.
Provision
for Income Taxes
We recorded tax provisions of $3.5 million and
$4.9 million for the three and nine months ended
September 30, 2007, respectively, and tax benefits of
$23.8 million and $15.7 million for the three and nine
months ended September 30, 2006, respectively. Our
effective tax rates were 11.3% and 3.8% for the three and nine
months ended September 30, 2007, respectively, and (27.6)%
and (4.9)% for the three and nine months ended
September 30, 2006, respectively. The difference between
our effective tax rates and the 35% federal statutory rate
resulted primarily from domestic losses recorded without income
tax benefit and foreign earnings taxed at rates lower than the
federal statutory rate for the three and nine months ended
September 30, 2007 and September 30, 2006. Included in
the foregoing amounts and percentages, we recorded
$4.6 million of tax benefits for the nine months ended
September 30, 2007 resulting primarily from the expiration
of the statutes of limitations for the assessment of taxes in
various foreign jurisdictions. For the three and nine months
ended September 30, 2006, we recorded income tax benefits
of $27.9 million and $29.6 million, respectively,
resulting primarily from the expiration of the statutes of
limitations for the assessment of taxes for certain foreign
subsidiaries.
As a result of applying the provisions of FIN 48, we
recognized a decrease of $3.9 million in the liability for
unrecognized tax benefits, and a $4.7 million increase in
retained earnings, as of January 1, 2007. Our unrecognized
tax benefits totaled $36.5 million at January 1, 2007
and related to various foreign jurisdictions. This
40
amount included $14.5 million of potential penalties and
$1.1 million of interest. Included in the balance at
January 1, 2007 was $34.3 million of tax benefits
that, if recognized, would reduce our annual effective income
tax rate. We do not expect our unrecognized tax benefits to
change significantly over the next 12 months.
We file U.S., state and foreign income tax returns in
jurisdictions with varying statutes of limitations. The 2003
through 2007 tax years generally remain subject to examination
by U.S. federal and most state tax authorities. In
significant foreign jurisdictions, the 2001 through 2007 tax
years generally remain subject to examination by tax authorities.
Liquidity
and Capital Resources
Working Capital and Cash and Marketable
Securities. The following table presents working
capital, cash and cash equivalents, and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Working capital
|
|
$
|
2,325,822
|
|
|
$
|
2,673,087
|
|
|
$
|
(347,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
2,037,214
|
|
|
$
|
2,158,110
|
|
|
$
|
(120,896
|
)
|
Short-term marketable securities(1)
|
|
|
308,932
|
|
|
|
522,340
|
|
|
|
(213,408
|
)
|
Long-term marketable securities
|
|
|
84,107
|
|
|
|
121,148
|
|
|
|
(37,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,430,253
|
|
|
$
|
2,801,598
|
|
|
$
|
(371,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in working capital. |
Our working capital, cash and cash equivalents, and marketable
securities balances decreased in the nine months ended
September 30, 2007 due primarily to repurchases of shares
of our Class A common stock and cash used for acquisitions,
partially offset by cash generated from operating activities.
Cash Provided and Used in the Nine Months Ended
September 30, 2007 and 2006. Cash and cash
equivalents decreased to $2.037 billion at
September 30, 2007 from $2.158 billion at
December 31, 2006 as a result of cash used in financing
activities (primarily stock repurchases) and investing
activities, offset in part by cash provided by operating
activities.
In the nine months ended September 30, 2007 our operating
activities provided $615.0 million in cash. This was
primarily the result of $123.0 million in net income,
$466.9 million in net non-cash operating expenses and
$25.1 million in net cash provided by changes in operating
assets and liabilities. Non-cash items included in net income in
the nine months ended September 30, 2007 included
depreciation and amortization, stock-based compensation expense,
amortization of purchased intangible assets, IPR&D,
impairment of intangible assets and loss on strategic
investments. In the nine months ended September 30, 2006
our operating activities provided $606.9 million in cash.
This was primarily the result of $334.0 million in net
income and $411.7 million in net non-cash operating
expenses offset in part by $138.8 million in net cash used
by changes in operating assets and liabilities. Non-cash items
included in net income in the nine months ended
September 30, 2006 included depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets and IPR&D.
Accounts receivable increased $12.9 million from
$382.8 million at December 31, 2006 to
$395.7 million at September 30, 2007. We typically
bill customers on an open account basis subject to our standard
net thirty day payment terms. If, in the longer term, our
revenue increases, it is likely that our accounts receivable
balance will also increase. Our accounts receivable could
further increase if customers delay their payments or if we
grant extended payment terms to customers.
Inventories increased $10.4 million from
$202.8 million at December 31, 2006 to
$213.2 million at September 30, 2007. In the future,
our inventory levels will continue to be determined based upon
the level of purchase orders we receive and the stage at which
our products are in their respective product life cycles, our
ability, as well as the ability of our customers, to manage
inventory under hubbing arrangements, as well as
41
competitive situations in the marketplace. Such considerations
are balanced against the risk of obsolescence or potentially
excess inventory levels.
Investing activities used cash of $95.4 million in the nine
months ended September 30, 2007, which was primarily the
result of the purchase of $123.3 million of capital
equipment to support our operations and the build-out and
relocation of our facilities in Irvine, California,
$233.3 million net cash paid for the acquisitions of LVL7
Systems, Inc., Octalica, Inc. and Global Locate Inc. and other
purchased intangible assets, and the net purchase of
$3.2 million of strategic investments, offset in part by
$250.4 million provided by the net proceeds from maturities
of marketable securities and proceeds of $14.0 million
received in connection with an escrow settlement from our
acquisition of Siliquent Technologies Inc. Investing activities
used $315.5 million in cash in the nine months ended
September 30, 2006, which was primarily the result of
$188.4 million used in the net purchase of marketable
securities, $70.1 million of net cash paid for
acquisitions, and the purchase of $57.2 million of capital
equipment to support operations.
Our financing activities used $640.5 million in cash in the
nine months ended September 30, 2007, which was primarily
the result of $811.8 million in repurchases of shares of
our Class A common stock pursuant to our share repurchase
program implemented in February 2007, offset in part by
$171.3 million in net proceeds received from issuances of
common stock upon exercise of stock options and pursuant to our
employee stock purchase plan. An additional $6.5 million of
repurchases of our Class A common stock was not settled in
cash as of September 30, 2007. Our financing activities
provided $199.2 million in cash in the nine months ended
September 30, 2006, which was primarily the result of
$475.8 million in net proceeds received from issuances of
common stock upon exercise of stock options and common stock
purchases through our employee stock purchase plan, which was
offset in part by $275.7 million in repurchases of shares
of our Class A common stock pursuant to our previous share
repurchase program.
In February 2007 our Board of Directors authorized a program to
repurchase shares of our Class A common stock for cash. The
Board approved the repurchase of shares having an aggregate
market value of up to $1.0 billion, depending on market
conditions and other factors. Repurchases under the program may
be made at any time and from time to time during the
18 month period that commenced February 12, 2007.
Repurchases under the program have been and will continue to be
made in open market or privately negotiated transactions.
Due to the decrease in the average price of our Class A
common stock as compared to the previous year, fewer stock
options were exercised by employees, and we received reduced
proceeds from the exercise of stock options, in the nine months
ended September 30, 2007 than during the nine months ended
September 30, 2006. The timing and number of stock option
exercises and the amount of cash proceeds we receive through
those exercises are not within our control. Moreover, it is now
our practice to issue a combination of restricted stock units
and stock options to employees, which will reduce the number of
stock options available for exercise in the future. Unlike the
exercise of stock options, the issuance of shares upon vesting
of restricted stock units does not result in any cash proceeds
to Broadcom and requires the use of cash, as we currently allow
employees to elect to have a portion of the shares issuable upon
vesting of restricted stock units during 2007 withheld to
satisfy minimum statutory withholding taxes which we then pay in
cash to the appropriate tax authorities on each employees
behalf.
Prospective Capital Needs. We believe that our
existing cash, cash equivalents and marketable securities,
together with cash generated from operations and from the
exercise of employee stock options and the purchase of common
stock through our employee stock purchase plan, will be
sufficient to cover our working capital needs, capital
expenditures, investment requirements, commitments and
repurchases of our Class A common stock for at least the
next 12 months. However, it is possible that we may need to
raise additional funds to finance our activities beyond the next
12 months or to consummate acquisitions of other
businesses, assets, products or technologies. We could raise
such funds by curtailing repurchases of our Class A common
stock, selling equity or debt securities to the public or to
selected investors, or by borrowing money from financial
institutions. 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 have filed a universal shelf registration statement
on SEC
Form S-3
that allows us to sell in one or more public offerings, shares
of our Class A common stock, shares of preferred stock or
debt securities, or any combination of such securities, for
proceeds in an aggregate amount of up to $750 million. We
have not issued any securities under the universal shelf
registration statement. Because one of
42
the eligibility requirements for use of a
Form S-3
is that an issuer must have timely filed all reports required to
be filed during the preceding twelve calendar months, we will
not be able to issue shares under the
Form S-3
until December 1, 2007. If we elect to raise additional
funds, we may not be able to obtain such funds on a timely basis
on acceptable terms, if 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 our
common stock.
