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, 2006
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or
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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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16215
Alton Parkway
Irvine, California
92618-3616
(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 o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
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þ
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Large accelerated
filer o Accelerated
filer o Non-accelerated
filer
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of December 31, 2006 the registrant had
473.5 million shares of Class A common stock,
$0.0001 par value, and 74.8 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, 2006
TABLE OF
CONTENTS
Broadcom®,
the pulse logo and
SystemI/Otm
are among the trademarks of Broadcom Corporation and/or its
affiliates in the United States, certain other countries and/or
the EU. Any other trademarks or trade names mentioned are the
property of their respective owners.
©2007
Broadcom Corporation. All rights reserved.
CAUTIONARY
STATEMENT
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 and new accounting rules related to the expensing of
stock options on our reported results; our success in pending
litigation; the demand for our products; the effect that
seasonality and volume fluctuations in the demand for our
customers consumer-oriented products will have on our
quarterly operating results; our dependence on a few key
customers for a substantial portion of our revenue; our ability
to scale our operations in response to changes in demand for
existing products and services or the demand for new products
requested by our customers; the competitive nature of and
anticipated growth in our markets; our ability to migrate to
smaller process geometries; manufacturing, assembly and test
capacity; our ability to consummate acquisitions and integrate
their operations successfully; our potential needs for
additional capital; inventory and accounts receivable levels;
and the level of accrued rebates. These forward-looking
statements are based on our current expectations, estimates and
projections about our industry and business, managements
beliefs, and certain assumptions made by us, all of which are
subject to change. Forward-looking statements can often be
identified by words such as anticipates,
expects, intends, plans,
predicts, believes, seeks,
estimates, may, will,
should, would, could,
potential, continue,
ongoing, similar expressions, and variations or
negatives of these words. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual
results could differ materially and adversely from those
expressed in any forward-looking statements as a result of
various factors, some of which are listed under the section
Risk Factors contained in Part II, Item 1A
of this Report. These forward-looking statements speak only as
of the date of this Report. We undertake no obligation to revise
or update publicly any forward-looking statement for any reason,
except as otherwise required by law.
Forward-looking statements are not the only statements you
should regard with caution. The preparation of our restated
consolidated financial statements for the three months ended
March 31, 2006 and prior periods required us to make
judgments with respect to the methodologies we selected to
calculate the adjustments contained in the restated financial
statements as well as estimates and assumptions regarding the
application of those methodologies. These judgments, estimates
and assumptions, which are based on factors that we believe to
be reasonable under the circumstances, affected the amounts of
additional deferred compensation and additional stock-based
compensation expense that we recorded in 2005 and the six months
ended June 30, 2006. The application of alternative
methodologies, estimates and assumptions could have resulted in
materially different amounts.
EXPLANATORY
NOTE
We recently completed a voluntary review of our equity award
practices. The voluntary review, which commenced in May 2006 and
covered all grants of options to purchase shares of our
Class A or Class B common stock, referred to in this
Quarterly Report on Form 10-Q, or this Report, as stock
options or options, and other equity awards made since our
initial public offering in April 1998, was directed by the Audit
Committee of our Board of Directors. The voluntary review
consisted of two components: (1) an equity award review,
so-referenced in this Report, to determine whether we used
appropriate measurement dates for option grants and other equity
awards made under our extensive employee equity award programs,
which was conducted with the assistance of outside legal counsel
Irell & Manella LLP and forensic accountants FTI
Consulting Inc., and (2) an investigation of the conduct
and performance of Broadcoms officers, employees and
directors who were involved in the stock option granting
process, referred to in this Report as the conduct review, which
was conducted with the assistance of independent legal counsel
Kaye Scholer LLP and forensic accountants LECG, LLC.
Based on the results of the equity award review, the Audit
Committee concluded that, pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and related interpretations, the
accounting measurement dates for most of the stock options
granted between June 1998 and May 2003, covering options to
purchase 232.9 million shares of our Class A or
Class B common stock, differed from the measurement dates
previously used for such awards. As a result, revised
measurement dates were applied to the affected option grants and
Broadcom recorded a total of $2.259 billion in additional
stock-based compensation
expense for the years 1998 through 2005. After related tax
adjustments of $38.7 million, the restatement resulted in
total net adjustments of $2.220 billion for the years 1998
through 2005. This amount is net of forfeitures related to
employee terminations. The additional stock-based compensation
expense is being amortized over the service period relating to
each option, typically four years, with approximately 95% of the
expense being recorded in years prior to 2004.
As a consequence of these adjustments, our audited consolidated
financial statements and related disclosures for the three years
ended December 31, 2005 and our consolidated statements of
operations and consolidated balance sheet data for the five
years ended December 31, 2005 have been restated. In
addition, the unaudited quarterly unaudited financial
information and financial statements for interim periods of 2005
and 2004 and unaudited condensed consolidated financial
statements for the three months ended March 31, 2006 have
been restated. We have also restated the stock-based
compensation expense footnote information calculated under
Statement of Financial Accounting Standards, or SFAS,
No. 123, Accounting for Stock-Based Compensation, or
SFAS 123, and SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure,
or SFAS 148, under the disclosure-only alternatives of
those pronouncements for the years 2003 through 2005 and for
interim periods of 2005 and 2004. This restated financial and
footnote information is included in our amended Annual Report on
Form 10-K/A for the year ended December 31, 2005 and amended
Quarterly Report on Form 10-Q/A for the three months ended March
31, 2006 filed with the Securities and Exchange Commission, or
SEC, today.
The adjustments did not affect Broadcoms
previously-reported revenue, cash, cash equivalents or
marketable securities balances in any of the restated periods.
The amounts of the adjustments we recorded for the years 1998
through 2005 were calculated pursuant to APB 25. Effective
January 1, 2006 we adopted SFAS No. 123 (revised
2004), Share-Based Payment, or SFAS 123R, which
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their respective grant date fair values. As
a result, the $14.3 million of additional stock-based
compensation expense that we recorded in connection with our
equity award review in the three months ended March 31,
2006 is calculated pursuant to SFAS 123R.
The follow table summarizes additional stock-based compensation
expense and related tax adjustments resulting from the review of
our equity award practices on a quarterly basis for 2005 and the
three months ended March 31, 2006:
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Three Months Ended
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March 31,
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June 30,
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September 30,
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December 31,
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March 31,
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2005
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2005
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2005
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2005
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2006(1)
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(In thousands)
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Additional stock-based
compensation expense
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$
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12,845
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$
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11,599
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$
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10,362
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$
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7,205
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$
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14,295
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Other tax adjustments
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223
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441
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1,084
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881
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2,893
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Additional operating expenses
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13,068
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12,040
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11,446
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8,086
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17,188
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Income tax expense (benefit)
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(8,255
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8,255
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Net adjustments
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$
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4,813
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$
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20,295
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$
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11,446
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$
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8,086
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$
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17,188
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(1)
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These amounts are not included in
the total additional stock-based compensation expense and
related tax adjustments recorded for the years 1998 through 2005
discussed above because they are calculated in accordance with
SFAS 123R, which we adopted effective January 1, 2006.
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The following table summarizes the impact of the additional
stock-based compensation expense and related income tax
adjustments (but not other tax adjustments)
resulting from the review of our equity award practices
2
on previously-reported stock-based compensation expense on a
quarterly basis for 2005 and the three months ended
March 31, 2006:
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Stock-Based Compensation Expense
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As Reported
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Adjustments
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As Restated
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(In thousands)
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Three Months Ended March 31,
2005
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$
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11,294
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$
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4,590
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$
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15,884
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Three Months Ended June 30,
2005
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14,548
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19,854
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34,402
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Three Months Ended
September 30, 2005
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16,584
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10,362
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26,946
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Three Months Ended
December 31, 2005
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17,578
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7,205
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24,783
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Year Ended December 31, 2005
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$
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60,004
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$
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42,011
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$
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102,015
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Three Months Ended March 31,
2006
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$
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93,691
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$
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14,295
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$
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107,986
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This Quarterly Report on
Form 10-Q
should be read in conjunction with our amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and amended Quarterly
Report on
Form 10-Q/A
for the three months ended March 31, 2006 filed with the
SEC today. Information regarding the effect of the restatement
on our financial position and results of operations is provided
in Note 2 of Notes to Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of
this Report and Managements Discussion and Analysis
of Financial Condition and Results of Operations in
Part I, Item 2 of this Report.
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, and all earnings
press releases and similar communications issued by us, for all
periods ended on or before March 31, 2006 should not be
relied upon and are superseded in their entirety by the
information in the amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and the amended
Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006 filed with the
SEC today.
Share and per share information presented in this Report has
been adjusted to reflect all splits and dividends of our common
stock subsequent to April 16, 1998, including the
three-for-two
stock split effected February 21, 2006 through the payment
of a stock dividend.
3
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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BROADCOM
CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
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December 31,
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2006
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2005
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(Restated)
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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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1,838,372
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$
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1,437,276
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Short-term marketable securities
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366,894
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295,402
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Accounts receivable, net
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408,301
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307,356
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Inventory
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278,036
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194,571
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Prepaid expenses and other current
assets
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90,242
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101,271
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Total current assets
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2,981,845
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2,335,876
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Property and equipment, net
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110,691
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96,438
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Long-term marketable securities
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171,961
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142,843
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Goodwill
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1,186,286
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1,149,602
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Purchased intangible assets, net
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34,019
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7,332
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Other assets
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15,916
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20,108
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Total assets
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$
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4,500,718
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$
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3,752,199
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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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321,011
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$
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289,069
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Wages and related benefits
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73,852
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74,709
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Deferred revenue
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1,520
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2,053
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Accrued liabilities
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257,628
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233,663
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Total current liabilities
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654,011
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599,494
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Commitments and contingencies
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Long-term liabilities
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7,952
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12,138
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Shareholders equity:
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Common stock
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55
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52
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Additional paid-in capital
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11,752,767
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11,474,724
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Notes receivable from employees
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(2,317
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(4,743
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Deferred compensation
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(194,331
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Accumulated deficit
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(7,912,459
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(8,136,243
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Accumulated other comprehensive
income
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709
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1,108
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Total shareholders equity
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3,838,755
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3,140,567
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Total liabilities and
shareholders equity
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$
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4,500,718
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$
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3,752,199
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See accompanying notes.
4
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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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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2006
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2005
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2006
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2005
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(Restated)
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(Restated)
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(In thousands, except per share data)
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Net revenue
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$
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941,131
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$
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604,861
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$
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1,841,778
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$
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1,155,206
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Cost of revenue
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457,374
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284,092
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891,583
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550,911
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Gross profit
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483,757
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320,769
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950,195
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604,295
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Operating expense:
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Research and development
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280,024
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161,991
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531,718
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316,575
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Selling, general and administrative
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121,982
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64,899
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234,881
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126,947
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Amortization of purchased
intangible assets
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605
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1,040
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1,688
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1,952
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In-process research and development
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5,200
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6,652
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Settlement costs
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110,000
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110,000
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Income (loss) from operations
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81,146
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(17,161
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)
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176,708
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42,169
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Interest income, net
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28,194
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10,678
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51,932
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18,636
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Other income, net
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1,448
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|
|
679
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3,219
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|
|
777
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Income (loss) before income taxes
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110,788
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(5,804
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)
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231,859
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61,582
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Provision (benefit) for income
taxes
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4,702
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|
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(570
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)
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|
|
8,075
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2,447
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Net income (loss)
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$
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106,086
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|
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$
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(5,234
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)
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$
|
223,784
|
|
|
$
|
59,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
.19
|
|
|
$
|
(.01
|
)
|
|
$
|
.41
|
|
|
$
|
.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) per share
(diluted)
|
|
$
|
.18
|
|
|
$
|
(.01
|
)
|
|
$
|
.37
|
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
547,790
|
|
|
|
502,353
|
|
|
|
543,379
|
|
|
|
499,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
594,546
|
|
|
|
502,353
|
|
|
|
597,875
|
|
|
|
536,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of total stock-based
compensation expense included in each functional line
item in the unaudited condensed consolidated statements of
operations above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006(1)
|
|
|
2005
|
|
|
2006(1)
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
7,105
|
|
|
$
|
1,007
|
|
|
$
|
13,391
|
|
|
$
|
2,066
|
|
Research and development
|
|
|
86,420
|
|
|
|
17,872
|
|
|
|
156,425
|
|
|
|
33,409
|
|
Selling, general and administrative
|
|
|
38,940
|
|
|
|
7,268
|
|
|
|
70,635
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,465
|
|
|
$
|
26,147
|
|
|
$
|
240,451
|
|
|
$
|
50,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts included in the three and six months ended
June 30, 2006 reflect the adoption of Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), effective January 1,
2006. Had Broadcom applied the provisions of SFAS 123R in
prior periods, it would have reported a net loss of
$128.8 million or a $0.26 net loss per share (basic
and diluted) in the three months ended June 30, 2005 and a
net loss of $214.4 million or a $0.43 net loss per
share (basic and diluted) in the six months ended June 30,
2005. See Notes 1 and 7 of Notes to Unaudited Condensed
Consolidated Financial Statements.
All historical share information has been adjusted to reflect
the
three-for-two
stock split effected February 21, 2006 through the payment
of a stock dividend of one additional share of Class A or
Class B common stock, as applicable, for every two shares
of such class held on the record date of February 6, 2006.
See accompanying notes.
5
BROADCOM
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
223,784
|
|
|
$
|
59,135
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
23,325
|
|
|
|
27,778
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
Stock options and other awards
|
|
|
181,248
|
|
|
|
36,727
|
|
Restricted stock units issued by
the Company
|
|
|
59,203
|
|
|
|
13,559
|
|
Acquisition-related items:
|
|
|
|
|
|
|
|
|
Amortization of purchased
intangible assets
|
|
|
7,413
|
|
|
|
7,486
|
|
In-process research and development
|
|
|
5,200
|
|
|
|
6,652
|
|
Gain on strategic investments
|
|
|
(700
|
)
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(100,901
|
)
|
|
|
(37,848
|
)
|
Inventory
|
|
|
(82,840
|
)
|
|
|
(4,728
|
)
|
Prepaid expenses and other assets
|
|
|
17,747
|
|
|
|
(10,622
|
)
|
Accounts payable
|
|
|
27,715
|
|
|
|
40,119
|
|
Accrued settlement liabilities
|
|
|
(2,000
|
)
|
|
|
99,852
|
|
Other accrued liabilities
|
|
|
17,798
|
|
|
|
(7,919
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
376,992
|
|
|
|
230,191
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Net purchases of property and
equipment
|
|
|
(37,229
|
)
|
|
|
(13,430
|
)
|
Net cash paid for acquisitions
|
|
|
(67,921
|
)
|
|
|
(24,028
|
)
|
Net proceeds from sales
(purchases) of strategic investments
|
|
|
137
|
|
|
|
(105
|
)
|
Purchases of marketable securities
|
|
|
(372,033
|
)
|
|
|
(334,880
|
)
|
Proceeds from maturities of
marketable securities
|
|
|
271,423
|
|
|
|
218,404
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(205,623
|
)
|
|
|
(154,039
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
477,690
|
|
|
|
99,422
|
|
Repurchases of Class A common
stock
|
|
|
(246,102
|
)
|
|
|
(18,240
|
)
|
Repayment of notes receivable by
employees
|
|
|
2,426
|
|
|
|
124
|
|
Excess tax benefits from
stock-based compensation
|
|
|
338
|
|
|
|
|
|
Payments on assumed debt and other
obligations
|
|
|
(4,625
|
)
|
|
|
(2,482
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
229,727
|
|
|
|
78,824
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
|
401,096
|
|
|
|
154,976
|
|
Cash and cash equivalents at
beginning of period
|
|
|
1,437,276
|
|
|
|
858,592
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
1,838,372
|
|
|
$
|
1,013,568
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
BROADCOM
CORPORATION
June 30, 2006
|
|
1.
|
Summary
of Significant Accounting Policies
|
The
Company
Broadcom Corporation is a global leader in semiconductors for
wired and wireless communications. The Companys products
enable the delivery of voice, video, data and multimedia to and
throughout the home, the office and the mobile environment. The
Company provides 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. Its diverse product portfolio
includes solutions for digital cable, satellite and Internet
Protocol (IP) set-top boxes and media servers; high definition
television (HDTV); high definition DVD players and personal
video recording (PVR) devices; cable and DSL modems and
residential gateways; high-speed transmission and switching for
local, metropolitan, wide area and storage networking; System
I/Otm
server solutions; broadband network and security processors;
wireless and personal area networking; cellular communications;
mobile multimedia and applications processors; mobile power
management; and Voice over Internet Protocol (VoIP) gateway and
telephony systems.
Basis
of Presentation
The interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Securities
and Exchange Commission (SEC)
Form 10-Q
and Article 10 of SEC
Regulation S-X.
They do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. Therefore, these financial
statements should be read in conjunction with the Companys
audited consolidated financial statements and notes thereto for
the year ended December 31, 2005, included in the
Companys amended Annual Report on
Form 10-K/A
filed January 23, 2007 with the SEC.
The condensed consolidated financial statements included herein
are unaudited; however, they contain all normal recurring
accruals and adjustments that, in the opinion of management, are
necessary to present fairly the Companys consolidated
financial position at June 30, 2006 and December 31,
2005, and the consolidated results of its operations for the
three and six months ended June 30, 2006 and 2005, and the
consolidated cash flows for the six months ended June 30,
2006 and 2005. The results of operations for the three and six
months ended June 30, 2006 are not necessarily indicative
of the results to be expected for future quarters or the full
year.
Use of
Estimates
The preparation of financial statements in accordance with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of net revenue and
expenses in the reporting period. The Company regularly
evaluates estimates and assumptions related to allowances for
doubtful accounts, sales returns and allowances, warranty
reserves, inventory reserves, stock-based compensation expense,
goodwill and purchased intangible asset valuations, strategic
investments, deferred income tax asset valuation allowances, tax
contingencies, restructuring costs, litigation and other loss
contingencies. The Company bases its estimates and assumptions
on current facts, historical experience and various other
factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
and the accrual of costs and expenses that are not readily
apparent from other sources. The actual results experienced by
the Company may differ materially and adversely from the
Companys estimates. To the extent there are material
differences between the estimates and the actual results, future
results of operations will be affected. The preparation of the
Companys restated consolidated financial statements
required management to make judgments with respect to the
methodologies it selected to calculate the adjustments to the
Companys unaudited condensed consolidated financial
statements and estimates and assumptions regarding the
application of those methodologies. These judgments, estimates
and assumptions affected the amounts of additional
7
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred compensation (recorded prior to 2006) and
additional stock-based compensation expense that the Company
recorded in 2005 and the six months ended June 30, 2006,
and the application of alternative methodologies, estimates and
assumptions could have resulted in materially different amounts.
Revenue
Recognition
The Companys net revenue is generated principally by sales
of its semiconductor products. The Company derives the remaining
balance of its net revenue predominantly from software licenses,
development agreements, support and maintenance agreements and
cancellation fees. In addition, the majority of the
Companys sales occur through the efforts of its direct
sales force. The remaining balance of its sales occurs through
distributors.
The following table presents details of the Companys
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Sales of semiconductor products
|
|
|
98.5
|
%
|
|
|
98.5
|
%
|
|
|
99.0
|
%
|
|
|
98.5
|
%
|
Other
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Sales made through direct sales
force
|
|
|
83.0
|
%
|
|
|
84.8
|
%
|
|
|
82.6
|
%
|
|
|
85.3
|
%
|
Sales made through distributors
|
|
|
17.0
|
|
|
|
15.2
|
|
|
|
17.4
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements (SAB 101) and
SAB No. 104, Revenue Recognition
(SAB 104), the Company recognizes product
revenue when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered,
(iii) the price to the customer is fixed or determinable
and (iv) collection of the resulting receivable is
reasonably assured. These criteria are usually met at the time
of product shipment. However, the Company does not recognize
revenue until all customer acceptance requirements have been
met, when applicable. A portion of the Companys sales are
made through distributors under agreements allowing for pricing
credits
and/or
rights of return. Product revenue on sales made through these
distributors is not recognized until the distributors ship the
product to their customers, at which time the terms of the sale
become fixed and determinable. The Company records reductions to
revenue for estimated product returns and pricing adjustments,
such as competitive pricing programs and rebates, in the same
period that the related revenue is recorded. The amount of these
reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate
agreements, and other factors known at the time.
In arrangements that include a combination of hardware and
software products that are also sold separately, where software
is more than incidental and essential to the functionality of
the product being sold, the Company follows the guidance in
Emerging Issues Task Force (EITF) Issue
No. 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental
Software, accounts for the entire arrangement as a sale of
software and software-related items, and follows the revenue
recognition criteria in Statement of Position (SOP)
97-2,
Software Revenue Recognition (SOP 97-2),
and related interpretations.
Revenue under development agreements is recognized when
applicable contractual milestones have been met, including
deliverables, and in any case, does not exceed the amount that
would be recognized using the
8
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
percentage-of-completion
method in accordance with the American Institute of Certified
Public Accountants Statement of Position (SOP)
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Revenue from software licenses
and maintenance agreements is recognized in accordance with the
provisions of
SOP 97-2
as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. Revenue from cancellation fees is recognized
when cash is received from the customer.
Inventory
Inventory consists of work in process and finished goods and is
stated at the lower of cost
(first-in,
first-out) or market. The Company establishes inventory reserves
for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and the estimated
realizable value based upon assumptions about future demand and
market conditions. Shipping and handling costs are classified as
a component of cost of revenue in the consolidated statements of
operations.
Rebates
The Company accounts for rebates in accordance with Financial
Accounting Standards Board (FASB) EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), and,
accordingly, records reductions to revenue for rebates in the
same period that the related revenue is recorded. The amount of
these reductions is based upon the terms included in the
Companys various rebate agreements.
Warranty
The Companys products typically carry a one to three year
warranty. The Company establishes reserves for estimated product
warranty costs at the time revenue is recognized based upon its
historical warranty experience, and additionally for any known
product warranty issues.
Stock-Based
Compensation
The Company has in effect stock incentive plans under which
incentive stock options have been granted to employees and
restricted stock units and non-qualified stock options have been
granted to employees and non-employee members of the Board of
Directors. The Company also has an employee stock purchase plan
for all eligible employees. Effective January 1, 2006 the
Company adopted SFAS 123R, which requires all share-based
payments to employees, including grants of employee stock
options, restricted stock units and employee stock purchase
rights, to be recognized in the financial statements based on
their respective grant date fair values and does not allow the
previously permitted pro forma disclosure-only method as an
alternative to financial statement recognition. SFAS 123R
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), and related interpretations and
amends SFAS No. 95, Statement of Cash
Flows. SFAS 123R also requires the benefits
of tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating
cash flow as required under previous literature. This
requirement may reduce future net operating cash flows and
increase net financing cash flows. In March 2005 the SEC issued
SAB No. 107, Share-Based Payment
(SAB 107), which provides guidance
regarding the interaction of SFAS 123R and certain SEC
rules and regulations. The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the
modified-prospective method of recognition of compensation
expense related to share-based payments. The Companys
unaudited condensed consolidated statements of operations for
the three and six months ended June 30, 2006 reflect the
impact of adopting SFAS 123R. In accordance with the
modified prospective transition method, the Companys
unaudited condensed consolidated statements of operations for
prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123R.
9
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 recognized as expense ratably
over the requisite service periods. The Company has estimated
the fair value of each award as of the date of grant or
assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options
that have no vesting restrictions and that are freely
transferable. The Black-Scholes model considers, among other
factors, the expected life of the award and the expected
volatility of the Companys stock price. Although the
Black-Scholes model meets the requirements of SFAS 123R and
SAB 107, the fair values generated by the model may not be
indicative of the actual fair values of the Companys
awards, as it does not consider other factors important to those
share-based payment awards, such as continued employment,
periodic vesting requirements, and limited transferability.
On November 10, 2005 the FASB issued Staff Position
No. SFAS 123R-3,
Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards
(SFAS 123R-3).
The Company has elected to adopt the alternative transition
method provided in
SFAS 123R-3
for calculating the tax effects of stock-based compensation
pursuant to SFAS 123R. The alternative transition method
includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC Pool)
related to the tax effects of employee stock-based compensation
expense, and to determine the subsequent impact on the APIC Pool
and unaudited condensed consolidated statements of cash flows of
the tax effects of employee stock-based compensation awards that
were outstanding at the Companys adoption of
SFAS 123R. In addition, in accordance with SFAS 123R,
SFAS No. 109, Accounting for Income Taxes
(SFAS 109), and EITF Topic D-32,
Intraperiod Tax Allocation of the Tax Effect of Pretax Income
from Continuing Operations, the Company has elected to
recognize excess income tax benefits from stock option exercises
in additional paid-in capital only if an incremental income tax
benefit would be realized after considering all other tax
attributes presently available to the Company.
Prior to the adoption of SFAS 123R, the Company accounted
for share-based payment awards to employees in accordance with
APB 25 and related interpretations, and had adopted the
disclosure-only alternative of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), and SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. In accordance with APB 25,
stock-based compensation expense was not recorded in connection
with share-based payment awards granted with exercise prices
equal to or greater than the fair market value of the
Companys Class A common stock on the date of grant,
unless certain modifications were subsequently made. The Company
recorded deferred compensation in connection with stock options
granted, as well as stock options assumed in acquisitions, with
exercise prices less than the fair market value of the
Class A common stock on the date of grant or assumption in
the case of acquisitions. The amount of such deferred
compensation per share was equal to the excess of the fair
market value over the exercise price on such date. The Company
recorded deferred compensation in connection with restricted
stock units equal to the fair market value of the Class A
common stock on the date of grant. Recorded deferred
compensation was recognized as stock-based compensation expense
ratably over the applicable vesting periods, which are generally
deemed to be the applicable service periods. In accordance with
the provisions of SFAS 123R, as of January 1, 2006,
all deferred compensation previously recorded has been
eliminated with a corresponding reduction in additional paid-in
capital.
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 and restricted stock units
calculated using the treasury stock method. Under the treasury
stock method, an increase in the fair market value of the
Companys Class A common stock results in a greater
dilutive effect from outstanding options and restricted stock
units. Additionally, the exercise of employee stock options and
the vesting of restricted stock units results in a greater
dilutive effect on net income per share.
10
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business
Enterprise Segments
The Company operates in one reportable operating segment, wired
and wireless broadband communications. SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), establishes
standards for the way public business enterprises report
information about operating segments in annual consolidated
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic
areas and major customers. Although the Company had four
operating segments at June 30, 2006, under the aggregation
criteria set forth in SFAS 131 the Company operates in only
one reportable operating segment, wired and wireless broadband
communications.
Under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS 131, if the segments
have similar economic characteristics, and if the segments are
similar in each of the following areas:
|
|
|
|
|
the nature of products and services;
|
|
|
|
the nature of the production processes;
|
|
|
|
the type or class of customer for their products and
services; and
|
|
|
|
the methods used to distribute their products or provide their
services.
|
The Company meets each of the aggregation criteria for the
following reasons:
|
|
|
|
|
the sale of integrated circuits is the only material source of
revenue for each of its four operating segments;
|
|
|
|
the integrated circuits sold by each of its operating segments
use the same standard CMOS manufacturing processes;
|
|
|
|
the integrated circuits marketed by each of its operating
segments are sold to one type of customer: manufacturers of
wired and wireless communications equipment, which incorporate
the Companys integrated circuits into their electronic
products; and
|
|
|
|
all of its integrated circuits are sold through a centralized
sales force and common wholesale distributors.
|
All of the Companys operating segments share similar
economic characteristics as they have a similar long term
business model, operate at similar gross margins, and have
similar research and development expenses and similar selling,
general and administrative expenses. The causes for variation
among each of the operating segments are the same and include
factors such as (i) life cycle and price and cost
fluctuations, (ii) number of competitors,
(iii) product differentiation and (iv) size of market
opportunity. Additionally, each operating segment is subject to
the overall cyclical nature of the semiconductor industry. The
number and composition of employees and the amounts and types of
tools and materials required are similar for each operating
segment. Finally, even though the Company periodically
reorganizes its operating segments based upon changes in
customers, end markets or products, acquisitions, long-term
growth strategies, and the experience and bandwidth of the
senior executives in charge, the common financial goals for each
operating segment remain constant.
Because the Company meets each of the criteria set forth in
SFAS 131 and its four operating segments as of
June 30, 2006 share similar economic characteristics,
the Company aggregates its results of operations into one
reportable operating segment.
Reclassifications
Certain amounts in the 2005 unaudited condensed consolidated
financial statements have been reclassified to conform with the
current period presentation.
11
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Restatement
of Unaudited Condensed Consolidated Financial
Statements
|
Broadcom Corporation recently completed a voluntary review of
the Companys equity award practices. The voluntary review,
which commenced in May 2006 and covered all grants of options to
purchase shares of the Companys Class A or
Class B common stock (stock options or
options) and other equity awards made since the
Companys initial public offering in April 1998, was
directed by the Audit Committee of the Board of Directors. The
voluntary review consisted of two components: (1) an equity
award review to determine whether the Company used appropriate
measurement dates for option grants and other equity awards made
under its extensive employee equity award programs, which was
conducted with the assistance of outside legal counsel
Irell & Manella LLP and forensic accountants FTI
Consulting Inc., and (2) an investigation of the conduct
and performance of Broadcoms officers, employees and
directors who were involved in the stock option granting
process, which was conducted with the assistance of independent
legal counsel Kaye Scholer LLP and forensic accountants LECG,
LLC.
Based on the results of the equity award review, the Audit
Committee concluded that, pursuant to APB 25 and related
interpretations, the accounting measurement dates for most of
the stock options granted between June 1998 and May 2003,
covering options to purchase 232.9 million shares of the
Companys Class A or Class B common stock,
differed from the measurement dates previously used for such
awards. As a result, revised measurement dates were applied to
the affected option grants and the Company recorded a total of
$2.259 billion in additional stock-based compensation
expense for the years 1998 through 2005. After related tax
adjustments of $38.7 million, the restatement resulted in
total net adjustments of $2.220 billion for the years 1998
through 2005. This amount is net of forfeitures related to
employee terminations. The additional stock-based compensation
expense is being recorded over the service period relating to
each option, typically four years, with approximately 95% of the
expense being recorded in years prior to 2004.
