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
June 30, 2008
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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
(State or Other
Jurisdiction
of Incorporation or Organization)
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33-0480482
(I.R.S. Employer
Identification No.)
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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 June 30, 2008 the registrant had 440.4 million
shares of Class A common stock, $0.0001 par value, and
66.9 million shares of Class B common stock,
$0.0001 par value, outstanding.
BROADCOM
CORPORATION
QUARTERLY
REPORT ON
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008
TABLE OF
CONTENTS
Broadcom®,
the pulse logo and
SystemI/Otm
are among the trademarks of Broadcom Corporation and/or its
affiliates in the United States, certain other countries and/or
the EU. Any other trademarks or trade names mentioned are the
property of their respective owners.
©
2008 Broadcom Corporation. All rights reserved.
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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BROADCOM
CORPORATION
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June 30,
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December 31,
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2008
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2007
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,705,715
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$
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2,186,572
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Short-term marketable securities
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228,418
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141,728
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Accounts receivable, net
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479,832
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369,004
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Inventory
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256,346
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231,313
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Prepaid expenses and other current assets
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89,815
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125,663
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Total current assets
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2,760,126
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3,054,280
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Property and equipment, net
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252,890
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241,803
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Long-term marketable securities
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105,513
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75,352
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Goodwill
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1,386,642
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1,376,721
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Purchased intangible assets, net
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38,371
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46,607
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Other assets
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56,812
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43,430
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Total assets
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$
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4,600,354
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$
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4,838,193
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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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435,082
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$
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313,621
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Wages and related benefits
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124,276
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147,853
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Deferred revenue
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7,514
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15,864
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Accrued liabilities
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259,617
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253,226
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Total current liabilities
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826,489
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730,564
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Commitments and contingencies
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Long-term deferred revenue
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5,878
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8,108
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Other long-term liabilities
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64,217
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63,373
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Shareholders equity:
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Common stock
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51
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54
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Additional paid-in capital
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11,039,306
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11,576,042
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Accumulated deficit
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(7,330,021
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)
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(7,539,124
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)
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Accumulated other comprehensive loss
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(5,566
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)
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(824
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)
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Total shareholders equity
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3,703,770
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4,036,148
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Total liabilities and shareholders equity
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$
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4,600,354
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$
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4,838,193
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See accompaying notes.
2
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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(In thousands, except per share data)
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Net revenue
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$
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1,200,931
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$
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897,920
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$
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2,233,141
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$
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1,799,401
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Cost of revenue
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554,596
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437,037
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1,035,759
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877,986
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Gross profit
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646,335
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460,883
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1,197,382
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921,415
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Operating expense:
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Research and development
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380,035
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332,130
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735,723
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632,940
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Selling, general and administrative
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142,017
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119,859
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253,963
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248,506
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Amortization of purchased intangible assets
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184
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200
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367
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529
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In-process research and development
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10,200
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10,900
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10,500
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Impairment of intangible assets
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1,900
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1,900
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1,500
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Settlement costs
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15,810
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Restructuring costs (reversal)
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(1,000
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)
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(1,000
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)
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Income (loss) from operations
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123,199
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(1,506
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)
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179,719
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27,440
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Interest income, net
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12,428
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32,904
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32,532
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69,912
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Other income (expense), net
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(191
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)
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642
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733
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(767
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)
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Income before income taxes
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135,436
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32,040
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212,984
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96,585
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Provision (benefit) for income taxes
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647
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(2,216
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)
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3,881
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1,338
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Net income
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$
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134,789
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$
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34,256
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$
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209,103
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$
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95,247
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Net income per share (basic)
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$
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.26
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$
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.06
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$
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.40
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$
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.17
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Net income per share (diluted)
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$
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.25
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$
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.06
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$
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.39
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$
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.16
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Weighted average shares (basic)
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512,875
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540,851
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521,606
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544,356
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Weighted average shares (diluted)
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529,977
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575,115
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534,902
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580,427
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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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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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(In thousands)
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Cost of revenue
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$
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6,237
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$
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6,861
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$
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11,702
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$
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12,675
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Research and development
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90,003
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90,832
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168,709
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169,263
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Selling, general and administrative
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31,268
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36,607
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60,333
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69,233
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See accompaying notes.
3
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended
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June 30,
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2008
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2007
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(In thousands)
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Operating activities
|
|
|
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Net income
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$
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209,103
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$
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95,247
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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35,364
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29,024
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Stock-based compensation expense:
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Stock options and other awards
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115,207
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165,198
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Restricted stock units issued by Broadcom
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125,537
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85,973
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Acquisition-related items:
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Amortization of purchased intangible assets
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8,236
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6,145
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In-process research and development
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10,900
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10,500
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Impairment of intangible assets
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1,900
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1,500
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Loss on strategic investments, net
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1,760
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2,648
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Changes in operating assets and liabilities:
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Accounts receivable
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(110,815
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)
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3,179
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Inventory
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(25,033
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)
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11,470
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Prepaid expenses and other assets
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18,758
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(16,646
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)
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Accounts payable
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123,829
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10,602
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Accrued settlement liabilities
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(2,000
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)
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|
(2,000
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)
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Other accrued and long-term liabilities
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(26,573
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)
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293
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|
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|
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Net cash provided by operating activities
|
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|
486,173
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403,133
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|
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Investing activities
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Net purchases of property and equipment
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(49,067
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)
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(107,379
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)
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Net cash paid for acquisitions and other purchased intangible
assets
|
|
|
(29,738
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)
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(77,952
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)
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Purchases of strategic investments
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(355
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)
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(3,194
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)
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Purchases of marketable securities
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(337,466
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)
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|
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(457,096
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)
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Proceeds from sales and maturities of marketable securities
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|
|
220,598
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|
|
|
664,132
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|
|
|
|
|
|
|
|
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Net cash provided by (used in) investing activities
|
|
|
(196,028
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)
|
|
|
18,511
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|
|
|
|
|
|
|
|
|
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Financing activities
|
|
|
|
|
|
|
|
|
Repurchases of Class A common stock
|
|
|
(835,863
|
)
|
|
|
(641,288
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)
|
Minimum tax withholding paid on behalf of employees for
restricted stock units
|
|
|
(25,753
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)
|
|
|
(36,579
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)
|
Proceeds from issuance of common stock
|
|
|
90,614
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|
|
|
142,450
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(771,002
|
)
|
|
|
(535,417
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(480,857
|
)
|
|
|
(113,773
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,186,572
|
|
|
|
2,158,110
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,705,715
|
|
|
$
|
2,044,337
|
|
|
|
|
|
|
|
|
|
|
See accompaying notes.
4
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2008
|
|
1.
|
Summary
of Significant Accounting Policies
|
Our
Company
Broadcom Corporation (including our subsidiaries, referred to
collectively in these consolidated financial statements as
Broadcom, we, our and
us) 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 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. 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; 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, or 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 our audited
consolidated financial statements and notes thereto for the year
ended December 31, 2007, included in our Annual Report on
Form 10-K
filed with the SEC January 28, 2008.
The interim 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 our consolidated financial position
at June 30, 2008 and December 31, 2007, and the
consolidated results of our operations for the three and six
months ended June 30, 2008 and 2007, and our consolidated
cash flows for the six months ended June 30, 2008 and 2007.
The results of operations for the three and six months ended
June 30, 2008 are not necessarily indicative of the results
to be expected for future quarters or the full year.
Foreign
Currency Translation
The functional currency for most of our international operations
is the U.S. dollar. The functional currency for relatively
few of our foreign subsidiaries is the local currency. Assets
and liabilities denominated in foreign currencies are translated
using the exchange rates on the balance sheet dates. Revenues
and expenses are translated using the average exchange rates
prevailing during the year. Any translation adjustments
resulting from this process are shown separately as a component
of accumulated other comprehensive income (loss) within
shareholders equity in the condensed consolidated balance
sheets. Foreign currency transaction gains and losses are
reported in other income (expense), net in the condensed
consolidated statements of income.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period presentation.
5
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. We regularly evaluate
estimates and assumptions related to revenue recognition,
rebates, 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, self-insurance,
restructuring costs, litigation and other loss contingencies.
These estimates and assumptions are based 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 recording of revenue, costs and
expenses that are not readily apparent from other sources. The
actual results we experience may differ materially and adversely
from our original estimates. To the extent there are material
differences between the estimates and actual results, our future
results of operations will be affected.
Revenue
Recognition
Our net revenue is generated principally by sales of
semiconductor products. We derive the remaining balance of net
revenue predominantly from royalty revenue pursuant to a patent
license agreement, 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
sales occurs through distributors.
The following table presents details of our net revenue:
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Six Months
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Three Months Ended
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Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Sales of semiconductor products
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96.1
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%
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99.0
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%
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95.8
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%
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99.0
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%
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Royalty and other
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3.9
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(1)
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1.0
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4.2
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(1)
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1.0
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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(1)
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Includes royalties in the amount of
$35.6 million and $71.2 million in the three and six
months ended June 30, 2008, respectively, received pursuant
to a patent license agreement entered into in July 2007.
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Six Months
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Three Months Ended
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Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Sales made through direct sales force
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85.1
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%
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85.1
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%
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85.9
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%
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85.3
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%
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Sales made through distributors
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14.9
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14.9
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14.1
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14.7
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|
|
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100.0
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%
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|
|
100.0
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%
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|
|
100.0
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%
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|
|
100.0
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%
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In accordance with SEC Staff Accounting Bulletin, or SAB,
No. 104, Revenue Recognition, or SAB 104, we
recognize product revenue when all of 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, we do not recognize revenue until all customer
acceptance requirements have been met and no significant
obligations remain, when applicable. 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
6
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. We account for rebates in accordance with Emerging
Issues Task Force, or EITF, Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), and,
accordingly, at the time of sale we accrue 100% of the potential
rebate as a reduction to revenue and do not apply a breakage
factor. The amount of these reductions is based upon the terms
included in our various rebate agreements. We reverse the
accrual for unclaimed rebates as specific rebate programs
contractually end or when we believe unclaimed rebates are no
longer subject to payment and will not be paid. See Note 2,
Supplementary Financial Information, for a summary of our
rebate activity.
A portion of our sales are made through distributors under
agreements allowing for pricing credits
and/or
rights of return. These pricing credits
and/or
rights of return provisions prevent us from being able to
reasonably estimate the final price of the inventory to be sold
and the amount of inventory that could be returned pursuant to
these agreements. As a result, the criteria listed in
(iii) in the paragraph above and all customer acceptance
requirements have not been met at the time we deliver products
to our distributors. Accordingly, product revenue from sales
made through these distributors is not recognized until the
distributors ship the product to their customers. We also
maintain inventory (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.
In arrangements that include a combination of semiconductor
products and software, where software is considered
more-than-incidental and essential to the functionality of the
product being sold, we follow 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, or
EITF 03-5.
Under
EITF 03-5,
we are required to account for the entire arrangement as a sale
of software and software-related items, and follow the revenue
recognition criteria in accordance with the American Institute
of Certified Public Accountants Statement of Position, or SOP,
No. 97-2,
Software Revenue Recognition, and related
interpretations, or
SOP 97-2.
In arrangements that include a combination of semiconductor
products, software
and/or
services, where software is not considered
more-than-incidental to the product being sold, we follow the
guidance in EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21.
In the arrangements described above, both the semiconductor
products and software are delivered concurrently and
post-contract customer support is not provided. Therefore, under
both
SOP 97-2
and SAB 104, we recognize revenue upon shipment of the
semiconductor product, assuming all other basic revenue
recognition criteria are met, as both the semiconductor products
and software are considered delivered elements and no
undelivered elements exist. In limited instances where there are
undelivered elements, we allocate revenue based on the relative
fair value of the individual elements. 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
cases where the undelivered element is a data or support
service, the revenue and costs applicable to both the delivered
and undelivered elements are recorded ratably over the
respective service period or estimated product life. 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.
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 No. 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 is recognized in accordance with the
provisions of
SOP 97-2.
Royalty revenue is recognized based upon reports received from
licensees during the period, unless collectibility is not
7
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
We record deferred revenue when advance payments are received
from customers before performance obligations have been
completed
and/or
services have been performed. Deferred revenue does not include
amounts from products delivered to distributors that the
distributors have not yet sold through to their end customers.
Cash
and Cash Equivalents
We consider all highly liquid investments that are readily
convertible into cash and have an original maturity of three
months or less at the time of purchase to be cash equivalents.
Marketable
Securities
Broadcom defines marketable securities as income yielding
securities that can be readily converted into cash. Examples of
marketable securities include U.S. Treasury and agency
obligations, commercial paper, corporate notes and bonds, time
deposits, foreign notes and certificates of deposit.
We account for our investment in debt and equity instruments
under Statement of Financial Accounting Standards, or SFAS,
No. 115, Accounting for Certain Investments in Debt and
Equity Securities and Financial Accounting Standards Board,
or FASB, Staff Position, or FSP,
SFAS No. 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments.
Management determines the appropriate classification of such
securities at the time of purchase and reevaluates such
classification as of each balance sheet date. The investments
are adjusted for amortization of premiums and discounts to
maturity and such amortization is included in interest income.
Historically we classified our cash equivalents and marketable
securities as held-to-maturity. Effective February 2008 we
reclassified our cash equivalents and marketable securities as
available-for-sale and recorded a net unrealized gain in the
amount of $0.2 million in the six months ended
June 30, 2008. Cash equivalents and marketable securities
are reported at fair value with the related unrealized gains and
losses included in accumulated other comprehensive income
(loss), a component of shareholders equity, net of tax. We
follow the guidance provided by EITF
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, to assess whether our
investments with unrealized loss positions are other than
temporarily impaired. Realized gains and losses and declines in
value judged to be other than temporary are determined based on
the specific identification method and are reported in other
income (expense), net in the unaudited condensed consolidated
statements of income.
Fair
Value of Financial Instruments
Our financial instruments consist principally of cash and cash
equivalents, short-term and long-term marketable securities,
accounts receivable and accounts payable. Marketable securities
are comprised of available-for-sale securities that are reported
at fair value with the related unrealized gains and losses
included in accumulated other comprehensive income (loss), a
component of shareholders equity, net of tax. Pursuant to
SFAS No. 157, Fair Value Measurements, or
SFAS 157, the fair value of our cash equivalents and
marketable securities is determined based on
Level 1 inputs, which consist of quoted prices
in active markets for identical assets. We believe that the
recorded values of all of our other financial instruments
approximate their current values because of their nature and
respective durations.
Inventory
Inventory consists of work in process and finished goods and is
stated at the lower of cost
(first-in,
first-out)
or market. We establish inventory reserves for estimated
obsolete or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable
value based upon assumptions about future demand
8
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and market conditions. Shipping and handling costs are
classified as a component of cost of revenue in the unaudited
condensed consolidated statements of income.
Property
and Equipment
Property and equipment are carried at cost. Depreciation and
amortization are calculated using the straight-line method over
the assets estimated remaining useful lives, ranging from
one to seven years. Depreciation and amortization of leasehold
improvements are computed using the shorter of the remaining
lease term or seven years.
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. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, we test goodwill for
impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis in the
fourth quarter or more frequently if we believe indicators of
impairment exist. The performance of the test involves a
two-step process. The first step of the impairment test involves
comparing the fair values of the applicable reporting units with
their aggregate carrying values, including goodwill. We
generally determine the fair value of our reporting units using
the income approach methodology of valuation that includes the
discounted cash flow method as well as other generally accepted
valuation methodologies. If the carrying amount of a reporting
unit exceeds the reporting units fair value, we perform
the second step of the goodwill impairment test to determine the
amount of impairment loss. The second step of the goodwill
impairment test involves comparing the implied fair value of the
affected reporting units goodwill with the carrying value
of that goodwill.