Although we believe that we have sufficient capital to fund our
activities for at least the next 12 months, our future
capital requirements may vary materially from those now planned.
We anticipate that the amount of capital we will need in the
future will depend on many factors, including:
|
|
|
|
|
the overall levels of sales of our products and gross profit
margins;
|
|
|
|
our business, product, capital expenditure and research and
development plans, and product and technology roadmaps;
|
|
|
|
the market acceptance of our products;
|
|
|
|
repurchases of our Class A common stock;
|
|
|
|
required levels of research and development and other operating
costs;
|
|
|
|
litigation expenses, settlements and judgments;
|
|
|
|
volume price discounts and customer rebates;
|
|
|
|
the levels of inventory and accounts receivable that we maintain;
|
|
|
|
acquisitions of other businesses, assets, products or
technologies;
|
|
|
|
royalties payable by or to us;
|
|
|
|
changes in our compensation policies;
|
|
|
|
the issuance of restricted stock units and the related cash
payments we make for withholding taxes due from employees during
2007 and possibly during future years;
|
|
|
|
capital improvements for new and existing facilities;
|
|
|
|
technological advances;
|
|
|
|
our competitors responses to our products and our
anticipation of and responses to their products;
|
|
|
|
our relationships with suppliers and customers;
|
|
|
|
the availability and cost of sufficient foundry, assembly and
test capacity and packaging materials;
|
|
|
|
the level of exercises of stock options and stock purchases
under our employee stock purchase plan; and
|
|
|
|
general economic conditions and specific conditions in the
semiconductor industry and wired and wireless communications
markets, including the effects of recent international conflicts
and related uncertainties.
|
In addition, we may require additional capital to accommodate
planned future growth, hiring, infrastructure and facility needs.
|
|
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.
We place our cash investments in instruments that meet high
credit quality standards, as specified in our investment policy
guidelines. These guidelines also limit the amount of credit
exposure to any one issue, issuer or type of instrument.
43
Our cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these
instruments. As of September 30, 2007 the carrying value of
our cash and cash equivalents approximated fair value.
Marketable securities, consisting of U.S. Treasury and
agency obligations, commercial paper, corporate notes and bonds,
time deposits, foreign notes and certificates of deposits, are
generally classified as held-to-maturity and are stated at cost,
adjusted for amortization of premiums and discounts to maturity.
In the past certain of our short term marketable securities were
classified as available-for-sale and were stated at fair value,
which was equal to cost due to the short-term maturity of these
securities. In the event that there were to be a difference
between fair value and cost in any of our available-for-sale
securities, unrealized gains and losses on these investments
would be reported as a separate component of accumulated other
comprehensive income (loss).
Our investment policy for marketable securities requires that
all securities mature in three years or less, with a weighted
average maturity of no longer than 18 months. As of
September 30, 2007 the carrying value and fair value of
these securities were $393.0 million and
$393.1 million, respectively. The fair value of our
marketable securities fluctuates based on changes in market
conditions and interest rates; however, given the short-term
maturities, we do not believe these instruments are subject to
significant market or interest rate risk.
Investments in fixed rate, interest-earning instruments carry a
degree of interest rate risk. Fixed rate securities may have
their market value adversely impacted due to rising interest
rates. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates.
The carrying value, maturity and estimated fair value of our
cash equivalents and marketable securities as of
September 30, 2007 and December 31, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
September 30,
|
|
|
Maturity
|
|
|
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(In thousands, except interest rates)
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
264,152
|
|
|
$
|
264,152
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
264,158
|
|
|
|
|
|
Weighted average yield
|
|
|
4.88
|
%
|
|
|
4.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
393,039
|
|
|
$
|
202,315
|
|
|
$
|
126,516
|
|
|
$
|
38,180
|
|
|
$
|
26,028
|
|
|
$
|
393,058
|
|
|
|
|
|
Weighted average yield
|
|
|
5.09
|
%
|
|
|
5.04
|
%
|
|
|
5.06
|
%
|
|
|
5.35
|
%
|
|
|
5.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
December 31,
|
|
|
Maturity
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except interest rates)
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
908,777
|
|
|
$
|
908,777
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
908,781
|
|
Weighted average yield
|
|
|
5.31
|
%
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
643,488
|
|
|
$
|
522,340
|
|
|
$
|
81,863
|
|
|
$
|
39,285
|
|
|
$
|
642,528
|
|
Weighted average yield
|
|
|
5.04
|
%
|
|
|
5.03
|
%
|
|
|
4.97
|
%
|
|
|
5.32
|
%
|
|
|
|
|
We also have invested in privately held companies, the majority
of which can still be considered to be in the
start-up or
development stage. We make investments in key strategic
businesses and other industry participants to establish
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
early stages and may never materialize. Likewise, the
development projects of these companies may not be successful.
In addition, early stage companies often fail for various other
reasons. Consequently, we could lose our entire investment in
these companies. As of September 30, 2007, the carrying and
fair value of our strategic investments was $4.5 million.
44
|
|
Item 4.
|
Controls
and Procedures
|
We are committed to maintaining disclosure controls and
procedures designed to ensure that information required to be
disclosed in our periodic reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures and
implementing controls and procedures based on the application of
managements judgment.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Exchange Act, as of September 30,
2007. Based on this evaluation, our principal executive officer
and our principal financial officer concluded that our
disclosure controls and procedures were effective at a
reasonable assurance level as of September 30, 2007, the
end of the period covered by this Report.
There has been no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) during the three months ended
September 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Inherent
Limitations on Internal Control
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of management override or improper
acts, if any, have been detected. These inherent limitations
include the realities that judgments in decision making can be
faulty, and that breakdowns can occur because of simple errors
or mistakes. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of
any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system,
misstatements due to management override, error or improper acts
may occur and not be detected. Any resulting misstatement or
loss may have an adverse and material effect on our business,
financial condition and results of operations.
Item 4T. Controls
and Procedures
Not applicable.
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
The information set forth under Note 7 of Notes to
Unaudited Condensed Consolidated Financial Statements, included
in Part I, Item 1 of this Report, is incorporated
herein by reference.
45
Our
quarterly operating results may fluctuate significantly. As a
result, we may fail to meet the expectations of securities
analysts and investors, which could cause our stock price to
decline.
Our quarterly net revenue and operating results have fluctuated
significantly in the past and are likely to 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,
who may derive their expectations by extrapolating data from
recent historical operating results, the market price of our
Class A common stock will likely decline. Fluctuations in
our operating results may be due to a number of factors,
including, but not limited to, those listed below and those
identified throughout this Risk Factors section:
|
|
|
|
|
the overall cyclicality of, and changing economic, political and
market conditions affecting the semiconductor industry and wired
and wireless communications markets, including seasonality in
sales of consumer products into which our products are
incorporated;
|
|
|
|
the timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory;
|
|
|
|
the gain or loss of a key customer, design win or order;
|
|
|
|
our ability to scale our operations in response to changes in
demand for our existing products and services or demand for new
products requested by our customers;
|
|
|
|
our dependence on a few significant customers for a substantial
portion of our revenue;
|
|
|
|
our ability to specify, develop or acquire, complete, introduce,
market and transition to volume production new products and
technologies in a cost-effective and timely manner;
|
|
|
|
our ability to timely and accurately predict market requirements
and evolving industry standards and to identify and capitalize
upon opportunities in new markets;
|
|
|
|
intellectual property disputes, customer indemnification claims
and other types of litigation risks;
|
|
|
|
our ability to timely and effectively transition to smaller
geometry process technologies or achieve higher levels of design
integration;
|
|
|
|
our ability to retain, recruit and hire key executives,
technical personnel and other employees in the positions and
numbers, with the experience and capabilities, and at the
compensation levels that we need to implement our business and
product plans;
|
|
|
|
the rate at which our present and future customers and end users
adopt our technologies and products in our target markets;
|
|
|
|
changes in our product or customer mix;
|
|
|
|
the availability and pricing of third party semiconductor
foundry, assembly and test capacity and raw materials;
|
|
|
|
competitive pressures and other factors such as the
qualification, availability and pricing of competing products
and technologies and the resulting effects on sales and pricing
of our products;
|
|
|
|
the volume of our product sales and pricing concessions on
volume sales; and
|
|
|
|
the effects of public health emergencies, natural disasters,
terrorist activities, international conflicts and other events
beyond our control.
|
We expect new product lines to continue to account for a high
percentage of our future sales. Some of these markets are
immature
and/or
unpredictable or are new markets for Broadcom, and we cannot
assure you that these markets will develop into significant
opportunities or that we will continue to derive significant
revenue from these markets. Based on the limited amount of
historical data available to us, it is difficult to anticipate
our future revenue streams from, or the sustainability of, such
newer markets. Typically our new products have lower gross
46
margins until we commence volume production and launch lower
cost revisions of such products enabling us to benefit from
economies of scale and more efficient designs.