As a consequence of these adjustments, the Companys
audited consolidated financial statements and related
disclosures for the three years ended December 31, 2005,
the unaudited quarterly financial information for interim
periods of 2005 and 2004, and unaudited condensed consolidated
financial statements for the three months ended March 31,
2006 have been restated. The Company has also restated the
stock-based compensation expense footnote information calculated
under SFAS 123 and SFAS 148 under the disclosure-only
alternatives of those pronouncements for the years 2003 through
2005 and for the quarterly periods of 2005 and 2004. This
restated financial and footnote information is included in the
Companys amended Annual Report on Form 10-K/A for the
year ended December 31, 2005 and amended Quarterly Report
on
Form 10-Q/A
for the three months ended March 31, 2006 filed with the
SEC today. The adjustments did not affect the Companys
previously-reported cash, cash equivalents or marketable
securities balances in any of the restated periods.
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 the
Companys independent registered public accounting firm,
and all earnings press releases and similar communications
issued by Broadcom, for all periods ended on or before
March 31, 2006 should not be relied upon and are superseded
in their entirety by the information in the amended Annual
Report on
Form 10-K/A
for the year ended December 31, 2005 and the amended
Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006 filed with the
SEC today.
The amounts of the adjustments the Company recorded for the
years 1998 through 2005 were calculated pursuant to APB 25.
The Company adopted SFAS 123R effective January 1,
2006, which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their respective grant date
fair values. As a result, the $14.3 million of additional
stock-based compensation expense that the Companys
recorded in connection with its equity award review in the three
months ended March 31, 2006 is calculated pursuant to
SFAS 123R.
12
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes additional stock-based
compensation expense and related tax adjustments resulting from
the review of the Companys equity award practices on a
quarterly basis for 2005 and the three months ended
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006(1)
|
|
|
|
(In thousands)
|
|
|
Additional stock-based
compensation expense
|
|
$
|
12,845
|
|
|
$
|
11,599
|
|
|
$
|
10,362
|
|
|
$
|
7,205
|
|
|
$
|
14,295
|
|
Other tax adjustments
|
|
|
223
|
|
|
|
441
|
|
|
|
1,084
|
|
|
|
881
|
|
|
|
2,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional operating expenses
|
|
|
13,068
|
|
|
|
12,040
|
|
|
|
11,446
|
|
|
|
8,086
|
|
|
|
17,188
|
|
Income tax expense (benefit)
|
|
|
(8,255
|
)
|
|
|
8,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustments
|
|
$
|
4,813
|
|
|
$
|
20,295
|
|
|
$
|
11,446
|
|
|
$
|
8,086
|
|
|
$
|
17,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These amounts are not included in
the total additional stock-based compensation expense and
related tax adjustments recorded for the years 1998 through 2005
discussed above because they are calculated in accordance with
SFAS 123R, which the Company adopted effective
January 1, 2006.
|
The following table summarizes the impact of the additional
stock-based compensation expense and related income tax
adjustments (but not other tax adjustments)
resulting from the review of the Companys equity award
practices on previously reported stock-based compensation
expense on a quarterly basis for 2005 and the three months ended
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Three months ended March 31,
2005
|
|
$
|
11,294
|
|
|
$
|
4,590
|
|
|
$
|
15,884
|
|
Three months ended June 30,
2005
|
|
|
14,548
|
|
|
|
19,854
|
|
|
|
34,402
|
|
Three months ended
September 30, 2005
|
|
|
16,584
|
|
|
|
10,362
|
|
|
|
26,946
|
|
Three months ended
December 31, 2005
|
|
|
17,578
|
|
|
|
7,205
|
|
|
|
24,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
60,004
|
|
|
$
|
42,011
|
|
|
$
|
102,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2006
|
|
$
|
93,691
|
|
|
$
|
14,295
|
|
|
$
|
107,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact of
the Additional Stock-Based Compensation Expense-Related
Adjustments on the Unaudited Condensed Consolidated Financial
Statements
Unaudited
Condensed Consolidated Statements of Operations
The following tables present the impact of the additional
stock-based compensation expense-related adjustments on the
Companys previously-reported unaudited condensed
consolidated statements of operations for the three and six
months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
604,861
|
|
|
$
|
|
|
|
$
|
604,861
|
|
|
$
|
1,155,206
|
|
|
$
|
|
|
|
$
|
1,155,206
|
|
Cost of revenue
|
|
|
283,455
|
|
|
|
637
|
|
|
|
284,092
|
|
|
|
549,571
|
|
|
|
1,340
|
|
|
|
550,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
321,406
|
|
|
|
(637
|
)
|
|
|
320,769
|
|
|
|
605,635
|
|
|
|
(1,340
|
)
|
|
|
604,295
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
153,634
|
|
|
|
8,357
|
|
|
|
161,991
|
|
|
|
299,504
|
|
|
|
17,071
|
|
|
|
316,575
|
|
Selling, general and administrative
|
|
|
61,853
|
|
|
|
3,046
|
|
|
|
64,899
|
|
|
|
120,250
|
|
|
|
6,697
|
|
|
|
126,947
|
|
Amortization of purchased
intangible assets
|
|
|
1,040
|
|
|
|
|
|
|
|
1,040
|
|
|
|
1,952
|
|
|
|
|
|
|
|
1,952
|
|
Settlement costs
|
|
|
110,000
|
|
|
|
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
|
|
|
|
110,000
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,652
|
|
|
|
|
|
|
|
6,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,121
|
)
|
|
|
(12,040
|
)
|
|
|
(17,161
|
)
|
|
|
67,277
|
|
|
|
(25,108
|
)
|
|
|
42,169
|
|
Interest income, net
|
|
|
10,678
|
|
|
|
|
|
|
|
10,678
|
|
|
|
18,636
|
|
|
|
|
|
|
|
18,636
|
|
Other income, net
|
|
|
679
|
|
|
|
|
|
|
|
679
|
|
|
|
777
|
|
|
|
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,236
|
|
|
|
(12,040
|
)
|
|
|
(5,804
|
)
|
|
|
86,690
|
|
|
|
(25,108
|
)
|
|
|
61,582
|
|
Provision (benefit) for income
taxes
|
|
|
(8,825
|
)
|
|
|
8,255
|
|
|
|
(570
|
)
|
|
|
2,447
|
|
|
|
|
|
|
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,061
|
|
|
$
|
(20,295
|
)
|
|
$
|
(5,234
|
)
|
|
$
|
84,243
|
|
|
$
|
(25,108
|
)
|
|
$
|
59,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
502,353
|
|
|
|
|
|
|
|
502,353
|
|
|
|
499,779
|
|
|
|
|
|
|
|
499,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
544,796
|
|
|
|
(42,443
|
)
|
|
|
502,353
|
|
|
|
540,967
|
|
|
|
(4,109
|
)
|
|
|
536,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents details of the total stock-based
compensation expense that is included in each functional
line item in the unaudited condensed consolidated statements of
operations above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
394
|
|
|
$
|
613
|
|
|
$
|
1,007
|
|
|
$
|
762
|
|
|
$
|
1,304
|
|
|
$
|
2,066
|
|
Research and development
|
|
|
9,915
|
|
|
|
7,957
|
|
|
|
17,872
|
|
|
|
16,940
|
|
|
|
16,469
|
|
|
|
33,409
|
|
Selling, general and administrative
|
|
|
4,239
|
|
|
|
3,029
|
|
|
|
7,268
|
|
|
|
8,140
|
|
|
|
6,671
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,548
|
|
|
$
|
11,599
|
|
|
$
|
26,147
|
|
|
$
|
25,842
|
|
|
$
|
24,444
|
|
|
$
|
50,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet
The net impact of the additional stock-based compensation
expense-related adjustments on the Companys
previously-reported consolidated balance sheet as of
December 31, 2005 was an increase in wages and related
benefits and a decrease in total shareholders equity for
related tax adjustments of $4.9 million as of
December 31, 2005.
Stock-Based
Compensation in Accordance with SFAS 123
In accordance with the requirements of the disclosure-only
alternative of SFAS 123, set forth below is a pro forma
illustration of the effect on net income (loss) and net income
(loss) per share information for the three and six months ended
June 30, 2005, computed as if the Company had valued
stock-based awards to employees using the Black-Scholes option
pricing model instead of applying the guidelines provided by
APB 25. In addition, the table below presents the impact of
the additional stock-based compensation expense-related
adjustments on the Companys previously-reported pro forma
illustrations for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss)
|
|
$
|
15,061
|
|
|
$
|
(20,295
|
)
|
|
$
|
(5,234
|
)
|
|
$
|
84,243
|
|
|
$
|
(25,108
|
)
|
|
$
|
59,135
|
|
Add: Stock-based compensation
expense included in net income (loss)
|
|
|
14,548
|
|
|
|
19,854
|
|
|
|
34,402
|
|
|
|
25,842
|
|
|
|
24,444
|
|
|
|
50,286
|
|
Deduct: Stock-based compensation
expense determined under the fair value method
|
|
|
(108,565
|
)
|
|
|
(49,368
|
)
|
|
|
(157,933
|
)
|
|
|
(250,569
|
)
|
|
|
(73,287
|
)
|
|
|
(323,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(78,956
|
)
|
|
$
|
(49,809
|
)
|
|
$
|
(128,765
|
)
|
|
$
|
(140,484
|
)
|
|
$
|
(73,951
|
)
|
|
$
|
(214,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and
diluted) pro forma
|
|
$
|
(0.16
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Supplemental
Financial Information
|
Inventory
The following table presents details of the Companys
inventory:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Work in process
|
|
$
|
121,259
|
|
|
$
|
86,445
|
|
Finished goods
|
|
|
156,777
|
|
|
|
108,126
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
278,036
|
|
|
$
|
194,571
|
|
|
|
|
|
|
|
|
|
|
Purchased
Intangible Assets
The following table presents details of the Companys
purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Completed technology
|
|
$
|
186,799
|
|
|
$
|
(156,400
|
)
|
|
$
|
30,399
|
|
|
$
|
156,099
|
|
|
$
|
(150,676
|
)
|
|
$
|
5,423
|
|
Customer relationships
|
|
|
49,266
|
|
|
|
(46,466
|
)
|
|
|
2,800
|
|
|
|
46,266
|
|
|
|
(45,228
|
)
|
|
|
1,038
|
|
Customer backlog
|
|
|
3,316
|
|
|
|
(3,316
|
)
|
|
|
|
|
|
|
3,316
|
|
|
|
(3,316
|
)
|
|
|
|
|
Other
|
|
|
7,614
|
|
|
|
(6,794
|
)
|
|
|
820
|
|
|
|
7,214
|
|
|
|
(6,343
|
)
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,995
|
|
|
$
|
(212,976
|
)
|
|
$
|
34,019
|
|
|
$
|
212,895
|
|
|
$
|
(205,563
|
)
|
|
$
|
7,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006 the unamortized balance of purchased
intangible assets that will be amortized to future cost of
revenue and other operating expenses was $30.4 million and
$3.6 million, respectively. This expense will be amortized
ratably through 2011. If the Company acquires additional
purchased intangible assets in the future, its cost of revenue
or other operating expenses will be increased by the
amortization of those assets.
The following table presents details of the amortization of
purchased intangible assets by expense category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
2,744
|
|
|
$
|
3,244
|
|
|
$
|
5,725
|
|
|
$
|
5,534
|
|
Operating expense
|
|
|
605
|
|
|
|
1,040
|
|
|
|
1,688
|
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,349
|
|
|
$
|
4,284
|
|
|
$
|
7,413
|
|
|
$
|
7,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Liabilities
The following table presents details of the Companys
accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Accrued rebates
|
|
$
|
110,938
|
|
|
$
|
99,645
|
|
Accrued taxes
|
|
|
70,761
|
|
|
|
68,318
|
|
Warranty reserve
|
|
|
18,272
|
|
|
|
14,131
|
|
Restructuring liabilities
|
|
|
7,335
|
|
|
|
8,083
|
|
Accrued settlement liabilities
|
|
|
2,048
|
|
|
|
2,047
|
|
Other
|
|
|
48,274
|
|
|
|
41,439
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,628
|
|
|
$
|
233,663
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
The following table presents details of the Companys
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Restructuring liabilities
|
|
$
|
5,952
|
|
|
$
|
8,138
|
|
Accrued settlement liabilities
|
|
|
2,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,952
|
|
|
$
|
12,138
|
|
|
|
|
|
|
|
|
|
|
Accrued
Rebate Activity
The following table summarizes the activity related to accrued
rebates during the six months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
99,645
|
|
|
$
|
93,222
|
|
Charged as a reduction to revenue
|
|
|
111,123
|
|
|
|
105,199
|
|
Payments
|
|
|
(99,830
|
)
|
|
|
(109,731
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
110,938
|
|
|
$
|
88,690
|
|
|
|
|
|
|
|
|
|
|
17
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
Reserve Activity
The following table summarizes the activity related to warranty
reserves during the six months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
14,131
|
|
|
$
|
19,185
|
|
Charged to costs and expenses
|
|
|
4,592
|
|
|
|
|
|
Acquired through acquisition
|
|
|
878
|
|
|
|
55
|
|
Payments
|
|
|
(1,329
|
)
|
|
|
(1,728
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
18,272
|
|
|
$
|
17,512
|
|
|
|
|
|
|
|
|
|
|
Restructuring
Activity
The following table summarizes the activity related to the
Companys current and long-term restructuring liabilities
during the six months ended June 30, 2006:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
16,221
|
|
Cash payments(1)
|
|
|
(2,934
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
13,287
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These cash payments relate to net
lease payments on excess facilities and non-cancelable lease
costs. The consolidation of excess facilities costs will be paid
over the respective lease terms through 2010.
|
18
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Computation
of Net Income (Loss) Per Share
The following table presents the computation of net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator: Net income (loss)
|
|
$
|
106,086
|
|
|
$
|
(5,234
|
)
|
|
$
|
223,784
|
|
|
$
|
59,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average
shares outstanding
|
|
|
547,969
|
|
|
|
502,994
|
|
|
|
543,588
|
|
|
|
500,483
|
|
Less: Unvested common shares
outstanding
|
|
|
(179
|
)
|
|
|
(641
|
)
|
|
|
(209
|
)
|
|
|
(704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income (loss)
per share (basic)
|
|
|
547,790
|
|
|
|
502,353
|
|
|
|
543,379
|
|
|
|
499,779
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested common shares outstanding
|
|
|
73
|
|
|
|
|
|
|
|
154
|
|
|
|
680
|
|
Stock options, restricted stock
units and certain other equity compensation instruments
|
|
|
46,683
|
|
|
|
|
|
|
|
54,342
|
|
|
|
36,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per
share (diluted)
|
|
|
594,546
|
|
|
|
502,353
|
|
|
|
597,875
|
|
|
|
536,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
.19
|
|
|
$
|
(.01
|
)
|
|
$
|
.41
|
|
|
$
|
.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)
|
|
$
|
.18
|
|
|
$
|
(.01
|
)
|
|
$
|
.37
|
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006 common share equivalents were calculated
based on (i) stock options to purchase 129.7 million
shares of Class A or Class B common stock outstanding
with a weighted average exercise price of $22.17 per share
and (ii) 13.5 million restricted stock units that
entitle the holder to receive a like number of freely
transferable shares of Class A common stock as the awards
vest.
In March 2006 the Company completed the acquisition of Sandburst
Corporation, a fabless semiconductor company specializing in the
design and development of packet switching and routing
systems-on-a-chip
(SoCs) that are deployed in enterprise core and
metropolitan Ethernet networks. In connection with this
acquisition, the Company paid $72.0 million in cash. In
addition, the Company assumed unvested stock options to purchase
0.1 million shares that had a fair value of
$4.4 million in accordance with SFAS 123R. The Company
recorded a one-time charge of $5.2 million for purchased
in-process research and development (IPR&D)
expense. The amount allocated to IPR&D in the three months
ended March 31, 2006 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. The Company also assumed
$7.6 million in net liabilities and recorded
$40.2 million in goodwill, $30.7 million of completed
technology and $3.4 million in other purchased intangible
assets in connection with this acquisition.
The Companys primary reasons for the Sandburst acquisition
were to enter into the design and development of packet
switching and routing SoCs that are deployed in enterprise core
and metropolitan Ethernet networks, reduce the time required to
develop new technologies and products and bring them to market,
incorporate enhanced functionality into and complement the
Companys existing network switch product offerings,
augment its engineering workforce, and enhance its 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, 2006 include the results of
operations of Sandburst commencing as of the acquisition date.
No supplemental pro forma
19
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
information is presented for the acquisition due to the
immaterial effect of the acquisition on the Companys
results of operations.
The Company recorded tax provisions of $4.7 million and
$8.1 million for the three and six months ended
June 30, 2006, respectively, and a tax benefit of
$0.6 million and a tax provision of $2.4 million for
the three and six months ended June 30, 2005, respectively.
The effective tax rates for the Company were 4.2% and 3.5% for
the three and six months ended June 30, 2006, respectively,
and 9.8% and 4.0% for the three and six months ended
June 30, 2005, respectively.
The difference between the Companys effective tax rates
and the 35% federal statutory rate resulted primarily from
domestic losses recorded without income tax benefit, foreign
earnings taxed at rates lower than the federal statutory rate
and certain foreign tax benefits recorded for the three and six
months ended June 30, 2006 and June 30, 2005. During
the three months ended June 30, 2005 the Companys
Singapore operations were granted certain additional tax
incentives, which reduced the Companys tax provision for
the three months ended June 30, 2005 by approximately
$4.6 million.
The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS 109. The Company records
net deferred tax assets to the extent it believes these assets
will more likely than not be realized. In making such
determination, the Company considers all available positive and
negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies and recent financial performance. SFAS 109
further states that forming a conclusion that a valuation
allowance is not required is difficult when there is negative
evidence such as cumulative losses in recent years. As a result
of the Companys recent cumulative losses in the U.S. and
certain foreign jurisdictions, and the full utilization of its
loss carryback opportunities, the Company has concluded that a
full valuation allowance should be recorded in such
jurisdictions. In certain other foreign jurisdictions where the
Company does not have cumulative losses, the Company recorded
net deferred tax assets of $1.3 million and
$1.4 million at June 30, 2006 and December 31,
2005, respectively, in accordance with SFAS 109.
Common
Stock
In June 2006 the Company filed Second Amended and Restated
Articles of Incorporation (the Restated Articles)
with the California Secretary of State. The Restated Articles
(i) increased the aggregate number of shares of
Class A common stock that the Company is authorized to
issue from 800,000,000 shares to 2,500,000,000 shares,
(ii) clarified that the Company is only authorized to issue
6,432,161 shares of preferred stock and
(iii) eliminated all statements referring to the rights,
preferences, privileges and restrictions of Series A,
Series B, Series C, Series D and Series E
preferred stock, all outstanding shares of which automatically
converted into shares of Class B common stock upon
consummation of its initial public offering.
Share
Repurchase Program
In February 2005 the Companys Board of Directors
authorized a program to repurchase shares of the Companys
Class A common stock. The Board approved the repurchase of
shares having an aggregate value of up to $250 million from
time to time over a period of one year, depending on market
conditions. In January 2006 the Board approved an amendment to
the share repurchase program extending the program through
January 26, 2007 and authorizing the repurchase of
additional shares of the Companys Class A common
stock having a total market value of up to $500 million
from time to time during the period beginning January 26,
2006 and ending January 26, 2007. From the time the program
was first implemented through June 30, 2006, the Company
repurchased 11.8 million shares at a weighted average price
of $33.94 per share. At June 30, 2006,
$256.2 million
20
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remained available to repurchase shares under the authorized
program, as amended. On July 24, 2006 the Companys
Board of Directors decided to suspend purchasing of shares of
Class A common stock under the share repurchase program.
Stock
Split
The Company effected a
three-for-two
stock split of its Class A and Class B common stock on
February 21, 2006 through the payment of a stock dividend
of one additional share of Class A or Class B common
stock, as applicable, for every two shares of such class held on
the record date of February 6, 2006. All historical share
numbers and per share amounts contained in these notes and in
the unaudited condensed consolidated financial statements have
been retroactively restated to reflect this change in the
Companys capital structure.
Comprehensive
Income
The components of comprehensive income, net of taxes, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
106,086
|
|
|
$
|
59,135
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
net realized loss included in net income
|
|
|
|
|
|
|
1
|
|
Translation adjustments
|
|
|
(399
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
105,687
|
|
|
$
|
59,102
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income reflected on the
unaudited condensed consolidated balance sheets at June 30,
2006 and December 31, 2005 represents accumulated
translation adjustments.
|
|
7.
|
Employee
Benefit Plans
|
Stock
Incentive Plans
The Company has in effect stock incentive plans under which
incentive stock options have been granted to employees and
restricted stock units and non-qualified stock options have been
granted to employees and non-employee members of the Board of
Directors. The Companys 1998 Stock Incentive Plan, as
amended and restated (the 1998 Plan), is shareholder
approved and permits the grant of stock options and restricted
stock units to employees, non-employee members of the Board of
Directors and consultants. At June 30, 2006,
56.7 million shares remained available for future grant
under the 1998 Plan. Stock option and restricted stock unit
awards are designed to reward employees for their long-term
contributions to the Company and to provide incentive for them
to remain in the Companys employ. The Company believes
that such awards better align the interests of its employees
with those of its shareholders.
The Board of Directors or the plan administrator determines
eligibility, vesting schedules and exercise prices for options
granted under the plans. Options granted generally have a term
of 10 years, and in the case of newly-hired employees
generally vest and become exercisable at the rate of 25% after
one year of service and ratably on a monthly basis over a period
of 36 months thereafter; subsequent option grants to
existing employees generally vest and become exercisable ratably
on a monthly basis over a period of 48 months measured from
the date of grant. Certain options that have been granted under
the Companys 1998 Plan or that were assumed by the Company
in connection with certain of its acquisitions provide that the
vesting of the options granted thereunder will accelerate in
whole or in part upon the occurrence of certain specified events.
21
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the Company grants restricted stock units as part
of its regular annual employee equity compensation review
program as well as to new hires and non-employee members of the
Board of Directors. Restricted stock units are share awards that
entitle the holder to receive freely tradable shares of the
Companys Class A common stock upon vesting.
Generally, restricted stock units vest ratably on a quarterly
basis over 16 quarters from the date of grant.
Combined
Incentive Plan Information
Option activity under the Companys stock incentive plans
in the six months ended June 30, 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number of
|
|
|
Price Range
|
|
|
Price
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
per Share
|
|
|
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
142,108
|
|
|
$
|
.01 - $81.50
|
|
|
$
|
19.00
|
|
|
$
|
18.57
|
|
Options granted under the 1998 Plan
|
|
|
16,786
|
|
|
|
29.33 - 48.63
|
|
|
|
41.09
|
|
|
|
12.49
|
|
Options assumed in acquisition
|
|
|
107
|
|
|
|
5.26 - 40.49
|
|
|
|
7.66
|
|
|
|
41.31
|
|
Options cancelled
|
|
|
(1,717
|
)
|
|
|
.01 - 46.58
|
|
|
|
24.02
|
|
|
|
11.65
|
|
Options exercised
|
|
|
(27,539
|
)
|
|
|
.01 - 38.17
|
|
|
|
17.21
|
|
|
|
19.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
129,745
|
|
|
|
.01 - 81.50
|
|
|
|
22.17
|
|
|
|
17.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, outstanding options to purchase
70.3 million shares were exercisable with an average per
share exercise price of $18.00. The weighted average remaining
contractual life of options outstanding and of options
exercisable as of June 30, 2006 were 7.1 years and
6.1 years, respectively.
The total pretax intrinsic value of options exercised during the
three and six months ended June 30, 2006 was
$112.3 million and $678.5 million, respectively. This
intrinsic value represents the difference between the fair
market value of the Companys Class A common stock on
the date of exercise and the exercise price of each option.
Based on the closing price of the Companys Class A
common stock of $30.33 on June 30, 2006, the total pretax
intrinsic value of all outstanding options was
$1.242 billion. The total pretax intrinsic value of
exercisable options was $875.1 million.
Restricted stock unit activity under the 1998 Plan in the six
months ended June 30, 2006 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, 2005
|
|
|
7,090
|
|
|
$
|
23.48
|
|
Restricted stock units granted
under the 1998 Plan
|
|
|
8,208
|
|
|
|
41.64
|
|
Restricted stock units cancelled
|
|
|
(253
|
)
|
|
|
28.90
|
|
Restricted stock units vested
|
|
|
(1,575
|
)
|
|
|
28.90
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
13,470
|
|
|
|
33.81
|
|
|
|
|
|
|
|
|
|
|
The total pretax intrinsic value of restricted stock units
vested during the three and six months ended June 30, 2006
was $42.8 million and $66.9 million, respectively.
Based on the closing price of the Companys Class A
22
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common stock of $30.33 on June 30, 2006, the total pretax
intrinsic value of all outstanding restricted stock units was
$408.5 million.
Employee
Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible
employees. Under the plan, employees may purchase shares of the
Companys Class A common stock at six-month intervals
at 85% of fair market value (calculated in the manner provided
in the plan). Employees purchase such stock using payroll
deductions, which may not exceed 15% of their total cash
compensation. The plan imposes certain limitations upon an
employees right to acquire Class A common stock,
including the following: (i) no employee may purchase more
than 9,000 shares of Class A common stock on any one
purchase date and (ii) no employee may be granted rights to
purchase more than $25,000 worth of Class A common stock
for each calendar year in which such rights are at any time
outstanding. The Company issued 1.6 million shares under
this plan in the three months ended June 30, 2006. At
June 30, 2006, 7.4 million shares were available for
future issuance under this plan.
Stock-Based
Compensation Expense
The following table presents details of total stock-based
compensation expense by functional line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006(1)
|
|
|
2005
|
|
|
2006(1)
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
7,105
|
|
|
$
|
1,007
|
|
|
$
|
13,391
|
|
|
$
|
2,066
|
|
Research and development
|
|
|
86,420
|
|
|
|
17,872
|
|
|
|
156,425
|
|
|
|
33,409
|
|
Selling, general and administrative
|
|
|
38,940
|
|
|
|
7,268
|
|
|
|
70,635
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,465
|
|
|
$
|
26,147
|
|
|
$
|
240,451
|
|
|
$
|
50,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts included in the three
and six months ended June 30, 2006 reflect the adoption of
SFAS 123R. In accordance with the modified prospective
transition method, the Companys unaudited condensed
consolidated statements of operations for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R.
|
The weighted average fair values per share of stock options
granted in connection with the Companys stock incentive
plans have been estimated utilizing the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Expected life (in years)
|
|
|
3.20
|
|
|
|
3.06
|
|
|
|
3.17
|
|
|
|
3.23
|
|
Volatility
|
|
|
0.35
|
|
|
|
0.39
|
|
|
|
0.35
|
|
|
|
0.41
|
|
Risk-free interest rate
|
|
|
4.99
|
%
|
|
|
4.01
|
%
|
|
|
4.93
|
%
|
|
|
3.96
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average fair values per share of the restricted
stock units awarded in the six months ended June 30, 2006
and 2005 were $41.64 and $21.37, respectively, calculated based
on the fair market value of the Companys Class A
common stock on the respective grant dates.
The adoption of SFAS 123R will continue to have a
significant adverse impact on the Companys reported
results of operations, although it should not have a material
impact on its overall financial position. The amount of unearned
stock-based compensation currently estimated to be expensed in
the period 2006 through 2011 related to unvested share-based
payment awards at June 30, 2006 is $1.054 billion. Of
this amount, $218.1 million, $390.7 million,
$257.8 million, $159.3 million and $27.9 million
are currently estimated to be recorded in the
23
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remainder of 2006, in 2007, 2008, 2009 and thereafter,
respectively. The weighted-average period over which the
unearned stock-based compensation is expected to be recognized
is approximately 1.6 years. Approximately 97% of the total
unearned stock-based compensation at June 30, 2006 will be
expensed by the end of 2009. If there are any modifications or
cancellations of the underlying unvested securities, the Company
may be required to accelerate, increase or cancel any remaining
unearned stock-based compensation expense. Future stock-based
compensation expense and unearned stock-based compensation will
increase to the extent that the Company grants additional equity
awards to employees or assumes unvested equity awards in
connection with acquisitions.
The Company granted employee stock options to purchase
12.4 million shares of its common stock and
6.2 million restricted stock units in the second quarter of
2006 as part of the Companys regular annual equity
compensation review program. The Company will recognize up to
$415.4 million of stock-based compensation expense, net of
forfeitures, related to those awards. This unearned stock-based
compensation is being amortized ratably over the service periods
of the underlying stock options and restricted stock units,
generally 48 months and 16 quarters, respectively.
In accordance with the requirements of the disclosure-only
alternative of SFAS 123, set forth below is a pro forma
illustration of the effect on net income (loss) and net income
(loss) per share computed as if the Company had valued
stock-based awards to employees using the Black-Scholes option
pricing model instead of applying the guidelines provided by
APB 25 in the three and six months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss) as
reported
|
|
$
|
(5,234
|
)
|
|
$
|
59,135
|
|
Add: Stock-based compensation
expense included in net income (loss) as reported
|
|
|
34,402
|
|
|
|
50,286
|
|
Deduct: Stock-based compensation
expense determined under the fair value method
|
|
|
(157,933
|
)
|
|
|
(323,856
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(128,765
|
)
|
|
$
|
(214,435
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(basic) as reported
|
|
$
|
(0.01
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted) as reported
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and
diluted) pro forma
|
|
$
|
(0.26
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
The following describes the material legal proceedings,
examinations and other matters in which the Company and its
subsidiaries are involved that: (1) were pending as of
December 31, 2005; (2) were terminated during the
period from December 31, 2005 through January 19,
2007; or (3) are pending as of January 19, 2007. Thus,
the description of a matter may include developments that
occurred since December 31, 2005, as well as those that
occurred during 2005. The matters include legal proceedings
relating to the restatement of our consolidated financial
statements, such as class action securities lawsuits,
shareholder derivative actions and governmental proceedings.