We account for long-lived assets, including other purchased
intangible assets, in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS 144, which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment, such as reductions in demand or
significant economic slowdowns in the semiconductor industry,
are present. Reviews are performed to determine whether the
carrying value of an asset is impaired, based on comparisons to
undiscounted expected future cash flows. If this comparison
indicates that there is impairment, the impaired asset is
written down to fair value, which is typically calculated using:
(i) quoted market prices or (ii) discounted expected
future cash flows utilizing a discount rate consistent with the
guidance provided in Concepts Statement No. 7, Using
Cash Flow Information and Present Value in Accounting
Measurements. Impairment is based on the excess of the
carrying amount over the fair value of those assets.
Warranty
Our products typically carry a one to three year warranty. We
establish reserves for estimated product warranty costs at the
time revenue is recognized based upon our historical warranty
experience, and additionally for any known product warranty
issues.
Guarantees
and Indemnifications
In some agreements to which we are a party, we have agreed to
indemnify the other party for certain matters such as product
liability. We include intellectual property indemnification
provisions in our standard terms and conditions of sale for our
products and have 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 unaudited
condensed consolidated financial statements. However, the
maximum potential amount of the future payments we could be
required to make under these indemnification obligations could
be significant.
9
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We also have obligations to indemnify certain of our present and
former directors, officers and employees to the maximum extent
not prohibited by law. Under these obligations, Broadcom is
required to indemnify each such director, officer and employee
against expenses, including attorneys fees, judgments,
fines and settlements, paid by such individual in connection
with our currently outstanding securities litigation and related
government investigations described in Note 7 (subject to
certain exceptions). The maximum potential amount of the future
payments we could be required to make under these
indemnification obligations could be significant. We maintain
directors and officers insurance policies that may
limit our exposure and enable us to recover a portion of the
amounts paid with respect to such obligations. However, certain
of our insurance carriers have reserved their rights or advised
us that they may in some instances deny coverage. If our
coverage under these policies is reduced or eliminated, our
potential financial exposure in the pending securities
litigation and related government investigations would be
increased. From inception of these matters through June 30,
2008, we have recovered legal expenses in the amount of
$26.7 million under these insurance policies, which amount
we have recorded as a reduction to selling, general and
administrative expense. In the three months ended June 30,
2008, due to a change in the underlying facts and circumstances
related to director and officer claims, we commenced recognizing
reimbursements from our directors and officers
insurance carriers on a cash basis, pursuant to which we record
a reduction to selling, general and administrative expense only
when cash is actually received from our insurance carriers
instead of offsetting a majority of the expenses in a quarter
with a receivable from the carriers. We collected
$13.0 million of the $14.1 million we had recorded as
a receivable at March 31, 2008 and charged the remaining
$1.1 million to selling, general and administrative expense
in the three months ended June 30, 2008. In the six months
ended June 30, 2008 we recorded a reduction of
$9.5 million to selling, general and administrative expense
related to insurance recoveries. In certain limited
circumstances, all or portions of the amounts recovered from our
insurance carriers may be required to be repaid. We regularly
evaluate the need to record a liability for potential future
repayments in accordance with SFAS No. 5,
Accounting for Contingencies, or SFAS 5. As of
June 30, 2008 we have not recorded a liability in
connection with these potential insurance repayment provisions.
Income
Taxes
We utilize the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109,
Accounting for Income Taxes, or SFAS 109. Under the
asset and liability method, deferred taxes are determined based
on the temporary differences between the financial statement and
tax basis of assets and liabilities using tax rates expected to
be in effect during the years in which the basis differences
reverse. A valuation allowance is recorded when it is more
likely than not that some of the deferred tax assets will not be
realized.
In July 2006 the FASB issued Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109, or 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 date
to be recognized upon the adoption of FIN 48 and in
subsequent periods. We 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.
We recognize potential accrued interest and penalties related to
unrecognized tax benefits within operations as income tax
expense.
Stock-Based
Compensation
Broadcom 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. We also have an employee stock purchase plan for all
eligible employees. Effective January 1, 2006 we adopted
SFAS No. 123 (revised 2004), Share-Based Payment,
or SFAS 123R, and applied the provisions of
SAB No. 107, Share-Based Payment, which require
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.
10
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 principally recognized as
expense ratably over the requisite service period. We have
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 our stock price.
Litigation
and Settlement Costs
From time to time, we are involved in disputes, litigation and
other legal actions. In accordance with SFAS 5, 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.
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 plan stock
purchase rights and restricted stock units calculated using the
treasury stock method. Under the treasury stock method, an
increase in the fair market value of our Class A common
stock results in a greater dilutive effect from outstanding
options, stock purchase rights and restricted stock units.
Additionally, the exercise of employee stock options and stock
purchase rights and the vesting of restricted stock units
results in a greater dilutive effect on net income per share.
Business
Enterprise Segments
We operate in one reportable operating segment, wired and
wireless broadband communications. 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
June 30, 2008, 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.
|
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, other than
royalty revenue in one of our operating segments in 2008;
|
11
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the integrated circuits sold by each of our operating segments
use the same standard CMOS manufacturing processes;
|
|
|
|
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
|
|
|
|
all of our integrated circuits are sold through a centralized
sales force and common wholesale distributors.
|
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 our 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 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 share similar economic
characteristics, we have aggregated our results of operations
into one reportable operating segment.
Self-Insurance
We are self-insured for certain healthcare benefits provided to
our U.S. employees. The liability for the self-insured
benefits is limited by the purchase of stop loss insurance. The
stop-loss coverage provides payment for aggregate claims
exceeding $300,000 per covered person for any given year.
Accruals for losses are made based on our claim experience and
actuarial estimates based on historical data. Actual losses may
differ from accrued amounts. Should actual losses exceed the
amount expected and liabilities are not sufficient, an
additional expense may be recorded by us.
Recent
Accounting Pronouncements
In September 2006 the FASB issued SFAS 157, which defines
fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157
is effective for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008 the
FASB issued
FSP 157-2,
Effective Date of FASB Statement No. 157, which
delays the effective date of SFAS 157 for non-financial
assets and liabilities to fiscal years beginning after
November 15, 2008. The adoption of SFAS 157 related to
financial assets and liabilities did not have a material impact
on our consolidated financial statements. We are currently
evaluating the impact, if any, that SFAS 157 may have on
our future consolidated financial statements related to
non-financial assets and liabilities.
In December 2007 the FASB issued SFAS No. 141R,
Business Combinations, or SFAS 141R. SFAS 141R
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of financial statements
to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for financial
statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations
we engage in will be recorded and disclosed according to
SFAS 141, Business Combinations, until
January 1, 2009. We expect SFAS No. 141R will
have an impact on our consolidated financial statements when
effective, but the nature and
12
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
magnitude of the specific effects will depend upon the nature,
terms and size of the acquisitions we consummate after the
effective date.
|
|
2.
|
Supplemental
Financial Information
|
Cash,
Cash Equivalents and Marketable Securities
At June 30, 2008 we had $2.040 billion in cash, cash
equivalents and marketable securities. Pursuant to
SFAS 157, the fair value of our cash equivalents and
marketable securities is determined based on
Level 1 inputs, which consist of quoted prices
in active markets for identical assets. We maintain an
investment portfolio of various security holdings, types and
maturities. We do not use derivative financial instruments. We
place our cash investments in instruments that meet 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. At
June 30, 2008 all of our investments were rated AAA, Aaa,
A+, A-1 or
P-1 by the
major credit rating agencies.
A summary of our cash, cash equivalents and short and long-term
marketable securities by major security type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Cash and
|
|
|
Marketable
|
|
|
Marketable
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
Securities
|
|
|
Securities
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
243,338
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
243,338
|
|
U.S. Treasury and agency money market funds
|
|
|
473,136
|
|
|
|
|
|
|
|
|
|
|
|
473,136
|
|
U.S. Treasury and agency obligations
|
|
|
104,779
|
|
|
|
193,438
|
|
|
|
100,299
|
|
|
|
398,516
|
|
Institutional money market funds
|
|
|
830,063
|
|
|
|
|
|
|
|
|
|
|
|
830,063
|
|
Commercial paper and corporate bonds
|
|
|
7,995
|
|
|
|
34,980
|
|
|
|
5,214
|
|
|
|
48,189
|
|
Cash
|
|
|
46,404
|
|
|
|
|
|
|
|
|
|
|
|
46,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,705,715
|
|
|
$
|
228,418
|
|
|
$
|
105,513
|
|
|
$
|
2,039,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
850,018
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
850,018
|
|
U.S. Treasury and agency money market funds
|
|
|
755,000
|
|
|
|
|
|
|
|
|
|
|
|
755,000
|
|
Institutional money market funds
|
|
|
425,756
|
|
|
|
|
|
|
|
|
|
|
|
425,756
|
|
Commercial paper and corporate bonds
|
|
|
77,313
|
|
|
|
89,630
|
|
|
|
5,229
|
|
|
|
172,172
|
|
U.S. Treasury and agency obligations
|
|
|
33,706
|
|
|
|
52,098
|
|
|
|
70,123
|
|
|
|
155,927
|
|
Cash
|
|
|
44,779
|
|
|
|
|
|
|
|
|
|
|
|
44,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,186,572
|
|
|
$
|
141,728
|
|
|
$
|
75,352
|
|
|
$
|
2,403,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our cash, cash equivalents and short and long-term marketable
securities had maturities as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
1,934,133
|
|
|
$
|
2,328,300
|
|
One to two years
|
|
|
79,384
|
|
|
|
37,268
|
|
Two to three years
|
|
|
26,129
|
|
|
|
38,084
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,039,646
|
|
|
$
|
2,403,652
|
|
|
|
|
|
|
|
|
|
|
Inventory
The following table presents details of our inventory:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Work in process
|
|
$
|
105,753
|
|
|
$
|
60,479
|
|
Finished goods
|
|
|
150,593
|
|
|
|
170,834
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256,346
|
|
|
$
|
231,313
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
The following table presents details of our property and
equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Leasehold improvements
|
|
|
1 to 7
|
|
|
$
|
152,682
|
|
|
$
|
140,089
|
|
Office furniture and equipment
|
|
|
3 to 7
|
|
|
|
25,192
|
|
|
|
24,817
|
|
Machinery and equipment
|
|
|
3 to 5
|
|
|
|
187,493
|
|
|
|
208,453
|
|
Computer software and equipment
|
|
|
2 to 4
|
|
|
|
146,348
|
|
|
|
149,459
|
|
Construction in progress
|
|
|
N/A
|
|
|
|
2,907
|
|
|
|
6,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514,622
|
|
|
|
529,376
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(261,732
|
)
|
|
|
(287,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
252,890
|
|
|
$
|
241,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the six months ended June 30, 2008, we disposed of
property and equipment with a net book value of
$2.1 million. In addition, we paid $9.2 million
related to capital equipment purchases that was accrued at
December 31, 2007 and accrued $6.8 million for capital
equipment purchases at June 30, 2008.
14
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
The following table summarizes the activity related to the
carrying value of our goodwill during the six months ended
June 30, 2008:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
1,376,721
|
|
Contingent consideration
(1)
|
|
|
10,000
|
|
Goodwill recorded in connection with Sunext Design, Inc.
acquisition (Note 3)
|
|
|
320
|
|
Other
|
|
|
(399
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
1,386,642
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Contingent consideration was paid
to the former holders of Global Locate capital stock and other
rights upon satisfaction of certain performance goals met during
the six months ended June 30, 2008.
|
Purchased
Intangible Assets
The following table presents details of our purchased intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Completed technology
|
|
$
|
218,769
|
|
|
$
|
(182,087
|
)
|
|
$
|
36,682
|
|
|
$
|
218,769
|
|
|
$
|
(174,217
|
)
|
|
$
|
44,552
|
|
Customer relationships
|
|
|
49,266
|
|
|
|
(47,666
|
)
|
|
|
1,600
|
|
|
|
49,266
|
|
|
|
(47,366
|
)
|
|
|
1,900
|
|
Customer backlog
|
|
|
3,436
|
|
|
|
(3,436
|
)
|
|
|
|
|
|
|
3,436
|
|
|
|
(3,436
|
)
|
|
|
|
|
Other
|
|
|
7,614
|
|
|
|
(7,525
|
)
|
|
|
89
|
|
|
|
7,614
|
|
|
|
(7,459
|
)
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
279,085
|
|
|
$
|
(240,714
|
)
|
|
$
|
38,371
|
|
|
$
|
279,085
|
|
|
$
|
(232,478
|
)
|
|
$
|
46,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of the amortization of
purchased intangible assets included in each expense
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
3,934
|
|
|
$
|
2,566
|
|
|
$
|
7,869
|
|
|
$
|
5,616
|
|
Operating expense
|
|
|
184
|
|
|
|
200
|
|
|
|
367
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,118
|
|
|
$
|
2,766
|
|
|
$
|
8,236
|
|
|
$
|
6,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents details of 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 Asset Amortization by Year
|
|
|
|
Remainder of
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
7,869
|
|
|
$
|
15,264
|
|
|
$
|
12,527
|
|
|
$
|
1,023
|
|
|
$
|
|
|
|
$
|
36,683
|
|
Operating expenses
|
|
|
366
|
|
|
|
622
|
|
|
|
600
|
|
|
|
100
|
|
|
|
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,235
|
|
|
$
|
15,886
|
|
|
$
|
13,127
|
|
|
$
|
1,123
|
|
|
$
|
|
|
|
$
|
38,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Liabilities
The following table presents details of our accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
|
(In thousands)
|
|
|
Accrued rebates
|
|
$
|
112,229
|
|
|
$
|
132,603
|
|
Warranty reserve
|
|
|
22,395
|
|
|
|
23,287
|
|
Accrued payments on repurchases of Class A common stock
|
|
|
21,606
|
|
|
|
16,067
|
|
Accrued taxes
|
|
|
18,409
|
|
|
|
10,911
|
|
Accrued settlement costs
|
|
|
|
|
|
|
2,000
|
|
Deferred rent
|
|
|
9,621
|
|
|
|
7,970
|
|
Restructuring liabilities
|
|
|
3,268
|
|
|
|
4,460
|
|
Qualcomm royalty payment
|
|
|
24,281
|
|
|
|
|
|
Other
|
|
|
47,808
|
|
|
|
55,928
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,617
|
|
|
$
|
253,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes $27.0 million of
deferred rent that has been reclassified to other long-term
liabilities to conform to the current year presentation.
|
Other
Long-Term Liabilities
The following table presents details of our other long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
|
(In thousands)
|
|
|
Accrued taxes
|
|
$
|
27,654
|
|
|
$
|
32,331
|
|
Deferred rent
|
|
|
31,372
|
|
|
|
27,045
|
|
Restructuring liabilities
|
|
|
1,673
|
|
|
|
2,997
|
|
Other
|
|
|
3,518
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,217
|
|
|
$
|
63,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes $27.0 million of
deferred rent that has been reclassified from accrued
liabilities to conform to the current year presentation.
|
16
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 six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
132,603
|
|
|
$
|
131,028
|
|
Charged as a reduction to revenue
|
|
|
110,371
|
|
|
|
119,826
|
|
Reversal of unclaimed rebates
|
|
|
(26,515
|
)
|
|
|
(4,064
|
)
|
Payments
|
|
|
(104,230
|
)
|
|
|
(109,428
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
112,229
|
|
|
$
|
137,362
|
|
|
|
|
|
|
|
|
|
|
Warranty
Reserve Activity
The following table summarizes the activity related to the
warranty reserve during the six months ended June 30, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
23,287
|
|
|
$
|
19,222
|
|
Charged to costs and expenses
|
|
|
2,282
|
|
|
|
4,675
|
|
Payments
|
|
|
(3,174
|
)
|
|
|
(1,928
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,395
|
|
|
$
|
21,969
|
|
|
|
|
|
|
|
|
|
|
Restructuring
Activity
The following table summarizes the activity related to our
current and long-term restructuring liabilities during the six
months ended June 30, 2008:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
7,457
|
|
Reversal of restructuring
liabilities(1)
|
|
|
(1,000
|
)
|
Cash
payments(2)
|
|
|
(1,516
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
4,941
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We recorded a reversal of
restructuring liabilities of $1.0 million reflecting
revised assumptions on the final facility included in the
restructuring plan.
|
|
(2)
|
|
Cash payments related to net lease
payments on excess facilities, lease terminations and
non-cancelable lease costs. The remaining excess facility cost
will be paid over the remaining lease term through 2010.
|
17
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator: Net income
|
|
$
|
134,789
|
|
|
$
|
34,256
|
|
|
$
|
209,103
|
|
|
$
|
95,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares outstanding
|
|
|
512,968
|
|
|
|
540,895
|
|
|
|
521,699
|
|
|
|
544,414
|
|
Less: Unvested common shares outstanding
|
|
|
(93
|
)
|
|
|
(44
|
)
|
|
|
(93
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (basic)
|
|
|
512,875
|
|
|
|
540,851
|
|
|
|
521,606
|
|
|
|
544,356
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested common shares outstanding
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
11
|
|
Stock awards
|
|
|
17,102
|
|
|
|
34,259
|
|
|
|
13,296
|
|
|
|
36,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (diluted)
|
|
|
529,977
|
|
|
|
575,115
|
|
|
|
534,902
|
|
|
|
580,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
.26
|
|
|
$
|
.06
|
|
|
$
|
.40
|
|
|
$
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted)
|
|
$
|
.25
|
|
|
$
|
.06
|
|
|
$
|
.39
|
|
|
$
|
.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) does not include the effect of
anti-dilutive common share equivalents from outstanding stock
options to purchase 48.9 million and 34.9 million
shares of Class A common stock in the three months ended
June 30, 2008 and 2007, respectively, and from outstanding
stock options to purchase 66.8 million and
32.1 million shares of Class A common stock in the six
months ended June 30, 2008 and 2007, respectively.