We have recently entered into arrangements that include multiple
deliverables, such as the sale of semiconductor products and
related data services. Under these arrangements, the services
may be provided without having a separate fair value
under
EITF 00-21.
In that event, we will only recognize a portion of the total
revenue we receive from the customer during a quarter, and will
recognize the remaining revenue on a ratable basis over the
expected life of the service being provided. As we enter into
future multiple element arrangements, where we do not have fair
value of each deliverable, the portion of revenue we recognize
on a deferred basis may vary significantly in any given quarter,
which could cause even greater fluctuations in our quarterly
operating results.
Additionally, as an increasing number of our chips are being
incorporated into consumer products, such as desktop and
notebook computers, cellular phones and other mobile
communication devices, other wireless-enabled consumer
electronics, and satellite and digital cable set-top boxes, we
anticipate greater seasonality and fluctuations in the demand
for our products, which may result in greater variations in our
quarterly operating results.
We are
subject to order and shipment uncertainties, and our ability to
accurately forecast customer demand may be impaired by our
lengthy sales cycle. If we are unable to accurately predict
customer demand, we may hold excess or obsolete inventory, which
would reduce our profit margin. Conversely, we may have
insufficient inventory, which would result in lost revenue
opportunities and potentially in loss of market share and
damaged customer relationships.
We typically sell products pursuant to purchase orders rather
than long-term purchase commitments. Customers can generally
cancel or defer purchase orders on short notice without
incurring a significant penalty. In the recent past, some of our
customers have developed excess inventories of their own
products and have, as a consequence, deferred purchase orders
for our products. We currently do not have the ability to
accurately predict what or how many products our customers will
need in the future. Anticipating demand is difficult because our
customers face volatile pricing and unpredictable demand for
their own products, are increasingly focused more on cash
preservation and tighter inventory management, and may be
involved in legal proceedings that could affect their ability to
buy our products. Our ability to accurately forecast customer
demand may also be impaired by the delays inherent in our
lengthy sales cycle. After we have developed and delivered a
product to a customer, the customer will usually test and
evaluate our product prior to designing its own equipment to
incorporate our product. Our customers may need three to more
than six months to test, evaluate and adopt our product and an
additional three to more than nine months to begin volume
production of equipment that incorporates our product. Due to
this lengthy sales cycle, we may experience significant delays
from the time we increase our operating expenses and make
investments in inventory until the time that we generate revenue
from these products. It is possible that we may never generate
any revenue from these products after incurring such
expenditures. Even if a customer selects our product to
incorporate into its equipment, we have no assurance that the
customer will ultimately market and sell its 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 curtail, reduce or delay its
product plans. If we incur significant research and development
expenses, marketing expenses and investments in inventory 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, as an increasing number of our
chips are being incorporated into consumer products, we
anticipate greater fluctuations in demand for our products,
which makes it even more difficult to forecast customer demand.
We place orders with our suppliers based on forecasts of
customer demand and, in some instances, may establish buffer
inventories to accommodate anticipated demand. Our forecasts are
based on multiple assumptions, each of which may introduce error
into our estimates. If we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be
able to sell when we expect to, if at all. As a result, we would
hold excess or obsolete inventory, which would reduce our profit
margins and adversely affect our financial results. Conversely,
if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would forego revenue
opportunities and potentially lose market share and damage our
customer relationships. In addition, any future significant
cancellations or deferrals of product orders or the return of
previously sold products could materially and adversely affect
our profit margins, increase product obsolescence and restrict
our
47
ability to fund our operations. Furthermore, we generally
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.
We maintain inventory, or hubbing, arrangements with certain of
our customers. Pursuant to these arrangements, we deliver
products to a customer or a designated third party warehouse
based upon the customers projected needs, but do not
recognize product revenue unless and until the customer reports
that it has removed our product from the warehouse to
incorporate into its end products. Historically we have had good
visibility into customer requirements and shipments within a
quarter. However, if a customer does not take our products under
a hubbing arrangement in accordance with the schedule it
originally provided us, our predicted future revenue stream
could vary substantially from our forecasts and our results of
operations could be materially and adversely affected.
Additionally, since we own inventory that is physically located
in a third partys warehouse, our ability to effectively
manage inventory levels may be impaired, causing our total
inventory turns to decrease, which could increase expenses
associated with excess and obsolete product and negatively
impact our cash flow.
Our
operating results may be adversely impacted by worldwide
political and economic uncertainties and specific conditions in
the markets we address, including the cyclical nature of and
volatility in the semiconductor industry. As a result, the
market price of our Class A common stock may
decline.
We operate primarily in the semiconductor industry, which is
cyclical and subject to rapid change and evolving industry
standards. From time to time, the semiconductor industry has
experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories, and accelerated erosion of prices. These factors
could cause substantial fluctuations in our revenue and in our
results of operations. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of the
industry or wired and wireless communications markets to fully
recover from downturns could seriously impact our revenue and
harm our business, financial condition and results of
operations. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the semiconductor industry,
which could cause large fluctuations in our stock price.
Additionally, in the recent past, general worldwide economic
conditions have experienced a downturn due to slower economic
activity, concerns about inflation and deflation, increased
energy costs, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns in the wired and wireless communications
markets, the ongoing effects of the war in Iraq, recent
international conflicts and terrorist and military activity, and
the impact of natural disasters and public health emergencies.
These conditions make it extremely difficult for our customers,
our vendors and us to accurately forecast and plan future
business activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which
would delay and lengthen sales cycles. We experienced slowdowns
in orders in the second half of 2006 and in the fourth quarter
of 2004 that we believe were attributable in substantial part to
excess inventory held by certain of our customers, and we may
experience a similar slowdown in the future. We cannot predict
the timing, strength or duration of any economic recovery,
worldwide, or in the wired and wireless communications markets.
If the economy or the wired and wireless communications markets
in which we operate do not continue at their present levels, our
business, financial condition and results of operations will
likely be materially and adversely affected.
If we
fail to appropriately scale our operations in response to
changes in demand for our existing products and services or to
the demand for new products requested by our customers, our
business could be materially and adversely affected.
To achieve our business objectives, we anticipate that we will
need to continue to expand. Through internal growth and
acquisitions, we significantly increased the scope of our
operations and expanded our workforce from 2,580 full-time,
contract and temporary employees as of December 31, 2002 to
6,114 full-time, contract and temporary employees as of
September 30, 2007. Nonetheless, we may not be able to
expand our workforce and operations in a sufficiently timely
manner to respond effectively to changes in demand for our
existing products and services or to the demand for new products
requested by our customers. In that event, we may be unable to
48
meet competitive challenges or exploit potential market
opportunities, and our current or future business could be
materially and adversely affected.
Conversely, if we expand our operations and workforce too
rapidly in anticipation of increased demand for our products,
and such demand does not materialize at the pace at which we
expect, our business could be materially and adversely affected.
We expect new product lines, which often require substantial
research and development expenses to develop, to continue to
account for a high percentage of our future revenue. However,
some of the markets for these new products are immature
and/or
unpredictable or are new markets for Broadcom, and if these
markets do not develop at the rates we originally anticipated,
the rate of increase in our operating expenses may exceed the
rate of increase, if any, in our revenue. Moreover, we may
intentionally choose to increase the rate of our research and
development expenses more rapidly than the increase in the rate
of our revenue in the short term in anticipation of the long
term benefits we would derive from such investment. However,
such benefits may never materialize or may not be as significant
as we originally believed they would be. Also, if we experience
a slowdown in the broadband wired and wireless communications
markets in which we operate, we may not be able to scale back
our operating expenses in a sufficiently timely or effective
manner. In that event, our business, financial condition and
results of operations would be materially and adversely affected.
Our past growth has placed, and any future growth is expected to
continue to place, a significant strain on our management
personnel, systems and resources. To implement our current
business and product plans, we will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors
will require substantial management effort. In the past we have
implemented an enterprise resource planning system to help us
improve our planning and management processes, and more recently
we have implemented a new equity administration system to
support our more complex equity programs as well as the adoption
of SFAS 123R. We anticipate that we will also need to
continue to implement a variety of new and upgraded operational
and financial systems, including enhanced human resources
management systems and a business-to-business solution, as well
as additional procedures and other internal management systems.
In general, the accuracy of information delivered by these
systems may be subject to inherent programming quality. In
addition, to support our growth, in March 2007 we relocated our
headquarters and Irvine operations to new, larger facilities
that have enabled us to centralize all of our Irvine employees
and operations on one campus. We may also engage in other
relocations of our employees or operations from time to time.
Such relocations could result in temporary disruptions of our
operations or a diversion of managements attention and
resources. If we are unable to effectively manage our expanding
operations, we may be unable to scale our business quickly
enough to meet competitive challenges or exploit potential
market opportunities, or conversely, we may scale our business
too quickly and the rate of increase in our expenses may exceed
the rate of increase in our revenue, either of which would
materially and adversely affect our current or future business.