Intellectual Property Proceedings. In May 2005
the Company filed a complaint in the U.S. International
Trade Commission (ITC) asserting that Qualcomm
Incorporated (Qualcomm) engaged in unfair trade
practices by importing integrated circuits and other products
that infringe, both directly and indirectly, five of the
Companys patents relating generally to wired and wireless
communications. The complaint seeks 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
24
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an investigation of Qualcomm based upon the allegations made in
the Companys complaint. The investigation was later
limited to asserted infringement of three Broadcom patents. At
Qualcomms request, the U.S. Patent and Trademark
Office (USPTO) is reexamining one of the patents. In
December 2006 the full Commission upheld the ITC administrative
law judges October 2006 Initial Determination finding all
three patents valid and one infringed. The Commission is
currently considering the appropriate remedies for
Qualcomms infringement. A decision is expected in March
2007.
In May 2005 the Company filed two complaints against Qualcomm in
the United States District Court for the Central District of
California. The first complaint asserts that Qualcomm has
infringed, both directly and indirectly, the same five patents
asserted by Broadcom in the ITC complaint. The District Court
complaint seeks preliminary and permanent injunctions against
Qualcomm and the recovery of monetary damages, including treble
damages for willful infringement, and attorneys fees. In
July 2005 Qualcomm answered the complaint and asserted
counterclaims seeking a declaratory judgment that the
Companys patents are invalid and not infringed. In
December 2005 the court transferred the causes of action
relating to two of the patents to the United States District
Court for the Southern District of California. Pursuant to
statute, the court has stayed the remainder of this action
pending the outcome of the ITC action.
The second District Court complaint asserts that Qualcomm has
infringed, both directly and indirectly, five other Broadcom
patents relating generally to wired and wireless communications
and multimedia processing technologies. The complaint seeks
preliminary and permanent injunctions against Qualcomm and the
recovery of monetary damages, including treble damages for
willful infringement, and attorneys fees. In July 2005
Qualcomm answered the second complaint and asserted
counterclaims seeking a declaratory judgment that the
Companys patents are invalid and not infringed. In
November 2006 Broadcom withdrew one of the patents from the
case. In December 2006 the court granted a motion to stay
proceedings on a second patent pending the outcome of a USPTO
reexamination of that patent initiated at Qualcomms
request. Trial has been set for May 2007.
In July 2005 Qualcomm filed a complaint against the Company in
the United States District Court for the Southern District of
California alleging that certain Broadcom products infringe,
both directly and indirectly, seven Qualcomm patents relating
generally to the transmission, reception and processing of
communication signals, including radio signals
and/or
signals for wireless telephony. The complaint seeks a
preliminary and permanent injunction against Broadcom as well as
the recovery of monetary damages and attorneys fees.
Qualcomm has subsequently withdrawn two patents from the case.
The Company filed an answer in September 2005 denying the
allegations in Qualcomms complaint and asserting
counterclaims. The counterclaims seek a declaratory judgment
that the seven Qualcomm patents are invalid and not infringed,
and assert that Qualcomm has infringed, both directly and
indirectly, six Broadcom patents relating generally to wired and
wireless communications. The counterclaims seek preliminary and
permanent injunctions against Qualcomm and the recovery of
monetary damages, including treble damages for willful
infringement, and attorneys fees. The Company has
subsequently withdrawn two patents from the case. In January
2006 Qualcomm amended its complaint to seek treble damages for
willful infringement. Discovery has been completed, and the
court has scheduled a series of five trials in this case over
the period March through August 2007.
In August 2005 Qualcomm filed a second complaint against the
Company in the United States District Court for the Southern
District of California alleging that Broadcom breached a
contract relating to Bluetooth development and seeking a
declaration that two of the Companys patents relating to
Bluetooth technology are invalid and not infringed. In March
2006 Qualcomm filed an amended complaint providing further
details concerning the same causes of action. The Company filed
an answer in April 2006 denying the allegations in the complaint
and asserting counterclaims. The counterclaims assert that
Qualcomm has infringed, both directly and indirectly, the same
two Broadcom patents, and also allege breach of the Bluetooth
contract by Qualcomm. Broadcom is seeking preliminary and
permanent injunctions against Qualcomm and the recovery of
monetary damages, including treble damages for willful
infringement, and attorneys fees. Discovery has been
completed, and trial has been set for March 2007.
25
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2005 Qualcomm filed a third complaint against the
Company in the United States District Court for the Southern
District of California alleging that certain Broadcom products
infringe, both directly and indirectly, two Qualcomm patents
relating generally to the processing of digital video signals.
The complaint seeks preliminary and permanent injunctions
against the Company as well as the recovery of monetary damages
and attorneys fees. The Company filed an answer in
December 2005 denying the allegations in Qualcomms
complaint and asserting counterclaims seeking a declaratory
judgment that the two Qualcomm patents are invalid and not
infringed. Discovery in the action has been completed, and trial
is currently in progress.
In March 2006 Qualcomm filed a fourth complaint against Broadcom
in the United States District Court for the Southern District of
California alleging that the Company had misappropriated certain
Qualcomm trade secrets and that certain Broadcom products
infringe, both directly and indirectly, a patent related
generally to orthogonal frequency division multiplexing
technology. The complaint seeks preliminary and permanent
injunctions against the Company as well as the recovery of
monetary damages, including double damages, and attorneys
fees. The Company filed an answer in May 2006 denying the
allegations in Qualcomms complaint and asserting
counterclaims. The counterclaims seek a declaratory judgment
that the Qualcomm patent is invalid and not infringed, and
assert that Qualcomm has infringed, both directly and
indirectly, two Broadcom patents relating generally to video
technology. The counterclaims seek preliminary and permanent
injunctions against Qualcomm and the recovery of monetary
damages, including treble damages for willful infringement, and
attorneys fees. In June 2006 Qualcomm filed a motion for
preliminary injunction against Broadcom. In October 2006 the
court entered a stipulated order for preliminary injunction
prohibiting Broadcom from using certain documents pending trial
on the merits of the case. The Company amended its answer to add
a counterclaim asserting that Qualcomm has misappropriated
certain Broadcom trade secrets, and Qualcomm amended its
complaint to add three individual Broadcom employees as
defendants and include additional allegations of trade secret
misappropriation. Discovery is ongoing, and trial has been set
for October 2007.
Antitrust Proceedings. In July 2005 the
Company filed a complaint against Qualcomm in the United States
District Court for the District of New Jersey asserting that
Qualcomms licensing and other practices related to
cellular technology and products violate federal and state
antitrust laws. The complaint also asserts causes of action
based on breach of contract, promissory estoppel, fraud, and
tortious interference with prospective economic advantage. In
September 2005 the Company filed an amended complaint in the
action also challenging Qualcomms proposed acquisition of
Flarion Technologies, Inc. under the antitrust laws and
asserting violations of various state unfair competition and
unfair business practices laws. In August 2006 the court granted
Qualcomms motion to dismiss the complaint. In September
2006 Broadcom filed a notice of appeal to the United States
Court of Appeals for the Third Circuit, where briefing is under
way. No appellate hearing date has been set.
In October 2005 the Company and five other leading mobile
wireless technology companies filed complaints with the European
Commission requesting that the Commission investigate
Qualcomms anticompetitive conduct related to the licensing
of its patents and the sale of its chipsets for mobile wireless
devices and systems. The Commission has commenced a preliminary
investigation, and is determining whether to institute 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.
Securities Litigation. In 2001 the Company and
three of its current and former executive officers were served
with a number of shareholder class action complaints alleging
violations of the Securities Exchange Act of 1934, as amended.
The essence of the allegations was that the defendants
intentionally failed to disclose and properly account for the
financial impact of performance-based warrants assumed in
connection with five acquisitions consummated in 2000 and 2001,
which plaintiffs alleged had the effect of materially
overstating the Companys reported and future financial
performance. The lawsuits were consolidated into a single action
before the United
26
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
States District Court for the Central District of California
entitled In re Broadcom Corp. Securities Litigation (the
Class Action). The court issued an order
certifying a class of all persons or entities who purchased or
otherwise acquired publicly traded securities of the Company, or
bought or sold options on the Companys stock, between
July 31, 2000 and February 26, 2001, with certain
exceptions.
By a Stipulation of Settlement (the Stipulation)
dated as of June 24, 2005, the parties agreed to settle the
Class Action. Pursuant to the Stipulation, the
Class Action has been dismissed with prejudice in exchange
for an aggregate payment of $150.0 million (the
Settlement Fund), which will be distributed to class
members after the payment of the costs of administering the
settlement and fees and costs awarded to plaintiffs
counsel by the court. The Companys insurance carriers paid
$40.0 million of the Settlement Fund, and the balance was
paid by the Company. As part of the settlement, the Company and
the other Defendants continue to deny any liability or
wrongdoing with respect to the claims raised in the
Class Action. In September 2005 the court granted final
approval of the Stipulation and entered final judgment and an
order of dismissal thereon and made effective full releases by
all class members of all claims relating to the matters asserted
in the Class Action. In October 2005 two objectors to the
settlement filed notices of appeal before the Ninth Circuit
Court of Appeals from, among other things, the order granting
final approval of the settlement and the final judgment and
order of dismissal. In December 2005 one of the objectors
decided to voluntarily dismiss its appeal, and the parties filed
a stipulation with the Ninth Circuit Court of Appeals dismissing
that appeal. The second objector also decided to voluntarily
dismiss its appeal, and the parties filed a stipulation in
January 2006 dismissing the final appeal. The settlement, final
judgment and order of dismissal are now final and no longer
subject to appeal.
In February 2002 an additional complaint, entitled Arenson,
et al. v. Broadcom Corp., et al., was filed
by 47 persons and entities in the Superior Court of the State of
California for the County of Orange, against the Company and
three of its current and former executive officers. The separate
case, which asserted causes of action substantially identical to
those asserted in the Class Action, was removed to the
United States District Court for the Central District of
California and consolidated with the Class Action for
purposes of discovery. The Stipulation of Settlement in the
Class Action provided to the Arenson plaintiffs the
option of joining the class in the Class Action in exchange
for dismissal of their claims in the separate case. In September
2005 each of the Arenson plaintiffs exercised that
option. Accordingly, the Arenson plaintiffs are now bound
by the terms of the Class Action settlement and the
judgment in the Class Action. In October 2005 the parties
filed a stipulation dismissing the Arenson action with
prejudice.
In March 2006 a purported class action lawsuit was filed in the
Superior Court of California, County of Orange, by a plaintiff
who claims to be a shareholder of Broadcom. The lawsuit,
entitled Jin v. Broadcom Corporation, et al. (Case
No. 06 CC00057), named as defendants Broadcom, each of the
members of our Board of Directors, certain Broadcom officers,
and Henry T. Nicholas III, our co-founder. In May 2006 the
plaintiff amended her complaint and added two plaintiffs, both
purportedly Broadcom shareholders. The principal claims asserted
in the amended complaint were that (a) disclosures in our
March 27, 2006 proxy statement concerning the Second
Amended and Restated Articles of Incorporation (the Second
Amended Articles), which, among other things, increased
the number of authorized shares of Broadcoms Class A
common stock, are incorrect
and/or
misleading; (b) Broadcoms recent stock split, the
recent amendment to our share repurchase program, and recent and
proposed changes in the compensation of our non-employee
directors constitute breaches of the defendants fiduciary
duties; and (c) the defendants improperly dated
Broadcoms stock option grants to enhance defendants
own profits on the exercise of such options. In June 2006
defendants removed the action to the United States District
Court for the Central District of California (where it was
assigned Case No. 06CV00573). The plaintiffs sought, and
received, leave to file a further amended complaint that asserts
only derivative claims on behalf of the Company. This case has
now been consolidated with the other federal derivative lawsuits
described below.
From May 2006 through August 2006, a number of purported
Broadcom shareholders brought five putative shareholder
derivative actions (the Options Derivative Actions)
against Broadcom, our entire Board of Directors, certain current
or former officers, and Henry T. Nicholas III, our co-founder,
alleging that the defendants
27
BROADCOM
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
improperly dated certain Broadcom employee stock option grants.
Three 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)), and Ronconi v. Dull, et al. (Case
No. SACV
06-771 R
(CWx)) were filed in the United States District Court for the
Central District of California. The District Court consolidated
those actions and the Jin action described above by
orders in August and October 2006, and the plaintiffs filed a
consolidated amended complaint in November 2006. The remaining
two putative shareholder derivative actions, Pirelli
Armstrong Tire Corp. Retiree Med. Benefits Trust v.
Samueli, et al. (Case No. 06CC0124) and
Servais v. Samueli, et al. (Case
No. 06CC0142), were filed in the California Superior Court
for the County of Orange. The Superior Court consolidated the
state-court derivative actions in August 2006, and the
plaintiffs filed a consolidated amended complaint in September
2006. The plaintiffs in the Options Derivative Actions contend,
among other things, that the defendants conduct violated
United States and California securities laws, breached
defendants fiduciary duties, wasted corporate assets,
unjustly enriched the defendants, and caused errors in 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 November 2006 the defendants moved to dismiss the federal
derivative action on the ground that the shareholder plaintiffs
lack standing to assert claims on behalf of Broadcom. That
motion is scheduled to be heard in February 2007. If the
court does not grant the motion to dismiss, the individual
defendants responses to the complaint will be due three
weeks after resolution of the motion to dismiss. In
January 2007 the Superior Court granted defendants
motion to stay the state derivative action pending resolution of
the prior-filed federal derivative action. The Company intends
to vigorously defend each of the Options Derivative Actions.
From August through October 2006 several plaintiffs filed
purported shareholder class actions in the United States
District Court for the Central District of California against
Broadcom and certain of its current or former officers and
directors, entitled Bakshi v. Samueli, et al.
(Case
No. 06-5036
R (CWx)), Mills v. Samueli,
et al. (Case No. SACV
06-9674 DOC
R(CWx)), and Minnesota Bakers Union Pension Fund,
et al. v. Broadcom Corp., et al. (Case
No. SACV
06-970 CJC R
(CWx)) (the Options Class Actions). The essence
of the plaintiffs allegations is that Broadcom improperly
backdated stock options, resulting in false or misleading
disclosures concerning, among other things, Broadcoms
business and financial condition. Plaintiffs also allege that
Broadcom failed to account for and pay taxes on stock options
properly, that the individual defendants sold Broadcom stock
while in possession of material nonpublic information, and that
the defendants conduct caused the artificial inflation of
Broadcoms stock price and damages to the putative
plaintiff class. The plaintiffs assert claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder. In November 2006, the Court consolidated
the Options Class Actions, appointed the New Mexico State
Investment Council as lead class plaintiff, ordered the lead
class plaintiff to file a consolidated complaint within
60 days after a restatement of the Companys financial
statements, and extended the deadline for the defendants to
respond to the complaint to 60 days after the filing of the
consolidated complaint. The Company intends to defend the
consolidated action vigorously.
The Company has entered into indemnification agreements with
each of its present and former directors and officers. Under
these agreements, Broadcom is required to indemnify each such
director or officer against expenses, including attorneys
fees, judgments, fines and settlements, paid by such individual
in connection with the Class Action, the Arenson lawsuit,
the Options Derivative Actions and Options Class Actions
(other than indemnified liabilities arising from willful
misconduct or conduct that is knowingly fraudulent or
deliberately dishonest).
SEC Inquiry and United States Attorneys Office
Information Request. In June 2006 the Company
received an informal request for information from the staff of
the Los Angeles regional office of the Securities and Exchange
Commission regarding its option granting practices. In December
2006 the SEC issued a formal order of investigation and a
subpoena for the production of documents. The Company is
cooperating with the SEC, but does not know when the inquiry and
investigation will be resolved or what, if any, actions the SEC
may require it to take as part of that resolution. Broadcom has
also been informally contacted by the U.S. Attorneys
Office for the Central District of California and has been asked
to produce on a voluntary basis documents, many of which
28
it previously provided to the SEC. The Company is cooperating
with this request. Any action by the SEC, the
U.S. Attorneys Office or other governmental agency
could result in civil or criminal sanctions against the Company
and/or
certain of its current or former officers, directors
and/or
employees.
United States Attorneys Office Investigation and
Prosecution. In June 2005 the United States
Attorneys Office for the Northern District of California
commenced an investigation into the possible misuse of
proprietary competitor information by certain Broadcom
employees. In December 2005 one former employee was indicted for
fraud and related activity in connection with computers and
trade secret misappropriation. The former employee had been
immediately suspended in June 2005, after just two months
employment, when the Company learned about the government
investigation. Following an internal investigation, his
employment was terminated, nearly two months prior to the
indictment. The indictment does not allege any wrongdoing by
Broadcom, which is cooperating fully with the ongoing
investigation and the prosecution.
General. The Company and its subsidiaries are
also involved in other legal proceedings, claims and litigation
arising in the ordinary course of business.
The pending proceedings involve complex questions of fact and
law and will require the expenditure of significant funds and
the diversion of other resources to prosecute and defend. The
results of legal proceedings are inherently uncertain, and
material adverse outcomes are possible. The resolution of any
future intellectual property litigation may require the Company
to pay damages for past infringement or one-time license fees or
running royalties, which could adversely impact gross profit and
gross margins in future periods, or could prevent Broadcom from
manufacturing or selling some of its products or limit or
restrict the type of work that employees involved in such
litigation may perform for Broadcom. From time to time the
Company may enter into confidential discussions regarding the
potential settlement of pending litigation or other proceedings;
however, there can be no assurance that any such discussions
will occur or will result in a settlement. The settlement of any
pending litigation or other proceeding could require Broadcom to
incur substantial settlement payments and costs. In addition,
the settlement of any intellectual property proceeding may
require the Company to obtain a license under the other
partys intellectual property rights that could require
one-time license fees
and/or
royalty payments in the future
and/or to
grant a license to certain of the Companys intellectual
property rights to the other party under a cross-license
agreement. If any of those events were to occur, Broadcoms
business, financial condition and results of operations could be
materially and adversely affected.
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement
You should read the following discussion and analysis in
conjunction with our Unaudited Condensed Consolidated Financial
Statements and the related Notes thereto contained in
Part I, Item 1 of this Report. The information
contained in this Quarterly Report on
Form 10-Q
is not a complete description of our business or the risks
associated with an investment in our common stock. We urge you
to carefully review and consider the various disclosures made by
us in this Report and in our other reports filed with the
Securities and Exchange Commission, or SEC, including our
amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and subsequent reports
on Forms 10-Q/A,
10-Q and
8-K, which
discuss our business in greater detail.
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, and all earnings press
releases and similar communications issued by us, for all
periods ended on or before March 31, 2006 should not be
relied upon and are superseded in their entirety by the
information in the amended Annual Report on Form 10-K/A for
the year ended December 31, 2005, the amended Quarterly
Report on Form
10-Q/A for
the three months ended March 31, 2006 and this Report.
The section entitled Risk Factors set forth
below, and similar discussions in our other SEC filings,
describe some of the important risk factors that may affect our
business, results of operations and financial condition. You
should carefully consider those risks, in addition to the other
information in this Report and in our other filings with the
SEC, before deciding to purchase, hold or sell our common
stock.
29
Purpose
of Certain Restated Information Contained in this Quarterly
Report on
Form 10-Q
We recently completed a voluntary review of our equity award
practices. The voluntary review, which commenced in May 2006 and
covered all grants of options and other equity awards made since
our initial public offering in April 1998, was directed by the
Audit Committee of our Board of Directors. The voluntary review
consisted of two components: (1) an equity award review to
determine whether we used appropriate measurement dates for
option grants and other equity awards made under our extensive
employee equity award programs, which was conducted with the
assistance of outside legal counsel Irell & Manella LLP
and forensic accountants FTI Consulting Inc., and (2) an
investigation of the conduct and performance of Broadcoms
officers, employees and directors who were involved in the stock
option granting process, which was conducted with the assistance
of independent legal counsel Kaye Scholer LLP and forensic
accountants LECG, LLC.
Based on the results of the equity award review, the Audit
Committee concluded that, pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and related interpretations, the
accounting measurement dates for most of the stock options
granted between June 1998 and May 2003, covering options to
purchase 232.9 million shares of our Class A or
Class B common stock, differed from the measurement dates
previously used for such awards. As a result, revised
measurement dates were applied to the affected option grants and
Broadcom has recorded a total of $2.259 billion in
additional stock-based compensation expense for the years 1998
through 2005. After related tax adjustments of
$38.7 million, the restatement resulted in total net
adjustments of $2.220 billion for the years 1998 through
2005. This amount is net of forfeitures related to employee
terminations. The additional stock-based compensation expense is
being recorded over the service period relating to each option,
typically four years, with approximately 95% of the expense
being recorded in years prior to 2004.
As a consequence of these adjustments, our audited consolidated
financial statements and related disclosures for the three years
ended December 31, 2005 and our consolidated statements of
operations and consolidated balance sheet data for the five
years ended December 31, 2005 have been restated. In
addition, the unaudited quarterly unaudited financial
information and financial statements for interim periods of 2005
and 2004 and unaudited condensed consolidated financial
statements for the three months ended March 31, 2006 have
been restated. We have also restated the stock-based
compensation expense footnote information calculated under
SFAS 123 and SFAS 148 under the disclosure-only
alternatives of those pronouncements for the years 2003 through
2005 and for the interim periods of 2005 and 2004. This restated
financial and footnote information is included in our amended
Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and amended Quarterly
Report on
Form 10-Q/A
for the three months ended March 31, 2006 filed with the
SEC today. The adjustments did not affect Broadcoms
previously-reported cash, cash equivalents or marketable
securities balances in any of the restated periods.
The amounts of the adjustments we recorded for the years 1998
through 2005 were calculated pursuant to APB 25. Effective
January 1, 2006 we adopted SFAS 123R, which requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial
statements based on their respective grant date fair values. As
a result, the $14.3 million of additional stock-based
compensation expense that we recorded in connection with our
equity award review in the three months ended March 31,
2006 is calculated pursuant to SFAS 123R.
30
The following table summarizes additional stock-based
compensation expense and related tax adjustments resulting from
the review of our equity award practices on a quarterly basis
for 2005 and the three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006(1)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Additional stock-based
compensation expense
|
|
$
|
12,845
|
|
|
$
|
11,599
|
|
|
$
|
10,362
|
|
|
$
|
7,205
|
|
|
$
|
14,295
|
|
|
|
|
|
Other tax adjustments
|
|
|
223
|
|
|
|
441
|
|
|
|
1,084
|
|
|
|
881
|
|
|
|
2,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional operating expenses
|
|
|
13,068
|
|
|
|
12,040
|
|
|
|
11,446
|
|
|
|
8,086
|
|
|
|
17,188
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(8,255
|
)
|
|
|
8,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustments
|
|
$
|
4,813
|
|
|
$
|
20,295
|
|
|
$
|
11,446
|
|
|
$
|
8,086
|
|
|
$
|
17,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These amounts are not included in
the total additional stock-based compensation expense and
related tax adjustments recorded for the years 1998 through 2005
discussed above because they are calculated in accordance with
SFAS 123R, which we adopted effective January 1, 2006.
|
The following table summarizes the impact of the additional
stock-based compensation expense and related income tax
adjustments (but not other tax adjustments)
resulting from the review of our equity award practices on
previously reported stock-based compensation expense on a
quarterly basis for 2005 and the three months ended
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Three months ended March 31,
2005
|
|
$
|
11,294
|
|
|
$
|
4,590
|
|
|
$
|
15,884
|
|
Three months ended June 30,
2005
|
|
|
14,548
|
|
|
|
19,854
|
|
|
|
34,402
|
|
Three months ended
September 30, 2005
|
|
|
16,584
|
|
|
|
10,362
|
|
|
|
26,946
|
|
Three months ended
December 31, 2005
|
|
|
17,578
|
|
|
|
7,205
|
|
|
|
24,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
60,004
|
|
|
$
|
42,011
|
|
|
$
|
102,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2006
|
|
$
|
93,691
|
|
|
$
|
14,295
|
|
|
$
|
107,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Impact of
the Additional Stock-Based Compensation Expense-Related
Adjustments on the Unaudited Condensed Consolidated Financial
Statements
Unaudited
Condensed Consolidated Statements of Operations
The following tables present the impact of the additional
stock-based compensation expense-related adjustments on our
previously-reported unaudited condensed consolidated statements
of operations for the three and six months ended June 30,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
604,861
|
|
|
$
|
|
|
|
$
|
604,861
|
|
|
$
|
1,155,206
|
|
|
$
|
|
|
|
$
|
1,155,206
|
|
Cost of revenue
|
|
|
283,455
|
|
|
|
637
|
|
|
|
284,092
|
|
|
|
549,571
|
|
|
|
1,340
|
|
|
|
550,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
321,406
|
|
|
|
(637
|
)
|
|
|
320,769
|
|
|
|
605,635
|
|
|
|
(1,340
|
)
|
|
|
604,295
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
153,634
|
|
|
|
8,357
|
|
|
|
161,991
|
|
|
|
299,504
|
|
|
|
17,071
|
|
|
|
316,575
|
|
Selling, general and administrative
|
|
|
61,853
|
|
|
|
3,046
|
|
|
|
64,899
|
|
|
|
120,250
|
|
|
|
6,697
|
|
|
|
126,947
|
|
Amortization of purchased
intangible assets
|
|
|
1,040
|
|
|
|
|
|
|
|
1,040
|
|
|
|
1,952
|
|
|
|
|
|
|
|
1,952
|
|
Settlement costs
|
|
|
110,000
|
|
|
|
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
|
|
|
|
110,000
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,652
|
|
|
|
|
|
|
|
6,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,121
|
)
|
|
|
(12,040
|
)
|
|
|
(17,161
|
)
|
|
|
67,277
|
|
|
|
(25,108
|
)
|
|
|
42,169
|
|
Interest income, net
|
|
|
10,678
|
|
|
|
|
|
|
|
10,678
|
|
|
|
18,636
|
|
|
|
|
|
|
|
18,636
|
|
Other income, net
|
|
|
679
|
|
|
|
|
|
|
|
679
|
|
|
|
777
|
|
|
|
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,236
|
|
|
|
(12,040
|
)
|
|
|
(5,804
|
)
|
|
|
86,690
|
|
|
|
(25,108
|
)
|
|
|
61,582
|
|
Provision (benefit) for income
taxes
|
|
|
(8,825
|
)
|
|
|
8,255
|
|
|
|
(570
|
)
|
|
|
2,447
|
|
|
|
|
|
|
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,061
|
|
|
$
|
(20,295
|
)
|
|
$
|
(5,234
|
)
|
|
$
|
84,243
|
|
|
$
|
(25,108
|
)
|
|
$
|
59,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
502,353
|
|
|
|
|
|
|
|
502,353
|
|
|
|
499,779
|
|
|
|
|
|
|
|
499,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
544,796
|
|
|
|
(42,443
|
)
|
|
|
502,353
|
|
|
|
540,967
|
|
|
|
(4,109
|
)
|
|
|
536,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of the total stock-based
compensation expense that is included in each functional
line item in the consolidated statements of operations above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
394
|
|
|
$
|
613
|
|
|
$
|
1,007
|
|
|
$
|
762
|
|
|
$
|
1,304
|
|
|
$
|
2,066
|
|
Research and development
|
|
|
9,915
|
|
|
|
7,957
|
|
|
|
17,872
|
|
|
|
16,940
|
|
|
|
16,469
|
|
|
|
33,409
|
|
Selling, general and administrative
|
|
|
4,239
|
|
|
|
3,029
|
|
|
|
7,268
|
|
|
|
8,140
|
|
|
|
6,671
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,548
|
|
|
$
|
11,599
|
|
|
$
|
26,147
|
|
|
$
|
25,842
|
|
|
$
|
24,444
|
|
|
$
|
50,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Consolidated
Balance Sheet
The net impact of the additional stock-based compensation
expense-related adjustments on our previously-reported unaudited
condensed consolidated balance sheet was an increase in wages
and related benefits and a decrease in total shareholders
equity for related tax adjustments of $4.9 million at
December 31, 2005.
Stock-Based
Compensation in Accordance with SFAS 123
In accordance with the requirements of the disclosure-only
alternative of SFAS 123, set forth below is a pro forma
illustration of the effect on net income (loss) and net income
(loss) per share information for the three and six months ended
June 30, 2005, computed as if the Company had valued
stock-based awards to employees using the Black-Scholes option
pricing model instead of applying the guidelines provided by
APB 25. In addition, the tables below present the impact of
the additional stock-based compensation expense-related
adjustments on the Companys previously-reported pro forma
illustrations for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,061
|
|
|
$
|
(20,295
|
)
|
|
$
|
(5,234
|
)
|
|
$
|
84,243
|
|
|
$
|
(25,108
|
)
|
|
$
|
59,135
|
|
Add: Stock-based compensation
expense included in net income (loss)
|
|
|
14,548
|
|
|
|
19,854
|
|
|
|
34,402
|
|
|
|
25,842
|
|
|
|
24,444
|
|
|
|
50,286
|
|
Deduct: Stock-based compensation
expense determined under the fair value method
|
|
|
(108,565
|
)
|
|
|
(49,368
|
)
|
|
|
(157,933
|
)
|
|
|
(250,569
|
)
|
|
|
(73,287
|
)
|
|
|
(323,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(78,956
|
)
|
|
$
|
(49,809
|
)
|
|
$
|
(128,765
|
)
|
|
$
|
(140,484
|
)
|
|
$
|
(73,951
|
)
|
|
$
|
(214,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and
diluted) pro forma
|
|
$
|
(0.16
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Broadcom Corporation is a 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;
mobile multimedia and applications processors; mobile power
management; and Voice over Internet Protocol (VoIP) gateway and
telephony systems.
Net Revenue. We sell our products to leading
manufacturers of wired and wireless communications equipment in
each of our target markets. Because we leverage our technologies
across different markets, certain of our integrated circuits may
be incorporated into equipment used in multiple markets. We
utilize independent foundries to manufacture all of our
semiconductor products.
Our net revenue is generated principally by sales of our
semiconductor products. We derive the remaining balance of our
net revenue predominantly from software licenses, development
agreements, support and
33
maintenance agreements and cancellation fees. In addition, the
majority of our sales occur through the efforts of our direct
sales force. The remaining balance of our sales occur through
distributors.