At June 30, 2008 there were outstanding stock options to
purchase 126.8 million shares of Class A or
Class B common stock with a weighted average exercise price
of $25.25 per share. In addition, there were 29.4 million
restricted stock units outstanding that entitle the holders to
receive a like number of freely transferable shares of
Class A common stock as the awards vest.
Patent
License Agreement
In July 2007 we entered into a patent license agreement with a
wireless network operator. Under the agreement, royalty payments
will be made to us 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 $40.0 million per calendar
quarter and a lifetime maximum of $200.0 million. We
recorded revenue in the amounts of $35.6 million and
$71.2 million in the three and six months ended
June 30, 2008 under this agreement and have recorded a
cumulative total of $103.0 million from the commencement of
the agreement through June 30, 2008.
Supplemental
Cash Flow Information
In the six months ended June 30, 2008 we paid
$16.1 million related to share repurchases that had not
settled by December 31, 2007 and accrued an additional
$21.6 million for share repurchases that had not settled by
June 30, 2008. In addition, we paid $9.2 million
related to capital equipment that was accrued at
December 31, 2007 and accrued $6.8 million for capital
equipment at June 30, 2008. The amounts accrued for share
repurchases that had not settled by June 30, 2008 and for
capital equipment purchases at June 30, 2008 have been
excluded from the unaudited condensed consolidated statements of
cash flows.
18
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2008 we acquired Sunext Design, Inc., a wholly-owned
subsidiary of Sunext Technology Corporation, Ltd., which
specializes in the design of optical storage semiconductor
products, for $9.9 million. In connection with the
acquisition, we assumed $0.8 million in net liabilities and
incurred $0.5 million in acquisition costs. We recorded a
one-time charge of $10.9 million for purchased in-process
research and development, or IPR&D, expense, as Sunext
Design was an early stage company that had no completed
technology, and recorded $0.3 million in goodwill. The
amount allocated to IPR&D in the six months ended
June 30, 2008 was determined through established valuation
techniques used in the high technology industry and was expensed
upon acquisition as it was determined that the underlying
projects had not reached technological feasibility and no
alternative future uses existed. In addition, we are required to
pay up to an additional $38.0 million in future license
fees and royalties on optical disk reader and writer technology,
assuming Sunext Technology successfully delivers the
technologies as defined in the license agreement. These
royalties and license rights will be capitalized upon delivery
and amortized to cost of revenue over the estimated economic
useful life of the related products.
Our primary reasons for the acquisition were to reduce the time
required to develop new technologies and products and bring them
to market, incorporate enhanced functionality into and
complement our existing high definition DVD technologies,
augment our engineering workforce, and enhance our technological
capabilities. Certain of the cash consideration in the above
acquisition is currently held in escrow pursuant to the terms of
the acquisition agreement.
The unaudited condensed consolidated financial statements for
the six months ended June 30, 2008 include the results of
operations of Sunext Design commencing as of the acquisition
date. No supplemental pro forma information is presented for the
acquisition due to the immaterial effect of the acquisition on
our results of operations.
We recorded tax provisions of $0.6 million and
$3.9 million for the three and six months ended
June 30, 2008, respectively, and a tax benefit of
$2.2 million and a tax provision of $1.3 million for
the three and six months ended June 30, 2007, respectively.
Our effective tax rates were 0.5% and 1.8% for the three and six
months ended June 30, 2008, respectively, and (6.9)% and
1.4% for the three and six months ended June 30, 2007,
respectively. The difference between our effective tax rates and
the 35% federal statutory rate resulted primarily from foreign
earnings taxed at rates lower than the federal statutory rate
for the three and six months ended June 30, 2008 and
June 30, 2007, domestic losses recorded without income tax
benefit for the three and six months ended June 30, 2007,
and tax benefits of $4.4 million for the three and six
months ended June 30, 2008 and $4.6 million for the
three and six months ended June 30, 2007 resulting
primarily from the expiration of the statutes of limitations for
the assessment of taxes in various foreign jurisdictions.
We utilize the asset and liability method of accounting for
income taxes as set forth in SFAS 109. We record net
deferred tax assets to the extent we believe these assets will
more likely than not be realized. In making such determination,
we consider 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 our recent cumulative
losses in the U.S. and certain foreign jurisdictions, our
U.S. tax losses after tax deductions for stock-based
compensation, and the full utilization of our loss carryback
opportunities, we have concluded that a full valuation allowance
should be recorded in the U.S. and certain foreign
jurisdictions. In certain other foreign jurisdictions where we
do not have cumulative losses, we had net deferred tax assets of
$5.3 million and $3.3 million, at June 30, 2008
and December 31, 2007, respectively, in accordance with
SFAS 109.
19
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We file federal, state and foreign income tax returns in
jurisdictions with varying statutes of limitations. The 2004
through 2007 tax years generally remain subject to examination
by federal and most state tax authorities. In foreign
jurisdictions, the 2001 through 2007 tax years generally remain
subject to examination by tax authorities.
Our income tax returns for the 2004, 2005 and 2006 tax years are
currently under examination by the Internal Revenue Service and
certain state jurisdictions. We do not expect that the results
of these examinations will have a material effect on our
financial condition or results of operations.
We operate under tax holidays in Singapore, which are effective
through March 31, 2014. The tax holidays are conditional
upon our meeting certain employment and investment thresholds.
Share
Repurchase Program
In November 2007 the Board of Directors authorized a program to
repurchase shares of Broadcoms Class A common stock
having an aggregate value of up to $1.0 billion depending
on market conditions and other factors. Repurchases under the
program may be made from time to time at any time during the
period that commenced November 19, 2007 and continues
through and including December 31, 2008. In the six months
ended June 30, 2008 we repurchased a total of
37.7 million shares of Class A common stock at a
weighted average price of $22.30 per share, for a total of
$841.4 million. In the six months ended June 30, 2008,
we paid $16.1 million related to 2007 repurchases that had
not settled by December 31, 2007 and accrued an additional
$21.6 million for 2008 repurchases that had not settled by
June 30, 2008. From commencement of the current program
through June 30, 2008, we repurchased a total of
43.4 million shares of Class A common stock at a
weighted average price of $22.97 per share. As of June 30,
2008, $2.3 million remained authorized and available to
repurchase shares of our Class A common stock under this
plan. This amount was expended to repurchase shares in July 2008.
Repurchases under our share repurchase program were made in open
market or privately negotiated transactions in compliance with
Rule 10b-18
promulgated under the Securities Exchange Act of 1934, as
amended, the Exchange Act.
Comprehensive
Income
The components of comprehensive income, net of taxes, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
209,103
|
|
|
$
|
95,247
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities, net of tax
|
|
|
(23
|
)
|
|
|
|
|
Translation adjustments
|
|
|
(4,719
|
)
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
204,361
|
|
|
$
|
95,792
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Employee
Benefit Plans
|
Equity
Awards
We granted options to purchase 5.3 million shares of our
Class A common stock and awarded 15.0 million
restricted stock units during the three months ended
June 30, 2008. During the six months ended June 30,
2008 we granted options to purchase a total of 6.5 million
and awarded 16.5 million restricted stock units. We issued
an additional 2.0 million shares of our Class A common
stock pursuant to our employee stock purchase plan in the
20
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
six months ended June 30, 2008. As a result of employee
terminations, we cancelled options to purchase 1.0 million
and 2.3 million shares of our Class A common stock and
0.3 million and 0.8 million restricted stock units
during the three and six months ended June 30, 2008,
respectively.
Stock-Based
Compensation Expense
The amount of unearned stock-based compensation currently
estimated to be expensed in the remainder of 2008 through 2012
related to unvested share-based payment awards at June 30,
2008 is $1.203 billion. Of this amount,
$265.0 million, $435.3 million, $294.0 million,
$169.4 million and $38.8 million are currently
estimated to be recorded in the remainder of 2008, and in 2009,
2010, 2011 and 2012, respectively. The weighted-average period
over which the unearned stock-based compensation is expected to
be recognized is approximately 1.5 years. 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 or assume unvested equity awards in
connection with acquisitions.
Combined
Incentive Plan Activity
Activity under all stock option incentive plans in 2008 is set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Grant-Date
|
|
|
|
Number of
|
|
|
Price Range
|
|
|
Price
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
per Share
|
|
|
per Share
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
126,142
|
|
|
$
|
.01 - $81.50
|
|
|
$
|
24.96
|
|
|
$
|
15.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted under the 1998 Plan
|
|
|
6,471
|
|
|
|
19.36 - 28.75
|
|
|
|
26.60
|
|
|
|
10.29
|
|
Options cancelled
|
|
|
(2,302
|
)
|
|
|
.01 - 48.63
|
|
|
|
31.40
|
|
|
|
10.80
|
|
Options exercised
|
|
|
(3,522
|
)
|
|
|
.01 - 27.75
|
|
|
|
13.25
|
|
|
|
14.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
126,789
|
|
|
|
.01 - 81.50
|
|
|
|
25.25
|
|
|
|
15.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit activity in 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units Outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
17,053
|
|
|
$
|
33.50
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted under the 1998 Plan
|
|
|
16,506
|
|
|
|
25.88
|
|
Restricted stock units cancelled
|
|
|
(767
|
)
|
|
|
31.64
|
|
Restricted stock units vested
|
|
|
(3,367
|
)
|
|
|
32.56
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
29,425
|
|
|
|
29.38
|
|
|
|
|
|
|
|
|
|
|
21
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The per share fair values of stock options and employee stock
purchase rights granted in the six months ended June 30,
2008 in connection with stock incentive plans and have been
estimated with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emplyee
|
|
|
|
Employee
|
|
|
Stock
|
|
|
|
Stock
|
|
|
Purchase
|
|
|
|
Options
|
|
|
Rights
|
|
|
|
2008
|
|
|
2008
|
|
|
Expected life (in years)
|
|
|
4.25
|
|
|
|
1.74
|
|
Volatility
|
|
|
0.44
|
|
|
|
.43
|
|
Risk-free interest rate
|
|
|
2.91
|
%
|
|
|
2.26
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted average fair value
|
|
$
|
10.29
|
|
|
$
|
10.28
|
|
In June 2008 Broadcoms 1998 Stock Incentive Plan, as
previously amended and restated, was further restated to:
(i) revise the Director Automatic Grant Program in effect
for non-employee directors under the plan, (ii) extend the
term of the plan through March 12, 2018, (iii) revise
the adjustments that may be made to certain performance criteria
that may serve as the vesting conditions for performance-based
awards made under the plan, and (iv) effect various
technical revisions to facilitate plan administration.
In June 2008 Broadcoms 1998 Employee Stock Purchase Plan
was amended to: (i) extend the term of the plan through
April 30, 2018, (ii) revise the automatic annual share
increase provision of the plan so that the number of shares of
Class A common stock that will be automatically added to
the share reserve on the first trading day of January in each
calendar year will increase from 1.00% to 1.25% of the total
number of shares of Class A and Class B common stock
outstanding on the last trading day of the immediately preceding
calendar year, and (iii) effect various technical revisions
and improvements. The increase described in (ii) will be in
effect for the January 2009 automatic increase. Similar
amendments will also be made to the 2007 International Employee
Stock Purchase Plan, which draws its shares of Class A
common stock from the share reserve available under the 1998
ESPP.
Intellectual Property Proceedings. In May 2005
we filed a complaint with the U.S. International Trade
Commission, or ITC, asserting that Qualcomm Incorporated, or
Qualcomm, engaged in unfair trade practices by importing
integrated circuits and other products that infringe, both
directly and indirectly, five of our 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 Broadcoms
complaint. The investigation was later limited to asserted
infringement of three Broadcom patents. Qualcomm has requested
that the U.S. Patent and Trademark Office, or USPTO,
reexamine two 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 chips. The ITC 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 on the
appeal occurred in July 2008.
22
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2007 we filed a complaint with the ITC to enforce
the cease and desist order entered by the Commission. The
complaint seeks monetary penalties and other remedies for
Qualcomms continued infringement. In December 2007 the ITC
instituted an investigation based upon the allegations made in
our complaint. A hearing in the matter occurred in April 2008.
An initial determination is expected in November 2008.
In May 2005 we 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 our 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, where they were later dismissed upon joint motion of
the parties. 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 sought
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 our patents
are invalid and not infringed. In November 2006 we 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 infringed the three remaining patents and awarded
Broadcom $19.6 million in compensatory damages. The
foregoing amount has not been recognized in our consolidated
statements of income. Qualcomm has requested that the USPTO
reexamine two of the infringed patents. In December 2007 the
court issued a permanent injunction enjoining Qualcomm from
future infringement of the three patents at issue. The permanent
injunction includes a sunset period through January 31,
2009 concerning sales by Qualcomm of certain infringing products
to customers existing as of May 29, 2007, provided that
Qualcomm pays Broadcom an ongoing royalty for all such sales
during the sunset period. The court amended the injunction in
February 2008 and again in March 2008. The court entered final
judgment against Qualcomm in March 2008, setting compensatory
damages at $22.8 million, plus pre-judgment and
post-judgment interest. Pursuant to the terms of the amended
injunction, in April 2008 Qualcomm paid Broadcom royalties of
$24.3 million, which were recorded as the Qualcomm Royalty
Payment in our unaudited condensed consolidated financial
statements as of June 30, 2008. In July 2008 Qualcomm paid
Broadcom an additional $8.3 million, which has not been
reflected in our unaudited condensed consolidated financial
statements as of June 30, 2008. In May 2008 the court
issued an order for Qualcomm to show cause why it should not be
held in contempt of the permanent injunction. Qualcomm has
appealed the jury verdict and the injunction, and has not yet
paid the compensatory damages award. Hearings on the order and
the appeal occurred in July 2008.