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 is dependent upon our ability to develop new
semiconductor products 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 products
are generally incorporated into our customers products at
the design stage. We often incur 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. Once an equipment manufacturer designs a
competitors product into its product offering, it becomes
significantly more difficult for us to sell our products to that
customer because changing suppliers involves significant cost,
time, effort and risk for the customer.
Even if an equipment manufacturer designs one of our products
into its product offering, we have no assurances that its
product will be commercially successful or that we will receive
any revenue from sales of that product. Sales of our products
largely depend on the commercial success of our customers
products. Our customers are typically not obligated to purchase
our products and can choose at any time to stop using our
products if their own products are not commercially successful
or for any other reason.
49
Our historical results have been, and we expect that our future
results will 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 and lower than
anticipated manufacturing yields in the early production of such
products. If we were to experience any similar delays in the
successful completion of a new product or similar reductions in
our manufacturing yields for a new product in the future, our
customer relationships, reputation and business could be
seriously harmed.
In addition, the development and introduction of new products
often requires substantial research and development resources.
As a result, we may choose to discontinue one or more products
or product development programs to dedicate more resources to
new products. The discontinuation of an existing or planned
product may materially and adversely affect our relationship
with our customers, including customers who may purchase more
than one product from us.
Our ability to develop and deliver new products successfully
will depend on various factors, including our ability to:
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timely and accurately predict market requirements and evolving
industry standards;
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accurately define new products;
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timely and effectively identify and capitalize upon
opportunities in new markets;
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timely complete and introduce new product designs;
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scale our operations in response to changes in demand for our
products and services or the demand for new products requested
by our customers;
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license any desired third party technology or intellectual
property rights;
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effectively develop and integrate technologies from companies
that we have acquired;
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timely qualify and obtain industry interoperability
certification of our products and the products of our customers
into which our products will be incorporated;
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obtain sufficient foundry capacity and packaging materials;
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achieve high manufacturing yields; and
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shift our products to smaller geometry process technologies to
achieve lower cost and higher levels of design integration.
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In some of our businesses, our ability to develop and deliver
next-generation products successfully and in a timely manner may
depend in part on access to information, or licenses of
technology or intellectual property rights, from companies that
are our competitors. We cannot assure you that such information
or licenses will be made available to us on a timely basis, if
at all, or at reasonable cost and on commercially reasonable
terms.
If we are not able to develop and introduce new products
successfully and in a cost-effective and timely manner, we will
be unable to attract new customers or to retain our existing
customers, as these customers may transition to other companies
that can meet their product development needs, which would
materially and adversely affect our results of operations.
Because
we depend on a few significant customers for a substantial
portion of our revenue, the loss of a key customer could
seriously impact our revenue and 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 past revenue 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.
50
Sales to our five largest customers represented 41.5% and 46.5%
of our net revenue in the nine months ended September 30,
2007 and 2006, respectively. We expect that our largest
customers will continue to account for a substantial portion of
our net revenue in 2007 and for the foreseeable future. The
identities of our largest customers and their respective
contributions to our net revenue have varied and will likely
continue to vary from period to period.
We may not be able to maintain or increase sales to certain of
our key customers for a variety of reasons, including the
following:
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most of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty;
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our agreements with our customers typically do not require them
to purchase a minimum quantity of our products;
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many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products;
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our customers face intense competition from other manufacturers
that do not use our products; and
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some of our customers offer or may offer products that compete
with our products.
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These relationships often require us to develop new products
that may involve significant technological challenges. Our
customers frequently place considerable pressure on us to meet
their tight development schedules. Accordingly, we may have to
devote a substantial amount of our 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 strategic customers and
negatively impact sales of the products under development.
In addition, our longstanding relationships with some larger
customers may also deter other potential customers who compete
with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain
customers favorable prices on our products. We may 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 sales to any key customer, or our inability to
attract new significant customers could seriously impact our
revenue and materially and adversely affect our results of
operations.
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 competitors or other unauthorized third parties
may obtain, copy, use or disclose our technologies and
processes. We currently hold more than 2,300 U.S. and
1,000 foreign patents and have filed more than 7,100 additional
U.S. and foreign patent applications. However, 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. As such, any rights granted under these patents
may not provide us with meaningful protection. We may not be
able to obtain foreign patents or file pending applications
corresponding to our U.S. patents and patent applications.
Even if foreign patents are granted, effective enforcement in
foreign countries may not be available. If our patents do not
adequately protect our technology, 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. Some or all of our patents have in the past
been licensed and likely will in the future be licensed to
certain of our competitors through cross-license agreements.
Moreover, because we have participated and continue to
participate in developing various industry standards, we may be
required to license some of our patents to others, including
competitors, who develop products based on those standards.
51
Certain of our software (as well as that of our customers) may
be derived from so-called open source software that
is generally made available to the public by its authors
and/or other
third parties. Such open source software is often made available
under licenses, such as the GNU General Public License, or GPL,
which impose certain obligations on us in the event we were to
distribute derivative works of the open source software. These
obligations may require us to make source code for the
derivative works available to the public,
and/or
license such derivative works under a particular type of
license, rather than the forms of license customarily used to
protect our intellectual property. In addition, there is little
or no legal precedent for interpreting the terms of certain of
these open source licenses, including the determination of which
works are subject to the terms of such licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software, in the event that
the copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work. With respect to our proprietary
software, we generally license such software under terms that
prohibit combining it with open source software as described
above. Despite these restrictions, parties may combine Broadcom
proprietary software with open source software without our
authorization, in which case we might nonetheless be required to
release the source code of our proprietary software.
We generally enter into confidentiality agreements with our
employees, consultants and strategic partners. We also try to
control access to and distribution of our technologies,
documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy,
disclose, obtain or use our products, services or technology
without our authorization. Also, current or former employees may
seek employment with our business partners, customers or
competitors, and we cannot assure you that the confidential
nature of our proprietary information will be maintained in the
course of such future employment. Additionally, current,
departing or former employees or third parties could attempt to
penetrate our computer systems and networks to misappropriate
our proprietary information and technology or interrupt our
business. Because the techniques used by computer hackers and
others to access or sabotage networks change frequently and
generally are not recognized until launched against a target, we
may be unable to anticipate, counter or ameliorate these
techniques. As a result, our technologies and processes may be
misappropriated, particularly in 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 fail to fulfill our obligations, including
product supply obligations, under those agreements, and if we do
not correct the failure within a specified time period. Also,
some customers may require that we make certain intellectual
property available to our competitors so that the customer has a
choice among semiconductor vendors for solutions to be
incorporated into the customers products. Moreover, we
often incorporate the intellectual property of 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. We have
in the past been and currently are engaged in litigation to
enforce or defend our intellectual property rights, protect our
trade secrets, or determine the validity and scope of the
proprietary rights of others, including our customers. It is
possible that the advent of or developments in such litigation
may adversely affect our relationships and agreements with
certain customers that are either involved in such litigation or
also have business relationships with the party with whom we are
engaged in litigation. Such litigation (and the settlement
thereof) has been and will likely continue to be very expensive
and time consuming. Additionally, any litigation can divert the
attention of management and other key employees from the
operation of the business, which could negatively impact our
business and results of operations.
52
Intellectual
property risks and third party claims of infringement,
misappropriation of proprietary rights 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. In addition,
the defense of such claims could result in significant costs and
divert the attention of our management or other key
employees.
Companies in and related to the semiconductor industry often
aggressively protect and pursue their intellectual property
rights. There are various intellectual property risks associated
with developing and producing new products and entering new
markets, and we may not be able to obtain, at reasonable cost
and upon commercially reasonable terms, licenses to intellectual
property of others that is alleged to read on such new or
existing products. From time to time, we have received, and may
continue to receive, notices that claim we have infringed upon,
misappropriated or misused other parties proprietary
rights. Moreover, in the past we have been and we currently are
engaged in litigation with parties that claim that we infringed
their patents or misappropriated or misused their trade secrets.
In addition, we or our customers may be sued by other parties
that claim that our products have infringed their patents or
misappropriated or misused their trade secrets, or which may
seek to invalidate one or more of our patents. An adverse
determination in any of these types of disputes could prevent us
from manufacturing or selling some of our products, limit or
restrict the type of work that employees involved in such
litigation may perform for Broadcom, increase our costs of
revenue, and expose us to significant liability. Any of these
claims may materially and adversely affect our business,
financial condition and results of operations. For example, in a
patent or trade secret action, a court could issue a preliminary
or permanent injunction that would require us to withdraw or
recall certain products from the market, redesign certain
products offered for sale or under development, or restrict
employees from performing work in their areas of expertise. We
may also be liable for damages for past infringement and
royalties for future use of the technology, and we may be liable
for treble damages if infringement is found to have been
willful. In addition, governmental agencies may commence
investigations or criminal proceedings against our employees,
former employees
and/or the
company relating to claims of misappropriation or misuse of
another partys proprietary rights. We may also have to
indemnify some customers and strategic partners under our
agreements with such parties if a third party alleges or if a
court finds that our products or activities have infringed upon,
misappropriated or misused another partys proprietary
rights. We have received requests from certain customers and
strategic partners to include increasingly broad indemnification
provisions in our agreements with them. These indemnification
provisions may, in some circumstances, extend our liability
beyond the products we provide to include liability for
combinations of components or system level designs and for
consequential damages
and/or lost
profits. Even if claims against us are not valid or successfully
asserted, these claims could result in significant costs and
diversion of the attention of management and other key employees
to defend. Additionally, we have sought and may in the future
seek to obtain a license under a third partys intellectual
property rights and have granted and may in the future grant a
license to certain of our intellectual property rights to a
third party in connection with a cross-license agreement or a
settlement of claims or actions asserted against us. However, we
may not be able to obtain a license under a third partys
intellectual property rights on commercially reasonable terms,
if at all.