The following table presents details of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Sales of semiconductor products
|
|
|
98.5
|
%
|
|
|
98.5
|
%
|
|
|
99.0
|
%
|
|
|
98.5
|
%
|
Other
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Sales made through direct sales
force
|
|
|
83.0
|
%
|
|
|
84.8
|
%
|
|
|
82.6
|
%
|
|
|
85.3
|
%
|
Sales made through distributors
|
|
|
17.0
|
|
|
|
15.2
|
|
|
|
17.4
|
|
|
|
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;
|
|
|
|
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 timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory;
|
|
|
|
seasonality in the demand for consumer wired and wireless
communication products into which our solutions 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 in the three months ended June 30, 2006 and
prior periods may not 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 Broadcom solutions that
are incorporated into consumer products, sales of which are
typically subject to greater seasonality and greater volume
fluctuations than non-consumer OEM products.
Sales to our five largest customers, including sales to their
manufacturing subcontractors, as a percentage of net revenue
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Five largest customers as a group
|
|
|
45.4
|
%
|
|
|
46.5
|
%
|
|
|
45.9
|
%
|
|
|
50.5
|
%
|
34
We expect that our largest customers will continue to account
for a substantial portion of our net revenue in 2006 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.
Net revenue derived from all independent customers located
outside the United States, excluding foreign subsidiaries or
manufacturing subcontractors of customers that are headquartered
in the United States, as a percentage of total net revenue was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Asia (primarily in Taiwan, Korea,
China and Japan)
|
|
|
18.9
|
%
|
|
|
16.0
|
%
|
|
|
19.4
|
%
|
|
|
16.6
|
%
|
Europe (primarily in France and
the United Kingdom)
|
|
|
10.2
|
|
|
|
8.1
|
|
|
|
9.8
|
|
|
|
7.4
|
|
Other
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.4
|
%
|
|
|
24.6
|
%
|
|
|
29.6
|
%
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from shipments to international
destinations, as a percentage of total net revenue was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Asia (primarily in Taiwan, Korea,
and China)
|
|
|
79.1
|
%
|
|
|
72.9
|
%
|
|
|
78.5
|
%
|
|
|
70.6
|
%
|
Europe (primarily in France and
the United Kingdom)
|
|
|
4.2
|
|
|
|
4.0
|
|
|
|
3.6
|
|
|
|
4.3
|
|
Other
|
|
|
4.0
|
|
|
|
6.2
|
|
|
|
5.3
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87.3
|
%
|
|
|
83.1
|
%
|
|
|
87.4
|
%
|
|
|
81.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
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|
|
|
|
our product mix and volume of product sales;
|
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|
|
stock-based compensation expense;
|
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|
|
the position of our products in their respective life cycles;
|
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|
|
the effects of competition;
|
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|
|
the effects of competitive pricing programs;
|
|
|
|
manufacturing cost efficiencies and inefficiencies;
|
|
|
|
fluctuations in direct product costs such as wafer pricing and
assembly, packaging and testing costs, and overhead costs;
|
|
|
|
provisions for excess or obsolete inventories;
|
|
|
|
product warranty costs;
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|
|
amortization of purchased intangible assets; and
|
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|
|
licensing and royalty arrangements.
|
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;
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35
|
|
|
|
|
settlement costs;
|
|
|
|
amortization of purchased intangible assets;
|
|
|
|
in-process research and development, or IPR&D;
|
|
|
|
impairment of goodwill and other intangible assets;
|
|
|
|
income tax benefits from adjustments to tax reserves of foreign
subsidiaries;
|
|
|
|
gain (loss) on strategic investments; and
|
|
|
|
restructuring costs or reversals thereof.
|
In the three months ended June 30, 2006 our net income was
$106.1 million as compared to a net loss of
$5.2 million in the three months ended June 30, 2005,
a difference of $111.3 million. This improvement in
profitability was the direct result of a 55.6% increase in net
revenue. These improvements were partially offset by an increase
in provisions for warranty costs of $2.3 million and an
increase in stock-based compensation of $106.3 million.
In the six months ended June 30, 2006 our net income was
$223.8 million as compared to $59.1 million in the six
months ended June 30, 2005, a difference of
$164.6 million. This improvement in profitability was the
direct result of a 59.4% increase in net revenue and a
6.7 percentage point reduction in operating expenses as a
percentage of net revenue. These improvements were partially
offset by an increase in provisions for excess and obsolete
inventory and warranty costs of $10.6 million and an
increase in stock-based compensation of $190.2 million.
Product Cycles. The cycle for test, evaluation
and adoption of our products by customers can range from three
to more than six 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/or
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 4 of Notes to Unaudited Condensed
Consolidated Financial Statements for information related to the
acquisition made during the six months ended June 30, 2006.
Business Enterprise Segments. We operate in
one reportable operating segment, wired and wireless broadband
communications. Financial Accounting Standards Board, or FASB,
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, 2006, under the aggregation criteria set forth in
SFAS 131 we operate in only one reportable operating
segment, wired and wireless broadband communications.
36
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;
|
|
|
|
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;
|
|
|
|
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 similar gross margins, and have similar research and
development expenses and similar selling, general and
administrative expenses. The causes for variation among each of
our operating segments are the same and include factors such as
(i) life cycle and price and cost fluctuations,
(ii) number of competitors, (iii) product
differentiation and (iv) size of market opportunity.
Additionally, each operating segment is subject to the overall
cyclical nature of the semiconductor industry. The number and
composition of employees and the amounts and types of tools and
materials required are similar for each operating segment.
Finally, even though we periodically reorganize our operating
segments based upon changes in customers, end markets or
products, acquisitions, long-term growth strategies, and the
experience and bandwidth of the senior executives in charge, the
common financial goals for each operating segment remain
constant.
Because we meet each of the criteria set forth in SFAS 131
and our four operating segments as of June 30,
2006 share similar economic characteristics, we aggregate
our results of operations into one reportable operating segment.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses
in the reporting period. We regularly evaluate our estimates and
assumptions related to allowances for doubtful accounts, sales
returns and allowances, warranty reserves, inventory reserves,
stock-based compensation expense, goodwill and purchased
intangible asset valuations, strategic investments, deferred
income tax asset valuation allowances, restructuring costs,
litigation and other loss contingencies. We base our estimates
and assumptions on current facts, historical experience and
various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
and the accrual of costs and expenses that are not readily
apparent from other sources. The actual results experienced by
us may differ materially and adversely from our estimates. To
the extent there are material differences between our estimates
and the actual results, our future results of operations will be
affected.
We believe the following critical accounting policies require us
to make significant judgments and estimates in the preparation
of our unaudited condensed consolidated financial statements:
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|
|
|
|
Net Revenue. We recognize product revenue when
the following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) our price to
|
37
|
|
|
|
|
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, when applicable. A
portion of our sales are made through distributors under
agreements allowing for pricing credits
and/or
rights of return. Product revenue on sales made through these
distributors is not recognized until the distributors ship the
product to their customers, at which time the terms of the sale
become fixed and determinable. Customer purchase orders
and/or
contracts are generally used to determine the existence of an
arrangement. Shipping documents and the completion of any
customer acceptance requirements, when applicable, are used to
verify product delivery or that services have been rendered. We
assess whether a price is fixed or determinable based upon the
payment terms associated with the transaction and whether the
sales price is subject to refund or adjustment. We assess the
collectibility of our accounts receivable based primarily upon
the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customers payment
history.
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|
|
|
|
|
Sales Returns and Allowance for Doubtful
Accounts. We record reductions to revenue for
estimated product returns and pricing adjustments, such as
competitive pricing programs and rebates, in the same period
that the related revenue is recorded. The amount of these
reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate
agreements, and other factors known at the time. Additional
reductions to revenue would result if actual product returns or
pricing adjustments exceed our estimates. We also maintain an
allowance for doubtful accounts for estimated losses resulting
from the inability of customers to make required payments. If
the financial condition of any of our customers were to
deteriorate, resulting in an impairment of its ability to make
payments, additional allowances could be required.
|
|
|
|
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. Our products typically carry a one to three year
warranty. We establish reserves for estimated product warranty
costs at the time revenue is recognized. Although we engage in
extensive product quality programs and processes, our warranty
obligation has been and may in the future be affected by product
failure rates, product recalls, repair or field replacement
costs and additional development costs incurred in correcting
any product failure, as well as possible claims for
consequential costs. Should actual product failure rates, use of
materials or service delivery costs differ from our estimates,
additional warranty reserves could be required. In that event,
our gross profit and gross margins would be reduced.
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|
Stock-Based Compensation Expense for 2006 and
Thereafter. Effective January 1, 2006 we
adopted SFAS 123R, which requires all share-based payments
to employees, including grants of employee stock options,
restricted stock units and employee stock purchase rights, to be
recognized in our financial statements based on their respective
grant date fair values. Under this standard, the fair value of
each share-based payment award 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 share-based payment awards. The
Black-Scholes model meets the requirements of SFAS 123R;
however, the fair values generated by the model may not be
indicative of the actual fair values of our awards as it does
not consider certain factors important to our awards, such as
continued employment, periodic vesting requirements and 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 awards is based
on historical and other economic data trended into the future.
The risk-free interest rate assumption is based on observed
interest rates appropriate for the terms of our awards. The
dividend yield assumption is based on our history and
expectation of dividend payouts. The fair value
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38
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|
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|
|
of our restricted stock units is based on the fair market value
of our Class A common stock on the date of grant.
Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Stock-based compensation expense
recognized in our financial statements in 2006 and thereafter is
based on awards that are ultimately expected to vest. We
evaluate the assumptions used to value our 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. Future
stock-based compensation expense and unearned stock-based
compensation will increase to the extent that we grant
additional equity awards to employees or we assume unvested
equity awards in connection with acquisitions. Had we adopted
SFAS 123R in prior periods, the magnitude of the impact of
that standard on our results of operations would have
approximated the impact of SFAS 123 assuming the
application of the Black-Scholes option pricing model as
described in the disclosure of pro forma net income (loss) and
pro forma net income (loss) per share in Notes 1 and 7 of
our Notes to Unaudited Condensed Consolidated Financial
Statements. See Critical Accounting Policies and
Estimates Applied to the Restatement of Broadcoms
Consolidated Financial Statements for additional
discussion of the estimates and assumptions used to calculated
the adjustments to our consolidated financial statements for
stock option grants awarded between June 1998 and May 2003.
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|
Goodwill and Purchased Intangible
Assets. Goodwill is recorded as the difference,
if any, between the aggregate consideration paid for an
acquisition and the fair value of the net tangible and
intangible assets acquired. The amounts and useful lives
assigned to intangible assets acquired, other than goodwill,
impact the amount and timing of future amortization, and the
amount assigned to in-process research and development is
expensed immediately. The value of our intangible assets,
including goodwill, could be impacted by future adverse changes
such as: (i) any future declines in our operating results,
(ii) a decline in the valuation of technology company
stocks, including the valuation of our common stock,
(iii) another significant slowdown in the worldwide economy
or the semiconductor industry or (iv) any failure to meet
the performance projections included in our forecasts of future
operating results. We evaluate these assets, including purchased
intangible assets deemed to have indefinite lives, on an annual
basis in the fourth quarter or more frequently if we believe
indicators of impairment exist. In the process of our annual
impairment review, we primarily use the income approach
methodology of valuation that includes the discounted cash flow
method as well as other generally accepted valuation
methodologies to determine the fair value of our intangible
assets. Significant management judgment is required in the
forecasts of future operating results that are used in the
discounted cash flow method of valuation. The estimates we have
used are consistent with the plans and estimates that we use to
manage our business. It is possible, however, that the plans and
estimates used may be incorrect. If our actual results, or the
plans and estimates used in future impairment analyses, are
lower than the original estimates used to assess the
recoverability of these assets, we could incur additional
impairment charges.
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|
Deferred Taxes and Tax Contingencies. We
utilize the liability method of accounting for income taxes. We
record a valuation allowance to reduce our deferred tax assets
to the amount that we believe is more likely than not to be
realized. In assessing the need for a valuation allowance, we
consider all positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies, and recent financial
performance. Forming a conclusion that a valuation allowance is
not required is difficult when there is negative evidence such
as cumulative losses in recent years. As a result of our
cumulative losses in the U.S. and certain foreign jurisdictions
and the full utilization of our loss carryback opportunities, we
have concluded that a full valuation allowance against our net
deferred tax assets is appropriate in such jurisdictions. In
certain other foreign jurisdictions where we do not have
cumulative losses, we record valuation allowances to reduce our
net deferred tax assets to the amount we believe is more likely
than not to be realized. In the future, if we realize a deferred
tax asset that currently carries a valuation allowance, we may
record a reduction to income tax expense in the period of such
realization. We record estimated income tax liabilities to the
extent they are probable and can be reasonably estimated. 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
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39
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|
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|
|
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
themselves are subject to change as a result of changes in
fiscal policy, changes in legislation, evolution of regulations
and court rulings. Therefore, the actual liability for
U.S. or foreign taxes may be materially different from our
estimates, which could result in the need to record additional
tax liabilities or potentially to reverse previously recorded
tax liabilities.
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|
Litigation and Settlement Costs. From time to
time, we are involved in disputes, litigation and other legal
proceedings. We prosecute and defend these matters aggressively.
However, there are many uncertainties associated with any
litigation, and we cannot assure you that these actions or other
third party claims against us will be resolved without costly
litigation
and/or
substantial settlement charges. In addition the resolution of
any future intellectual property litigation may require us to
pay damages for past infringement or one-time license fees or
ongoing royalties, which could adversely impact gross profit and
gross margins in future periods or could prevent us from
manufacturing or selling some of our products or limit or
restrict the type of work that employees involved in such
litigation may perform for Broadcom. If any of those events were
to occur, our business, financial condition and results of
operations could be materially and adversely affected. We record
a charge equal to at least the minimum estimated liability for a
loss contingency when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements and (ii) the range of loss can
be reasonably estimated. However the actual liability in any
such litigation may be materially different from our estimates,
which could result in the need to record additional costs.
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Critical Accounting Policies and Estimates Applied to the
Restatement of Broadcoms Consolidated Financial
Statements. The preparation of our restated
consolidated financial statements required us to make estimates
and assumptions that affected the amount of the recorded
additional deferred compensation and stock-based compensation
expense. We used three methodologies to calculate the
adjustments to our consolidated financial statements for stock
option grants awarded between June 1998 and May 2003.
|
Equity
Edge®
Entry Date
In many instances, the new measurement date applied to an
affected option grant was the date the grant was entered into
our Equity Edge software system, which we used to monitor and
administer our equity award programs from 1998 through 2006.
This methodology was used for: (1) option grants to
employees other than Section 16 Officers for which we were
unable to locate contemporaneous documentation confirming that
an Equity Award Committee meeting occurred on the indicated
grant date; (2) those broad-based option grants for which
we had not completed allocations of options to individual
employees by the time the grant date was selected by the Equity
Award or Compensation Committee; and (3) those option
grants for which the grant date was selected after the date
indicated on the unanimous written consent documenting the
approval of those options. When an option grant was entered into
Equity Edge, the entry date was recorded by the system. Also,
once option grants were entered into Equity Edge, individual
grant information was generally transmitted to an online
brokerage website on which employees were able to view their
specific option grants. We believe in most cases, the Equity
Edge entry date represents the best approximation of the date on
which the measurement date criteria of APB 25 were met.
Therefore, in each of the three circumstances described above,
we usually determined that the date on which an option grant was
entered into the Equity Edge system represented the best
approximation of the appropriate measurement date under
APB 25.
We considered three alternate revised measurement dates or
values for these option grants:
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First, we considered alternate measurement dates based on the
date seven days prior to the date of each grants entry
into Equity Edge. This alternative was based on evidence
obtained during our equity award review that indicated that most
grants were entered into Equity Edge a number of
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40
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|
|
days after the date on which the measurement date criteria of
APB 25 had been met. Had we used the dates seven days prior
to the dates of entry into Equity Edge, rather than the later
Equity Edge entry dates, our total gross additional deferred
compensation adjustment of $2.672 billion would have been
reduced by $24.2 million.
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Second, we considered measurement dates based on the date
fourteen days prior to the date of each grants entry into
Equity Edge. Again, this alternative was based on evidence
obtained during our equity award review which indicated that
most grants were entered into Equity Edge a number of days after
the date on which the measurement date criteria of APB 25
had been met. Had we used the dates fourteen days prior to the
dates of entry into Equity Edge rather than the later Equity
Edge entry dates, our total gross additional deferred
compensation adjustment of $2.672 billion would have been
reduced by $116.7 million.
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Third, we considered an alternate measurement approach based on
the average closing stock price during the period between the
date indicated on the unanimous written consent documenting each
option grant approval and the date of each grants entry
into Equity Edge. Had we used the average closing stock prices
as the basis for measurement rather than measurement on the
dates of entry into Equity Edge, our total gross additional
deferred compensation adjustment of $2.672 billion would
have been reduced by $409.5 million.
|
With respect to option grants for which we were unable to locate
contemporaneous documentation confirming that an Equity Award
Committee meeting had occurred on the indicated grant date, we
also considered using the indicated grant date as the
measurement date under APB 25. Although this approach would
have resulted in a substantially lower deferred compensation
adjustment as compared to the methodology we used, we were not
able to conclude that the indicated grant date represented the
best approximation of the date the terms of the option were
determined with finality. We also considered whether variable
accounting should apply to such option grants. Generally,
variable accounting applies when a particular grants
exercise price, the number of shares, or both, are unknown until
after the date of grant. Variable accounting could also be
applicable if the option grant were subject to some modification
of terms. In our particular circumstances, the exercise prices
and number of shares underlying the affected option grants were
known and not subject to any change, and therefore we determined
that variable accounting is not appropriate for these awards.
Date of Execution of Unanimous Written Consents
For option grants to executive officers, as defined in
Section 16 of the Securities Exchange Act of 1934, as
amended, or Section 16 Officers, for which we were unable
to locate contemporaneous documentation confirming that a
Compensation Committee meeting occurred on the indicated grant
date, the new measurement date applied to the affected option
grant was the date that the unanimous written consent ratifying
the option grant was likely signed, rather than the as
of date specified on the consent. The date that each
unanimous written consent ratifying the option grant was likely
signed was determined based either on interview evidence
indicating that a unanimous written consent was signed on a
particular Board of Directors meeting date, or a facsimile
header indicating the date on which a unanimous written consent
was signed and returned to Broadcom.
With respect to these option grants we also considered using the
indicated grant date or the date of entry into the Equity Edge
system as the measurement date under APB 25. Had we used
the indicated grant date, our total gross additional deferred
compensation adjustment of $2.672 billion would have been
reduced by $73.7 million. Had we used the dates of entry
into the Equity Edge system in these instances rather than the
dates that the unanimous written consents ratifying these
Section 16 Officer option grants were likely signed, our
additional deferred compensation adjustment would have been
reduced by $5.6 million.
41
Date of Notification to Employee-Recipients
In those instances in which option grants were awarded but we
did not notify the employees of such option grants for an
extended period, the additional deferred compensation was
calculated based on our best approximation of the date on which
notification of the option grant to the affected employee
occurred and the fair market value of the shares at the time of
notification. For 78% of these option grants, we located copies
of written grant notifications, which were signed and dated by
the employee-recipient, or signed by the employee-recipient and
dated by the Shareholder Services or Human Resources Department
when received. While we believe that notification is not an
explicit criterion required by APB 25 to establish a
measurement date, in these instances we determined that the date
of notification to those employees represented the best
approximation of the date on which the measurement date criteria
could have been met with finality, and that the date recorded on
the written notification represented the best approximation of
the appropriate measurement date under APB 25. For each of
the remaining 22% of the affected option grants for which we
were unable to locate documentation of written option grant
notification (representing fewer than 0.6% of the total number
of grants made from June 1998 through May 2003), we identified
an approximate range of dates during which employee notification
likely occurred. The ranges were determined based on periodic
option grant reports that were prepared using the Equity Edge
system. We concluded that the average closing stock price during
each date range represented the best approximation of the
intrinsic value of each option grant for which we were unable to
locate documentation of written option grant notification.
The above conclusion is based on a test in which we measured
three alternate values for the 78% of grants for which we were
able to ascertain actual notification dates: (1) the
average closing stock price during the notification date range;
(2) the highest closing stock price during the notification
date range; and (3) the lowest closing stock price during
the notification date range for each grant. The average price
produced the result that most closely approximated the amount of
additional stock-based compensation expense resulting from the
actual notice dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Additional Stock-Based
|
|
|
Difference from
|
|
|
|
Method
|
|
Compensation Expense
|
|
|
Actual Notice
|
|
% Difference
|
|
|
Actual Notice
|
|
$
|
403.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
|
$
|
386.4 million
|
|
|
$(17.3) million
|
|
|
(4.3
|
)%
|
Highest Price
|
|
$
|
597.6 million
|
|
|
$193.9 million
|
|
|
48.0
|
%
|
Lowest Price
|
|
$
|
179.6 million
|
|
|
$(224.1) million
|
|
|
(55.5
|
)%
|
Had we used the dates of entry into the Equity Edge system in
these instances, rather than the later notification dates, our
total gross additional deferred compensation adjustment would
have been reduced by $251.1 million.
42
Results
of Operations for the Three and Six Months Ended June 30,
2006 Compared to the Three and Six Months Ended June 30,
2005
The following table sets forth certain unaudited consolidated
statements of operations data expressed as a percentage of net
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue(1)
|
|
|
48.6
|
|
|
|
47.0
|
|
|
|
48.4
|
|
|
|
47.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
51.4
|
|
|
|
53.0
|
|
|
|
51.6
|
|
|
|
52.3
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
29.7
|
|
|
|
26.8
|
|
|
|
28.9
|
|
|
|
27.4
|
|
Selling, general and
administrative(1)
|
|
|
13.0
|
|
|
|
10.7
|
|
|
|
12.7
|
|
|
|
11.0
|
|
Amortization of purchased
intangible assets
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.5
|
|
Restructuring costs (reversal)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement costs
|
|
|
|
|
|
|
18.2
|
|
|
|
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8.6
|
|
|
|
(2.8
|
)
|
|
|
9.6
|
|
|
|
3.7
|
|
Interest income, net
|
|
|
3.0
|
|
|
|
1.7
|
|
|
|
2.8
|
|
|
|
1.5
|
|
Other income, net
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
11.8
|
|
|
|
(1.0
|
)
|
|
|
12.6
|
|
|
|
5.3
|
|
Provision (benefit) for income
taxes
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
11.3
|
%
|
|
|
(0.9
|
)%
|
|
|
12.2
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The percentages included in the
three and six months ended June 30, 2006 reflect the
adoption of SFAS 123R. In accordance with the modified
prospective transition method, our unaudited condensed
consolidated statements of operations for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R. See Notes 1 and 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
|
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,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
941,131
|
|
|
|
100.0
|
%
|
|
$
|
604,861
|
|
|
|
100.0
|
%
|
|
$
|
336,270
|
|
|
|
55.6
|
%
|
Cost of revenue(1)
|
|
|
457,374
|
|
|
|
48.6
|
|
|
|
284,092
|
|
|
|
47.0
|
|
|
|
173,282
|
|
|
|
61.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
483,757
|
|
|
|
51.4
|
%
|
|
$
|
320,769
|
|
|
|
53.0
|
%
|
|
$
|
162,988
|
|
|
|
50.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
Net revenue
|
|
$
|
1,841,778
|
|
|
|
100.0
|
%
|
|
$
|
1,155,206
|
|
|
|
100.0
|
%
|
|
$
|
686,572
|
|
|
|
59.4
|
%
|
Cost of revenue(1)
|
|
|
891,583
|
|
|
|
48.4
|
|
|
|
550,911
|
|
|
|
47.7
|
|
|
|
340,672
|
|
|
|
61.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
950,195
|
|
|
|
51.6
|
%
|
|
$
|
604,295
|
|
|
|
52.3
|
%
|
|
$
|
345,900
|
|
|
|
57.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts included in the three
and six months ended June 30, 2006 reflect the adoption of
SFAS 123R. In accordance with the modified prospective
transition method, our unaudited condensed consolidated
statements of operations for prior periods have not been
restated to reflect, and do not include, the impact of
SFAS 123R. See Notes 1 and 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
|
Net Revenue. Our revenue is generated
principally by sales of our semiconductor products. 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 their respective contributions to the
increase in net revenue in the three months ended June 30,
2006 as compared to the three months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Enterprise networking
|
|
$
|
305,213
|
|
|
|
32.5
|
%
|
|
$
|
253,153
|
|
|
|
41.9
|
%
|
|
$
|
52,060
|
|
|
|
20.6
|
%
|
Broadband communications
|
|
|
357,103
|
|
|
|
37.9
|
|
|
|
225,735
|
|
|
|
37.3
|
|
|
|
131,368
|
|
|
|
58.2
|
|
Mobile and wireless
|
|
|
278,815
|
|
|
|
29.6
|
|
|
|
125,973
|
|
|
|
20.8
|
|
|
|
152,842
|
|
|
|
121.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
941,131
|
|
|
|
100.0
|
%
|
|
$
|
604,861
|
|
|
|
100.0
|
%
|
|
$
|
336,270
|
|
|
|
55.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our enterprise networking products include Ethernet
transceivers, controllers, switches, broadband network and
security processors, server chipsets and storage 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 HD DVD and
personal video recording devices. Our mobile and wireless
products include wireless LAN, cellular, Bluetooth, mobile
multimedia and VoIP solutions.
The increase in net revenue from our enterprise networking
target market resulted primarily from an increase in net revenue
attributable to our enterprise Ethernet, network switching and
controller products. The increase in net revenue from our
broadband communications target market resulted from increases
in cable modems, DSL applications and direct broadcast
satellite. The increase in net revenue from our mobile and
wireless target market resulted primarily from strength in our
Bluetooth, mobile multimedia, cellular and wireless LAN product
offerings.
The following table presents net revenue from each of our major
target markets and their respective contributions to net revenue
in the six months ended June 30, 2006 as compared to the
six months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Enterprise networking
|
|
$
|
610,803
|
|
|
|
33.1
|
%
|
|
$
|
487,106
|
|
|
|
42.2
|
%
|
|
$
|
123,697
|
|
|
|
25.4
|
%
|
Broadband communications
|
|
|
688,255
|
|
|
|
37.4
|
|
|
|
432,943
|
|
|
|
37.5
|
|
|
|
255,312
|
|
|
|
59.0
|
|
Mobile and wireless
|
|
|
542,720
|
|
|
|
29.5
|
|
|
|
235,157
|
|
|
|
20.3
|
|
|
|
307,563
|
|
|
|
130.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,841,778
|
|
|
|
100.0
|
%
|
|
$
|
1,155,206
|
|
|
|
100.0
|
%
|
|
$
|
686,572
|
|
|
|
59.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The increase in net revenue from our enterprise networking
target market resulted primarily from an increase in net revenue
attributable to our enterprise Ethernet, network switching and
controller products. The increase in net revenue in our
broadband communications target market resulted from increases
in cable modems, DSL applications and direct broadcast
satellite. In our mobile and wireless target market, we
experienced strong growth in our Bluetooth, mobile multimedia
and wireless LAN offerings.
The following table presents net revenue from each of our major
target markets and their respective contributions to net revenue
in the three months ended June 30, 2006 as compared to the
three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Enterprise networking
|
|
$
|
305,213
|
|
|
|
32.5
|
%
|
|
$
|
305,590
|
|
|
|
33.9
|
%
|
|
$
|
(377
|
)
|
|
|
(0.1
|
)%
|
Broadband communications
|
|
|
357,103
|
|
|
|
37.9
|
|
|
|
331,152
|
|
|
|
36.8
|
|
|
|
25,951
|
|
|
|
7.8
|
|
Mobile and wireless
|
|
|
278,815
|
|
|
|
29.6
|
|
|
|
263,905
|
|
|
|
29.3
|
|
|
|
14,910
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
941,131
|
|
|
|
100.0
|
%
|
|
$
|
900,647
|
|
|
|
100.0
|
%
|
|
$
|
40,484
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although our enterprise networking target market was flat, we
experienced strong growth in our controller and PHY products
offset by a decrease in our switching products. The increase in
net revenue in our broadband communications target market
resulted primarily from an increase in net revenue from our
solutions for DSL applications, cable set-top boxes and cable
modems, partially offset by a decrease in our direct broadcast
satellite revenue. In our mobile and wireless target market, we
experienced strong growth in our wireless LAN offerings,
partially offset by a decline in our mobile multimedia and
Bluetooth business.
We recorded rebates to certain customers in the amounts of
$56.8 million and $53.1 million in the three months
ended June 30, 2006 and 2005, respectively, and
$111.1 million and $105.2 million in the six months
ended June 30, 2006 and 2005, respectively. We account for
rebates in accordance with FASB 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, record reductions to revenue for rebates in the
same period that the related revenue is recorded. The amount of
these reductions is based upon the terms included in our various
rebate agreements. We anticipate that accrued rebates will vary
in future periods based on the level of overall sales to
customers that participate in our rebate programs and as
specific rebate programs contractually end and unclaimed rebates
are no longer subject to payment. However, we do not expect
rebates to impact our gross margin as our prices to these
customers and corresponding revenue and margins are already net
of such rebates. Historically, reversals of rebate accruals have
not been material.
Cost of Revenue and Gross Profit. Cost of
revenue includes the cost of purchasing the 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,
prototyping costs, amortization of purchased technology, and
manufacturing overhead, including costs of personnel and
equipment associated with manufacturing support, provisions for
excess or obsolete inventories, product warranty costs 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, 2006 as compared to the three
and six months ended June 30, 2005 resulted primarily from
the 55.6% and 59.4% increase in net revenue, respectively. Gross
margin decreased from 53.0% in the three months ended
June 30, 2005 to 51.4% in the three months ended
June 30, 2006. Gross margin decreased from 52.3% in the six
months ended June 30, 2005 to 51.6% in the six months ended
June 30, 2006. The primary factors that contributed to
these reductions in gross margin were (i) an increase in
stock-based compensation expense resulting from the adoption of
SFAS 123R, as well as an increase in provisions for excess
and obsolete inventory and warranty costs, partially offset by
(ii) improvements as a percentage of revenue in
manufacturing overhead due to our significant growth. For a
further discussion of stock-based compensation expense, see
Stock-Based Compensation Expense, below.