In October 2005 Qualcomm filed a third complaint against us 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 sought preliminary and permanent injunctions against
us as well as the recovery of monetary damages and
attorneys fees. We filed an answer in December 2005
denying the allegations in Qualcomms complaint and
asserting counterclaims seeking a declaratory judgment that the
two Qualcomm patents were invalid and not infringed. In January
2007 a jury returned a verdict that we did not infringe either
patent, and rendered advisory verdicts that Qualcomm committed
inequitable conduct before the USPTO 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 us our attorneys fees and costs.
Qualcomm has appealed, and
23
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a hearing date has been set for August 2008. In January 2008,
the court
granted-in-part
our motion for sanctions against Qualcomm for litigation
misconduct, awarding us our attorneys fees and costs. In
January 2008 Qualcomm paid Broadcom $8.6 million pursuant
to that award, which amount has been reflected as a reduction of
legal expense included in selling, general and administrative
expense in the six months ended June 30, 2008.
In December 2006 SiRF Technology, Inc., or SiRF, filed a
complaint in the United States District Court for the Central
District of California against Global Locate, Inc., a
privately-held company that became a wholly-owned subsidiary of
Broadcom in July 2007, 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 alleging that
Global Locate engaged in unfair trade practices by importing
integrated circuits and other products that infringe, both
directly and indirectly, four SiRF 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. SiRF withdrew two patents from the investigation, and
an ITC administrative law judge conducted a hearing on
SiRFs remaining two patents in suit in March 2008. In June
2008 the ITC administrative law judge issued an initial
determination finding SiRFs two patents not infringed and
one patent invalid. 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,
incorporated in products, such as personal navigation devices
and GPS-enabled cellular telephones, that infringe, both
directly and indirectly, six Global Locate 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
Locate complaint. A hearing was held in April 2008, and we are
awaiting the initial determination of the ITC administrative law
judge. The ITC has set a target date for completion of the
investigation in December 2008.
In July 2007 OPTi Inc. filed a complaint against us and others
in the United States District Court for the Eastern District of
Texas. The complaint alleges that we have infringed, both
directly and indirectly, two patents relating generally to a bus
interface architecture. The complaint seeks preliminary and
permanent injunctions, the recovery of monetary damages,
including treble damages for willful infringement, and
attorneys fees. In September 2007 we answered the
complaint and asserted counterclaims seeking declaratory
judgments that the asserted patents are invalid, unenforceable,
and not infringed. Discovery is ongoing. Trial has been set for
February 2009.
In October 2007
Wi-LAN Inc.
filed a complaint against us and multiple other defendants in
the United States District Court for the Eastern District
of Texas alleging that certain Broadcom products infringe three
Wi-LAN
patents relating generally to wireless LAN and DSL technology.
The complaint seeks a permanent injunction against us as well as
the recovery of monetary damages and attorneys fees. We
filed an answer in January 2008 denying the allegations in
Wi-LANs
complaint and asserting counterclaims seeking a declaratory
judgment that the three
Wi-LAN
patents are invalid, unenforceable and not infringed. Discovery
has not yet begun and no trial date has been set.
24
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2008 Netgear, Inc. filed a third party complaint
against us and multiple other defendants in the
United States District Court for the Western District of
Wisconsin alleging that, to the extent Broadcom was a supplier
of components for products accused of infringement in a related
patent infringement case by LG Electronics Inc.,
Fujitsu Limited and U.S. Philips Corporation, Broadcom is
obligated to defend and indemnify Netgear. In June 2008 the
judge granted the parties joint motion to dismiss all
claims asserted by Netgear against Broadcom in the case without
prejudice.
Antitrust and Unfair Competition
Proceedings. In July 2005 we 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
asserted causes of action based on breach of contract,
promissory estoppel, fraud, and tortious interference with
prospective economic advantage. In September 2005 we 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 District 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 Court for further proceedings.
In November 2007 we filed an amended complaint in the case
adding additional causes of action based primarily upon
allegations originally made in the California state unfair
competition case described below. In December 2007 Qualcomm
filed a motion to dismiss the additional causes of action. The
court has not yet ruled on the motion. In February 2008 Qualcomm
filed counterclaims seeking a declaratory judgment that it had
complied with its obligations to industry standards bodies.
Qualcomm also filed an affirmative defense asserting that our
claims were barred by unclean hands. In April 2008 we moved to
dismiss Qualcomms counterclaims and affirmative defense.
In May 2008 we moved to transfer the case to the United States
District Court for the Southern District of California. The
court has not yet ruled on either motion. Discovery is in
progress, and a trial date in the District Court has been
tentatively set for June 2009.
In October 2005 Broadcom 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 had instituted a formal investigation of Qualcomm.
In June 2006 Broadcom 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 we 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 our 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 Broadcom, each of the members of our Board of
Directors, certain current or former officers, and Henry T.
Nicholas III, our 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
25
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
our 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 California 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
our 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 Broadcom should pursue in respect of the claims asserted
in the Options Derivative Actions. The SLC is currently engaged
in its review.
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
Broadcom and certain of our 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 we improperly backdated
stock options, resulting in false or misleading disclosures
concerning, among other things, our business and financial
condition. Plaintiffs also allege that we failed to account for
and pay taxes on stock options properly, that the individual
defendants sold our common stock while in possession of material
nonpublic information, and that the defendants conduct
caused artificial inflation in our stock price and damages to
the putative plaintiff class. The plaintiffs assert claims under
Sections 10(b) and 20(a) of the Exchange Act 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. In March 2008 the district
judge entered a revised order appointing lead class counsel. The
lead plaintiff filed an amended consolidated class action
complaint in late April 2008, naming additional defendants
including certain current officers and directors of Broadcom as
well as Ernst & Young LLP, our former independent
registered public accounting firm, or E&Y. We filed a
motion to dismiss the amended consolidated class action
complaint in June 2008. We intend to defend the consolidated
class action vigorously.
We have indemnification agreements with each of our present and
former directors and officers, under which we are generally
required to indemnify each such director or officer against
expenses, including attorneys fees, judgments, fines and
settlements, arising from the Options Derivative Actions, the
Options Class Actions and the pending SEC and
U.S. Attorneys Office investigations described below
(subject to certain exceptions, including liabilities arising
from willful misconduct, from conduct knowingly contrary to the
best interests of Broadcom, or conduct that is knowingly
fraudulent or deliberately dishonest or results in improper
personal benefit). The maximum potential amount of the future
payments we could be required to make under these
indemnification obligations could be significant. We maintain
directors and officers insurance policies that may
limit our exposure and enable us to recover a portion of the
amounts paid with respect to such obligations. However, certain
of our insurance carriers have reserved their rights or advised
us that they may in some instances deny coverage. If our
coverage under these policies is reduced or eliminated, our
potential financial exposure in the pending securities
litigation and related government investigations would be
increased.
In April 2008 we delivered a Notice of Arbitration and
Arbitration Claim to our former independent registered public
accounting firm, E&Y, and certain related parties. The
arbitration relates to the issues that led to the restatement of
Broadcoms financial statements for the periods from 1998
through March 31, 2006 as disclosed in an amended Annual
Report on
Form 10-K/A
for the year ended December 31, 2005 and an amended
Quarterly
26
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed with
the SEC January 23, 2007. In May 2008 E&Y delivered a
Notice of Defense and Counterclaim. No date for an arbitration
hearing has been scheduled.
SEC Formal Order of Investigation and United States
Attorneys Office Investigation. In June
2006 we received an informal request for information from the
staff of the Los Angeles regional office of the
SEC regarding our historical option granting practices. In
December 2006 the SEC issued a formal order of investigation and
a subpoena for the production of documents. In 2007 we provided
substantial amounts of documents and information to the SEC on a
voluntary basis. In addition, we have produced documents
pursuant to subpoenas. In July 2007 we received a Wells
Notice from the SEC in connection with this investigation.
Our then Chairman of the Board of Directors and Chief Technical
Officer, Dr. Henry Samueli, also received a Wells Notice at
that time. In August 2007 our then 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. 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 April 2008 the SEC brought a
complaint against Broadcom alleging violations of the federal
securities laws, and we entered into a settlement with the SEC.
Without admitting or denying the SECs allegations, we
agreed to pay a civil penalty of $12.0 million, which we
recorded as a settlement cost in the six months ended
June 30, 2008, and stipulated to an injunction against
future violations of certain provisions of the federal
securities laws. The settlement was approved by the United
States District Court for the Central District of California
Court in late April 2008, thus, concluding the SECs
investigation of this matter with respect to Broadcom.
In May 2008 the SEC filed a complaint in the United States
District Court for the Central District of California (Case
No. SACV08-539
CJC (RNBx)) against Dr. Samueli, Mr. Dull and two
other former executive officers of Broadcom, relating to its
previously-disclosed investigation of the companys
historical stock option granting practices. The SECs civil
complaint alleges that Dr. Samueli and Mr. Dull, along
with the other defendants, violated the anti-fraud provisions of
the federal securities laws, falsified books and records, and
caused the company to report false financial results. The
SECs complaint seeks to: (i) enjoin the defendants
from future violations of the securities laws; (ii) require
Mr. Dull and another defendant to disgorge any ill-gotten
gains and pay prejudgment interest; (iii) require all
defendants to pay civil monetary penalties; (iv) require
two defendants to disgorge bonuses and stock sales profits
pursuant to Section 304 of the Sarbanes-Oxley Act of 2002;
(v) bar all defendants from serving as officers or
directors of a public company; and (vi) provide other
appropriate relief. Pending resolution of the SEC action,
Dr. Samueli and Mr. Dull have taken leaves of absence
from their positions as executive officers of Broadcom and
Dr. Samueli resigned from his position as Chairman and a
member of the Board of Directors. We do not know when the
investigation will be resolved with respect to Dr. Samueli
and/or
Mr. Dull or what actions, if any, the SEC may require
either to take in resolution of the investigation against them
personally.
In August 2006 we were informally contacted by the
U.S. Attorneys Office for the Central District of
California and asked to produce documents. In 2007 and 2008 we
have continued to provide substantial amounts of documents and
information to the U.S. Attorneys Office on a
voluntary basis and pursuant to grand jury subpoenas. In June
2008 Dr. Samueli pled guilty to making a materially false
statement to the SEC in connection with its investigation of
alleged stock options backdating at the company. In agreeing to
plead guilty, Dr. Samueli has agreed to, among other
things, five years probation, a $250,000 fine, a $100
special assessment, and a $12.0 million payment to the
U.S. Treasury. Dr. Samuelis plea agreement is
conditioned on acceptance by the United States District Court
for the Central District of California. We are continuing to
cooperate with the U.S. Attorneys Office in its
investigation. Any further action by the SEC, the
U.S. Attorneys Office or other governmental agency
could result in additional civil or criminal sanctions
and/or fines
against us
and/or
certain of our current or former officers, directors
and/or
employees.
27
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 we 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 us, and we are
cooperating fully with the ongoing investigation and the
prosecution.
General. The foregoing discussion includes
material developments that occurred during the three months
ended June 30, 2008 or thereafter in material legal
proceedings in which we
and/or our
subsidiaries are involved. For additional information regarding
certain of these and related legal proceedings, see Note 11
of Notes to Consolidated Financial Statements in Broadcoms
Annual Report on
Form 10-K
for the year ended December 31, 2007.
We and our subsidiaries are also involved in other legal
proceedings, claims and litigation arising in the ordinary
course of business. In the six months ended June 30, 2008
we settled a patent infringement claim for $3.8 million and
recorded the settlement cost in our unaudited condensed
consolidated statements of income.
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 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 ongoing royalties, which could
adversely impact our 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 us. From
time to time we 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 us to incur substantial settlement payments and costs.
In addition, the settlement of any intellectual property
proceeding may require us to grant a license to certain of our
intellectual property rights to the other party under a
cross-license agreement. If any of those events were to occur,
our business, financial condition and results of operations
could be materially and adversely affected.
28
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Item 2.
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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, 2007 and subsequent reports
on Forms 10Q and
8-K, which
discuss our business in greater detail.
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
Quarterly Report on
Form 10-Q,
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 and/or design wins 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; the impact of the IRS review of certain
income tax returns on our results of operations; 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 entitled Risk Factors. 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; 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.
29
Net Revenue. Our net revenue is generated
principally by sales of our semiconductor products. We derive
the remainder of our net revenue predominantly from royalty
revenue pursuant to a patent license agreement, 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.
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.
The following table presents details of our net revenue:
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2007
|
|
|
2008
|
|
|
2007
|
|
|
Sales of semiconductor products
|
|
|
96.1
|
%
|
|
|
99.0
|
%
|
|
|
95.8
|
%
|
|
|
99.0
|
%
|
Royalty and other
|
|
|
3.9
|
(1)
|
|
|
1.0
|
|
|
|
4.2
|
(1)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes royalties in the amount of
$35.6 million and $71.2 million in the three and six
months ended June 30, 2008, respectively, received pursuant
to a patent license agreement entered into in July 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Sales made through direct sales force
|
|
|
85.1
|
%
|
|
|
85.1
|
%
|
|
|
85.9
|
%
|
|
|
85.3
|
%
|
Sales made through distributors
|
|
|
14.9
|
|
|
|
14.9
|
|
|
|
14.1
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-oriented products into
which certain of 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 June 30, 2008 and
prior periods may not necessarily be indicative of future net
revenue and results of operations.
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
30
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 Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Five largest customers as a group
|
|
|
38.0
|
%
|
|
|
41.2
|
%
|
|
|
37.3
|
%
|
|
|
43.5
|
%
|
We expect that our largest customers will continue to account
for a substantial portion of our net revenue in 2008 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. The
primary factors that contributed to the decrease in net revenue
from our top customers as a percentage of net revenue were:
(i) product mix changes with some of our large customers,
(ii) new product ramps at new customers that increased our
total revenues and (iii) royalties received pursuant to a
patent license agreement entered into in July 2007.
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 even though such subsidiaries or
manufacturing subcontractors are located outside of the United
States, as a percentage of total net revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Asia (primarily in Japan, Korea, China and Taiwan)
|
|
|
29.9
|
%
|
|
|
25.6
|
%
|
|
|
28.7
|
%
|
|
|
24.4
|
%
|
Europe (primarily in Finland, France and the United Kingdom)
|
|
|
9.5
|
|
|
|
7.8
|
|
|
|
9.6
|
|
|
|
7.5
|
|
Other
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.9
|
%
|
|
|
34.0
|
%
|
|
|
38.8
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from shipments to international
destinations, as a percentage of total net revenue was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Asia (primarily in China, Hong Kong and Taiwan)
|
|
|
83.8
|
%
|
|
|
82.0
|
%
|
|
|
81.3
|
%
|
|
|
81.5
|
%
|
Europe (primarily in Hungary and Germany)
|
|
|
2.2
|
|
|
|
3.0
|
|
|
|
2.6
|
|
|
|
2.9
|
|
Other
|
|
|
2.7
|
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.7
|
%
|
|
|
88.2
|
%
|
|
|
86.9
|
%
|
|
|
88.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
|
31
|
|
|
|
|
licensing and royalty revenue;
|
|
|
|
the effects of competition;
|
|
|
|
the effects of competitive pricing programs and rebates;
|
|
|
|
manufacturing cost efficiencies and inefficiencies;
|
|
|
|
fluctuations in direct product costs such as wafer pricing and
assembly, packaging and testing costs, and overhead costs;
|
|
|
|
our ability to create cost advantages through successful
integration and convergence;
|
|
|
|
product warranty costs;
|
|
|
|
provisions for excess and obsolete inventories;
|
|
|
|
amortization of purchased intangible assets;
|
|
|
|
stock-based compensation expense; and
|
|
|
|
reversals of unclaimed rebates.
|
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;
|
|
|
|
licensing and royalty revenue;
|
|
|
|
in-process research and development, or IPR&D;
|
|
|
|
litigation costs and insurance recoveries;
|
|
|
|
settlement costs;
|
|
|
|
the loss of interest income resulting from lower average
interest rates and expenditures on repurchases of our
Class A common stock;
|
|
|
|
amortization of purchased intangible assets;
|
|
|
|
impairment of goodwill and other intangible assets;
|
|
|
|
income tax benefits from adjustments to tax reserves of foreign
subsidiaries;
|
|
|
|
deferral of revenue under multiple-element arrangements;
|
|
|
|
gain (loss) on strategic investments; and
|
|
|
|
restructuring costs or reversals thereof.
|
In the three months ended June 30, 2008 our net income was
$134.8 million as compared to $34.3 million in the
three months ended June 30, 2007, a difference of
$100.5 million. This increase in profitability was the
direct result of increased gross profit generated from a
$303.0 million increase in net revenue, offset by a
$60.7 million increase in operating expenses. The increase
in net revenue included royalty revenue in the amount of
$35.6 million and the reversal of rebates in the amount of
$11.2 million. The remaining increase in net revenue was
primarily the result of strong growth driven by new products and
customer ramps for our
Bluetooth®,
wireless LAN and GPS products, an increase in demand for our
digital cable set-top box, cable modem, and Ethernet switch,
controller and broadband network and security processor
products. Operating expenses increased principally due to an
increase in the number of employees engaged in research and
development and selling, general and administrative activities,
increased legal expenses and increased mask and prototyping
costs due to the continued transition of certain products to 65
nanometer process technology. Operating expenses also increased
due to an increase in cash compensation levels since
June 30, 2007 due to our annual merit increase program.