Our products may contain technology provided to us by other
parties such as contractors, suppliers or customers. We may have
little or no ability to determine in advance whether such
technology infringes the intellectual property rights of a third
party. Our contractors, suppliers and licensors may not be
required to indemnify us in the event that a claim of
infringement is asserted against us, or they may be required to
indemnify us only up to a maximum amount, above which we would
be responsible for any further costs or damages. In addition, we
may have little or no ability to correct errors in the
technology provided by such contractors, suppliers and
licensors, or to continue to develop new generations of such
technology. Accordingly, we may be dependent on their ability
and willingness to do so. In the event of a problem with such
technology, or in the event that our rights to use such
technology become impaired, we may be unable to ship our
products containing such technology, and may be unable to
replace the technology with a suitable alternative within the
time frame needed by our customers.
53
The
complexity of our products could result in unforeseen delays or
expenses and in undetected defects, or bugs, which could damage
our reputation with current or prospective customers, result in
significant costs and claims, and adversely affect the market
acceptance of new products.
Highly complex products such as the products that we offer
frequently contain hardware or software defects or bugs when
they are first introduced or as new versions are released. Our
products have previously experienced, and may in the future
experience, these defects and bugs. If any of our products
contains defects or bugs, or has 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 and attract new customers. In addition, these defects
or bugs could interrupt or delay sales or shipment of our
products to our customers. To alleviate these problems, we may
have to invest significant capital and other resources. Although
our products are tested by us, our subcontractors, suppliers and
customers, 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 field replacement costs. These
problems may divert our technical and other resources from other
development efforts and could result in claims against us by our
customers or others, including possible claims for consequential
damages
and/or lost
profits. In addition, system and handset providers that purchase
components may require that we assume liability for defects
associated with products produced by their manufacturing
subcontractors and require that we provide a warranty for
defects or other problems which may arise at the system level.
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.
To remain
competitive, we must keep pace with rapid technological change
and evolving industry standards in the semiconductor industry
and wired and wireless communications markets.
Our future success will depend on our ability to anticipate and
adapt to changes in technology and industry standards and our
customers changing demands. We sell products in markets
that are characterized by rapid technological change, evolving
industry standards, frequent new product introductions, short
product life cycles and increasing demand for higher levels of
integration and smaller process geometries. 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 and technologies. 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. If new industry standards
emerge, our products or our customers products could
become unmarketable or obsolete, and we could lose market share.
We may also have to incur substantial unanticipated costs to
comply with these new standards. In addition, our target markets
continue to undergo rapid growth and consolidation. A
significant slowdown in any of these wired and wireless
communications markets could materially and adversely affect our
business, financial condition and results of operations. These
rapid technological changes and evolving industry standards make
it difficult to formulate a long-term growth strategy because
the semiconductor industry and wired and wireless communications
markets may not continue to develop to the extent or in the time
periods that we anticipate. We have invested substantial
resources in emerging technologies that did not achieve the
market acceptance that we had expected. If new markets do not
develop as and when 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.
We may
experience difficulties in transitioning to smaller geometry
process technologies or in achieving higher levels of design
integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
To remain competitive, we expect to continue to transition our
semiconductor products to increasingly smaller line width
geometries. This transition requires us to modify the
manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit
designs that we may use in multiple products. We periodically
evaluate the benefits, on a
product-by-product
basis, of migrating to smaller geometry process technologies to
reduce our costs. Currently most of our products are
manufactured in .35 micron, .22
54
micron, .18 micron, .13 micron, 90 nanometer or 65 nanometer
geometry processes. We are now designing most new products in 65
nanometer process technology and planning for the transition to
smaller process geometrics. In the past, we have experienced
some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes, which resulted in
reduced manufacturing yields, delays in product deliveries and
increased expenses. The transition to 65 nanometer geometry
process technology has resulted in significantly higher mask and
prototyping costs, as well as additional expenditures for
engineering design tools and related computer hardware. 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 foundry subcontractors
to transition to smaller geometry processes successfully. We
cannot assure you that the foundries that we use will be able to
effectively manage the transition in a timely manner, or at all,
or that we will be able to maintain our existing foundry
relationships or develop new ones. If any of our foundry
subcontractors or we experience significant delays in this
transition or fail to efficiently implement this transition, we
could experience reduced manufacturing yields, delays in product
deliveries and increased expenses, all of which could harm our
relationships with our customers and our results of operations.
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, if at all. Moreover, even if we are able to
achieve higher levels of design integration, such integration
may have an adverse impact on our operating results, as a result
of increasing costs and expenditures as described above as well
as the risk that we may reduce our revenue by integrating the
functionality of multiple chips into a single chip.
Our
operating results for 2006 and prior periods have been
materially and adversely impacted by the results of the
voluntary review of our past equity award practices concluded in
January 2007. Any related action by a governmental agency could
result in civil or criminal sanctions against certain of our
former officers, directors and/or employees and might result in
such sanctions against us and/or certain of our current
officers, directors and/or employees. Such matters, and the
civil litigation relating to our past equity award practices or
the January 2007 restatement of our financial statements for
periods ended on or before March 31, 2006, could result in
significant costs and the diversion of attention of our
management and other key employees.
In connection with the equity award review, we restated our
financial statements for each of the years ended
December 31, 1998 through December 31, 2005, and for
the three months ended March 31, 2006. Accordingly, you
should not rely on financial information included in the reports
on
Form 10-K,
Form 10-Q
and
Form 8-K
previously filed by Broadcom, the related opinions of our
independent registered public accounting firm, or earnings press
releases and similar communications issued by us, for periods
ended on or before March 31, 2006, all of which have been
superseded in their entirety by the information contained in our
amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and our amended
Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed
January 23, 2007.
In June 2006 we received an informal request for information
from the staff of the Los Angeles regional office of the SEC
regarding our option granting practices. In December 2006 we
were informed that the SEC had issued a formal order of
investigation in the matter. On July 19, 2007 we received a
Wells Notice from the SEC in connection with this
investigation. Our Chairman of the Board of Directors and Chief
Technical Officer, Dr. Henry Samueli, also received a Wells
Notice on that date. On August 8, 2007 our Senior Vice
President, Business Affairs and General Counsel, David A. Dull,
also received a Wells Notice. The Wells Notices provide
notification that the staff of the SEC intends to recommend to
the Commission that it bring a civil action against the
recipients for possible violations of the securities laws. Based
on discussions with the SEC staff, we believe that the issues
the staff intends to pursue relate to our historical option
granting processes and the accounting relating to those option
grants. Under the process established by the SEC, recipients
have the opportunity to respond in writing to a Wells Notice
before the SEC staff makes any formal recommendation to the
Commission regarding what action, if any, should be brought by
the SEC. We, Dr. Samueli and Mr. Dull have provided
written submissions to the SEC in response to the Wells Notices
and may seek meetings with the SEC staff. We are cooperating
with the SEC investigation, but do not know when or how the
investigation will be resolved or what, if any, actions the SEC
may require us, Dr. Samueli
and/or
Mr. Dull to take as part of that resolution. Any resolution
of this investigation could result in civil sanctions
and/or fines
against Broadcom
and/or
certain of our
55
current or former officers, directors
and/or
employees, as well as potential director or officer bars against
certain of our current or former officers, directors
and/or
employees.
Broadcom has also been informally contacted by the
U.S. Attorneys Office for the Central District of
California and has been asked to produce on a voluntary basis
documents, many of which we previously provided to the SEC. In
addition, we have produced documents pursuant to grand jury
subpoenas. We are cooperating with the U.S. Attorneys
Office in its investigation. The U.S. Attorneys
Office continues to interview present and former Broadcom
employees, officers and directors as part of the investigation.
Any action by the U.S. Attorneys Office or other
governmental agency could result in criminal sanctions
and/or fines
against Broadcom
and/or
certain of our current or former officers, directors
and/or
employees.