45
Gross margin has been and will likely continue to be impacted in
the future by competitive pricing programs, fluctuations in
silicon wafer costs and assembly, packaging and testing costs,
product warranty costs, provisions for excess or obsolete
inventories, possible future changes in product mix, the
introduction of products with lower margins, stock-based
compensation expense, and the amortization of purchased
technology, among other factors.
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, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006(1)
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and development
|
|
$
|
280,024
|
|
|
|
29.7
|
%
|
|
$
|
161,991
|
|
|
|
26.8
|
%
|
|
$
|
118,033
|
|
|
|
72.9
|
%
|
Selling, general and administrative
|
|
|
121,982
|
|
|
|
13.0
|
|
|
|
64,899
|
|
|
|
10.7
|
|
|
|
57,083
|
|
|
|
88.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006(1)
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
531,718
|
|
|
|
28.9
|
%
|
|
$
|
316,575
|
|
|
|
27.4
|
%
|
|
$
|
215,143
|
|
|
|
68.0
|
%
|
Selling, general and administrative
|
|
|
234,881
|
|
|
|
12.7
|
|
|
|
126,947
|
|
|
|
11.0
|
|
|
|
107,934
|
|
|
|
85.0
|
|
|
|
|
(1)
|
|
The amounts included in the three
and six months ended June 30, 2006 reflect the adoption of
SFAS 123R. In accordance with the modified prospective
transition method, our unaudited condensed consolidated
statements of operations for prior periods have not been
restated to reflect, and do not include, the impact of
SFAS 123R. See Notes 1 and 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
|
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, costs
related to engineering design tools and computer hardware,
prototyping costs, subcontracting costs and facilities expenses.
The increase in research and development expense in the three
and six months ended June 30, 2006 as compared to the three
and six months ended June 30, 2005 resulted primarily from
increase of $68.5 million and $123.0 million,
respectively, in stock-based compensation and an increase of
$32.5 million and $59.1 million, respectively, in
personnel-related expenses. These increases are primarily
attributable to (i) our adoption of SFAS 123R,
(ii) an increase in the number of employees engaged in
research and development activities since June 30, 2005,
resulting from both direct hiring and acquisitions, and
(iii) an increase in cash compensation levels. For a
further discussion of stock-based compensation expense, see
Stock-Based Compensation Expense, below.
Based upon past experience, we anticipate that research and
development expense will continue to increase over the long term
as a result of the growth and diversification of the markets we
serve, new product opportunities, changes in our compensation
policies, and any expansion into new markets and technologies.
We remain committed to significant research and development
efforts to extend our technology leadership in the wired and
wireless communications markets in which we operate. We
currently hold more than 1,900 U.S. patents, and we
maintain an active program of filing for and acquiring
additional U.S. and foreign patents in wired and wireless
communications and other fields.
Selling, General and Administrative
Expense. Selling, general and administrative
expense consists primarily of personnel-related expenses,
including stock-based compensation expense, legal and other
professional fees, facilities expenses and communications
expenses.
46
The increase in selling, general and administrative expense in
the three and six months ended June 30, 2006 as compared to
the three and six months ended June 30, 2005 resulted
primarily from increase of $31.7 million and
$55.8 million, respectively, in stock-based compensation,
and an increase of $23.7 million and $46.9 million
increases in legal fees and personnel-related expenses. These
increases are primarily attributable to (i) our adoption of
SFAS 123R, (ii) the cost of ongoing litigation,
(iii) an increase in the number of employees engaged in
selling, general and administrative activities since
June 30, 2005, resulting from both direct hiring and
acquisitions, and (iv) an increase in cash compensation
levels. For a further discussion of stock-based compensation
expense, see Stock-Based Compensation Expense,
below. For a further discussion of our litigation matters, see
Note 8 of Notes to Unaudited Condensed Consolidated
Financial Statements.
Based upon past experience, we anticipate that selling, general
and administrative expense will continue to increase over the
long-term to support any expansion of our operations through
periodic changes in our infrastructure, changes in our
compensation policies, acquisition and integration activities,
international operations, and current and future litigation.
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
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006(1)
|
|
|
2005
|
|
|
2006(1)
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
7,105
|
|
|
$
|
1,007
|
|
|
$
|
13,391
|
|
|
$
|
2,066
|
|
Research and development
|
|
|
86,420
|
|
|
|
17,872
|
|
|
|
156,425
|
|
|
|
33,409
|
|
Selling, general and administrative
|
|
|
38,940
|
|
|
|
7,268
|
|
|
|
70,635
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,465
|
|
|
$
|
26,147
|
|
|
$
|
240,451
|
|
|
$
|
50,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts included in the three
and six months ended June 30, 2006 reflect the adoption of
SFAS 123R. In accordance with the modified prospective
transition method, our unaudited condensed consolidated
statements of operations for prior periods have not been
restated to reflect, and do not include, the impact of
SFAS 123R. See Notes 1 and 7 of Notes to Unaudited
Condensed Consolidated Financial Statements.
|
The adoption of SFAS 123R will continue to have a
significant adverse impact on our reported results of
operations, although it should not have a material impact on our
overall financial position. The amount of unearned stock-based
compensation currently estimated to be expensed in the period
2006 through 2011 related to unvested share-based payment awards
at June 30, 2006 is $1.054 billion. Of this amount,
$218.1 million, $390.7 million $257.8 million,
$159.3 million and $27.9 million are currently
estimated to be recorded in the remainder of 2006, in 2007,
2008, 2009 and thereafter, respectively. The weighted-average
period over which the unearned stock-based compensation is
expected to be recognized is approximately 1.6 years.
Approximately 97% of the total unearned stock-based compensation
at June 30, 2006 will be expensed by the end of 2009. 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. 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 12.4 million
shares of our Class A common stock and 6.2 million
restricted stock units in the second quarter of 2006 as part of
our Class A regular annual equity compensation review
program. We will recognize up to $415.4 million of
stock-based compensation expense, net of forfeitures, related to
those awards. This unearned stock-based compensation is being
amortized ratably over the service periods of the underlying
stock options and restricted stock units, generally
48 months and 16 quarters, respectively.
47
Amortization
of Purchased Intangible Assets
The following table presents details of the amortization of
purchased intangible assets included in each expense
category above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
2,744
|
|
|
$
|
3,244
|
|
|
$
|
5,725
|
|
|
$
|
5,534
|
|
Operating expense
|
|
|
605
|
|
|
|
1,040
|
|
|
|
1,688
|
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,349
|
|
|
$
|
4,284
|
|
|
$
|
7,413
|
|
|
$
|
7,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006 the unamortized balance of purchased
intangible assets that will be amortized to future cost of
revenue and other operating expenses was $30.4 million and
$3.6 million, respectively. This expense will be amortized
ratably through 2011. If we acquire additional purchased
intangible assets in the future, our cost of revenue or other
operating expenses will be increased by the amortization of
those assets.
In-Process
Research and Development
In the six months ended June 30, 2006 and 2005, we recorded
IPR&D of $5.2 million and $6.7 million,
respectively. The amounts allocated to IPR&D in the six
months ended June 30, 2006 and 2005 were determined through
established valuation techniques used in the high technology
industry and were expensed upon acquisition as it was determined
that the underlying projects had not reached technological
feasibility and no alternative future uses existed.
Interest
and Other Income, Net
The following tables present interest and other income, net, for
the three and six months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest income, net
|
|
$
|
28,194
|
|
|
|
3.0
|
%
|
|
$
|
10,678
|
|
|
|
1.7
|
%
|
|
$
|
17,516
|
|
|
|
164.0
|
%
|
Other income, net
|
|
|
1,448
|
|
|
|
0.2
|
|
|
|
679
|
|
|
|
0.1
|
|
|
|
769
|
|
|
|
113.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(In thousands, except percentages)
|
|
|
Interest income, net
|
|
$
|
51,932
|
|
|
|
2.8
|
%
|
|
$
|
18,636
|
|
|
|
1.5
|
%
|
|
$
|
33,296
|
|
|
|
178.7
|
%
|
Other income, net
|
|
|
3,219
|
|
|
|
0.2
|
|
|
|
777
|
|
|
|
0.1
|
|
|
|
2,442
|
|
|
|
314.3
|
|
Interest income, net, reflects interest earned on cash and cash
equivalents and marketable securities balances. Other income,
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
increase in interest income, net, was the result of an overall
increase in our cash and marketable securities balances and an
increase in market interest rates. Our cash and marketable
securities balances increased from $1.547 billion at
June 30, 2005 to $2.377 billion at June 30, 2006.
The weighted average interest rates earned for the three months
ended June 30, 2006 and 2005 were 4.76% and 3.16%,
respectively. The weighted average interest rates earned for the
six months ended June 30, 2006 and 2005 were 4.58% and
2.93%, respectively.
48
Provision
for Income Taxes
We recorded tax provisions of $4.7 million and
$8.1 million for the three and six months ended
June 30, 2006, respectively, and a tax benefit of
$0.6 million and a tax provision of $2.4 million for
the three and six months ended June 30, 2005, respectively.
Our effective tax rates were 4.2% and 3.5% for the three and six
months ended June 30, 2006, respectively, and (9.8%) and
4.0% for the three and six months ended June 30, 2005,
respectively.
The difference between the our effective tax rates and the 35%
federal statutory rate resulted primarily from domestic losses
recorded without income tax benefit, foreign earnings taxed at
rates lower than the federal statutory rate and certain foreign
tax benefits recorded for the three and six months ended
June 30, 2006 and June 30, 2005. During the three
months ended June 30, 2005 our Singapore operations were
granted certain additional tax incentives, which reduced our tax
provision for the three months ended June 30, 2005 by
approximately $4.6 million.
We utilize the 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, and the
full utilization of its loss carryback opportunities, we have
concluded that a full valuation allowance should be recorded in
such jurisdictions. In certain other foreign jurisdictions where
we do not have cumulative losses, we recorded net deferred tax
assets of $1.3 million and $1.4 million at
June 30, 2006 and December 31, 2005, respectively, in
accordance with SFAS 109.
Subsequent
Event
We recorded total charges of $10.9 million in the three
months ended September 30, 2006 and expect to record
$50.6 million in the three months ended December 31,
2006 in connection with payments we have decided to make to or
on behalf of certain current and former employees related to
consequences of the equity award review, as well as non-cash
stock-based compensation expense we incurred related to the
extension of the post-service stock option exercise period for
certain former employees. The payments are to remunerate
participants in the employee stock purchase plan who were unable
to purchase shares thereunder during the period in which we were
not current in our SEC reporting obligations, to remediate
adverse tax consequences, if any, to individuals that may result
from the equity award review, and to compensate individuals for
the value of stock options that expired or would have expired
during the period in which we were not current in our SEC
reporting obligations.
Liquidity
and Capital Resources
Working Capital and Cash and Marketable
Securities. The following table presents working
capital and cash and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
|
(In thousands)
|
|
|
Working capital
|
|
$
|
2,327,834
|
|
|
$
|
1,736,382
|
(1)
|
|
$
|
591,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(2)
|
|
$
|
1,838,372
|
|
|
$
|
1,437,276
|
|
|
$
|
401,096
|
|
Short-term marketable securities(2)
|
|
|
366,894
|
|
|
|
295,402
|
|
|
|
71,492
|
|
Long-term marketable securities
|
|
|
171,961
|
|
|
|
142,843
|
|
|
|
29,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,377,227
|
|
|
$
|
1,875,521
|
|
|
$
|
501,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
(1)
|
|
Restated.
|
|
(2)
|
|
Included in working capital.
|
Our working capital increased in the six months ended
June 30, 2006 primarily related to cash provided by
operations and cash proceeds received from issuances of common
stock in connection with the exercise of employee stock options,
offset in part by cash paid for the repurchase of shares of our
Class A common stock, the acquisition of Sandburst
Corporation, and the purchase of long-term marketable securities
and property and equipment.
Cash Provided and Used in the Six Months Ended June 30,
2006 and 2005. Cash and cash equivalents
increased to $1.838 billion at June 30, 2006 from
$1.437 billion at December 31, 2005 as a result of
cash provided by operating and financing activities, offset in
part by cash used in investing activities.
In the six months ended June 30, 2006 our operating
activities provided $377.0 million in cash. This was
primarily the result of $223.8 million in net income and
$275.7 million in net non-cash operating expenses offset in
part by $122.5 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, 2006 included
depreciation and amortization, stock-based compensation expense,
amortization of purchased intangible assets and IPR&D. In
the six months ended June 30, 2005 our operating activities
provided $230.2 million in cash. This was primarily the
result of $59.1 million in net income, $92.2 million
in net non-cash operating expenses and $78.9 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, 2005 included depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets and IPR&D.
Accounts receivable increased $100.9 million to
$408.3 million in the six months ended June 30, 2006.
The increase in accounts receivable was primarily the result of
the $120.5 million increase in net revenue in the three
months ended June 30, 2006 to $941.1 million, as
compared with $820.6 million in the three months ended
December 31, 2005. 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 continues to increase
as it has in the most recent past, it 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 $83.5 million to $278.0 million
in the six months ended June 30, 2006, primarily in
response to higher levels of purchase orders received from our
customers and the buildup of buffer inventories based upon our
forecast of future demand for certain key products. In the
future, our inventory levels will continue to be determined
based on the level of purchase orders received and the stage at
which our products are in their respective product life cycles
as well as competitive situations in the marketplace. Such
considerations are balanced against the risk of obsolescence or
potentially excess inventory levels.
Investing activities used $205.6 million in cash in the six
months ended June 30, 2006, which was primarily the result
of $67.9 million of net cash paid for the acquisition of
Sandburst, the purchase of $37.2 million of capital
equipment to support operations, and $100.6 million used in
the net purchase of marketable securities. Investing activities
used $154.0 million in cash in the six months ended
June 30, 2005, which was primarily the result of
$116.5 million used in the net purchase of marketable
securities, $24.0 million of net cash paid for two
acquisitions and the purchase of $13.4 million of capital
equipment to support operations.
Our financing activities provided $229.7 million in cash in
the six months ended June 30, 2006, which was primarily the
result of $477.7 million in net proceeds received from
issuances of common stock upon exercises of stock options and
common stock purchases through our employee stock purchase plan,
which was offset in part by $246.1 million in repurchases
of our Class A common stock pursuant to our share
repurchase program. Our financing activities provided
$78.8 million in cash in the six months ended June 30,
2005, which was primarily the result of $99.4 million in
net proceeds received from issuances of common stock upon
exercises of stock options and common stock purchases through
our employee stock purchase plan, which was offset in part by
$18.2 million in repurchase of our class A common
stock and a $2.5 million payment on debt assumed in
connection with an acquisition.
50
Due to the increase in the price of our Class A common
stock, a greater number of stock options were exercised by
employees, and we received more proceeds from the exercise of
stock options, in the six months ended June 30, 2006 than
during the six months ended June 30, 2005. 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, which will reduce future
growth in the number of stock options available for exercise.
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
have determined to allow employees to elect to have a portion of
the shares issuable upon vesting of restricted stock units
during 2006 withheld to satisfy withholding taxes and to make
corresponding cash payments to the appropriate tax authorities
on each employees behalf.
Prospective Capital Needs. We believe that our
existing cash, cash equivalents and marketable securities,
together with cash generated from operations and from the
exercise of employee stock options and the purchase of common
stock through our employee stock purchase plan, will be
sufficient to cover our working capital needs, capital
expenditures, investment requirements, commitments and
repurchases of our Class A common stock for at least the
next 12 months. However, it is possible that we may need to
raise additional funds to finance our activities beyond the next
12 months or to consummate acquisitions of other
businesses, assets, products or technologies. We could raise
such funds by selling equity or debt securities to the public or
to selected investors, or by borrowing money from financial
institutions. In addition, even though we may not need
additional funds, we may still elect to sell additional equity
or debt securities or obtain credit facilities for other
reasons. We have filed a universal shelf registration statement
on SEC
Form S-3
that allows us to sell, in one or more public offerings, shares
of our Class A common stock, shares of preferred stock or
debt securities, or any combination of such securities, for
proceeds in an aggregate amount of up to $750 million. We
have not issued any securities under the universal shelf
registration statement. Because one of the eligibility
requirements for use of a
Form S-3
is that an issuer must have timely filed all SEC reports
required to be filed during the preceding twelve calendar
months, we will not be able to issue shares under the
Form S-3
until December 1, 2007. If we elect to raise additional
funds, we may not be able to obtain such funds on a timely basis
or on acceptable terms, if at all. If we raise additional funds
by issuing additional equity or convertible debt securities, the
ownership percentages of existing shareholders would be reduced.
In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of our
common stock.
Although we believe that we have sufficient capital to fund our
activities for at least the next 12 months, our future
capital requirements may vary materially from those now planned.
We anticipate that the amount of capital we will need in the
future will depend on many factors, including:
|
|
|
|
|
the overall levels of sales of our products and gross profit
margins;
|
|
|
|
our business, product, capital expenditure and research and
development plans, and product and technology roadmaps;
|
|
|
|
the market acceptance of our products;
|
|
|
|
repurchases of our Class A common stock;
|
|
|
|
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;
|
|
|
|
changes in our compensation policies;
|
|
|
|
issuance of restricted stock units and the related payments in
cash for withholding taxes due from employees during 2006 and
possibly during future years;
|
|
|
|
capital improvements for new and existing facilities;
|
51
|
|
|
|
|
technological advances;
|
|
|
|
our competitors responses to our products;
|
|
|
|
our relationships with suppliers and customers;
|
|
|
|
the availability of sufficient foundry, assembly and test
capacity and packaging materials;
|
|
|
|
expenses related to our restructuring plans;
|
|
|
|
the level of exercises of stock options and stock purchases
under our employee stock purchase plan; and
|
|
|
|
general economic conditions and specific conditions in the
semiconductor industry and wired and wireless communications
markets, including the effects of recent international conflicts
and related uncertainties.
|
In addition, we may require additional capital to accommodate
planned future growth, hiring, infrastructure and facility needs.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We maintain an investment portfolio of various holdings, types
and maturities. We do not use derivative financial instruments.
We place our cash investments in instruments that meet high
credit quality standards, as specified in our investment policy
guidelines. These guidelines also limit the amount of credit
exposure to any one issue, issuer or type of instrument.
Our cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these
instruments. As of June 30, 2006 the carrying value of our
cash and cash equivalents approximated fair value.
Marketable securities, consisting of U.S. Treasury and
agency obligations, commercial paper, corporate notes and bonds,
time deposits, foreign notes and certificates of deposits, are
generally classified as
held-to-maturity
and are stated at cost, adjusted for amortization of premiums
and discounts to maturity. In addition, in the past certain of
our short term marketable securities were classified as
available-for-sale
and were stated at fair value, which was equal to cost due to
the short term maturity of these securities. In the event that
there were to be a difference between fair value and cost in any
of our
available-for-sale
securities, unrealized gains and losses on these investments
would be reported as a separate component of accumulated other
comprehensive income (loss). Our investment policy for
marketable securities requires that all securities mature in
three years or less, with a weighted average maturity of no
longer than 18 months. As of June 30, 2006 the
carrying value and fair value of these securities were
$538.9 million and $535.9 million, respectively. The
fair value of our marketable securities fluctuates based on
changes in market conditions and interest rates; however, given
the short-term maturities, we do not believe these instruments
are subject to significant market or interest rate risk.
The carrying value, maturity and estimated fair value of our
cash equivalents and marketable securities as of June 30,
2006 and December 31, 2005, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
June 30,
|
|
|
Maturity
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2006
|
|
|
|
(In thousands, except interest rates)
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
1,062,458
|
|
|
$
|
1,062,458
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,062,459
|
|
Weighted average interest rate
|
|
|
5.24
|
%
|
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
538,855
|
|
|
$
|
267,691
|
|
|
$
|
178,686
|
|
|
$
|
78,572
|
|
|
$
|
13,906
|
|
|
$
|
535,875
|
|
Weighted average interest rate
|
|
|
4.64
|
%
|
|
|
4.69
|
%
|
|
|
4.38
|
%
|
|
|
4.95
|
%
|
|
|
5.30
|
%
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
December 31,
|
|
|
Maturity
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2005
|
|
|
|
(In thousands, except interest rates)
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
835,598
|
|
|
$
|
835,598
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
835,202
|
|
Weighted average interest rate
|
|
|
4.38
|
%
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
438,245
|
|
|
$
|
295,402
|
|
|
$
|
103,985
|
|
|
$
|
38,858
|
|
|
$
|
435,702
|
|
Weighted average interest rate
|
|
|
3.77
|
%
|
|
|
3.62
|
%
|
|
|
3.94
|
%
|
|
|
4.45
|
%
|
|
|
|
|
Our strategic equity investments are generally classified as
available-for-sale
and are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of
accumulated other comprehensive income (loss) for publicly
traded investments. We have also 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
the early stages and may never materialize. Likewise, the
development projects of these companies may not be successful.
In addition, early stage companies often fail for various other
reasons. Consequently, we could lose our entire investment in
these companies. As of June 30, 2006, the carrying and fair
value of our strategic investments was $4.5 million.
|
|
Item 4.
|
Controls
and Procedures
|
We are committed to maintaining disclosure controls and
procedures designed to ensure that information required to be
disclosed in our periodic reports filed under the Securities
Exchange Act of 1934, as amended, or 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 Acting
Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures
and implementing controls and procedures based on the
application of managements judgment.
As required by
Rules 13a-15
and 15d-15 under the Exchange Act, in connection with the filing
of this Quarterly Report on
Form 10-Q,
our current management, under the supervision and with the
participation of our principal executive officer and principal
financial officer, conducted an evaluation of our disclosure
controls and procedures, as such term is defined under
Rule 13a-15(e).
Based on this evaluation, which included the findings of the
voluntary review and the restatement described herein, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were not
effective at a reasonable assurance level at June 30, 2006
because of a material weakness in internal control over
financial reporting. Since the material weakness was remediated
as of the date of this filing, our principal executive officer
and principal financial officer have determined that disclosure
controls and procedures are effective at a reasonable assurance
level as of the date of this filing.
We recently completed a voluntary review of our equity award
practices. The review covered all grants of options and other
equity awards made since our initial public offering in April
1998. During the course of the equity award review, we
identified instances in which: (i) option grants failed to
meet the measurement date criteria of APB 25; (ii) we did
not notify some of the employee-recipients of their option
grants for extended periods; (iii) grants made to some
consultants were erroneously accounted for under APB 25 as if
they had been made to employees; (iv) grants were made to
employees upon acceptance of their employment offers at Broadcom
rather than as of or after the actual commencement of
employment; and (v) modifications made to employee stock
options were not accounted for in accordance with APB 25.
Details of the results of the equity award review and the
restatement of our financial statements are discussed in the
Explanatory Note and in Note 2 of Notes to
53
Consolidated Financial Statements in Part IV, Item 15
of the amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 filed with the SEC
January 23, 2007.
The voluntary review found that in June 2003 we implemented
revisions to our equity award processes and procedures. As a
result, the processes were formalized and a consistent procedure
was implemented for the Equity Award and Compensation
Committees. In addition, the composition of the Equity Award
Committee was changed to include an independent director. Our
review of the equity award granting practices has determined
that our process and practices in effect since June 2003 are
sound and have been consistently adhered to. Management has not
identified any instances of inappropriate measurement dates
under APB 25 for option grants or other equity awards made since
May 2003.
The restatement covers our financial statements for the years
1998 through 2005 and for the three months ended March 31,
2006. The adjustments to our financial statements for 2005 and
for the three months ended March 31, 2006 were principally
amortization of deferred compensation resulting from revisions
made to measurement dates for certain options granted prior to
June 2003.
In assessing the findings of the voluntary review and the
restatement of our financial statements in the context of
paragraph 139 of Public Company Accounting Oversight Board
Auditing Standard No. 2, An Audit of Internal Control
Over Financial Reporting Performed in Conjunction with An Audit
of Financial Statements (AS 2), management has
concluded that there was a material weakness as of
December 31, 2005 under paragraph 139 with respect to
our former chief financial officers role in the
application of accounting principles to the equity award
granting process prior to June 2003, including the impact on the
2005 financial statements of amortizing deferred compensation
related to those equity awards.
Under paragraph 139 of AS 2, certain interactions of
qualitative and quantitative considerations in the area of
controls over the selection and application of accounting
policies that are in conformity with generally accepted
accounting principles result in at least a significant
deficiency. The conduct review directed by the Audit Committee
with the assistance of independent legal counsel Kaye Scholer
LLP and with the forensic accounting assistance of LECG, LLC,
found that our former Chief Financial Officer failed to provide
proper advice concerning proper accounting standards or to
establish proper procedures as they pertain to the option
granting process prior to June 2003. As a result, management,
consistent with paragraph 139 of AS 2, has determined that
a material weakness existed as of December 31, 2005 with
respect to our former Chief Financial Officers role in the
application of accounting principles to the equity award
granting process prior to June 2003, including the impact on the
2005 financial statements of amortizing deferred compensation
related to those equity awards.
This material weakness was initially identified in conjunction
with the voluntary review and was remediated upon the retirement
of our former chief financial officer on September 19, 2006.
Managements assessment of internal control over financial
reporting with respect to 2005 included a review of the overall
control environment. This included controls that mitigate the
risk of management override, including: (i) the
participation of independent directors on the Audit,
Compensation, Equity Award, and Nominating & Corporate
Governance Committees, with minutes recorded and maintained by
the Legal Department; (ii) inclusion of multiple personnel
in reviews of reserves and disclosures; (iii) no direct
financial system add/update capabilities for executive
management; (iv) employee and third party complaint
procedures (including the ability for employees to make
anonymous complaints); (v) a Code of Ethics and Corporate
Conduct; (vi) an Internal Audit function; (vii) a
Corporate Compliance Officer; (viii) general Finance
employee surveys that include questions regarding ethics; and
(ix) processes that include checks and balances on
management. The Audit, Compensation, and Nominating &
Corporate Governance Committees are composed entirely of
independent directors. The Equity Award Committee includes an
independent director. Broadcoms Code of Ethics and
Corporate Conduct provides general guidance with respect to the
accuracy of financial reports as well as compliance and
complaint procedures. As of the date of this filing, these
controls continue to be in effect.
54
In addition, Broadcoms controls over the equity award
process as of December 31, 2005 included the following
controls to prevent and/or detect, at a reasonable assurance
level, any future instances of improper accounting for equity
awards:
|
|
|
|
|
Awards to newly hired employees are compiled by our Human
Resources Department and are submitted to the relevant committee
for approval only on or after the commencement of employment. As
a practice, equity awards are not made to consultants. All
awards are communicated to the Shareholder Services Department
by the Human Resources Department (or, in the case of patent
incentive awards, by the Legal Department) for approval by the
Equity Award or Compensation Committee (each of which typically
meets on a regular basis). The lists of equity awards approved
by the relevant committee include specific allocation of awards
to individuals. Awards are entered into our equity award
administration system promptly after they are approved by the
relevant committee (a grant to a consultant would be detected by
our Shareholder Services Department at this point).
|
|
|
|
A member of the Legal Department attends Compensation and Equity
Award Committee meetings, records minutes, and confirms that
awards comply with equity plans.
|
|
|
|
The exercise price for each option grant is equal to or greater
than the closing price of our Class A common stock on the
date of approval. We would record deferred compensation if for
any reason the exercise price of any option grant were lower
than the closing price of our Class A common stock on the
date of approval.
|
|
|
|
Formal resolutions approving equity awards are reconciled to the
data maintained in the equity award administration system on a
monthly basis. The Human Resources Department validates new
awards reflected in the equity award administration system.
|
|
|
|
Timely notification of equity awards is sent (electronically or
by mail) to employee recipients. The equity awards are uploaded
from the equity award administration system to an online
brokerage website, at which time grants are available for
viewing by employees. Additionally, for members of the Board of
Directors and Section 16 Officers, a Form 4 is filed
with the SEC within two business days after the grant date.
|
|
|
|
The Human Resources system and the equity award administration
system are periodically reconciled to reflect the cancellation
of awards held by employees whose employment with Broadcom has
terminated.
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Any proposed modifications to equity awards (e.g., accelerations
and exercise extensions) are communicated by the Human Resources
Department to, and regular inquiry is made of the Human
Resources Department by, the Shareholder Services Department.
Changes are approved by the appropriate Board committee.
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The issuance of shares upon exercise or release of equity awards
recorded in our equity award administration system is
periodically reconciled to the records of our transfer agent.
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As of the date of this filing, these controls continue to be in
effect. Currently, the Compensation Committee and Equity Award
Committee each holds monthly equity award meetings based upon a
predetermined schedule.
There has been no change in our internal control over financial
reporting during the three months ended June 30, 2006
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 fraud, 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
55
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 error or fraud may occur and not be
detected.
PART II.
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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The information set forth under Note 8 of Notes to
Unaudited Condensed Consolidated Financial Statements, included
in Part I, Item 1 of this Report, is incorporated
herein by reference.
Item 1A. Risk
Factors
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 amended and
subsequent reports on
Forms 10-K/A,
10-K,
10-Q/A,
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.
Our
operating results for 2006 and prior periods have been
materially and adversely impacted by the results of the
voluntary review of our past equity award practices. Any related
action by a governmental agency could result in civil or
criminal sanctions against certain of our former officers,
directors
and/or
employees and might result in such sanctions against us
and/or
certain of our current officers, directors
and/or
employees. Such matters and civil litigation relating to our
past equity award practices or the January 2007 restatement of
our financial statements could result in significant costs and
the diversion of attention of our management and other key
employees.
In connection with our previously announced equity award review,
we restated our financial statements for each of the years ended
December 31, 1998 through December 31, 2005, and have
restated our financial statements for the first quarter of 2006
as well. 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,
and the related opinions of our independent registered public
accounting firm, and all earnings press releases and similar
communications issued by us, for all periods ended on or before
March 31, 2006, which have been superseded in their
entirety by the information contained in the amended Annual
Report on Form 10-K/A for the year ended December 31,
2005 and the amended Quarterly Report on Form 10-Q/A for
the three months ended March 31, 2006.