32
In the six months ended June 30, 2008 our net income was
$209.1 million as compared to $95.2 million in the six
months ended June 30, 2007, a difference of
$113.9 million. This increase in profitability was the
direct result of increased gross profit generated from a
$433.7 million increase in net revenue, offset by a
$123.7 million increase in operating expenses. The increase
in net revenue included royalty revenue in the amount of
$71.2 million and the reversal of rebates in the amount of
$26.5 million. The remaining increase in net revenue was
primarily the result of strong growth driven by new products and
customer ramps for our Bluetooth, wireless LAN and GPS products,
and an increase in demand for our digital cable set-top box,
cable modem and Ethernet switch, controller and broadband
network and security processor products. Operating expenses
increased principally due to an increase in the number of
employees engaged in research and development and selling,
general and administrative activities, and increased mask and
prototyping costs due to the continued transition of certain
products to 65 nanometer process technology. Operating expenses
also increased due to an increase in cash compensation levels
since June 30, 2007 due to our annual merit increase
program and settlement costs of $15.8 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 acquisition
made during the six months ended June 30, 2008.
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 June 30, 2008, 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:
|
|
|
|
|
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.
|
We meet each of the aggregation criteria for the following
reasons:
|
|
|
|
|
the sale of integrated circuits is the only material source of
revenue for each of our four operating segments, other than
royalty revenue in one of our operating segments in 2008;
|
33
|
|
|
|
|
the integrated circuits sold by each of our operating segments
use the same standard CMOS manufacturing processes;
|
|
|
|
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
|
|
|
|
all of our integrated circuits are sold through a centralized
sales force and common wholesale distributors.
|
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 our 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 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 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 revenue recognition, rebates, 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, self-insurance, 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 recording of revenue, 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 are either (i) critical accounting
policies that require us to make significant estimates or
judgments in the preparation of our consolidated financial
statements or (ii) other key accounting policies that
generally do not require us to make estimates or assumptions but
may require us to make difficult or subjective judgments:
|
|
|
|
|
Net Revenue. We recognize product revenue when
all of 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.
|
34
In arrangements in which our semiconductor products and software
are delivered concurrently and post-contract customer support is
not provided, we recognize revenue upon shipment of the
semiconductor product, assuming all other basic revenue
recognition criteria are met, as both the semiconductor products
and software are considered delivered elements and no
undelivered elements exist. In limited instances in which there
are undelivered elements, we allocate revenue based on the
relative fair value of the individual elements. 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 data or a support service,
the revenue and costs applicable to both the delivered and
undelivered elements are recorded ratably over the respective
service period or estimated product life. 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. If we enter into future
multiple element arrangements in which the fair value of each
deliverable is not known, 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.
A portion of our sales is made through distributors under
agreements allowing for pricing credits
and/or
rights of return. These pricing credits
and/or
rights of return provisions prevent us from being able to
reasonably estimate the final price of the inventory to be sold
and the amount of inventory that could be returned pursuant to
these agreements. As a result, the price to the customer is not
fixed or determinable and all customer acceptance requirements
have not been met at the time we deliver products to our
distributors. Accordingly, product revenue from sales made
through these distributors is not recognized until the
distributors ship the product to their customers. 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 future revenue stream could vary
substantially from our forecasts and our results of operations
could be materially and adversely affected. In addition,
distributors and customers with hubbing arrangements provide us
periodic data regarding the product, price, quantity, and the
customers when products are shipped to their customers, as well
as the quantities of our products that they still have in stock.
For specialized shipping terms we may rely on data provided by
our freight forwarding providers. For our royalty revenue we
rely on data provided by the licensee. Any error in the data
provided to us by customers, distributors or other third parties
could lead to inaccurate reporting of our revenue, gross profit
and net income.
We record deferred revenue when advance payments are received
from customers before performance obligations have been
completed
and/or
services have been performed. Deferred revenue does not include
amounts from products delivered to distributors that the
distributors have not yet sold through to their end customers.
|
|
|
|
|
Sales Returns, Pricing Adjustments 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. We accrue 100%
of potential rebates at the time of sale and do not apply a
breakage factor. We reverse the accrual of unclaimed rebate
amounts as specific rebate programs contractually end or when we
believe unclaimed rebates are no longer subject to payment and
will not be paid. Thus the reversal of unclaimed rebates may
have a positive impact on our revenue, gross profit and net
income in subsequent periods. 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 customer were
|
35
|
|
|
|
|
to deteriorate, resulting in an impairment of its ability to
make payments, additional allowances could be required.
|
|
|
|
|
|
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 customers or 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.
|
|
|
|
Stock-Based Compensation Expense. Effective
January 1, 2006 we adopted SFAS No. 123R
(revised), Share-Based Payment, or 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 expected
terms of our stock options and stock purchase rights. The
dividend yield assumption is based on our history and
expectation of no dividend payouts. The fair value of our
restricted stock units is based on the closing market price of
our Class A common stock on the date of grant. 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.
|
|
|
|
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
|
36
|
|
|
|
|
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.
|
|
|
|
|
|
Deferred Taxes and Uncertain Tax Positions. We
utilize the asset and 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, our U.S. tax losses after tax deductions for
stock-based compensation, 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
the U.S. and certain foreign 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 taxing jurisdictions. If we ultimately
determine that the payment of these liabilities will be
unnecessary, we reverse the liability and recognize a tax
benefit during the period in which we determine the liability no
longer applies. Conversely, we record additional tax charges in
a period in which we determine that a recorded tax liability is
less than we expect the ultimate assessment to be. 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 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 reverse
previously recorded tax liabilities.
|
|
|
|
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
|
37
|
|
|
|
|
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 disputes or litigation may be materially different from our
estimates, which could result in the need to record additional
costs.
|
Results
of Operations for the Three and Six Months Ended June 30,
2008 Compared to the Three and Six Months Ended June 30,
2007
The following table sets forth certain condensed consolidated
statements of income data expressed as a percentage of net
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
|
100.0
|
%(1)
|
|
|
100.0
|
%
|
|
|
100.0
|
%(1)
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
46.2
|
|
|
|
48.7
|
|
|
|
46.4
|
|
|
|
48.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53.8
|
|
|
|
51.3
|
|
|
|
53.6
|
|
|
|
51.2
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
31.6
|
|
|
|
37.0
|
|
|
|
32.9
|
|
|
|
35.2
|
|
Selling, general and administrative
|
|
|
11.8
|
|
|
|
13.4
|
|
|
|
11.4
|
|
|
|
13.8
|
|
Amortization of purchased intangible assets
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
In-process research and development
|
|
|
|
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Impairment of intangible assets
|
|
|
0.2
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Settlement costs
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
Restructuring costs (reversal)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10.3
|
|
|
|
(0.2
|
)
|
|
|
8.0
|
|
|
|
1.5
|
|
Interest income, net
|
|
|
1.0
|
|
|
|
3.7
|
|
|
|
1.5
|
|
|
|
3.9
|
|
Other income (expense), net
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11.3
|
|
|
|
3.6
|
|
|
|
9.5
|
|
|
|
5.4
|
|
Provision (benefit) for income taxes
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.2
|
%
|
|
|
3.8
|
%
|
|
|
9.4
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes royalties in the amount of
$35.6 million and $71.2 million in the three and six
months ended June 30, 2008, respectively, received pursuant
to a patent license agreement entered into in July 2007.
|
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 unaudited condensed
consolidated statements of income data above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenue
|
|
|
0.5
|
%
|
|
|
0.8
|
%
|
|
|
0.5
|
%
|
|
|
0.7
|
%
|
Research and development
|
|
|
7.5
|
|
|
|
10.1
|
|
|
|
7.6
|
|
|
|
9.4
|
|
Selling, general and administrative
|
|
|
2.6
|
|
|
|
4.1
|
|
|
|
2.7
|
|
|
|
3.8
|
|
38
Net
Revenue, Cost of Revenue and Gross Profit
The following tables present net revenue, cost of revenue and
gross profit for the three and six months ended June 30,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
1,200,931
|
(2)
|
|
|
100.0
|
%
|
|
$
|
897,920
|
|
|
|
100.0
|
%
|
|
$
|
303,011
|
|
|
|
33.7
|
%
|
Cost of
revenue(1)
|
|
|
554,596
|
|
|
|
46.2
|
|
|
|
437,037
|
|
|
|
48.7
|
|
|
|
117,559
|
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
646,335
|
|
|
|
53.8
|
%
|
|
$
|
460,883
|
|
|
|
51.3
|
%
|
|
$
|
185,452
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
2,233,141
|
(2)
|
|
|
100.0
|
%
|
|
$
|
1,799,401
|
|
|
|
100.0
|
%
|
|
$
|
433,740
|
|
|
|
24.1
|
%
|
Cost of
revenue(1)
|
|
|
1,035,759
|
|
|
|
46.4
|
|
|
|
877,986
|
|
|
|
48.8
|
|
|
|
157,773
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,197,382
|
|
|
|
53.6
|
%
|
|
$
|
921,415
|
|
|
|
51.2
|
%
|
|
$
|
275,967
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes stock-based compensation
expense resulting from stock options and restricted stock units
we issued or assumed in acquisitions. For a further discussion
of stock-based compensation expense, see the section entitled
Stock-Based Compensation Expense below.
|
|
(2)
|
|
Includes royalties in the amount of
$35.6 million and $71.2 million in the three and six
months ended June 30, 2008, respectively, received pursuant
to a patent license agreement entered into in July 2007.
|
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 mobile and
wireless products include wireless LAN, cellular, GPS,
Bluetooth, mobile multimedia and applications processors, mobile
power management and VoIP solutions. Our enterprise networking
products include Ethernet transceivers, controllers, switches,
broadband network and security processors and server chipsets.
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 June 30, 2008 as compared to the
three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
457,924
|
|
|
|
38.1
|
%
|
|
$
|
347,995
|
|
|
|
38.8
|
%
|
|
$
|
109,929
|
|
|
|
31.6
|
%
|
Mobile and wireless
|
|
|
414,471
|
(1)
|
|
|
34.5
|
|
|
|
266,192
|
|
|
|
29.6
|
|
|
|
148,279
|
|
|
|
55.7
|
|
Enterprise networking
|
|
|
328,536
|
|
|
|
27.4
|
|
|
|
283,733
|
|
|
|
31.6
|
|
|
|
44,803
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,200,931
|
(1)
|
|
|
100.0
|
%
|
|
$
|
897,920
|
|
|
|
100.0
|
%
|
|
$
|
303,011
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes royalties in the amount of
$35.6 million in the three months ended June 30, 2008
received pursuant to a patent license agreement entered into in
July 2007.
|
The increase in net revenue from our broadband communications
target market resulted primarily from increased demand for
digital cable set-top box and cable modem products, and to a
lesser extent, growth in solutions for digital TV and DSL
applications. The increase in net revenue from our mobile and
wireless target market resulted primarily from new products and
customer ramps for our Bluetooth, wireless LAN and GPS
39
product offerings, as well as royalty revenue in the amount of
$35.6 million received pursuant to a patent license
agreement entered into in July 2007, offset in part by a
decrease in demand for our mobile multimedia product offerings.
The increase in net revenue from our enterprise networking
target market resulted primarily from an increase in demand
attributable to our Ethernet switch, controller and broadband
network and security processor product lines.
The following table presents net revenue from each of our major
target markets and its respective contribution to net revenue in
the six months ended June 30, 2008 as compared to the six
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
823,365
|
|
|
|
36.9
|
%
|
|
$
|
697,290
|
|
|
|
38.8
|
%
|
|
$
|
126,075
|
|
|
|
18.1
|
%
|
Mobile and wireless
|
|
|
773,499
|
(1)
|
|
|
34.6
|
|
|
|
540,430
|
|
|
|
30.0
|
|
|
|
233,069
|
|
|
|
43.1
|
|
Enterprise networking
|
|
|
636,277
|
|
|
|
28.5
|
|
|
|
561,681
|
|
|
|
31.2
|
|
|
|
74,596
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,233,141
|
(1)
|
|
|
100.0
|
%
|
|
$
|
1,799,401
|
|
|
|
100.0
|
%
|
|
$
|
433,740
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes royalties in the amount of
$71.2 million in the six months ended June 30, 2008
received pursuant to a patent license agreement entered into in
July 2007.
|
The increase in net revenue from our broadband communications
target market resulted primarily from an increase in demand for
digital cable set-top box and cable modem products, and digital
TV and DSL applications, offset in part by a decrease in demand
for our direct broadcast satellite set-top box products. 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, wireless LAN and
GPS product offerings, as well as royalty revenue in the amount
of $71.2 million received pursuant to a patent license
agreement entered into in July 2007, offset in part by a
decrease in demand for our mobile multimedia product offerings.
The increase in net revenue from our enterprise networking
target market resulted primarily from an increase in demand
attributable to our Ethernet switch, controller and broadband
network and security processor product lines.
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 June 30, 2008 as compared to the
three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadband communications
|
|
$
|
457,924
|
|
|
|
38.1
|
%
|
|
$
|
365,441
|
|
|
|
35.4
|
%
|
|
$
|
92,483
|
|
|
|
25.3
|
%
|
Mobile and
wireless(1)
|
|
|
414,471
|
|
|
|
34.5
|
|
|
|
359,028
|
|
|
|
34.8
|
|
|
|
55,443
|
|
|
|
15.4
|
|
Enterprise networking
|
|
|
328,536
|
|
|
|
27.4
|
|
|
|
307,741
|
|
|
|
29.8
|
|
|
|
20,795
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue(1)
|
|
$
|
1,200,931
|
|
|
|
100.0
|
%
|
|
$
|
1,032,210
|
|
|
|
100.0
|
%
|
|
$
|
168,721
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes royalties in the amount of
$35.6 million in each of the three months ended
June 30, 2008 and March 31, 2008, received pursuant to
a patent license agreement entered into in July 2007.
|
The increase in net revenue in our broadband communications
target market resulted primarily from an increase in demand for
digital cable and direct broadcast satellite set-top box and
cable modem products. The increase in net revenue for our mobile
and wireless target market resulted primarily from strong demand
for our Bluetooth and wireless LAN products. The increase in net
revenue from our enterprise networking target market resulted
primarily from growth in demand from our Ethernet switch
products.