Additionally, as discussed in Note 7 of Notes to Unaudited
Consolidated Financial Statements, included in Part I,
Item I of this Report, we currently are engaged in civil
litigation with parties that claim, among other allegations,
that certain of our current and former directors and officers
improperly dated stock option grants to enhance their own
profits on the exercise of such options or for other improper
purposes. Although we and the other defendants intend to defend
these claims vigorously, there are many uncertainties associated
with any litigation, and we cannot assure you that these actions
will be resolved without substantial costs
and/or
settlement charges. We have entered into indemnification
agreements with each of our present and former directors and
officers. Under those agreements, Broadcom is required to
indemnify each such director or officer against expenses,
including attorneys fees, judgments, fines and
settlements, paid by such individual in connection with the
pending litigation (other than indemnified liabilities arising
from willful misconduct or conduct that is knowingly fraudulent
or deliberately dishonest).
The resolution of the pending investigations by the SEC and
U.S. Attorneys Office, the defense of our pending
civil litigation, and the defense of any additional litigation
that may arise relating to our past equity award practices or
the January 2007 restatement of our prior financial statements
could result in significant costs and diversion of the attention
of management and other key employees. Although we maintain
various insurance policies related to the risks associated with
our business, including directors and officers
insurance, we cannot assure you that the amount of our insurance
coverage will be sufficient or that our insurance policies will
provide coverage for all of the matters and circumstances
described above. Our business, financial position and results of
operations may be materially and adversely affected to the
extent that our insurance coverage fails to pay or reimburse all
of the expenses and any judgments, fines or settlement costs
that we may incur in connection with these matters.
We may be
unable to attract, retain or motivate key senior management and
technical personnel, which could seriously harm our
business.
Our future success depends to a significant extent upon the
continued service of our key senior management personnel,
including our co-founder, Chairman of the Board and Chief
Technical Officer, Henry Samueli, Ph.D., our Chief
Executive Officer, Scott A. McGregor, and other senior
executives. We have employment agreements with Mr. McGregor
and Eric K. Brandt, our Senior Vice President and Chief
Financial Officer; however the agreements do not govern the
length of their service. We do not have employment agreements
with any other executives, or any other key employees, although
we do have limited retention arrangements in place with certain
executives. The loss of the services of Dr. Samueli,
Mr. McGregor or certain other key senior management or
technical personnel could materially and adversely affect our
business, financial condition and results of operations. For
instance, if certain of these individuals were to leave our
company unexpectedly, we could face substantial difficulty in
hiring qualified successors and could experience a loss in
productivity during the search for and while any such successor
is integrated into our business and operations.
Furthermore, our future success depends on our ability to
continue to attract, retain and motivate senior management and
qualified technical personnel, particularly software engineers,
digital circuit designers, RF and mixed-signal circuit designers
and systems applications engineers. Competition for these
employees is intense. If we are unable to attract, retain and
motivate such personnel in sufficient numbers and on a timely
basis, we will experience difficulty in implementing our current
business and product plans. In that event, we may be unable to
56
successfully meet competitive challenges or to exploit potential
market opportunities, which could adversely affect our business
and results of operations.
Equity awards generally comprise a significant portion of our
compensation packages for all employees. During the time that
our periodic filings with the SEC were not current, as a result
of the recent voluntary review of our equity award practices, we
were not able to issue shares of our common stock pursuant to
equity awards. We cannot be certain that we will be able to
continue to attract, retain and motivate employees if we are
unable to issue shares of our common stock pursuant to equity
awards for a sustained period or if our Class A common
stock experiences another substantial price decline.
We have also modified our compensation policies by increasing
cash compensation to certain employees and instituting awards of
restricted stock units, while simultaneously reducing awards of
stock options. This modification of our compensation policies
and the applicability of the SFAS 123R requirement to
expense the fair value of equity awards to employees have
increased our operating expenses. We cannot be certain that the
changes in our compensation policies will improve our ability to
attract, retain and motivate employees. Our inability to attract
and retain additional key employees and the increase in
stock-based compensation expense could each have an adverse
effect on our business, financial condition and results of
operations.
Our
acquisition strategy may 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 or businesses, or be dilutive to
existing shareholders.
A key element of our business strategy involves expansion
through the acquisitions of businesses, assets, 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, 2007, we acquired
37 companies and certain assets of three other businesses.
We continually evaluate and explore strategic opportunities as
they arise, including business combination transactions,
strategic partnerships, and the purchase or sale of assets,
including tangible and intangible assets such as intellectual
property.
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 acquired
companies or businesses. We have in the past and may in the
future experience delays in the timing and successful
integration of an acquired companys 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, key personnel of an
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. These
challenges are magnified as the size of the acquisition
increases. Furthermore, these challenges would be even greater
if we acquired a business or entered into a business combination
transaction with a company that was larger and more difficult to
integrate than the companies we have historically acquired.
Acquisitions may require large one-time charges and can result
in increased debt or contingent liabilities, adverse tax
consequences, deferred compensation charges, and the recording
and later amortization of amounts related to deferred
compensation and certain purchased intangible assets, any of
which items could negatively impact our results of operations.
In addition, we may record goodwill in connection with an
acquisition and incur goodwill impairment charges in the future.
Any of these charges could cause the price of our Class A
common stock to decline.
Acquisitions or asset purchases made entirely or partially for
cash may reduce our cash reserves. We may seek to obtain
additional cash to fund an acquisition by selling equity or debt
securities. Any issuance of equity or convertible debt
securities 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 prior
pooling-of-interests accounting rules, the securities issued in
nine of our acquisitions were shares of Class B common
stock, which have voting rights superior to those of our
publicly traded Class A common stock.
57
We cannot assure you that we will be able to consummate any
pending or future acquisitions or that we will realize any
anticipated benefits from these acquisitions. We may not be able
to find 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, and any decline
in the price of our Class A common stock may make it
significantly more difficult and expensive to initiate or
consummate additional acquisitions.
As our
international business expands, we are increasingly exposed to
various legal, business, political and economic risks associated
with our international operations.
We currently obtain substantially all of our manufacturing,
assembly and testing services from suppliers located outside the
United States. In addition, 38.8% and 34.7% of our net revenue
for the three and nine months ended September 30, 2007,
respectively, was derived from sales to independent customers
outside the United States, excluding foreign subsidiaries or
manufacturing subcontractors of customers that are headquartered
in the United States. We also frequently ship products to our
domestic customers international manufacturing divisions
and subcontractors. Products shipped to international
destinations, primarily in Asia, represented 88.2% and 88.1% of
our net revenue in the three and nine months ended
September 30, 2007, respectively. We also undertake design
and development activities in Belgium, Canada, China, Denmark,
France, Greece, India, Israel, Japan, Korea, the Netherlands,
Spain, Taiwan and the United Kingdom, among other locations. In
addition, we undertake various sales and marketing activities
through regional offices in a number of countries. We intend to
continue to expand our international business activities and to
open other design and operational centers abroad. The continuing
effects of the war in Iraq and terrorist attacks in the United
States and abroad, the resulting heightened security, and the
increasing risk of extended international military conflicts may
adversely impact our international sales and could make our
international operations more expensive. International
operations are subject to many other inherent risks, including
but not limited to:
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political, social and economic instability;
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exposure to different business practices and legal standards,
particularly with respect to intellectual property;
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natural disasters and public health emergencies;
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nationalization of business and blocking of cash flows;
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trade and travel restrictions;
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the imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions of the
United States and each other country in which we operate;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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changes in taxation and tariffs;
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difficulties in staffing and managing international operations;
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fluctuations in currency exchange rates;
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difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
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potentially adverse tax consequences.
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Any of the factors described above may have a material adverse
effect on our ability to increase or maintain our foreign sales.
We currently operate under tax holidays and favorable tax
incentives in certain foreign jurisdictions. For instance, in
Singapore we operate under tax holidays that reduce our taxes in
that country on certain non-
58
investment income. Such tax holidays and incentives often
require us to meet specified employment and investment criteria
in such jurisdictions. However, we cannot assure you that we
will continue to meet such criteria or enjoy such tax holidays
and incentives, or realize any net tax benefits from tax
holidays or incentives. If any of our tax holidays or incentives
are terminated, our results of operations may be materially and
adversely affected.
The economic conditions in our primary overseas markets,
particularly in Asia, may negatively impact the demand for our
products abroad. All of our international sales to date have
been denominated in U.S. dollars. Accordingly, an increase
in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in
international markets or require us to assume the risk of
denominating certain sales in foreign currencies. We anticipate
that these factors will impact our business to a greater degree
as we further expand our international business activities.
In addition, a significant portion of our cash and marketable
securities are held in
non-U.S. domiciled
countries.
We had a
material weakness in internal control over financial reporting
prior to 2007 and cannot assure you that additional material
weaknesses will not be identified in the future. If our internal
control over financial reporting or disclosure controls and
procedures are not effective, there may be errors in our
financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in
our reported financial information, which could lead to a
decline in our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal control over
financial reporting as of the end of each year, and to include a
management report assessing the effectiveness of our internal
control over financial reporting in each Annual Report on
Form 10-K.
Section 404 also requires our independent registered public
accounting firm to attest to, and report on, managements
assessment of Broadcoms internal control over financial
reporting.