Based on the results of the equity award review, the Audit
Committee concluded that, pursuant to APB 25 and related
interpretations, the accounting measurement dates for most of
the stock option grants awarded between June 1998 and May 2003,
covering options to purchase 232.9 million shares of our
Class A or Class B common stock, differed from the
measurement dates previously used for such awards. As a result,
revised measurement dates were applied to the affected option
grants and Broadcom recorded a total of $2.259 billion in
additional stock-based compensation expense for the years 1998
through 2005. After related tax adjustments of
$38.7 million, the restatement resulted in total net
adjustments of $2.220 billion for the years 1998 through
2005. This amount is net of forfeitures related to employee
terminations. The additional stock-based compensation expense is
being amortized over the service period relating to each option,
typically four years, with approximately 95% of the total
expense being recorded in years prior to 2004. Additional
stock-based compensation expense will be recorded in the first
quarter of 2006 and thereafter pursuant to the provisions of
SFAS 123R.
These expenses had the effect of decreasing income from
operations, net income, and net income per share (basic and
diluted) in affected periods in which we reported a profit, and
increasing loss from operations, net loss, and net loss per
share in affected periods in which we reported a loss.
Information regarding the effect of the restatement on our
financial statements for various periods is provided in
Note 2 of Notes to Consolidated
56
Financial Statements, included in Part IV, Item 15 of
our amended Annual Report on
Form 10-K/A
for the year ended December 31, 2005 and Note 2 of
Notes to Unaudited Condensed Consolidated Financial Statements,
included in Part I, Item 1 of our amended Quarterly
Report on
Form 10-Q/A
for the three months ended March 31, 2006.
In June 2006 we received an informal request for information
from the staff of the Los Angeles regional office of the
Securities and Exchange Commission regarding our option granting
practices. In December 2006 we were informed that the SEC issued
a formal order of investigation in the matter. We are
cooperating with the SEC investigation, but do not know when or
how it will be resolved or what, if any, actions the SEC may
require us to take as part of the resolution of that matter.
Broadcom has also been informally contacted by the
U.S. Attorneys Office for the Central District of
California and has been asked to produce on a voluntary basis
documents, many of which we previously provided to the SEC. We
are cooperating with this request. Any action by the SEC, the
U.S. Attorneys Office or other governmental agency
could result in civil or criminal sanctions against certain of
our former officers, directors
and/or
employees and might result in such sanctions against us
and/or
certain of our current officers, directors
and/or
employees.
Additionally, as discussed in Note 8 of Notes to Unaudited
Condensed Consolidated Financial Statements, included in
Part I, Item 1 of this Report, we currently are
engaged in civil litigation with parties that claim, among other
allegations, that certain of our current and former officers
improperly dated stock option grants to enhance their own
profits on the exercise of such options or for other improper
purposes. Although we and the other defendants intend to defend
these claims vigorously, there are many uncertainties associated
with any litigation, and we cannot assure you that these actions
will be resolved without substantial costs and/or settlement
charges. We have entered into indemnification agreements with
each of our present and former directors and officers. Under
those agreements, Broadcom is required to indemnify each such
director or officer against expenses, including attorneys
fees, judgments, fines and settlements, paid by such individual
in connection with the pending litigation (other than
indemnified liabilities arising from willful misconduct or
conduct that is knowingly fraudulent or deliberately dishonest).
The resolution of the pending investigations by the SEC and U.S.
Attorneys Office, the defense of our pending civil
litigation and any additional litigation relating to our past
equity award practices or the January 2007 restatement of our
financial statements could result in significant costs and
diversion of the attention of management and other key employees.
The
implementation of new accounting rules related to the expensing
of stock-based awards will negatively impact our operating
results in periods beginning with the first quarter of 2006. Any
subsequent changes in accounting rules may also have an adverse
effect on our results of operations.
We adopted SFAS 123R effective January 1, 2006.
SFAS 123R requires all share-based payment awards to
employees, including grants of stock options, restricted stock
units and employee stock purchase rights, to be recognized in
our financial statements based on their respective grant date
fair values and does not allow the previously permitted pro
forma disclosure-only method as an alternative to financial
statement recognition.
The adoption of SFAS 123R will have a significant adverse
impact on our reported results of operations because the
stock-based compensation expense is charged directly against our
reported earnings. Stock-based compensation expense and unearned
stock-based compensation will increase to the extent that we
increase our work force, grant additional equity awards to
employees or assume unvested equity awards in connection with
acquisitions.
Any other subsequent changes in the accounting rules applicable
to Broadcom may also have an adverse effect on our results of
operations.
We had a
material weakness in internal control over financial reporting
and cannot assure you that additional material weaknesses will
not be identified in the future. If our internal control over
financial reporting
57
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 review as well as the
restatement, our management concluded that there was a material
weakness, as defined in the Public Company Accounting Oversight
Boards Auditing Standard No. 2, in our internal
control over financial reporting as of December 31, 2005.
Management believes this material weakness was remediated as of
September 19, 2006 and, accordingly, no longer exists as of
the date of this filing. See the discussion included in
Part I, Item 4 of this Report for additional
information regarding our internal control over financial
reporting.
Our management, including our Chief Executive Officer and Acting
Chief Financial Officer, does not expect that our internal
control over financial reporting will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Further,
the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be
considered relative to their costs. Controls can be circumvented
by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. Over
time, controls may become inadequate because changes in
conditions or deterioration in the degree of compliance with
policies or procedures may occur. 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.
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 in, the semiconductor industry and wired and
wireless communications markets, including seasonality in sales
of consumer products into which our products are incorporated;
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the timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory;
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the gain or loss of a key customer, design win or order;
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intellectual property disputes, customer indemnification claims
and other types of litigation risks;
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changes in accounting rules, such as the change requiring the
recording of expenses for employee stock options and other
stock-based compensation expense commencing with the first
quarter of 2006;
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our ability to timely and effectively transition to smaller
geometry process technologies or achieve higher levels of design
integration;
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our dependence on a few significant customers for a substantial
portion of our revenue;
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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;
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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;
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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;
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the rate at which our present and future customers and end users
adopt our technologies and products in our target markets;
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the availability and pricing of third party semiconductor
foundry, assembly and test capacity and raw materials;
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our ability to timely and accurately predict market requirements
and evolving industry standards and to identify and capitalize
upon opportunities in new markets;
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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;
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changes in our product or customer mix;
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the volume of our product sales and pricing concessions on
volume sales; and
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the effects of public health emergencies, natural disasters,
terrorist activities, international conflicts and other events
beyond our control.
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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, and the sustainability of, such
newer markets.
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.
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
59
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 last four years, 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 a slowdown
in orders in the third quarter of 2006 as well as a reduction in
net revenue in the fourth quarter of 2004 that we believe were
attributable in substantial part to excess inventory held by
certain of our customers, and we may experience a similar
slowdown in the future. We cannot predict the timing, strength
or duration of any economic recovery, worldwide, or in the wired
and wireless communications markets. If the economy or the wired
and wireless communications markets in which we operate do not
continue at their present levels, our business, financial
condition and results of operations will likely be materially
and adversely affected.
We are
subject to order and shipment uncertainties, and if we are
unable to accurately predict customer demand, we may hold excess
or obsolete inventory, which would reduce our profit margin.
Conversely, we may have insufficient inventory, which would
result in lost revenue opportunities and potentially in loss of
market share and damaged customer relationships.
We typically sell products pursuant to purchase orders rather
than long-term purchase commitments. Customers can generally
cancel or defer purchase orders on short notice without
incurring a significant penalty. In the recent past, some of our
customers have developed excess inventories of their own
products and have, as a consequence, deferred purchase orders
for our products. We currently do not have the ability to
accurately predict what or how many products our customers will
need in the future. Anticipating demand is difficult because our
customers face volatile pricing and unpredictable demand for
their own products, are increasingly focused more on cash
preservation and tighter inventory management, and may be
involved in legal proceedings that could affect their ability to
buy our products. Our ability to accurately forecast customer
demand may also be impaired by the delays inherent in our
lengthy sales cycle. After we have developed and delivered a
product to a customer, the customer will usually test and
evaluate our product prior to designing its own equipment to
incorporate our product. Our customers may need three to more
than six months to test, evaluate and adopt our product and an
additional three to more than nine months to begin volume
production of equipment that incorporates our product. Due to
this lengthy sales cycle, we may experience significant delays
from the time we increase our operating expenses and make
investments in inventory until the time that we generate revenue
from these products. It is possible that we may never generate
any revenue from these products after incurring such
expenditures. Even if a customer selects our product to
incorporate into its equipment, we have no assurance that the
customer will ultimately market and sell its equipment or that
such efforts by our customer will be successful. The delays
inherent in our lengthy sales cycle increase the risk that a
customer will decide to cancel or curtail, reduce or delay its
product plans. If we incur significant 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
60
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, we could
incur significant charges against our income. We have also
recently entered into consigned or customer managed inventory
arrangements with certain of our customers, although we have not
shipped a significant amount of product under those arrangements
as of December 31, 2006. Pursuant to these arrangements we
deliver products to a warehouse of the customer or a designated
third party 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. If a customer does not take
product under such an 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.
Intellectual
property risks and third party claims of infringement,
misappropriation of proprietary rights or other claims against
us could adversely affect our ability to market our products,
require us to redesign our products or seek licenses from third
parties, and seriously harm our operating results. In addition,
the defense of such claims could result in significant costs and
divert the attention of our management or other key
employees.
Companies in and related to the semiconductor industry often
aggressively protect and pursue their intellectual property
rights. There are often intellectual property risks associated
with developing and producing new products and entering new
markets, and we may not be able to obtain, at reasonable cost
and upon commercially reasonable terms, licenses to intellectual
property of others that is alleged to read on such new or
existing products. From time to time, we have received, and may
continue to receive, notices that claim we have infringed upon,
misappropriated or misused other parties proprietary
rights. Moreover, in the past we have been and we currently are
engaged in litigation with parties that claim that we infringed
their patents or misappropriated or misused their trade secrets.
In addition, we or our customers may be sued by other parties
that claim that our products have infringed their patents or
misappropriated or misused their trade secrets, or which may
seek to invalidate one or more of our patents. An adverse
determination in any of these types of disputes could prevent us
from manufacturing or selling some of our products, limit or
restrict the type of work that employees involved in such
litigation may perform for Broadcom, increase our costs of
revenue and expose us to significant liability. Any of these
claims may materially and adversely affect our business,
financial condition and results of operations. For example, in a
patent or trade secret action, a court could issue a preliminary
or permanent injunction that would require us to withdraw or
recall certain products from the market, redesign certain
products offered for sale or under development, or restrict
employees from performing work in their areas of expertise. We
may also be liable for damages for past infringement and
royalties for future use of the technology, and we may be liable
for treble damages if infringement is found to have been
willful. In addition, governmental agencies may commence
investigations or criminal proceedings against our employees,
former employees
and/or the
company relating to claims of misappropriation or misuse of
another partys proprietary rights. We may also have to
indemnify some customers and strategic partners under our
agreements with such parties if a third party alleges or if a
court finds that our products or activities have infringed upon,
misappropriated or misused another partys proprietary
rights. We have received requests from certain customers and
strategic partners to include increasingly broad indemnification
provisions in our agreements with them. These indemnification
provisions may, in some circumstances, extend our liability
beyond the products we provide to include liability for
combinations of components or system level designs and for
consequential damages
and/or lost
profits. Even if claims against us are not valid or successfully
asserted, these claims could result in significant costs and a
diversion of the attention of management and other key employees
to defend. Additionally, we have sought and may in the future
seek to obtain a license under a third partys intellectual
property rights and have granted and may in the future grant a
license to certain of our intellectual property rights to a
third party in connection with a cross-license agreement or a
settlement of claims or actions asserted against us. However, we
may not be able to obtain such a license on commercially
reasonable terms.
61
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.
We may
not be able to adequately protect or enforce our intellectual
property rights, which could harm our competitive
position.
Our success and future revenue growth will depend, in part, on
our ability to protect our intellectual property. We primarily
rely on patent, copyright, trademark and trade secret laws, as
well as nondisclosure agreements and other methods, to protect
our proprietary technologies and processes. Despite our efforts
to protect our proprietary technologies and processes, it is
possible that competitors or other unauthorized third parties
may obtain, copy, use or disclose our technologies and
processes. We currently hold more than 1,900 U.S. patents
and more than 750 foreign patents and have filed approximately
5,900 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 have
foreign patents or 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 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
to us 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 the
copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work. With respect to our proprietary
software, we generally license such software under terms that
prohibit combining it with open source software as described
above. Despite these restrictions, parties may combine Broadcom
proprietary software with open source software without our
authorization, in which case we might nonetheless be required to
release the source code of our proprietary software.
We generally enter into confidentiality agreements with our
employees, consultants and strategic partners. We also try to
control access to and distribution of our technologies,
documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy,
disclose, obtain or use our products, services or technology
without our authorization. Also, current or former employees may
seek employment with our
62
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.
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. 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.
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 .25 micron, .22 micron, .18 micron, .13 micron
and 90 nanometer geometry processes. In addition, we are now
designing a number of new products in 65-nanometer process
technology. 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. In
addition, 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 a short-term adverse impact on our operating results,
as we may reduce our revenue by integrating the functionality of
multiple chips into a single chip.
63
Because
we depend on a few significant customers for a substantial
portion of our revenue, the loss of a key customer could
seriously impact our revenue and harm our business. In addition,
if we are unable to continue to sell existing and new products
to our key customers in significant quantities or to attract new
significant customers, our future operating results could be
adversely affected.
We have derived a substantial portion of our past revenue from
sales to a relatively small number of customers. As a result,
the loss of any significant customer could materially and
adversely affect our financial condition and results of
operations.
Sales to our five largest customers, including sales to their
manufacturing subcontractors, represented 45.9% and 50.5% of our
net revenue in the six months ended June 30, 2006 and 2005,
respectively. We expect that our largest customers will continue
to account for a substantial portion of our net revenue during
the balance of 2006 and for the foreseeable future. The
identities of our largest customers and their respective
contributions to our net revenue have varied and will likely
continue to vary from period to period.
We may not be able to maintain or increase sales to certain of
our key customers for a variety of reasons, including the
following:
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most of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty;
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our agreements with our customers typically do not require them
to purchase a minimum quantity of our products;
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many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products;
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our customers face intense competition from other manufacturers
that do not use our products; and
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some of our customers offer or may offer products that compete
with our products.
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These relationships often require us to develop new products
that may involve significant technological challenges. Our
customers frequently place considerable pressure on us to meet
their tight development schedules. Accordingly, we may have to
devote a substantial amount of our resources to our strategic
relationships, which could detract from or delay our completion
of other important development projects. Delays in development
could impair our relationships with strategic customers and
negatively impact sales of the products under development.
In addition, our longstanding relationships with some larger
customers may also deter other potential customers who compete
with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain
customers favorable prices on our products. We may have to offer
the same lower prices to certain of our customers who have
contractual most favored nation pricing
arrangements. In that event, our average selling prices and
gross margins would decline. The loss of a key customer, a
reduction in sales to any key customer, or our inability to
attract new significant customers could seriously impact our
revenue and materially and adversely affect our results of
operations.
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. We have experienced a period of
rapid growth and expansion in the past. Through internal growth
and acquisitions, we significantly increased the scope of our
operations and expanded our workforce from 2,580 employees,
including contractors, as of December 31, 2002 to 4,854
employees, including contractors, as of June 30, 2006.
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 meet competitive
challenges or exploit potential market opportunities, and our
current or future business could be materially and adversely
affected.
64
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, the rate of increase in our operating expenses may
exceed the rate of increase, if any, in our revenue. Moreover,
if we experience another slowdown in the broadband
communications markets in which we operate, we may not be able
to scale back our operating expenses in a sufficiently timely or
effective manner. In that event, our business, financial
condition and results of operations would be materially and
adversely affected.
Our past growth has placed, and any future growth is expected to
continue to place, a significant strain on our management
personnel, systems and resources. To implement our current
business and product plans, we will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors
will require substantial management effort. In the past we have
implemented an enterprise resource planning, or ERP, system to
help us improve our planning and management processes and a new
human resources management, or HRM, system. 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, 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 December 2004 we signed a $183.0 million lease
agreement under which we will relocate our headquarters and
Irvine operations to new, larger facilities that will enable us
to centralize all of our Irvine employees and operations on one
campus. This relocation is currently anticipated to occur in the
first quarter of 2007. 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 our 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.
We may be
unable to attract, retain or motivate key senior management and
technical personnel, which could seriously harm our
business.
Our future success depends to a significant extent upon the
continued service of our key senior management personnel,
including our co-founder, Chairman of the Board and Chief
Technical Officer, Henry Samueli, Ph.D., our Chief
Executive Officer, Scott A. McGregor, and other senior
executives. We have an employment agreement with
Mr. McGregor; however it does not govern the length of his
service. We do not have employment agreements with any other
executives, or any other key employees, although we do have
limited retention arrangements in place with certain executives.
The loss of the services of Dr. Samueli, Mr. McGregor
or certain other key senior management or technical personnel
could materially and adversely affect our business, financial
condition and results of operations. For instance, if any 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. At the present time,
pending the filing of our amended and delayed SEC periodic
reports, we are not able to issue shares of our common stock
pursuant to equity awards. In 2003 we conducted a stock option
exchange offer to address the substantial decline in the price
of our Class A common stock over the preceding two years
and to improve our ability to retain key employees. However, we
cannot be certain that we will be able to continue to attract,
retain
65
and motivate employees if we are unable to issue shares of our
common stock pursuant to equity awards for a sustained period or
if our Class A common stock experiences another substantial
price decline.
We have also modified our compensation policies by increasing
cash compensation to certain employees and instituting awards of
restricted stock units, while simultaneously reducing awards of
stock options. This modification of our compensation policies
and the applicability of the SFAS 123R requirement to
expense the fair value of stock options awarded to employees
will increase 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 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 solutions for existing and new markets, introduce
these products in a cost-effective and timely manner, and
convince leading equipment manufacturers to select these
products for design into their own new products. Our 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 and lower than
anticipated manufacturing yields in the early production of such
products. If we were to experience any similar delays in the
successful completion of a new product or similar reductions in
our manufacturing yields for a new product in the future, our
customer relationships, reputation and business could be
seriously harmed.
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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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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66
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shift our products to smaller geometry process technologies to
achieve lower cost and higher levels of design integration.
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In some of our businesses, our ability to develop and deliver
next-generation products successfully and in a timely manner may
depend in part on access to information, or licenses of
technology or intellectual property rights, from companies that
are our competitors. We cannot assure you that such information
or licenses will be made available to us on a timely basis, if
at all, or at reasonable cost and on commercially reasonable
terms.
If we are not able to develop and introduce new products
successfully and in a cost-effective and timely manner, we will
be unable to attract new customers or to retain our existing
customers, as these customers may transition to other companies
that can meet their product development needs, which would
materially and adversely affect our results of operations.
We must
keep pace with rapid technological change and evolving industry
standards in the semiconductor industry and wired and wireless
communications markets to remain competitive.
Our future success will depend on our ability to anticipate and
adapt to changes in technology and industry standards and our
customers changing demands. We sell products in markets
that are characterized by rapid technological change, evolving
industry standards, frequent new product introductions, short
product life cycles and increasing demand for higher levels of
integration and smaller process geometries. Our past sales and
profitability have resulted, to a large extent, from our ability
to anticipate changes in technology and industry standards and
to develop and introduce new and enhanced products incorporating
the new standards and technologies. Our ability to adapt to
these changes and to anticipate future standards, and the rate
of adoption and acceptance of those standards, will be a
significant factor in maintaining or improving our competitive
position and prospects for growth. If new industry standards
emerge, our products or our customers products could
become unmarketable or obsolete, and we could lose market share.
We may also have to incur substantial unanticipated costs to
comply with these new standards. In addition, our target markets
continue to undergo rapid growth and consolidation. A
significant slowdown in any of these wired and wireless
communications markets could materially and adversely affect our
business, financial condition and results of operations. These
rapid technological changes and evolving industry standards make
it difficult to formulate a long-term growth strategy because
the semiconductor industry and wired and wireless communications
markets may not continue to develop to the extent or in the time
periods that we anticipate. We have invested substantial
resources in emerging technologies that did not achieve the
market acceptance that we had expected. If new markets do not
develop as we anticipate, or if our products do not gain
widespread acceptance in these markets, our business, financial
condition and results of operations could be materially and
adversely affected.
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 defects and bugs when they are first
introduced or as new versions are released. Our products have
previously experienced, and may in the future experience, these
defects and bugs. If any of our products contains defects or
bugs, or has reliability, quality or compatibility problems, our
reputation may be damaged and customers may be reluctant to buy
our products, which could materially and adversely affect our
ability to retain existing customers and attract new customers.
In addition, these defects or bugs could interrupt or delay
sales or shipment of our products to our customers. To alleviate
these problems, we may have to invest significant capital and
other resources. Although our products are tested by us and our
suppliers and customers, it is possible that our new products
will contain defects or bugs. If any of these problems are not
found until after we have commenced commercial production of a
new product, we may be required to incur additional development
costs and product recall, repair or field replacement costs.
These problems may divert our technical and other resources from
other development efforts and could result in claims against us
by our customers or others, including possible claims for
consequential damages
and/or lost
profits. In addition, system and handset providers that purchase
components may require that we assume liability for defects
associated with products produced by their manufacturing
subcontractors and require that we provide a warranty for
defects or other problems which may arise at the system level.
Moreover, we would likely lose, or experience a
67
delay in, market acceptance of the affected product or products,
and we could lose credibility with our current and prospective
customers.
Our
acquisition strategy may be dilutive to existing shareholders,
result in unanticipated accounting charges or otherwise
adversely affect our results of operations, and result in
difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of
acquired companies or businesses.
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, 2006, we acquired
33 companies and certain assets of one other business. We
continually evaluate and explore strategic opportunities as they
arise, including business combination transactions, strategic
partnerships, and the purchase or sale of assets, including
tangible and intangible assets such as intellectual property.
Acquisitions may require significant capital infusions,
typically entail many risks, and could result in difficulties in
assimilating and integrating the operations, personnel,
technologies, products and information systems of acquired
companies or businesses. We have in the past and may in the
future experience delays in the timing and successful
integration of an acquired companys technologies and
product development through volume production, unanticipated
costs and expenditures, changing relationships with customers,
suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, key personnel of an
acquired company may decide not to work for us. The acquisition
of another company or its products and technologies may also
require us to enter into a geographic or business market in
which we have little or no prior experience. These challenges
could disrupt our ongoing business, distract our management and
employees, harm our reputation and increase our expenses. These
challenges are magnified as the size of the acquisition
increases. Furthermore, these challenges would be even greater
if we acquired a business or entered into a business combination
transaction with a company that was larger and more difficult to
integrate than the companies we have historically acquired.
Acquisitions may require large one-time charges and can result
in increased debt or contingent liabilities, adverse tax
consequences, deferred compensation charges, and the recording
and later amortization of amounts related to deferred
compensation and certain purchased intangible assets, any of
which items could negatively impact our results of operations.
In addition, we may record goodwill in connection with an
acquisition and incur goodwill impairment charges in the future.
Any of these charges could cause the price of our Class A
common stock to decline.
Acquisitions or asset purchases made entirely or partially for
cash may reduce our cash reserves. We may seek to obtain
additional cash to fund an acquisition by selling equity or debt
securities. Any issuance of equity or convertible debt
securities may be dilutive to our existing shareholders. In
addition, the equity or debt securities that we may issue could
have rights, preferences or privileges senior to those of our
common stock. For example, as a consequence of the prior
pooling-of-interests
accounting rules, the securities issued in nine of our prior
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.
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, 29.4% and 29.6% of our net revenue
in the three and six months ended June 30, 2006,
respectively, was derived from sales to independent customers
outside the United States,
68
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 87.3% and 87.4% of our net revenue in the
three and six months ended June 30, 2006, respectively. We
also undertake design and development activities in Belgium,
Canada, China, Denmark, France, Greece, India, Israel, Japan,
Korea, the Netherlands, Taiwan and the United Kingdom, among
other locations. In addition, we undertake various sales and
marketing activities through regional offices in a number of
countries. We intend to continue to expand our international
business activities and to open other design and operational
centers abroad. The continuing effects of the war in Iraq and
terrorist attacks in the United States and abroad, the resulting
heightened security, and the increasing risk of extended
international military conflicts may adversely impact our
international sales and could make our international operations
more expensive. International operations are subject to many
other inherent risks, including but not limited to:
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political, social and economic instability;
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exposure to different business practices and legal standards,
particularly with respect to intellectual property;
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natural disasters and public health emergencies;
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nationalization of business and blocking of cash flows;
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trade and travel restrictions;
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the imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions of the
United States and each other country in which we operate;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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changes in taxation and tariffs;
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difficulties in staffing and managing international operations;
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fluctuations in currency exchange rates;
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difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
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potentially adverse tax consequences.
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Any of the factors described above may have a material adverse
effect on our ability to increase or maintain our foreign sales.
We currently operate under tax holidays and favorable tax
incentives in certain foreign jurisdictions. For instance, in
Singapore we operate under tax holidays that reduce our taxes in
that country on certain non-investment income. Such tax holidays
and incentives often require us to meet specified employment and
investment criteria in such jurisdictions. However, we cannot
assure you that we will continue to meet such criteria or enjoy
such tax holidays and incentives, or realize any net tax
benefits from tax holidays or incentives. If any of our tax
holidays or incentives are terminated, our results of operations
may be materially and adversely affected.
The economic conditions in our primary overseas markets,
particularly in Asia, may negatively impact the demand for our
products abroad. All of our international sales to date have
been denominated in U.S. dollars. Accordingly, an increase
in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in
international markets or require us to assume the risk of
denominating certain sales in foreign currencies. We anticipate
that these factors will impact our business to a greater degree
as we further expand our international business activities.
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We face
intense competition in the semiconductor industry and the wired
and wireless communications markets, which could reduce our
market share in existing markets and affect our entry into new
markets.
The semiconductor industry and the wired and wireless
communications markets are intensely competitive. We expect
competition to continue to increase as industry standards become
well known and as other competitors enter our target markets. We
currently compete with a number of major domestic and
international suppliers of integrated circuits and related
applications in our target markets. We also compete with
suppliers of system-level and motherboard-level solutions
incorporating integrated circuits that are proprietary or
sourced from manufacturers other than Broadcom. In all of our
target markets we also may face competition from newly
established competitors, suppliers of products based on new or
emerging technologies, and customers who choose to develop their
own semiconductor solutions. We expect to encounter further
consolidation in the markets in which we compete.
Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases, and
significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than
we do. These competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer
requirements. They may also be able to devote greater resources
to the promotion and sale of their products. In addition,
current and potential competitors have established or may
establish financial or strategic relationships among themselves
or with existing or potential customers, resellers or other
third parties. Accordingly, new competitors or alliances among
competitors could emerge and rapidly acquire significant market
share. Existing or new competitors may also develop technologies
that more effectively address our markets with products that
offer enhanced features and functionality, lower power
requirements, greater levels of integration or lower cost.
Increased competition has resulted in and is likely to continue
to result in declining average selling prices, reduced gross
margins and loss of market share in certain markets. We cannot
assure you that we will be able to continue to compete
successfully against current or new competitors. If we do not
compete successfully, we may lose market share in our existing
markets and our revenues may fail to increase or may decline.
We depend
on five independent foundry subcontractors to manufacture
substantially all of our current products, and any failure to
secure and maintain sufficient foundry capacity could materially
and adversely affect our business.
We do not own or operate a fabrication facility. Five
third-party foundry subcontractors located in Asia manufacture
substantially all of our semiconductor devices in current
production. Availability of foundry capacity has at times in the
past been reduced due to strong demand. In addition, a
recurrence of severe acute respiratory syndrome, or SARS, the
occurrence of a significant outbreak of avian influenza among
humans, or another public health emergency in Asia could further
affect the production capabilities of our manufacturers by
resulting in quarantines or closures. If we are unable to secure
sufficient capacity at our existing foundries, or in the event
of a quarantine or closure at any of these foundries, our
revenues, cost of revenues and results of operations would be
negatively impacted.
In September 1999 two of our 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, including:
|
|
|
|
|
a lack of guaranteed wafer supply and potential wafer shortages
and higher wafer prices;
|
70
|
|
|
|
|
limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and
|
|
|
|
the unavailability of, or potential delays in obtaining access
to, key process technologies.
|
In addition, the manufacture of integrated circuits is a highly
complex and technologically demanding process. Although we work
closely with our foundries to minimize the likelihood of reduced
manufacturing yields, our foundries have from time to time
experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the
installation and
start-up of
new process technologies. 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 recent past been reduced from
time to time due to strong demand. Foundries can allocate
capacity to the production of other companies products and
reduce deliveries to us on short notice. It is possible that
foundry customers that are larger and better financed than we
are, or that have long-term agreements with our main foundries,
may induce our foundries to reallocate capacity to them. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use five independent
foundries to manufacture substantially all of our semiconductor
products, each component is typically manufactured at only one
or two foundries at any given time, and if any of our foundries
is unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. Also, our third party foundries typically
migrate capacity to newer,
state-of-the-art
manufacturing processes on a regular basis, which may create
capacity shortages for our products designed to be manufactured
on an older process. We cannot assure you that any of our
existing or new foundries will be able to produce integrated
circuits with acceptable manufacturing yields, or that our
foundries will be able to deliver enough semiconductor devices
to us on a timely basis, or at reasonable prices. These and
other related factors could impair our ability to meet our
customers needs and have a material and adverse effect on
our operating results.
Although we may utilize new foundries for other products in the
future, in using new foundries we will be subject to all of the
risks described in the foregoing paragraphs with respect to our
current foundries.
We depend
on third-party subcontractors to assemble, obtain packaging
materials for, and test substantially all of our current
products. If we lose the services of any of our subcontractors
or if these subcontractors are unable to obtain sufficient
packaging materials, shipments of our products may be disrupted,
which could harm our customer relationships and adversely affect
our net sales.
We do not own or operate an assembly or test facility. Seven
third-party subcontractors located in Asia assemble, obtain
packaging materials for, and test substantially all of our
current products. Because we rely on third-party subcontractors
to perform these functions, we cannot directly control our
product delivery schedules and quality assurance. This lack of
control has resulted, and could in the future result, in product
shortages or quality assurance problems that could delay
shipments of our products or increase our manufacturing,
assembly or testing costs.
In the past we and others in our industry experienced a shortage
in the supply of packaging substrates that we use for our
products. If our third-party subcontractors are unable to obtain
sufficient packaging materials for our products in a timely
manner, we may experience a significant product shortage or
delay in product shipments, which could seriously harm our
customer relationships and materially and adversely affect our
net sales.
We do not have long-term agreements with any of our assembly or
test subcontractors and typically procure services from these
suppliers on a per order basis. If any of these subcontractors
experiences capacity constraints or financial difficulties,
suffers any damage to its facilities, experiences power outages
or any other disruption of assembly or testing capacity, we may
not be able to obtain alternative assembly and testing services
in a timely manner. Due to the amount of time that it usually
takes us to qualify assemblers and testers, we could experience
significant delays in product shipments if we are required to
find alternative assemblers or testers for our
71
components. Any problems that we may encounter with the
delivery, quality or cost of our products could damage our
customer relationships and materially and adversely affect our
results of operations. We are continuing to develop
relationships with additional third-party subcontractors to
assemble and test our products. However, even if we use these
new subcontractors, we will continue to be subject to all of the
risks described above.
Our stock
price is highly volatile. Accordingly, you may not be able to
resell your shares of common stock at or above the price you
paid for them.
The market price of our Class A common stock has fluctuated
substantially in the past and is likely to continue to be highly
volatile and subject to wide fluctuations. Since January 1,
2002 our Class A common stock has traded at prices as low
as $6.35 and as high as $50.00 per share. Fluctuations have
occurred and may continue to occur in response to various
factors, many of which we cannot control, including:
|
|
|
|
|
quarter-to-quarter
variations in our operating results;
|
|
|
|
changes in accounting rules, particularly those related to the
expensing of stock options;
|
|
|
|
newly-instituted litigation or an adverse decision or outcome in
litigation;
|
|
|
|
announcements of changes in our senior management;
|
|
|
|
the gain or loss of one or more significant customers or
suppliers;
|
|
|
|
announcements of technological innovations or new products by
our competitors, customers or us;
|
|
|
|
the gain or loss of market share in any of our markets;
|
|
|
|
general economic and political conditions and specific
conditions in the semiconductor industry and the wired and
wireless communications markets, including seasonality in sales
of consumer products into which our products are incorporated;
|
|
|
|
continuing international conflicts and acts of terrorism;
|
|
|
|
changes in earnings estimates or investment recommendations by
analysts;
|
|
|
|
changes in investor perceptions; or
|
|
|
|
changes in expectations relating to our products, plans and
strategic position or those of our competitors or customers.
|
In addition, the market prices of securities of
Internet-related, semiconductor and other technology companies
have been 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.
The
independent foundries upon which we rely to manufacture
substantially all of our current products, as well as our own
California and Singapore facilities, are located in regions that
are subject to earthquakes and other natural
disasters.
Two of the five third-party foundries upon which we rely to
manufacture substantially all of our semiconductor devices are
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 is
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.
72
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 or the imposition of new
laws and regulations in the United States or elsewhere could
materially and adversely affect our business.
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.
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
(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, absent any unforeseen delays, our current product designs
and material supply chains will allow production to continue in
compliance with the RoHS Directive and without interruption.
However, it is possible that unanticipated supply shortages or
delays may occur as a result of these new regulations.
Our
co-founders, directors, executive officers and their affiliates
can control the outcome of matters that require the approval of
our shareholders, and accordingly we will not be able to engage
in certain transactions without their approval.
As of June 30, 2006 our co-founders, directors, executive
officers and their respective affiliates beneficially owned
14.3% of our outstanding common stock and held 60.3% 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, 2006 our two founders, Dr. Henry T.
Nicholas III, who is no longer an officer or director of
Broadcom, and Dr. Henry Samueli, our Chairman of the Board
and Chief Technical Officer, beneficially owned a total of 13.4%
of our outstanding common stock and held 59.4% 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
73
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.
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.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
In the three months ended June 30, 2006, we issued an
aggregate of 1.9 million shares of our Class A common
stock upon conversion of a like number of shares of our
Class B common stock. Each share of our Class B common
stock is convertible at the option of the holder into one share
of Class A common stock, and in most instances will
automatically convert into one share of Class A common
stock upon sale or other transfer. The offer and sale of the
securities were effected without registration in reliance on the
exemption from registration proved by Section 3(a)(9) of
the Securities Act.
Issuer
Purchases of Equity Securities
In February 2005 our Board of Directors authorized a program to
repurchase shares of our Class A common stock. The Board
approved the repurchase of shares having an aggregate value of
up to $250 million from time to time over a period of one
year, depending on market conditions. In January 2006 the Board
approved an amendment to the share repurchase program extending
the program through January 27, 2007 and authorizing the
repurchase of additional shares of our Class A common stock
having a total market value of up to $500 million
74
from time to time during the period beginning January 26,
2006 and ending January 26, 2007. The following table
details the repurchases that were made under the program during
the three months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
That May Yet Be
|
|
|
|
of Shares
|
|
|
Price
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Announced Plan
|
|
|
the Plan
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
April 1, 2006
April 30, 2006
|
|
|
939
|
|
|
$
|
43.85
|
|
|
|
939
|
|
|
|
|
|
May 1, 2006
May 31, 2006
|
|
|
1,484
|
|
|
$
|
37.17
|
|
|
|
1,484
|
|
|
|
|
|
June 1, 2006
June 30, 2006
|
|
|
1,790
|
|
|
$
|
31.27
|
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,213
|
|
|
$
|
36.15
|
|
|
|
4,213
|
|
|
$
|
256,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From the time the program was first implemented through
June 30, 2006, we repurchased 11.8 million shares of
our Class A common stock at a weighted average price of
$33.94 per share.
On July 24, 2006 we decided to suspend purchasing shares of
Class A common stock under the share repurchase program.
|
|
Item 3.
|
Defaults
upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
(a) Our 2006 Annual Meeting of Shareholders (the 2006
Annual Meeting) was held April 27, 2006.
(b) At the 2006 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
|
Votes
|
|
|
Shares
|
|
|
Votes
|
|
|
Total Votes
|
|
|
George L. Farinsky
|
|
|
358,035,138
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,115,338,368
|
|
Maureen E. Grzelakowski
|
|
|
372,738,415
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,130,041,645
|
|
Nancy H. Handel
|
|
|
372,755,056
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,130,058,286
|
|
John Major
|
|
|
338,958,511
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,096,261,741
|
|
Scott A. McGregor
|
|
|
362,621,985
|
|
|
|
75,730,013
|
|
|
|
757,300,130
|
|
|
|
1,119,922,115
|
|
Alan E. Ross
|
|
|
362,190,396
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,119,493,626
|
|
Henry Samueli, Ph.D.
|
|
|
362,220,963
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,119,524,193
|
|
Robert E. Switz
|
|
|
358,064,109
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,115,367,339
|
|
Werner F. Wolfen
|
|
|
330,490,184
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,087,793,414
|
|
(c) At the 2006 Annual Meeting, the Shareholders also voted
on the following four proposals and cast their votes as follows:
(1) To approve Second Amended and Restated Articles of
Incorporation of Broadcom to (i) increase the aggregate
number of authorized shares of Class A common stock from
800,000,000 shares to 2,500,000,000 shares, and
(ii) eliminate all statements referring to the rights,
preferences, privileges and restrictions of Series A
preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock and Series E
preferred stock.
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
|
Votes
|
|
|
Shares
|
|
|
Votes
|
|
|
Total Votes
|
|
|
For
|
|
|
309,597,589
|
|
|
|
75,726,951
|
|
|
|
757,269,510
|
|
|
|
1,066,867,099
|
|
Against
|
|
|
74,167,179
|
|
|
|
5,284
|
|
|
|
52,840
|
|
|
|
74,220,019
|
|
Abstain
|
|
|
2,615,183
|
|
|
|
|
|
|
|
|
|
|
|
2,615,183
|
|
Broker Non-Votes
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(2) To approve an amendment to our Bylaws, as previously
amended and restated, to increase the authorized number of
directors from a range of five (5) to nine (9) to a
range of six (6) to eleven (11) directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
|
Votes
|
|
|
Shares
|
|
|
Votes
|
|
|
Total Votes
|
|
|
For
|
|
|
372,744,511
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,130,047,741
|
|
Against
|
|
|
12,039,504
|
|
|
|
1,912
|
|
|
|
19,120
|
|
|
|
12,058,624
|
|
Abstain
|
|
|
2,408,737
|
|
|
|
|
|
|
|
|
|
|
|
2,408,737
|
|
Broker Non-Votes
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(3) To approve an amendment and restatement of
Broadcoms 1998 Stock Incentive Plan, as previously amended
and restated, which revises the automatic equity grant program
in effect for new and continuing non-employee Board members and
makes certain technical revisions and improvements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
|
Votes
|
|
|
Shares
|
|
|
Votes
|
|
|
Total Votes
|
|
|
For
|
|
|
47,712,419
|
|
|
|
75,670,025
|
|
|
|
756,700,250
|
|
|
|
804,412,669
|
|
Against
|
|
|
284,845,298
|
|
|
|
53,726
|
|
|
|
537,260
|
|
|
|
285,382,558
|
|
Abstain
|
|
|
2,428,490
|
|
|
|
1,912
|
|
|
|
19,120
|
|
|
|
2,447,610
|
|
Broker Non-Votes
|
|
|
52,206,547
|
|
|
|
6,572
|
|
|
|
65,720
|
|
|
|
52,272,267
|
|
(4) To ratify the appointment of Ernst & Young LLP
as our independent registered public accounting firm for the
year ending December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
|
Votes
|
|
|
Shares
|
|
|
Votes
|
|
|
Total Votes
|
|
|
For
|
|
|
384,497,719
|
|
|
|
75,730,323
|
|
|
|
757,303,230
|
|
|
|
1,141,800,949
|
|
Against
|
|
|
330,992
|
|
|
|
|
|
|
|
|
|
|
|
330,992
|
|
Abstain
|
|
|
2,364,041
|
|
|
|
1,912
|
|
|
|
19,120
|
|
|
|
2,383,161
|
|
Broker Non-Votes
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
76
|
|
Item 5.
|
Other
Information
|
Committee
Composition
In April 2006 and August 2006 our Board of Directors
reconstituted its committees. The current members of each
committee and the respective committee chairs are identified in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominating &
|
|
C = Chair
|
|
|
|
|
Compen-
|
|
|
Equity
|
|
|
Corporate
|
|
M = Member
|
|
Audit
|
|
|
sation
|
|
|
Award
|
|
|
Governance
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George L. Farinsky
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maureen E. Grzelakowski
|
|
|
|
|
|
|
M
|
|
|
|
|
|
|
|
M
|
|
Nancy H. Handel
|
|
|
M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Major
|
|
|
M
|
|
|
|
C
|
|
|
|
M
|
|
|
|
M
|
|
Robert E. Switz
|
|
|
M
|
|
|
|
|
|
|
|
|
|
|
|
C
|
|
Werner F. Wolfen(1)
|
|
|
M
|
|
|
|
M
|
|
|
|
|
|
|
|
|
|
Employee Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. McGregor
|
|
|
|
|
|
|
|
|
|
|
C
|
|
|
|
|
|
Henry Samueli, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
M
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Wolfen also continues to
serve as Lead Independent Director.
|
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.
Stock
Ownership Policy
On August 2, 2006 our Board of Directors amended and
restated its Policy on Stock Ownership by Members of the
Board of Directors and Section 16 Officers. Under the
amended and restated Policy, each Section 16 Officer as of
October 31, 2005 and each director who was serving on the
Board as of October 31, 2005 will be required to own at
least the following number of shares of Broadcom common stock as
of each respective date indicated below and to hold the
respective indicated number of shares continuously after that
date:
|
|
|
|
|
December 31, 2005
|
|
|
1,000 shares
|
|
December 31, 2006
|
|
|
2,000 shares
|
|
December 31, 2007
|
|
|
3,000 shares
|
|
December 31, 2008
|
|
|
4,000 shares
|
|
December 31, 2009
|
|
|
5,000 shares
|
|
A director or Section 16 Officer first elected to such
capacity after October 31, 2005 will be expected to own
1,000 shares of Broadcom common stock by the first
anniversary of the date
he/she
commences service in that capacity, increasing to
2,000 shares by the second anniversary of that date, and
thereafter increasing in annual increments of 1,000 shares
as of each ensuing anniversary, to a total of 5,000 shares
after five years of service in that capacity, and to hold the
respective indicated number of shares continuously after each
such date.
77
(a) Exhibits. The following Exhibits are
attached hereto and incorporated herein by reference:
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Where Located
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Filed
|
Number
|
|
Description
|
|
Form
|
|
File No.
|
|
Exhibit No.
|
|
Date
|
|
Herewith
|
|
|
3
|
.1
|
|
Second Amended and Restated
Articles of Incorporation filed on June 8, 2006.
|
|
8-K
|
|
000-23993
|
|
3.1
|
|
08/10/2006
|
|
|
|
3
|
.2
|
|
Bylaws as Amended through
April 27, 2006.
|
|
8-K
|
|
000-23993
|
|
3.2
|
|
08/10/2006
|
|
|
|
10
|
.1
|
|
2006 Performance Bonus Plan.
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.2
|
|
Separation Agreement and Release
of All Claims between the registrant and Andrew J. Pease
effective as of June 1, 2006.
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.3
|
|
1998 Stock Incentive Plan (as
amended and restated February 24, 2006).
|
|
8-K
|
|
000-23993
|
|
10.3
|
|
08/10/2006
|
|
|
|
31
|
|
|
Certifications of the Chief
Executive Officer and Chief Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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X
|
|
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.
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|
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|
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X
|
78
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)
Bruce E. Kiddoo
Vice President, Corporate Controller and Acting Chief
Financial Officer
(Principal Financial and Accounting Officer)
January 23, 2007
79
EXHIBIT INDEX
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Where Located
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Filed
|
Number
|
|
Description
|
|
Form
|
|
File No.
|
|
Exhibit No.
|
|
Date
|
|
Herewith
|
|
|
3
|
.1
|
|
Second Amended and Restated
Articles of Incorporation filed on June 8, 2006.
|
|
8-K
|
|
000-23993
|
|
3.1
|
|
08/10/2006
|
|
|
|
3
|
.2
|
|
Bylaws as Amended through
April 27, 2006.
|
|
8-K
|
|
000-23993
|
|
3.2
|
|
08/10/2006
|
|
|
|
10
|
.1
|
|
2006 Performance Bonus Plan.
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.2
|
|
Separation Agreement and Release
of All Claims between the registrant and Andrew J. Pease
effective as of June 1, 2006.
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.3
|
|
1998 Stock Incentive Plan (as
amended and restated February 24, 2006).
|
|
8-K
|
|
000-23993
|
|
10.3
|
|
08/10/2006
|
|
|
|
31
|
|
|
Certifications of the Chief
Executive Officer and Chief Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
X
|
|
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.
|
|
|
|
|
|
|
|
|
|
X
|
EXHIBIT 10.1
BROADCOM CORPORATION
2006 PERFORMANCE BONUS PLAN
I. PURPOSES OF THE PLAN
A. The Broadcom Corporation 2006 Performance Bonus Plan (the "Plan")
is intended to promote the interests of Broadcom Corporation (the "Company") and
its shareholders by establishing a compensation program to provide executives
and other key employees with incentive awards tied to the achievement of goals
relating to the performance of the Company and/or the achievement of individual
performance goals.
B. The Plan shall be in effect for the Company's fiscal year ending
December 31, 2006 (the "Plan Year"), and bonuses may be earned under the Plan on
the basis of the Company's financial performance for such Plan Year.
II. PLAN ADMINISTRATION
A. The Plan shall be administered by the Compensation Committee of
the Company's Board of Directors. The Compensation Committee in its capacity as
administrator of the Plan (the "Plan Administrator") shall have full power and
authority (subject to the express provisions of the Plan) to:
(i) establish the performance objectives to be attained for the
Plan Year in order for participants to become entitled to bonus payments under
the Plan; and
(ii) determine the actual bonus (if any) to be paid to each
participant based on actual performance relative to the established objectives
for the Plan Year.
B. The Plan Administrator shall also have full power and authority
to interpret and construe the provisions of the Plan, to adopt rules and
regulations for the administration of the Plan and to determine an individual's
eligibility for participation in the Plan and the amount of the actual bonus (if
any) to be paid to him or her.
C. Decisions of the Plan Administrator shall be final and binding
upon all parties who may have an interest in the Plan or any bonus amount
payable under the Plan.
III. PARTICIPATION
A. The individuals who shall participate in the Plan for the Plan
Year shall be limited to (i) the executive officers of the Company, (ii) all
other employees of the Company (or its subsidiaries) at the level of Director or
above and (iii) any other employees of the Company (or its subsidiaries)
identified by the Company's Chief Executive Officer as key contributors to the
Company's growth and financial success and selected for participation in the
Plan by the Plan Administrator.
B. A participant shall cease to participate in the Plan and shall
not be entitled to any bonus payment under the Plan if that participant ceases
Employee status for any reason prior to the date that bonuses are paid under the
Plan (the "Distribution Date"); provided, however, that:
(i) a participant who ceases Employee status prior to the
Distribution Date by reason of death or Disability may be entitled to
receive a pro-rated bonus based upon the number of days which such
individual remained in active Employee status during the Plan Period (as
defined below); and
(ii) the Plan Administrator shall have complete discretion to
make individual bonus awards under Article V of the Plan to one or more
participants who terminate Employee status for any other reason prior to
the Distribution Date, when the Plan Administrator deems the special
circumstances of the participant's termination warrant a bonus award under
the Plan.
C. For purposes of the Plan:
(i) A participant shall be deemed to have ceased Employee status
by reason of a DISABILITY if such cessation of Employee status is
occasioned by his or her inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which is expected to result in death or has lasted or can be
expected to last for a continuous period of twelve (12) months or longer.
(ii) A participant shall be deemed to continue in EMPLOYEE status
for so long as that individual remains in the employ of the Company or any
subsidiary of the Company;
(iii) The PLAN PERIOD shall mean the period beginning with the
first day of the Plan Year and ending with the Distribution Date.
(iv) Each corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company shall be considered to be
a SUBSIDIARY of the Company, provided that each such corporation (other
than the last corporation in the unbroken chain) owns, at the time of
determination, stock possessing more than fifty percent (50%) of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
D. A participant who is absent from active Employee status for a
portion of the Plan Period by reason of an authorized leave of absence shall not
be deemed to have ceased Employee status during the period of that leave.
However, such participant's bonus may be pro-rated based on the portion of the
Plan Period during which that individual is in active working status and not on
such leave of absence, unless the Plan Administrator otherwise deems it
appropriate under the circumstances to provide that individual with a full bonus
for the Plan Period.
IV. BONUS POOL
A. The Plan Administrator shall take each of the following actions
during the Plan Year:
(i) The Plan Administrator shall establish the specific
performance objectives that must be attained for the Plan Year for a
bonus pool to be created under the Plan for that year. The performance
objectives shall be based on the following financial measures: (a) net
revenue, (b) non-GAAP gross margin, (c) non-GAAP operating margin, (d)
non-GAAP earnings per share, (e) change in the price per share of the
Common Stock relative to the stock prices of an identified peer group
and (f) non-GAAP free cash flow.
(ii) The Plan Administrator shall determine the bonus pool
for the Plan Year. The target bonus pool for the Plan Year shall be
fourteen million dollars ($14,000,000). The maximum bonus pool payable
under the Plan in the event the Company exceeds each of the
established performance objectives shall be limited to twenty-one
million dollars ($21,000,000). The actual dollar amount of the bonus
pool to be awarded for the Plan Year shall be determined on the basis
of the Company's actual performance relative to each of the
performance objectives established for the Plan Year. Accordingly,
each performance objective shall be measured separately in terms of
actual percentage attainment and shall be weighted equally in
determining the actual size of the bonus pool. For example, for the
six (6) performance objectives, each objective at one hundred percent
(100%) attainment will account for sixteen and two-thirds percent (16
2/3%) of the total target bonus pool or two million three hundred
thirty-three thousand three hundred thirty-three dollars and
thirty-three cents ($2,333,333.33). No bonus pool will be established
with respect any performance objective, unless the Company attains at
least a specified percentage of that objective, with such
specification to be made by the Plan Administrator at the time each
performance objective is established.
B. In determining whether the established performance objectives
based on non-GAAP gross margin, non-GAAP operating margin, non-GAAP earnings per
share and/or non-GAAP free cash flow are attained, the Plan Administrator shall
apply the dollar amounts which the Company reports for those items in accordance
with U.S. generally accepted accounting principles ("GAPP"), as adjusted for
non-cash, non-recurring, extraordinary and certain other items. The dollar
amount of the actual bonus pool shall be determined by the Plan Administrator as
soon as administratively practicable following the completion of the audit of
the Company's 2006 financial statements by the Company's independent registered
public accounting firm.
V. INDIVIDUAL BONUS AWARDS
A. The actual bonus award to be made to (i) each participant who is
an executive officer of the Company shall be determined at the sole discretion
of the Plan Administrator and (ii) each participant who is not an executive
officer of the Company shall be approved by the Plan Administrator, based upon
the recommendation of the Company's management.
B. Except as otherwise provided in this Paragraph V.B, no
participant shall accrue any right to receive a bonus award under the Plan
unless and until that participant remains in Employee status through the
Distribution Date. Accordingly, no bonus payment shall be made to any
participant who ceases Employee status prior to the Distribution Date, provided,
however,
that (i) one or more participants may be entitled to a pro-rata bonus should
their Employee status terminate under circumstances which entitle them to such a
pro-rata bonus pursuant to the express terms of any other agreement or
arrangement to which they and the Company are parties and (ii) the provisions of
Paragraph III.B shall govern the bonus entitlement of participants whose
Employee status terminates by reason of death, Disability or under other special
circumstances identified by the Plan Administrator.
C. The Distribution Date for the individual bonus amount for each
participant shall be as soon as administratively practicable following the
completion of the audit of the Company's 2006 financial statements by the
Company's independent registered public accounting firm, but in no event shall
such Distribution Date be later than March 31, 2007. The payment of each bonus
shall be subject to the Company's collection of all applicable federal, state
and local income and employment withholding taxes, as and when those taxes
become due and payable.
VI. GENERAL PROVISIONS
A. The Plan and all rights hereunder shall be construed,
administered and governed in all respects in accordance with the laws of the
State of California without resort to its conflict-of-laws provisions. If any
provision of the Plan shall be held by a court of competent jurisdiction to be
invalid or unenforceable, the remaining provisions of the Plan shall continue in
full force and effect.
B. The Plan Administrator may at any time amend, suspend or
terminate the Plan, provided such action does not adversely affect the rights
and interests of participants accrued to date under the Plan or otherwise impair
their ability to earn a bonus award based upon the performance objectives
established by the Plan Administrator for the Plan Year.
C. Neither the action of the Company in establishing or maintaining
the Plan, nor any action taken under the Plan by the Plan Administrator, nor any
provision of the Plan itself shall be construed so as to grant any person the
right to remain in Employee status for any period of specific duration, and each
participant shall at all times remain an Employee at will and may accordingly be
discharged at any time, with or without cause and with or without advance notice
of such discharge.
D. Should a participant die before payment is made of the actual
bonus to which he or she has become entitled under the Plan, then that bonus
shall be paid to the executor or other legal representative of his or her
estate.
E. No participant shall have the right to transfer, alienate, pledge
or encumber his or her interest in the Plan, and such interest shall not (to the
maximum permitted by law) be subject to the claims of the participant's
creditors or to attachment, execution or other process of law.
F. The terms and conditions of the Plan, together with the
obligations and liabilities of the Company which accrue hereunder, shall be
binding upon any successor to the Company, whether by way of merger,
consolidation, reorganization or other change in ownership or control of the
Company.
G. No amounts accrued or earned under the Plan shall actually be
funded, set aside or to otherwise segregated prior to actual payment. The
obligation to pay the bonuses which actually become due and payable under the
Plan shall at all times be an unfunded and unsecured obligation of the Company.
Participants shall have the status of general creditors and shall look solely
and exclusively to the general assets of the Company for payment.
H. Any disputes between the Company and a participant arising out of
or relating to the Plan, his or her entitlement to any bonus award hereunder or
the amount or method of payment of such award shall be settled exclusively by
binding arbitration to be held in the county in which the participant is (or has
most recently been) employed by the Company (or any subsidiary) at the time of
such arbitration. The arbitration proceedings shall be governed by (i) the
national rules of the American Arbitration Association then in effect for the
resolution of employment disputes and (ii) the Federal Arbitration Act. The
decision of the arbitrator shall be final and binding on the parties to the
arbitration and shall be in lieu of the rights those parties may otherwise have
to a jury trial.
I. The actual performance objectives for the Plan Year, as
established by the Plan Administrator in accordance with the terms of the Plan,
shall be set forth in attached Schedule I.
EXHIBIT 10.2
SEPARATION AGREEMENT AND RELEASE OF ALL CLAIMS
This Separation Agreement and Release of All Claims (the "AGREEMENT") is
made by and between Andrew J. Pease ("Executive") and Broadcom Corporation, a
California corporation (the "Company"), effective as of June 1, 2006.
RECITALS
A. Executive is the Company's Senior Vice President, Global Sales.
B. Executive and the Company mutually desire to end Executive's
employment by the Company and to enter into a consulting relationship for a
limited period of time following the termination of Executive's employment.
AGREEMENTS
Based upon the foregoing, and in consideration of the mutual promises
contained in this Agreement, Executive and the Company (for its benefit and the
benefit of the other Company Parties as defined below) agree as follows:
1. Employment Status. Executive hereby resigns as Senior Vice President,
Global Sales effective June 1, 2006 and his status in such position shall end
effective that date. Executive shall continue full time employment with the
Company (but not in the status of an officer) until June 30, 2006 (June 30, 2006
is referred to herein as the "Termination Date"). Following the Termination
Date, Executive will be engaged as a consultant under the provisions of Section
2 hereof and Appendix A attached hereto ("Appendix A").
2. Engagement as a Consultant.
2.1 Executive and Company agree that Company will engage
Executive as a consultant from the Termination Date until October 28, 2007
(unless earlier terminated) (the "Consulting Period") on the terms and
conditions set forth in this Section 2 and in Appendix A. During the Consulting
Period, the Company may share with Executive confidential information about its
business, including without limitation trade secrets, technology and product
roadmaps, legal theories, litigation strategies, and other technical, financial
business and legal information. Executive and the Company agree that Executive's
rendering services, without the Company's consent, to any entity that the
Company reasonably and in good faith determines is competitive with the Company
(a "Competitor"), would conflict with Executive's duties as a consultant.
Therefore, during the Consulting Period, Executive will not, without the
Company's written consent, render services to any Competitor (any such rendering
of services is referred to herein as "Prohibited Employment"). The parties shall
abide by the procedure set forth in Appendix A to determine whether any proposed
employment by Executive would constitute Prohibited Employment. If Executive
engages in Prohibited Employment prior to October 28, 2007, the Consulting
Period shall immediately terminate. Subject to the restrictions set forth
herein, Executive may render services to an entity other than a Competitor
during the Consulting Period, and may, with the written consent of the Company,
render services to a Competitor during the Consulting Period (each, "Permitted
Employment"). Engagement in Permitted Employment
1
shall not cause the Consulting Period to cease. Executive may terminate the
Consulting Period at any time prior to October 28, 2007 by providing written
notice of termination to the Company.
2.2 Commencing on the Termination Date and continuing until the
earlier of (i) June 30, 2007, or (ii) the early termination of the Consulting
Period under Section 2.1, and subject to Executive's continued compliance with
all of the terms and conditions of this Agreement: (a) Executive shall be paid
consulting fees at the annual rate of Two Hundred Fifty Thousand Dollars
($250,000), less appropriate withholdings, payable in accordance with the
Company's regular payroll practices, and (b) Executive shall continue to receive
life insurance and long-term disability insurance offered to the Company's
employees generally on the same terms as all other executive employees.
2.3 Executive shall continue to be covered by the Company's
medical, dental and vision benefits until June 30, 2007. Coverage of Executive
pursuant to the continued coverage requirements of section 601 et. seq. of the
Employee Retirement Income Security Act of 1974, as amended (commonly known as
"COBRA coverage") shall commence July 1, 2007. The Company shall pay the cost of
Executive's COBRA coverage until June 30, 2008, and Executive shall be
responsible for the cost of such coverage commencing July 1, 2008 and continuing
until COBRA coverage ceases. Notwithstanding the foregoing, if the Executive
engages in either Prohibited Employment or Permitted Employment before July 1,
2008, (i) any remaining obligation of the Company to provide health benefit
coverage (other than any COBRA coverage then required) shall immediately cease,
and (ii) the Company's obligation to pay the cost of COBRA coverage shall
immediately cease.
2.4 Unless the Executive engages in Prohibited Employment, if
permitted under the terms of the Company's 401(k) plan, Executive will be
eligible to continue participation in such plan until June 30, 2007 and be
eligible for allocation of the 2006 Company matching contribution under such
plan.
2.5 Executive shall not accrue any other benefits including
without limitation, vacation, flexible spending, leave entitlement, severance or
other compensation after the Termination Date.
2.6 If the Executive has not engaged in Prohibited Employment on
or before the date the Company pays bonuses to other executives of the Company
with respect to services in 2006 (generally expected to occur in the first
quarter of 2007), on that date the Company shall pay Executive a pro-rated bonus
equal to the product of (i) $100,000 times (ii) a fraction, the numerator of
which is the number of days in 2006 prior to the Termination Date, and the
denominator of which is 365. No bonus shall be payable with respect to any
period accruing after the Termination Date.