We recorded rebates to certain customers of $55.3 million
and $53.3 million in the three months ended June 30,
2008 and 2007, respectively, and $110.4 million and
$119.8 million in the six months ended June 30, 2008
and 2007, respectively. We account for rebates in accordance
with Emerging Issues Task Force, or EITF, Issue
40
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), and,
accordingly, at the time of the sale we accrue 100% of the
potential rebate as a reduction to revenue and do not apply a
breakage factor. 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. We reverse the accrual of
unclaimed rebate amounts as specific rebate programs
contractually end, or when we believe unclaimed rebates are no
longer subject to payment and will not be paid. We reversed
accrued rebates in the amount of $11.2 million and
$1.6 million in the three months ended June 30, 2008
and 2007, respectively, and $26.5 million and
$4.1 million in the six months ended June 30, 2008 and
2007, respectively.
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 and
obsolete inventories, and stock-based compensation expense for
personnel engaged in manufacturing support.
The increase in absolute dollars of gross profit in the three
and six months ended June 30, 2008 as compared to the three
and six months ended June 30, 2007 resulted primarily from
the 33.7% and 24.1% increase in net revenue in the three and six
months ended June 30, 2008, respectively. Gross margin
increased from 51.3% in the three months ended June 30,
2007 to 53.8% in the three months ended June 30, 2008. The
primary factors that contributed to the increase in gross margin
were: (i) royalty revenue in the amount of
$35.6 million and (ii) an increase in the reversal of
rebates in the amount of $9.6 million related to unclaimed
rebates. Gross margin increased from 51.2% in the six months
ended June 30, 2007 to 53.6% in the six months ended
June 30, 2008. The primary factors that contributed to the
increase in gross margin were: (i) royalty revenue in the
amount of $71.2 million and (ii) an increase in the
reversal of rebates in the amount of $22.4 million related
to unclaimed rebates.
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, royalty revenue, competitive pricing
programs and rebates, 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. Typically our newly
introduced 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.
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
six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and
development(1)
|
|
$
|
380,035
|
|
|
|
31.6
|
%
|
|
$
|
332,130
|
|
|
|
37.0
|
%
|
|
$
|
47,905
|
|
|
|
14.4
|
%
|
Selling, general and
administrative(1)
|
|
|
142,017
|
|
|
|
11.8
|
|
|
|
119,859
|
|
|
|
13.4
|
|
|
|
22,158
|
|
|
|
18.5
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and
development(1)
|
|
$
|
735,723
|
|
|
|
32.9
|
%
|
|
$
|
632,940
|
|
|
|
35.2
|
%
|
|
$
|
102,783
|
|
|
|
16.2
|
%
|
Selling, general and
administrative(1)
|
|
|
253,963
|
|
|
|
11.4
|
|
|
|
248,506
|
|
|
|
13.8
|
|
|
|
5,457
|
|
|
|
2.2
|
|
|
|
|
(1) |
|
Includes stock-based compensation
expense resulting from stock options and restricted stock units
we issued or assumed in acquisitions. For a further discussion
of stock-based compensation expense, see the section entitled
Stock-Based Compensation Expense below.
|
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 six months ended June 30, 2008 as compared to the three
and six months ended June 30, 2007 resulted primarily from
an increase of $35.0 million and $65.0 million,
respectively, in personnel-related expenses (excluding
stock-based compensation expense). This increase is primarily
attributable to an (i) increase in headcount by
643 personnel (predominantly in the mobile and wireless
products area) to 4,929, which represents a 15.0% increase over
the same period in the previous year and (ii) an increase
in cash compensation levels since June 30, 2007 due to our
annual merit review program. In addition, there were increased
mask and prototyping costs due to the continued transition of
certain products to 65 nanometer process technology. These costs
vary from period to period depending on the timing of
development and tape-out of various products.
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 over 2,800 U.S. and 1,200 foreign patents,
and 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.
The increase in selling, general and administrative expense in
the three months ended June 30, 2008 as compared to the
three months ended June 30, 2007 resulted primarily from an
increase of $17.1 million in legal fees and an increase of
$12.7 million in personnel-related expenses, offset in part
by a $5.3 million reduction in stock-based compensation
expense. The increase in selling, general and administrative
expense in the six months ended June 30, 2008 as compared
to the six months ended June 30, 2007 resulted primarily
from an increase of $21.0 million in personnel-related
expenses offset in part by an $8.9 million reduction in
stock-based compensation expense. The increase in
personnel-related expenses is primarily attributable to
(i) an increase of 110 personnel to 1,262, which
represents a 9.5% increase over the same period in the previous
year and (ii) an increase in cash compensation levels since
June 30, 2007 due to our annual merit review program. Legal
fees fluctuate from period to period due to the nature, scope,
timing and costs of the matters in litigation from time to time.
We also have obligations to indemnify certain of our present and
former directors, officers and employees to the maximum extent
not prohibited by law. Under these obligations, Broadcom is
required to indemnify each such director, officer and employee
against expenses, including attorneys fees, judgments,
fines and settlements, paid by such individual in connection
with our currently outstanding securities litigation and related
government investigations described in Note 7 of Notes to
Unaudited Condensed Consolidated Financial Statements (subject
to certain exceptions). The maximum potential amount of the
future payments we could be required to make under these
indemnification obligations could be significant. We maintain
insurance policies that may limit our exposure and enable us to
recover a portion of our legal fees paid related to our equity
award review and related securities litigation and government
investigations. However, certain of our insurance carriers have
reserved their rights or advised us that they may in some
instances deny coverage. If our coverage under these policies is
reduced or eliminated, our potential financial exposure in the
pending securities litigation and related government
42
investigations would be increased. From inception of the
securities litigation and related government investigations
through June 30, 2008, we have recovered legal expenses in
the amount of $26.7 million under these insurance policies,
which amount we have recorded as a reduction to selling, general
and administrative expense. In the three months ended
June 30, 2008, due to a change in the underlying facts and
circumstances related to director and officer claims, we
commenced recognizing reimbursements from our directors
and officers insurance carriers on a cash basis. We
collected $13.0 million of the $14.1 million we had
recorded as a receivable at March 31, 2008 and charged the
remaining $1.1 million to selling, general and
administrative expense in the three months ended June 30,
2008. In the six months ended June 30, 2008 we recorded a
reduction of $9.5 million to selling, general and
administrative expense related to insurance recoveries. In
certain limited circumstances, all or portions of the amounts
recovered from our insurance carriers may be required to be
repaid. We regularly evaluate the need to record a liability for
potential future repayments in accordance with
SFAS No. 5, Accounting for Contingencies, or
SFAS 5. As of June 30, 2008 we have not recorded a
liability in connection with these potential insurance repayment
provisions.
For further discussion of litigation matters, see Note 7 of
Notes to Unaudited Condensed Consolidated Financial Statements.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
6,237
|
|
|
$
|
6,861
|
|
|
$
|
11,702
|
|
|
$
|
12,675
|
|
Research and development
|
|
|
90,003
|
|
|
|
90,832
|
|
|
|
168,709
|
|
|
|
169,263
|
|
Selling, general and administrative
|
|
|
31,268
|
|
|
|
36,607
|
|
|
|
60,333
|
|
|
|
69,233
|
|
The amount of unearned stock-based compensation currently
estimated to be expensed in the remainder of 2008 through 2012
related to unvested share-based payment awards at June 30,
2008 is $1,203 billion. Of this amount,
$265.0 million, $435.3 million, $294.0 million,
$169.4 million and $38.8 million are currently
estimated to be recorded in the remainder of 2008, and in 2009,
2010, 2011 and 2012, respectively. The weighted-average period
over which the unearned stock-based compensation is expected to
be recognized is approximately 1.5 years.
The increase in unearned stock-based compensation of
$254.2 million at June 30, 2008 to $1.203 billion
from the $948.3 million balance at December 31, 2007
was primarily the result of our regular annual equity
compensation review program. If there are any modifications or
cancellations of the underlying unvested equity 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.
We granted employee stock options to purchase approximately
5.1 million shares of our common stock and awarded
approximately 14.1 million restricted stock units in the
three months ended June 30, 2008 as part of our regular
annual equity compensation review program. We will recognize
approximately $426 million of stock-based compensation
expense related to those awards over their respective service
periods. This unearned stock-based compensation will be
principally amortized ratably over the service periods of the
underlying stock options and restricted stock units, generally
48 months and 16 quarters, respectively. We issued
2.0 million shares of our Class A common stock
pursuant to our employee stock purchase plan in the six months
ended June 30, 2008.
43
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
3,934
|
|
|
$
|
2,566
|
|
|
$
|
7,869
|
|
|
$
|
5,616
|
|
Operating expense
|
|
|
184
|
|
|
|
200
|
|
|
|
367
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,118
|
|
|
$
|
2,766
|
|
|
$
|
8,236
|
|
|
$
|
6,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of 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 Asset Amortization by Year
|
|
|
|
Remainder of
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
7,869
|
|
|
$
|
15,264
|
|
|
$
|
12,527
|
|
|
$
|
1,023
|
|
|
$
|
|
|
|
$
|
36,683
|
|
Operating expenses
|
|
|
366
|
|
|
|
622
|
|
|
|
600
|
|
|
|
100
|
|
|
|
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,235
|
|
|
$
|
15,886
|
|
|
$
|
13,127
|
|
|
$
|
1,123
|
|
|
$
|
|
|
|
$
|
38,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Process
Research and Development
In the six months ended June 30, 2008 we recorded
IPR&D of $10.9 million related to our acquisition of
Sunext Design, Inc. The amount allocated to IPR&D was
determined through established valuation techniques used in the
high technology industry and was expensed upon acquisition as it
was determined that the underlying projects had not reached
technological feasibility and no alternative future uses existed.
Settlement
Costs
In April 2008 we entered into a settlement with the SEC relating
to the previously-disclosed SEC investigation of Broadcoms
historical stock option granting practices. Without admitting or
denying the SECs allegations, we agreed to pay a civil
penalty of $12.0 million, which we recorded as a settlement
cost in the six months ended June 30, 2008. The settlement
was approved by the United States District Court for the Central
District of California in late April 2008. In addition, we
settled a patent infringement claim for $3.8 million in the
six months ended June 30, 2008. For further discussion of
litigation matters, see Note 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
Interest
and Other Income (Expense), Net
The following table presents interest and other income, net, for
the three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest income, net
|
|
$
|
12,428
|
|
|
|
1.0
|
%
|
|
$
|
32,904
|
|
|
|
3.7
|
%
|
|
$
|
(20,476
|
)
|
|
|
(62.2
|
)%
|
Other income (expense), net
|
|
|
(191
|
)
|
|
|
0.0
|
|
|
|
642
|
|
|
|
0.1
|
|
|
|
(833
|
)
|
|
|
(129.8
|
)
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest income, net
|
|
$
|
32,532
|
|
|
|
1.5
|
%
|
|
$
|
69,912
|
|
|
|
3.9
|
%
|
|
$
|
( 37,380
|
)
|
|
|
(53.5
|
)%
|
Other income (expense), net
|
|
|
733
|
|
|
|
0.0
|
|
|
|
(767
|
)
|
|
|
(0.0
|
)
|
|
|
1,500
|
|
|
|
(195.6
|
)
|
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, was the result
of the overall decrease in market interest rates and a decrease
in our average cash and marketable securities balances. Our cash
and marketable securities balances decreased from
$2.404 billion at December 31, 2007 to
$2.040 billion at June 30, 2008, primarily due to
repurchases of shares of our Class A common stock. The
average interest rates earned for the six months ended
June 30, 2008 and 2007 were 2.93% and 5.22%, respectively.
Provision
for Income Taxes
We recorded tax provisions of $0.6 million and
$3.9 million for the three and six months ended
June 30, 2008, respectively, and a tax benefit of
$2.2 million and a tax provision of $1.3 million for
the three and six months ended June 30, 2007, respectively.
Our effective tax rates were 0.5% and 1.8% for the three and six
months ended June 30, 2008, respectively, and (6.9)% and
1.4% for the three and six months ended June 30, 2007,
respectively. The difference between our effective tax rates and
the 35% federal statutory rate resulted primarily from foreign
earnings taxed at rates lower than the federal statutory rate
for the three and six months ended June 30, 2008 and
June 30, 2007, domestic losses recorded without income tax
benefit for the three and six months ended June 30, 2007,
and tax benefits of $4.4 million for the three and six
months ended June 30, 2008 and $4.6 million for the
three and six months ended June 30, 2007 resulting
primarily from the expiration of the statutes of limitations for
the assessment of taxes in various foreign jurisdictions.
We utilize the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, Accounting for
Income Taxes, or SFAS 109. We record net deferred tax assets
to the extent we believe these assets will more likely than not
be realized. In making such determination, we consider 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 our recent cumulative
losses in the U.S. and certain foreign jurisdictions, our
U.S. tax losses after tax deductions for stock-based
compensation, and the full utilization of our loss carryback
opportunities, we have concluded that a full valuation allowance
should be recorded in the U.S. and certain foreign
jurisdictions. In certain other foreign jurisdictions where we
do not have cumulative losses, we had net deferred tax assets of
$5.3 million and $3.3 million, at June 30, 2008
and December 31, 2007, respectively, in accordance with
SFAS 109.
We file federal, state and foreign income tax returns in
jurisdictions with varying statutes of limitations. The 2004
through 2007 tax years generally remain subject to examination
by federal and most state tax authorities. In foreign
jurisdictions, the 2001 through 2007 tax years generally remain
subject to examination by tax authorities.
Our income tax returns for the 2004, 2005 and 2006 tax years are
currently under examination by the Internal Revenue Service and
certain state jurisdictions. We do not expect that the results
of these examinations will have a material effect on our
financial condition or results of operations.
We operate under tax holidays in Singapore, which are effective
through March 31, 2014. The tax holidays are conditional
upon our meeting certain employment and investment thresholds.
We believe we have met these employment and investment
thresholds for prior periods, and that we will continue to meet
all requirements for the duration of the holidays.
45
Liquidity
and Capital Resources
Working Capital and Cash and Marketable
Securities. The following table presents working
capital, cash and cash equivalents and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
|
Working capital
|
|
$
|
1,933,637
|
|
|
$
|
2,323,716
|
|
|
$
|
(390,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
1,705,715
|
|
|
$
|
2,186,572
|
|
|
$
|
(480,857
|
)
|
Short-term marketable
securities(1)
|
|
|
228,418
|
|
|
|
141,728
|
|
|
|
86,690
|
|
Long-term marketable securities
|
|
|
105,513
|
|
|
|
75,352
|
|
|
|
30,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,039,646
|
|
|
$
|
2,403,652
|
|
|
$
|
(364,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in working capital.
|
Our working capital, cash and cash equivalents and marketable
securities decreased in the six months ended June 30, 2008
primarily due to repurchases of shares of our Class A
common stock and purchases of capital equipment, offset by cash
provided by operations. See the summary of cash, cash
equivalents, short and long-term marketable securities by major
security type and discussion of market risk that follows in
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.