In assessing the findings of the voluntary equity award review
as well as the restatement of our consolidated financial
statements for periods ended on or before March 31, 2006,
our management concluded that there was a material weakness, as
defined in Public Company Accounting Oversight Board Auditing
Standard No. 2, in our internal control over financial
reporting as of December 31, 2005. Management believes this
material weakness was remediated September 19, 2006 and,
accordingly, no longer exists as of the date of this filing.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal control
over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Controls can be circumvented
by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. Over
time, controls may become inadequate because changes in
conditions or deterioration in the degree of compliance with
policies or procedures may occur. In addition, we may reassess
the implementation or testing of certain of our current controls
as a result of the recent release of Public Company Accounting
Oversight Board Auditing Standard No. 5, which may lead to
modifications in such controls. These modifications could affect
the overall effectiveness or evaluation of the control system in
the future by us or our independent registered public accounting
firm. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur
and not be detected.
As a result, we cannot assure you that significant deficiencies
or material weaknesses in our internal control over financial
reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or any
difficulties we encounter in their implementation, could result
in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or
result in material misstatements in our financial statements.
Any such failure could also adversely affect the results of
periodic management evaluations and annual auditor attestation
reports regarding disclosure controls and the effectiveness of
our internal control over financial reporting required under
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. The existence of a material weakness
could result in errors in our financial statements that could
result in a restatement of financial statements, cause us to
fail to timely meet our reporting
59
obligations and cause investors to lose confidence in our
reported financial information, leading to a decline in our
stock price.
We face
intense competition in the semiconductor industry and the wired
and wireless communications markets, which could reduce our
market share in existing markets and affect our entry into new
markets.
The semiconductor industry and the wired and wireless
communications markets are intensely competitive. We expect
competition to continue to increase 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 our target markets. 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. 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 semiconductor solutions. We 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. 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, new competitors or alliances among
competitors could emerge and rapidly acquire significant market
share. Existing or new competitors may also develop technologies
that more effectively address our markets with products that
offer enhanced features and functionality, lower power
requirements, greater levels of integration or lower cost.
Increased competition has resulted in and is likely to continue
to result in declining average selling prices, reduced gross
margins and loss of market share in certain markets. We cannot
assure you that we will be able to continue to compete
successfully against current or new competitors. If we do not
compete successfully, we may lose market share in our existing
markets and our revenues may fail to increase or may decline.
We depend
on five independent foundry subcontractors to manufacture
substantially all of our current products, and any failure to
secure and maintain sufficient foundry capacity could materially
and adversely affect our business.
We do not own or operate a fabrication facility. Five
third-party foundry subcontractors located in Asia manufacture
substantially all of our semiconductor devices in current
production. Availability of foundry capacity has at times in the
past been reduced due to strong demand. In addition, a
recurrence of severe acute respiratory syndrome, or SARS, the
occurrence of a significant outbreak of avian influenza among
humans, or another public health emergency in Asia could further
affect the production capabilities of our manufacturers by
resulting in quarantines or closures. If we are unable to secure
sufficient capacity at our existing foundries, or in the event
of a quarantine or closure at any of these foundries, our
revenues, cost of revenues and results of operations would be
negatively impacted.
In September 1999 two of our third-party 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 experiences a shortage in capacity, suffers any
damage to its facilities, experiences power outages, suffers an
adverse outcome in pending or future litigation, or encounters
financial difficulties or any other disruption of foundry
capacity, we may encounter supply delays or disruptions, and we
may need to qualify an alternative foundry. Even our current
foundries need to have new manufacturing processes qualified if
there is a disruption in an existing process. We typically
require several months to qualify a new foundry or process
before we can begin shipping products from it. If we cannot
accomplish this qualification in a timely manner, we may
experience a significant interruption in supply of the affected
products.
60
Because we rely on outside foundries with limited capacity, we
face several significant risks in addition to those discussed
above, including:
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a lack of guaranteed wafer supply and potential wafer shortages
and higher wafer prices;
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limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and
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the unavailability of, or potential delays in obtaining access
to, key process technologies.
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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. Poor yields from our foundries could
result in product shortages or delays in product shipments,
which could seriously harm our relationships with our customers
and materially and adversely affect our results of operations.
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 some of
our customers, we do not have a long-term volume purchase
agreement or a significant 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 past been reduced from time to
time due to strong demand. 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 main foundries, may
induce our foundries to reallocate capacity to them. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use five independent
foundries to manufacture substantially all of our semiconductor
products, each component is typically manufactured at only one
or two foundries at any given time, and if any of our foundries
is unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. Also, our third party foundries typically
migrate capacity to newer, state-of-the-art manufacturing
processes on a regular basis, which may create capacity
shortages for our products designed to be manufactured on an
older process. We cannot assure you that any of our existing or
new foundries will be able to produce integrated circuits with
acceptable manufacturing yields, or that our foundries will be
able to deliver enough semiconductor devices to us on a timely
basis, or at reasonable prices. These and other related factors
could impair our ability to meet our customers needs and
have a material and adverse effect on our operating results.
Although we may utilize new foundries for other products in the
future, in using any new foundries we will be subject to all of
the risks described in the foregoing paragraphs with respect to
our current foundries.
We depend
on third-party subcontractors to assemble, obtain packaging
materials for, and test substantially all of our current
products. If we lose the services of any of our subcontractors
or if these subcontractors are unable to obtain sufficient
packaging materials, shipments of our products may be disrupted,
which could harm our customer relationships and adversely affect
our net sales.
We do not own or operate an assembly or test facility. Seven
third-party subcontractors located in Asia assemble, obtain
packaging materials for, and test substantially all of our
current products. Because we rely on third-party subcontractors
to perform these functions, we cannot directly control our
product delivery schedules and quality assurance. This lack of
control has resulted, and could in the future result, in product
shortages or quality assurance problems that could delay
shipments of our products or increase our manufacturing,
assembly or testing costs.
In the past we and others in our industry experienced a shortage
in the supply of packaging substrates that we use for our
products. If our third-party subcontractors are unable to obtain
sufficient packaging materials for our products in a timely
manner, we may experience a significant product shortage or
delay in product shipments, which could seriously harm our
customer relationships and materially and adversely affect our
net sales.
We do not have long-term agreements with any of our assembly or
test subcontractors and typically procure services from these
suppliers on a per order basis. If any of these subcontractors
experiences capacity constraints or
61
financial difficulties, suffers any damage to its facilities,
experiences power outages or any other disruption of assembly or
testing capacity, or is unable to obtain sufficient packaging
materials for our products, 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 damage our customer relationships and materially and
adversely affect our results of operations. We are continuing to
develop relationships with additional third-party subcontractors
to assemble and test our products. However, even if we use these
new subcontractors, we will continue to be subject to all of the
risks described above.
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 January 1,
2002 our Class A common stock has traded at prices as low
as $6.35 and as high as $50.00 per share. Fluctuations have
occurred and may continue to occur in response to various
factors, many of which we cannot control, including:
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quarter-to-quarter variations in our operating results;
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changes in accounting rules, particularly those related to the
expensing of stock options;
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rulings in currently pending or newly-instituted intellectual
property litigation;
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other newly-instituted litigation or governmental investigations
or an adverse decision or outcome in any litigation or
investigations;
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announcements of changes in our senior management;
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the gain or loss of one or more significant customers or
suppliers;
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announcements of technological innovations or new products by
our competitors, customers or us;
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the gain or loss of market share in any of our markets;
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general economic and political conditions and specific
conditions in the semiconductor industry and the wired and
wireless communications markets, including seasonality in sales
of consumer products into which our products are incorporated;
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continuing international conflicts and acts of terrorism;
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changes in earnings estimates or investment recommendations by
analysts;
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changes in the methods, metrics or measures used by analysts to
evaluate our stock;
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changes in investor perceptions; or
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changes in expectations relating to our products, plans and
strategic position or those of our competitors or customers.
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In addition, the market prices of securities of
Internet-related, semiconductor and other technology companies
have been and remain volatile. This volatility has significantly
affected the market prices of securities of many technology
companies for reasons frequently unrelated to the operating
performance of the specific companies. Accordingly, you may not
be able to resell your shares of common stock at or above the
price you paid. In the past, we and other companies that have
experienced volatility in the market price of their securities
have been, and in the future we may be, the subject of
securities class action litigation.
Due to the nature of our compensation packages, most of our
executive officers regularly sell shares of our common stock
each quarter or otherwise periodically, often pursuant to
trading plans established under
Rule 10b5-1
of the Exchange Act. As a result, sales of shares by our
executive officers may not be indicative of
62
their opinion of Broadcoms performance at the time of sale
or of our potential future performance. Nonetheless, the market
price of our stock may be affected by sales of shares by our
executive officers.
Our
co-founders, 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 September 30, 2007 our co-founders, directors,
executive officers and their respective affiliates beneficially
owned 13.6% of our outstanding common stock and held 58.9% of
the total voting power 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 our Board of
Directors, the issuance of additional shares of Class B
common stock, and the approval of most significant corporate
transactions, including certain mergers and consolidations and
the sale of substantially all of our assets. In particular, as
of September 30, 2007 our two founders, Dr. Henry T.