2.7 Until the earlier of (i) the last day of the Consulting
Period, or (ii) the "Applicable Equity Vesting Date," as defined below,
Executive will be deemed to be in the continued service of the Company for
purposes of vesting in awards of options to purchase shares of the Company's
common stock or restricted stock units that were in existence as of the
Termination Date (collectively, the "Outstanding Awards") and provided to
Executive pursuant to any plan of the Company or any stock option agreement or
restricted stock unit award
2
agreement between Executive and the Company (collectively, the "Equity
Agreements"). Therefore, in accordance with the terms of the applicable Equity
Agreements, the Outstanding Awards will continue to vest (to the extent not
previously vested) until the Applicable Equity Vesting Date (but in no event
beyond the maximum term of the particular option or restricted stock unit, as
applicable). On the earlier of (x) the last day of the Consulting Period, or (y)
October 28, 2007, Executive will be deemed to have incurred a separation from
service for purposes of each Outstanding Award, and Outstanding Awards that are
vested stock options will remain exercisable for the period of time following
such date provided for in the applicable Equity Agreement (generally an
additional ninety (90) days). The "Applicable Equity Vesting Date" shall mean
(A) with respect to the December, 2003 option grant made to Executive, October
28, 2007, and (B) with respect to all other Outstanding Awards, June 30, 2007.
In addition, Executive relinquishes his Section 16 status when he ceases to be
an officer of the Company on June 1, 2006 and will be removed from the Company's
Blackout List ninety (90) days after the Termination Date. Notwithstanding
Executive's removal from the Blackout List, throughout the term of this
Agreement, Executive may continue to be subject to special blackout windows
provided that the Company determines in good faith that Executive possesses
material inside information at that time.
2.8 The Company shall have grounds for termination of the
Company's obligations under this Agreement ("Termination Grounds") if Executive
(a) violates in any material respect the terms and conditions of Section 2.9,
Section 4.1, Section 5, Section 9, Appendix A or the Confidentiality and
Inventions Assignment Agreement attached as Appendix B, and such violation is
not curable or Executive fails to promptly cure such violation after written
notice from the Company, or (b) engages in Prohibited Employment. If the Company
believes in good faith that Termination Grounds exist, then the Company shall
provide a written notice to Executive setting forth a brief description of the
Termination Grounds it believes exist. If such Termination Grounds are curable
by Executive, then Executive shall have 15 days from the date of such notice to
cure such Termination Grounds. Upon the expiration of such 15-day period (if
such Termination Grounds are curable and have not been cured), or upon providing
written notice of Termination Grounds that are not curable, the Company may
immediately suspend (i) the payment of any consulting fees, (ii) vesting of any
then unvested stock options and restricted stock unit awards, and (iii) the
exercisability of stock options (subject to the post-termination exercise
period, if applicable, as set forth the in each applicable Equity Agreement).
Such suspensions shall be subject to the arbitration procedure set forth in
Section 10.1. If the arbitrator determines that Termination Grounds exist, then
the Company's obligation to make the suspended payments and provide the
suspended benefits shall terminate without further payment to Executive, and the
Consulting Period shall be deemed to have ended as of the date of the
suspension. If the arbitrator determines that Termination Grounds do not exist,
then the suspension shall be lifted and the suspended payments and benefits
shall be paid or provided to Executive.
2.9 Following the end of the Consulting Period (regardless of
whether the Consulting Period terminated early), upon the reasonable requests of
the Company made from time-to-time, the Executive will provide the Company with
information in the Executive's possession as well as reasonable assistance
regarding any business or legal issues where Executive's knowledge may be
relevant.
3
3. Separate Payment of Vacation. The parties recognize that, apart from
this Agreement and except for the payment of accrued but unused vacation pay,
the Company is not obligated to provide Executive with any of the benefits set
forth hereunder. Executive will be paid for all accrued but unused vacation,
without regard to his execution of this Agreement, on or before the Termination
Date.
4. Confidentiality Agreement and Disclosure by Company.
4.1 Executive agrees to continue to abide by the terms and
provisions of the Confidentiality and Invention Assignment Agreement dated July
10, 2003 signed by Executive (the "Confidentiality Agreement"), a copy of which
is attached as Appendix B to this Agreement. Nothing in this Agreement shall
affect the scope, enforceability, term or any other provision of the
Confidentiality Agreement.
4.2 The Company and Executive agree that the Company may
disclose the existence, terms or provisions of, or any other information
concerning, this Agreement to the extent the Company determines in its sole
judgment that disclosure is required by law or is or otherwise appropriate.
5. Mutual Non-Disparagement. During the Consulting Period and for one
year after the end of the Consulting Period: (a) Executive agrees that he will
not disparage the Company or any past or present (as of the time any statement
is made) officer, director or employee of the Company or otherwise make
statements -- whether or not such statements are thought to be (or are) true,
and whether or not such statements are made publicly, privately, subject to
confidentiality obligations or otherwise -- which could tend to harm or injure
the personal or business reputation or business, of the Company or of any past
or present officer, director or employee of the Company, and whether or not such
statements are made to any present or former employee or director of the Company
or to someone outside of the Company. The Company agrees that it will instruct
its "named executive officers," as defined in 17 CFR 229.402(a)(3) to not,
during the Consulting Period and for one year after the end of the Consulting
Period, disparage Executive or otherwise make statements -- whether or not such
statements are thought to be (or are) true, and whether or not such statements
are made publicly, privately, subject to confidentiality obligations, or
otherwise -- which could tend to harm or injure the personal or business
reputation, or business, of Executive, and whether or not such statements are
made to any present or former employee or director of the Company or to someone
outside of the Company.
Without limiting the generality of this Section 5, in response to any
inquiries or in connection with any explanation of the reasons for the end of
Executive's employment with the Company, the parties agree that the Company may
provide a response substantially as follows: "The Company's policy is to just
confirm the date of hire, date of termination, positions held and salary, bonus
and options (without disclosing the number of options)" and the Company may then
provide the foregoing information if requested. If asked, the Company will also
confirm Executive's engagement as a consultant with the Company and his current
salary and benefits. After the end of his employment, the Company may also state
that Executive resigned and voluntarily ended his employment with the Company.
4
6. Release and Waiver.
6.1 Release of Company Parties. Except for the obligations of
the Company as provided in this Agreement, Executive, on behalf of himself and
his successors, heirs, assigns, related individuals and entities (if any),
hereby fully and forever releases and discharges Company and any of its parent
corporations, subsidiaries (whether or not wholly-owned), brother-sister
corporations, and all other affiliated, related, predecessor or successor
corporations and entities, and each of their respective present and former
officers, representatives, administrators, accountants, attorneys,
investigators, insurers, partners, associates, successors and assigns, in any
and all capacities (including but not limited to the fiduciary, representative
or individual capacity of any released person or entity), and any entity owned
by or affiliated with any of the foregoing (each a "Company Party" and together,
the "Company Parties") from, and covenants not to sue or otherwise institute or
cause to be instituted any legal or administrative proceedings against the
Company or Company Parties with respect to, any matter arising out of or
relating to Executive's employment, or the termination thereof, or any acts of
the Company or any Company Party, including, without limitation, any claims and
causes of action against the Company or any Company Party that relate to conduct
occurring before and up to the date of this Agreement. Moreover, Executive
releases, acquits and discharges the Company and the Company Parties from any
and all rights, actions, claims, demands, costs and expenses (including but not
limited to attorneys fees), contracts, allegations, liabilities, obligations,
debts, damages and causes of action, whether known, suspected or unknown, fixed
or contingent, apparent or concealed, which Executive had or now has or may
claim to have had by reason of any matter or thing at any time up to and
including the date Executive executes this Agreement. The foregoing
notwithstanding, this release shall not extend to claims for indemnification
permitted under common law, the Company's Bylaws or Articles of Incorporation or
the Indemnification Agreement dated June 28, 2003 between Executive and the
Company (the "Indemnification Agreement"), provided, however, that Executive
shall notify the Company in writing within fifteen (15) days of receipt of
notice of any claim subject to such indemnification.
6.2 Acknowledgement and Waiver. Executive understands and agrees
that he is waiving any rights he may have had, now has, or in the future may
have, to pursue any and all remedies available to him individually or on behalf
of others to any claims based on, arising out of, or related to Executive's
employment with, or the termination of Executive's employment with, the Company,
including but not limited to any claims arising from rights under federal,
state, and local laws relating to the regulation of federal or state tax
payments or accounting; federal, state or local laws that prohibit harassment or
discrimination on the basis of race, national origin, religion, sex, gender,
age, marital status, bankruptcy status, disability, perceived disability,
ancestry, sexual orientation, family and medical leave, or any other form of
harassment or discrimination or related cause of action (including but not
limited to failure to maintain environment free from harassment and
retaliation); laws such as workers' compensation laws, which provide rights and
remedies for injuries sustained in the workplace; statutory or common law claims
of any kind, including but not limited to, contract, tort, and property rights,
unfair business practices, breach of contract, breach of implied-in-fact
contract, breach of the implied covenant of good faith and fair dealing,
tortious interference with contract or current or prospective economic
advantage, fraud, deceit, invasion of privacy, unfair competition,
misrepresentation, defamation, wrongful termination, tortious infliction of
emotional distress (whether intentional or negligent), breach of fiduciary duty,
violation of public
5
policy, or any other common law claim of any kind whatsoever; any claims for
severance pay, sick leave, family leave, liability pay, overtime pay, vacation,
life insurance, health insurance, continuation of health benefits, disability or
medical insurance or any other fringe benefit or compensation, including stock
options; any and all rights or claims arising under Title VII of the 1964 Civil
Rights Act, as amended, the California Fair Employment and Housing Act, and any
other state or federal statutes relating to securities, discrimination or
wrongful termination of employment or employment related claims, the Equal Pay
Act of 1963, the Americans with Disabilities Act, California Labor Code Section
1197.5, the Age Discrimination in Employment Act of 1967, as amended, the Civil
Rights Act of 1866, the California Business and Professions Code Section 17200
et seq., the Employee Retirement Income Security Act of 1976 ("ERISA") and any
other laws and regulations relating to employment or the Executive's receipt of
wages, stock, stock options or other compensation or benefits. Executive
represents and warrants that as of the date this Agreement is executed by him,
he has not suffered any work related injuries or illnesses.
6.3 ADEA Waiver. Executive expressly acknowledges and agrees
that by entering into this Agreement, he is waiving any and all rights or claims
that he may have arising under the Age Discrimination Employment Act of 1967, as
amended ("ADEA"), which have arisen on or before the date of execution of this
Agreement. Executive further expressly acknowledges and agrees that: (a) in
return for this Agreement, he will receive consideration beyond that which he
was already entitled to receive before entering into this Agreement; (b) he is
hereby advised in writing by this Agreement to consult with an attorney before
signing this Agreement; (c) he was given a copy of the Agreement on June 1, 2006
and informed that he had twenty-one (21) days within which to consider the
Agreement and that if he wished to execute this Agreement prior to expiration of
such 21-day period, he should execute the Acknowledgement and Waiver attached
hereto as Appendix C; (d) nothing in this Agreement prevents or precludes
Executive from challenging or seeking a determination in good faith of the
validity of this waiver under the ADEA, nor does it impose any condition
precedent, penalties or costs from doing so, unless specifically authorized by
federal law; and (e) he was informed that he has seven (7) days following the
date of execution of this Agreement in which to revoke this Agreement, and this
Agreement will become null and void if Executive elects revocation during that
time. Any revocation must be in writing and must be received by the Company
during the 7-day revocation period. In the event Executive exercises his right
of revocation, neither the Company nor Executive will have any obligations under
this Agreement.
6.4 Tax Treatment. Executive expressly acknowledges and agrees
that the release provided by Executive to the Company herein fully releases any
claim the Executive may have had, now has, or in the future may have with
respect to the Federal, state and local tax treatment of the consideration
provided under this Agreement, including but not limited to claims related to
any taxes or penalties arising under Section 409A of the Internal Revenue Code
or comparable provisions of any state law with respect to the continued
exercisability of stock options following the Termination Date, and without
regard to whether the Executive actually performs or is deemed to have performed
consulting services during the Consulting Period.
6.5 Termination of Special Retention Program. Executive
expressly acknowledges and agrees that the special retention program set forth
in a letter agreement dated November 11, 2004 shall terminate with respect to
Executive as of the date of this Agreement.
6
Executive expressly acknowledges and agrees that he is not now and will not in
the future be entitled to any payments or benefits under the special retention
program, and he expressly waives any rights or claims had, now has, or in the
future may have.
6.6 Mistakes in Fact/Voluntary Consent. Executive expressly and
knowingly acknowledges that, after the execution of this Agreement, he may
discover facts different from or in addition to those that he now knows or
believes to be true with respect to the claims released in this Agreement.
Nonetheless, Executive agrees that this Agreement shall be and remain in full
force and effect in all respects, notwithstanding such different or additional
facts. It is the intention of Executive to fully, finally, and forever settle
and release any and all claims he may have against the Company and the Company
Parties. In furtherance of such intention, the release given in this Agreement
shall be and remain in effect as a full and complete release of such claims,
notwithstanding the discovery and existence of any additional or different
claims or facts. This Agreement is intended, pursuant to the advice of
independently selected legal counsel, to be final and binding between and among
the parties to this Agreement, regardless of any allegations of
misrepresentations, or promises made without the intention of performance, or
concealments of facts, or mistake of fact or law, or of any other circumstances
whatsoever.
In furtherance of Executive's intention, Executive waives any and all
rights or benefits which he or it may have under the provisions of California
Civil Code Section 1542, which provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
[EXECUTIVE] DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR [COMPANY]."
6.7 Follow-up Release. At the end of the Consulting Period, the
Executive shall execute and deliver to the Company the follow-up release
attached hereto as Appendix D.
7. Non-assignment and Absence of Claims. Executive represents and
warrants that he has not assigned or transferred any portion of any claim that
he has or may have to any other person, firm, corporation or any other entity,
and that no other person, firm, corporation, or other entity has any lien or
interest in any such claim. Executive represents that he has not filed any
claims, charges, complaints or actions against the Company or any Company
Parties, or assigned to anyone any charges, complaints, claims or actions
against the Company or any Company Parties. Executive also agrees that if any
claim is prosecuted in his name before any court or administrative agency that
he waives and agrees not to take any award or other damages from such suit. This
provision, however, shall apply only to the extent permissible under applicable
law.
8. No Admission of Liability. The parties acknowledge and covenant that
this Agreement represents a settlement and compromise of any claims Executive
may have against the Company or the Company Parties, and that by entering into
this Agreement, no party admits or acknowledges the existence of any liability
or wrongdoing, all such liability or wrongdoing being expressly denied.
7
9. Return of Company Property. Executive represents and warrants that on
or before June 30, 2006 he will deliver, to the Company and/or the Company's
counsel, all tangible property of the Company in his possession, custody or
control, including all originals and copies of documents, all documents and
materials, of whatever nature, relating to the Company, its products and/or its
services, and/or Executive's employment with the Company, including without
limitation all datasheets, files, memoranda, emails, records, software, disks,
instructional manuals and other physical or personal property that Executive
received, prepared or helped prepare in connection with his employment with the
Company. Executive further agrees that he will not keep any paper or electronic
copies or excerpts of any of the above items and that he has no property or
other interest in such documents and materials. Such documents as are necessary
for Executive to perform his duties as a consultant during the Consultant Period
shall be provided to Executive by the Company and those documents will be
returned to the Company on or before the termination of the Consulting Period.
10. Confidential Arbitration of Disputes.
10.1 Any controversy, dispute, or claim between the parties to
this Agreement, including without limitation any claim arising out of, in
connection with, or in relation to the formation, interpretation, performance or
breach of this Agreement shall be settled exclusively by expedited arbitration,
before a single arbitrator, in accordance with this Section and the then most
applicable rules of the Judicial Arbitration and Mediation Services (JAMS) in
Orange County, California, or its successor. The hearing and arbitration
proceedings (as well as any resulting judicial proceedings seeking to enforce or
vacate any arbitration award) shall be conducted in as confidential a manner as
is legally permissible and any award and decision of the arbitrator shall be
written in such a way as to protect the confidentiality of information made
confidential by this Agreement or recognized as confidential by the
Confidentiality Agreement. Any demand for arbitration by either party must be
filed within the statute or statutes of limitation that is or are applicable to
the claim(s) relating to the dispute upon which arbitration is sought or
required. The arbitration shall be administered by JAMS pursuant to its
Comprehensive Arbitration Rules and Procedures if the amount in controversy
exceeds $250,000, or pursuant to its Streamlined Arbitration Rules and
Procedures if the amount in controversy is $250,000 or less. Both parties will
be entitled to conduct discovery in accordance with the rules and procedures as
set forth in the California Code of Civil Procedure. The arbitrator shall have
the same, but no greater, remedial authority as would a court hearing the same
dispute. At the conclusion of the arbitration, the arbitrator shall issue a
written decision that sets forth the essential findings and conclusions upon
which the arbitrator's award or decision is based. Judgment on the award may be
entered in any court having jurisdiction; provided, however, that the
arbitrator's award shall be subject to correction, confirmation or vacation in
accordance with the provisions and standards of applicable law governing the
judicial review of arbitration awards. Notwithstanding the foregoing, either
party may in an appropriate matter apply to a court pursuant to California Code
of Civil Procedure Section 1281.8, or any comparable statutory provision or
common law principle, for provisional relief, including a temporary restraining
order or a preliminary injunction. To the extent permitted by law, the
proceedings and results, including the arbitrator's decision, shall be kept
confidential.
10.2 Right to Take or Forbear From Action. Although all disputes
between the parties are to be resolved pursuant to the dispute resolution
procedure set forth in this Section 10,
8
commencement or exhaustion of the dispute resolution procedure is not
prerequisite to any party taking or forbearing from any action that the party in
good faith believes is consistent with this Agreement. Thus, by way of example
and not limitation, in the event the Company in good faith believes Termination
Grounds exist, the Company may suspend payments and benefits under this
Agreement as set forth in Section 2.8 prior to the commencement or initiation of
the dispute resolution procedure, and if Executive subsequently prevails in the
dispute resolution procedure, Executive will be entitled only to those payments
and benefits that were due to Executive under this Agreement.
11. Miscellaneous Provisions.
11.1 Cooperation and Indemnification. Executive agrees to
cooperate with the Company in connection with any future, potential or currently
pending litigation, including, without limitation, by providing information
within Executive's knowledge to Company and by making himself reasonably
available to testify in any action as reasonably requested by the Company.
11.2 Additional Documents. The parties will execute all such
further and additional documents and undertake all such other actions as shall
be reasonable, convenient, necessary or desirable to carry out the provisions of
this Agreement.
11.3 Notices. Written notices required or permitted to be given
pursuant to this Agreement shall be given as follows:
If to Executive: At the address and facsimile no. set forth on
the signature page of this Agreement.
If to the Company:
Broadcom Corporation
16215 Alton Parkway
P. O. Box 57013
Irvine, CA 92619-7013
Attn: General Counsel
Facsimile No.: (949) 450-0504
Such notice shall be deemed to have been duly given: (i) when delivered
by hand, if personally delivered; (ii) five business days after being deposited
in the U.S. Mail, postage prepaid, if mailed certified mail, return receipt
requested; (iii) one business day after being timely delivered to a
nationally-recognized next-day air courier guaranteeing overnight delivery; (iv)
the date of transmission if sent via confirmed facsimile transmission to the
facsimile number as set forth in this Section or the signature page hereof prior
to 6:00 p.m. in the recipient's time zone on a business day, or (v) the business
day next following the date of transmission if sent via confirmed facsimile
transmission to a facsimile number set forth in this Section or on the signature
page hereof after 6:00 p.m. in the recipient's time zone or on a date that is
not a business day. Change of a party's address or facsimile number may be
designated hereunder by giving notice to all of the other parties hereto in
accordance with this Section 11.3.
9
11.4 Integration. This Agreement constitutes a single,
integrated written contract expressing the entire Agreement of the parties
concerning the subject matter referred to in this Agreement. No covenants,
agreements, representations, or warranties of any kind whatsoever, whether
express or implied in law or fact, have been made by any party to this
Agreement, except as specifically set forth in this Agreement. All prior and
contemporaneous discussions, negotiations, and agreements have been and are
merged and integrated into, and are superseded by, this Agreement; provided,
however, that the Confidentiality Agreement and the Indemnification Agreement
shall remain in full force and effect in accordance with their respective terms
and as provided in Sections 4.1 and 6.1 hereof, respectively.
11.5 Modifications. No modification, amendment, or waiver of any
of the provisions contained in this Agreement, or any future representation,
promise, or condition in connection with the subject matter of this Agreement,
shall be binding upon any party to this Agreement unless made in writing and
signed by each of Executive and the Company.
11.6 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law but if any provision of this Agreement is held to be void,
voidable, invalid, illegal or for any other reason unenforceable, the validity,
legality and enforceability of the other provisions of this Agreement will not
be affected or impaired thereby.
11.7 Non-Reliance on Other Parties. Except for statements
expressly set forth in this Agreement, no party has made any statement or
representation to any other party regarding a fact relied on by the other party
in entering into this Agreement, and no party has relied on any statement,
representation, or promise of any other party, or of any representative or
attorney for any other party, in executing this Agreement or in making the
settlement provided for in this Agreement.
11.8 Negotiated Agreement. The terms of this Agreement are
contractual, not a mere recital, and are the result of negotiations between the
parties. Accordingly, no party shall be deemed to be the drafter of this
Agreement.
11.9 Construction. Whenever the context so requires, the
singular number shall include the plural number and vice versa, and the
masculine gender shall include the feminine (or neuter) gender and vice versa.
11.10 Headings. The descriptive headings and sub-headings of the
several section(s) contained in this Agreement are inserted for convenience only
and shall not control or affect the meaning or construction of any of the
provisions hereof.
11.11 Successors and Assigns. This Agreement shall inure to the
benefit of and shall be binding upon the heirs, successors, and assigns of the
parties hereto and each of them. In the case of the Company, this Agreement is
intended to release and inure to the benefit of any affiliated corporations,
parent corporations, brother-sister corporations, subsidiaries (whether or not
wholly owned), divisions, shareholders, officers, directors, agents,
representatives, principals, employees, and any and all other related
individuals and entities.
10
11.12 Applicable Law. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of California without
taking into account conflict of law principles.
11.13 Counterparts. This Agreement may be executed and delivered
in any number of counterparts or copies ("Counterparts") by the parties to this
Agreement. When each party has signed and delivered at least one Counterpart to
the other party to this Agreement, each counterpart shall be deemed an original
and, taken together, shall constitute one and the same Agreement, which shall be
binding and effective as to the parties to this Agreement. Such delivery may be
made by confirmed facsimile transmission.
11.14 Independent Advice from Counsel. Each of the parties has
received prior independent legal advice from legal counsel of such party's
choice with respect to the advisability of making the settlement provided for in
this Agreement and with respect to the advisability of executing this Agreement.
Each party's attorney has reviewed the Agreement at length, made any desired
changes, and signed the Agreement to indicate that the attorney approved the
Agreement as to form and substance.
11.15 Knowing and Voluntary Agreement. Each party acknowledges
that he or it is entering into this Agreement knowingly and voluntarily after
having had an opportunity to negotiate with regard to the terms of this
Agreement, to receive advice with regard to it, to carefully read and consider
its terms, and to make such investigation of the facts pertaining to the
settlement and this Agreement and of all matters pertaining to this Agreement as
such party deems necessary or desirable.
11
IN WITNESS WHEREOF, the parties hereto and their respective attorneys of
record have approved and executed this Agreement on the dates specified below.
June 2, 2006 THE COMPANY:
BROADCOM CORPORATION, a California corporation
By: /s/ Scott A. McGregor
------------------------------------
Scott A. McGregor
President and Chief Executive Officer
June 2, 2006 EXECUTIVE:
/s/ Andrew J. Pease
------------------------------------
Name: Andrew J. Pease
Address:
----------------------------
----------------------------
Facsimile No.:
----------------------
12
June 2, 2006 AGREED AS TO FORM AND SUBSTANCE:
LAW OFFICE OF ACKERMAN AND KEVORKIAN
By: /s/ Kevin B. Kevorkian
------------------------------------
Print Name: Kevin B. Kevorkian
Title: Attorney
Address:
----------------------------
----------------------------
Facsimile No.:
----------------------
June 2, 2006 AGREED AS TO FORM AND SUBSTANCE:
O'MELVENY & MYERS LLP
By: /s/ Wayne Jacobsen
------------------------------------
Print Name: Wayne Jacobsen
Title: Attorney
Address: 610 Newport Center Drive, #1700
Newport Beach, CA 92660
Facsimile No.: (949) 823-6994
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APPENDIX A
TERMS OF CONSULTANCY
1. This Appendix A sets forth the terms of Executive's engagement as a
consultant to the Company following the Date of Termination, as referred to in
Section 2 of the Separation Agreement and Release of All Claims (the
"Agreement"). Capitalized terms used in this Appendix A have the meanings set
forth in the Agreement.
2. The timing and scope of Executive's services to the Company during
the Consulting Period will be as reasonably determined by the Company. Executive
may provide such services, to the extent feasible, on a basis that avoids
conflict with his obligations to others to whom he is then providing services.
The Company agrees that it will make commercially reasonable efforts to (i)
schedule the dates and times Executive will perform his consulting services
during regular business days and hours, (ii) provide Executive reasonable
advance notice of such schedule, and (iii) accommodate Executive's reasonable
requests regarding such schedule. Executive and the Company acknowledge and
agree that limitations and deadlines concerning the scheduling of Executive's
services may be imposed by the Company as a result of the Company's need to
comply with schedules and deadlines established by persons other than the
Company (such as, by way of example and not limitation, schedules established
pursuant to the order of a judge or magistrate or otherwise pursuant to court
rules). Executive and the Company also acknowledge and agree that extenuating
circumstances, such as the need to comply with schedules and deadlines as
described in the preceding sentence, may limit the Company's ability to provide
advance notice of the dates and times Executive will perform Executive's
consulting services, although the Company will make commercially reasonable
efforts to do so. Without limitation, Executive's consulting services to the
Company may include meetings with the Company's internal and external legal
counsel, review of documents and other evidence and forensic materials,
providing evidence and testimony, and preparing to provide evidence and
testimony, with respect to one or more legal matters involving the Company. The
time Executive will be required to devote to services to the Company during the
Consulting Period will not exceed the limits set forth in paragraph 3 of this
Appendix A.
3. During any twelve-month period within the Consulting Period, without
Executive's consent, Executive will not be required to perform more than 200
hours of consulting services in the aggregate, and during any single calendar
month Executive will not be required to perform more than 17 hours of consulting
services. The monthly limits on the number of hours Executive can be required to
perform consulting services will not apply in any month in which Executive is
providing testimony in any deposition, trial, arbitration or similar proceeding,
or at the Company's request is preparing for such testimony, but the twelve
month limits will still apply. In the event that Executive provides more than
the 200 hours of consulting services required during any twelve-month period
within the Consulting Period, Executive and the Company will agree on the amount
of additional compensation to be paid to Executive for the additional hours
served.
4. It is intended and expected that Executive will provide substantial
consulting services under this Agreement. However, because the precise extent to
which the Company will request Executive's services is not known, it is agreed
that the consideration for Executive's
D-1
consulting services, as set forth in the Agreement, will be payable to Executive
regardless of the actual extent to which the Company requests that Executive
provide consulting services. However, if Executive unreasonably refuses or fails
to provide consulting services requested by the Company consistent with this
Appendix A, or the Consulting Period is terminated early as provided in Section
2 of the Agreement, payment of such consideration will cease.
5. Consistent with Executive's status as a consultant during the
Consulting Period, and to allow the parties to determine if any employment by
Executive would constitute Prohibited Employment, Executive may not render
services to another company without notifying the Company as set forth below.
Executive is free to seek opportunities to render services (as an employee or
otherwise) to another company during the Consulting Period. If Executive accepts
an opportunity to render services to another company during the Consulting
Period, he shall promptly notify the Company in writing. If Executive is
considering an opportunity to render services during the Consulting Period
("Possible Employment"), the Executive may if he so chooses notify the Company
of such Possible Employment; any such notice to be in a writing delivered to the
Company's President and Chief Executive Officer. The Company shall review any
such notice and notify Executive within five (5) business days of the Company's
receipt of such notice whether the Company would regard such Possible Employment
as Prohibited Employment. If the Company's initial advice to Executive is that
the Company would regard the Possible Employment as Prohibited Employment, the
Executive may request that the Company reconsider its initial determination. Any
such request shall be by written notice delivered to the Chairman of the Board
of the Company. The Company shall notify Executive of the results of any such
reconsideration within five (5) business days of the Company's receipt of the
request for reconsideration. Any remaining dispute following such
reconsideration shall be subject to Section 10 of the Agreement. In determining
whether to consent to Executive's employment with a Competitor, the Company will
take into account the extent to which Executive's knowledge related to the
Company could reasonably be expected to adversely affect the Company if
Executive was so employed.
D-2
exv31
EXHIBIT 31
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Scott A. McGregor, President and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on
Form 10-Q
of Broadcom Corporation;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Scott A. McGregor
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 23, 2007
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Bruce E. Kiddoo, Vice President and Acting Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on
Form 10-Q
of Broadcom Corporation;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Bruce E. Kiddoo
Vice President and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 23, 2007
exv32
EXHIBIT 32
The following certifications are being furnished solely to
accompany the Report pursuant to 18 U.S.C.
§ 1350, and pursuant to SEC Release
No. 33-8238
are being furnished to the SEC rather than
filed either as part of the Report or as a separate
disclosure statement, and are not to be incorporated by
reference into the Report or any other filing of the Company,
whether made before or after the date hereof, regardless of any
general incorporation language in such filing. The foregoing
certifications shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liabilities of
Section 18 or Sections 11 and 12(a)(2) of the
Securities Act of 1933, as amended.
Certification
of Chief Executive Officer
Pursuant to 18 U.S.C. § 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of Broadcom Corporation (the
Company) hereby certifies, to such officers
knowledge, that:
(i) the accompanying Quarterly Report on
Form 10-Q
of the Company for the quarterly period ended June 30, 2006
(the Report) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as
amended; and
(ii) the information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
Scott A. McGregor
Chief Executive Officer
Date: January 23, 2007
Certification
of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of Broadcom Corporation (the
Company) hereby certifies, to such officers
knowledge, that:
(i) the accompanying Quarterly Report on
Form 10-Q
of the Company for the quarterly period ended June 30, 2006
(the Report) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as
amended; and
(ii) the information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
Bruce E. Kiddoo
Acting Chief Financial Officer
Date: January 23, 2007