Cash Provided and Used in the Six Months Ended June 30,
2008 and 2007. Cash and cash equivalents
decreased to $1.705 billion at June 30, 2008 from
$2.187 billion at December 31, 2007 as a result of
cash used in financing and investing activities (primarily for
repurchases of our Class A common stock), offset in part by
cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash provided by operating activities
|
|
$
|
486,173
|
|
|
$
|
403,133
|
|
Cash provided by (used in) investing activities
|
|
|
(196,028
|
)
|
|
|
18,511
|
|
Cash used in financing activities
|
|
|
(771,002
|
)
|
|
|
(535,417
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(480,857
|
)
|
|
$
|
(113,773
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,186,572
|
|
|
|
2,158,110
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,705,715
|
|
|
$
|
2,044,337
|
|
|
|
|
|
|
|
|
|
|
In the six months ended June 30, 2008 our operating
activities provided $486.2 million in cash. This was
primarily the result of $209.1 million in net income and
$298.9 million in net non-cash operating expenses, offset
in part by $21.8 million in net cash used by changes in
operating assets and liabilities. Non-cash items included in net
income in the six months ended June 30, 2008 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 six months ended June 30, 2007 our
operating activities provided $403.1 million in cash. This
was primarily the result of $95.2 million in net income,
$301.0 million in net non-cash operating expenses and
$6.9 million in net cash provided by changes in operating
assets and liabilities. Non-cash items included in net income in
the six months ended June 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.
Accounts receivable increased $110.8 million from
$369.0 million at December 31, 2007 to
$479.8 million at June 30, 2008. Our days sales
outstanding increased from 32.7 days at December 31,
2007 to 36.4 days at June 30, 2008, driven primarily
by the linearity of product shipments. 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
46
is likely that our accounts receivable balance will also
increase. Our accounts receivable could also increase if
customers delay their payments or if we grant extended payment
terms to customers.
Inventories increased $25.0 million from
$231.3 million at December 31, 2007 to
$256.3 million at June 30, 2008. Our inventory days on
hand decreased from 43.1 days at December 31, 2007 to
42.1 days at June 30, 2008. 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, and the ability of our customers, to manage inventory
under hubbing arrangements, and competitive situations in the
marketplace. Such considerations are balanced against the risk
of obsolescence or potentially excess inventory levels.
Investing activities used cash of $196.0 million in the six
months ended June 30, 2008, which was primarily the result
of purchases of marketable securities of $116.9 million,
$49.1 million of capital equipment purchases mostly to
support our research and development efforts, $9.6 million
in net cash paid for the acquisition of Sunext Design,
$20.1 million related to contingent consideration paid for
certain performance goals, and the purchase of $0.4 million
of strategic investments. Investing activities provided cash of
$18.5 million in the six months ended June 30, 2007,
which was primarily the result of $207.0 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., offset in part by the purchase of
$107.4 million of capital equipment to support our
operations and the build out and relocation of our facilities in
Irvine, California, $92.0 million net cash paid for the
acquisitions of LVL7 Systems, Inc. and Octalica, Inc., and the
net purchase of $3.2 million of strategic investments.
Our financing activities used $771.0 million in cash in the
six months ended June 30, 2008, which was primarily the
result of $835.9 million in repurchases of shares of our
Class A common stock pursuant to the share repurchase
program implemented in November 2007, offset in part by
$64.9 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 $21.6 million
of repurchases of our Class A common stock was not settled
in cash as of June 30, 2008. Our financing activities used
$535.4 million in cash in the six months ended
June 30, 2007, which was primarily the result of
$641.3 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
$105.9 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 $13.2 million
of repurchases of our Class A common stock was not settled
in cash as of June 30, 2007.
In November 2007 the Board of Directors authorized a new program
to repurchase shares of our Class A common stock having an
aggregate value of up to $1.0 billion depending on market
conditions and other factors. Repurchases under this program may
be made at any time and from time to time during the period that
commenced November 19, 2007 and continues through and
including December 31, 2008. From the commencement of the
current program through June 30, 2008, we repurchased a
total of 43.4 million shares of Class A common stock
at a weighted average price of $22.97 per share. As of
June 30, 2008, $2.3 million remained authorized and
available for repurchase of shares of our Class A common
stock under this plan. This amount was expended to repurchase
shares in July 2008.
We received reduced proceeds from the exercise of stock options,
in the six months ended June 30, 2008 as compared with the
six months ended June 30, 2007. The timing and number of
stock option exercises and the amount of cash proceeds we
receive through those exercises are not within our control, and
in the future we may not generate as much cash from the exercise
of stock options as we have in the past. Moreover, it is now our
practice to issue a combination of restricted stock units and
stock options to employees and, in some cases solely restricted
stock units, 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 issued upon vesting of
restricted stock units 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,
47
capital expenditures, investment requirements and commitments
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. If needed, we may be able to raise such funds by
selling equity or debt securities to the public or to selected
investors, or by borrowing money from financial institutions. We
could also reduce certain expenditures, such as the repurchases
of our Class A common stock.
In addition, even though we may not need additional funds, we
may still elect to sell additional equity or debt securities or
to obtain credit facilities for other reasons. 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 Class A 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, royalty revenue 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
2008 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.
Off-Balance Sheet Arrangements. At
June 30, 2008 we had no material off-balance sheet
arrangements.
48
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Investment
and Interest Rate Risk
At June 30, 2008 we had $2.040 billion in cash, cash
equivalents and marketable securities. We maintain an investment
portfolio of various security holdings, types and maturities.
Pursuant to SFAS No. 157, Fair Value
Measurements, or SFAS 157, the fair value of our cash
equivalents and marketable securities is determined based on
Level 1 inputs, which consist of quoted prices
in active markets for identical assets. We do not use derivative
financial instruments. We place our cash investments in
instruments that meet 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. At June 30, 2008 all of our investments were
rated AAA, Aaa, A+,
A-1 or
P-1 by the
major credit rating agencies.
A summary of our cash, cash equivalents, short and long-term
marketable securities by major security type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Cash
|
|
|
Marketable
|
|
|
Marketable
|
|
|
|
|
|
|
Equivalents
|
|
|
Securities
|
|
|
Securities
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
243,338
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
243,338
|
|
U.S. Treasury and agency money market funds
|
|
|
473,136
|
|
|
|
|
|
|
|
|
|
|
|
473,136
|
|
U.S. Treasury and agency obligations
|
|
|
104,779
|
|
|
|
193,438
|
|
|
|
100,299
|
|
|
|
398,516
|
|
Institutional money market funds
|
|
|
830,063
|
|
|
|
|
|
|
|
|
|
|
|
830,063
|
|
Commercial paper and corporate bonds
|
|
|
7,995
|
|
|
|
34,980
|
|
|
|
5,214
|
|
|
|
48,189
|
|
Cash
|
|
|
46,404
|
|
|
|
|
|
|
|
|
|
|
|
46,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,705,715
|
|
|
$
|
228,418
|
|
|
$
|
105,513
|
|
|
$
|
2,039,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
850,018
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
850,018
|
|
U.S. Treasury and agency money market funds
|
|
|
755,000
|
|
|
|
|
|
|
|
|
|
|
|
755,000
|
|
Institutional money market funds
|
|
|
425,756
|
|
|
|
|
|
|
|
|
|
|
|
425,756
|
|
Commercial paper and corporate bonds
|
|
|
77,313
|
|
|
|
89,630
|
|
|
|
5,229
|
|
|
|
172,172
|
|
U.S. Treasury and agency obligations
|
|
|
33,706
|
|
|
|
52,098
|
|
|
|
70,123
|
|
|
|
155,927
|
|
Cash
|
|
|
44,779
|
|
|
|
|
|
|
|
|
|
|
|
44,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,186,572
|
|
|
$
|
141,728
|
|
|
$
|
75,352
|
|
|
$
|
2,403,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We account for our investment in debt and equity instruments
under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities and FASB Staff
Position, or FSP,
SFAS No. 115-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. Management determines
the appropriate classification of such securities at the time of
purchase and reevaluates such classification as of each balance
sheet date. The investments are adjusted for amortization of
premiums and discounts to maturity and such amortization is
included in interest income. Historically we classified our cash
equivalents and marketable securities as held-to-maturity.
Effective February 2008 we reclassified our cash equivalents and
marketable securities as available-for-sale and recorded a net
unrealized gain in the amount of $0.2 million in the six
months ended June 30, 2008. Cash equivalents and marketable
securities are reported at fair value with the related
unrealized gains and losses included in accumulated other
comprehensive income (loss), a component of shareholders
equity, net of tax. We follow the guidance provided by EITF
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, to assess whether our
investments with unrealized loss positions are other than
temporarily impaired. Realized gains and losses and declines in
value judged to be other than temporary are determined based on
the specific identification method and are reported in other
income (expense), net, in the condensed consolidated statements
of income. The fair value of cash equivalents and marketable
securities is determined based on quoted market prices for those
securities.
49
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.
Our cash, cash equivalents, short and long-term marketable
securities had maturities as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
1,934,133
|
|
|
$
|
2,328,300
|
|
One to two years
|
|
|
79,384
|
|
|
|
37,268
|
|
Two to three years
|
|
|
26,129
|
|
|
|
38,084
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,039,646
|
|
|
$
|
2,403,652
|
|
|
|
|
|
|
|
|
|
|
The fair value of our cash equivalents and 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 or if the decline in fair value of our publicly traded
debt or equity investments is judged to be other-than-temporary.
We may suffer losses in principal if we are forced to sell
securities that have declined in market value.
In a declining interest rate environment, as short term
investments mature, reinvestment occurs at less favorable market
rates. Given the short term nature of certain investments,
declining interest rates will negatively impact investment
income.
The subprime-mortgage crisis that began last summer has had
widespread negative effects on the financial markets. The credit
concerns and lack of liquidity in the short-term funding markets
have reinforced our bias towards U.S. Treasury and other
government securities and high credit quality commercial paper
and time deposits. If the global credit markets continue to
deteriorate, our investment portfolio may be negatively
impacted, particularly in the form of declining yields as
investors seek more secure investments.
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. In the three months ended June 30, 2008 we
recorded a loss of approximately $1.7 million on a
strategic investment. As of June 30, 2008 the carrying and
fair value of our strategic investments was $2.5 million.
Exchange
Rate Risk
We consider our direct exposure to foreign exchange rate
fluctuations to be minimal. Currently, sales to customers and
arrangements with third-party manufacturers provide for pricing
and payment in United States dollars, and, therefore, are not
subject to exchange rate fluctuations. Increases in the value of
the United States dollar relative to other currencies could make
our products more expensive, which could negatively impact our
ability to compete. Conversely, decreases in the value of the
United States dollar relative to other currencies could result
in our suppliers raising their prices to continue doing business
with us. A small percentage of our international operational
expenses are denominated in foreign currencies. Exchange rate
volatility could negatively or positively impact those operating
costs. Fluctuations in currency exchange rates could have a
greater effect on our business in the future.
50
|
|
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 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.
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. 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
June 30, 2008, 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 June 30,
2008 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.
PART II.
OTHER INFORMATION
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|
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. For an additional discussion of certain
risks associated with legal proceedings, see Risk
Factors immediately below.
Before deciding to purchase, hold or sell our common stock,
you should carefully consider the risks described below in
addition to the other cautionary statements and risks described
elsewhere and the other information contained in this Report and
in our other filings with the SEC, including our Annual Report
on
Form 10-K
for the year ended December 31, 2007 and subsequent reports
on
Forms 10-Q
and 8-K. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or
uncertainties actually occurs with material adverse effects on
Broadcom, our business, financial condition, results of
operations
and/or
liquidity could be seriously harmed. In that event, the market
price for our Class A common stock will likely decline, and
you may lose all or part of your investment.
51
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 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 slowdown or subsequent economic
recovery, worldwide, or in the semiconductor industry or the
wired and wireless communications markets. If the economy or
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.
Additionally, the combination of our lengthy sales cycle coupled
with challenging macroeconomic conditions could have a
synergistic negative impact on the results of our operations.
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:
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|
|
|
|
the overall cyclicality of, and changing economic, political and
market conditions affecting the semiconductor industry and wired
and wireless communications markets, including without
limitation seasonality in sales of consumer products into which
some of 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 dependence on a few significant customers and/or design wins
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;
|
|
|
|
the availability and pricing of third party semiconductor
foundry, assembly and test capacity and raw materials;
|
52
|
|
|
|
|
intellectual property disputes, customer indemnification claims
and other types of litigation risks;
|
|
|
|
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;
|
|
|
|
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 ability to timely and accurately predict market requirements
and evolving industry standards and to identify and capitalize
upon opportunities in new markets;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
our ability to timely and effectively transition to smaller
geometry process technologies or achieve higher levels of design
integration;
|
|
|
|
the volume of our product sales and pricing concessions on
volume sales;
|
|
|
|
the impact of the IRS review of certain of our income tax
returns; 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
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.
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.
In the past we have 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 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 ratably over the respective
service period or estimated product life. There are also other
scenarios under
EITF 00-21
and other accounting literature whereby revenue may be deferred
for even longer periods or ratable recognition over the service
period may not be permitted and all of the revenue may be
required to be recognized in later periods or at the end of the
arrangement. As we enter into future multiple element
arrangements in which the fair value of each deliverable is not
known, 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.
53
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 have insufficient inventory, which would
result in lost revenue opportunities and potentially in loss of
market share and damaged customer relationships. Conversely, we
may hold excess or obsolete inventory, which would reduce our
profit margin.
We typically sell products pursuant to purchase orders rather
than long-term purchase commitments. Customers can generally
cancel, change 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 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 that
will incorporate our product. Our customers may need three to
more than nine months to test, evaluate and adopt our product
and an additional three to more than twelve months to begin
volume production of equipment that incorporates our products.
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 bring its product to market or that
such effort 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 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, our revenue and financial results could
be materially and adversely impacted.
We maintain inventory, or hubbing, arrangements with certain of
our customers. Our use of these arrangements increased in the
first half of 2008 and we expect that trend to continue for the
foreseeable future. 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. In
addition, distributors
and/or
customers with hubbing arrangements provide us periodic reports
regarding the product, price, quantity, and when products are
shipped to their customer, as well as the quantities of our
products they still have in stock. For specialized shipping
terms we may also rely on data provided
54
by our freight forwarding providers. For our royalty revenue we
also rely on data provided by our customers. Any error in the
data provided to us by customers, distributors or other third
parties could lead to inaccurate reporting of our revenue, gross
profit and net income. 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.
Because
we depend on a few significant customers and/or design wins for
a substantial portion of our revenue, the loss of a key customer
or design win 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.
Sales to our five largest customers represented 37.3% and 43.5%
of our net revenue in the six months ended June 30, 2008
and 2007, respectively. We expect that our largest customers
will continue to account for a substantial portion of our net
revenue in 2008 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. The primary factors that contributed to
the decrease in net revenue from our top customers as a
percentage of net revenue were: (i) product mix changes
with some of our large customers, (ii) new product ramps at new
customers that increased our total revenues, and
(iii) royalties received pursuant to a patent license
agreement entered into in July 2007.
A significant portion of our revenue may also depend on a single
product design win with a large customer. As a result, the loss
of any such key design win could materially and adversely affect
our financial condition and results of operations. In addition,
these key design wins are often with large customers who have
significantly greater financial, sales, marketing and other
resources than we have and greater bargaining and pricing power,
which could materially and adversely affect our operating
margins.
We may not be able to maintain or increase sales to certain of
our key customers or continue to secure key design wins 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.
|
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 portion of our resources to strategic
relationships, which could detract from or delay our completion
of other important development projects or the development of
next generation products and technologies. 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 or
design win, a
55
reduction in sales to any key customer, or our inability to
attract new significant customers or secure new key design wins
could seriously impact our revenue and materially and adversely
affect our results of operations.
If we are
unable to develop and introduce new products successfully and in
a cost-effective and timely manner or to achieve market
acceptance of our new products, our operating results would be
adversely affected.
Our future success 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.
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 or 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.
|
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
56
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.
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.
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, potential wafer shortages and
higher wafer prices, particularly in light of the recent
volatility in the commodities markets, which has the impact of
increasing the cost of metals used in production of wafers;
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limited control over delivery schedules, quality assurance,
manufacturing yields and production costs and other
terms; 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
57
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 and under
acceptable terms, 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 on reasonable terms 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 business, financial condition and results
of operations.
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 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 over 2,800 U.S. and 1,200
foreign patents and have filed more than 7,300 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.
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.
58
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.
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 and the
wired and wireless communications markets 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 or litigation 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
59
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 or litigation 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 licenses under other
parties intellectual property rights and have granted and
may in the future grant licenses to certain of our intellectual
property rights to others in connection with cross-license
agreements or settlements of claims or actions asserted against
us. However, we may not be able to obtain licenses under
anothers 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.
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 June 30, 2008, we acquired
38 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, additional stock-based compensation expense, and
the recording and later amortization
60
of amounts related to 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. Beginning January 1,
2009, the accounting for future business combinations will
change. We expect that the new requirements will have an impact
on our consolidated financial statements when effective, but the
nature and magnitude of the specific effects will depend upon
the nature, terms and size of the acquisitions we consummate
after the effective date.
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
Class A
and/or
Class B 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.
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.
Our
operating results for 2006 and prior periods have been
materially and adversely impacted as a result of the voluntary
review of our past equity award practices reported in January
2007. Our settlement of the SEC action filed against us relating
to our past equity award practices resulted in a
$12.0 million penalty and our outstanding civil litigation
relating to these matters could result in further significant
costs to us. In addition, any other related action by a
governmental agency could result in civil or criminal sanctions
against us and/or certain of our current and/or former officers,
directors and/or 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 historical option granting practices. In December
2006 we were informed that the SEC had issued a formal order of
investigation in the matter. In July 2007 we received a
Wells Notice from the SEC in connection with this
investigation. Our then Chairman of the Board of Directors and
Chief Technical Officer, Dr. Henry Samueli, also received a
Wells Notice at that time. In August 2007 our then 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.
In April 2008 the SEC brought a complaint against Broadcom
alleging violations of the federal securities laws, and we
entered into a settlement with the SEC. Without admitting or
denying the SECs allegations, we agreed to pay a civil
penalty of $12.0 million, which we recorded as a settlement
cost in the six months ended June 30, 2008, and stipulated
to an injunction against future violations of certain provisions
of the federal securities laws. The settlement was approved by
the United States District Court for the Central District of
California in late April 2008, thus concluding the SECs
investigation of this matter with respect to Broadcom.
61
As discussed in detail in Note 7 of Notes to Unaudited
Condensed Consolidated Financial Statements, included in
Part I, Item 1 of this Report, in May 2008 the SEC
filed a complaint in the United States District Court for the
Central District of California against Dr. Samueli,
Mr. Dull and two other former executive officers of
Broadcom. The SECs civil complaint alleges that
Dr. Samueli and Mr. Dull, along with the other
defendants, violated the anti-fraud provisions of the federal
securities laws, falsified books and records, and caused the
company to report false financial results. We do not know when
the SEC action will be resolved with respect to Dr. Samueli
and/or
Mr. Dull or what actions, if any, the SEC may require
either to take in resolution of the matter against him
personally.
In August 2006 we were informally contacted by the
U.S. Attorneys Office for the Central District of
California and asked to produce documents. In 2007 and 2008 we
have continued to provide substantial amounts of documents and
information to the U.S. Attorneys Office on a
voluntary basis and pursuant to grand jury subpoenas. In June
2008 Dr. Samueli pled guilty to making a materially false
statement in connection with the SECs investigation of
alleged stock options backdating at the company. In agreeing to
plead guilty, Dr. Samueli has agreed to, among other
things, five years probation, a $250,000 fine, a $100
special assessment, and a $12.0 million payment to the
U.S. Treasury. Dr. Samuelis plea agreement is
conditioned on acceptance by the United States District Court
for the Central District of California. We are continuing to
cooperate with the U.S. Attorneys Office in its
investigation. Any further action by the SEC, the
U.S. Attorneys Office or other governmental agency
could result in additional civil or criminal sanctions
and/or fines
against us
and/or
certain of our current or former officers, directors
and/or
employees.
Additionally, as discussed in Note 7 of Notes to Unaudited
Condensed Consolidated Financial Statements, 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 that may exceed any reimbursement we may be
entitled to under our directors and officers
insurance policies. We have indemnification agreements with each
of our present and former directors and officers, under which
Broadcom is generally required to indemnify them against
expenses, including attorneys fees, judgments, fines and
settlements, arising from the pending litigation (subject to
certain exceptions, including liabilities arising from willful
misconduct, from conduct knowingly contrary to the best
interests of Broadcom, or conduct that is knowingly fraudulent
or deliberately dishonest or results in improper personal
benefit). The maximum potential amount of the future payments we
could be required to make under these indemnification
obligations could be significant.
In addition, we rely on independent registered public accounting
firms for opinions and consents to maintain current reports
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act and to have effective Securities Act registration
statements on file with the SEC, including our outstanding
registration statements on
Forms S-1
and S-8. The
pending arbitration proceedings involving Ernst &
Young LLP, or E&Y, our former independent registered public
accounting firm, could adversely impact our ability to obtain
any necessary consents in the future from E&Y or the
ongoing effectiveness of opinions previously rendered by
E&Y. In that event, we may be required to have our new
independent registered public accounting firm reaudit the
affected periods and during such reaudit may not be able to
timely file required Exchange Act reports with the SEC or to
issue equity, including common stock pursuant to equity awards
that comprise a significant portion of our compensation
packages, under our outstanding or any new registration
statements. Furthermore, as a result of the reaudit, it is
possible that additional accounting issues may be identified.
The resolution of the pending investigation by the
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
has in the past and could continue to 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, that our insurance policies will provide coverage
for the matters and circumstances described above or that
portions of payments by our insurance companies previously made
to us will not be required to be repaid to the insurance
companies as
62
these matters reach conclusion. Certain of our insurance
carriers have reserved their rights or advised us that they may
in some instances deny coverage. If our coverage under these
policies is reduced or eliminated, our potential financial
exposure in the pending securities litigation and related
government investigations would be increased. 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 or in the event we are required to repay amounts
that were previously paid by our insurance companies.
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 Chief Executive Officer, Scott A. McGregor, and
senior executives, and our Senior Technical Advisor,
Dr. Samueli. 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 with Broadcom. 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 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
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 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 in the event of substantial declines in the
price of our Class A common stock, such as the decline that
commenced in the second half of 2007.
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.
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
6,686 full-time, contract and temporary employees as of
June 30, 2008. 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
63
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 or
if we do not execute successfully, 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 longer 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 semiconductor
industry or the 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 any
such 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.
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 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 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. Moreover, we may lose, or experience a delay in, market
acceptance of the affected
64
product or products, and we could lose credibility with our
current and prospective customers. 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.
To remain
competitive, we must keep pace with rapid technological change
and evolving industry standards in the semiconductor industry
and the 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 the 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 those markets, our
business, financial condition and results of operations could be
materially and adversely affected.
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% of our net revenue in the six
months ended June 30, 2008 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 86.9% of our net revenue in the six months
ended June 30, 2008. 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 and
unexpected changes in regulatory requirements;
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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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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-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.
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
66
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 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.
67
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 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
geometries. 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.
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. Eight
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. Additionally, the recent volatility in the
commodities markets could significantly increase our substrate
costs.
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 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
68
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 earnings estimates or investment recommendations by
analysts;
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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 some of our products are
incorporated;
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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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changes in accounting rules;
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continuing international conflicts and acts of terrorism;
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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 programs, 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
promulgated under the Exchange Act. As a result, sales of shares
by our executive officers may not be indicative of their
respective opinions 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.
69
Our
co-founders and their affiliates can control the outcome of
matters that require the approval of our shareholders, and
accordingly we will not be able to engage in certain
transactions without their approval.
As of June 30, 2008 our co-founders, directors, executive
officers and their respective affiliates beneficially owned
14.0% of our outstanding common stock and held 59.3% 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 June 30, 2008 our two founders, Dr. Henry T.
Nicholas III and Dr. Samueli, who are no longer
officers or directors of Broadcom, beneficially owned a total of
13.0% of our outstanding common stock and held 58.8% 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 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 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 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.
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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 June 30, 2008, we issued an
aggregate of 0.8 million shares of Class A common
stock upon conversion of a like number of shares of Class B
common stock. Each share of Class B common stock is
convertible at any time into one share of Class A common
stock at the option of the holder. The offers and sales of those
securities were effected without registration in reliance on the
exemption from registration provided by Section 3(a)(9) of
the Securities Act of 1933, as amended.
Issuer
Purchases of Equity Securities
In November 2007 the Board of Directors authorized a new program
to repurchase shares of our Class A common stock having an
aggregate value of up to $1.0 billion depending on market
conditions and other factors. Repurchases under this program may
be made at any time and from time to time during the period that
commenced November 19, 2007 and continues through and
including December 31, 2008. As of June 30, 2008,
71
$2.3 million remained authorized and available for the
repurchase of shares of our Class A common stock under this
plan. This amount was expended to repurchase shares in July 2008.
Repurchases under our share repurchase programs were made in
open market or privately negotiated transactions in compliance
with
Rule 10b-18
promulgated under the Exchange Act.
The following table presents details of our repurchases during
the three months ended June 30, 2008:
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Approximate Dollar
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Total Number of
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Value of Shares
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Total Number
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Average
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Shares Purchased
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that may yet be
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of Shares
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Price
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as Part of Publicly
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Purchased under
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Period
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Purchased
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per Share
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Announced Plan
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the Plan
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(In thousands)
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(In thousands)
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(In thousands)
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April 2008
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8,476
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$
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22.56
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8,476
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May 2008
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3,664
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26.99
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3,664
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June 2008
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5,562
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26.99
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5,562
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Total
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17,702
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24.87
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17,702
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$
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2,309
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From commencement of the current program through June 30,
2008, we repurchased a total of 43.4 million shares of
Class A common stock at a weighted average price of $22.97
per share.
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Item 3.
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Defaults
upon Senior Securities
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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(a) Our 2008 Annual Meeting of Shareholders (the 2008
Annual Meeting) was held June 19, 2008.
(b) At the 2008 Annual Meeting, the shareholders elected
each of the following nominees as directors, to serve on our
Board of Directors until the next annual meeting of shareholders
and/or until
their successors are duly elected and qualified. The vote for
each director was as follows:
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Class A
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Shares/
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Class B
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Class B
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Votes
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Shares
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Votes
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Total Votes
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George L. Farinsky
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364,612,511
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34,321,725
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343,217,250
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707,829,761
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Nancy H. Handel
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378,417,588
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34,321,725
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343,217,250
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721,634,838
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Eddy W. Hartenstein
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391,131,989
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34,321,725
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343,217,250
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734,349,239
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John E. Major
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346,834,445
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34,321,725
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343,217,250
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690,051,695
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Scott A. McGregor
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387,980,662
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34,321,725
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343,217,250
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731,197,912
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Alan E. Ross
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374,248,315
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34,321,725
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343,217,250
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717,465,565
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Robert E. Switz
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367,626,099
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34,321,725
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343,217,250
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710,843,349
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(c) At the 2008 Annual Meeting, the Shareholders also voted
on the following four proposals and cast their votes as follows:
(1) To approve an amendment and restatement of
Broadcoms 1998 Stock Incentive Plan, as previously amended
and restated, and referred to as our 1998 Incentive Plan, that
will (i) revise the Director Automatic Grant Program in
effect for non-employee directors under the plan,
(ii) extend the term of the 1998 Incentive Plan through
March 12, 2018, (iii) revise the adjustments that may
be made to certain performance criteria that may serve as the
vesting conditions for performance-based awards made under the
plan, and (iv) effect various technical revisions to
facilitate plan administration.
72
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Class A
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Shares/
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Class B
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Class B
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Votes
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Shares
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Votes
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Total Votes
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For
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65,998,827
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34,314,245
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343,142,450
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409,141,277
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Against
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257,536,148
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2,587
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25,870
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257,562,018
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Abstain
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3,499,811
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90
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900
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3,500,711
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Broker Non-Votes
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71,568,897
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6,715
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67,150
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71,636,047
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(2) To approve the amendment and restatement to
Broadcoms 1998 Employee Stock Purchase Plan to
(i) extend the term of the plan through April 30,
2018, (ii) revise the automatic annual share increase
provision of the 1998 ESPP so that the number of shares of
Class A common stock that will be automatically added to
the share reserve on the first trading day of January in each
calendar year will increase from 1.00% to 1.25% of the total
number of shares of Class A and Class B common stock
outstanding on the last trading day of the immediately preceding
calendar year, and (iii) effect various technical revisions
and improvements. The increase described in (ii) will be in
effect for the January 2009 automatic increase. Similar
amendments will also be made to the 2007 International Employee
Stock Purchase Plan, referred to as the 2007 IESPP, which draws
its shares of Class A common stock from the share reserve
available under the 1998 ESPP.
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Class A
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Shares/
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Class B
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Class B
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Votes
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Shares
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Votes
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Total Votes
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For
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78,844,434
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34,314,245
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343,142,450
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421,986,884
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Against
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244,694,566
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2,587
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25,870
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244,720,436
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Abstain
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3,495,786
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90
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900
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3,496,686
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Broker Non-Votes
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71,568,897
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6,715
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67,150
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71,636,047
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(3) To ratify the appointment of KPMG LLP as our
independent registered public accounting firm for the year
ending December 31, 2008.
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Class A
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Shares/
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Class B
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Class B
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|
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Votes
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Shares
|
|
|
Votes
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|
Total Votes
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For
|
|
|
392,679,114
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34,321,725
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343,217,250
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735,896,364
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Against
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|
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2,316,509
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0
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0
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2,316,509
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Abstain
|
|
|
3,608,060
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|
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1,912
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19,120
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|
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3,627,180
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Broker Non-Votes
|
|
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N/A
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|
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N/A
|
|
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N/A
|
|
|
|
N/A
|
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|
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Item 5.
|
Other
Information
|
In June 2008 our Board of Directors reconstituted its
committees. The current members of each committee and the
respective committee chairs are identified in the following
table:
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Nominating &
|
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C =
Chair M
= Member
|
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|
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Compen-
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|
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Equity
|
|
|
Corporate
|
|
Independent Directors
|
|
Audit
|
|
|
sation
|
|
|
Award
|
|
|
Governance
|
|
|
George L. Farinsky
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy H. Handel
|
|
|
M
|
|
|
|
|
|
|
|
|
|
|
|
|
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Eddy W. Hartenstein
|
|
|
|
|
|
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M
|
|
|
|
|
|
|
|
|
|
John
Major(1)
|
|
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|
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|
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C
|
|
|
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M
|
|
|
|
M
|
|
William T. Morrow
|
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|
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M
|
|
Robert E. Switz
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|
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M
|
|
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|
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C
|
|
Employee Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. McGregor
|
|
|
|
|
|
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|
|
C
|
|
|
|
|
|
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|
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(1)
|
|
Mr. Major also served as a
member of the Audit Committee through June 19, 2008.
|
73
The Board has determined that each member of the Audit Committee
(i) qualifies as an audit committee financial
expert under applicable SEC rules and regulations
governing composition of the Audit Committee and
(ii) satisfies the financial sophistication
requirements of the Nasdaq listing standards.
(a) Exhibits. The following Exhibits are
attached hereto and incorporated herein by reference:
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|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1
|
|
1998 Stock Incentive Plan (as amended and restated
March 12, 2008)
|
|
10
|
.2
|
|
1998 Employee Stock Purchase Plan (as amended and restated
March 12, 2008)
|
|
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
|
74
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)
Robert L. Tirva
Vice President and
Corporate Controller
(Principal Accounting Officer)
July 23, 2008
75
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1
|
|
1998 Stock Incentive Plan (as amended and restated
March 12, 2008)
|
|
10
|
.2
|
|
1998 Employee Stock Purchase Plan (as amended and restated
March 12, 2008)
|
|
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
|