Nicholas III, who is no longer an officer or director of
Broadcom, and Dr. Henry Samueli, our Chairman of the Board
and Chief Technical Officer, beneficially owned a total of 12.8%
of our outstanding common stock and held 58.3% of the total
voting power held by our shareholders. Because of their
significant voting stock ownership, we will not be able to
engage in certain transactions, and our shareholders will not be
able to effect certain actions or transactions, without the
approval of one or both of these shareholders. These actions and
transactions include changes in the composition of our Board of
Directors, certain mergers, and the sale of control of our
company by means of a tender offer, open market purchases or
other purchases of our Class A common stock, or otherwise.
Repurchases of shares of our Class A common stock under our
share repurchase program will result in an increase in the total
voting power of our co-founders, directors, executive officers
and their affiliates, as well as other continuing shareholders.
Some of
the independent foundries upon which we rely to manufacture our
products, as well as our own California and Singapore
facilities, are located in regions that are subject to
earthquakes and other natural disasters.
One of the third-party foundries upon which we rely to
manufacture substantially all of our semiconductor devices is
located in Taiwan. Taiwan has experienced significant
earthquakes in the past and could be subject to additional
earthquakes. Any earthquake or other natural disaster, such as a
tsunami, in a country in which any of our foundries is located
could significantly 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.
Our California facilities, including our principal executive
offices and major design centers, are located near major
earthquake fault lines. Our international distribution center
and some of our third-party foundries are located in Singapore,
which could also be subject to an earthquake, tsunami or other
natural disaster. If there is a major earthquake or any other
natural disaster in a region where one or more of our facilities
are located, our operations could be significantly disrupted.
Although we have established business interruption plans to
prepare for any such event, we cannot guarantee that we will be
able to effectively address all interruptions that such an event
could cause.
Any supply disruption or business interruption could materially
and adversely affect our business, financial condition and
results of operations.
Changes
in current or future laws or regulations or accounting rules or
the imposition of new laws or regulations by federal or state
agencies or foreign governments could impede the sale of our
products or otherwise harm our business.
Changes in current laws or regulations or accounting rules
(including the possible adoption at some undetermined future
date of International Financial Reporting Standards in lieu of
U.S. GAAP) applicable to us or the imposition of new laws
and regulations in the United States or elsewhere could
materially and adversely affect our business, financial
condition and results of operations.
The effects of regulation on our customers or the industries in
which they operate may materially and adversely impact our
business. For example, the Federal Communications Commission has
broad jurisdiction over
63
each of our target markets in the United States. 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. FCC regulatory policies that affect
the ability of cable or satellite operators or telephone
companies to offer certain services to their customers or other
aspects of their business may impede sales of our products in
the United States. For example, in the past we have experienced
delays when products incorporating our chips failed to comply
with FCC emissions specifications.
In addition, we and our customers are subject to various import
and export regulations of the United States government. Changes
in or violations of such regulations could materially and
adversely affect our business, financial condition and results
of operations. Additionally, various government export
regulations apply to the encryption or other features contained
in some of our products. We have made numerous filings and
applied for and received a number of export licenses under these
regulations. However, if we fail to continue to receive licenses
or otherwise comply with these regulations, 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.
We and our customers may also be subject to regulation by
countries other than the United States. Foreign governments may
impose tariffs, duties and other import restrictions on
components that we obtain from non-domestic suppliers and may
impose export restrictions on products that we sell
internationally. These tariffs, duties or restrictions could
materially and adversely affect our business, financial
condition and results of operations.
Due to environmental concerns, the use of lead and other
hazardous substances in electronic components and systems is
receiving increased attention. In response, the European Union
passed the Restriction on Hazardous Substances, or RoHS,
Directive, legislation that limits the use of lead and other
hazardous substances in electrical equipment. The RoHS Directive
became effective July 1, 2006. We believe that our current
product designs and material supply chains are in compliance
with the RoHS Directive. However, it is possible that
unanticipated supply shortages or delays may occur as a result
of these recent regulations.
Our
articles of incorporation and bylaws contain anti-takeover
provisions that could prevent or discourage a third party from
acquiring us.
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 to one vote
per share in the case of our Class A common stock) as well
as the right to vote separately as a class (i) as required
by law and (ii) in the case of a proposed issuance of
additional shares of Class B common stock, unless such
issuance is approved by at least two-thirds of the members of
the Board of Directors then in office. Our Board of Directors
also has the authority to fix the rights and preferences of
shares of our preferred stock and to issue shares of common or
preferred stock without a shareholder vote. It is possible that
the provisions in our charter documents, the exercise of
supervoting rights by holders of our Class B common stock,
our co-founders, directors and officers
ownership of a majority of the Class B common stock, or the
ability of our Board of Directors to issue preferred stock or
additional shares of Class B common stock may prevent or
discourage third parties from acquiring us, even if the
acquisition would be beneficial to our shareholders. In
addition, these factors may discourage third parties from
bidding for our Class A common stock at a premium over the
market price for our stock. These factors may also materially
and adversely affect voting and other rights of the holders of
our common stock and the market price of our Class A common
stock.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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In the three months ended September 30, 2007, we issued an
aggregate of 1.5 million shares of our Class A common
stock upon conversion of a like number of shares of our
Class B common stock. Each share of our Class B common
stock is convertible at the option of the holder into one share
of Class A common stock, and in most instances will
automatically convert into one share of Class A common
stock upon sale or other transfer. The
64
offer and sale of the securities were effected without
registration in reliance on the exemption from registration
provided by Section 3(a)(9) of the Securities Act.
Issuer
Purchases of Equity Securities
In February 2007 our Board of Directors authorized a program to
repurchase shares of our Class A common stock for cash. The
Board approved the repurchase of shares having an aggregate
market value of up to $1.0 billion, depending on market
conditions and other factors. Repurchases under the program may
be made at any time and from time to time during the
18 month period that commenced February 12, 2007. The
following table presents details of our repurchases during the
three months ended September 30, 2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
That May yet be
|
|
|
|
of Shares
|
|
|
Price
|
|
|
as Part of Publicly
|
|
|
Purchased under
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Announced Plan
|
|
|
the Plan
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
July 2007
|
|
|
1,840
|
|
|
$
|
31.67
|
|
|
|
1,840
|
|
|
|
|
|
August 2007
|
|
|
1,787
|
|
|
|
33.75
|
|
|
|
1,787
|
|
|
|
|
|
September 2007
|
|
|
1,267
|
|
|
|
35.76
|
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,894
|
|
|
|
33.49
|
|
|
|
4,894
|
|
|
$
|
181,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From the time this program was implemented through
September 30, 2007, we repurchased a total of
24.7 million shares of Class A common stock at a
weighted average price of $33.12 per share, of which
$811.8 million was settled in cash during the nine months
ended September 30, 2007 and the remaining
$6.5 million was included in accrued liabilities at
September 30, 2007.
|
|
Item 3.
|
Defaults
upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
None.
(a) Exhibits. The following Exhibits are
attached hereto and incorporated herein by reference:
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10.1*
|
|
Lease Agreement dated November 20, 2000, together with
Second Amendment dated March 30, 2001 and Third Amendment
dated July 9, 2007, between Sobrato Interests and the
registrant. Lease dated July 9, 2007 between Sobrato
Interests and the registrant.
|
10.2*
|
|
First Amendment, Second Amendment, and Third Amendment dated
June 7, 2005, April 9, 2007 and April 9, 2007,
respectively, to Lease dated December 17, 2004 between
Irvine Commercial Property Company LLC and the registrant.
|
10.3*
|
|
Patent License Agreement dated July 19, 2007 by and between
the registrant, Cellco Partnership d/b/a Verizon Wireless and
Verizon Communications Inc.
|
31*
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
32**
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer, as required pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and furnished herewith pursuant
to SEC Release
No. 33-8238.
|
|
|
|
|
|
Confidential treatment has been requested with respect to the
redacted portions of the referenced exhibit. |
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
65
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)
Eric K. Brandt
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Bret W. Johnsen
Vice President and
Corporate Controller
(Principal Accounting Officer)
October 24, 2007
66
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10.1*
|
|
Lease Agreement dated November 20, 2000, together with
Second Amendment dated March 30, 2001 and Third Amendment
dated July 9, 2007, between Sobrato Interests and the
registrant. Lease dated July 9, 2007 between Sobrato
Interests and the registrant.
|
10.2*
|
|
First Amendment, Second Amendment, and Third Amendment dated
June 7, 2005, April 9, 2007 and April 9, 2007,
respectively, to Lease dated December 17, 2004 between
Irvine Commercial Property Company LLC and the registrant.
|
10.3*
|
|
Patent License Agreement dated July 19, 2007 by and between
the registrant, Cellco Partnership d/b/a Verizon Wireless and
Verizon Communications Inc.
|
31*
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
32**
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer, as required pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and furnished herewith pursuant
to SEC Release
No. 33-8238.
|
|
|
|
|
|
Confidential treatment has been requested with respect to the
redacted portions of the referenced exhibit. |
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |