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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 000-23993
Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
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California
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33-0480482 |
(State or Other Jurisdiction
of Incorporation or Organization) |
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(I.R.S. Employer
Identification No.) |
16215 Alton Parkway
Irvine, California 92618-3616
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code:
(949) 450-8700
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: Class A common stock
(Title of
class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by a check mark whether the registrant is an
accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the registrant’s common
stock, $0.0001 par value per share, held by non-affiliates
of the registrant on June 30, 2004, the last business day
of the registrant’s most recently completed second fiscal
quarter, was $12,202,995,163 (based on the closing sales price
of the registrant’s common stock on that date). Shares of
the registrant’s common stock held by each officer and
director and each person known to the registrant to own 10% or
more of the outstanding voting power of the registrant have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not a determination
for other purposes.
The registrant has two classes of common stock authorized, Class
A common stock and Class B common stock. The rights, preferences
and privileges of each class of common stock are substantially
identical except for voting rights. Shares of Class B common
stock are not publicly traded but are convertible at any time
into shares of Class A common stock. As of December 31,
2004 there were 273,112,763 shares of Class A common
stock and 57,395,782 shares of Class B common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from
the registrant’s definitive proxy statement (the
“Proxy Statement”) for the 2005 Annual Meeting of
Shareholders to be filed on or before March 29, 2005.
Except with respect to information specifically incorporated by
reference in this Form 10-K, the Proxy Statement is not
deemed to be filed as part hereof.
Broadcom®, the pulse
logo, Blutonium®,
BroadVoice®,
NetXtreme®,
QAMLink®,
QuadSquad®,
ServerWorks®,
SiByte®,
StrataSwitch®,
StrataXGS®,
V-thernet®,
Videocore®,
54gtm,
125 High Speed
Modetm,
AirForcetm,
AirForce
Onetm,
BladeRunnertm,
BroadRangetm,
CryptoNetXtm,
FirePathtm,
InConcerttm,
NetXtreme
IItm,
ROBOswitch-plustm,
ROBO-HStm,
SecureEasySetuptm,
StrataSwitch
IItm,
StrataXGS IIItm
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 tradenames mentioned are the
property of their respective owners.
©2005 Broadcom Corporation. All rights reserved.
BROADCOM CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
CAUTIONARY STATEMENT
All statements included or incorporated by reference in this
Report, other than statements or characterizations of historical
fact, are forward-looking statements. Examples of
forward-looking statements include, but are not limited to,
statements concerning projected net revenue, costs and expenses
and gross margin; our accounting estimates, assumptions and
judgments; the market acceptance and performance of our
products; our ability to retain and hire key executives,
technical personnel and other employees in the numbers, with the
capabilities, and at the compensation levels needed to implement
our business and product plans; the competitive nature of and
anticipated growth in our markets; our ability to achieve
further product integration; the status of evolving technologies
and their growth potential; the timing of new product
introductions; the adoption of future industry standards; our
dependence on a few key customers for a substantial portion of
our revenue; our ability to migrate to smaller process
geometries; manufacturing capacity; our ability to consummate
acquisitions and integrate their operations successfully; the
need for additional capital; inventory and accounts receivable
levels; and our success in pending litigation. These
forward-looking statements are based on our current
expectations, estimates and projections about our industry and
business, management’s 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” at the end of Item 7
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.
PART I
Overview
Broadcom Corporation is a global leader in wired and wireless
broadband communications semiconductors. Our products enable the
convergence of high-speed data, high definition video, voice and
audio at home, in the office and on the go. Broadcom provides
manufacturers of computing and networking equipment, digital
entertainment and broadband access products, and mobile devices
with complete system-on-a-chip and software solutions. Our
diverse product portfolio addresses every major broadband
communications market, and includes solutions for digital cable,
satellite and Internet Protocol (IP) set-top boxes; high
definition television (HDTV); cable and DSL modems and
residential gateways; high-speed transmission and switching for
local, metropolitan, wide area and storage networking; home and
wireless networking; cellular and terrestrial wireless
communications; Voice over Internet Protocol (VoIP) gateway and
telephony systems; broadband network and security processors;
and SystemI/
Otm
server solutions.
Broadcom was incorporated in California in August 1991. Our
principal executive offices are located at 16215 Alton
Parkway, Irvine, California 92618-3616, and our telephone number
at that location is 949.450.8700. Our Internet address is
www.broadcom.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, amendments to those reports and other Securities
and Exchange Commission, or SEC, filings are available free of
charge through our website as soon as reasonably practicable
after such reports are electronically filed with, or furnished
to, the SEC. Our Class A common stock trades on the NASDAQ
National Market® under the symbol BRCM. The inclusion of
our website address in this Report does not include or
incorporate by reference into this Report any information on our
website.
Industry Environment and Our Business
Over the past two decades communications technologies have
evolved dramatically in response to the proliferation of the
Internet and the emergence of new data-intensive computing and
communications applications. These new applications include
high-speed Internet web browsing, online audio and video
communication, high definition television, corporate networking
and information systems, wireless networking, and mobile voice
and data connectivity. This evolution has also changed the ways
in which we communicate. We
can now access and communicate information via wired and
wireless networks through a variety of electronic devices,
including personal computers, digital cable and satellite
set-top boxes, high definition televisions, handheld computing
devices such as personal digital assistants, or PDAs, and
cellular phones. These applications and devices require
increasingly higher processing speeds and information transfer
rates within the computing systems and the data storage devices
that support them and across the network communication
infrastructures that serve them.
This evolution has inspired equipment manufacturers and service
providers to develop and expand existing broadband
communications markets, and has created the need for new
generations of integrated circuits. Integrated circuits, or
chips, are made using semiconductor wafers imprinted with a
network of electronic components. They are designed to perform
various functions such as processing electronic signals,
controlling electronic system functions and processing and
storing data. Today all electronic products use integrated
circuits, and they are essential components of personal
computers, wired and wireless voice and data communications
devices, networking products and home entertainment equipment.
The broadband transmission of digital information over existing
wired and wireless infrastructures requires very sophisticated
semiconductor solutions to perform critical systems functions
such as complex signal processing, converting digital data to
and from analog signals, and switching and routing of packets of
information over Internet Protocol, or IP, based networks.
Solutions that are based on multiple discrete analog and digital
chips generally cannot achieve the cost-effectiveness,
performance and reliability required by today’s broadband
marketplace. These requirements are best addressed by new
generations of highly integrated mixed-signal devices. These
devices combine complex analog, digital, and in many cases,
radio frequency functions onto a single integrated circuit, and
can be manufactured in high volumes using cost-effective process
technologies.
Target Markets and Broadcom® Products
We design, develop and supply a diverse portfolio of products
targeted to every significant broadband communications market.
Our semiconductor solutions are ubiquitous, embedded in cable
and DSL modems and digital set-top boxes in the home, networking
equipment in the enterprise, wireless-enabled laptop and desktop
computers and advanced PDAs and cellular phones, among other
wired and wireless equipment.
The following is a brief description of each of our target
markets and the silicon solutions that we provide for each
market.
Unlike traditional dial-up modems that provide online access
through the public telephone system, cable modems provide users
high-speed Internet access through a cable television network.
Although cable networks were originally established to deliver
television programming to subscribers’ homes, cable
television operators have generally upgraded their systems to
support two-way communications, high-speed Internet access and
telecommuting through the use of cable modems. These modems are
designed to achieve downstream transmission speeds of up to
43 megabits per second, or Mbps (North American standard),
or 56 Mbps (international standard), and upstream
transmission to the network at speeds of up to 30 Mbps. The
speeds achieved by cable modems are nearly 1,000 times
faster than the fastest analog telephone modems, which transmit
downstream at up to 56 kilobits per second, or Kbps, and
upstream at up to 28.8 Kbps. Cable modems typically connect
to a user’s PC through a standard 10/ 100BASE-T Ethernet
card or Universal Serial Bus, also known as a USB, connection. A
device called a cable modem termination system, or CMTS, located
at a local cable operator’s network hub, communicates
through television channels to cable modems in subscribers’
homes and controls access to cable modems on the network.
The cable industry’s adoption of an open standard, the Data
Over Cable Service Interface Specification, commonly known as
DOCSIS®, has made possible interoperability among different
manufacturers’ cable modems and CMTS equipment used by
different cable networks. The first specification,
DOCSIS 1.0, was adopted in 1997 and enabled the
cost-effective deployment of cable modems. In 1998 the
DOCSIS 1.1 specification was
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announced. The new specification enhanced DOCSIS 1.0 to
include support for cable telephony using VoIP technology,
streaming video and managed data services. In 2002
DOCSIS 2.0 was approved. DOCSIS 2.0 adds support for
higher upstream transmission speeds of up to 30 Mbps and
more symmetric IP services, and provides extra capacity for
cable telephony.
The high speeds of today’s cable modems can enable an
entirely new generation of multimedia-rich content over the
Internet and allow cable operators to expand their traditional
video product offerings to include data and telephone services.
The adoption of cable modem services and the continued
proliferation of homes with multiple PCs have also generated the
need for residential networking. Cable television operators have
recognized the opportunity to include this feature in the
equipment they utilize for cable modem services through either
home telephone line or wireless solutions, and the cable
industry has created a specification called
CableHometm
that defines how a home intranet interoperates with a cable
operator’s Internet service.
We offer integrated semiconductor solutions for cable modems and
cable modem termination systems. We currently have a leading
market position in both equipment areas, with an extensive
product offering for the high-speed, two-way transmission of
voice, video and data services to residential customers. We
offer a complete system-level solution that not only includes
integrated circuits, but also reference design hardware and a
full software suite to support our customers’ needs and
accelerate their time to market.
Cable Modem Solutions. All of our cable modem chips are
built around our QAMLink® DOCSIS-compliant transceiver and
media access controller, or MAC, technologies. These
technologies enable downstream data rates up to 56 Mbps and
upstream data rates up to 30 Mbps and are compliant with
DOCSIS versions 1.0, 1.1 and 2.0. These devices
provide a complete DOCSIS system solution in silicon, enabling
quality of service to support constant bit rate services like
VoIP and video streaming.
Residential Broadband Gateway Solutions. The levels of
integration and performance that we continue to achieve in our
cable modem chips are reducing the cost and size of cable modems
while providing consumers with easy to use features and seamless
integration to other transmission media. As a result, cable
modem functionality is evolving into a small silicon core that
can be incorporated into other consumer devices for broader
distribution of IP-based services throughout the home. Broadcom
offers residential broadband gateway solutions that bring
together a range of capabilities, including those for cable
modems, digital set-top boxes, home networking, VoIP and
Ethernet connectivity. These products allow cable operators
worldwide to provide residential broadband gateways capable of
delivering digital telephone service via the
PacketCabletm
specification, IP video, and cable modem Internet services,
as well as data home networking over in-home Ethernet or
wireless networks.
CMTS Solutions. We have a complete end-to-end
DOCSIS 1.0, 1.1 and 2.0 compliant cable modem
semiconductor solution for both head-end and subscriber
locations. Our CMTS chipset consists of downstream and upstream
physical layer, or PHY, devices and a DOCSIS MAC. This cable
modem termination system enables the exchange of information to
and from the subscriber location, making it a key element in the
delivery of broadband access over cable.
Digital subscriber line technologies, commonly known as DSL,
represent a family of broadband technologies that use a greater
range of frequencies over existing telephone lines than
traditional telephone services. This provides greater bandwidth
to send and receive information. DSL speeds range from
128 Kbps to 52 Mbps depending upon the particular DSL
standard and the distance between the central office and the
subscriber. These data rates allow local exchange carriers to
provide, and end users to receive, a wide range of new broadband
services.
DSL technology has a number of standards or line codes used
worldwide. We support all standards-based line codes, such as
asymmetric DSL, or ADSL, ADSL2, ADSL2+ and very-high-speed DSL,
or VDSL, including the standard Annexes used in North America,
Europe, Japan and China. In addition, we provide end-to-end
technology, with solutions designed for both customer premises
equipment, or CPE, and central office applications. Our DSL
technologies enable local exchange carriers and enterprise
networking vendors to deliver
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bundled broadband services, such as digital video, high-speed
Internet access, VoIP, video teleconferencing and IP data
business services, over existing telephone lines.
DSL Modem and Residential Gateway Solutions. For DSL CPE
applications, we provide products that address the wide variety
of local area network, or LAN, connectivity options, including
Ethernet, USB-powered solutions, VoIP-enabled access devices and
IEEE 802.11 wireless access points with multiple Ethernet
ports. These solutions also provide a fully scalable
architecture to address emerging value-added services such as
in-home voice and video distribution. Wide area network
connectivity is provided using integrated, standards-compliant
PHY technology.
DSL Central Office Solutions. We provide highly
integrated semiconductor solutions for DSL central office
applications as well. Our
BladeRunnertm
high-density central office DSL chipset supports all worldwide
DSL standards using our proprietary
Firepathtm
64-bit digital signal processor. We believe these solutions will
enable equipment manufacturers of digital subscriber line access
multiplexers, or DSLAMs, and next generation digital loop
carriers to offer a significant increase in the number of DSL
connections that can be supported within telecommunication
companies’ tight heat, power and space constraints. We also
provide the inter-networking software that is enabling DSLAM
technology to transition from Asynchronous Transfer Mode to
Internet Protocol.
VDSL Solutions. For VDSL applications, we offer our
QAM-based V-thernet® product family, which supports
Ethernet transport over standard telephone wires and is
instrumental in developing standards and products for
next-generation VDSL2 applications.
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Digital Cable, Direct Broadcast Satellite Set-Top Boxes
and Digital Television |
The last decade has seen rapid growth in the quantity and
diversity of television programming. Despite ongoing efforts to
upgrade the existing cable infrastructure, an inadequate number
of channels exist to provide the content demanded by consumers.
In an effort to increase the number of channels and provide
higher picture quality, cable service providers began offering
digital programming in 1996 through the use of new digital cable
set-top boxes. These digital cable set-top boxes facilitate
high-speed digital communications between a subscriber’s
television and the cable network. Digital cable set-top boxes
are currently able to support downstream transmission speeds to
the subscriber of up to 43 Mbps (North American standard)
or 56 Mbps (international standard), and several hundred
MPEG-2 or MPEG-4 advanced video coding compressed digital
television channels.
Direct broadcast satellite, or DBS, is the primary alternative
to cable for providing digital television programming. DBS
broadcasts video and audio data from satellites directly to
digital set-top boxes in the home via dish antennas. Due to the
ability of DBS to provide television programming where no cable
infrastructure is in place, we believe that the global market
for DBS set-top boxes will outpace the market for cable set-top
boxes.
The Federal Communications Commission has stated that
traditional terrestrial broadcast stations will be required to
broadcast in digital format in the future. Currently, the FCC is
targeting 2007 for this mandated digital conversion. This
conversion will ultimately require all television sets that are
13 inches or larger, DVD players and video cassette
recorders to incorporate an HDTV receiver. We believe this
conversion to digital broadcasting will create demand for new
digital cable and satellite set-top boxes and digital television
receivers. In addition, manufacturers continue to develop and
introduce new generations of digital cable and satellite set-top
boxes that incorporate enhanced functionalities, such as
Internet access, personal video recording, or PVR, video on
demand, interactive television, HDTV, 3-D gaming, audio players
and various forms of home networking.
TV manufacturers also plan to incorporate digital cable-ready
capability into television sets for the North American market by
integrating today’s cable set-top box functionality
directly into TV sets. The manufacturers of TVs, through their
trade association, the Consumer Electronics Association, and in
cooperation with North American cable operators, have created an
industry specification called the “plug-n-play”
agreement. This agreement and its associated specification
define how to design digital cable-ready TVs for connection into
the North American cable infrastructure.
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Cable-TV Set-Top Box Solutions. We offer a complete
silicon platform for the digital cable-TV set-top box market.
These highly integrated chips give manufacturers a broad range
of features and capabilities for building standard digital
cable-TV boxes for digital video broadcasting, as well as
high-end interactive set-top boxes. These high-end set-top boxes
merge high-speed cable modem functionality with studio-quality
graphics, text and video for both standard definition
television, or SDTV, and HDTV formats.
Our cable-TV set-top box silicon consists of front-end
transceivers with downstream, upstream and MAC functions,
single-chip cable modems, advanced 2D/3D video-graphics encoders
and decoders, radio frequency television tuners based on
complementary metal oxide semiconductor, or CMOS, process
technology, and digital visual interface chipsets. These
cable-TV set-top box chips support most industry transmission
and television standards, enabling universal interoperability
and easy retail channel distribution. Peripheral modules
incorporated into front-end devices also provide support for
common set-top box peripheral devices, such as infrared remotes
and keyboards, LED displays and keypads.
Our chips provide a comprehensive silicon platform for high-end
interactive set-top boxes, supporting the simultaneous viewing
of television programming with Internet content capability in
either HDTV or SDTV format. This capability offers consumers a
true interactive environment, allowing them to access Internet
content while watching television. By adding our home networking
and VoIP technologies, these set-top boxes can also support the
functions of a residential broadband gateway for receiving and
distributing digital voice and data services throughout the home
over Ethernet or wireless networking. In addition, our set-top
box semiconductor solutions incorporate PVR functionality. This
allows viewers to watch and record multiple programs and enables
additional features such as selective viewing, fast forward,
fast reverse, skip forward, skip back, and slow motion and
frame-by-frame viewing.
DBS Solutions. By leveraging our extensive investment and
expertise in the cable-TV set-top box market, we have also
developed comprehensive DBS solutions. These products include an
advanced, high-definition video graphics subsystem, which drives
the audio, video and graphic interfaces in DBS set-top boxes and
provides multi-stream control to support PVR capabilities; a
CMOS satellite tuner, which allows our customers to provide
additional channel offerings; front-end receiver chips for
set-top boxes, including an advanced modulation system to
increase satellite capacity with existing satellites; and a
digital visual interface transmitter. In addition, we offer a
complete end-to-end chipset for receiving and displaying HDTV.
This chipset provides television and set-top box manufacturers
with a high performance vestigial side band receiver and a 2D/3D
video-graphics subsystem for SDTV and HDTV displays.
To meet the needs of the growing broadband satellite market, we
have also developed a complete satellite system solution that
enables DBS providers to cost effectively deploy two-way
broadband satellite services, enabling Internet access via
satellite. This solution includes an advanced modulation digital
satellite receiver, digital satellite tuner/receiver and a
high-performance broadband gateway modem, combining the
functionality of a satellite modem, a firewall router and home
networking into a single chip.
Digital TV Solutions. We were an early developer of
advanced television systems committee, or ATSC, demodulators
used for the reception of terrestrial HDTV signals broadcast in
North America. Capitalizing on the FCC HDTV mandate and the
“plug-n-play” agreement, as well as on our extensive
cable-TV set-top box technology portfolio, we have developed a
highly integrated digital TV system-on-a-chip solution. This
digital TV solution, when combined with our existing satellite,
cable or terrestrial demodulators, forms a complete
semiconductor solution for HDTV delivery platforms, including
satellite, cable or terrestrial set-top boxes and integrated
high definition televisions. Our integrated HDTV solution will
allow television manufactures to develop digital cable-ready
televisions that connect directly to the North American cable
infrastructure without the need for an external set-top box.
Local area networks, or LANs, consist of different types of
equipment, such as servers, workstations and desktop and laptop
computers, interconnected by copper, fiber or coaxial cables
utilizing a common networking
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protocol, generally the Ethernet protocol. Ethernet scales in
speed from 10 Mbps to 10 gigabits per second, or Gbps,
providing both the bandwidth and scalability required in
today’s dynamic networking environment. As the volume and
complexity of network traffic continues to increase,
communications bottlenecks have developed in corporate LANs. As
a result, new technologies such as Gigabit Ethernet, a
networking standard that supports data transfer rates of up to
one Gbps, and the 10 Gigabit Ethernet standard, which supports
data transfer rates of up to 10 Gbps, are replacing older
technologies such as Fast Ethernet, which supports data transfer
rates of up to 100 Mbps, and 10BASE-T Ethernet, which
supports data transfer rates of 10 Mbps.
Gigabit Ethernet is emerging as the predominant networking
technology for desktop and laptop computers. As Gigabit Ethernet
is deployed to desktop and laptop computers, we expect server
and backbone connections to continue to migrate to the new 10
Gigabit Ethernet standard. We further expect the continued use
of switch connections in place of legacy repeater connections.
Switches not only have the ability to provide dedicated
bandwidth to each connection, but also provide routing
functionality and possess the intelligence to deal with
differentiated traffic such as voice, video and data. We
anticipate that a significant portion of the installed base of
10/100BASE-T Ethernet switches as well as network interface
cards, or NICs, will be upgraded to faster technologies.
Our 10/100 Mbps Ethernet and Gigabit Ethernet transceivers,
controllers and switches are integrated, low-power semiconductor
solutions for servers, workstations, desktop and laptop
computers, VoIP phones and wireless access points that enable
the high-speed transmission of voice, video and data services
over the Category 5 unshielded twisted-pair copper wiring widely
deployed in enterprise and small office networks. We also offer
10 Gigabit Ethernet transceivers for network infrastructure
products. These high-speed connections are enabling users to
share Internet access, exchange graphics and video
presentations, receive VoIP and video conferencing services, and
share peripheral equipment, such as printers and scanners. We
also incorporate intelligent networking functionality into our
devices, enabling system vendors to deploy enhanced classes of
services and applications, typically found only in the core of
the network, to every corporate desktop.
Digital Signal Processing Communication Architecture. Our
complex Ethernet transceivers are built upon a proprietary
digital signal processing, or DSP, communication architecture
optimized for high-speed enterprise network connections. Our DSP
silicon core enables interoperability and robust performance
over a wide range of cable lengths and operating conditions, and
delivers performance of greater than 250 billion operations
per second. This proprietary DSP architecture facilitates the
migration path to smaller process geometries and minimizes the
development schedule and cost of our transceivers. It has been
successfully implemented in .5, .35, .25, .18 and .13 micron
CMOS processes, and in chips with one, four, six and eight ports.
Fast Ethernet and Gigabit Ethernet Transceivers. Our
10/100 Ethernet transceiver product line ranges from single-chip
10/100 Ethernet transceivers to single-chip octal 10/100
Ethernet transceivers. These devices allow information to travel
over standard Category 5 copper cable at rates of 10 Mbps
and 100 Mbps. Our Gigabit Ethernet transceivers are
enabling manufacturers to make equipment that delivers data at
Gigabit speeds over Category 5 cabling. We believe this
equipment can significantly upgrade the performance of existing
networks without the need to rewire the network infrastructure
with fiber or enhanced copper cabling. Additionally, we have
developed a family of semiconductor solutions incorporating four
transceivers on a single chip optimized for high-port-density
Gigabit Ethernet switches and routers. Our QuadSquad®
transceivers greatly reduce system costs by simplifying typical
high-density board designs, further facilitating the deployment
of Gigabit Ethernet bandwidth to the desktop.
Our Gigabit transceivers are driving the market toward lower
power, smaller footprint solutions, making it easier and less
expensive to build 10/100/1000 Ethernet NICs, switches, hubs and
routers and to put networking chips directly on computer
motherboards in LAN on motherboard, or LOM, configurations. We
plan to continue to incorporate additional functionality into
all of our transceivers, providing customers with advanced
networking features, on-chip and cable diagnostic capabilities
and higher performance capabilities.
10 Gigabit Ethernet Transceivers. We have developed a
family of 10 Gigabit Ethernet CMOS transceivers. When combined
with serial 10 Gigabit optics, these devices can simultaneously
transmit and receive at 10 Gbps data rates over 100 kilometers
of existing single mode optical fiber. A 10 Gigabit Ethernet
link over such distances extends the reach of Ethernet into
local, regional and metropolitan fiber optic networks. We
believe that
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significant cost, performance and latency advantages can be
realized when the Ethernet protocol and other associated quality
of service capabilities are available in these network domains.
We anticipate that convergence around 10 Gigabit Ethernet will
allow massive data flow from remote storage sites across the
country over the metropolitan area network, or MAN, and into the
corporate LAN, without unnecessary delays, costly buffering for
speed mismatches or latency, or breaks in the quality of service
protocol.
SerDes Technology and Products. We have developed an
extensive library of Serializer/ Deserializer, or SerDes, cores
for Ethernet, storage and telecommunications network
infrastructures. The technology is available in stand-alone
SerDes devices or integrated with our standard and custom
products. New generations of SerDes architectures provide
advanced on-chip diagnostic intelligence to allow system
designers to monitor, test and control high-speed serial links
for signal integrity and bit error rate performance to reduce
development cycles and costly field maintenance support.
Gigabit Ethernet Controllers. Built upon five generations
of Gigabit Ethernet MAC technology, our NetXtreme® family
of Gigabit Ethernet controllers supports peripheral component
interconnect, or PCI®, PCI-X® and PCI Express®
local bus interfaces for use in NICs and LOM implementations.
The NetXtreme family includes comprehensive solutions for
servers, workstations, and desktop and laptop computers. These
devices incorporate an integrated Gigabit Ethernet PHY
transceiver and are provided with an advanced software suite
available for a variety of operating systems. The NetXtreme
architecture also features a processor-based design that enables
advanced management software to run in firmware so it can be
remotely upgraded through simple downloads. In 2004 Broadcom
introduced the
NetXtreme IItm
family of Ethernet controllers. The NetXtreme II family is
comprised of converged network interface controllers that are
designed to improve server performance by integrating a TCP/ IP
offload engine, remote direct memory access, iSCSI storage and
remote management. NetXtreme II controllers simultaneously
perform storage networking, high-performance clustering,
accelerated data networking and remote system management
pass-through functions. The entire NetXtreme product family is
fabricated in a .13 micron or .18 micron CMOS process.
Ethernet Switches. We offer a broad switch-on-a-chip
product line ranging from low-cost, unmanaged and managed, OSI
Layer 2 eight port switch chips to high-end managed, Layer 3
through Layer 7 enterprise class switch chips.
Our
ROBOswitch-plustm
product family consists of Layer 2+ switch chips supporting
five, eight, 16 and 24 port 10/100 Ethernet switches, and our
ROBO-HStm
product family supports single-chip networking solutions for
Layer 2+ Gigabit Ethernet configurations of four, five, eight,
16 and 24 ports. We believe our switch chips make it economical
for the remote office/business office and small office/home
office network markets to have the same high-speed local
connectivity as the large corporate office market. Our highly
integrated family of switch products combines the switching
fabric, MACs, 10/100 and Gigabit Ethernet transceivers, media
independent interface and packet buffer memory onto single-chip
solutions. These chips give manufacturers multiple switch design
options that combine plug and play ease-of-use, scalability,
network management features and non-blocking switching
performance at optimal price points for the remote office and
branch office user. In 2004 we introduced a switch that
integrates 24-port Fast Ethernet physical layer transceivers and
2-port Gigabit Ethernet media access controllers into a single
chip tailored for small-to-medium-sized business networking
applications. The ROBOswitch family includes products for
unmanaged, smart and managed solutions.
Our family of high-end StrataSwitch® products consists of
wire-speed, multi-layer chips that combine multiservice
provisioning capabilities with switching, routing and traffic
classification functionality onto single-chip solutions.
Replacing as many as 10 chips with one, our
StrataSwitch IItm
family of chips incorporates 24 Fast Ethernet and two Gigabit
Ethernet ports with advanced Layer 3 switching and multi-layer
packet classification.
Our StrataXGS® product family provides the multi-layer
switching capabilities of our StrataSwitch II technology
with wire-speed Gigabit and 10 Gigabit Ethernet switching
performance for enterprise business networks. These devices, in
combination with our quad and octal Gigabit Ethernet
transceivers, enable system vendors to build 12, 24 and 48
port multi-layer Gigabit Ethernet stackable switches, supporting
systems with up to 1,536 Gigabit Ethernet ports. These
multi-layer switches are capable of receiving, prioritizing and
forwarding packets of voice, video and data at high speeds over
existing corporate networks. The StrataXGS family also
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enables advanced network management capabilities in the
switching infrastructure to track different data flows and
monitor or control bandwidth on any one of these flows. This
results in a more intelligent use of network resources and
enables a whole new set of network service applications that
require high bandwidth, reliable data transmission, low latency
and advanced quality service features such as streaming video
and VoIP. In addition, our
StrataXGS IIItm
product family incorporates advanced features such as IPv6
routing, unified wired and wireless switch management, advanced
security and intrusion detection features, sophisticated traffic
management, and scalable buffer and routing tables for high end
applications.
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Servers, Storage and Workstations |
With the proliferation of data being accessed and sorted by the
Internet and corporate intranets, the demand for servers has
increased substantially. As integral pieces of the overall
communications infrastructure, servers are multiprocessor-based
computers that are used to support users’ PCs over networks
and to perform data intensive PC functions such as accessing,
maintaining and updating databases.
The dramatic increase in the volume of business-critical data
that is generated, processed, stored and manipulated has also
created challenges for organizations, which must find new ways
to efficiently manage the proliferation of stored data.
Traditionally, many companies accessed stored network data using
a direct attached storage architecture in which a single server
controls access to each storage device, and stored data is only
available to applications running on the server directly
connected to the storage device. However, with the proliferation
of stored data, many companies found that this architecture
created bottlenecks in their networks. As a result, many
companies have moved to the use of new architectures such as
networked attached storage, or NAS, and storage area networks,
or SANs. In a NAS system, individual storage devices can be
connected to a network and be made available to various servers
on the network. In a SAN, multiple servers on a network are
connected to a centralized pool of storage data devices using a
switching element to enable data sharing at gigabit speeds. This
shift in architecture has also inspired the creation of new
interface protocols such as serial-ATA, or SATA, iSCSI and
serial attached SCSI, or SAS, to connect computers, peripherals,
storage devices and networks at high speeds.
Unlike mobile and desktop PCs, which are dominated by central
processing units, or CPUs, server, storage and workstation
platforms require highly-tuned core logic to provide high
bandwidth, high performance and the reliability, availability
and scalability that customers demand. The Internet has created
a new market for servers, storage and workstation platforms as
users access data and entertainment stored on servers from their
PCs, handheld computers and wireless handsets.
Our SystemI/ O semiconductor solutions act as the essential
conduits for delivering high-bandwidth data in and out of
servers, and coordinating all input/output, or I/ O,
transactions within server, storage and workstation platforms,
including among external I/ O devices, the main system memory
and multiple CPUs.
We provide core logic technology that manages the flow of data
to and from a system’s processors, memory and peripheral I/
O devices. Our ServerWorks® products are used to design
low-end and mid-range servers with two to four CPUs, as well as
storage, workstation and networking platforms. The bandwidth of
our SystemI/ O solutions, both from CPU to memory and memory to
I/ O subsystems such as disk drives or networks, leads the
industry. These products also provide reliability, availability
and serviceability features. The current generation of
ServerWorks SystemI/ O products supports Intel Pentium® 4
processors, which run at speeds beyond 2.4 GHz, and
provides memory bandwidth of up to five gigabytes per second and
I/ O bandwidth of up to four gigabytes per second. However, in
response to the unique competitive dynamics within the Intel
processor-based server I/ O chipset market, in the second half
of 2003 we announced that we planned to actively diversify our
ServerWorks products beyond Intel-based platforms. In 2004 we
entered into an agreement with Advanced Micro Devices to provide
core logic chipsets for AMD’s Opteron® product line.
We currently anticipate that the Operton processor-based
chipsets that we have developed under this agreement will be
introduced in 2005.
To date our SystemI/ O chips have been used primarily in servers
sold by major PC server OEMs and motherboard manufacturers;
however, recently we have leveraged our server chipset
technology and our expertise in networking technology into other
expanding markets such as storage and networking. In addition to
developing our own chips for storage platforms, in early 2004 we
acquired a provider of complete enterprise-class,
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redundant array of inexpensive disks, or RAID, software stack to
enable us to deliver complete RAID solutions for local server
storage. RAID is a technology in which data is stored in a
distributed manner across multiple disk drives to enhance fault
tolerance and the ability to survive and recover from a hard
drive failure. RAID provides real-time data recovery, with
uninterrupted access, when a hard drive fails, as well as
increased system uptime and continuous network availability. Our
initial RAID products included highly integrated RAID-on-chip
and RAID-on-motherboard solutions for entry-level and mid-range
server applications, including the software stack to provide our
customers complete validated solutions. During 2004 Broadcom
also introduced two new RAID products based on the emerging SATA
standard. These products are chip-, board- and software-based
and began shipping to value added resellers and systems
integrators in 2004. We also continued to expand our portfolio
of storage products with NAS-on-chip solutions targeted to the
small business and residential user, RAID controllers based upon
the SAS standard, and our converged network interface
controllers that incorporate iSCSI storage as well as a TCP/ IP
offload engine, remote direct memory access, and remote
management.
Metropolitan and Wide
Area Networking
To address the increasing volume of data traffic emanating from
the growing number of broadband connections in homes and
businesses, MANs and wide area networks, or WANs, will have to
evolve at both the transport and switching layers. We believe
that the CMOS fabrication process will be a key technology in
this evolution by enabling the development of smaller optical
modules and system components that cost less, consume less power
and integrate greater functionality.
Electronic components for optical communications are a natural
extension of our large portfolio of high-speed LAN chips, one
that will allow us to provide end-to-end semiconductor solutions
across the WAN, MAN and LAN that increase the performance,
intelligence and cost-effectiveness of broadband communications
networks.
We offer a portfolio of CMOS OC-48 and OC-192 transceiver and
forward error correction solutions, chips for Synchronous
Optical Networks and dense wave division multiplexing, or DWDM,
applications, as well as a serial CMOS transceiver for 10
Gigabit Ethernet applications. Our use of the CMOS process
allows substantially higher levels of integration and lower
power consumption than competitive gallium arsenide, bipolar or
silicon germanium solutions. Our DWDM transport processor
combines an OC-192 transceiver, forward error correction,
performance monitoring logic and G.709 digital wrapper into a
single CMOS chip solution, occupying less than one half the
space and consuming one-third the power of non-integrated
solutions.
In addition, our latest generation of switch devices is designed
for the Metro access and edge markets. These devices feature
support for IPv4 and IPv6, MPLS, Ethernet over MPLS, advanced
quality of service, and sophisticated packet classification and
traffic management. They are also scalable to large systems with
external memory.
The economies of scale derived from the Ethernet protocol have
created emerging markets for Ethernet applications.
Broadcom’s advance switch products are being used in second
and third generation cellular infrastructures, IP DSLAM,
Metro Ethernet, blade servers in data centers, passive optical
networks and residential Ethernet applications. In addition, our
Ethernet transceivers are now being integrated into printers,
gaming consoles, LAN on motherboard applications, audiovisual
equipment and a number of other consumer devices.
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Security Processors and Adapters |
Most corporations today use the Internet for the transmission of
data among corporate offices and remote sites and for a variety
of e-commerce and business-to-business applications. To secure
corporate networks from intrusive attacks and provide for secure
communications among corporate sites and remote users, an
increasing amount of networking equipment will include
technology to establish virtual private networks, or VPNs, which
use the Internet Protocol security, or IPSec, protocol. In
addition to VPNs, secure socket layer, commonly referred to as
SSL, is used to secure sensitive information among users and
service providers for e-commerce applications.
9
Our SSL family of
CryptoNetXtm
high-speed security processors and adapters for enterprise
networks is enabling companies to guard against Internet attacks
without compromising the speed and performance of their
networks. Our PCI 2.2-compliant adapters provide a range of
performance from 800 to 10,000 SSL transactions per second. Our
IPsec processors are built upon a proprietary, scalable silicon
architecture that performs standards-compliant cryptographic
functions at data rates ranging from a few Mbps to 10 Gbps
full duplex. This architecture is being deployed across all of
our product lines, addressing the entire broadband security
network spectrum from residential applications to enterprise
networking equipment. This scalable architecture allows us to
develop standalone security products for very high-speed
networking applications and to integrate the IP security
processor core into lower speed solutions for consumer products,
such as cable and DSL modem applications.
Broadband processors are high performance devices enabling
high-speed computations that help identify, optimize and control
the flow of data within the broadband network. The continued
growth of IP traffic, coupled with the increasing demand
for new and improved services and applications such as security,
high-speed access and quality of service, is placing additional
processing demands on next-generation networking and
communications infrastructures. From the enterprise to access
network to the service provider edge, networking equipment must
be able to deliver wire-speed performance from the OC-3
standard, which transmits data at 155 Mbps, through the
OC-192 standard, which transmits data at 10 Gbps, as
well as the scalability and flexibility required to support
next-generation services and features. In the enterprise and
data center markets, server and storage applications require
high computational performance to support complex protocol
conversions, and services such as virtualization. With the
migration from second generation cellular mobile systems, or 2G,
to the third generation cellular mobile systems, or 3G, networks
and mobile infrastructure equipment must be able to support
higher bandwidth rates utilizing low power resource levels.
Leveraging our expertise in high-performance, low-power very
large scale integration design, we have developed a family of
high performance, low power processor solutions designed
specifically to meet the needs of next-generation networks. Our
SiByte® family of processors delivers four key features
essential for today’s embedded broadband network
processors: very high performance, low power dissipation, high
integration of network-centric functions, and programmability
based on an industry-standard instruction set architecture. At
the heart of the SiByte family of processors is the SB-1 core, a
MIPS® 64-bit superscalar CPU capable of operating at
frequencies of 400 MHz up to 1.2 GHz. These processors
provide customers with a solution for high-speed network
processing, including packet classification, queuing, forwarding
and exception processing for wired and wireless networks. They
enable complex applications such as deep content switching,
routing and load balancing to be performed at wire speed. Our
devices are also being designed for utilization in the fast
growing network storage market, including network attached
storage, storage area networking and RAID applications. Our
general purpose processors are ideal for the complex protocol
conversions, virtualization and proxy computations that storage
applications require.
Custom silicon products are devices for applications that
customers are able to semi-customize by integrating their own
intellectual property with our proprietary intellectual property
cores. We have successfully deployed such devices into the LAN,
WAN and PC markets. Our typical semi-custom devices are complex
mixed-signal designs that leverage our advanced design processes.
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Mobile & Wireless Networking |
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Wireless Local Area Networking |
Wireless local area networking, also known as wireless LAN or
Wi-Fi® networking, allows equipment on a local area network
to connect without the use of any cables or wires. Wireless
local area networking adds the convenience of mobility to the
powerful utility provided by high-speed data networks, and is a
natural extension of broadband connectivity in the home and
office.
10
The first widely adopted standard for Wi-Fi technology was the
IEEE 802.11b specification, which is the wireless equivalent of
10 Mbps Ethernet, allowing transfer speeds up to
11 Mbps and spanning distances of up to 100 meters.
However, over the past year technology based upon the 802.11g
specification, which provides almost five times the data rate of
802.11b networks, has replaced 802.11b as the mainstream
wireless technology for both business and consumer applications.
The industry has also begun transitioning, although to a lesser
degree, to the 802.11a standard. Wi-Fi technology was first
utilized in applications such as computers and routers, and is
now being embedded into a number of other electronic devices
such as printers, digital cameras, gaming devices, PDAs,
cellular phones and broadband modems.
Our
AirForcetm
wireless LAN product family consists of standards-based
transceiver and wireless network process chipsets and software
that allow PCs and other devices to connect to wireless home or
enterprise networks using 802.11b, 802.11g or 802.11a/g
dual-band technology. Our
54gtm
chipsets represent our implementation of the IEEE 802.11g
wireless LAN standard that preserves full interoperability with
802.11b but provides connectivity at speeds of up to
54 Mbps. In 2003 we introduced our AirForce
Onetm
single-chip 802.11b wireless LAN solution that enables wireless
LAN connectivity in pocket-sized mobile devices such as PDAs,
cellular phones, MP3 players and digital cameras. In 2004
Broadcom introduced the AirForce One single-chip 802.11g
solution designed for embedded applications, an 802.11g and
802.11a/g chipset for USB 2.0 devices, and an integrated
router system-on-a-chip with advanced security designed for
small-to-medium sized business requirements.
In 2004 we also introduced a number of software and hardware
performance enhancements for our wireless LAN product family,
including 125 High Speed
Modetm
technology, which increases the speed of wireless transmissions,
BroadRangetm
technology, which extends Wi-Fi coverage range, and
SecureEasySetuptm,
a software wizard that enables simple setup of a secure wireless
network. All of our AirForce products also offer advanced
security features, including certified support for Wi-Fi
Protected
Accesstm,
or WPA, the Cisco Compatible Extensions, and hardware
accelerated Advanced Encryption Standard, or AES, encryption The
entire AirForce family is comprised of all-CMOS solutions that
are capable of self-calibrating based on usage temperature and
other environmental conditions.
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Cellular and Wireless Wide Area Networking |
The cellular handset market is transitioning from pure voice to
broadband multimedia and data, transforming the traditional
cellular phone from a voice-only device into a multimedia
gateway. Products emerging from this transition will allow
end-users to wirelessly download e-mail, view web pages, stream
audio and video, and conduct videoconferences with cellular
phones, PDAs, laptops and other mobile devices.
The international Global System for Mobile Communication, or
GSM, is currently the dominant standard for digital mobile
communications. Enhanced data communications standards derived
from GSM include General Packet Radio Services, or GPRS,
Enhanced Data Rates for GSM Evolution, or EDGE, and Universal
Mobile Telecommunications System, or UMTS. UMTS technologies,
including Wideband Code Division Multiple Access (WCDMA), are
typically referred to as 3G technologies. Each of these
standards have extended GSM to enable packet-based “always
on” Internet applications and more efficient data transport
with higher transmission rates for a new generation of data
services such as Internet browsing, 3-D gaming and multimedia
messaging with rich graphics and audio content.
We develop and market GSM, GPRS, EDGE and WCDMA chipsets and
reference designs with complete software and terminal solutions
for use in cellular phones, cellular modem cards and wireless
PDAs. Our cellular and wireless wide area networking products
include baseband processor solutions, which integrate both mixed
signal and digital functions on a single chip. We also provide a
range of handset and cellular modem engineering design services
to select customers, encompassing printed circuit board, RF and
handset hardware, software development and integration, product
verification and certification, and manufacturing support.
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Wireless Personal Area Networking |
The Bluetooth® short-range wireless networking standard is
a low-cost wire-replacement technology that enables connectivity
among a wide variety of mainstream consumer electronic devices
including PCs, mobile
11
phones, PDAs, headsets and automotive electronics. Bluetooth
short-range wireless connectivity enables personal area
networking, or PAN, at speeds up to one Mbps, and can cover
distances up to 30 feet. Bluetooth technology allows
devices to automatically synchronize and exchange data with
other Bluetooth-enabled devices without the need for wires, and
enables wireless headset connections to cellular phones and
wireless mouse and keyboard applications.
Our Blutonium® family of single-chip Bluetooth devices and
software provides a complete solution that enables manufacturers
to add Bluetooth functionality to almost any electronic device
with a minimal amount of development time and resources. Our
Bluetooth solutions, all of which have been qualified by the
Bluetooth Qualification Board to meet version 1.2 of the
Bluetooth specification, are incorporated in PCs, PDAs, wireless
mouse and keyboard applications, and GSM/ GPRS/ UMTS and CDMA
mobile phones.
Our Bluetooth solutions offer the industry’s highest levels
of performance and integration with designs in standard CMOS,
allowing them to be highly reliable while lowering manufacturing
costs. In addition, we have developed
InConcerttm
software to allow products enabled with our AirForce Wi-Fi and
Blutonium Bluetooth chips to collaboratively coexist within the
same radio frequency.
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Mobile Multimedia Processors |
Multimedia is becoming increasingly prevalent in handheld
devices such as cellular phones. To support new multimedia
features including imaging, graphics, camera image capture,
audio capture, music playback, music streaming, video streaming,
video capture, gaming, mobile TV, and more, Broadcom offers a
new line of video and multimedia processors based on a low
power, high performance architecture referred to as
Videocore®.
Unlike hard-wired processor cores, Videocore devices are built
to provide customers the benefit of total software flexibility
and programmability. Videocore supports a wide variety of
standard and non-standard software and codecs including, but not
limited to, extremely low power implementations of MPEG-4 and
H.264 for video, MP3 and AAC for audio, and MIDI. Providing the
base codecs to our key customers allows them to rapidly develop
next-generation products while maintaining backward
compatibility of applications software. Because the fully
programmable architecture of our mobile multimedia processors
enables a complete range of multimedia functions to be executed
in software, the system designer can quickly move to production
without the costly overhead and time-to-market uncertainty of
hardware accelerators. The scalability of the architecture
allows features or new industry standard codecs to be added
shortly before product release or through firmware upgrades in
the field.
Our Videocore processors can either be used as standalone
multimedia processors or as co-processors in conjunction with a
host processor such as a GSM, EDGE or WCDMA baseband.
Videocore-enabled video and multimedia processors for advanced
handheld multimedia products are designed and optimized for
video record/playback, mobile TV and 3D mobile gaming. Videocore
technology is designed to create power efficient, high
performance processors focused on multimedia for cellular
handsets, but we are also deploying Videocore processors into a
number of other portable applications, where battery life and
performance are important.
Voice over Internet Protocol refers to the transmission of voice
over any IP packet-based network. VoIP is stimulating dramatic
changes in the traditional public switched and enterprise
telephone networks. Packet-based networks provide significant
economic advantages over traditional circuit-switched voice
networks. The trend to IP networks for voice has been driven by
the significant buildout of the Internet and deregulation of
long distance and local phone service.
The enterprise equipment market is being radically affected by
the convergence of corporate data networks and voice
communications. A host of new enterprise services can be enabled
when a LAN-based Ethernet switching infrastructure is used to
carry both data and voice. We provide both silicon and software
to enable our enterprise equipment customers to provide
cost-effective IP phones.
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Within residential markets, VoIP is gaining momentum as a viable
alternative to traditional public telephone networks. In
addition to enabling cost savings for long-distance calls, VoIP
creates a number of consumer product opportunities and
applications for equipment vendors and service providers.
IP Phone Processors. Our IP phone silicon and software
solutions integrate packet processing, voice processing and
switching technologies to provide the quality of service, high
fidelity and reliability necessary for enterprise telephony
applications. Our processors have enabled the development of new
XML-based IP phones that can perform a wide variety of functions
that traditional phones cannot support. Originally focused on
Fast Ethernet, these processors now include support for Gigabit
Ethernet as well to support the growing deployment of Gigabit
Ethernet throughout enterprises.
Residential Terminal Adapter Processors. Our terminal
adapter VoIP solutions enable existing analog phones to be
connected to broadband modems via Ethernet. These products
support residential VoIP services that are now being offered by
a variety of broadband service providers.
Wi-Fi Phone Processors. In 2004 we introduced our first
Wi-Fi phone processor that enables the development of next
generation, cordless phone replacement devices. These Wi-Fi
phones are beginning to be deployed in both enterprises and
homes as the use of broadband and Wi-Fi applications increases
in these markets.
All of our VoIP processors support our BroadVoice®
technology, which features a wideband high fidelity mode that
significantly improves the clarity and quality of telephony
voice service.
Reference Platforms
We also develop reference platforms designed around our
integrated circuit products that represent example system-level
applications for incorporation into our customers’
equipment. These reference platforms generally include a fairly
extensive suite of software drivers as well as protocol and
application layer software to assist our customers in developing
their own end products. By providing these reference platforms,
we can assist our customers in achieving easier and faster
transitions from initial prototype designs to final production
releases. These reference platforms enhance the customer’s
confidence that our products will meet its market requirements
and product introduction schedules.
Customers and Strategic Relationships
We sell our products to leading manufacturers of broadband
communications equipment in each of our target markets. Because
we leverage our technologies across different markets, certain
of our integrated circuits may be incorporated into equipment
used in several different markets.
Customers currently shipping broadband communications equipment
incorporating our products include Alcatel, Apple, Askey, Cisco,
D-Link, Dell, Echostar, Hewlett-Packard, IBM, Motorola, Ningbo
Bird, Nortel Networks, Scientific-Atlanta, Sony Ericsson,
Thomson CE and 3Com, among others. To meet the current and
future technical needs in our target markets, we have also
established strategic relationships with multiservice operators
that provide broadband communications services to consumers and
businesses.
As part of our business strategy, we periodically establish
strategic relationships with certain key customers. In September
1997 we entered into a development, supply and license agreement
with General Instrument, now a wholly-owned subsidiary of
Motorola, which provided that we would develop and supply chips
for General Instrument’s digital cable set-top boxes. In
November 2000 we modified that agreement to amend General
Instrument’s minimum purchase requirements and entered into
a new supply agreement with General Instrument covering our sale
of cable modem chips. In January 2002 we modified the new supply
agreement to add minimum purchase requirements of chips for
digital set-top boxes. In December 2002 and January 2003 we
further amended the supply agreement to extend minimum purchase
requirements of chips for cable modems and digital set-top
boxes, respectively.
From time to time, we have entered into development agreements
with Cisco, Nortel Networks, Sony Ericsson, 3Com and others. We
have worked closely with these customers to co-develop products.
13
A small number of customers have historically accounted for a
substantial portion of our net revenue. Sales to our five
largest customers represented approximately 51.1%, 51.6% and
52.3% of our net revenue in 2004, 2003 and 2002, respectively.
See Note 13 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report.
We expect that our key customers will continue to account for a
substantial portion of our net revenue in 2005 and in the
foreseeable future. These customers and their respective
contributions to our net revenue have varied and will likely
continue to vary from period to period. We typically sell
products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a
significant penalty, and currently do not have agreements with
any of our key customers that contain long-term commitments to
purchase specified volumes of our products.
Core Technologies
Using proprietary technologies and advanced design
methodologies, we design, develop and supply complete
system-on-a-chip solutions and related hardware and software
applications for our target markets. Our proven system-on-a-chip
design methodology has enabled us to be first to market with
advanced chips that are highly integrated and cost-effective,
and that facilitate the easy integration of our customers’
intellectual property. Our design methodology leverages
industry-standard, state-of-the-art electronic design automation
tools, and generally migrates easily to new silicon processes
and technology platforms. It also allows for the easy
integration of acquired or licensed technology, providing
customers with a broad range of silicon options with
differentiated networking and performance features.
We believe that one of our key competitive advantages is our
broad base of core technologies encompassing the complete design
space from systems to silicon. We have developed and continue to
build on the following technology foundations:
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proprietary communications systems algorithms and protocols; |
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advanced DSP hardware architectures; |
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system-on-a-chip design methodologies and advanced library
development for both standard cell and full-custom integrated
circuit design; |
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high-performance radio frequency, analog and mixed-signal
circuit design using industry-standard CMOS processes; |
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high-performance custom microprocessor architectures and circuit
designs; and |
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extensive software reference platforms and board-level hardware
reference platforms to enable complete system-level solutions. |
Research and Development
We have assembled a large team of experienced engineers and
technologists, many of whom are leaders in their particular
field or discipline. As of December 31, 2004 we had 2,282
research and development employees, the majority of whom hold
advanced degrees. Our work force includes 291 employees
with Ph.Ds. These key employees are involved in advancing our
core technologies, as well as applying them to our product
development activities. Because the system-on-a-chip solutions
for many of our target markets benefit from the same underlying
core technologies, we are able to address a wide range of
broadband communications markets with a relatively focused
investment in research and development.
We believe that the achievement of higher levels of integration
and the timely introduction of new products in our target
markets is essential to our growth. Our current plans are to
maintain our significant research and development staffing
levels in 2005. In addition to our principal design facilities
in Irvine, California and Santa Clara County, California,
we have additional design centers in Tempe, Arizona;
San Diego County, California; Duluth, Georgia; Germantown,
Maryland; Andover, Massachusetts; Nashua, New Hampshire;
Matawan, New Jersey; and Seattle, Washington. Internationally,
we also have design facilities in Belgium, Canada, China,
France, India, Israel, the Netherlands, Singapore, Taiwan and
the United Kingdom. We anticipate establishing additional design
centers in the United States and other countries in the future.
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Our research and development expense was $495.1 million,
$434.0 million and $461.8 million in 2004, 2003 and
2002, respectively. In addition, for employees engaged in
research and development, we had non-cash stock-based
compensation expense and stock option exchange expense of
$58.6 million, $384.1 million and $252.4 million
in 2004, 2003 and 2002, respectively. We also had amortization
of purchased intangible assets related to research and
development of $0.8 million and $19.6 million in 2003
and 2002, respectively. We had no amortization of purchased
intangible assets related to research and development in 2004.
Manufacturing
We manufacture our products using standard CMOS process
techniques. The standard nature of these processes permits us to
engage independent silicon foundries to fabricate our integrated
circuits. By subcontracting our manufacturing requirements, we
are able to focus our resources on design and test applications
where we believe we have greater competitive advantages. This
strategy also eliminates the high cost of owning and operating a
semiconductor wafer fabrication facility.
Our operations and quality engineering team closely manages the
interface between manufacturing and design engineering. While
our design methodology typically creates a smaller than average
die for a given function, it also generates full-custom
integrated circuit designs. As a result, we are responsible for
the complete functional and parametric performance testing of
our devices, including quality. We employ a fully staffed
operations and quality organization similar to that of a
vertically integrated semiconductor manufacturer. We also
arrange with our foundries to have online work-in-progress
control. Our approach makes the manufacturing subcontracting
process transparent to our customers.
We depend on six independent foundry subcontractors located in
Asia to manufacture substantially all of our products. Our key
silicon foundries are Taiwan Semiconductor Manufacturing
Corporation in Taiwan, Chartered Semiconductor Manufacturing in
Singapore, NEC Corporation in Japan, Semiconductor Manufacturing
International Corporation in China, Silterra Malaysia Sdn. Bhd.
in Malaysia and United Microelectronics Corporation in Taiwan.
Any inability of one of our six independent foundry
subcontractors to provide the necessary capacity or output for
our products could result in significant production delays and
could materially and adversely affect our business, financial
condition and results of operations. While we currently believe
we have adequate capacity to support our current sales levels,
we continue to work with our existing foundries to obtain more
production capacity, and we intend to qualify new foundries to
provide additional production capacity. It is possible that from
time to time adequate foundry capacity may not be available on
acceptable terms, if at all. In the event a foundry experiences
financial difficulties, or if a foundry suffers any damage to or
destruction of its facilities, or in the event of any other
disruption of foundry capacity, we may not be able to qualify
alternative manufacturing sources for existing or new products
in a timely manner.
Our products are currently fabricated with .5 micron, triple
layer metal; .35 micron, quad layer metal; .22 micron, five
layer metal; .18 micron, five and six layer metal; and .13
micron, six and seven layer metal. We continuously evaluate the
benefits, on a product-by-product basis, of migrating to smaller
geometry process technologies, and in 2004 we began to migrate
certain products to 90 nanometer, seven to eight layer metal,
feature sizes. Although our experience to date with the
migration of products to smaller processes geometries has been
predominantly favorable, we could experience difficulties in
future process migration. Other companies in our industry have
experienced difficulty transitioning to new manufacturing
processes and, consequently, have suffered reduced yields or
delays in product deliveries. We believe that the transition of
our products to smaller geometries will be important for us to
remain competitive. Our business, financial condition and
results of operations could be materially and adversely affected
if any such transition is substantially delayed or inefficiently
implemented.
Our wafer probe testing is conducted by either our independent
foundries or independent wafer probe test subcontractors.
Following completion of the wafer probe tests, the die are
assembled into packages and the finished products are tested by
one of our seven key subcontractors: ASAT Ltd. in Hong Kong;
STATSChipac in
15
Singapore, Korea, Malaysia and China; Siliconware Precision in
Taiwan; NEC Corporation in Japan; United Test and Assembly
Center in Singapore; Signetics in Korea; and Amkor in Korea,
Philippines and China. While we have not experienced material
disruptions in supply from assembly subcontractors to date, we
and others in our industry have experienced shortages in the
supply of packaging materials from time to time, and we could
experience shortages or assembly problems in the future. The
availability of assembly and testing services from these
subcontractors could be materially and adversely affected in the
event a subcontractor experiences financial difficulties, or if
a subcontractor suffers any damage to or destruction of its
facilities, or in the event of any other disruption of assembly
and testing capacity.
Manufacturers of broadband communications equipment demand high
quality and reliable semiconductors for incorporation into their
products. We focus on product reliability from the initial stage
of the design cycle through each specific design process,
including layout and production test design. In addition, we
subject our designs to in-depth circuit simulation at
temperature, voltage and processing extremes before initiating
the manufacturing process.
We prequalify each assembly and foundry subcontractor. This
prequalification process consists of a series of industry
standard environmental product stress tests, as well as an audit
and analysis of the subcontractor’s quality system and
manufacturing capability. We also participate in quality and
reliability monitoring through each stage of the production
cycle by reviewing electrical and parametric data from our wafer
foundry and assembly subcontractors. We closely monitor wafer
foundry production to ensure consistent overall quality,
reliability and yield levels. In cases where we purchase wafers
on a fixed cost basis, any improvement in yields can reduce our
cost per chip.
As part of our total quality program, we received ISO 9002
certification, a comprehensive International Standards
Organization specified quality system, for our Singapore
facility. All of our principal independent foundries and package
assembly facilities are currently ISO 9001 certified.
While every effort is made to monitor and meet the quality
requirements of Broadcom’s customers, including the use of
industry standard procedures and other additional methods, it is
possible that an unanticipated quality problem may result in
interruptions or delays in product shipments to our end
customers. In that event, our reputation may be damaged and
customers may be reluctant to buy our products, and we may be
required to incur significant capital and other resources to
remedy any quality problem with our products.
Broadcom is also focusing on managing the environmental impact
of our products. Our manufacturing flow is registered to ISO
14000, the international standards related to environmental
management, by our subcontractors. Due to environmental
concerns, the need for lead-free solutions in electronic
components and systems is receiving increasing attention within
the semiconductor industry and many companies are moving towards
becoming compliant with the Restriction of Hazardous Substances
Directive, the European legislation that restricts the use of a
number of substances, including lead, effective July 2006.
Broadcom believes that its products are compliant with the RoHS
Directive and that materials will be available to meet these
emerging regulations. However, it is possible that unanticipated
supply shortages or delays may occur as a result of these new
regulations.
Initially we distributed products to our customers through an
operations and distribution center located in Irvine,
California. In 1999 we established an international distribution
center in Singapore. This facility put us closer to our
suppliers and many key customers and improved our ability to
meet customers’ needs. Our Irvine facility continues to
ship products to U.S. destinations, while our Singapore
facility distributes products to international destinations. We
also ship products of our wholly-owned subsidiary ServerWorks
from a Los Angeles distribution facility. Products shipped to
international destinations, primarily in Asia, represented
79.0%, 77.7% and 70.0% of our total net revenue in 2004, 2003
and 2002, respectively.
16
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with
technology leaders in each of our targeted broadband
communications markets by providing quality, state-of-the-art
products and superior sales, field application and engineering
support. We market and sell our products in the United States
through a direct sales force, distributors and
manufacturers’ representatives. The majority of our sales
occur through our direct sales force, which is based in offices
located in California, Colorado, Florida, Georgia, Illinois,
Maine, Maryland, Massachusetts, Michigan, New York, New Jersey,
North Carolina, Ohio, Texas and Virginia. We have engaged
independent distributors, Arrow Electronics and Insight
Electronics, to service the North American and South American
markets.
We dedicate sales managers to principal customers to promote
close cooperation and communication. We also provide our
customers with reference platform designs for most products. We
believe this enables our customers to achieve easier and faster
transitions from the initial prototype designs through final
production releases. We believe these reference platform designs
also significantly enhance customers’ confidence that our
products will meet their market requirements and product
introduction schedules.
We market and sell our products internationally through regional
offices located in Canada, China, Finland, France, Germany,
Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan and the
United Kingdom, as well as through a network of independent
distributors and representatives in Australia, Canada, Germany,
Hong Kong, India, Israel, Japan, Korea, Singapore and Taiwan. We
select these independent entities based on their ability to
provide effective field sales, marketing communications and
technical support to our customers. All international sales to
date have been denominated in U.S. dollars. For information
regarding revenue from independent customers by geographic area,
see Note 13 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report.
Backlog
Our sales are made primarily pursuant to standard purchase
orders for delivery of products. Due to industry practice that
allows customers to cancel or change orders with limited advance
notice prior to shipment, we do not believe that backlog is a
reliable indicator of future revenue levels.
Competition
Broadband communications markets and the semiconductor industry
are intensely competitive and are characterized by rapid change,
evolving standards, short product life cycles and price erosion.
We believe that the principal factors of competition for
integrated circuit providers in our target markets include:
|
|
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| |
• |
product quality; |
| |
• |
product capabilities; |
| |
• |
level of integration; |
| |
• |
reliability; |
| |
• |
price; |
| |
• |
time-to-market; |
| |
• |
market presence; |
| |
• |
standards compliance; |
| |
• |
system cost; |
| |
• |
intellectual property; |
| |
• |
customer interface and support; and |
| |
• |
reputation. |
We believe that we compete favorably with respect to each of
these factors.
We compete with a number of major domestic and international
suppliers of integrated circuits and related applications in our
target broadband communications 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. This competition
has resulted and will continue to result in declining
17
average selling prices for our products. In all of our target
markets, we also may face competition from newly established
competitors, suppliers of products based on new or emerging
technologies, and customers that choose to develop their own
silicon solutions. We also expect to encounter further
consolidation in the markets in which we compete.
Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases and
significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than
we do. As a result, these competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and
sale of their products. Current and potential competitors have
established or may establish financial or strategic
relationships among themselves or with existing or potential
customers, resellers or other third parties, and may refuse to
provide us with information necessary to permit the
interoperability of our products with theirs. Accordingly, it is
possible that new competitors or alliances among competitors
could emerge and rapidly acquire significant market share. In
addition, competitors may develop technologies that more
effectively address our markets with products that offer
enhanced features, lower power requirements or lower costs.
Increased competition could result in pricing pressures,
decreased gross margins and loss of market share and may
materially and adversely affect our business, financial
condition and results of operations.
Intellectual Property
Our success and future revenue growth depend, in part, on our
ability to protect our intellectual property. We rely primarily
on patent, copyright, trademark and trade secret laws, as well
as nondisclosure agreements and other methods, to protect our
proprietary technologies and processes. However, these measures
may not provide meaningful protection for our intellectual
property.
We hold more than 800 U.S. patents and have filed more than
3,000 additional U.S. patent applications. We may not
receive any additional patents as a result of these applications
or future applications. Even if additional patents are issued,
any claims allowed may not be sufficiently broad to protect our
technology. In addition, any existing or future patents could be
challenged, invalidated or circumvented, and any rights granted
under such patents may not provide us with meaningful
protection. We may not have foreign patents or pending
applications corresponding to our U.S. patents and
applications. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available. The
failure of any patents to adequately protect our technology
would make it easier for our competitors to offer similar
products. In connection with our participation in the
development of various industry standards, we may be required to
license certain of our patents to other parties, including
competitors, that develop products based upon the adopted
industry standards.
We also generally enter into confidentiality agreements with our
employees and strategic partners, and typically control access
to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products,
services or technology without authorization, to develop similar
technology independently, or to design around our patents. In
addition, effective copyright, trademark and trade secret
protection may not be available or may be limited in certain
foreign countries. We have also entered into agreements with
certain of our customers and granted these customers the right
to use our proprietary technology in the event we default in our
contractual obligations, including product supply obligations,
and fail to cure the default within a specified time period. In
addition, we often incorporate the intellectual property of our
strategic customers into our designs, and therefore have certain
obligations with respect to the non-use and non-disclosure of
their intellectual property. It is possible that the steps taken
by us to prevent misappropriation or infringement of our
intellectual property or our customers’ intellectual
property may not be successful. Moreover, we are currently
engaged in litigation and may need to engage in additional
litigation to enforce our intellectual property rights or the
rights of our customers, to protect our trade secrets, or to
determine the validity and scope of proprietary rights of
others, including our customers. Such litigation could result in
substantial costs and diversion of our resources and could
materially and adversely affect our business, financial
condition and results of operations.
18
Companies in the semiconductor industry often aggressively
protect and pursue their intellectual property rights. From time
to time, we have received, and may continue to receive, notices
that claim we have infringed upon, misappropriated or misused
other parties’ proprietary rights. Moreover, we have in the
past and may continue to be engaged in litigation with parties
who claim that we have infringed their patents or
misappropriated or misused their trade secrets. We may also be
sued by parties who may seek to invalidate one or more of our
patents. Any future 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 or redesign
certain products offered for sale or under development. In
addition, we may be liable for damages for past infringement and
royalties for future use of the technology. We may also have to
indemnify certain customers and strategic partners under our
agreements with such parties if a third party alleges or if a
court finds that our products or activities have infringed upon,
misappropriated or misused another party’s proprietary
rights. Even if claims against us are not valid or successfully
asserted, the defense of these claims could result in
significant costs and a diversion of management and personnel
resources. In any of these events, our business, financial
condition and results of operations may be materially and
adversely affected. Additionally, we have sought and may in the
future seek to obtain a license under a third party’s
intellectual property rights and have granted and may grant a
license to certain of our intellectual property rights to a
third party in connection with a cross-license agreement or a
settlement of claims or actions asserted against us. However, we
may not be able to obtain a license on commercially reasonable
terms, if at all.
Employees
As of December 31, 2004 we had 3,373 full-time,
contract and temporary employees, including 2,282 individuals
engaged in research and development, 444 engaged in sales and
marketing, 268 engaged in manufacturing operations and 379
engaged in finance, legal and general administration activities.
Our employees are not represented by any collective bargaining
agreement, and we have never experienced a work stoppage. We
believe our employee relations are good.
We lease facilities in Irvine (our corporate headquarters) and
Santa Clara County, California. Each of these facilities
includes administration, sales and marketing, research and
development and operations functions. In addition to our
principal design facilities in Irvine and Santa Clara
County, we lease additional design facilities in Tempe, Arizona;
San Diego County, California; Duluth, Georgia; Germantown,
Maryland; Andover, Massachusetts; Nashua, New Hampshire;
Matawan, New Jersey; and Seattle, Washington.
Internationally, we lease a distribution center that includes
engineering design and administrative facilities in Singapore as
well as engineering design and administrative facilities in
Belgium, Canada, China, France, India, Israel, the Netherlands,
Taiwan and the United Kingdom.
In addition, we lease various sales and marketing facilities in
the United States and several other countries.
The leased facilities currently in use comprise an aggregate of
approximately 1.5 million square feet. Our principal
facilities have lease terms expiring between 2005 and 2017. We
believe that the facilities under lease by us will be adequate
for at least the next 12 months. In December 2004 we
entered into a lease agreement under which our corporate
headquarters will move from our present location to a new,
larger facility in Irvine, which will eventually consist of
eight buildings with an aggregate of approximately
0.7 million square feet. The lease term is a period of ten
years and two months beginning after the completion of the first
two buildings and related tenant improvements, which is
anticipated to occur in the first quarter of 2007.
For additional information regarding our obligations under
property leases, see Note 6 of Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of
this Report.
19
|
|
| Item 3. |
Legal Proceedings |
The information set forth under Note 12 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report, is incorporated herein by reference.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2004.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Market Information and Holders
Our Class A common stock is traded on the NASDAQ National
Market under the symbol BRCM. The following table sets forth,
for the periods indicated, the high and low sale prices for our
Class A common stock on the NASDAQ National Market:
| |
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|
|
|
|
|
|
|
| |
|
High |
|
Low |
| |
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
20.34 |
|
|
$ |
12.20 |
|
|
|
|
|
|
| |
Second Quarter
|
|
|
28.23 |
|
|
|
11.86 |
|
|
|
|
|
|
| |
Third Quarter
|
|
|
29.96 |
|
|
|
19.81 |
|
|
|
|
|
|
| |
Fourth Quarter
|
|
|
37.65 |
|
|
|
26.25 |
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
45.00 |
|
|
$ |
34.08 |
|
|
|
|
|
|
| |
Second Quarter
|
|
|
47.05 |
|
|
|
36.51 |
|
|
|
|
|
|
| |
Third Quarter
|
|
|
46.75 |
|
|
|
25.25 |
|
|
|
|
|
|
| |
Fourth Quarter
|
|
|
34.49 |
|
|
|
25.61 |
|
|
|
|
|
|
|
Year Ending December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First Quarter (through February 25, 2005)
|
|
$ |
34.07 |
|
|
$ |
29.79 |
|
As of December 31, 2004 there were 1,972 record holders of
our Class A common stock and 303 record holders of our
Class B common stock. On February 25, 2005 the last
reported sale price of our Class A common stock on the
NASDAQ National Market was $32.88 per share.
Our Class B common stock is not publicly traded. Each share
of Class B common stock is convertible at any time at the
option of the holder into one share of Class A common stock
and in most instances automatically converts upon sale or other
transfer.
Dividend Policy
We have never declared or paid cash dividends on shares of our
capital stock. We currently intend to retain all of our
earnings, if any, for use in our business and in acquisitions of
other businesses, assets, products or technologies, and for
purchases of our common stock from time to time. We do not
anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation
Plans
The information under the caption “Equity Compensation Plan
Information,” appearing in the Proxy Statement, is hereby
incorporated by reference. For additional information on our
stock incentive plans and activity, see Note 8 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report.
20
Issuer Purchases of Equity Securities
Although we have made no purchases of our equity securities in
the open market to date, 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. These
repurchases will be made in open market or privately negotiated
transactions in compliance with SEC Rule 10b-18, subject to
market conditions, applicable legal requirements and other
factors. This program does not obligate us to acquire any
particular amount of common stock and may be suspended at any
time at our discretion.
Recent Sales of Unregistered Securities
In the three months ended December 31, 2004, we issued an
aggregate of 1,776,944 shares of our Class A common
stock upon conversion of a like number of shares of our
Class B common stock. The offer and sale of those
securities were effected without registration in reliance on the
exemption from registration provided by Section 3(a)(9) of
the Securities Act.
21
|
|
| Item 6. |
Selected Financial Data |
| |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except per share data) |
|
|
|
|
|
|
Consolidated Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
2,400,610 |
|
|
$ |
1,610,095 |
|
|
$ |
1,082,948 |
|
|
$ |
961,821 |
|
|
$ |
1,096,160 |
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,193,294 |
|
|
|
839,776 |
|
|
|
604,397 |
|
|
|
557,733 |
|
|
|
484,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,207,316 |
|
|
|
770,319 |
|
|
|
478,551 |
|
|
|
404,088 |
|
|
|
611,941 |
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and
development(1)
|
|
|
495,075 |
|
|
|
434,018 |
|
|
|
461,804 |
|
|
|
446,648 |
|
|
|
250,676 |
|
|
|
|
|
|
| |
Selling, general and
administrative(1)
|
|
|
212,727 |
|
|
|
190,138 |
|
|
|
165,267 |
|
|
|
155,448 |
|
|
|
103,305 |
|
|
|
|
|
|
| |
Stock-based compensation
|
|
|
73,320 |
|
|
|
263,960 |
|
|
|
359,790 |
|
|
|
484,039 |
|
|
|
115,307 |
|
|
|
|
|
|
| |
Amortization of purchased intangible assets
|
|
|
3,703 |
|
|
|
3,504 |
|
|
|
22,387 |
|
|
|
27,192 |
|
|
|
1,255 |
|
|
|
|
|
|
| |
Settlement costs
|
|
|
68,700 |
|
|
|
194,509 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
— |
|
|
|
|
|
|
| |
In-process research and development
|
|
|
63,766 |
|
|
|
— |
|
|
|
— |
|
|
|
109,710 |
|
|
|
713,050 |
|
|
|
|
|
|
| |
Impairment of goodwill and other intangible assets
|
|
|
18,000 |
|
|
|
439,611 |
|
|
|
1,265,038 |
|
|
|
1,181,649 |
|
|
|
— |
|
|
|
|
|
|
| |
Stock option exchange
|
|
|
— |
|
|
|
209,266 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Restructuring costs
|
|
|
— |
|
|
|
2,932 |
|
|
|
119,680 |
|
|
|
34,281 |
|
|
|
— |
|
|
|
|
|
|
| |
Amortization of goodwill
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
753,042 |
|
|
|
136,984 |
|
|
|
|
|
|
| |
Merger-related costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,745 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
272,025 |
|
|
|
(967,619 |
) |
|
|
(1,918,415 |
) |
|
|
(2,790,921 |
) |
|
|
(713,381 |
) |
|
|
|
|
|
|
Interest income, net
|
|
|
15,010 |
|
|
|
6,828 |
|
|
|
12,183 |
|
|
|
23,019 |
|
|
|
24,299 |
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
7,317 |
|
|
|
26,053 |
|
|
|
(32,750 |
) |
|
|
(30,875 |
) |
|
|
(2,693 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
294,352 |
|
|
|
(934,738 |
) |
|
|
(1,938,982 |
) |
|
|
(2,798,777 |
) |
|
|
(691,775 |
) |
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
75,607 |
|
|
|
25,127 |
|
|
|
297,594 |
|
|
|
(56,729 |
) |
|
|
(3,953 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
|
$ |
(2,742,048 |
) |
|
$ |
(687,822 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(basic)(2)
|
|
$ |
.68 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
|
$ |
(10.79 |
) |
|
$ |
(3.13 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
(diluted)(2)
|
|
$ |
.63 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
|
$ |
(10.79 |
) |
|
$ |
(3.13 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
858,592 |
|
|
$ |
558,669 |
|
|
$ |
389,555 |
|
|
$ |
403,758 |
|
|
$ |
523,904 |
|
|
|
|
|
|
|
Working capital
|
|
|
1,087,342 |
|
|
|
492,227 |
|
|
|
187,767 |
|
|
|
265,107 |
|
|
|
673,092 |
|
|
|
|
|
|
|
Goodwill and purchased intangible assets, net
|
|
|
1,079,262 |
|
|
|
834,319 |
|
|
|
1,252,639 |
|
|
|
2,338,740 |
|
|
|
3,260,464 |
|
|
|
|
|
|
|
Total assets
|
|
|
2,885,839 |
|
|
|
2,017,622 |
|
|
|
2,216,153 |
|
|
|
3,631,409 |
|
|
|
4,677,822 |
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
|
— |
|
|
|
— |
|
|
|
113,470 |
|
|
|
118,046 |
|
|
|
23,649 |
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
2,365,986 |
|
|
|
1,489,805 |
|
|
|
1,644,521 |
|
|
|
3,207,410 |
|
|
|
4,475,260 |
|
|
|
| (1) |
Excludes stock-based compensation expense, amortization of
purchased intangible assets and stock option exchange expense.
See Consolidated Statements of Operations, included in
Part IV, Item 15 of this Report. |
| |
| (2) |
See Notes 1 and 2 of Notes to Consolidated Financial
Statements, included in Part IV, Item 15 of this
Report, for an explanation of the calculation of net income
(loss) per share. |
The table above sets forth our selected consolidated financial
data. We prepared this information using the consolidated
financial statements of Broadcom for the five years ended
December 31, 2004. The consolidated financial statements
include the results of operations of acquisitions as of their
respective acquisition dates. See Note 3 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report.
You should read this selected consolidated financial data
together with the Consolidated Financial Statements and related
Notes contained in this Report and in our prior and subsequent
reports filed with the SEC, as well as the section of this
Report and our other reports entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
22
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
You should read the following discussion and analysis in
conjunction with our Consolidated Financial Statements and
related Notes thereto included in Part IV, Item 15 of
this Report and the “Risk Factors” section at the end
of this Item 7, as well as other cautionary statements and
risks described elsewhere in this Report, before deciding to
purchase, hold or sell our common stock.
Overview
Broadcom Corporation is a global leader in wired and wireless
broadband communications semiconductors. Our products enable the
convergence of high-speed data, high definition video, voice and
audio at home, in the office and on the go. Broadcom provides
manufacturers of computing and networking equipment, digital
entertainment and broadband access products, and mobile devices
with complete system-on-a-chip and software solutions. Our
diverse product portfolio addresses every major broadband
communications market, and includes solutions for digital cable,
satellite and IP set-top boxes; high definition television
(HDTV); cable and DSL modems and residential gateways;
high-speed transmission and switching for local, metropolitan,
wide area and storage networking; home and wireless networking;
cellular and terrestrial wireless communications; Voice over
Internet Protocol (VoIP) gateway and telephony systems;
broadband network and security processors; and SystemI/
Otm
server solutions.
Net Revenue. We sell our products to leading
manufacturers of broadband communications equipment in each of
our target markets. Because we leverage our technologies across
different markets, certain of our integrated circuits may be
incorporated into equipment used in several different markets.
We utilize independent foundries to manufacture all of our
semiconductor products.
Our net revenue is generated principally by sales of our
semiconductor products. Such sales represented approximately
99.0%, 98.5% and 95.7% of our total net revenue in 2004, 2003
and 2002, respectively. We derive the remaining balance of our
net revenue predominantly from development agreements, software
licenses and maintenance agreements, system-level reference
designs and cancellation fees.
The majority of our sales occur through the efforts of our
direct sales force. However, we derived approximately 9.6%, 7.1%
and 10.4% of our total net revenue from sales made through
distributors in 2004, 2003 and 2002, respectively.
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:
|
|
|
| |
• |
economic and market conditions in the semiconductor industry and
the broadband communications markets; |
| |
• |
the timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory; |
| |
• |
the rate at which our present and future customers and end-users
adopt our products and technologies in our target 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; 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 2004 and prior periods may not necessarily be
indicative of future net revenue and results of operations.
From time to time, our key customers place large orders causing
our quarterly net revenue to fluctuate significantly. We expect
these fluctuations will continue.
23
Sales to our significant customers, including sales to their
manufacturing subcontractors, as a percentage of net revenue
were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended |
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Hewlett-Packard(1)
|
|
|
12.9 |
% |
|
|
15.5 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
Motorola
|
|
|
12.4 |
|
|
|
* |
|
|
|
12.1 |
|
|
|
|
|
|
|
Dell
|
|
|
* |
|
|
|
11.9 |
|
|
|
11.3 |
|
|
|
|
|
|
|
Cisco(2)
|
|
|
* |
|
|
|
* |
|
|
|
10.0 |
|
|
|
|
|
|
|
Five largest customers as a group
|
|
|
51.1 |
|
|
|
51.6 |
|
|
|
52.3 |
|
|
|
| * |
Less than 10% of net revenue. |
|
|
| (1) |
Includes sales to Compaq, which was acquired by Hewlett-Packard
in May 2002, for all periods presented. |
| |
| (2) |
Includes sales to Linksys, which was acquired by Cisco in June
2003, for all periods presented. |
We expect that our largest customers will continue to account
for a substantial portion of our net revenue in 2005 and for the
foreseeable future. The identity 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 percent of total net revenue was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended |
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Asia
|
|
|
15.0 |
% |
|
|
19.6 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
Europe
|
|
|
6.4 |
|
|
|
5.9 |
|
|
|
4.4 |
|
|
|
|
|
|
|
Other
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
21.6 |
% |
|
|
25.8 |
% |
|
|
25.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from actual shipments to international
destinations, primarily to Asia, represented approximately
79.0%, 77.7% and 70.0% of the Company’s net revenue in
2004, 2003 and 2002, respectively.
All of our revenue to date has been denominated in
U.S. dollars.
Gross Margin. Our gross profit as a percentage of net
revenue, or gross margin, has been affected in the past, and may
continue to be affected in the future, by various factors,
including, but not limited to, the following:
|
|
|
| |
• |
our product mix and volumes of product sales; |
| |
• |
stock-based compensation expense; |
| |
• |
the position of our products in their respective life cycles; |
| |
• |
the effects of competition; |
| |
• |
the effects of competitive pricing programs; |
| |
• |
manufacturing cost efficiencies and inefficiencies; |
| |
• |
fluctuations in direct product costs such as wafer pricing and
assembly, packaging and testing costs, and overhead costs such
as prototyping expenses; |
| |
• |
provisions for excess or obsolete inventories; |
| |
• |
product warranty costs; |
| |
• |
amortization of purchased intangible assets; and |
| |
• |
licensing and royalty arrangements. |
24
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; |
| |
• |
amortization of purchased intangible assets; |
| |
• |
settlement costs; |
| |
• |
in-process research and development, or IPR&D; |
| |
• |
impairment of goodwill and intangible assets; |
| |
• |
stock-option exchange expense; and |
| |
• |
restructuring costs. |
In 2004 our net income was approximately $218.7 million as
compared to a net loss of approximately $959.9 million in
2003, a difference of $1.179 billion. This significant
improvement in profitability in 2004 was the direct result of a
49.1% improvement in net revenue and a 2.5 percentage point
improvement in gross margin. This resulted in an increase of
$437.0 million of gross profit. In addition, we had
significant reductions in 2004 in stock-based compensation
expense, settlement costs, impairment of goodwill and intangible
assets, and stock option exchange expense, aggregating
approximately $947.3 million, offset by an increase in
IPR&D of approximately $63.8 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 nine
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 business combination transactions, strategic
relationships, capital infusions and the purchase or sale of
assets.
In 2004, 2003 and 2002 we completed eight acquisitions for
original aggregate equity consideration of $458.0 million
and cash consideration of $86.0 million. In 2004 we
acquired RAIDCore, Inc., a developer of redundant array of
inexpensive disks, or RAID, and virtualization software; Sand
Video, Inc., a developer of advanced video compression
semiconductor technology; M-Stream, Inc., a developer of
solutions for signal-to-noise ratio performance improvements in
cellular handsets; WIDCOMM, Inc., a provider of software
solutions for Bluetooth wireless products; Zyray Wireless Inc.,
a developer of baseband co-processors addressing WCDMA (Wideband
Code Division Multiple Access) mobile devices; and Alphamosaic
Limited, a developer of advanced mobile imaging, multimedia and
3D graphics technology optimized for use in cellphones and other
mobile devices. In 2003 we acquired certain assets of Gadzoox
Networks, Inc., a provider of storage networking technology. In
2002 we acquired Mobilink Telecom, Inc., a supplier of chipsets
and reference designs for use in mobile phones, PDAs and
cellular modem cards. Because each of these acquisitions was
accounted for as a purchase transaction, the accompanying
consolidated financial statements include the results of
operations of the acquired companies commencing as of their
respective acquisition dates. See Note 3 of Notes to
Consolidated Financial Statements.
Business Enterprise Segments. We operate in one
reportable operating segment, broadband communications. The
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 that 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
25
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 December 31, 2004, under the
aggregation criteria set forth in SFAS 131 we only operate
in one reportable operating segment, broadband communications.
Under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS 131, if the segments
have similar economic characteristics, and if the segments are
similar in each of the following areas:
|
|
|
| |
• |
the nature of products and services; |
| |
• |
the nature of the production processes; |
| |
• |
the type or class of customer for their products and
services; and |
| |
• |
the methods used to distribute their products or provide their
services. |
We meet each of the aggregation criteria for the following
reasons:
|
|
|
| |
• |
the sale of integrated circuits is the only material source of
revenue for each of our four operating segments or business
groups; |
| |
• |
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
broadband equipment, who 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 business groups 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 business groups 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 business group is subject to the overall
cyclical nature of the semiconductor industry. The number and
composition of employees and the amount and types of tools and
materials required are similar for each business group. Finally,
even though we periodically reorganize our business groups based
upon changes in customers, end markets or products,
acquisitions, long-term growth strategies, and the experience
and bandwidth of our vice presidents/general managers, the
common financial goals for each business group remain constant.
Because we meet each of the criteria set forth in SFAS 131
and our four business groups as of December 31,
2004 share similar economic characteristics, we aggregate
our results of operations in 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,
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 that are not readily apparent from other
sources. The actual results experienced by us may differ
materially and adversely from management’s estimates. To
the extent there are material differences between our estimates
and the actual results, our future results of operations will be
affected.
26
We believe the following critical accounting policies require us
to make significant judgments and estimates in the preparation
of our consolidated financial statements:
|
|
|
| |
• |
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
the customer is fixed or determinable and (iv) collection
of the resulting accounts receivable is reasonably assured. In
addition, we do not recognize revenue until all customer
acceptance requirements have been met, when applicable. These
criteria are usually met at the time of product shipment.
However, 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. 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 customer’s payment history. |
| |
| |
• |
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 was to deteriorate, resulting in an impairment of its
ability to make payments, additional allowances could be
required. |
| |
| |
• |
Inventory and Warranty Reserves. We write down our
inventory 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 write-downs 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 is affected by product failure rates, use of
materials and service delivery costs incurred in correcting any
product failure. Should actual product failure rates, use of
materials or service delivery costs differ from our estimates,
additional warranty reserves could be required, which could
reduce gross margins. |
| |
| |
• |
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 other intangible assets 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 |
27
|
|
|
| |
|
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. |
| |
| |
• |
Deferred Taxes and 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. As a
result of our cumulative losses and the full utilization of our
loss carrybacks, we concluded that a full valuation allowance
against our net deferred tax assets was appropriate. In the
future, if we realize a deferred tax asset that carries a
valuation allowance, we will record a reduction to income tax
expense in the period of such realization. We record estimated
tax liabilities to the extent the contingencies are probable and
can be reasonably estimated. However the actual liability in any
such tax contingencies may be materially different from our
estimates, which could result in the need to record additional
tax liabilities or potentially reverse previously recorded tax
liabilities. |
| |
| |
• |
Litigation and Settlement Costs. From time to time, we
are involved in disputes, litigation and other legal actions. We
are aggressively defending our current litigation matters,
including our pending securities class action lawsuit. 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 make royalty payments, which could adversely
impact gross margins in future periods. 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. |
28
Results of Operations
The following table sets forth certain Consolidated Statements
of Operations data expressed as a percentage of net revenue for
the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Net revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
Cost of revenue
|
|
|
49.7 |
|
|
|
52.2 |
|
|
|
55.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50.3 |
|
|
|
47.8 |
|
|
|
44.2 |
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and
development(1)
|
|
|
20.6 |
|
|
|
27.0 |
|
|
|
42.6 |
|
|
|
|
|
|
| |
Selling, general and
administrative(1)
|
|
|
8.9 |
|
|
|
11.8 |
|
|
|
15.3 |
|
|
|
|
|
|
| |
Stock-based compensation
|
|
|
3.0 |
|
|
|
16.3 |
|
|
|
33.1 |
|
|
|
|
|
|
| |
Amortization of purchased intangible assets
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
2.1 |
|
|
|
|
|
|
| |
Settlement costs
|
|
|
2.9 |
|
|
|
12.1 |
|
|
|
0.3 |
|
|
|
|
|
|
| |
In-process research and development
|
|
|
2.7 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Impairment of goodwill and other intangible assets
|
|
|
0.7 |
|
|
|
27.3 |
|
|
|
116.8 |
|
|
|
|
|
|
| |
Stock option exchange
|
|
|
— |
|
|
|
13.0 |
|
|
|
— |
|
|
|
|
|
|
| |
Restructuring costs
|
|
|
— |
|
|
|
0.2 |
|
|
|
11.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11.3 |
|
|
|
(60.1 |
) |
|
|
(177.1 |
) |
|
|
|
|
|
|
Interest income, net
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
0.3 |
|
|
|
1.6 |
|
|
|
(3.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12.3 |
|
|
|
(58.1 |
) |
|
|
(179.0 |
) |
|
|
|
|
|
|
Provision for income taxes
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
27.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
9.1 |
% |
|
|
(59.6 |
)% |
|
|
(206.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Excludes stock-based compensation expense, amortization of
purchased intangible assets and stock option exchange expense.
See Consolidated Statements of Operations, included in
Part IV, Item 15 of this Report. |
|
|
|
Years Ended December 31, 2004 and 2003 |
|
|
|
Net Revenue, Cost of Revenue and Gross Profit |
The following table presents net revenue, cost of revenue and
gross profit for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Net revenue
|
|
$ |
2,400,610 |
|
|
|
100.0 |
% |
|
$ |
1,610,095 |
|
|
|
100.0 |
% |
|
$ |
790,515 |
|
|
|
49.1 |
% |
|
|
|
|
|
|
Cost of revenue
|
|
|
1,193,294 |
|
|
|
49.7 |
|
|
|
839,776 |
|
|
|
52.2 |
|
|
|
353,518 |
|
|
|
42.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
1,207,316 |
|
|
|
50.3 |
% |
|
$ |
770,319 |
|
|
|
47.8 |
% |
|
$ |
436,997 |
|
|
|
56.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
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 contributions to the
increase in net revenue in 2004 as compared to 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Enterprise networking
|
|
$ |
1,121,090 |
|
|
|
46.7 |
% |
|
$ |
917,876 |
|
|
|
57.0 |
% |
|
$ |
203,214 |
|
|
|
22.1 |
% |
|
|
|
|
|
|
Broadband communications
|
|
|
780,383 |
|
|
|
32.5 |
|
|
|
373,562 |
|
|
|
23.2 |
|
|
|
406,821 |
|
|
|
108.9 |
|
|
|
|
|
|
|
Mobile and wireless
|
|
|
499,137 |
|
|
|
20.8 |
|
|
|
318,657 |
|
|
|
19.8 |
|
|
|
180,480 |
|
|
|
56.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
2,400,610 |
|
|
|
100.0 |
% |
|
$ |
1,610,095 |
|
|
|
100.0 |
% |
|
$ |
790,515 |
|
|
|
49.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The growth in net revenue resulted primarily from an increase in
the volume of shipments of our semiconductor products stemming
from the rise in demand for our products in each of our major
target markets in 2004, except for Intel processor-based server
chipsets, included in enterprise networking, which declined. The
previously anticipated decline in shipments of our Intel
processor-based server chipsets resulted in a $46.9 million
decrease in net revenue for those products in 2004 as compared
with 2003.
Our enterprise networking products include Ethernet controllers,
transceivers, switches, broadband network and security
processors, server chipsets and storage products. Our broadband
communications products include solutions for cable modems,
digital cable set-top boxes, direct broadcast satellites,
personal video recording applications, DSL applications, IP
set-top boxes, HD-DVD and digital TV. Our mobile and wireless
products include wireless LAN, cellular, Bluetooth, mobile
multimedia and VoIP solutions.
The following table presents net revenue from each of our major
target markets and their contributions to the decrease in net
revenue that occurred in the three months ended
December 31, 2004 as compared to the three months ended
September 30, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Three Months Ended |
|
|
|
|
| |
|
December 31, 2004 |
|
September 30, 2004 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Enterprise networking
|
|
$ |
238,048 |
|
|
|
44.1 |
% |
|
$ |
295,724 |
|
|
|
45.8 |
% |
|
$ |
(57,676 |
) |
|
|
(19.5 |
)% |
|
|
|
|
|
|
Broadband communications
|
|
|
175,354 |
|
|
|
32.5 |
|
|
|
218,810 |
|
|
|
33.8 |
|
|
|
(43,456 |
) |
|
|
(19.9 |
) |
|
|
|
|
|
|
Mobile and wireless
|
|
|
125,988 |
|
|
|
23.4 |
|
|
|
131,981 |
|
|
|
20.4 |
|
|
|
(5,993 |
) |
|
|
(4.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
539,390 |
|
|
|
100.0 |
% |
|
$ |
646,515 |
|
|
|
100.0 |
% |
|
$ |
(107,125 |
) |
|
|
(16.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net revenue from the third quarter of 2004 to
the fourth quarter of 2004 resulted primarily from overall
industry weakness, specifically related to inventory corrections
in the direct broadcast satellite and networking markets. In
addition, as expected, we experienced a quarter-to-quarter
decline in shipments of our Intel processor-based server
chipsets of approximately $35.0 million.
We currently anticipate that total net revenue in the first
quarter of 2005 will be relatively consistent with the
$539.4 million achieved in the fourth quarter of 2004. In
the first quarter of 2005, we expect continued softness in the
enterprise networking market and a further decline in shipments
of our Intel processor-based server chipsets. In addition we
expect to see some seasonality in our mobile and wireless
business, offset by an increase in our Bluetooth business. We
also believe we are seeing signs of recovery in our direct
broadcast satellite business, as well as in other areas of our
broadband communications target market.
We recorded rebates to certain customers in the amounts of
$263.6 million and $165.2 million in 2004 and 2003,
respectively. We account for rebates in accordance with FASB
Emerging Issues Task Force Issue, or EITF,
30
Issue No. 01-9, Accounting for Consideration Given by a
Vendor to Customer (Including a Reseller of the Vendor’s
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 rebate agreements. Historically, reversals of
rebate accruals have not been material. We anticipate that
accrued rebates in absolute dollars will vary in future periods
based on the level of overall sales to customers who participate
in our rebate programs. 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.
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
assembly, packaging, test and quality assurance for
semiconductor products, prototyping costs, amortization of
purchased technology, and manufacturing overhead, including
costs of personnel and equipment associated with manufacturing
support, product warranty costs and provisions for excess or
obsolete inventories. Gross profit represents net revenue less
the cost of revenue.
The 2004 increase in absolute dollars of gross profit resulted
primarily from the 49.1% increase in net revenue. Gross margin
increased from 47.8% in 2003 to 50.3% in 2004. The primary
factors that resulted in this 2.5 percentage point
improvement in gross margin were (i) a 1.5 percentage
point improvement in product margin primarily due to changes in
product mix, (ii) decreases in stock option exchange
expense, the amortization of purchased intangible assets and
stock-based compensation expense, which improved gross margin by
0.7, 0.6 and 0.3 percentage points, respectively,
(iii) offset by an increase in the provision for excess and
obsolete inventory of 0.4 percentage points.
In 2004 we increased our provision for excess and obsolete
inventory as compared to 2003 as a result of an increase in
gross inventory. The primary factors that resulted in increased
inventory were the expansion of inventory in response to higher
levels of purchase orders received from our customers, shorter
lead times for certain of our customers, and the buildup of
buffer inventory based upon our forecast of future demand for
certain key products. Our inventory levels are determined based
on these factors as well as the stage at which our products are
in their respective product life cycles and competitive
situations in the marketplace. Such considerations are balanced
against the risk of obsolescence or potentially excess inventory
levels and may require us to make additional provisions.
The following table presents details of certain non-cash
expenses incurred in manufacturing operations for 2004 and 2003
that are included in cost of revenue:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Stock-based compensation expense
|
|
$ |
1,367 |
|
|
|
0.1 |
% |
|
$ |
6,528 |
|
|
|
0.4 |
% |
|
$ |
(5,161 |
) |
|
|
(79.1 |
)% |
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
12,821 |
|
|
|
0.5 |
|
|
|
17,207 |
|
|
|
1.1 |
|
|
|
(4,386 |
) |
|
|
(25.5 |
) |
|
|
|
|
|
|
Stock option exchange expense
|
|
|
— |
|
|
|
— |
|
|
|
11,454 |
|
|
|
0.7 |
|
|
|
(11,454 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
14,188 |
|
|
|
0.6 |
% |
|
$ |
35,189 |
|
|
|
2.2 |
% |
|
$ |
(21,001 |
) |
|
|
(59.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2004 decrease in stock-based compensation expense related
primarily to a reduction in the number of assumed unvested
options and shares of restricted stock being amortized and the
elimination of deferred compensation as a result of the
termination of employment of certain employees. At
December 31, 2004 the unamortized balance of deferred
compensation, which will be amortized to cost of revenue through
2007, was approximately $0.2 million. However, if there are
any modifications or cancellations of the underlying unvested
stock options or restricted stock, we may be required to either
accelerate from future periods or cancel the remaining deferred
compensation. In the event additional deferred compensation is
recorded in connection with any future acquisitions, our cost of
revenue may be increased by its amortization.
The 2004 decrease in amortization of purchased intangible assets
resulted from fewer purchased intangible assets being amortized.
At December 31, 2004 the unamortized balance of completed
technology was
31
approximately $12.2 million, of which $9.2 million and
$3.0 million are expected to be amortized to cost of
revenue in 2005 and 2006, respectively. However, if we acquire
purchased intangible assets in the future, our cost of revenue
may be increased by the amortization of those assets.
We charged approximately $11.5 million in stock option
exchange expense to cost of revenue in 2003. There were no
comparable charges incurred in 2004.
Gross margin has been and will likely continue to be impacted in
the future by competitive pricing programs, fluctuations in the
volume of our product sales, 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 and the introduction of products
with lower margins, among other factors. Our gross margin may
also be impacted by additional stock-based compensation expense
and amortization of purchased intangible assets related to
future acquisitions and will be negatively impacted by the
effectiveness of the FASB’s revised rules on stock option
expensing in the third quarter of 2005. For a discussion of the
effects of future expensing of stock options, see “Recent
Accounting Pronouncements,” below. We anticipate that gross
margin in the first quarter of 2005 will be relatively
consistent with the 49.9% reported in the fourth quarter of 2004.
Research and
Development and Selling, General and Administrative Expenses
The following table presents research and development and
selling, general and administrative expenses for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
495,075 |
|
|
|
20.6 |
% |
|
$ |
434,018 |
|
|
|
27.0 |
% |
|
$ |
61,057 |
|
|
|
14.1 |
% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
212,727 |
|
|
|
8.9 |
|
|
|
190,138 |
|
|
|
11.8 |
|
|
|
22,589 |
|
|
|
11.9 |
|
Research and Development Expense. Research and
development expense consists primarily of salaries and related
costs of employees engaged in research, design and development
activities, costs related to engineering design tools and
computer hardware, subcontracting costs, prototyping costs and
facilities expenses. Research and development expense does not
include amounts associated with stock-based compensation or
stock option exchange expenses for employees engaged in research
and development or expense amounts associated with amortization
of purchased intangible assets related to research and
development activities.
The 2004 increase in research and development expense in
absolute dollars resulted primarily from a $41.2 million
increase in personnel-related expenses. The increase in
personnel-related expenses was primarily due to a 22.3% increase
in the number of employees engaged in research and development
activities in 2004, through acquisitions and hiring. In
addition, there were increases in outsourced engineering,
facilities and engineering design tool expenses in 2004, offset
in part by lower depreciation expense on computer software and
equipment. Based upon past experience, we anticipate that
research and development expense in absolute dollars will
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 anticipate that
research and development expense in the first quarter of 2005
will increase from the $127.4 million incurred in the
fourth quarter of 2004.
We remain committed to significant research and development
efforts to extend our technology leadership in the broadband
communications markets in which we operate. We hold over 800
U.S. patents, and we maintain an active program of filing
for and acquiring additional U.S. and foreign patents in
broadband communications and other fields.
Selling, General and Administrative Expense. Selling,
general and administrative expense consists primarily of
personnel-related expenses, legal and other professional fees,
facilities expenses, communications expenses and advertising
expenses. Selling, general and administrative expense does not
include amounts associated with stock-
32
based compensation or stock option exchange expenses for
administrative employees or expense amounts associated with
amortization of purchased intangible assets related to selling,
general and administrative activities.
The 2004 increase in selling, general and administrative expense
in absolute dollars resulted primarily from a $22.5 million
increase in personnel-related expenses. The increase in
personnel-related expenses was primarily due to a 22.1% increase
in the number of employees engaged in selling, general and
administrative activities in 2004, through acquisitions and
hiring. In addition, there were increases in expenses for travel
and entertainment, marketing and accounting, which were offset
by decreases in legal expense. Based upon past experience, we
anticipate that selling, general and administrative expense in
absolute dollars will continue to increase over the long-term to
support any expansion of our operations through indigenous
growth and acquisitions, as a result of periodic changes in our
infrastructure to support any increased headcount, changes in
our compensation policies, acquisition and integration
activities, and international operations, and as a result of
current and future litigation. We anticipate that selling,
general and administrative expense in the first quarter of 2005
will increase from the $51.4 million incurred in the fourth
quarter of 2004.
|
|
|
Stock-Based Compensation Expense |
The following table presents stock-based compensation expense
for employees engaged in research and development and selling,
general and administrative activities for 2004 and 2003, which
expense was segregated from the presentation of those items in
the consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
58,611 |
|
|
|
2.4 |
% |
|
$ |
219,337 |
|
|
|
13.6 |
% |
|
$ |
(160,726 |
) |
|
|
(73.3 |
)% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
14,709 |
|
|
|
0.6 |
|
|
|
44,623 |
|
|
|
2.7 |
|
|
|
(29,914 |
) |
|
|
(67.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
73,320 |
|
|
|
3.0 |
% |
|
$ |
263,960 |
|
|
|
16.3 |
% |
|
$ |
(190,640 |
) |
|
|
(72.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense generally represents the
amortization of deferred compensation resulting from
acquisitions. Deferred compensation primarily represents the
difference between the fair value of our Class A common
stock at the measurement date of each acquisition and the
exercise price of each unvested stock option or each share of
restricted stock assumed in the acquisition. To a much lesser
extent, stock-based compensation expense represents expense
related to restricted stock units issued to employees. Deferred
compensation is presented as a reduction of shareholders’
equity and is amortized ratably over the respective vesting
periods of the applicable unvested securities, generally three
to five years.
The 2004 decrease in stock-based compensation expense related
primarily to a reduction in the number of assumed unvested
options and shares of restricted stock being amortized and the
elimination of deferred compensation as a result of the
termination of employment of certain employees. At
December 31, 2004 the unamortized balance of deferred
compensation, which will be amortized to operating expenses
through 2008, was approximately $40.5 million. However, if
there are any modifications or cancellations of the underlying
unvested stock options or restricted stock, we may be required
to either accelerate from future periods or cancel the remaining
deferred compensation. In the event additional deferred
compensation is recorded in connection with any future
acquisitions, our operating expenses would be increased by its
amortization.
For a discussion of the effects of future expensing of stock
options, see the “Recent Accounting Pronouncements,”
below.
33
|
|
|
Amortization of Purchased Intangible Assets |
The following table presents amortization of purchased
intangible assets related to research and development and
selling, general and administrative activities for 2004 and
2003, which expense was segregated from the presentation of
those items in the consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
Increase |
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
— |
|
|
|
— |
% |
|
$ |
815 |
|
|
|
0.0 |
% |
|
$ |
(815 |
) |
|
|
— |
% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,703 |
|
|
|
0.2 |
|
|
|
2,689 |
|
|
|
0.2 |
|
|
|
1,014 |
|
|
|
37.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,703 |
|
|
|
0.2 |
% |
|
$ |
3,504 |
|
|
|
0.2 |
% |
|
$ |
199 |
|
|
|
5.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased intangible assets primarily include completed
technology, customer relationships, customer contracts and
backlog, and are amortized on a straight-line basis over the
estimated remaining useful lives of the respective assets,
ranging from less than one to three years.
At December 31, 2004 the unamortized balance of customer
relationships and other purchased intangible assets that will be
amortized to future operating expense was approximately
$4.9 million, of which $3.6 million and
$1.3 million are expected to be amortized in 2005 and 2006,
respectively. However, if we acquire purchased intangible assets
in the future, our operating expenses would be increased by the
amortization of those assets.
The following table presents settlement costs for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Settlement costs
|
|
$ |
68,700 |
|
|
|
2.9 |
% |
|
$ |
194,509 |
|
|
|
12.1 |
% |
|
$ |
(125,809 |
) |
|
|
(64.7 |
)% |
We recorded $68.7 million in settlement costs in 2004. Of
this amount, $60.0 million was related to the settlement of
various litigation matters, and the remaining $8.7 million
reflects settlement costs related to a claim arising from an
acquisition and certain indemnification costs. For a more
detailed discussion of our settled and outstanding litigation,
see Notes 3 and 12 of Notes to Consolidated Financial
Statements.
In May 2003 we completed a management transition at our
ServerWorks Corporation subsidiary and entered into a settlement
agreement resolving various issues and disputes raised by
certain employees and former securities holders of ServerWorks,
including issues and disputes with three departing employees,
relating to agreements entered into when we acquired ServerWorks
in January 2001. In connection with the settlement, we incurred
approximately $25.2 million in cash payments and expenses
and recorded a one-time non-cash charge of approximately
$88.1 million in May 2003, reflecting the acceleration from
future periods of stock-based compensation expense, most of
which was previously recorded as deferred compensation
established upon the acquisition of ServerWorks (and based upon
stock market valuations at the time of the acquisition).
In August 2003 we agreed with Intel Corporation to settle all
litigation between the companies as well as litigation involving
our respective affiliates. In connection with the settlement
agreement, we paid Intel $60.0 million in 2003.
We recorded an additional $21.2 million in settlement costs
in 2003 in connection with the settlement of other litigation
and third party claims.
34
|
|
|
In-Process Research and Development |
IPR&D totaled $63.8 million for acquisitions completed
in 2004. No comparable amount of IPR&D was recorded in 2003.
The amounts allocated to IPR&D were determined through
established valuation techniques used in the high technology
industry and were expensed upon acquisition as it was determined
that the underlying projects had not reached technological
feasibility and no alternative future uses existed. In
accordance with SFAS No. 2, Accounting for Research
and Development Costs, as clarified by FASB Interpretation,
or FIN, No. 4, Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the
Purchase Method — an Interpretation of FASB Statement
No. 2, amounts assigned to IPR&D meeting the
above-stated criteria were charged to expense as part of the
allocation of purchase price.
The fair value of the IPR&D for each of the acquisitions was
determined using the income approach. Under the income approach,
the expected future cash flows from each project under
development are estimated and discounted to their net present
value at an appropriate risk-adjusted rate of return.
Significant factors considered in the calculation of the rate of
return are the weighted-average cost of capital and return on
assets, as well as the risks inherent in the development
process, including the likelihood of achieving technological
success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence
and reliance on core technology, the existence of any
alternative future use or current technological feasibility, and
the complexity, cost and time to complete the remaining
development. Future cash flows for each project were estimated
based on forecasted revenue and costs, taking into account
product life cycles, and market penetration and growth rates.
The IPR&D charges include only the fair value of IPR&D
performed as of the respective acquisition dates. The fair value
of developed technology is included in identifiable purchased
intangible assets, and future research and development is
included in goodwill. We believe the amounts recorded as
IPR&D, as well as developed technology, represent the fair
values and approximate the amounts an independent party would
pay for these projects at the time of the respective acquisition
dates.
The following table summarizes the significant assumptions at
the acquisition dates underlying the valuations of IPR&D for
our acquisitions completed in 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
Average |
|
Average |
|
|
|
Risk |
|
|
| |
|
|
|
Estimated |
|
Estimated |
|
Estimated |
|
Adjusted |
|
|
| |
|
|
|
Percent |
|
Time to |
|
Cost to |
|
Discount |
|
|
| Company Acquired |
|
Development Projects |
|
Complete |
|
Complete |
|
Complete |
|
Rate |
|
IPR&D |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(In years) |
|
(In millions) |
|
|
|
(In millions) |
|
|
|
|
|
|
RAIDCore
|
|
|
RAID software stack |
|
|
|
60 |
% |
|
|
1 |
|
|
$ |
1.8 |
|
|
|
23 |
% |
|
$ |
2.3 |
|
|
|
|
|
|
|
Sand Video
|
|
|
Decoder/codec chips |
|
|
|
45 |
|
|
|
1.5 |
|
|
|
6.4 |
|
|
|
28 |
|
|
|
20.5 |
|
|
|
|
|
|
|
M-Stream
|
|
|
Algorithm implemented in DSP chip |
|
|
|
30 |
|
|
|
1 |
|
|
|
1.3 |
|
|
|
26 |
|
|
|
3.7 |
|
|
|
|
|
|
|
Zyray
|
|
|
WCDMA baseband co-processor |
|
|
|
80 |
|
|
|
1 |
|
|
|
5.6 |
|
|
|
24 |
|
|
|
25.9 |
|
|
|
|
|
|
|
Alphamosaic
|
|
|
Multimedia co-processor |
|
|
|
50 |
|
|
|
1 |
|
|
|
11.5 |
|
|
|
21 |
|
|
|
11.3 |
|
We completed the development projects related to the RAIDCore
acquisition. For one development project related to the Sand
Video acquisition, we reallocated the resources to focus on
semiconductor products that we believe are a higher priority.
All other development projects are still in process.
Except as noted above, actual results to date have been
consistent, in all material respects, with our assumptions at
the time of the acquisitions. The assumptions consist primarily
of expected completion dates for the IPR&D projects,
estimated costs to complete the projects, and revenue and
expense projections for the products once they have entered the
market.
As of the respective acquisition dates of the 2004 acquisitions,
certain ongoing development projects were in process. Research
and development costs to bring the products of the acquired
companies to technological feasibility are not expected to have
a material impact on our results of operations or financial
condition.
35
Impairment of
Goodwill and Other Intangible Assets
The following table presents impairment of goodwill and other
intangible assets for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
|
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
% Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Impairment of goodwill and other intangible assets
|
|
$ |
18,000 |
|
|
|
0.7 |
% |
|
$ |
439,611 |
|
|
|
27.3 |
% |
|
$ |
(421,611 |
) |
|
|
(95.9 |
)% |
We performed annual impairment assessments of the carrying value
of goodwill recorded in connection with various acquisitions as
required under SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, in October 2004 and
2003. Upon completion of the October 2004 and 2003 annual
impairment assessments, we determined no impairment was
indicated as the estimated fair values of our four reporting
units exceeded their respective carrying values. In accordance
with SFAS 142, we compared the carrying value of each of
our reporting units that existed at those times to their
estimated fair values. At October 1, 2004 and 2003 we
determined and identified our four reporting units in accordance
with SFAS 142.
We estimated the fair values of our reporting units primarily
using the income approach valuation methodology that includes
the discounted cash flow method, taking into consideration the
market approach and certain market multiples as verification of
the values derived using the discounted cash flow methodology.
The discounted cash flows for each reporting unit were based on
discrete four year financial forecasts developed by management
for planning purposes and consistent with those distributed to
our Board of Directors. Cash flows beyond the four year discrete
forecasts were estimated using a terminal value calculation,
which incorporated historical and forecasted financial trends
for each identified reporting unit and considered long-term
earnings growth rates for publicly traded peer companies. Future
cash flows were discounted to present value by incorporating the
present value techniques discussed in FASB Concepts
Statement 7, Using Cash Flow Information and Present
Value in Accounting Measurements, or Concepts
Statement 7. Specifically, the income approach valuations
included reporting unit cash flow discount rates ranging from
13% to 17%, and terminal value growth rates ranging from 0% to
11%. Publicly available information regarding the market
capitalization of our company was also considered in assessing
the reasonableness of the cumulative fair values of our
reporting units estimated using the discounted cash flow
methodology.
In May 2003 we determined that indicators of impairment existed
for two of our reporting units, ServerWorks and mobile
communications, and an additional impairment assessment was
performed at that time. We tested the goodwill of these two
reporting units for impairment in accordance with SFAS 142.
The implied fair value of goodwill was determined in the same
manner as that which is utilized to estimate the amount of
goodwill recognized in a business combination. As part of the
second step of the impairment test performed in 2003, we
calculated the fair value of certain assets, including developed
technology and IPR&D. To determine the implied value of
goodwill, fair values were allocated to the assets and
liabilities of each of the affected reporting units in 2003. The
implied fair value of goodwill was measured as the excess of the
fair value of the affected reporting unit over the amounts
assigned to its assets and liabilities. The impairment loss for
each of the affected reporting units was measured by the amount
the carrying value of goodwill for that reporting unit exceeded
the implied fair value of the goodwill. Based on this
assessment, we recorded a charge of $438.6 million in June
2003 to write down the value of goodwill associated with the
reporting units. Of this charge, $414.5 million represented
the balance of goodwill related to the ServerWorks reporting
unit and $24.1 million represented the balance of goodwill
related to the mobile communications reporting unit.
With respect to the ServerWorks reporting unit, the primary
factors that contributed to the impairment assessment were
additional competitive pressures in the server market and recent
design losses experienced by that reporting unit that were
attributable, in part, to our ongoing inability to obtain
required design information from a third party that is also a
competitor. Another factor that contributed to the impairment
assessment was the recording of additional goodwill due to
contingent consideration earned by former ServerWorks
stockholders and employees (see Note 3 of Notes to
Consolidated Financial Statements). As a result of the
competitive pressures
36
and design losses, we reduced our forecasts of future operating
results for the ServerWorks reporting unit for periods beginning
as early as the second quarter of 2004 with the expectation of
future loss of market share for that business. These forecasts
in turn formed the basis for estimating the fair value of the
ServerWorks reporting unit as of June 2003. We are continuing to
pursue strategies to reposition our ServerWorks business and
develop alternative sources of revenue for that reporting unit.
With respect to the mobile communications reporting unit, the
primary factor that contributed to the impairment assessment was
the recording of additional goodwill due to contingent
consideration earned by former Mobilink shareholders and
employees in May 2003 (see Note 3 of Notes to Consolidated
Financial Statements), after that reporting unit had already
been written down to its implied fair value in October 2002.
In January 2004 we acquired approximately 80 patents and patent
applications related to the read channel and hard disk
controller market, for $18.0 million. The immediate purpose
for acquiring this patent portfolio was to assist us in the
defense and settlement of then ongoing and future intellectual
property litigation. As a result, we were unable to estimate any
future cash flows from the patents. We also did not have any
plans to resell the patents to a third party. Due to our
intended use for these assets, we concluded that indicators of
impairment existed upon acquisition of the patents because the
carrying value of the patents might not be recoverable. Upon
determining that indicators of impairment existed, we performed
a recoverability test in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS 144. Estimates of future cash flows
used to test the recoverability of long-lived assets should
include only the future cash flows that are directly associated
with, and that are expected to arise as a direct result of the
use and eventual disposition of the asset. The only cash flows
expected to arise as a direct result of the use of the patents
are the cash savings expected to result from reduced but
undeterminable litigation expenses over the next several years.
Due to the unpredictable nature of legal disputes, it is not
possible to reasonably: (i) determine if our strategy with
respect to the patents will be successful, (ii) forecast
litigation expenses that would have been incurred if the patent
portfolio was not acquired, or (iii) forecast cash flows
generated as a result of acquiring the patents. As a result, no
reasonable analysis could be prepared to support future cash
flows associated with the patents. Accordingly, pursuant to
SFAS 144 the patents were determined to be fully impaired
at the date of acquisition. The impairment charge for the patent
portfolio was classified as an impairment of goodwill and other
intangible assets in the consolidated statements of operations
in 2004.
For further discussion of impairment of goodwill and other
intangible assets, see Notes 1 and 9 of Notes to
Consolidated Financial Statements.
Stock Option
Exchange Expense
In April 2003 we commenced an offering to our employees to
voluntarily exchange certain vested and unvested stock options.
Under the program, employees holding options to purchase our
Class A or Class B common stock were given the
opportunity to exchange certain of their existing options, with
exercise prices at or above $23.58 per share. In connection
with this offering we recorded a stock option exchange expense
for employees engaged in research and development and selling,
general and administrative activities in the amount of
$209.3 million in 2003. No comparable charges were incurred
in 2004.
On May 5, 2003 the offer period ended and we accepted for
exchange and cancellation vested eligible options to
purchase 32,642,634 shares of Class A or Class B
common stock, with a weighted average exercise price of
$48.59 per share. In exchange, we issued 8,574,033 fully
vested, non-forfeitable shares of our Class A common stock
and recorded stock-based compensation expense of approximately
$162.3 million related to the issuance of such vested
shares, based on the closing price of our Class A common
stock on May 5, 2003 of $18.93 per share. The
8,574,033 shares were included in our calculation of net
loss per share effective as of May 5, 2003. Additionally,
on May 5, 2003 we accepted for exchange and cancellation
unvested eligible options to purchase
20,086,234 shares of Class A or Class B common
stock, with a weighted average exercise price of $50.93 per
share. In exchange, new options to purchase
18,301,676 shares of our Class A common stock were
issued on November 10, 2003. The terms and conditions of
the new options, including the vesting schedules, were
substantially the same as the terms and conditions of the
options cancelled. The exercise price for the new
37
options was $35.12 per share which was the last reported
trading price of our Class A common stock on the grant date.
Eligible employees (members of our Board of Directors were not
eligible to participate in the offer) who participated in the
offer received, in exchange for the cancellation of vested
eligible options, an amount of consideration, represented by
fully vested, non-forfeitable common stock, equal to the number
of shares underlying such vested eligible options, multiplied by
the offered value (as determined under certain terms and
conditions set forth in our offer), divided by the closing price
of our Class A common stock as reported on the NASDAQ
National Market on May 5, 2003. We concluded that the
consideration paid for the eligible options represented
“substantial consideration” as required by EITF Issue
No. 00-23 Issues Relating to Accounting for Stock
Compensation Under APB Opinion No. 25 and FASB
Interpretation No. 44, or EITF 00-23, as the
offered value per vested option was at least equal to the fair
value for each eligible option, as determined using the
Black-Scholes option pricing model. In determining the fair
value of the eligible options using the Black-Scholes option
pricing model, we primarily used the following assumptions:
(i) an expected life of approximately four years;
(ii) a volatility of 0.70 during that expected life;
(iii) a risk-free interest rate of 2.72%; and (iv) no
dividends. The weighted average offered value per vested option
share was $4.97.
Certain of our employees held unvested eligible options
that were previously assumed by us in connection with
acquisitions that were accounted for using the purchase method
of accounting. We had recorded deferred compensation with
respect to those options based upon the applicable stock market
valuation at the time of acquisition. To the extent those
employees tendered, and we accepted for exchange and
cancellation, such assumed eligible options in exchange for new
options, we were required to immediately accelerate the
amortization of the remaining related deferred compensation
previously recorded. Consequently, we recorded a non-cash charge
of approximately $55.6 million in May 2003, reflecting the
acceleration from future periods of stock-based compensation
expense.
Variable accounting is not required under EITF 00-23 for
eligible options subject to the offer that were not surrendered
for cancellation, because: (i) the shares of Class A
common stock offered as consideration for the surrendered
options were fully vested and non-forfeitable and (ii) the
number of shares received by an employee who accepted the offer
was based on the number of surrendered eligible options
multiplied by the offered value per vested option, divided by
the fair value of the stock at the date of exchange.
We further concluded that the “look back” and
“look forward” provisions of paragraph 45 of FIN
No. 44, Accounting for Certain Transactions Involving
Stock Compensation — An Interpretation of APB Opinion
No. 25, or FIN 44, applied to the stock options
surrendered for cancellation. If any stock options were granted
to participants in the offer within the six months prior to or
following May 5, 2003, those stock options would be subject
to variable accounting. As a result of these provisions, we
recorded approximately $0.3 million and $3.5 million
in 2004 and 2003, respectively, of stock-based compensation
expense related to the portion of these variable options that
vested during the periods.
In addition to the non-cash charges described above, we incurred
certain associated employer payroll taxes and professional fees
of approximately $2.8 million in connection with the
offering. Employees were responsible for satisfying their
portion of the payroll taxes, either through direct cash payment
to us or through the sale of a portion of their new shares.
38
Restructuring
Costs
Activity and liability balances related to the 2002 and 2001
Restructuring Plans were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2001 Restructuring Plan |
|
2002 Restructuring Plan |
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Consolidation |
|
|
|
Consolidation |
|
|
| |
|
Workforce |
|
of Excess |
|
Workforce |
|
of Excess |
|
|
| |
|
Reductions |
|
Facilities |
|
Reductions |
|
Facilities |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Restructuring liabilities at December 31, 2001
|
|
$ |
124 |
|
|
$ |
10,470 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,594 |
|
|
|
|
|
|
|
Charged to expense in 2002
|
|
|
1,411 |
|
|
|
30,454 |
|
|
|
65,048 |
|
|
|
22,767 |
|
|
|
119,680 |
|
|
|
|
|
|
|
Liabilities assumed in acquisition
(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,815 |
|
|
|
6,815 |
|
|
|
|
|
|
|
Non-cash
costs(2)
|
|
|
(135 |
) |
|
|
(4,868 |
) |
|
|
(46,821 |
) |
|
|
(1,495 |
) |
|
|
(53,319 |
) |
|
|
|
|
|
|
Cash
payments(3)
|
|
|
(1,400 |
) |
|
|
(6,502 |
) |
|
|
(16,683 |
) |
|
|
(3,494 |
) |
|
|
(28,079 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2002
|
|
|
— |
|
|
|
29,554 |
|
|
|
1,544 |
|
|
|
24,593 |
|
|
|
55,691 |
|
|
|
|
|
|
|
Charged to expense in 2003
|
|
|
— |
|
|
|
— |
|
|
|
2,932 |
|
|
|
— |
|
|
|
2,932 |
|
|
|
|
|
|
|
Non-cash
costs(2)
|
|
|
— |
|
|
|
— |
|
|
|
(972 |
) |
|
|
— |
|
|
|
(972 |
) |
|
|
|
|
|
|
Cash
payments(3)
|
|
|
— |
|
|
|
(11,195 |
) |
|
|
(3,504 |
) |
|
|
(5,778 |
) |
|
|
(20,477 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2003
|
|
|
— |
|
|
|
18,359 |
|
|
|
— |
|
|
|
18,815 |
|
|
|
37,174 |
|
|
|
|
|
|
|
Liabilities assumed in acquisitions
(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,411 |
|
|
|
3,411 |
|
|
|
|
|
|
|
Cash
payments(3)
|
|
|
— |
|
|
|
(6,066 |
) |
|
|
— |
|
|
|
(7,402 |
) |
|
|
(13,468 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2004
|
|
$ |
— |
|
|
$ |
12,293 |
|
|
$ |
— |
|
|
$ |
14,824 |
|
|
$ |
27,117 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Although not related to the 2002 or 2001 Restructuring Plans, we
assumed additional liabilities of approximately
$6.8 million in connection with the Mobilink acquisition in
2002 and $3.4 million in connection with the Sand Video,
WIDCOMM, Zyray and Alphamosaic acquisitions in 2004, for the
consolidation of excess facilities, relating primarily to lease
terminations, non-cancelable lease costs and write-offs of
leasehold improvements. These costs were accounted for under
EITF Issue No. 95-3, Recognition of Liabilities in
Connection with Purchase Business Combinations, and were
recognized as liabilities assumed in the purchase business
combinations and offset by corresponding increases in goodwill.
The liabilities related to these acquisitions have been
classified as restructuring liabilities for presentation in the
consolidated balance sheets. |
| |
| (2) |
Non-cash costs related to stock-based compensation expense
resulting from an extension of the exercise period for vested
stock options of certain terminated employees and the
acceleration of the vesting period of certain options of certain
terminated employees as required by their assumed option
agreements, and the write-off of leasehold improvements. |
| |
| (3) |
Cash payments relate to severance and fringe benefits, net lease
payments on excess facilities, lease terminations and
non-cancelable lease costs. |
These restructuring charges are classified as operating expenses
in our consolidated statements of operations.
Certain of the restructuring charges were recorded in periods
subsequent to the initial implementations of the 2001 and 2002
Restructuring Plans. These subsequent charges were primarily due
to the inability to reasonably estimate those costs at the time
of the initial implementations as we were still in the process
of reviewing many of our facilities to determine where we could
consolidate and which locations would no longer be required. We
do not anticipate recording any additional charges under the
2001 and 2002 Restructuring Plans.
The consolidation of excess facilities costs will be paid over
the respective lease terms through 2010.
39
Interest and Other
Income, Net
The following table presents interest and other income, net for
2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
Increase |
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Interest income, net
|
|
$ |
15,010 |
|
|
|
0.7 |
% |
|
$ |
6,828 |
|
|
|
0.4 |
% |
|
$ |
8,182 |
|
|
|
119.8 |
% |
|
|
|
|
|
|
Other income, net
|
|
|
7,317 |
|
|
|
0.3 |
|
|
|
26,053 |
|
|
|
1.6 |
|
|
|
(18,736 |
) |
|
|
(71.9 |
) |
Interest Income, Net. Interest income, net, reflects
interest earned on average cash and cash equivalents and
marketable securities balances. The increase in 2004 was
primarily the result of an overall increase in our cash and
marketable securities balances and an increase in interest rates.
Other Income, Net. 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. We recognized gains from
strategic investments in the amounts of $5.2 million and
$24.4 million in 2004 and 2003, respectively. The 2003 gain
on investment was incurred on an investment that was previously
written down by $24.1 million in September 2002,
representing an other-than-temporary decline in the value of
that investment at the time. The 2003 gain was offset in part by
$2.3 million in losses, representing other-than-temporary
declines in the value of other strategic investments. For
additional information, see the comparable discussion included
under “Years Ended December 31, 2003 and 2002,”
below.
|
|
|
Provision for Income Taxes |
The following table presents the provision for income taxes for
2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
75,607 |
|
|
|
3.2 |
% |
|
$ |
25,127 |
|
|
|
1.5 |
% |
|
$ |
50,480 |
|
|
|
200.9 |
% |
The federal statutory rate was 35% for 2004 and 2003. The
difference between our effective tax rate for 2004 and the
federal statutory rate resulted primarily from the effects of
nondeductible IPR&D and foreign earnings taxed at rates
differing from the federal statutory rate. In addition, we
realized tax benefits resulting from the reversal of certain
prior period tax accruals of $21.3 million related to
foreign subsidiaries due to the expiration of the statute of
limitations for the assessment of taxes related to such periods.
The difference between our effective tax rate for 2003 and the
federal statutory rate resulted primarily from the effects of
impairment of goodwill, foreign earnings taxed at rates
differing from the federal statutory rate, as well as the
effects of 2003 domestic losses recorded without tax benefit. We
utilize the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income
Taxes, or SFAS 109. See Note 5 of Notes to Consolidated
Financial Statements.
We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized in accordance with
SFAS 109. As a result of our cumulative losses and the full
utilization of our loss carrybacks, we provided a full valuation
allowance against our net deferred tax assets in 2004 and 2003.
40
|
|
|
Years Ended December 31, 2003 and 2002 |
|
|
|
Net Revenue, Cost of Revenue and Gross Profit |
The following table presents net revenue, cost of revenue and
gross profit for 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Net revenue
|
|
$ |
1,610,095 |
|
|
|
100.0 |
% |
|
$ |
1,082,948 |
|
|
|
100.0 |
% |
|
$ |
527,147 |
|
|
|
48.7 |
% |
|
|
|
|
|
|
Cost of revenue
|
|
|
839,776 |
|
|
|
52.2 |
|
|
|
604,397 |
|
|
|
55.8 |
|
|
|
235,379 |
|
|
|
38.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
770,319 |
|
|
|
47.8 |
% |
|
$ |
478,551 |
|
|
|
44.2 |
% |
|
$ |
291,768 |
|
|
|
61.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue. The following table presents net revenue
from each of our target markets and their contributions to the
increase in net revenue in 2003 as compared to 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Enterprise networking
|
|
$ |
917,876 |
|
|
|
57.0 |
% |
|
$ |
702,562 |
|
|
|
64.9 |
% |
|
$ |
215,314 |
|
|
|
30.6 |
% |
|
|
|
|
|
|
Broadband communications
|
|
|
373,562 |
|
|
|
23.2 |
|
|
|
288,609 |
|
|
|
26.7 |
|
|
|
84,953 |
|
|
|
29.4 |
|
|
|
|
|
|
|
Mobile and wireless
|
|
|
318,657 |
|
|
|
19.8 |
|
|
|
91,777 |
|
|
|
8.4 |
|
|
|
226,880 |
|
|
|
247.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
1,610,095 |
|
|
|
100.0 |
% |
|
$ |
1,082,948 |
|
|
|
100.0 |
% |
|
$ |
527,147 |
|
|
|
48.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The growth in net revenue resulted primarily from an increase in
volume shipments of our semiconductor products stemming from the
rise in demand for our products in each of our major target
markets in 2003.
Cost of Revenue and Gross Profit. The 2003 increase in
absolute dollars of gross profit resulted primarily from the
48.7% growth in net revenue. The increase in gross margin in
2003 resulted primarily from lower amortization of purchased
intangible assets, lower stock-based compensation expense and
shifts in our product mix, offset in part by additional
stock-based compensation expense due to our stock option
exchange.
The following table presents details of certain non-cash
expenses incurred in manufacturing operations for 2003 and 2002
that are included in cost of revenue:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
Increase |
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Stock-based compensation expense
|
|
$ |
6,528 |
|
|
|
0.4 |
% |
|
$ |
12,917 |
|
|
|
1.2 |
% |
|
$ |
(6,389 |
) |
|
|
(49.5 |
)% |
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
17,207 |
|
|
|
1.1 |
|
|
|
56,032 |
|
|
|
5.2 |
|
|
|
(38,825 |
) |
|
|
(69.3 |
) |
|
|
|
|
|
|
Stock option exchange expense
|
|
|
11,454 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
11,454 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
35,189 |
|
|
|
2.2 |
% |
|
$ |
68,949 |
|
|
|
6.4 |
% |
|
$ |
(33,760 |
) |
|
|
(49.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
Research and Development and Selling, General and
Administrative Expenses |
The following table presents research and development and
selling, general and administrative expenses for 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
Increase |
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
434,018 |
|
|
|
27.0 |
% |
|
$ |
461,804 |
|
|
|
42.6 |
% |
|
$ |
(27,786 |
) |
|
|
(6.0 |
)% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
190,138 |
|
|
|
11.8 |
|
|
|
165,267 |
|
|
|
15.3 |
|
|
|
24,871 |
|
|
|
15.0 |
|
Research and Development Expense. The 2003 decrease in
research and development expense in absolute dollars resulted
primarily from a $14.0 million decrease in
personnel-related expenses and a $7.4 million decrease in
prototyping costs due to our restructuring efforts. In addition,
there were modest decreases in system level testing and costs
related to engineering design tools and computer hardware.
Research and developments costs in 2003 reflected cost savings
resulting from the restructuring plan we began implementing in
the fourth quarter of 2002, or the 2002 Restructuring Plan,
which included workforce reductions. This was partially offset
by new hires in 2003 as well as a change in our employee
compensation policies implemented in the second quarter of 2003
that resulted in an increase in cash compensation to certain
employees.
Selling, General and Administrative Expense. The 2003
increase in selling, general and administrative expense in
absolute dollars resulted primarily from a $16.6 million
increase in legal costs. In addition, there were modest
increases in salaries and related costs, insurance costs and bad
debt expense, offset in part by a decrease in information
technology maintenance and supplies expense and expenditures for
travel and entertainment.
|
|
|
Stock-Based Compensation Expense |
The following table presents stock-based compensation expense
for employees engaged in research and development and selling,
general and administrative activities for 2003 and 2002, which
expense was segregated from the presentation of those items in
the consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
219,337 |
|
|
|
13.6 |
% |
|
$ |
252,365 |
|
|
|
23.3 |
% |
|
$ |
(33,028 |
) |
|
|
(13.1 |
)% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
44,623 |
|
|
|
2.7 |
|
|
|
107,425 |
|
|
|
9.8 |
|
|
|
(62,802 |
) |
|
|
(58.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
263,960 |
|
|
|
16.3 |
% |
|
$ |
359,790 |
|
|
|
33.1 |
% |
|
$ |
(95,830 |
) |
|
|
(26.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2003 decrease in stock-based compensation expense related
primarily to the elimination of deferred compensation due to the
termination of certain employees and certain assumed options
being fully amortized, offset in part by the acceleration from
future periods of stock-based compensation expense related to
certain assumed stock options and additional deferred
compensation related to earned contingent consideration.
Employee terminations in 2003 and 2002 resulted in the
elimination of deferred compensation of approximately
$30.1 million and $103.0 million, respectively, that
is no longer amortized. We recorded approximately
$60.5 million of net deferred compensation in 2003,
primarily for contingent consideration earned in connection with
our acquisitions of ServerWorks and Mobilink. We recorded
approximately $2.2 million of deferred compensation in
2002, primarily for restricted stock assumed in our acquisition
of Mobilink.
42
|
|
|
Amortization of Purchased Intangible Assets |
The following table presents amortization of purchased
intangible assets related to research and development and
selling, general and administrative activities for 2003 and
2002, which expense was segregated from the presentation of
those items in the consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Research and development
|
|
$ |
815 |
|
|
|
0.0 |
% |
|
$ |
19,566 |
|
|
|
1.8 |
% |
|
$ |
(18,751 |
) |
|
|
(95.8 |
)% |
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,689 |
|
|
|
0.2 |
|
|
|
2,821 |
|
|
|
0.3 |
|
|
|
(132 |
) |
|
|
(4.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,504 |
|
|
|
0.2 |
% |
|
$ |
22,387 |
|
|
|
2.1 |
% |
|
$ |
(18,883 |
) |
|
|
(84.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2003 decrease in amortization of purchased intangible assets
was primarily a result of certain purchased intangible assets
becoming fully amortized during the year.
|
|
|
Impairment of Goodwill and Other Intangible Assets |
The following table presents impairment of goodwill and other
intangible assets for 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Impairment of goodwill and other intangible assets
|
|
$ |
439,611 |
|
|
|
27.3 |
% |
|
$ |
1,265,038 |
|
|
|
116.8 |
% |
|
$ |
(825,427 |
) |
|
|
(65.2 |
)% |
For impairment of goodwill and other intangible assets in 2003,
see the comparable discussion included under “Years Ended
December 31, 2004 and 2003,” above.
We performed our annual impairment assessment of the carrying
value of goodwill recorded in connection with our various
acquisitions required under SFAS 142 in October 2002 and
determined that the carrying values of four of our seven
reporting units exceeded their estimated fair values. The four
affected reporting units were broadband processors, client
server networking, mobile communications and ServerWorks.
Because indicators of impairment existed for these four
reporting units, we performed the second step of the test
required under SFAS 142 to determine the fair value of the
goodwill for each of the affected reporting units.
We tested the goodwill of these reporting units for impairment
in accordance with SFAS 142, as described above. Based on
this assessment, we recorded a charge of $1.241 billion in
October 2002. Of such charge, $536.0 million related to the
goodwill of our broadband processor reporting unit,
$206.1 million related to the goodwill of our client server
networking reporting unit, $179.6 million related to the
goodwill of our mobile communications reporting unit and
$319.3 million related to the goodwill of our ServerWorks
reporting unit.
The primary factors resulting in the 2002 impairment charge
were: (i) the continued significant economic slowdown in
the technology sector and the semiconductor industry, which
affected both our operations at that time and our expectations
with respect to future revenue, (ii) a decline in the
valuation of technology company stocks, including the valuation
of our stock, and (iii) unfavorable revisions in revenue
and cash flow expectations regarding certain of our acquired
businesses. These acquired businesses were priced based on
valuation multiples that were indicative of the value at which
businesses were purchased and sold at that time, but were
inflated relative to historical and subsequent standards. In the
second and third quarters of 2002 demand for servers, WAN
networking equipment, handheld devices and other products using
our chips declined relative to the demand that was anticipated
when certain of our purchase acquisitions were consummated. In
addition, we recognized that a sustained decline in demand
combined with an oversupply of these products resulted in
increased price competition for certain chipsets, giving effect
to shrinking profit margins and expected future cash flows for
our four affected reporting units. In response to the existing
market conditions, we initiated a
43
restructuring program in the fourth quarter of 2002 that
included significant headcount reductions, and we decreased our
investment in certain target markets that were either performing
below our expectations or had low near term growth potential. As
a result, we revised our forecasts of future operating results,
which were in turn used in calculating the estimated fair values
of the reporting units.
In December 2003 and 2002, we acquired over 150 patents related
to various technologies, including among others, wireless
networking topologies and protocols, dual mode wireless
transceivers, power management in integrated circuits, Ethernet
networking, personal video recording, and VoIP telephony, for
$1.0 million and $24.0 million, respectively. Pursuant
to SFAS 144 the patents were determined to be fully
impaired at their respective dates of acquisition. The
impairment charge for the patent portfolio was classified as an
impairment of intangible assets in the consolidated statements
of operations in 2003 and 2002.
For further discussion of impairment of goodwill and other
intangible assets, see Notes 1 and 9 of Notes to
Consolidated Financial Statements.
The following table presents settlement costs for 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Increase |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Settlement costs
|
|
$ |
194,509 |
|
|
|
12.1 |
% |
|
$ |
3,000 |
|
|
|
0.3 |
% |
|
$ |
191,509 |
|
|
|
6,383 |
% |
For settlement costs in 2003, see the comparable discussion
included under “Years Ended December 31, 2004 and
2003,” above.
For a more detailed discussion of our settled and outstanding
litigation, see Notes 3 and 12 of Notes to Consolidated
Financial Statements.
|
|
|
Stock Option Exchange Expense |
For stock option exchange expense in 2003, see the comparable
discussion included under “Years Ended December 31,
2004 and 2003,” above. There was no comparable stock option
exchange expense in 2002.
The following table presents restructuring costs for 2003 and
2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Restructuring costs
|
|
$ |
2,932 |
|
|
|
0.2 |
% |
|
$ |
119,680 |
|
|
|
11.1 |
% |
|
$ |
(116,748 |
) |
|
|
(97.6 |
)% |
For a description of our restructuring activities in 2003 and
2002, see the comparable discussion included under “Years
Ended December 31, 2004 and 2003,” above.
44
|
|
|
Interest and Other Income (Expense), Net |
The following table presents interest and other income
(expense), net for 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
Increase |
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Interest income, net
|
|
$ |
6,828 |
|
|
|
0.4 |
% |
|
$ |
12,183 |
|
|
|
1.1 |
% |
|
$ |
(5,355 |
) |
|
|
(44.0 |
)% |
|
|
|
|
|
|
Other income (expense), net
|
|
|
26,053 |
|
|
|
1.6 |
|
|
|
(32,750 |
) |
|
|
(3.0 |
) |
|
|
58,803 |
|
|
|
179.6 |
|
Interest Income, Net. The decrease in 2003 resulted
primarily from a decline in interest rates, offset in part by a
decline in interest expense on lower average debt balances.
|
|
|
Other Income (Expense), Net |
For Other Income (Expense), Net in 2003, see the comparable
discussion included under “Years Ended December 31,
2004 and 2003,” above.
In 2002 we recorded impairment losses on strategic investments
of approximately $37.8 million. We recorded a loss of
approximately $4.1 million in February 2002, which was
based on information that led us to believe that the investee
was proceeding into either a major financial restructuring
and/or bankruptcy. This belief was based on our working
knowledge of the investee, the fact that we had been solicited
by the investee company for continued financings, and the poor
performance of venture technology investments in the
geographical region. Previously, this privately held investment
was reduced to its fair value of $4.1 million in September
2001 based on a then recent round of financing.
We also recorded impairment losses on strategic investments of
$33.7 million in September 2002. Approximately
$24.1 million related to a second privately held
investment. Originally, this investment had high growth
prospects and was proposed to be selected for a key customer
design win. This key design win potentially would have generated
hundreds of millions in revenue over the next several years and
positioned the investee for either an initial public offering or
as an acquisition target. Ultimately, the investee did not
secure the key design win, and, accordingly, was forced to enter
into discussions to obtain a subsequent round of financing at a
lower valuation. Therefore, at September 30, 2002 we
believed it was necessary to permanently reduce the carrying
value of this investment to its fair value, based on the term
sheet for the potential subsequent financing. In addition,
approximately $7.8 million in impairment losses was related
to a third privately held investment. The impairment was caused
by an impending financing that was offered at a price
substantially lower than our previously reduced carrying value.
Earlier, this privately held investment was reduced to its fair
value of $8.8 million in September 2001 based on a pricing
model using historical financial information. In September 2002
we recorded an additional $1.8 million in impairment losses
relating to other strategic investments using the methodologies
described above.
The losses recorded in 2002 were offset in part by approximately
$4.6 million in gains realized on sales of an investment in
a publicly traded company.
|
|
|
Provision for Income Taxes |
The following table presents provision for income taxes for 2003
and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
|
|
| |
|
|
|
|
|
|
| |
|
2003 |
|
2002 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
% of Net |
|
|
|
% of Net |
|
|
|
% |
| |
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
Decrease |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except percentages) |
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
25,127 |
|
|
|
1.5 |
% |
|
$ |
297,594 |
|
|
|
27.5 |
% |
|
$ |
(272,467 |
) |
|
|
(91.6 |
)% |
The federal statutory rate was 35% for 2003 and 2002. No income
tax benefit has been recorded for domestic tax losses. Our
income tax expense in 2003 and 2002 primarily represents taxes
on certain foreign
45
operations and increases in the valuation allowance for deferred
tax assets. As a result of our cumulative losses and the full
utilization of our loss carrybacks, we provided a full valuation
allowance against our net deferred tax assets in 2003 and 2002.
Subsequent Events
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.
Recent Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment, or SFAS 123R, which is a
revision of SFAS 123, Accounting for Stock-Based
Compensation, or SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values and does not allow the previously
permitted pro forma disclosure as an alternative to financial
statement recognition. SFAS 123R supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25, and related
interpretations and amends SFAS No. 95, Statement
of Cash Flows, or SFAS 95. SFAS 123R is scheduled
to be effective beginning in the third quarter of fiscal 2005.
SFAS 123R allows for either prospective recognition of
compensation expense or retroactive recognition, which may date
back to the original issuance of SFAS 123 or only to
interim periods in the year of adoption. We are currently
evaluating these transition methods.
The adoption of the SFAS 123R fair value method will have a
significant impact on our reported results of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS 123R cannot be
predicted at this time because that will depend on the fair
value and number of share-based payments granted in the future.
However, had we adopted SFAS 123R in prior periods, the
magnitude of the impact of that standard would have approximated
the impact of SFAS 123 assuming the application of the
Black-Scholes model as described in the disclosure of pro forma
net loss and pro forma loss per share in Note 1 of our
Notes to Consolidated Financial Statements. SFAS 123R also
requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in
the future, the amount of operating cash flows recognized in
2004 for such excess tax deductions was $81.8 million. No
comparable amounts were recorded in 2003 and 2002.
Liquidity and Capital Resources
Working Capital and Cash and Marketable Securities on
Hand. The following table presents working capital and cash
and marketable securities on hand:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
December 31, |
|
|
| |
|
2004 |
|
2003 |
|
Increase |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Working capital
|
|
$ |
1,087,342 |
|
|
$ |
492,227 |
|
|
$ |
595,115 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(1)
|
|
$ |
858,592 |
|
|
$ |
558,669 |
|
|
$ |
299,923 |
|
|
|
|
|
|
|
Short-term marketable
securities(1)
|
|
|
324,041 |
|
|
|
47,296 |
|
|
|
276,745 |
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
92,918 |
|
|
|
36,405 |
|
|
|
56,513 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,275,551 |
|
|
$ |
642,370 |
|
|
$ |
633,181 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Included in working capital |
Our working capital increased in 2004 primarily from cash
provided by operations and cash proceeds from issuances of
common stock in connection with the exercise of employee stock
options and our employee stock
46
purchase plan, offset in part by cash paid in purchase
transactions and the purchase of long-term marketable securities
and property and equipment.
Cash Provided and Used in 2004 and 2003. Cash and cash
equivalents increased to $858.6 million at
December 31, 2004 from $558.7 million at
December 31, 2003 as a result of cash provided by operating
and financing activities, offset in part by cash used in
investing activities.
In 2004 our operating activities provided $501.8 million in
cash. This was primarily the result of $218.7 million in
net income and $324.7 million in net non-cash operating
expenses, offset in part by net cash used of $41.6 million
from changes in operating assets and liabilities. Non-cash items
included in net income include depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets, IPR&D, impairment of intangible assets,
tax benefit from stock plans and gains on strategic investments.
In 2003 our operating activities provided $30.6 million in
cash. Although we had a net loss of $959.9 million and used
cash of $95.0 million related to changes in net operating
assets and liabilities, these amounts were more than offset by
$1.085 billion in non-cash items.. Non-cash items included
in net loss in 2003 included depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets, impairment of goodwill and intangible assets,
stock option exchange expense, certain settlement costs, certain
restructuring charges, net gains on strategic investments and
development revenue.
Accounts receivable decreased $15.0 million from
$220.1 million in 2003 to $205.1 million in 2004. The
decrease in accounts receivable was primarily the result of
improved shipment linearity and collections during the fourth
quarter of 2004. 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 $24.2 million to $128.3 million
in 2004 primarily due an expansion of inventory in response to
higher levels of purchase orders received from our customers. In
the future, our inventory levels will be determined based on
these factors as well as the stage in which our products are in
their respective product life cycles and competitive situations
in the marketplace. Such considerations are balanced against the
risk of obsolescence or potentially excess inventory levels.
Investing activities used cash of $456.0 million in 2004,
which was primarily the result of $333.3 million used in
the net purchase of marketable securities, $74.8 million
net cash paid in purchase transactions, the purchase of
$49.9 million of capital equipment to support our
operations and the purchase of $3.2 million of strategic
investments, offset by $5.2 million in net proceeds
received from the sale of strategic investments. Investing
activities provided cash of $42.5 million in 2003, which
was primarily the result of $69.7 million in net proceeds
received from the maturities of marketable securities and
$29.2 million in net proceeds received from the sale of
strategic investments, offset in part by the purchase of
$47.9 million of capital equipment to support our
operations, the purchase of $5.9 million in net assets of a
business and the purchase of $2.5 million of strategic
investments.
Our financing activities provided $254.1 million in cash in
2004, which was primarily the result of $253.3 million in
net proceeds received from issuances of common stock upon
exercises of stock options and pursuant to our employee stock
purchase plan. Cash provided by financing activities was
$96.0 million in 2003, which was primarily the result of
$207.5 million in net proceeds received from issuances of
common stock upon exercises of stock options pursuant to our
employee stock purchase plan, offset in part by
$113.5 million in repayments of debt and other obligations.
Due to the increase in the price of our Class A common
stock, a greater number of employees exercised stock options and
we received more proceeds from the exercise of stock options in
2004 than in 2003. The timing and number of stock option
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. In addition, we have started to issue to
employees a combination of restricted stock units and employee
stock options. Unlike the exercise of stock options, the
issuance of shares upon vesting of restricted stock units will
not result in any cash proceeds and will require the use of cash
as we have determined to allow employees to elect to have a
portion of their shares
47
issuable during 2005 withheld to satisfy withholding taxes and
then make corresponding cash payments to the appropriate taxing
authorities on each employee’s behalf.
Obligations and Commitments. The following table
summarizes our contractual payment obligations and commitments
as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment Obligations by Year (In thousands) |
| |
|
|
| |
|
|
|
There- |
|
|
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
after |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$ |
86,526 |
|
|
$ |
76,831 |
|
|
$ |
51,568 |
|
|
$ |
42,966 |
|
|
$ |
37,570 |
|
|
$ |
159,724 |
|
|
$ |
455,185 |
|
|
|
|
|
|
|
Inventory and other related purchased obligations
|
|
|
113,430 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
113,430 |
|
|
|
|
|
|
|
Other purchase obligations
|
|
|
45,360 |
|
|
|
4,348 |
|
|
|
2,136 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,844 |
|
|
|
|
|
|
|
Restructuring liabilities
|
|
|
10,364 |
|
|
|
5,990 |
|
|
|
4,495 |
|
|
|
2,507 |
|
|
|
2,507 |
|
|
|
1,254 |
|
|
|
27,117 |
|
|
|
|
|
|
|
Accrued settlement payments
|
|
|
10,700 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
— |
|
|
|
— |
|
|
|
16,700 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
266,380 |
|
|
$ |
89,169 |
|
|
$ |
60,199 |
|
|
$ |
47,473 |
|
|
$ |
40,077 |
|
|
$ |
160,978 |
|
|
$ |
664,276 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease our facilities and certain engineering design tools and
information systems equipment under operating lease agreements
that expire at various dates through 2017. In December 2004 we
entered into a lease agreement under which our corporate
headquarters will move from its present location to a new,
larger facility in Irvine, California, which will eventually
consist of eight buildings with an aggregate of approximately
0.7 million square feet. The lease term is a period of ten
years and two months beginning after the completion of the first
two buildings and related tenant improvements, which is
anticipated to occur in the first quarter of 2007. The aggregate
rent for the term of the lease, approximately
$183.0 million, is included in the table above.
Inventory and other related purchase obligations are comprised
of purchase commitments for silicon wafers and assembly and test
services. We depend entirely upon subcontractors to manufacture
our silicon wafers and provide assembly and test services. Due
to lengthy subcontractor lead times, we must order these
materials and services from these subcontractors well in
advance. We expect to receive and pay for these materials and
services within the next six months. Our subcontractor
relationships allow for the cancellation of outstanding purchase
orders, but require repayment of all expenses incurred through
the date of cancellation.
Other purchase obligations are comprised of purchase commitments
for lab test equipment, computer hardware, information systems
infrastructure and other purchase commitments in the ordinary
course of business.
Our restructuring liabilities consist of estimated future lease
and operating costs on restructured facilities, less offsetting
sublease income, if any. These costs will be paid over the
respective lease terms through 2010. These amounts are included
in our consolidated balance sheet.
Settlement payments represent payments to be made in connection
with certain settlement and license agreements entered into in
2004. These amounts are included in our consolidated balance
sheet. See Note 11 of Notes to Consolidated Financial
Statements.
For purposes of the table above, obligations for the purchase of
goods or services are defined as agreements that are enforceable
and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing
of the transaction. Our purchase orders are based on our current
manufacturing needs and are typically fulfilled by our vendors
within short time horizons. We have additional purchase orders
(not included in the table above) that represent authorizations
to purchase rather than binding agreements. We do not have
significant agreements for the purchase of raw materials or
other goods specifying minimum quantities or set prices that
exceed our expected requirements.
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, 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
48
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 in effect 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. However, we have not issued nor do we have
immediate plans to issue securities to raise capital under the
universal shelf registration statement. If we elect to raise
additional funds, we may not be able to obtain such funds on a
timely basis on acceptable terms, or at all. If we raise
additional funds by issuing additional equity or convertible
debt securities, the ownership percentages of existing
shareholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or
privileges senior to those of 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 that we will need in
the future will depend on many factors, including:
|
|
|
| |
• |
the overall levels of sales of our products and gross profit
margins; |
| |
• |
our business, product, capital expenditure and research and
development plans, and product and technology roadmaps; |
| |
• |
the market acceptance of our products; |
| |
• |
volume price discounts and customer rebates; |
| |
• |
the levels of inventory and accounts receivable that we maintain; |
| |
• |
capital improvements for new and existing facilities; |
| |
• |
technological advances; |
| |
• |
our competitors’ responses to our products; |
| |
• |
our relationships with suppliers and customers; |
| |
• |
the availability of sufficient foundry capacity and packaging
materials; |
| |
• |
the levels of promotion and advertising that will be required to
launch our new products and achieve and maintain a competitive
position in the marketplace; |
| |
• |
litigation expenses, settlements and judgments; |
| |
• |
expenses related to our restructuring plans; |
| |
• |
changes in our compensation policies; |
| |
• |
the exercise of stock options and stock purchases under our
employee stock purchase plan; |
| |
• |
use of restricted stock units and the related payment in cash of
withholding taxes due from employees; and |
| |
• |
general economic conditions and specific conditions in the
semiconductor industry and the broadband communications markets,
including the effects of recent international conflicts and the
general economic slowdown and related uncertainties. |
In addition, we may require additional capital to accommodate
planned future growth, hiring, infrastructure and facility needs
or to consummate acquisitions of other businesses, assets,
products or technologies.
49
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 subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently
deem immaterial may also affect our business. If any of these
known or unknown risks or uncertainties actually occurs with
material adverse effects on Broadcom, our business, financial
condition and results of operations could be seriously harmed.
In that event, the market price for our Class A common
stock could decline and you may lose all or part of your
investment.
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. For instance, our net revenue
for the three months ended December 31, 2004 decreased by
16.6% over the level achieved in the three months ended
September 30, 2004. If our operating results do not meet
the expectations of securities analysts or investors, 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:
|
|
|
| |
• |
changes in accounting rules, such as the change requiring the
recording of expenses for employee stock options and other
stock-based compensation that is scheduled to go into effect in
the third quarter of 2005; |
| |
• |
a possible adverse outcome in or the settlement of our pending
securities litigation or other actual or threatened litigation; |
| |
• |
the overall cyclicality of, and changing economic and market
conditions in, the semiconductor industry and the broadband
communications markets; |
| |
• |
the timing, rescheduling or cancellation of significant customer
orders and our ability, as well as the ability of our customers,
to manage inventory; |
| |
• |
the gain or loss of a key customer, design win or order; |
| |
• |
our ability to develop new sources of revenue to replace lost
revenue from our declining Intel processor-based server chipset
business; |
| |
• |
our ability to retain, recruit and hire key executives,
technical personnel and other employees in the positions and
numbers, with the experience and capabilities, and at the
compensation levels that we need to implement our business and
product plans; |
| |
• |
our ability to scale our operations in response to changes in
demand for our existing products and services or demand for new
products requested by our customers; |
| |
• |
our ability to timely and accurately predict market requirements
and evolving industry standards and to identify opportunities in
new markets; |
| |
• |
the rate at which our present and future customers and end users
adopt our technologies and products in our target markets; |
| |
• |
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 qualification, availability and pricing of competing
products and technologies and the resulting effects on sales and
pricing of our products; |
| |
• |
changes in our product or customer mix; |
| |
• |
the volume of our product sales and pricing concessions on
volume sales; |
| |
• |
fluctuations in the manufacturing yields of our foundries, and
other problems or delays in the fabrication, assembly, testing
or delivery of our products; and |
| |
• |
the effects of public health emergencies, natural disasters,
terrorist activities, international conflicts and other events
beyond our control. |
50
We continue to derive a larger portion of our product revenue
from relatively newer markets. We expect new product lines to
continue to account for a high percentage of our future sales.
Some of these markets are immature and unpredictable, 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
predict our future revenue streams from, and the sustainability
of, such newer markets.
Additionally, rapid changes in our markets and across our
product areas make it difficult for us to estimate the impact of
seasonal factors on our business. We believe that we may become
subject to some seasonality in demand for our solutions that are
designed for use in consumer products, such as desktop and
notebook computers, cellphones and other mobile communication
devices, other wireless-enabled consumer electronics, and
satellite and digital cable set-top boxes, which may result in
fluctuations in our quarterly operating results.
Due to all of the foregoing factors, and the other risks
discussed in this Report, you should not rely on
quarter-to-quarter comparisons of our operating results as an
indicator of future performance.
Changes in the accounting treatment of stock options will
adversely affect our results of operations.
In December 2004 the FASB issued SFAS 123R, which is a
revision of SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values and does not permit pro forma
disclosure as an alternative to financial statement recognition.
SFAS 123R is scheduled to be effective beginning in the
third quarter of 2005. The adoption of the SFAS 123R fair
value method will have a significant adverse impact on our
reported results of operations because the stock-based
compensation expense will be charged directly against our
reported earnings. The impact of our adoption of SFAS 123R
cannot be predicted at this time because that will depend on the
future fair values and number of share-based payments granted in
the future. However, had we adopted SFAS 123 in prior
periods, the magnitude of the impact of that standard would have
approximated the impact of SFAS 123 assuming the
application of the Black-Scholes model as described in the
disclosure of pro forma net loss and pro forma loss per share in
Note 1 of our Notes to Consolidated Financial Statements.
Continuing worldwide political and economic uncertainties may
adversely impact our revenue and profitability.
In the last three years, worldwide economic conditions have
experienced a downturn due to slower economic activity, concerns
about inflation and deflation, decreased consumer confidence,
reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns in the telecommunications and
broadband communications markets, the lingering effects of the
war in Iraq, and recent international conflicts and terrorist
and military activity. 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 recently experienced a slowdown in orders and a
reduction in net revenue in the fourth quarter of 2004 that we
believe was attributable in substantial part to excess inventory
held by certain of our customers. We cannot predict the timing,
strength or duration of any economic recovery, worldwide or in
the broadband communications markets. If the economy or the
broadband communications markets in which we operate do not
recover, our business, financial condition and results of
operations will likely be materially and adversely affected.
Our operating results may fluctuate significantly due to the
cyclical nature of the semiconductor industry. Any such
variations could adversely affect the market price of our
Class A common stock.
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 the broadband communications markets to fully
recover from downturns could seriously impact our
51
revenue and harm our business, financial condition and results
of operations. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the semiconductor industry,
which could cause large fluctuations in our stock price.
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. In addition we, like many other
companies that experience volatility in the market prices of
their securities, are engaged in securities litigation. An
adverse outcome in such litigation could materially and
adversely affect our operating results.
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 $9.52 and as high as $53.35 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; |
| |
• |
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 semiconductor industry and the broadband
communications markets; |
| |
• |
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 especially 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, companies that have experienced
volatility in the market price of their securities have been the
subject of securities class action litigation. As noted in
Note 12 of Notes to Consolidated Financial Statements, we
have been sued in several purported securities class action
lawsuits, which have been consolidated into a single action, as
well as other securities litigation. Although we believe that
those lawsuits are without merit, the plaintiffs in our pending
securities class action litigation have asserted that, if
liability is found, damages may exceed $4.5 billion. Trial
for our pending securities litigation is scheduled to commence
in September 2005. An adverse determination in, or the
settlement of, our pending securities litigation could require
us to pay amounts that exceed the coverage that remains
available to us under our directors’ and officers’
insurance, which amounts could be substantial. Such an event
could have a very significant effect on our business and results
of operations, and could materially and adversely affect the
price of our stock. Moreover, regardless of the ultimate result,
it is likely that the lawsuits will continue to divert
management’s attention and resources from other matters,
which could also adversely affect the price of our stock.
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, or, 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
52
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.
However, 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, or at all. As a result, we would
hold excess or obsolete inventory, which would reduce our profit
margins and adversely affect our financial results. Conversely,
if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would forego revenue
opportunities and potentially lose market share and damage our
customer relationships. In addition, any future significant
cancellations or deferrals of product orders or the return of
previously sold products could materially and adversely affect
our profit margins, increase product obsolescence and restrict
our ability to fund our operations. Furthermore, we generally
recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely
pay for these products, we could incur significant charges
against our income.
Our efforts to develop new revenue sources and replace lost
revenue sources for our ServerWorks business may not be
successful.
In the past few years, a significant portion of our total net
revenue has been derived from our chipset business for servers
based on Intel processors. However, in 2003 that business
experienced design losses that were attributable, in part, to
our ongoing inability to obtain required design information from
a third party that is also a competitor. During the second half
of 2004 we experienced the first real impact of the
long-anticipated decline in our Intel processor-based server
chipset business, and we anticipate a steeper decline in that
business going forward. We are now pursuing strategies to
diversify our revenue stream beyond Intel-based platforms and to
develop alternative sources of revenue for the business. Our new
areas of focus are alternative server I/ O chipset platforms and
the storage market. During 2004 we began to develop server
platform products that support the AMD
Opterontm
processor; however, these products are not expected to generate
any substantial revenue until the second half of 2005. We cannot
assure you that these strategies will be successful, and it is
likely that we will not be able to make up the loss of revenue
from our Intel processor-based server chipset business in the
near term. If our strategies to reposition our server chipset
business are not successful, or if revenues from our other
businesses do not increase, our revenue, revenue growth rate and
results of operations will be adversely affected.
We may be unable to attract, retain or motivate key senior
management and technical personnel, which could seriously harm
our business.
On January 3, 2005 Scott A. McGregor joined Broadcom
as President and Chief Executive Officer. Mr. McGregor
succeeded our former President and CEO, Alan E. Ross, who
retired from these positions upon Mr. McGregor’s
arrival but remains a member of the Board of Directors. The
integration of Mr. McGregor into our business and
operations, and any adjustments or changes that may be
implemented by Mr. McGregor, may require the substantial
attention of our Board of Directors and senior management
personnel.
Our future success also depends to a significant extent upon the
continued service of other key senior management personnel,
including our co-founder, Chairman of the Board and Chief
Technical Officer, Henry Samueli, Ph.D., and other senior
executives. We do not have employment agreements with these
executives, or any other key employees, that govern the length
of their service, although we do have limited retention
arrangements in place with certain executives. The loss of the
services of Dr. Samueli 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
53
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.
Stock options generally comprise a significant portion of our
compensation packages for all employees. In April and May 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 and motivate employees 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 FASB requirement to expense the fair value of stock
options awarded to employees beginning in the third quarter of
2005 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 fail to 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, we may be unable to
meet competitive challenges or exploit potential market
opportunities, and 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 3,373 employees, including
contractors, as of December 31, 2004. This 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. Although we have recently implemented a new
enterprise resource planning, or ERP, system to help us improve
our planning and management processes and a new human resources
management, or HRM, system, we anticipate that we will also need
to continue to implement a variety of new and upgraded
operational and financial systems, such as a new material
requirements planning, or MRP, system, as well as additional
procedures and other internal management systems. In addition,
to support our growth we recently signed a 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 begin 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 management’s 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, and our business could be materially and
adversely affected.
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 represented approximately
51.1%, 51.6% and 52.3% of our net revenue n 2004, 2003 and 2002,
respectively. See Note 13 of Notes to Consolidated
Financial Statements for further
54
details. We expect that our largest customers will continue to
account for a substantial portion of our net revenue in 2005 and
for the foreseeable future. The identity 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 their 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. |
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.
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Our future success depends in significant part on strategic
relationships with certain customers. If we cannot maintain
these relationships or if these customers develop their own
solutions or adopt a competitor’s solutions instead of
buying our products, our operating results would be adversely
affected. |
In the past, we have relied in significant part on our strategic
relationships with customers that are technology leaders in our
target markets. We intend to pursue the formation of these
strategic relationships but we cannot assure you that we will be
able to do so. 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 limited resources
to our strategic relationships, which could detract from or
delay our completion of other important development projects.
Delays in development could impair our relationships with our
strategic customers and negatively impact sales of the products
under development. Moreover, it is possible that our customers
may develop their own solutions or adopt a competitor’s
solution for products that they currently buy from us. If that
happens, our sales would decline and our business, financial
condition and results of operations could be materially and
adversely affected.
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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 December 31, 2004, we acquired
28 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. We
also continually evaluate the performance and prospects of our
various businesses and possible adjustments in our businesses to
reflect changes in our assessment of their performance and
prospects.
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
55
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 company’s
technologies and product development through volume production,
unanticipated costs and expenditures, changing relationships
with customers, suppliers and strategic partners, or
contractual, intellectual property or employment issues. In
addition, 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 typical size of
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. Alternatively, we may issue
equity or convertible debt securities in connection with an
acquisition. We have in effect an acquisition shelf registration
statement on SEC Form S-4 that enables us to issue up to
30 million shares of our Class A common stock in one
or more acquisition transactions that we may enter into from
time to time. Any additional 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 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.
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We must keep pace with rapid technological changes and
evolving industry standards in the semiconductor industry and
broadband 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 changes, 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 broadband communications
markets could materially and adversely affect our business,
financial condition and results of operations. Our success will
also depend on the ability of our customers to develop new
products and enhance existing products for the broadband
communications markets and to introduce and promote those
products successfully. These rapid technological changes and
evolving industry standards make it difficult to formulate a
long-term growth strategy
56
because the semiconductor industry and broadband 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.
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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 historical
quarterly 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. 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 accurately identify opportunities in new markets; |
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timely complete and introduce new product designs; |
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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; |
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shift our products to smaller geometry process technologies to
achieve lower cost and higher levels of design
integration; and |
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gain market acceptance of our products and our customers’
products. |
In some of our businesses, our ability to develop and deliver
next-generation products successfully depends in part on access
to information from companies that are our competitors. 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.
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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, approximately 21.6% of our net
revenue in 2004 was derived from sales to independent customers
outside the United States. We also frequently ship products to
our domestic customers’ international manufacturing
divisions and subcontractors. Products shipped to international
destinations, primarily in Asia, represented approximately 79.0%
of our net revenue in 2004. In 1999 we established an
international distribution center in Singapore that includes an
engineering design center. We also undertake design, development
activities in Belgium, Canada, China, France, India, Israel, the
Netherlands, Taiwan and the United Kingdom. In addition, we
undertake various sales and marketing activities through
regional offices in several other countries. We intend to
continue to expand our international business activities and to
open other design and operational centers abroad. The recent war
in Iraq and the lingering effects of 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
57
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 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. |
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 in certain foreign
jurisdictions. However, we cannot assure you that we will
continue to enjoy such tax holidays or realize any net tax
benefits from such tax holidays.
The seasonality of international sales and 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.
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 hold more than 800 U.S. patents and have
filed more than 3,000 additional U.S. 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
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
58
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 could 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, parties may attempt to copy, disclose, obtain or use
our products, services or technology without our authorization.
Also, former employees may seek employment with our business
partners, customers or competitors, and we cannot assure you
that the confidential nature of our proprietary information will
be maintained in the course of such future employment.
Additionally, 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 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 foreign countries where laws
may not protect our proprietary rights as fully as in the United
States.
In addition, some of our customers have entered into agreements
with us that grant them the right to use our proprietary
technology if we ever fail to fulfill our obligations, including
product supply obligations, under those agreements, and 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 engaged and may in the future engage 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. This
litigation 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
operations.
Third party claims of infringement or other claims against us
could adversely affect our ability to market our products,
require us to redesign our products or seek licenses from third
parties, and seriously harm our operating results. 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 the semiconductor industry often aggressively
protect and pursue their intellectual property rights. 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 several
instances we have been engaged in litigation with parties who
claimed that we infringed their patents or misappropriated or
misused their trade secrets. In addition, we or our customers
may be sued by other parties who claim that our products have
infringed their patents or misappropriated or misused their
trade secrets, or who 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, could increase our costs of revenue and could
expose us to
59
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 or redesign certain products offered for sale or under
development. In addition, we may be liable for damages for past
infringement and royalties for future use of the technology, and
we may be liable for treble damages if infringement is found to
have been willful. 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 party’s 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, result in liability for combinations of
components or system level designs and 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 party’s
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, if we are able to obtain one at
all.
Our products may contain technology provided to us by third
parties. Because we did not develop such technology ourselves,
we may have little or no ability to determine in advance whether
such technology infringes the intellectual property rights of a
third party. Our 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.
We will have difficulty selling our products if customers do
not design our products into their product offerings or if our
customers’ product offerings are not commercially
successful.
Our products are generally incorporated into our customers’
products at the design stage. As a result, we rely on equipment
manufacturers to select our products to be designed into their
products. Without these “design wins,” it becomes
difficult to sell our products. 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. Additionally, in some
instances, we are dependent on third parties to obtain or
provide information that we need to achieve a design win. Some
of these third parties may be our competitors and, accordingly,
may not supply this information to us on a timely basis, if at
all. Once an equipment manufacturer designs a competitor’s
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. Furthermore, even if an equipment
manufacturer designs one of our products into its product
offering, we cannot be assured that its product will be
commercially successful or that we will receive any revenue from
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. We cannot assure you that we will continue to achieve
design wins or that our customers’ equipment incorporating
our products will ever be commercially successful.
We face intense competition in the semiconductor industry and
the broadband communications markets, which could reduce our
market share in existing markets and affect our entry into new
markets.
The semiconductor industry and the broadband 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. This competition has resulted and may
continue to result in declining average selling prices for some
of our products. In all of our target markets we also may face
competition from
60
newly established competitors, suppliers of products based on
new or emerging technologies, and customers who choose to
develop their own semiconductor solutions. We also expect to
encounter further consolidation in the markets in which we
compete.
Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases, and
significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than
we do. 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 price reductions, reduced gross margins and loss of
market share in certain markets. In some of our businesses, we
are dependent on competitors for information for the timely
development of next-generation products, and such information
may not always be given to us on a timely basis, if at all. 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 six 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. Six 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, or 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 litigation, or encounters financial
difficulties or any other disruption of foundry capacity, we may
need to qualify an alternative foundry in a timely manner. 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:
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a lack of guaranteed wafer supply and potential wafer shortages
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limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and |
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the unavailability of, or potential delays in obtaining access
to, key process technologies. |
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
61
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. We place our orders on the
basis of our customers’ purchase orders or our forecast of
customer demand, and the foundries can allocate capacity to the
production of other companies’ products and reduce
deliveries to us on short notice. It is possible that foundry
customers that are larger and better financed than we are, or
that have long-term agreements with our 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 six independent
foundries to manufacture substantially all of our semiconductor
products, most of our components are not manufactured at more
than one foundry at any given time, and our products typically
are designed to be manufactured in a specific process at only
one of these foundries. Accordingly, if one of our foundries is
unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. 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 recent 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 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.
62
However, even if we use these new subcontractors, we will
continue to be subject to all of the risks described above.
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 and .13 micron geometry
processes. In addition, we have begun to migrate some of our
products to 90-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. We may face similar
difficulties, delays and expenses as we continue to transition
our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller
geometry processes successfully. We cannot assure you that our
foundries will be able to effectively manage the transition or
that we will be able to maintain our existing foundry
relationships or develop new ones. If our foundries 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, or 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.
Our products typically have lengthy sales cycles. A customer
may decide to cancel or change its product plans, which could
cause us to lose anticipated sales. In addition, our average
product life cycles tend to be short and, as a result, we may
hold excess or obsolete inventory that could adversely affect
our operating results.
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 assurances 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
change its product plans. Such a cancellation or change in plans
by a customer could cause us to lose sales that we had
anticipated. In addition, anticipated sales could be materially
and adversely affected if a significant customer curtails,
reduces or delays orders during our sales cycle or chooses not
to release equipment that contains our products.
While our sales cycles are typically long, our average product
life cycles tend to be short as a result of the rapidly changing
technology environment in which we operate. As a result, the
resources devoted to product sales and marketing may not
generate material revenue for us, and from time to time, we may
need to write off excess and obsolete inventory. 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
63
adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions but still hold
higher cost products in inventory, our operating results would
be harmed.
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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 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. We 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. In addition, system and handset
providers who purchase components may require that we assume
liability for defects associated with products produced by their
manufacturing subcontractors and require that we provide a
warranty for defects or other problems which may arise at the
system level. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products,
and we could lose credibility with our current and prospective
customers.
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The six primary independent foundries upon which we rely to
manufacture substantially all of our current products and our
California and Singapore facilities are located in regions that
are subject to earthquakes and other natural disasters. |
Two of the six third-party foundries upon which we rely to
manufacture substantially all of our semiconductor devices are
located in Taiwan and one such third-party foundry is located in
Japan. Both Taiwan and Japan have 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, are located near
major earthquake fault lines, and our international distribution
center is located in Singapore, which could 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 of our facilities is located, it could significantly disrupt
our operations.
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Changes in current or future laws or regulations or the
imposition of new laws or regulations by the FCC, other federal
or state agencies or foreign governments could impede the sale
of our products or otherwise harm our business. |
The Federal Communications Commission has broad jurisdiction
over each of our target markets. Although current FCC
regulations and the laws and regulations of other federal or
state agencies are not directly applicable to our products, they
do apply to much of the equipment into which our products are
incorporated. FCC regulatory policies that affect the ability of
cable operators or telephone companies to offer certain services
to their customers or other aspects of their business may impede
sales of our products. Accordingly, the effects of regulation on
our customers or the industries in which they operate may, in
turn, materially and adversely impact our business. For example,
in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions
specifications. We and our customers may also be subject to
regulation by countries other than the United States. Foreign
governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic
suppliers and may impose export restrictions on products that we
sell internationally. These tariffs, duties or restrictions
could materially and adversely affect our business, financial
64
condition and results of operations. Changes in current laws or
regulations or the imposition of new laws and regulations in the
United States or elsewhere could also materially and adversely
affect our business.
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If our internal controls over financial reporting do not
comply with the requirements of the Sarbanes-Oxley Act, our
business and stock price could be adversely affected. |
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal controls over
financial reporting as of the end of each year beginning in
2004, and to include a management report assessing the
effectiveness of our internal controls over financial reporting
in all annual reports beginning with this Report.
Section 404 also requires our independent registered public
accounting firm to attest to, and report on, management’s
assessment of our internal controls over financial reporting.
Our management, including our CEO and CFO, does not expect that
our internal controls 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 system’s 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.
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, involving the
company have been, or will be, detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Although our management has determined, and our independent
registered public accounting firm has attested, that our
internal control over financial reporting was effective as of
December 31, 2004, we cannot assure you that we or our
independent registered public accounting firm will not identify
a material weakness in our internal controls in the future. A
material weakness in our internal controls over financial
reporting would require management and our independent
registered public accounting firm to evaluate our internal
controls as ineffective. If our internal controls over financial
reporting are not considered adequate, we may experience a loss
of public confidence, which could have an adverse effect on our
business and our stock price.
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We may experience difficulties in implementing or enhancing
new information systems. |
We recently implemented a new ERP information system to manage
our business operations and a new HRM system, and we intend to
implement a new MRP information system. The implementation and
migration to a new MRP system could adversely impact our ability
to do the following in a timely manner: accept and process
customer orders, receive inventory and ship products, invoice
and collect receivables, place purchase orders and pay invoices,
and process other business transactions related to the order
entry, purchasing, and, supply chain processes within a new MRP
system. Any such disruption could adversely affect our financial
position, results of operations, cash flows and the market price
of our Class A common stock. In addition, if any of the
providers of our information systems do not choose to continue
supporting the systems we have implemented, we may be forced to
switch to new information systems, which could result in further
disruptions.
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We may seek to raise additional capital through the issuance
of additional equity or debt securities or by borrowing money,
but additional funds may not be available on terms acceptable to
us, or at all. |
We believe that our existing cash, cash equivalents and
marketable securities, together with cash generated by
operations and from the exercise of employee stock options 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
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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 in effect 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. However, we
have not issued nor do we have immediate plans to issue
securities to raise capital under the universal shelf
registration statement. If we elect to raise additional funds,
we may not be able to obtain such funds on a timely basis on
acceptable terms, or at all. If we raise additional funds by
issuing additional equity or convertible debt securities, the
ownership percentages of existing shareholders would be reduced.
In addition, the equity or debt securities that we issue may
have rights, preferences or privileges senior to those of our
common stock.
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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 December 31, 2004 our co-founders, directors,
executive officers and their respective affiliates beneficially
owned approximately 17.8% of our outstanding common stock and
held 65.2% 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 a merger, consolidation or
sale of substantially all of our assets. In particular, as of
December 31, 2004 our two founders, Dr. Henry T.
Nicholas III, who is no longer an officer or director of
the company, and Dr. Henry Samueli, our Chairman of the
Board and Chief Technical Officer, beneficially owned a total of
approximately 16.6% of our outstanding common stock and held
64.1% of the total voting power held by our shareholders.
Because of their significant voting stock ownership, we will not
be able to engage in certain transactions, and our shareholders
will not be able to effect certain actions or transactions,
without the approval of one or both of these shareholders. These
actions and transactions include changes in control of our Board
of Directors, 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.
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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 with one vote
per share in the case of our Class A common stock). Our
Board of Directors also has the authority to fix the rights and
preferences of shares of our preferred stock and to issue such
shares without a shareholder vote. It is possible that the
provisions in our charter documents, the exercise of supervoting
rights by holders of our Class B common stock, our
co-founders’, directors’ and officers’ ownership
of a majority of the Class B common stock, or the ability
of our Board of Directors to issue preferred stock or additional
shares of Class B common stock may prevent or discourage
third parties from acquiring us, even if the acquisition would
be beneficial to our shareholders. In addition, these factors
may discourage third parties from bidding for our Class A
common stock at a premium over the market price for our stock.
These factors may also materially and adversely affect voting
and other rights of the holders of our common stock and the
market price of our Class A common stock.
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| Item 7A. |
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 December 31, 2004 the carrying value of
our cash and cash equivalents approximated fair value.
Our marketable debt 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 debt 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 holding gains and losses on these
investments would be reported as a separate component of
accumulated other comprehensive income (loss). Our investment
policy for marketable debt securities requires that all
securities mature in three years or less, with a weighted
average maturity of no longer than one year. As of
December 31, 2004 the carrying value and fair value of
these securities were approximately $417.0 million and
$415.8 million, respectively. The fair value of our
marketable debt 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 debt securities as of
December 31, 2004 and 2003, respectively, were as follows:
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(In thousands, except interest rates) |
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$ |
356,845 |
|
|
$ |
356,845 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
356,831 |
|
|
|
|
|
|
| |
Weighted average interest rate
|
|
|
2.33 |
% |
|
|
2.33 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
|
|
$ |
416,959 |
|
|
$ |
324,041 |
|
|
$ |
69,717 |
|
|
$ |
23,201 |
|
|
$ |
415,757 |
|
|
|
|
|
|
| |
Weighted average interest rate
|
|
|
2.40 |
% |
|
|
2.30 |
% |
|
|
2.64 |
% |
|
|
3.12 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Carrying |
|
|
|
Fair |
| |
|
Value |
|
Maturity |
|
Value |
| |
|
December 31, |
|
|
|
December 31, |
| |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2003 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except interest rates) |
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$ |
64,299 |
|
|
$ |
64,299 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
64,299 |
|
|
|
|
|
|
| |
Weighted average interest rate
|
|
|
1.15 |
% |
|
|
1.15 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
|
|
$ |
83,701 |
|
|
$ |
47,296 |
|
|
$ |
17,273 |
|
|
$ |
19,132 |
|
|
$ |
84,050 |
|
|
|
|
|
|
| |
Weighted average interest rate
|
|
|
2.20 |
% |
|
|
2.08 |
% |
|
|
2.26 |
% |
|
|
2.46 |
% |
|
|
|
|
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
our 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 business partners 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
67
and may never materialize. Likewise, the development projects of
these companies may not be successful. In addition, early stage
companies often fail to succeed for various other reasons.
Consequently, we could lose our entire investment in these
companies. As of December 31, 2004, the carrying and fair
value of our strategic investments was approximately
$5.2 million.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The financial statements and supplementary data required by this
item are included in Part IV, Item 15 of this Report.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
Based on this evaluation, our principal executive officer and
our principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31,
2004, the end of the period covered by this Report.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of our management,
including our principal executive officer and principal
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework set forth in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework set
forth in Internal Control — Integrated
Framework, our management concluded that our internal
control over financial reporting was effective as of
December 31, 2004. Our management’s assessment of the
effectiveness of our internal control over financial reporting
as of December 31, 2004 has been audited by
Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
68
Attestation Report of Independent Registered Public
Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Broadcom Corporation
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting appearing above, that Broadcom Corporation
maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Broadcom Corporation’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed 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. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Broadcom
Corporation maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Broadcom Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of Broadcom Corporation
as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2004 of Broadcom Corporation and our
report dated February 25, 2004 expressed an unqualified
opinion thereon.
Orange County, California
February 25, 2005
69
|
|
| Item 9B. |
Other Information |
None.
PART III.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
(a) Identification of Directors. The information
under the caption “Election of Directors,” appearing
in the Proxy Statement, is hereby incorporated by reference.
(b) Identification of Executive Officers and Certain
Significant Employees. The information under the caption
“Elected Officers,” appearing in the Proxy Statement,
is hereby incorporated by reference.
(c) Compliance with Section 16(a) of the Exchange
Act. The information under the caption
“Section 16(a) Beneficial Ownership Reporting
Compliance,” appearing in the Proxy Statement, is hereby
incorporated by reference.
(d) Code of Ethics. The information under the
caption “Corporate Governance,” appearing in the Proxy
Statement, is hereby incorporated by reference.
|
|
| Item 11. |
Executive Compensation |
The information under the caption “Executive Compensation
and Other Information,” appearing in the Proxy Statement,
is hereby incorporated by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The information under the captions “Ownership of
Securities” and “Equity Compensation Plan
Information,” appearing in the Proxy Statement, is hereby
incorporated by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information under the caption “Certain
Transactions,” appearing in the Proxy Statement, is hereby
incorporated by reference.
|
|
| Item 14. |
Principal Accounting Fees and Services |
The information under the caption “Fees Paid to Independent
Registered Public Accounting Firm,” appearing in the Proxy
Statement, is hereby incorporated by reference.
70
PART IV.
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) 1. Financial Statements.
The following consolidated financial statements, and related
notes thereto, of Broadcom and the Report of Independent
Registered Public Accounting Firm are filed as part of this
Form 10-K:
| |
|
|
|
|
| |
|
Page |
| |
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-1 |
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
F-2 |
|
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
|
|
|
F-3 |
|
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity for the
years ended December 31, 2004, 2003 and 2002
|
|
|
F-4 |
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
|
|
|
F-5 |
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
F-6 |
|
2. Financial Statement
Schedules.
The following financial statement schedule of Broadcom and the
related Report of Independent Registered Public Accounting Firm
are filed as part of this Form 10-K:
| |
|
|
|
|
| |
|
Page |
| |
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
|
|
|
S-1 |
|
|
|
|
|
|
|
Schedule II — Consolidated Valuation and
Qualifying Accounts
|
|
|
S-2 |
|
All other schedules have been omitted because they are not
applicable or not required, or the information is included in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits.
The exhibits listed on the accompanying index to exhibits
immediately following the financial statements are filed as part
of, or hereby incorporated by reference into, this Report.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying consolidated balance sheets of
Broadcom Corporation as of December 31, 2004 and 2003, and
the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Broadcom Corporation at December 31,
2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Broadcom Corporation’s internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 25, 2005 expressed an unqualified opinion thereon.
Orange County, California
February 25, 2005
F-1
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
858,592 |
|
|
$ |
558,669 |
|
|
|
|
|
|
| |
Short-term marketable securities
|
|
|
324,041 |
|
|
|
47,296 |
|
|
|
|
|
|
| |
Accounts receivable (net of allowance for doubtful accounts of
$6,900 in 2004 and $6,493 in 2003)
|
|
|
205,135 |
|
|
|
220,124 |
|
|
|
|
|
|
| |
Inventory
|
|
|
128,294 |
|
|
|
104,047 |
|
|
|
|
|
|
| |
Prepaid expenses and other current assets
|
|
|
68,380 |
|
|
|
65,667 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Total current assets
|
|
|
1,584,442 |
|
|
|
995,803 |
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
107,160 |
|
|
|
142,113 |
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
92,918 |
|
|
|
36,405 |
|
|
|
|
|
|
|
Goodwill
|
|
|
1,062,188 |
|
|
|
827,652 |
|
|
|
|
|
|
|
Purchased intangible assets, net
|
|
|
17,074 |
|
|
|
6,667 |
|
|
|
|
|
|
|
Other assets
|
|
|
22,057 |
|
|
|
8,982 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Total assets
|
|
$ |
2,885,839 |
|
|
$ |
2,017,622 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
171,248 |
|
|
$ |
219,064 |
|
|
|
|
|
|
| |
Wages and related benefits
|
|
|
42,697 |
|
|
|
33,965 |
|
|
|
|
|
|
| |
Deferred revenue
|
|
|
3,648 |
|
|
|
963 |
|
|
|
|
|
|
| |
Accrued liabilities
|
|
|
279,507 |
|
|
|
249,584 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Total current liabilities
|
|
|
497,100 |
|
|
|
503,576 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
22,753 |
|
|
|
24,241 |
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Convertible preferred stock, $.0001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Authorized shares — 10,000,000 — none issued
and outstanding
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
|
Class A common stock, $.0001 par value:
|
|
|
|
|
|
|
|
|
| |
|
|
Authorized shares — 800,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Issued and outstanding shares — 273,112,763 in 2004
and 240,243,633 in 2003
|
|
|
27 |
|
|
|
24 |
|
|
|
|
|
|
| |
|
Class B common stock, $.0001 par value:
|
|
|
|
|
|
|
|
|
| |
|
|
Authorized shares — 400,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Issued and outstanding shares — 57,395,782 in 2004 and
65,778,605 in 2003
|
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
| |
Additional paid-in capital
|
|
|
8,741,045 |
|
|
|
8,123,941 |
|
|
|
|
|
|
| |
Notes receivable from employees
|
|
|
(7,955 |
) |
|
|
(10,906 |
) |
|
|
|
|
|
| |
Deferred compensation
|
|
|
(40,701 |
) |
|
|
(77,616 |
) |
|
|
|
|
|
| |
Accumulated deficit
|
|
|
(6,327,535 |
) |
|
|
(6,546,280 |
) |
|
|
|
|
|
| |
Accumulated other comprehensive income
|
|
|
1,099 |
|
|
|
635 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Total shareholders’ equity
|
|
|
2,365,986 |
|
|
|
1,489,805 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Total liabilities and shareholders’ equity
|
|
$ |
2,885,839 |
|
|
$ |
2,017,622 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Net revenue
|
|
$ |
2,400,610 |
|
|
$ |
1,610,095 |
|
|
$ |
1,082,948 |
|
|
|
|
|
|
|
Cost of
revenue(1)
|
|
|
1,193,294 |
|
|
|
839,776 |
|
|
|
604,397 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,207,316 |
|
|
|
770,319 |
|
|
|
478,551 |
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and
development(2)
|
|
|
495,075 |
|
|
|
434,018 |
|
|
|
461,804 |
|
|
|
|
|
|
| |
Selling, general and
administrative(2)
|
|
|
212,727 |
|
|
|
190,138 |
|
|
|
165,267 |
|
|
|
|
|
|
| |
Stock-based compensation
|
|
|
73,320 |
|
|
|
263,960 |
|
|
|
359,790 |
|
|
|
|
|
|
| |
Amortization of purchased intangible assets
|
|
|
3,703 |
|
|
|
3,504 |
|
|
|
22,387 |
|
|
|
|
|
|
| |
Settlement costs
|
|
|
68,700 |
|
|
|
194,509 |
|
|
|
3,000 |
|
|
|
|
|
|
| |
In-process research and development
|
|
|
63,766 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Impairment of goodwill and intangible assets
|
|
|
18,000 |
|
|
|
439,611 |
|
|
|
1,265,038 |
|
|
|
|
|
|
| |
Stock option exchange
|
|
|
— |
|
|
|
209,266 |
|
|
|
— |
|
|
|
|
|
|
| |
Restructuring costs
|
|
|
— |
|
|
|
2,932 |
|
|
|
119,680 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
272,025 |
|
|
|
(967,619 |
) |
|
|
(1,918,415 |
) |
|
|
|
|
|
|
Interest income, net
|
|
|
15,010 |
|
|
|
6,828 |
|
|
|
12,183 |
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
7,317 |
|
|
|
26,053 |
|
|
|
(32,750 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
294,352 |
|
|
|
(934,738 |
) |
|
|
(1,938,982 |
) |
|
|
|
|
|
|
Provision for income taxes
|
|
|
75,607 |
|
|
|
25,127 |
|
|
|
297,594 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$ |
.68 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$ |
.63 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
319,442 |
|
|
|
292,009 |
|
|
|
267,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
349,037 |
|
|
|
292,009 |
|
|
|
267,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cost of revenue includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Stock-based compensation expense
|
|
$ |
1,367 |
|
|
$ |
6,528 |
|
|
$ |
12,917 |
|
|
|
|
|
|
| |
|
|
Amortization of purchased intangible assets
|
|
|
12,821 |
|
|
|
17,207 |
|
|
|
56,032 |
|
|
|
|
|
|
| |
|
|
Stock option exchange expense
|
|
|
— |
|
|
|
11,454 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
14,188 |
|
|
$ |
35,189 |
|
|
$ |
68,949 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Stock-based compensation expense is excluded
from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Research and development expense
|
|
$ |
58,611 |
|
|
$ |
219,337 |
|
|
$ |
252,365 |
|
|
|
|
|
|
| |
|
|
Selling, general and administrative expense
|
|
|
14,709 |
|
|
|
44,623 |
|
|
|
107,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
73,320 |
|
|
$ |
263,960 |
|
|
$ |
359,790 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization of purchased intangible assets is excluded
from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Research and development expense
|
|
$ |
— |
|
|
$ |
815 |
|
|
$ |
19,566 |
|
|
|
|
|
|
| |
|
|
Selling, general and administrative expense
|
|
|
3,703 |
|
|
|
2,689 |
|
|
|
2,821 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,703 |
|
|
$ |
3,504 |
|
|
$ |
22,387 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock option exchange expense is excluded from the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Research and development expense
|
|
$ |
— |
|
|
$ |
164,798 |
|
|
$ |
— |
|
|
|
|
|
|
| |
|
|
Selling, general and administrative expense
|
|
|
— |
|
|
|
44,468 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
— |
|
|
$ |
209,266 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Notes |
|
|
|
|
|
Accumulated |
|
|
| |
|
Common Stock |
|
Additional |
|
Receivable |
|
|
|
|
|
Other |
|
Total |
| |
|
|
|
Paid-In |
|
From |
|
Deferred |
|
Accumulated |
|
Comprehensive |
|
Shareholders’ |
| |
|
Shares |
|
Amount |
|
Capital |
|
Employees |
|
Compensation |
|
Deficit |
|
Income (Loss) |
|
Equity |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
|
264,504,496 |
|
|
$ |
26 |
|
|
$ |
7,529,685 |
|
|
$ |
(14,452 |
) |
|
$ |
(964,916 |
) |
|
$ |
(3,349,839 |
) |
|
$ |
6,906 |
|
|
$ |
3,207,410 |
|
|
|
|
|
|
| |
Purchase transactions
|
|
|
6,769,500 |
|
|
|
1 |
|
|
|
214,728 |
|
|
|
(299 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
214,430 |
|
|
|
|
|
|
| |
Exercise of stock options, net
|
|
|
5,491,411 |
|
|
|
1 |
|
|
|
25,377 |
|
|
|
(295 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,083 |
|
|
|
|
|
|
| |
Employee stock purchase plan
|
|
|
1,038,541 |
|
|
|
— |
|
|
|
18,972 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,972 |
|
|
|
|
|
|
| |
Repayment of notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,199 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,199 |
|
|
|
|
|
|
| |
Deferred compensation, net
|
|
|
— |
|
|
|
— |
|
|
|
(100,812 |
) |
|
|
— |
|
|
|
100,812 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
10,449 |
|
|
|
— |
|
|
|
409,214 |
|
|
|
— |
|
|
|
— |
|
|
|
419,663 |
|
|
|
|
|
|
| |
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Change in net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,152 |
) |
|
|
(7,152 |
) |
|
|
|
|
|
| |
|
Reclassification adjustment for net realized loss included in
net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
106 |
|
|
|
106 |
|
|
|
|
|
|
| |
|
Translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
386 |
|
|
|
386 |
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,236,576 |
) |
|
|
— |
|
|
|
(2,236,576 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,243,236 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
277,803,948 |
|
|
|
28 |
|
|
|
7,698,399 |
|
|
|
(12,847 |
) |
|
|
(454,890 |
) |
|
|
(5,586,415 |
) |
|
|
246 |
|
|
|
1,644,521 |
|
|
|
|
|
|
| |
Purchase transactions, net
|
|
|
2,565,372 |
|
|
|
— |
|
|
|
17,837 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,837 |
|
|
|
|
|
|
| |
Exercise of stock options, net
|
|
|
14,865,522 |
|
|
|
2 |
|
|
|
182,716 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,718 |
|
|
|
|
|
|
| |
Employee stock purchase plan
|
|
|
2,213,363 |
|
|
|
— |
|
|
|
24,777 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,777 |
|
|
|
|
|
|
| |
Repayment of notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,941 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,941 |
|
|
|
|
|
|
| |
Deferred compensation, net
|
|
|
— |
|
|
|
— |
|
|
|
30,363 |
|
|
|
— |
|
|
|
(30,363 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
7,544 |
|
|
|
— |
|
|
|
352,003 |
|
|
|
— |
|
|
|
— |
|
|
|
359,547 |
|
|
|
|
|
|
| |
Stock option exchange
|
|
|
8,574,033 |
|
|
|
1 |
|
|
|
162,305 |
|
|
|
— |
|
|
|
55,634 |
|
|
|
— |
|
|
|
— |
|
|
|
217,940 |
|
|
|
|
|
|
| |
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Change in net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(61 |
) |
|
|
(61 |
) |
|
|
|
|
|
| |
|
Reclassification adjustment for net realized loss included in
net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
137 |
|
|
|
137 |
|
|
|
|
|
|
| |
|
Translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
313 |
|
|
|
313 |
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(959,865 |
) |
|
|
— |
|
|
|
(959,865 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(959,476 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
306,022,238 |
|
|
|
31 |
|
|
|
8,123,941 |
|
|
|
(10,906 |
) |
|
|
(77,616 |
) |
|
|
(6,546,280 |
) |
|
|
635 |
|
|
|
1,489,805 |
|
|
|
|
|
|
| |
Purchase transactions, net
|
|
|
7,370,165 |
|
|
|
1 |
|
|
|
244,212 |
|
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
244,179 |
|
|
|
|
|
|
| |
Shares issued pursuant to stock awards, net
|
|
|
14,570,066 |
|
|
|
1 |
|
|
|
222,314 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222,315 |
|
|
|
|
|
|
| |
Employee stock purchase plan
|
|
|
2,546,076 |
|
|
|
— |
|
|
|
31,008 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,008 |
|
|
|
|
|
|
| |
Tax benefit realized from stock plans
|
|
|
— |
|
|
|
— |
|
|
|
81,798 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81,798 |
|
|
|
|
|
|
| |
Repayment of notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,985 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,985 |
|
|
|
|
|
|
| |
Deferred compensation, net
|
|
|
— |
|
|
|
— |
|
|
|
37,053 |
|
|
|
— |
|
|
|
(37,053 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
719 |
|
|
|
— |
|
|
|
73,968 |
|
|
|
— |
|
|
|
— |
|
|
|
74,687 |
|
|
|
|
|
|
| |
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Change in net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
| |
|
Translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
467 |
|
|
|
467 |
|
|
|
|
|
|
| |
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
218,745 |
|
|
|
— |
|
|
|
218,745 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
219,209 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
330,508,545 |
|
|
$ |
33 |
|
|
$ |
8,741,045 |
|
|
$ |
(7,955 |
) |
|
$ |
(40,701 |
) |
|
$ |
(6,327,535 |
) |
|
$ |
1,099 |
|
|
$ |
2,365,986 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
75,166 |
|
|
|
70,237 |
|
|
|
68,709 |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
74,687 |
|
|
|
270,488 |
|
|
|
372,707 |
|
|
|
|
|
|
| |
Amortization of purchased intangible assets
|
|
|
16,524 |
|
|
|
20,711 |
|
|
|
78,419 |
|
|
|
|
|
|
| |
In-process research and development
|
|
|
63,766 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Impairment of goodwill and intangible assets
|
|
|
18,000 |
|
|
|
439,611 |
|
|
|
1,265,038 |
|
|
|
|
|
|
| |
Tax benefit realized from stock plans
|
|
|
81,798 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Non-cash stock option exchange expense
|
|
|
— |
|
|
|
217,940 |
|
|
|
— |
|
|
|
|
|
|
| |
Non-cash settlement costs
|
|
|
— |
|
|
|
88,087 |
|
|
|
— |
|
|
|
|
|
|
| |
Non-cash restructuring charges
|
|
|
— |
|
|
|
972 |
|
|
|
52,456 |
|
|
|
|
|
|
| |
(Gain) loss on strategic investments, net
|
|
|
(5,231 |
) |
|
|
(22,041 |
) |
|
|
33,201 |
|
|
|
|
|
|
| |
Non-cash development revenue
|
|
|
— |
|
|
|
(508 |
) |
|
|
(4,700 |
) |
|
|
|
|
|
| |
Deferred taxes
|
|
|
— |
|
|
|
— |
|
|
|
286,525 |
|
|
|
|
|
|
| |
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
23,631 |
|
|
|
(91,019 |
) |
|
|
(62,333 |
) |
|
|
|
|
|
| |
|
Inventory
|
|
|
(22,310 |
) |
|
|
(57,554 |
) |
|
|
(22,577 |
) |
|
|
|
|
|
| |
|
Prepaid expenses and other assets
|
|
|
(22,080 |
) |
|
|
(27,786 |
) |
|
|
(26,371 |
) |
|
|
|
|
|
| |
|
Accounts payable
|
|
|
(57,186 |
) |
|
|
50,828 |
|
|
|
62,568 |
|
|
|
|
|
|
| |
|
Other accrued liabilities
|
|
|
36,328 |
|
|
|
30,538 |
|
|
|
63,743 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) operating activities
|
|
|
501,838 |
|
|
|
30,639 |
|
|
|
(69,191 |
) |
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(49,931 |
) |
|
|
(47,932 |
) |
|
|
(75,182 |
) |
|
|
|
|
|
|
Net cash received (paid) in purchase transactions
|
|
|
(74,846 |
) |
|
|
(5,862 |
) |
|
|
839 |
|
|
|
|
|
|
|
Purchases of strategic investments
|
|
|
(3,216 |
) |
|
|
(2,500 |
) |
|
|
(3,250 |
) |
|
|
|
|
|
|
Proceeds from sales of strategic investments
|
|
|
5,231 |
|
|
|
29,152 |
|
|
|
7,597 |
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(525,949 |
) |
|
|
(69,637 |
) |
|
|
(94,300 |
) |
|
|
|
|
|
|
Proceeds from sale of available for sale marketable securities
|
|
|
48,145 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
144,546 |
|
|
|
139,288 |
|
|
|
186,743 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) investing activities
|
|
|
(456,020 |
) |
|
|
42,509 |
|
|
|
22,447 |
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on debt and other obligations
|
|
|
(2,203 |
) |
|
|
(113,470 |
) |
|
|
(13,713 |
) |
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
253,323 |
|
|
|
207,495 |
|
|
|
44,055 |
|
|
|
|
|
|
|
Proceeds from repayment of notes receivable from employees
|
|
|
2,985 |
|
|
|
1,941 |
|
|
|
2,199 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
254,105 |
|
|
|
95,966 |
|
|
|
32,541 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
299,923 |
|
|
|
169,114 |
|
|
|
(14,203 |
) |
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
558,669 |
|
|
|
389,555 |
|
|
|
403,758 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
858,592 |
|
|
$ |
558,669 |
|
|
$ |
389,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
57 |
|
|
$ |
1,019 |
|
|
$ |
3,004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded)
|
|
$ |
5,234 |
|
|
$ |
8,355 |
|
|
$ |
(3,083 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 1. |
Summary of Significant Accounting Policies |
The Company
Broadcom Corporation (the “Company”) is a global
leader in wired and wireless broadband communications
semiconductors. The Company’s products enable the
convergence of high-speed data, high definition video, voice and
audio at home, in the office and on the go. The Company provides
manufacturers of computing and networking equipment, digital
entertainment and broadband access products, and mobile devices
with complete system-on-a-chip and software solutions. The
Company’s diverse product portfolio addresses every major
broadband communications market, and includes solutions for
digital cable, satellite and Internet Protocol set-top boxes;
high definition television (HDTV); cable and DSL modems and
residential gateways; high-speed transmission and switching for
local, metropolitan, wide area and storage networking; home and
wireless networking; cellular and terrestrial wireless
communications; Voice over Internet Protocol (VoIP) gateway and
telephony systems; broadband network and security processors;
and SystemI/
Otm
server solutions.
Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with
U.S. 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, goodwill and purchased intangible
asset valuations, strategic investments, deferred income tax
asset valuation allowances, restructuring costs, litigation and
other loss contingencies. The Company bases its estimates and
assumptions on current facts, historical experience and on
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 that are not readily apparent from other sources.
The actual results experienced by the Company may differ
materially and adversely from management’s estimates. To
the extent there are material differences between the estimates
and the actual results, future results of operations will be
affected.
Revenue Recognition
The Company’s net revenue is generated principally by sales
of its semiconductor products. Such sales represented
approximately 99.0%, 98.5% and 95.7% of its total net revenue in
2004, 2003 and 2002, respectively. The Company derives the
remaining balance of its net revenue predominantly from
development agreements, software licenses and maintenance
agreements, system-level reference designs and cancellation fees.
The majority of the Company’s sales occur through the
efforts of its direct sales force. However, the Company derived
approximately 9.6%, 7.1% and 10.4% of its total net revenue from
sales made through distributors in 2004, 2003 and 2002,
respectively.
In accordance with Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin (“SAB”)
No. 101, Revenue Recognition in Financial Statements
(“SAB 101”) as well as 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. In addition, the Company does
not recognize revenue until all customer acceptance requirements
have been met, when applicable. These criteria are usually met
at the time of product shipment. However, a portion of the
Company’s sales are made through distributors under
agreements allowing for pricing credits and/or rights of
F-6
return. Product revenue on sales made through these distributors
is not recognized until the distributors ship the product to
their customers. The Company records reductions to revenue for
estimated product returns and pricing adjustments, such as
competitive pricing programs and rebates, in the same period
that the related revenue is recorded. The amount of these
reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate
agreements, and other factors known at the time.
Revenue under development agreements is recognized when
applicable contractual milestones have been met, including
deliverables, and in any case, does not exceed the amount that
would be recognized using the percentage-of-completion method in
accordance with the American Institute of Certified Public
Accountants Statement of Position (“SOP”) 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (“SOP 81-1”). The
costs associated with development agreements are included in
cost of revenue. Revenue from licensed software and maintenance
agreements is recognized in accordance with the provisions of
SOP 97-2, Software Revenue Recognition, as amended
by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions.
Revenue from system-level reference designs is recognized in
accordance with SAB 101 and SAB 104. Revenue from
cancellation fees is recognized when cash is received from the
customer.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable
based on a combination of factors. In cases where the Company is
aware of circumstances that may impair a specific
customer’s ability to meet its financial obligations
subsequent to the original sale, the Company will record a
specific allowance against amounts due, and thereby reduce the
net recognized receivable to the amount the Company reasonably
believes will be collected. For all other customers, the Company
recognizes allowances for doubtful accounts based on the length
of time the receivables are past due, industry and geographic
concentrations, the current business environment and the
Company’s historical experience.
Concentration of Credit Risk
The Company sells the majority of its products throughout North
America, Asia and Europe. Sales to the Company’s recurring
customers are generally made on open account while sales to
occasional customers are typically made on a prepaid or letter
of credit basis. The Company performs periodic credit
evaluations of its recurring customers and generally does not
require collateral. Reserves are maintained for potential credit
losses, and such losses historically have not been significant
and have been within management’s expectations.
The Company invests its cash in deposits and money market funds
with major financial institutions, in U.S. Treasury and
agency obligations, and in debt securities of corporations with
strong credit ratings and in a variety of industries. It is the
Company’s policy to invest in instruments that have a final
maturity of no longer than three years, with a portfolio
weighted average maturity of not more than one year.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of
cash and cash equivalents, short-term and long-term marketable
securities, accounts receivable, accounts payable and
borrowings. The Company believes all of the financial
instruments’ recorded values approximate current values
because of their nature and respective durations. The fair value
of marketable securities is determined using quoted market
prices for those securities or similar financial instruments.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term
investments with original maturities of 90 days or less.
F-7
Marketable Securities
The Company defines marketable securities as income yielding
securities that can be readily converted into cash. Examples of
marketable securities include U.S. Treasury and agency
obligations, commercial paper, corporate notes and bonds, time
deposits, foreign notes and certificates of deposit.
Investments
The Company accounts for its investments in debt and equity
securities under Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Management
determines the appropriate classification of such securities at
the time of purchase and reevaluates such classification as of
each balance sheet date. The investments are adjusted for
amortization of premiums and discounts to maturity and such
amortization is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary
are determined based on the specific identification method and
are reported in the statements of operations.
The Company also has made strategic investments in publicly
traded and privately held companies for the promotion of
business and strategic objectives. The Company’s
investments in publicly traded equity securities are classified
as available-for-sale. Available-for-sale investments are
initially recorded at cost and periodically adjusted to fair
value through comprehensive income. The Company’s
investments in equity securities of non-publicly traded
companies are accounted for under the cost method. Under the
cost method, strategic investments in which the Company holds
less than a 20% voting interest and on which the Company does
not have the ability to exercise significant influence are
carried at the lower of cost or fair value. Both types of
investments are included in other assets on the Company’s
balance sheet and are carried at fair value or cost, as
appropriate. The Company periodically reviews these investments
for other-than-temporary declines in fair value based on the
specific identification method and writes down investments to
their fair value when an other-than-temporary decline has
occurred. When determining whether a decline is
other-than-temporary, the Company examines: (i) the length
of time and the extent to which the fair value of an investment
has been lower than its carrying value; (ii) the financial
condition and near-term prospects of the investee, including any
specific events that may influence the operations of the
investee such as changes in technology that may impair the
earnings potential of the investee; and (iii) the
Company’s intent and ability to retain its investment in
the investee for a sufficient period of time to allow for any
anticipated recovery in market value. The Company generally
believes an other-than-temporary decline has occurred when the
fair value of the investment is below the carrying value for two
consecutive quarters, absent evidence to the contrary. Fair
values for investments in public companies are determined using
their quoted market prices. Fair values for investments in
privately held companies are estimated based upon one or more of
the following: (a) values established in recent rounds of
financing, (b) pricing models using historical and
forecasted financial information, and/or (c) quoted market
prices of comparable public companies.
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 allowances for estimated
obsolescence 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.
Property and Equipment
Property and equipment are carried at cost. Depreciation and
amortization are provided using the straight-line method over
the assets’ estimated remaining useful lives, ranging from
one to seven years. Depreciation and amortization of leasehold
improvements are computed using the shorter of the remaining
lease term or seven years.
F-8
Goodwill and Purchased Intangible Assets
Goodwill is recorded as the difference, if any, between the
aggregate consideration paid for an acquisition and the fair
value of the net tangible and intangible assets acquired. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”), the Company
tests goodwill for impairment at the reporting unit level
(operating segment or one level below an operating segment) on
an annual basis in the fourth quarter or more frequently if the
Company believes indicators of impairment exist. The performance
of the test involves a two-step process. The first step of the
impairment test involves comparing the fair values of the
applicable reporting units with their aggregate carrying value,
including goodwill. The Company generally determines the fair
value of its reporting units using the income approach
methodology of valuation that includes the discounted cash flow
method as well as other generally accepted valuation
methodologies. If the carrying amount of a reporting unit
exceeds the reporting unit’s fair value, the Company
performs the second step of the goodwill impairment test to
determine the amount of impairment loss. The second step of the
goodwill impairment test involves comparing the implied fair
value of the affected reporting unit’s goodwill with the
carrying value of that goodwill.
The Company accounts for long-lived assets, including other
purchased intangible assets, in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”),
which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment, such as
reductions in demand or significant economic slowdowns in the
semiconductor industry, are present. Reviews are performed to
determine whether the carrying value of an asset is impaired,
based on comparisons to undiscounted expected future cash flows.
If this comparison indicates that there is impairment, the
impaired asset is written down to fair value, which is typically
calculated using: (i) quoted market prices and/or
(ii) discounted expected future cash flows utilizing a
discount rate consistent with the guidance provided in FASB
Concepts Statement No. 7, Using Cash Flow Information
and Present Value in Accounting Measurements (“Concepts
Statement 7”). Impairment is based on the excess of
the carrying amount over the fair value of those assets.
Income Taxes
The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS No. 109,
Accounting for Income Taxes (“SFAS 109”).
Under the liability method, deferred taxes are determined based
on the temporary differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates. A
valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized. The
Company also determines its tax contingencies in accordance with
SFAS No. 5, Accounting for Contingencies. The
Company records estimated tax liabilities to the extent the
contingencies are probable and can be reasonably estimated.
Stock-Based Compensation
The Company has in effect several stock incentive plans under
which incentive stock options and restricted stock units
(“RSUs”) have been granted to employees and
non-qualified stock options have been granted to employees,
non-employee members of the Board of Directors and other
non-employees. The Company also has an employee stock purchase
plan for all eligible employees. The Company accounts for
stock-based awards to employees in accordance with Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees
(“APB 25”) and related interpretations, and
has 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. The fair
value of options granted to non-employees, as defined under
SFAS 123, has been expensed in accordance with
SFAS 123.
In accordance with APB 25, stock-based compensation expense
is not recorded in connection with stock options granted with
exercise prices equal to or greater than the fair market value
of the Company’s Class A common stock on the date of
grant, unless certain modifications are subsequently made. The
Company records deferred compensation in connection with stock
options granted with exercise prices less than the fair market
value of the Class A common stock on the date of grant. The
amount of such deferred compensation per share is equal to the
excess of such fair market value over the exercise price. In
addition, the Company records deferred compensation in
connection with RSU awards equal to the fair market value of the
Class A common stock on
F-9
the date of grant. Recorded deferred compensation is recognized
as stock-based compensation expense ratably over the applicable
vesting periods.
In accordance with the requirements of the disclosure-only
alternative of SFAS 123, set forth below are the
assumptions used and 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.
The per share fair values of stock awards granted in connection
with stock incentive plans and rights granted in connection with
the employee stock purchase plan have been estimated with the
following weighted average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee Stock Awards |
|
Employee Stock Purchase Rights |
| |
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in years)
|
|
|
4.73 |
|
|
|
4.00 |
|
|
|
4.00 |
|
|
|
1.59 |
|
|
|
1.28 |
|
|
|
1.17 |
|
|
|
|
|
|
|
Volatility
|
|
|
0.64 |
|
|
|
0.70 |
|
|
|
0.70 |
|
|
|
0.64 |
|
|
|
0.70 |
|
|
|
0.70 |
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
3.40 |
% |
|
|
2.74 |
% |
|
|
2.72 |
% |
|
|
2.40 |
% |
|
|
1.57 |
% |
|
|
2.72 |
% |
|
|
|
|
|
|
Dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
Weighted average fair value
|
|
$ |
19.19 |
|
|
$ |
16.88 |
|
|
$ |
9.33 |
|
|
$ |
7.36 |
|
|
$ |
5.90 |
|
|
$ |
6.89 |
|
The results of applying the requirements of the disclosure-only
alternative of SFAS 123 to the Company’s stock-based
awards to employees, assuming the application of the
Black-Scholes model, would approximate the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands, except per share data) |
|
|
|
|
|
|
Net income (loss) — as reported
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
|
|
|
|
|
|
Add: Stock-based compensation expense included in net income
(loss) — as reported
|
|
|
74,687 |
|
|
|
577,487 |
|
|
|
419,663 |
|
|
|
|
|
|
|
Deduct: Stock-based compensation expense determined under the
fair value method
|
|
|
(676,864 |
) |
|
|
(1,025,896 |
) |
|
|
(1,068,281 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss — pro forma
|
|
$ |
(383,432 |
) |
|
$ |
(1,408,274 |
) |
|
$ |
(2,885,194 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic) — as reported
|
|
$ |
.68 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted) — as reported
|
|
$ |
.63 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and diluted) — pro forma
|
|
$ |
(1.20 |
) |
|
$ |
(4.82 |
) |
|
$ |
(10.77 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of this illustration, the value of each stock award
has been estimated as of the date of grant using the
Black-Scholes 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 option
and the expected volatility of the Company’s stock price.
Because it does not consider other factors important to
stock-based awards, such as continued employment and periodic
vesting requirements and limited transferability, the fair value
generated by the Black-Scholes option pricing model may not be
indicative of the actual fair value of the Company’s
stock-based awards. For pro forma illustration purposes, the
Black-Scholes value of the Company’s stock-based awards is
assumed to be amortized on a straight-line basis over their
respective vesting periods.
For the first three quarters of 2004, in performing the
Black-Scholes calculations the Company used an expected life of
five years and a volatility of 0.70. In the fourth quarter of
2004 the Company changed its expected life and volatility
assumptions to four years and 0.50, respectively. This change
represents a refinement to the Company’s determination of
the appropriate assumptions to be used in the Black-Scholes
model. The Company updated its assumptions based on more recent
historical data related to trading patterns in its stock as well
as other guidance included in the most recent accounting
literature regarding the methods for selecting
F-10
assumptions. The Company believes that this refinement will
generate more representative estimates of fair value. These
refinements to the Company’s methodology decreased the 2004
pro forma net loss by approximately $1.2 million.
In March 2000 the FASB issued Interpretation (“FIN”)
No. 44, Accounting for Certain Transactions Involving
Stock Compensation — An Interpretation of APB Opinion
No. 25 (“FIN 44”). FIN 44 clarifies
the definition of an employee for purposes of applying
APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed
stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. The rules
require that the intrinsic value of the restricted stock and
unvested options be allocated to deferred compensation and
recognized as stock-based compensation expense ratably over the
remaining future vesting period. In the event that a holder does
not fully vest in the restricted stock or unvested options, the
unamortized portion of deferred compensation is eliminated.
The Company also complies with the provisions of FASB Emerging
Issues Task Force (“EITF”) Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services (“EITF 96-18”) with respect to
stock option grants to non-employees who are consultants to the
Company. EITF 96-18 requires variable plan accounting with
respect to such non-employee stock options, whereby compensation
associated with such options is measured on the date such
options vest, and incorporates the then-current fair market
value of the Company’s common stock into the option
valuation model.
In addition, the Company has complied with the provisions of
FIN No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans
(“FIN 28”), which requires use of the
variable accounting method with respect to certain stock options
assumed in connection with purchase transactions in which
contingent consideration was paid. Stock-based compensation
expense with respect to such options was based on the amount by
which the Class A common stock closing price at the end of
each quarterly reporting period, or at the date of exercise, if
earlier, exceeds the exercise price.
In December 2004 the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment (“SFAS 123R”),
which is a revision of SFAS 123. SFAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial
statements based on their fair values and does not allow the
previously permitted pro forma disclosure as an alternative to
financial statement recognition. SFAS 123R supersedes
APB 25 and related interpretations and amends
SFAS No. 95, Statement of Cash Flows.
SFAS 123R is scheduled to be effective beginning in the
third quarter of fiscal 2005. SFAS 123R allows for either
prospective recognition of compensation expense or retroactive
recognition, which may date back to the original issuance of
SFAS 123 or only to interim periods in the year of
adoption. The Company is currently evaluating these transition
methods.
The adoption of the SFAS 123R fair value method will have a
significant impact on the Company’s reported results of
operations, although it will have no impact on the
Company’s overall financial position. The impact of
adoption of SFAS 123R cannot be predicted at this time
because that will depend on the fair value and number of
share-based payments granted in the future. However, had the
Company adopted SFAS 123R in prior periods, the magnitude
of the impact of that standard would have approximated the
impact of SFAS 123 assuming the application of the
Black-Scholes model as illustrated in the table above.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. While the Company cannot estimate
what those amounts will be in the future, the amount of
operating cash flows recognized in 2004 for such excess tax
deductions was $81.8 million. No comparable amounts were
recorded in 2003 and 2002.
Contingent Consideration
In connection with certain of the Company’s acquisitions,
if certain future internal performance goals were later
satisfied, the aggregate consideration for the respective
acquisition was increased. Such additional consideration, if
earned, was paid in the form of additional shares of the
Company’s Class A common stock,
F-11
which were reserved for that purpose. Any additional
consideration paid was allocated between goodwill, stock-based
compensation expense and deferred compensation. The measurement,
recognition and allocation of contingent consideration are
accounted for using the following principles:
|
|
|
Measurement and Recognition |
In accordance with SFAS No. 141, Business
Combinations (“SFAS 141”) contingent
consideration is recorded when a contingency is satisfied and
additional consideration is issued or becomes issuable. The
Company records the additional consideration issued or issuable
in connection with the relevant acquisition when a specified
internal performance goal is met. For additional consideration
paid in stock, the Company calculates the amount of additional
consideration using the closing price of its Class A common
stock on the date the performance goal is satisfied.
|
|
|
Amount Allocated to Goodwill |
In accordance with EITF Issue No. 95-8, Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination (“EITF
95-8”) and FIN 44, the portion of additional
consideration issuable to holders of unrestricted common stock
and fully vested options as of the acquisition date is recorded
as additional purchase price, as the consideration is unrelated
to continuing employment with the Company. Such portion is
allocated to goodwill.
|
|
|
Amount Allocated to Stock-Based Compensation
Expense |
In accordance with EITF 95-8, the intrinsic value
associated with additional consideration related to stock or
options that vest between the acquisition date and the date at
which the contingency is satisfied is recorded as an immediate
charge to stock-based compensation expense because the
consideration is related to continuing employment with the
Company.
|
|
|
Amount Allocated to Deferred Compensation |
Additional consideration related to options and restricted stock
that remain unvested when the contingency is satisfied is
recorded as deferred compensation expense under EITF 95-8
and FIN 44, as such consideration will only be earned to
the extent that the holder of such options or restricted stock
continues to be employed by the Company and meets the vesting
requirements. The amount recorded as deferred compensation is
based upon the intrinsic value of the restricted stock and
unvested options at the date at which the contingency is
satisfied. The Company amortizes such deferred compensation to
stock-based compensation expense over the remaining vesting
period of the underlying restricted stock and unvested options.
In the event that a holder does not fully vest in the restricted
stock or unvested options, the unamortized portion of deferred
compensation is eliminated.
Litigation and Settlement Costs
From time to time, the Company is involved in disputes,
litigation and other legal actions. In accordance with
SFAS 5, the Company records a charge equal to at least the
minimum estimated liability for a loss contingency when both of
the following conditions are met: (i) information available
prior to issuance of the financial statements indicates that it
is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and
(ii) the range of loss can be reasonably estimated.
Net Income (Loss) Per Share
Net income (loss) per share (basic) is calculated by
dividing net income (loss) by the weighted average number of
common shares outstanding during the year. Net income (loss) per
share (diluted) is calculated by adjusting outstanding
shares, assuming any dilutive effects of options, RSUs, warrants
and convertible securities calculated using the treasury stock
method.
F-12
Research and Development Expense
Research and development expenditures are expensed in the period
incurred.
Advertising Expense
Advertising costs are expensed in the period incurred.
Rebates
The Company accounts for rebates in accordance with EITF Issue
No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor’s
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 equal to 100% of the
potential rebates, based upon the terms of the Company’s
rebate agreements.
Warranty
The Company’s 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.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial
statements. Accumulated other comprehensive income (loss)
includes foreign currency translation adjustments and unrealized
gains or losses on investments.
Business Enterprise Segments
The Company operates in one reportable operating segment,
broadband communications. SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information
(“SFAS 131”), establishes standards for the
way that 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
December 31, 2004, under the aggregation criteria set forth
in SFAS 131 the Company only operates in one reportable
operating segment, 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 or business
groups; |
| |
• |
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
broadband equipment, who incorporate its integrated circuits
into their electronic products; and |
| |
• |
all of its integrated circuits are sold through a centralized
sales force and common wholesale distributors. |
F-13
All of the Company’s business groups 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 business groups 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 business group is subject to the overall
cyclical nature of the semiconductor industry. The number and
composition of employees and the amount and types of tools and
materials required are similar for each business group. Finally,
even though the Company periodically reorganizes its business
groups based upon changes in customers, end markets or products,
acquisitions, long-term growth strategies, and the experience
and bandwidth of its vice presidents/ general managers, the
common financial goals for each business group remain constant.
Because the Company meets each of the criteria set forth in
SFAS 131 and its four business groups as of
December 31, 2004 share similar economic
characteristics, the Company aggregates its results of
operations in one reportable operating segment.
Reclassifications
Certain amounts in the 2003 and 2002 consolidated financial
statements have been reclassified to conform with the current
year presentation.
|
|
| 2. |
Supplementary Financial Information |
Inventory
The following table presents details of the Company’s
inventory:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Work in process
|
|
$ |
38,659 |
|
|
$ |
53,845 |
|
|
|
|
|
|
|
Finished goods
|
|
|
89,635 |
|
|
|
50,202 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
128,294 |
|
|
$ |
104,047 |
|
| |
|
|
|
|
|
|
|
|
Property and Equipment
The following table presents details of the Company’s
property and equipment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, |
| |
|
|
|
|
| |
|
Useful Life |
|
2004 |
|
2003 |
| |
|
|
|
|
|
|
| |
|
(In years) |
|
|
| |
|
|
|
(In thousands) |
|
|
|
|
|
|
Leasehold improvements
|
|
|
1 to 7 |
|
|
$ |
48,556 |
|
|
$ |
43,509 |
|
|
|
|
|
|
|
Office furniture and equipment
|
|
|
3 to 7 |
|
|
|
28,351 |
|
|
|
25,946 |
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
2 to 5 |
|
|
|
128,187 |
|
|
|
90,938 |
|
|
|
|
|
|
|
Computer software and equipment
|
|
|
2 to 4 |
|
|
|
142,620 |
|
|
|
176,559 |
|
|
|
|
|
|
|
Construction in progress
|
|
|
N/A |
|
|
|
9,436 |
|
|
|
17,156 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
357,150 |
|
|
|
354,108 |
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(249,990 |
) |
|
|
(211,995 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
107,160 |
|
|
$ |
142,113 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-14
Goodwill
The following table presents the changes in the carrying value
of the Company’s goodwill:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Beginning balance
|
|
$ |
827,652 |
|
|
$ |
1,228,603 |
|
|
$ |
2,241,632 |
|
|
|
|
|
|
| |
Goodwill recorded in connection with purchase transactions
(Note 3)
|
|
|
239,351 |
|
|
|
— |
|
|
|
173,656 |
|
|
|
|
|
|
| |
Goodwill recorded in connection with contingent consideration
earned (Note 3)
|
|
|
— |
|
|
|
51,315 |
|
|
|
42,229 |
|
|
|
|
|
|
| |
Reclassification of assembled workforce
|
|
|
— |
|
|
|
— |
|
|
|
12,124 |
|
|
|
|
|
|
| |
Impairment losses (Note 9)
|
|
|
— |
|
|
|
(438,611 |
) |
|
|
(1,241,038 |
) |
|
|
|
|
|
| |
Other
|
|
|
(4,815 |
) |
|
|
(13,655 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
1,062,188 |
|
|
$ |
827,652 |
|
|
$ |
1,228,603 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets
The following table presents details of the Company’s
purchased intangible assets:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 |
|
December 31, 2003 |
| |
|
|
|
|
| |
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
|
|
| |
|
Gross |
|
Amortization |
|
Net |
|
Gross |
|
Amortization |
|
Net |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Completed technology
|
|
$ |
152,230 |
|
|
$ |
(140,066 |
) |
|
$ |
12,164 |
|
|
$ |
133,911 |
|
|
$ |
(127,244 |
) |
|
$ |
6,667 |
|
|
|
|
|
|
|
Customer relationships
|
|
|
46,266 |
|
|
|
(41,997 |
) |
|
|
4,269 |
|
|
|
39,921 |
|
|
|
(39,921 |
) |
|
|
— |
|
|
|
|
|
|
|
Other
|
|
|
9,027 |
|
|
|
(8,386 |
) |
|
|
641 |
|
|
|
6,759 |
|
|
|
(6,759 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
207,523 |
|
|
$ |
(190,449 |
) |
|
$ |
17,074 |
|
|
$ |
180,591 |
|
|
$ |
(173,924 |
) |
|
$ |
6,667 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with six purchase transactions completed in 2004,
the Company recorded approximately $26.9 million in
purchased intangible assets. See Note 3. At
December 31, 2004 the unamortized balance of completed
technology that will be amortized to future cost of revenue was
approximately $12.2 million, of which $9.2 million and
$3.0 million are expected to be amortized in 2005 and 2006,
respectively. At December 31, 2004 the unamortized balance
of customer relationships and other purchased intangible assets
that will be amortized to future operating expense was
approximately $4.9 million, of which $3.6 million and
$1.3 million are expected to be amortized in 2005 and 2006,
respectively.
Other Assets
The following table presents details of the Company’s other
assets:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Strategic investments (Note 4)
|
|
$ |
5,229 |
|
|
$ |
2,766 |
|
|
|
|
|
|
|
Employee notes and interest receivable
|
|
|
996 |
|
|
|
1,926 |
|
|
|
|
|
|
|
Other
|
|
|
15,832 |
|
|
|
4,290 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
22,057 |
|
|
$ |
8,982 |
|
| |
|
|
|
|
|
|
|
|
F-15
Accrued Liabilities
The following table presents details of the Company’s
accrued liabilities:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Accrued taxes
|
|
$ |
94,382 |
|
|
$ |
106,099 |
|
|
|
|
|
|
|
Accrued rebates
|
|
|
93,222 |
|
|
|
62,282 |
|
|
|
|
|
|
|
Warranty reserve
|
|
|
19,185 |
|
|
|
5,996 |
|
|
|
|
|
|
|
Accrued settlement liabilities
|
|
|
10,700 |
|
|
|
14,767 |
|
|
|
|
|
|
|
Restructuring liabilities
|
|
|
10,364 |
|
|
|
12,933 |
|
|
|
|
|
|
|
Other
|
|
|
51,654 |
|
|
|
47,507 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
279,507 |
|
|
$ |
249,584 |
|
| |
|
|
|
|
|
|
|
|
Long-Term Liabilities
The following table presents details of the Company’s
long-term liabilities:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Restructuring liabilities
|
|
$ |
16,753 |
|
|
$ |
24,241 |
|
|
|
|
|
|
|
Accrued settlement liabilities
|
|
|
6,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
22,753 |
|
|
$ |
24,241 |
|
| |
|
|
|
|
|
|
|
|
Accrued Rebates Activity
The following table summarizes the 2004 and 2003 activity
related to accrued rebates:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Beginning balance
|
|
$ |
62,282 |
|
|
$ |
42,391 |
|
|
|
|
|
|
| |
Rebates charged as a reduction of revenue
|
|
|
263,634 |
|
|
|
165,162 |
|
|
|
|
|
|
| |
Rebate payments
|
|
|
(232,694 |
) |
|
|
(145,271 |
) |
| |
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
93,222 |
|
|
$ |
62,282 |
|
| |
|
|
|
|
|
|
|
|
Warranty Reserve Activity
The following table summarizes the 2004 and 2003 activity
related to the warranty reserve:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Beginning balance
|
|
$ |
5,996 |
|
|
$ |
3,881 |
|
|
|
|
|
|
| |
Charged to costs and expenses
|
|
|
14,812 |
|
|
|
8,325 |
|
|
|
|
|
|
| |
Acquired through acquisition
|
|
|
157 |
|
|
|
— |
|
|
|
|
|
|
| |
Payments
|
|
|
(1,780 |
) |
|
|
(6,210 |
) |
| |
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
19,185 |
|
|
$ |
5,996 |
|
| |
|
|
|
|
|
|
|
|
F-16
Advertising Expense
Advertising expense in 2004, 2003 and 2002 was
$5.3 million, $3.2 million, and $0.3 million,
respectively.
Interest Expense
Interest expense in 2004, 2003 and 2002 was $0.1 million,
$1.1 million and $3.6 million, respectively.
Other Income (Expense), Net
The following table presents details of the Company’s other
income (expense), net:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Net gain (loss) on strategic investments (Note 4)
|
|
$ |
5,231 |
|
|
$ |
22,041 |
|
|
$ |
(33,201 |
) |
|
|
|
|
|
|
Other
|
|
|
2,086 |
|
|
|
4,012 |
|
|
|
451 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
7,317 |
|
|
$ |
26,053 |
|
|
$ |
(32,750 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Computation of Net Income (Loss) Per Share
The following table presents the computation of net income
(loss) per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands, except per share data) |
|
|
|
|
|
|
Numerator: Net income (loss)
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding
|
|
|
319,778 |
|
|
|
292,881 |
|
|
|
271,628 |
|
|
|
|
|
|
| |
Less: Unvested common shares outstanding
|
|
|
(336 |
) |
|
|
(872 |
) |
|
|
(3,638 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income (loss) per share (basic)
|
|
|
319,442 |
|
|
|
292,009 |
|
|
|
267,990 |
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Unvested common shares outstanding
|
|
|
318 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
|
Stock options and other
|
|
|
29,277 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income (loss) per share (diluted)
|
|
|
349,037 |
|
|
|
292,009 |
|
|
|
267,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$ |
.68 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$ |
.63 |
|
|
$ |
(3.29 |
) |
|
$ |
(8.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
If the Company had reported net income in 2003 and 2002,
additional common share equivalents of 19,688,168 and
19,320,114, respectively, would have been included in the
denominator for net income (loss) per share (diluted) noted
in the table above. These common share equivalents, calculated
using the treasury stock method, have been excluded from the
diluted net loss per share calculation because such equivalents
were antidilutive as of such dates. These excluded common share
equivalents could be dilutive in the future. Contingent equity
consideration paid by the Company in connection with certain
acquisitions is included, as appropriate, in the calculation of
basic and diluted net income (loss) per share as of the
beginning of the period in which the respective equity
consideration is earned.
F-17
Supplementary Cash Flow Information
The following table sets forth certain non-cash transactions
excluded from the statements of cash flows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Acquisition of equipment through deferred payments
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
14,314 |
|
|
|
|
|
|
|
Trade-in of equipment as partial consideration for equipment
acquired through an operating lease
|
|
|
10,712 |
|
|
|
— |
|
|
|
— |
|
From January 1, 2002 through December 31, 2004 the
Company completed eight acquisitions. The consolidated financial
statements include the results of operations of these acquired
companies commencing as of their respective acquisition dates.
A summary of these transactions as of their respective
acquisition dates is outlined below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Shares |
|
Shares |
|
|
|
|
| |
|
|
|
|
|
|
|
Reserved |
|
Reserved |
|
|
|
|
| |
|
|
|
|
|
|
|
for Stock |
|
for Certain |
|
|
|
|
| |
|
|
|
|
|
|
|
Purchase |
|
Future |
|
Total Shares |
|
Cash |
| |
|
Date |
|
|
|
Shares |
|
Rights |
|
Performance |
|
Issued or |
|
Consideration |
| Company Acquired |
|
Acquired |
|
Business |
|
Issued |
|
Assumed |
|
Goals |
|
Reserved |
|
Paid |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
2004 Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAIDCore, Inc.
|
|
|
Jan. 2004 |
|
|
Redundant array of inexpensive disks (“RAID”) and
virtualization software |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
9,886 |
|
|
|
|
|
|
|
Sand Video, Inc.
|
|
|
Apr. 2004 |
|
|
Advanced video compression semiconductor technology |
|
|
1,406,038 |
|
|
|
261,919 |
|
|
|
— |
|
|
|
1,667,957 |
|
|
|
7,365 |
|
|
|
|
|
|
|
M-Stream, Inc.
|
|
|
Apr. 2004 |
|
|
Solutions for signal-to-noise ratio performance improvements in
cellular handsets |
|
|
— |
|
|
|
26,536 |
|
|
|
— |
|
|
|
26,536 |
|
|
|
7,898 |
|
|
|
|
|
|
|
WIDCOMM, Inc.
|
|
|
May 2004 |
|
|
Software solutions for Bluetooth® wireless products |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48,427 |
|
|
|
|
|
|
|
Zyray Wireless Inc.
|
|
|
July 2004 |
|
|
Baseband co-processors addressing WCDMA (Wideband Code Division
Multiple Access) mobile devices |
|
|
1,894,221 |
|
|
|
344,977 |
|
|
|
— |
|
|
|
2,239,198 |
|
|
|
3,850 |
|
|
|
|
|
|
|
Alphamosaic Limited
|
|
|
Sep. 2004 |
|
|
Advanced mobile imaging, multimedia and 3D graphics technology
optimized for use in cellphones and other mobile devices |
|
|
4,172,537 |
|
|
|
141,208 |
|
|
|
— |
|
|
|
4,313,745 |
|
|
|
2,695 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
7,472,796 |
|
|
|
774,640 |
|
|
|
— |
|
|
|
8,247,436 |
|
|
$ |
80,121 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gadzoox Networks, Inc.
|
|
|
Mar. 2003 |
|
|
Storage networking technology |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
5,862 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobilink Telecom, Inc.
|
|
|
May 2002 |
|
|
Chipsets and reference designs for use in mobile phones, PDAs
and cellular modem cards |
|
|
4,396,734 |
|
|
|
1,211,637 |
|
|
|
2,045,569 |
|
|
|
7,653,940 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
11,869,530 |
|
|
|
1,986,277 |
|
|
|
2,045,569 |
|
|
|
15,901,376 |
|
|
$ |
85,983 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
The Company’s primary reasons for the above acquisitions
were to enter into or expand its market share in the relevant
broadband communications markets, reduce the time required to
develop new technologies and products and bring them to market,
incorporate enhanced functionality into and complement the
Company’s existing product offerings, augment its
engineering workforce, and/ or enhance its technological
capabilities.
Certain of the shares issued or cash paid are held in escrow
pursuant to the terms of the respective acquisition agreements.
Additionally, certain issued shares are subject to the
Company’s right of repurchase should the shareholder cease
employment with the Company prior to the scheduled vesting of
those shares.
Allocation of Initial Purchase Consideration
The Company calculated the fair value of the tangible and
intangible assets acquired to allocate the purchase prices in
accordance with SFAS 141. Based upon those calculations,
the purchase price for each of the acquisitions was allocated as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Assets |
|
Goodwill and |
|
|
|
|
|
In-Process |
|
|
| |
|
(Liabilities) |
|
Purchased |
|
Deferred |
|
Deferred Tax |
|
Research & |
|
Total |
| |
|
Assumed |
|
Intangibles |
|
Compensation |
|
Liabilities |
|
Development |
|
Consideration |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
2004 Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAIDCore
|
|
$ |
(267 |
) |
|
$ |
7,893 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,260 |
|
|
$ |
9,886 |
|
|
|
|
|
|
|
Sand Video
|
|
|
(2,067 |
) |
|
|
43,841 |
|
|
|
14,760 |
|
|
|
— |
|
|
|
20,518 |
|
|
|
77,052 |
|
|
|
|
|
|
|
M-Stream
|
|
|
452 |
|
|
|
4,080 |
|
|
|
630 |
|
|
|
— |
|
|
|
3,726 |
|
|
|
8,888 |
|
|
|
|
|
|
|
WIDCOMM
|
|
|
(689 |
) |
|
|
49,116 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48,427 |
|
|
|
|
|
|
|
Zyray
|
|
|
(1,781 |
) |
|
|
59,516 |
|
|
|
13,707 |
|
|
|
— |
|
|
|
25,929 |
|
|
|
97,371 |
|
|
|
|
|
|
|
Alphamosaic
|
|
|
913 |
|
|
|
101,836 |
|
|
|
8,705 |
|
|
|
— |
|
|
|
11,333 |
|
|
|
122,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
(3,439 |
) |
|
$ |
266,282 |
|
|
$ |
37,802 |
|
|
$ |
— |
|
|
$ |
63,766 |
|
|
$ |
364,411 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gadzoox
|
|
$ |
2,521 |
|
|
$ |
3,341 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,862 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobilink
|
|
$ |
(10,998 |
) |
|
$ |
191,126 |
|
|
$ |
1,253 |
|
|
$ |
(7,629 |
) |
|
$ |
— |
|
|
$ |
173,752 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions
|
|
$ |
(11,916 |
) |
|
$ |
460,749 |
|
|
$ |
39,055 |
|
|
$ |
(7,629 |
) |
|
$ |
63,766 |
|
|
$ |
544,025 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The equity consideration for each acquisition was calculated as
follows: (i) common shares issued were valued based upon
the Company’s stock price for a period commencing two
trading days before and ending two trading days after the
parties reached agreement and the proposed transaction was
announced and (ii) restricted common stock and employee
stock options were valued in accordance with FIN 44.
Acquisition costs incurred by the Company have been included as
part of the net assets (liabilities) assumed in connection
with the purchase transactions.
F-19
Accounting for Contingent Consideration
In connection with its prior acquisitions of SiByte, Inc.,
ServerWorks Corporation and Mobilink, the Company reserved
additional shares of its Class A common stock for issuance
to the former share and option holders of the acquired companies
upon satisfaction of certain future internal performance goals
established in the definitive agreements for each of these
acquisitions.
The following table presents activity in the Company’s
Class A common stock reserved for issuance upon
satisfaction of future internal performance goals related to
purchase acquisitions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Shares |
| |
|
|
|
|
|
|
|
Reserved for |
| |
|
|
|
|
|
|
|
Certain |
| |
|
|
|
|
|
|
|
Future |
| |
|
|
|
|
|
|
|
Performance |
| |
|
SiByte |
|
ServerWorks |
|
Mobilink |
|
Goals |
| |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
|
1,406,954 |
|
|
|
5,000,000 |
|
|
|
— |
|
|
|
6,406,954 |
|
|
|
|
|
|
| |
Shares reserved for certain future internal performance goals
|
|
|
— |
|
|
|
— |
|
|
|
2,045,569 |
|
|
|
2,045,569 |
|
|
|
|
|
|
| |
Shares/options earned
|
|
|
— |
|
|
|
(2,986,583 |
) |
|
|
(500,444 |
) |
|
|
(3,487,027 |
) |
|
|
|
|
|
| |
Shares/options cancelled
|
|
|
(1,406,954 |
) |
|
|
(13,417 |
) |
|
|
(10,948 |
) |
|
|
(1,431,319 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
— |
|
|
|
2,000,000 |
|
|
|
1,534,177 |
|
|
|
3,534,177 |
|
|
|
|
|
|
| |
Shares/options earned
|
|
|
— |
|
|
|
(1,984,144 |
) |
|
|
(1,501,251 |
) |
|
|
(3,485,395 |
) |
|
|
|
|
|
| |
Shares/options cancelled
|
|
|
— |
|
|
|
(15,856 |
) |
|
|
(32,926 |
) |
|
|
(48,782 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In early 2003 the Company notified the stockholder agent
representing the former stock and option holders of SiByte that
the final SiByte performance goal for 2002 had not been
satisfied, and the shares and options that remained available
for future issuance in connection with such acquisition were
cancelled. The stockholder agent disputed the Company’s
determination, contending that the former stock and option
holders of SiByte were entitled to the shares reserved for
issuance upon satisfaction of the final performance goal. In
November 2004 the Company recorded a cash settlement of that
dispute in the amount of $8.2 million. See Note 11.
The following table presents the allocation of contingent
consideration earned in connection with the satisfaction of the
internal performance goals detailed in the table above:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Total |
| |
|
|
|
|
|
Contingent |
| |
|
ServerWorks |
|
Mobilink |
|
Consideration |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
2002 Allocation of Contingent Consideration Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Goodwill
|
|
$ |
36,252 |
|
|
$ |
5,977 |
|
|
$ |
42,229 |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
— |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
| |
Deferred compensation, net
|
|
|
— |
|
|
|
66 |
|
|
|
66 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
36,252 |
|
|
$ |
6,054 |
|
|
$ |
42,306 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Allocation of Contingent Consideration Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Goodwill
|
|
$ |
27,168 |
|
|
$ |
24,147 |
|
|
$ |
51,315 |
|
|
|
|
|
|
| |
Stock-based compensation expense
|
|
|
13,831 |
|
|
|
2,650 |
|
|
|
16,481 |
|
|
|
|
|
|
| |
Deferred compensation, net
|
|
|
30,235 |
|
|
|
6,677 |
|
|
|
36,912 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
71,234 |
|
|
$ |
33,474 |
|
|
$ |
104,708 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See Note 1 for a detailed explanation of the accounting
policy relating to the measurement, recognition and allocation
of contingent consideration.
F-20
Condensed Balance Sheets
The following table presents the combined details of the
unaudited condensed balance sheets of the acquired companies at
the respective dates of acquisition:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
Acquisitions |
|
Acquisition |
|
Acquisition |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
5,275 |
|
|
$ |
— |
|
|
$ |
839 |
|
|
|
|
|
|
| |
Accounts receivable
|
|
|
8,642 |
|
|
|
890 |
|
|
|
584 |
|
|
|
|
|
|
| |
Inventory
|
|
|
1,937 |
|
|
|
457 |
|
|
|
1,192 |
|
|
|
|
|
|
| |
Prepaid expenses and other current assets
|
|
|
1,698 |
|
|
|
— |
|
|
|
893 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
17,552 |
|
|
|
1,347 |
|
|
|
3,508 |
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
944 |
|
|
|
1,174 |
|
|
|
4,934 |
|
|
|
|
|
|
|
Other assets
|
|
|
159 |
|
|
|
— |
|
|
|
3,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
18,655 |
|
|
$ |
2,521 |
|
|
$ |
11,442 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
10,220 |
|
|
$ |
— |
|
|
$ |
2,636 |
|
|
|
|
|
|
| |
Wages and related benefits
|
|
|
1,140 |
|
|
|
— |
|
|
|
628 |
|
|
|
|
|
|
| |
Accrued liabilities
|
|
|
5,191 |
|
|
|
— |
|
|
|
8,706 |
|
|
|
|
|
|
| |
Short-term debt
|
|
|
2,203 |
|
|
|
— |
|
|
|
9,137 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
18,754 |
|
|
|
— |
|
|
|
21,107 |
|
|
|
|
|
|
| |
Total shareholders’ equity (deficit)
|
|
|
(99 |
) |
|
|
2,521 |
|
|
|
(9,665 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total liabilities and shareholders’ equity (deficit)
|
|
$ |
18,655 |
|
|
$ |
2,521 |
|
|
$ |
11,442 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
In connection with acquisitions, the Company incurred
acquisition costs of approximately $3.3 million and
$1.3 million in 2004 and 2002, respectively.
Goodwill and Purchased Intangible Assets
The following table presents the combined details of the total
goodwill and purchased intangible assets of the acquired
companies at the respective dates of acquisitions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2004 |
|
2003 |
|
2002 |
| |
|
Useful Life |
|
Acquisitions |
|
Acquisition |
|
Acquisition |
| |
|
|
|
|
|
|
|
|
| |
|
(In years) |
|
|
| |
|
|
|
(In thousands) |
|
|
|
|
|
|
Goodwill
|
|
|
N/A |
|
|
$ |
239,351 |
|
|
$ |
— |
|
|
$ |
173,656 |
|
|
|
|
|
|
|
Purchased intangible assets (finite lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Completed technology
|
|
|
2 to 3 |
|
|
|
18,318 |
|
|
|
2,441 |
|
|
|
14,550 |
|
|
|
|
|
|
| |
Customer relationships
|
|
|
2 |
|
|
|
6,345 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Customer contracts
|
|
|
1 to 2 |
|
|
|
725 |
|
|
|
— |
|
|
|
1,620 |
|
|
|
|
|
|
| |
Other
|
|
|
<1 |
|
|
|
1,543 |
|
|
|
900 |
|
|
|
1,300 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
266,282 |
|
|
$ |
3,341 |
|
|
$ |
191,126 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
In-Process Research and Development
In-process research and development (“IPR&D”)
totaled $63.8 million for acquisitions completed in 2004.
No comparable amount of IPR&D was recorded in 2003 and 2002.
The amounts allocated to IPR&D were determined through
established valuation techniques used in the high technology
industry and were expensed upon acquisition as it was determined
that the underlying projects had not reached technological
feasibility and no alternative future uses existed. In
accordance with SFAS No. 2, Accounting for Research
and Development Costs, as clarified by FIN No. 4,
Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, an
Interpretation of FASB Statement No. 2, amounts
assigned to IPR&D meeting the above-stated criteria were
charged to expense as part of the allocation of the purchase
price.
The fair value of the IPR&D for each of the acquisitions was
determined using the income approach. Under the income approach,
the expected future cash flows from each project under
development are estimated and discounted to their net present
value at an appropriate risk-adjusted rate of return.
Significant factors considered in the calculation of the rate of
return are the weighted-average cost of capital and return on
assets, as well as the risks inherent in the development
process, including the likelihood of achieving technological
success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence
and reliance on core technology, the existence of any
alternative future use or current technological feasibility, and
the complexity, cost and time to complete the remaining
development. Future cash flows for each project were estimated
based on forecasted revenue and costs, taking into account
product life cycles, and market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D
performed as of the respective acquisition dates. The fair value
of developed technology is included in identifiable purchased
intangible assets, and future research and development is
included in goodwill. The Company believes the amounts recorded
as IPR&D, as well as developed technology, represent the
fair values and approximate the amounts an independent party
would pay for these projects at the time of the respective
acquisition dates.
The following table summarizes the significant assumptions at
the acquisition dates underlying the valuations for the
Company’s significant acquisitions completed in 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
Average |
|
Average |
|
|
|
Risk |
|
|
| |
|
|
|
Estimated |
|
Estimated |
|
Estimated |
|
Adjusted |
|
|
| |
|
|
|
Percent |
|
Time to |
|
Cost to |
|
Discount |
|
|
| Company Acquired |
|
Development Projects |
|
Complete |
|
Complete |
|
Complete |
|
Rate |
|
IPR&D |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(In years) |
|
(In millions) |
|
|
|
(In millions) |
|
|
|
|
|
|
RAIDCore
|
|
RAID software stack |
|
|
60 |
% |
|
|
1 |
|
|
$ |
1.8 |
|
|
|
23 |
% |
|
$ |
2.3 |
|
|
|
|
|
|
|
Sand Video
|
|
Decoder/codec chips |
|
|
45 |
|
|
|
1.5 |
|
|
|
6.4 |
|
|
|
28 |
|
|
|
20.5 |
|
|
|
|
|
|
|
M-Stream
|
|
Algorithm implemented in DSP chip |
|
|
30 |
|
|
|
1 |
|
|
|
1.3 |
|
|
|
26 |
|
|
|
3.7 |
|
|
|
|
|
|
|
Zyray
|
|
WCDMA co-processor |
|
|
80 |
|
|
|
1 |
|
|
|
5.6 |
|
|
|
24 |
|
|
|
25.9 |
|
|
|
|
|
|
|
Alphamosaic
|
|
Multimedia co-processor |
|
|
50 |
|
|
|
1 |
|
|
|
11.5 |
|
|
|
21 |
|
|
|
11.3 |
|
The Company completed the development projects related to the
RAIDCore acquisition. For one development project related to the
Sand Video acquisition, the Company reallocated the resources to
focus on semiconductor products that the Company believes are a
higher priority. All other development projects are still in
process.
Except as noted above, actual results to date have been
consistent, in all material respects, with the Company’s
assumptions at the time of the acquisitions. The assumptions
consist primarily of expected completion dates for the IPR&D
projects, estimated costs to complete the projects, and revenue
and expense projections for the products once they have entered
the market.
As of the respective acquisition dates of the 2004 acquisitions,
certain ongoing development projects were in process. Research
and development costs to bring the products of the acquired
companies to technological feasibility are not expected to have
a material impact on the Company’s results of operations or
financial condition.
F-22
Supplemental Pro Forma Data (Unaudited)
The pro forma data of the Company set forth below gives effect
to certain acquisitions completed in 2004 as if they had
occurred at the beginning of 2003 and includes amortization of
purchased intangible assets and stock-based compensation
expense, but excludes the charge for acquired IPR&D.
Included in the reported pro forma data for 2004 is a
$3.4 million restructuring charge for the consolidation of
excess facilities, related primarily to non-cancelable lease
costs. This pro forma data is presented for informational
purposes only and does not purport to be indicative of the
results of future operations of the Company or of the results
that would have actually occurred had the acquisitions taken
place at the beginning of 2003. No supplemental pro forma
information is presented for the acquisitions of RAIDCore,
M-Stream or Gadzoox due to the immaterial effect of those
acquisitions on the results of operations.
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands, |
| |
|
except per share data) |
|
|
|
|
|
|
Pro forma net revenue
|
|
$ |
2,410,176 |
|
|
$ |
1,621,061 |
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
|
254,290 |
|
|
|
(1,010,675 |
) |
|
|
|
|
|
|
Pro forma net income (loss) per share (basic)
|
|
|
.78 |
|
|
|
(3.37 |
) |
|
|
|
|
|
|
Pro forma net income (loss) per share (diluted)
|
|
|
.71 |
|
|
|
(3.37 |
) |
Held-to-Maturity Investments
At December 31, 2004 all of the Company’s
held-to-maturity investments consisted of U.S. Treasury and
agency obligations, commercial paper, corporate notes and bonds,
time deposits, foreign notes and certificates of deposit. Debt
securities are classified as held-to-maturity when the Company
has the intent and ability to hold the securities to maturity.
Held-to-maturity investments are stated at cost, adjusted for
amortization of premiums and discounts to maturity. A summary of
the Company’s held-to-maturity investments by balance sheet
caption is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross |
|
Gross |
|
|
| |
|
|
|
Unrealized |
|
Unrealized |
|
|
| |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| |
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$ |
356,845 |
|
|
$ |
21 |
|
|
$ |
(35 |
) |
|
$ |
356,831 |
|
|
|
|
|
|
|
Short-term marketable securities
|
|
|
324,041 |
|
|
|
17 |
|
|
|
(656 |
) |
|
|
323,402 |
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
92,918 |
|
|
|
19 |
|
|
|
(582 |
) |
|
|
92,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
773,804 |
|
|
$ |
57 |
|
|
$ |
(1,273 |
) |
|
$ |
772,588 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$ |
64,299 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
64,299 |
|
|
|
|
|
|
|
Short-term marketable securities
|
|
|
47,296 |
|
|
|
262 |
|
|
|
(40 |
) |
|
|
47,518 |
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
36,405 |
|
|
|
169 |
|
|
|
(42 |
) |
|
|
36,532 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
148,000 |
|
|
$ |
431 |
|
|
$ |
(82 |
) |
|
$ |
148,349 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Scheduled maturities of held-to-maturity securities were as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
| |
|
Amortized |
|
|
|
Amortized |
|
|
| |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
| |
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$ |
680,886 |
|
|
$ |
680,233 |
|
|
$ |
111,595 |
|
|
$ |
111,817 |
|
|
|
|
|
|
|
One to two years
|
|
|
69,717 |
|
|
|
69,247 |
|
|
|
17,273 |
|
|
|
17,380 |
|
|
|
|
|
|
|
Two to three years
|
|
|
23,201 |
|
|
|
23,108 |
|
|
|
19,132 |
|
|
|
19,152 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
773,804 |
|
|
$ |
772,588 |
|
|
$ |
148,000 |
|
|
$ |
148,349 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Investments
At December 31, 2004 and 2003 the carrying values of the
Company’s investments in equity securities of privately
held companies accounted for using the cost method were
approximately $5.2 million and $2.8 million,
respectively. In 2004, 2003 and 2002 the Company performed
impairment analyses of these investments. The Company recorded
impairment charges for these investments in the amounts of
$2.3 million and $37.3 million in 2003 and 2002,
respectively, representing other-than-temporary declines in the
value of these non-marketable equity securities. There were no
comparable charges incurred in 2004. In addition, in 2004 and
2002 the Company recorded net gains on the sale of its
investments in publicly traded companies in the amounts of
$5.2 million and $4.6 million, respectively. In 2002
the Company performed impairment analyses and recorded
impairment charges for these investments in the amount of
$0.5 million. These gains and charges were included in
other income (expense), net, in the consolidated statements of
operations.
From October 2001 through January 2002 the Company purchased an
approximate 9.8% ownership interest in a privately held company
for $23.0 million. In October 2001 the Company also entered
into a separate agreement to perform certain development
services for that company in exchange for additional equity
consideration with an estimated aggregate value, based on the
value at the time the agreement was signed, of up to
approximately $10.0 million, if all of the development
milestones were satisfied. The additional equity that the
Company could receive under the development agreement consisted
of shares of preferred stock of the privately held company that
had rights that could protect the Company against subsequent
dilution in the event that the privately held company issued
additional equity securities for a per share price that was
below the per share value of the stock received by the Company.
Consistent with the Company’s existing policies, the
strategic investment was accounted for using the cost method,
and revenue under the development agreement was recorded using
the percentage-of-completion method. In 2003 and 2002
approximately $0.5 million and $4.7 million of
non-cash revenue, respectively, was recognized under the
development agreement. In September 2003 the Company received
approximately $28.4 million of proceeds and realized a gain
on the sale of this investment of approximately
$24.4 million. The investment was previously written down
by $24.1 million in September 2002, representing an
other-than-temporary decline in the value of that investment at
that time. These charges and gains were also included in other
income (expense), net, in the consolidated statements of
operations.
For financial reporting purposes, income (loss) before income
taxes includes the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
United States
|
|
$ |
29,027 |
|
|
$ |
(1,071,532 |
) |
|
$ |
(1,856,820 |
) |
|
|
|
|
|
|
Foreign
|
|
|
265,325 |
|
|
|
136,794 |
|
|
|
(82,162 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
294,352 |
|
|
$ |
(934,738 |
) |
|
$ |
(1,938,982 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-24
A reconciliation of the provision (benefit) for income taxes at
the federal statutory rate compared to the Company’s
effective tax rate follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Statutory federal provision (benefit) for income taxes
|
|
$ |
103,023 |
|
|
$ |
(327,158 |
) |
|
$ |
(678,644 |
) |
|
|
|
|
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-deductible impairment of goodwill
|
|
|
— |
|
|
|
153,514 |
|
|
|
434,363 |
|
|
|
|
|
|
| |
In-process research and development
|
|
|
17,499 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
State taxes, net of federal benefit
|
|
|
14,047 |
|
|
|
583 |
|
|
|
52,108 |
|
|
|
|
|
|
| |
Benefit of federal tax credits
|
|
|
(11,836 |
) |
|
|
(39,939 |
) |
|
|
(38,208 |
) |
|
|
|
|
|
| |
Valuation allowance (federal)
|
|
|
36,893 |
|
|
|
262,201 |
|
|
|
465,557 |
|
|
|
|
|
|
| |
Reversal of taxes previously accrued
|
|
|
(21,300 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Tax rate differential on foreign earnings
|
|
|
(65,066 |
) |
|
|
(23,334 |
) |
|
|
63,572 |
|
|
|
|
|
|
| |
Other
|
|
|
2,347 |
|
|
|
(740 |
) |
|
|
(1,154 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Provision for income taxes
|
|
$ |
75,607 |
|
|
$ |
25,127 |
|
|
$ |
297,594 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision consists of the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
44,598 |
|
|
$ |
15,753 |
|
|
$ |
— |
|
|
|
|
|
|
| |
State
|
|
|
21,610 |
|
|
|
583 |
|
|
|
437 |
|
|
|
|
|
|
| |
Foreign
|
|
|
9,399 |
|
|
|
8,791 |
|
|
|
15,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
75,607 |
|
|
|
25,127 |
|
|
|
15,656 |
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
— |
|
|
|
— |
|
|
|
202,209 |
|
|
|
|
|
|
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
79,729 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
— |
|
|
|
281,938 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
75,607 |
|
|
$ |
25,127 |
|
|
$ |
297,594 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company’s deferred taxes were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development tax credit carryforwards
|
|
$ |
332,031 |
|
|
$ |
293,765 |
|
|
|
|
|
|
| |
Capitalized research and development costs
|
|
|
113,341 |
|
|
|
104,421 |
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
|
1,010,151 |
|
|
|
915,190 |
|
|
|
|
|
|
| |
Investments in securities
|
|
|
16,809 |
|
|
|
9,842 |
|
|
|
|
|
|
| |
Reserves and accruals not currently deductible for tax purposes
|
|
|
30,837 |
|
|
|
32,352 |
|
|
|
|
|
|
| |
Deferred compensation and purchased intangible assets
|
|
|
141,328 |
|
|
|
98,790 |
|
|
|
|
|
|
| |
Other
|
|
|
14,873 |
|
|
|
16,113 |
|
| |
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
1,659,370 |
|
|
|
1,470,473 |
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,659,370 |
) |
|
|
(1,470,473 |
) |
| |
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
The Company operates under a tax holiday in Singapore, which is
effective through March 2006. The tax holiday is conditional
upon the Company meeting certain employment and investment
thresholds. The impact of the Singapore tax holiday was to
decrease Singapore taxes by approximately $147.1 million,
$101.1 million and $47.8 million for 2004, 2003 and
2002, respectively. The benefit of the tax holiday on net income
(loss) per share (diluted) was approximately $.42, $.35 and $.18
for 2004, 2003 and 2002, respectively.
At December 31, 2004 the Company had federal, state and
United Kingdom net operating loss carryforwards of approximately
$2.731 billion, $816.8 million and $35.7 million,
respectively. If unutilized, the federal and state net operating
loss carryforwards expire at various dates from 2006 to 2024 and
2005 to 2024, respectively. The United Kingdom net
operating losses have no expiration date. The federal and state
net operating losses are primarily the result of tax deductions
related to employee stock option exercises.
At December 31, 2004 the Company had federal, state and
Canadian research and development credit carryforwards of
approximately $190.5 million, $209.8 million and
$5.2 million, respectively. These research and development
credit carryforwards expire at various dates from 2009 to 2024,
if not previously utilized. Certain state research and
development credit carryforwards have no expiration date.
In 2004 and 2003 the Company concluded that a full valuation
allowance against its net deferred tax assets was appropriate.
SFAS 109 requires that a valuation allowance must be
established when it is more likely than not that all or a
portion of deferred tax assets will not be realized. In making
such determination, a review of all available positive and
negative evidence must be considered, including scheduled
reversal of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial
performance. The accounting guidance further states that forming
a conclusion that a valuation allowance is not needed is
difficult when there is negative evidence such as cumulative
losses in recent years. As a result of the Company’s recent
cumulative losses and the full utilization of its loss carryback
potential, the Company concluded that a full valuation allowance
should be recorded in 2004 and 2003.
If or when recognized, the tax benefits relating to any reversal
of the valuation allowance on deferred tax assets at
December 31, 2004 will be accounted for as follows:
approximately $1.266 billion will be recognized as a
reduction of income tax expense, $81.3 million will be
recognized as a reduction of goodwill and $312.4 million
will be recognized as an increase in shareholders’ equity
for certain tax deductions from employee stock options.
F-26
In 2003 the IRS commenced a routine examination of the
Company’s 1999 and 2000 tax years. Management believes that
the results of this examination will not have a material effect
on the Company’s financial condition or results of
operations.
The Company has not provided for U.S. income taxes on
undistributed earnings of non-U.S. subsidiaries of
approximately $180.0 million as of December 31, 2004
because it is the Company’s intention to permanently invest
these earnings overseas. U.S. income taxes would be
immaterial if such earnings were not considered permanently
reinvested due to U.S. net operating loss and tax credit
carryforwards and resulting foreign tax credits.
The Company leases facilities in Irvine (its corporate
headquarters) and Santa Clara County, California. Each of
these facilities includes research and development,
administration, sales and marketing, and operations functions.
In addition to the Company’s principal design facilities in
Irvine and Santa Clara County, the Company leases
additional design facilities in Tempe, Arizona; San Diego
County, California; Duluth, Georgia; Germantown, Maryland;
Andover, Massachusetts; Nashua, New Hampshire; Matawan,
New Jersey; and Seattle, Washington. Internationally, the
Company leases a distribution center that includes engineering
design and administrative facilities in Singapore as well as
engineering design and administrative facilities in Belgium,
Canada, China, France, India, Israel, the Netherlands, Taiwan
and the United Kingdom. In addition, the Company leases various
sales and marketing facilities in the United States and several
other countries.
In December 2004 the Company entered into a lease agreement
under which its corporate headquarters will move from its
present location to a new, larger facility in Irvine eventually
consisting of eight buildings with an aggregate of approximately
0.7 million square feet. The lease term is a period of ten
years and two months beginning after the completion of the first
two buildings and related tenant improvements, which is
anticipated to be in the first quarter of 2007. The aggregate
rent for the term of the lease, approximately
$183.0 million, is included in the table below.
Future minimum payments under noncancelable operating leases and
purchase obligations are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment Obligations by Year |
| |
|
|
| |
|
|
|
There- |
|
|
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
after |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Operating leases
|
|
$ |
86,526 |
|
|
$ |
76,831 |
|
|
$ |
51,568 |
|
|
$ |
42,966 |
|
|
$ |
37,570 |
|
|
$ |
159,724 |
|
|
$ |
455,185 |
|
|
|
|
|
|
|
Inventory and other related purchase obligations
|
|
|
113,430 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
113,430 |
|
|
|
|
|
|
|
Other purchase obligations
|
|
|
45,360 |
|
|
|
4,348 |
|
|
|
2,136 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,844 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
245,316 |
|
|
$ |
81,179 |
|
|
$ |
53,704 |
|
|
$ |
42,966 |
|
|
$ |
37,570 |
|
|
$ |
159,724 |
|
|
$ |
620,459 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities rent expense in 2004, 2003 and 2002 was
$38.4 million, $33.6 million and $35.0 million,
respectively.
The Company leases its facilities and certain engineering design
tools and information systems equipment under operating lease
agreements that expire at various dates through 2017.
Inventory and other related purchase obligations are comprised
of purchase commitments for silicon wafers and assembly and test
services. The Company depends entirely upon subcontractors to
manufacture its silicon wafers and provide assembly and test
services. Due to lengthy subcontractor lead times, the Company
must order these materials and services from these
subcontractors well in advance. The Company expects to receive
and pay for these materials and services within the next six
months. The Company’s subcontractor relationships allow for
the cancellation of outstanding purchase orders, but require
repayment of all expenses incurred through the date of
cancellation.
Other purchase obligations are comprised of purchase commitments
for lab test equipment, computer hardware, information systems
infrastructure and other purchase commitments in the ordinary
course of business.
F-27
For the purpose of the table above, obligations for the purchase
of goods or services are defined as agreements that are
enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The Company’s purchase orders
are based on its current manufacturing needs and are typically
fulfilled by its vendors within short time horizons. The Company
has additional purchase orders (not included in the table above)
that represent authorizations to purchase rather than binding
agreements. The Company does not have significant agreements for
the purchase of raw materials or other goods specifying minimum
quantities or set prices that exceed its expected requirements.
7. Shareholders’ Equity
Common Stock
The Company has 800,000,000 authorized shares of Class A
common stock and 400,000,000 authorized shares of Class B
common stock. The shares of Class A common stock and
Class B common stock are substantially identical, except
that holders of Class A common stock are entitled to one
vote for each share held, and holders of Class B common
stock are entitled to ten votes for each share held, on all
matters submitted to a vote of the shareholders. In addition,
holders of Class B common stock are entitled to vote
separately on the proposed issuance of additional shares of
Class B common stock in certain circumstances. The shares
of Class B common stock are not publicly traded. Each share
of Class B common stock is convertible at any time at the
option of the holder into one share of Class A common stock
and in most instances automatically converts upon sale or other
transfer. The Class A common stock and Class B common
stock are sometimes collectively referred to herein as
“common stock.”
Registration Statements
The Company has in effect a universal shelf registration
statement on SEC Form S-3 and an acquisition shelf
registration statement on SEC Form S-4. The universal shelf
registration statement on Form S-3 permits the Company to
sell, in one or more public offerings, shares of its
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. The
acquisition shelf registration statement on Form S-4
enables the Company to issue up to 30 million shares of its
Class A common stock in one or more acquisition
transactions. These transactions may include the acquisition of
assets, businesses or securities, by any form of business
combination. To date no securities have been issued pursuant to
either registration statement.
Comprehensive Income (Loss)
The components of comprehensive income (loss), net of taxes, are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Net income (loss)
|
|
$ |
218,745 |
|
|
$ |
(959,865 |
) |
|
$ |
(2,236,576 |
) |
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Change in unrealized gain (loss) on investments, net of taxes
|
|
|
(3 |
) |
|
|
(61 |
) |
|
|
(7,152 |
) |
|
|
|
|
|
| |
Reclassification adjustment for net realized loss included in
net loss
|
|
|
— |
|
|
|
137 |
|
|
|
106 |
|
|
|
|
|
|
|
Translation adjustments
|
|
|
467 |
|
|
|
313 |
|
|
|
386 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$ |
219,209 |
|
|
$ |
(959,476 |
) |
|
$ |
(2,243,236 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-28
The components of accumulated other comprehensive income are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Accumulated unrealized gain (loss) on investments
|
|
$ |
(1 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
Accumulated translation adjustments
|
|
|
1,100 |
|
|
|
633 |
|
| |
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$ |
1,099 |
|
|
$ |
635 |
|
| |
|
|
|
|
|
|
|
|
8. Employee Benefit Plans
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
Company’s 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
employee’s right to acquire Class A common stock,
including the following: (i) no employee may purchase more
than 6,000 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 that such rights are at any time
outstanding. In 2004, 2003 and 2002, 2,546,076, 2,213,363 and
1,038,541 shares, respectively, were issued under this plan
at average per share prices of $12.18, $11.20 and $18.27,
respectively. At December 31, 2004, 1,756,314 shares
were available for future issuance under this plan.
In April 2002 the shareholders approved an amendment to the
employee stock purchase plan to increase the number of shares of
Class A common stock reserved for issuance under that plan
by an additional 3,000,000 shares. In October 2002 the
Board of Directors adopted an amendment to the employee stock
purchase plan to increase the maximum number of shares of
Class A common stock purchasable in total by all
participants on each purchase date within an offering period
from 600,000 shares to 1,200,000 shares.
In May 2003 the shareholders approved an amendment to the
employee stock purchase plan to (i) revise the automatic
annual share increase provision of the plan so that the
increment by which the number of shares of Class A common
stock reserved for issuance under the plan is augmented on the
first trading day of January in each calendar year, beginning
with the year 2004, would equal 1% of the total number of shares
of common stock outstanding on the last trading day of the
immediately preceding calendar year and (ii) increase the
limitation on the automatic annual share increase to
3,000,000 shares per year.
Stock Incentive Plans
The Company has in effect several stock incentive plans under
which incentive stock options and RSUs have been granted to
employees and non-qualified stock options have been granted to
employees, non-employee members of the Board of Directors, and
other non-employees. The Company’s 1998 Stock Incentive
Plan as amended and restated (the “1998 Plan”) is the
successor equity incentive program to the Company’s 1994
Stock Option Plan (the “1994 Plan”) and the
Company’s 1998 Special Stock Option Plan (together, the
“Predecessor Plans”).
In March 2004, March 2003 and April 2002, the Board of Directors
approved amendments to the 1998 Plan, as previously amended, to
increase the number of shares of Class A common stock
reserved for issuance under this plan by an additional
12,000,000, 13,000,000 and 13,000,000 shares, respectively.
These amendments were approved by the shareholders at the Annual
Meetings of Shareholders held in April 2004, May 2003 and April
2002, respectively.
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 new hires generally vest
and become exercisable at the rate of 25% after one year and
ratably on a monthly basis over
F-29
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. However, certain options that
have been granted under the Company’s 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.
In 2004 the Company granted RSUs to certain employees under the
1998 Plan. RSUs are share awards that entitle the holder to
receive shares of Class A common stock as the award vests.
Generally, RSUs vest on a quarterly basis over a period of
sixteen quarters from the date of grant. During 2004, 153,000
RSUs were awarded at a weighted average fair value of
approximately $28.20, of which 5,556 vested and the underlying
shares were issued.
As of December 31, 2004, 128,460,708 shares of common
stock were reserved for issuance under the 1998 Plan, including
shares reserved for issuance upon exercise of outstanding
options granted under Predecessor Plans. The number of shares of
Class A common stock reserved for issuance under the 1998
Plan automatically increases in January each year. The increase
is equal to 4.5% of the total number of shares of common stock
outstanding on the last trading day of the immediately preceding
year, subject to an 18 million annual share limit.
In 1999 the Board of Directors approved the 1999 Special Stock
Option Plan (the “1999 Plan”) and reserved an
aggregate of 1,000,000 shares of Class A common stock
for issuance under that plan. Employees, independent consultants
and advisors in the service of the Company or any of its
subsidiaries who are neither officers of the Company nor members
of the Board of Directors at the time of the option grant are
eligible to participate in the plan. The exercise price of
options granted under the 1999 Plan can be less than the fair
market value of the underlying common stock on the grant date.
In 2003 and 1999, 944,500 and 40,542 options were granted under
the 1999 Plan to certain employees at a weighted average
exercise price per share of $14.44 and $2.84, respectively. As
of December 31, 2004, 688,351 shares of common stock
were reserved for issuance under the 1999 Plan. The 1998 Plan,
1999 Plan and Predecessor Plans are collectively referred to
herein as the “Broadcom Plans.”
As a result of the Company’s acquisitions, the Company
assumed stock options granted under stock option plans or
agreements established by each acquired company. As of
December 31, 2004, 3,291,264 and 128,538 shares of
Class A and Class B common stock, respectively, were
reserved for issuance upon exercise of outstanding options
assumed under these stock option plans.
F-30
Combined Incentive Plan Activity
Activity under all the stock incentive plans in 2004, 2003 and
2002 is set forth below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Options Outstanding |
| |
|
|
|
|
| |
|
|
|
|
|
Weighted |
| |
|
Shares |
|
|
|
Average |
| |
|
Available for |
|
Number of |
|
Price Range |
|
Exercise Price |
| |
|
Grant |
|
Shares |
|
Per Share |
|
Per Share |
| |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
|
24,718,006 |
|
|
|
106,910,400 |
|
|
$ |
.02 - $213.06 |
|
|
$ |
36.74 |
|
|
|
|
|
|
| |
Additional shares reserved
|
|
|
24,964,761 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Options granted under Broadcom Plans
|
|
|
(40,694,533 |
) |
|
|
40,694,533 |
|
|
|
10.10 - 35.06 |
|
|
|
16.61 |
|
|
|
|
|
|
| |
Options assumed in purchase transactions
|
|
|
— |
|
|
|
2,013,253 |
(1) |
|
|
.04 - 23.64 |
|
|
|
9.79 |
|
|
|
|
|
|
| |
Options cancelled
|
|
|
11,969,651 |
|
|
|
(12,964,129 |
) |
|
|
.02 - 213.06 |
|
|
|
40.53 |
|
|
|
|
|
|
| |
Options exercised
|
|
|
— |
|
|
|
(4,654,444 |
) |
|
|
.02 - 46.78 |
|
|
|
5.48 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
20,957,885 |
|
|
|
131,999,613 |
|
|
|
.02 - 213.06 |
|
|
|
30.84 |
|
|
|
|
|
|
| |
Additional shares reserved
|
|
|
25,501,177 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Options granted under Broadcom Plans
|
|
|
(48,256,513 |
) (2) |
|
|
48,256,513 |
(2) |
|
|
12.63 - 36.05 |
|
|
|
32.30 |
|
|
|
|
|
|
| |
Options assumed in purchase transactions
|
|
|
— |
|
|
|
397,797 |
(1) |
|
|
.02 - .02 |
|
|
|
.02 |
|
|
|
|
|
|
| |
Options cancelled
|
|
|
28,431,762 |
(3) |
|
|
(29,919,925 |
) (4) |
|
|
.02 - 213.06 |
|
|
|
47.29 |
|
|
|
|
|
|
| |
Options tendered in stock option exchange offer
|
|
|
— |
|
|
|
(32,642,634 |
) |
|
|
23.58 - 219.48 |
|
|
|
48.59 |
|
|
|
|
|
|
| |
Shares issued in stock option exchange offer
|
|
|
(8,574,033 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Options exercised
|
|
|
— |
|
|
|
(15,178,631 |
) |
|
|
.02 - 33.68 |
|
|
|
11.89 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
18,060,278 |
|
|
|
102,912,733 |
|
|
|
.02 - 155.50 |
|
|
|
23.51 |
|
|
|
|
|
|
| |
Additional shares reserved
|
|
|
25,771,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Options granted under Broadcom Plans
|
|
|
(13,291,903 |
) |
|
|
13,291,903 |
|
|
|
25.98 - 45.41 |
|
|
|
35.32 |
|
|
|
|
|
|
| |
Share awards granted under Broadcom Plans
|
|
|
(157,560 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| |
Options assumed in purchase transactions
|
|
|
— |
|
|
|
854,775 |
(1) |
|
|
.02 - 10.31 |
|
|
|
4.86 |
|
|
|
|
|
|
| |
Options cancelled
|
|
|
4,547,271 |
|
|
|
(4,741,729 |
) |
|
|
.02 - 155.50 |
|
|
|
27.49 |
|
|
|
|
|
|
| |
Options exercised
|
|
|
— |
|
|
|
(14,677,907 |
) |
|
|
.02 - 40.59 |
|
|
|
15.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
34,929,086 |
|
|
|
97,639,775 |
|
|
$ |
.02 - $122.25 |
|
|
$ |
26.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes options assumed in connection with purchase
acquisitions and/or additional options subsequently issued upon
achievement of internal performance goals (see Note 3). |
| |
| (2) |
Includes 18,301,676 replacement options issued pursuant to the
Company’s 2003 stock option exchange offer to employees. |
| |
| (3) |
Includes 19,225,696 unvested options cancelled from Broadcom
Plans pursuant to the Company’s 2003 stock option exchange
offer to employees. |
| |
| (4) |
Includes 20,086,234 unvested options cancelled from Broadcom
Plans and options assumed in connection with purchase
acquisitions pursuant to the Company’s 2003 stock option
exchange offer to employees. |
F-31
The weighted average remaining contractual life and weighted
average per share exercise price of options outstanding and of
options exercisable as of December 31, 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding |
|
Exercisable |
| |
|
|
|
|
| |
|
|
|
Weighted |
|
Weighted |
|
|
|
Weighted |
| |
|
|
|
Average |
|
Average |
|
|
|
Average |
| Range of |
|
Number of |
|
Remaining |
|
Exercise |
|
Number of |
|
Exercise |
| Exercise Prices |
|
Shares |
|
Contractual Life |
|
Price |
|
Shares |
|
Price |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
(Years) |
|
|
|
|
|
|
|
|
|
|
|
|
$ .02 to $ 10.11
|
|
|
8,227,446 |
|
|
|
4.50 |
|
|
$ |
3.31 |
|
|
|
6,817,748 |
|
|
$ |
2.49 |
|
|
|
|
|
|
|
10.31 to 15.74
|
|
|
21,538,169 |
|
|
|
7.45 |
|
|
|
15.39 |
|
|
|
12,353,961 |
|
|
|
15.44 |
|
|
|
|
|
|
|
15.92 to 20.45
|
|
|
10,203,977 |
|
|
|
5.62 |
|
|
|
19.73 |
|
|
|
7,034,669 |
|
|
|
19.78 |
|
|
|
|
|
|
|
20.71 to 33.68
|
|
|
12,548,510 |
|
|
|
8.42 |
|
|
|
28.97 |
|
|
|
4,251,165 |
|
|
|
27.94 |
|
|
|
|
|
|
|
34.10 to 35.12
|
|
|
36,523,731 |
|
|
|
8.83 |
|
|
|
34.74 |
|
|
|
19,309,117 |
|
|
|
34.95 |
|
|
|
|
|
|
|
35.36 to 122.25
|
|
|
8,597,942 |
|
|
|
8.74 |
|
|
|
40.32 |
|
|
|
2,099,344 |
|
|
|
42.73 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
97,639,775 |
|
|
|
|
|
|
|
|
|
|
|
51,866,004 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information relating to the stock incentive plans is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(Number of shares) |
|
|
|
|
|
|
Unvested options outstanding
|
|
|
46,289,070 |
|
|
|
62,448,042 |
|
|
|
65,714,964 |
|
|
|
|
|
|
|
Vested options outstanding
|
|
|
51,350,705 |
|
|
|
40,464,691 |
|
|
|
66,284,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding
|
|
|
97,639,775 |
|
|
|
102,912,733 |
|
|
|
131,999,613 |
|
|
|
|
|
|
|
Shares available for grant
|
|
|
34,929,086 |
|
|
|
18,060,278 |
|
|
|
20,957,885 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total shares of common stock reserved for stock incentive plans
|
|
|
132,568,861 |
|
|
|
120,973,011 |
|
|
|
152,957,498 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested common shares subject to repurchase
|
|
|
556,276 |
|
|
|
148,624 |
|
|
|
2,757,190 |
|
|
|
|
|
|
|
Weighted average per share repurchase price
|
|
$ |
1.15 |
|
|
$ |
7.15 |
|
|
$ |
1.68 |
|
At December 31, 2004 there were unvested options
outstanding to purchase 515,299 shares of common stock
that were exercisable in advance of vesting subject to
repurchase arrangements.
The Company recorded deferred compensation for restricted common
stock and employee stock options assumed in acquisitions in
accordance with FIN 44. Net deferred compensation is
presented as a reduction of shareholders’ equity and is
amortized ratably over the respective vesting periods of the
applicable options and restricted stock. The activity recorded
in net deferred compensation by component was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Purchase acquisitions
|
|
$ |
37,802 |
|
|
$ |
53,393 |
|
|
|
|
|
|
|
Awards to employees
|
|
|
4,314 |
|
|
$ |
7,091 |
|
|
|
|
|
|
|
Terminations
|
|
|
(5,063 |
) |
|
|
(30,121 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
$ |
37,053 |
|
|
$ |
30,363 |
|
| |
|
|
|
|
|
|
|
|
F-32
Stock-based compensation expense is derived from the following
equity transactions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Awards to employees
|
|
$ |
4,951 |
|
|
$ |
12,557 |
|
|
$ |
349 |
|
|
|
|
|
|
|
Stock option exchange program
|
|
|
— |
|
|
|
217,940 |
|
|
|
— |
|
|
|
|
|
|
|
Pooling-of-interests acquisitions
|
|
|
— |
|
|
|
— |
|
|
|
1,942 |
|
|
|
|
|
|
|
Purchase acquisitions
|
|
|
69,736 |
|
|
|
346,990 |
|
|
|
417,372 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
74,687 |
|
|
$ |
577,487 |
|
|
$ |
419,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Included in these amounts is approximately $1.0 million of
stock-based compensation expense which was classified as
restructuring costs in 2003 resulting from an extension of the
post-service exercise period for vested stock options of certain
terminated employees and due to the acceleration of the vesting
period of certain options of certain terminated employees as
required by their assumed option agreements. Also included in
the 2003 amount is approximately $88.1 million of
settlement costs reflecting the acceleration from future periods
of stock-based compensation expense, most of which was
previously recorded as deferred compensation established upon
the acquisition of ServerWorks (and based upon stock market
valuations at the time of the acquisition).
Outstanding stock options assumed in certain acquisitions were
subject to variable accounting in accordance with FIN 44
and FIN 28 and were revalued quarterly over their vesting
periods until all performance goals were satisfied or until the
options were exercised, forfeited, cancelled or expired. In 2003
all remaining performance goals were achieved for ServerWorks
and Mobilink and variable accounting was no longer required for
these assumed outstanding stock options. Prior to the remaining
performance goals being achieved, stock-based compensation
expense in 2003 and 2002 included reversals of $3.1 million
and $7.0 million, respectively, of previously recorded
stock-based compensation expense related to stock options
subject to variable accounting. These reversals were based on
the amount by which the Class A common stock closing price
at the end of each quarterly reporting period, or at the date of
exercise, if earlier, exceeded the exercise price.
Shares Reserved For Future Issuance
The Company had the following shares of common stock reserved
for future issuance upon the exercise of equity instruments as
of December 31, 2004:
| |
|
|
|
|
| |
|
Number of Shares |
| |
|
|
|
Stock options outstanding
|
|
|
97,639,775 |
|
|
|
|
|
|
|
Authorized for future grants under stock incentive plans
|
|
|
34,929,086 |
|
|
|
|
|
|
|
Authorized for future issuance under stock purchase plan
|
|
|
1,756,314 |
|
|
|
|
|
|
|
Stock awards
|
|
|
147,444 |
|
|
|
|
|
|
|
Other
|
|
|
76,739 |
|
| |
|
|
|
|
| |
|
|
134,549,358 |
|
| |
|
|
|
|
In February 2005 as part of the Company’s regular annual
employee review or “focal grant” program, the Company
granted 3,164,288 RSUs and 10,937,121 options. The fair value of
the RSUs and the exercise price of the options awarded were both
$32.21 per share. These awards are not included in the
tables above.
2003 Stock Option Exchange Offer
On April 7, 2003 the Company commenced an offering to its
employees to voluntarily exchange certain vested and unvested
stock option grants. Under the program, employees holding
options to purchase the Company’s Class A or
Class B common stock were given the opportunity to exchange
certain of their existing options, with exercise prices at or
above $23.58 per share. Stock options to purchase an
aggregate of 57,271,153 shares with a weighted average
exercise price of $47.32 per share were eligible for tender
at the
F-33
commencement of the program, representing approximately 43.6% of
the Company’s outstanding stock options as of the
commencement date.
On May 5, 2003 the offer period ended and the Company
accepted for exchange and cancellation vested eligible
options to purchase 32,642,634 shares of Class A
or Class B common stock, with a weighted average exercise
price of $48.59 per share. In exchange, the Company issued
8,574,033 fully vested, non-forfeitable shares of the
Company’s Class A common stock and recorded
stock-based compensation expense of approximately
$162.3 million related to the issuance of such vested
shares, based on the closing price of the Company’s
Class A common stock on May 5, 2003 of $18.93 per
share. The 8,574,033 shares were included in the
Company’s calculation of net loss per share effective as of
May 5, 2003. Additionally, on May 5, 2003 the Company
accepted for exchange and cancellation unvested eligible
options to purchase 20,086,234 shares of Class A
or Class B common stock, with a weighted average exercise
price of $50.93 per share. In exchange, new options to
purchase 18,301,676 shares of the Company’s
Class A common stock were issued on November 10, 2003.
The terms and conditions of the new options, including the
vesting schedules, were substantially the same as the terms and
conditions of the options cancelled. The exercise price for the
new options was $35.12 per share, which was the last
reported trading price of the Company’s Class A common
stock on the grant date.
Eligible employees (members of the Company’s Board of
Directors were not eligible to participate in the offer) who
participated in the offer received, in exchange for the
cancellation of vested eligible options, an amount of
consideration, represented by fully vested, non-forfeitable
common stock, equal to the number of shares underlying such
vested eligible options, multiplied by the offered value (as
determined under certain terms and conditions set forth in the
Company’s offer), divided by the closing price of the
Company’s Class A common stock as reported on the
NASDAQ National Market on May 5, 2003. The Company
concluded that the consideration paid for the eligible options
represented “substantial consideration” as required by
EITF Issue No. 00-23, Issues Relating to Accounting for
Stock Compensation Under APB Opinion No. 25 and FASB
Interpretation No. 44 (“EITF 00-23”), as
the offered value per vested option was at least equal to the
fair value for each eligible option, as determined using the
Black-Scholes option pricing model. In determining the fair
value of the eligible options using the Black-Scholes option
pricing model, the Company primarily used the following
assumptions: (i) an expected life of approximately four
years; (ii) an expected volatility of 0.70 during that
expected life; (iii) a risk-free interest rate of 2.72%;
and (iv) no dividends. The weighted average offered value
per vested option share was $4.97.
Certain of the Company’s employees held unvested
eligible options that were previously assumed by the Company
in connection with acquisitions that were accounted for using
the purchase method of accounting. The Company had recorded
deferred compensation with respect to those options based upon
the applicable stock market valuation at the time of
acquisition. To the extent those employees tendered, and the
Company accepted for exchange and cancellation, such assumed
eligible options in exchange for new options, the Company was
required to immediately accelerate the amortization of the
remaining related deferred compensation previously recorded.
Consequently, the Company recorded a non-cash charge of
approximately $55.6 million in May 2003, reflecting the
acceleration from future periods of stock-based compensation
expense.
Variable accounting is not required under EITF 00-23 for
eligible options subject to the offer that were not surrendered
for cancellation, because: (i) the shares of Class A
common stock offered as consideration for the surrendered
options were fully vested and non-forfeitable and (ii) the
number of shares received by an employee who accepted the offer
was based on the number of surrendered eligible options
multiplied by the offered value per vested option, divided by
the fair value of the stock at the date of exchange.
The Company further concluded that the “look back” and
“look forward” provisions of paragraph 45 of
FIN 44 applied to the stock options surrendered for
cancellation. If any stock options were granted to participants
in the offer within the six months prior to or following
May 5, 2003, those stock options would be subject to
variable accounting. As a result of these provisions, the
Company recorded approximately $0.3 million and
$3.5 million in 2004 and 2003, respectively, of stock-based
compensation expense related to the portion of these variable
options that vested during the periods.
In addition to the non-cash charges described above, the Company
incurred certain associated employer payroll taxes and
professional fees of approximately $2.8 million in
connection with the offering. Employees were
F-34
responsible for satisfying their portion of the payroll taxes,
either through direct cash payment to the Company or through the
sale of a portion of their new shares.
Defined Contribution 401(k) Savings and Investment Plan
The Company sponsors a defined contribution 401(k) savings and
investment plan, which was established in 1996, covering
substantially all of the Company’s employees, subject to
certain eligibility requirements. At its discretion, the Company
may make contributions to this plan. The Company made no
contributions to this plan in 2004, 2003 or 2002.
|
|
| 9. |
Impairment of Goodwill and Acquired Patents |
Impairment of Goodwill
|
|
|
Years 2004, 2003 and 2002 |
The Company performed annual impairment assessments of the
carrying value of the goodwill recorded in connection with
various acquisitions as required under SFAS 142 in October
2004, 2003 and 2002. In accordance with SFAS 142, the
Company compared the carrying value of each of its reporting
units that existed at those times to their estimated fair
values. At October 1, 2004 and 2003, the Company had four
reporting units. At October 1, 2002 the Company had seven
reporting units. The Company determined and identified those
reporting units in accordance with SFAS 142.
The Company estimated the fair values of its reporting units
primarily using the income approach valuation methodology that
includes the discounted cash flow method, taking into
consideration the market approach and certain market multiples
as verification of the values derived using the discounted cash
flow methodology. The discounted cash flows for each reporting
unit were based on discrete four year financial forecasts
developed by management for planning purposes and consistent
with those distributed to the Company’s Board of Directors.
Cash flows beyond the four year discrete forecast were estimated
using a terminal value calculation, which incorporated
historical and forecasted financial trends for each identified
reporting unit and considered long-term earnings growth rates
for publicly traded peer companies. Future cash flows were
discounted to present value by incorporating the present value
techniques discussed in FASB Concepts Statement 7.
Specifically, the income approach valuations included reporting
unit cash flow discount rates ranging from 13% to 17%, and
terminal value growth rates ranging from 0% to 11%. Publicly
available information regarding the market capitalization of the
Company was also considered in assessing the reasonableness of
the cumulative fair values of its reporting units estimated
using the discounted cash flow methodology.
Upon completion of the October 2004 and 2003 annual impairment
assessments, the Company determined no impairment was indicated
as the estimated fair values of the four reporting units
exceeded their respective carrying values. Upon completion of
the October 2002 assessment, the Company determined that the
carrying values of four of its seven reporting units exceeded
their estimated fair values. The four affected reporting units
were broadband processors, client server networking, mobile
communications and ServerWorks. Because indicators of impairment
existed for these four reporting units, the Company performed
the second step of the test required under SFAS 142 to
determine the fair value of the goodwill for each of the
affected reporting units.
In accordance with SFAS 142, the implied fair value of
goodwill was determined in the same manner as that which is
utilized to estimate the amount of goodwill recognized in a
business combination. As part of the second step of the
impairment test performed in 2002, the Company calculated the
fair value of certain assets, including developed technology and
IPR&D assets. To determine the implied value of goodwill,
fair values were allocated to the assets and liabilities of each
of the four affected reporting units in 2002. The implied fair
value of goodwill was measured as the excess of the fair value
of the affected reporting unit over the amounts assigned to its
assets and liabilities. The impairment loss for each of the
affected reporting units was measured by the amount the carrying
value of goodwill for that reporting unit exceeded the implied
fair value of the goodwill. Based on this assessment, the
Company recorded a charge of $1.241 billion in October
2002. Of such charge, $536.0 million related to the
goodwill of the broadband processor reporting unit,
$206.1 million related to the goodwill of the
F-35
client server networking reporting unit, $179.6 million
related to the goodwill of the mobile communications reporting
unit and $319.3 million related to the goodwill of the
ServerWorks reporting unit.
The primary factors resulting in the 2002 impairment charge
were: (i) the continued significant economic slowdown in
the technology sector and the semiconductor industry, which
affected both the Company’s operations at that time and its
expectations with respect to future revenue, (ii) a decline
in the valuation of technology company stocks, including the
valuation of the Company’s stock, and
(iii) unfavorable revisions in revenue and cash flow
expectations regarding certain of the Company’s acquired
businesses. These acquired businesses were priced based on
valuation multiples that were indicative of the value at which
businesses were purchased and sold at that time, but were
inflated relative to historical and subsequent standards. In the
second and third quarters of 2002 demand for servers, WAN
networking equipment, handheld devices and other products using
the Company’s chips declined relative to the demand that
was anticipated when certain of its purchase acquisitions were
consummated. In addition, the Company recognized that a
sustained decline in demand combined with an oversupply of these
products resulted in increased price competition for certain
chipsets, giving effect to shrinking profit margins and expected
future cash flows for the four affected reporting units. In
response to the existing market conditions, the Company
initiated a restructuring program in the fourth quarter of 2002
that included significant headcount reductions, and decreased
its investment in certain target markets that were either
performing below expectations or had low near term growth
potential. As a result, the Company revised its forecasts of
future operating results, which were in turn used in calculating
the estimated fair values of the reporting units.
In May 2003 the Company determined that indicators of impairment
existed for two of its reporting units, ServerWorks and mobile
communications, and an additional impairment assessment was
performed at that time. The Company tested the goodwill of these
reporting units for impairment in accordance with SFAS 142
as described above. Based on this assessment, the Company
recorded a charge of $438.6 million in June 2003 to write
down the value of goodwill associated with the two reporting
units. Of this charge, $414.5 million represented the
balance of goodwill related to the ServerWorks reporting unit
and $24.1 million represented the balance of goodwill
related to the mobile communications reporting unit.
With respect to the ServerWorks reporting unit, the primary
factors that contributed to the impairment assessment were
additional competitive pressures in the server market and recent
design losses experienced by that reporting unit that were
attributable, in part, to the Company’s ongoing inability
to obtain required design information from a third party that is
also a competitor. Another factor that contributed to the
impairment assessment was the recording of additional goodwill
due to contingent consideration earned by former ServerWorks
stockholders and employees (see Note 3). As a result of the
competitive pressures and design losses, the Company reduced its
forecasts of future operating results for the ServerWorks
reporting unit for periods beginning as early as the second
quarter of 2004 with the expectation of future loss of market
share for that business. These forecasts in turn formed the
basis for estimating the fair value of the ServerWorks reporting
unit as of June 2003. The Company is continuing to pursue
strategies to reposition its ServerWorks business and develop
alternative sources of revenue for that reporting unit.
With respect to the mobile communications reporting unit, the
primary factor that contributed to the impairment assessment was
the recording of additional goodwill due to contingent
consideration earned by former Mobilink shareholders and
employees in May 2003 (see Note 3), after that reporting
unit had already been written down to its implied fair value in
October 2002.
Impairment of Acquired Patents
In January 2004 the Company acquired approximately
80 patents and patent applications related to the read
channel and hard disk controller market, for $18.0 million.
In December 2003 and 2002 the Company acquired over
150 patents related to various technologies, including
among others, wireless networking topologies and protocols, dual
mode wireless transceivers, power management in integrated
circuits, Ethernet networking, personal video recording and VoIP
telephony, for $1.0 million and $24.0 million,
respectively. The immediate purpose for acquiring these patent
portfolios was to assist the Company in the defense and
settlement of then ongoing and future intellectual property
litigation. As a result, the Company was unable to estimate any
future
F-36
cash flows from the patents. The Company also does not have any
plans to resell the patents to a third party. Due to the
intended use for these assets, the Company concluded that
indicators of impairment existed upon acquisition of the patents
because the carrying value of the patents might not be
recoverable. Upon determining that indicators of impairment
existed, the Company performed a recoverability test in
accordance with SFAS 144. Estimates of future cash flows
used to test the recoverability of long-lived assets should
include only the future cash flows that are directly associated
with, and that are expected to arise as a direct result of the
use and eventual disposition of the asset. The only cash flows
expected to arise as a direct result of the use of the patents
are the cash savings expected to result from reduced but
undeterminable litigation expenses over the next several years.
Due to the unpredictable nature of legal disputes, it is not
possible to reasonably: (i) determine if the Company’s
strategy with respect to the patents will be successful,
(ii) forecast litigation expenses that would have been
incurred if the patent portfolio was not acquired, or
(iii) forecast cash flows generated as a result of
acquiring the patents. As a result, no reasonable analysis could
be prepared to support future cash flows associated with the
patents. Accordingly, pursuant to SFAS 144 the patents were
determined to be fully impaired at the date of acquisition. The
impairment charges for the patent portfolios were classified as
impairment of goodwill and other intangible assets in the
consolidated statements of operations in 2004, 2003 and 2002.
From the second quarter of 2001 through the third quarter of
2002, the Company implemented a plan to restructure its
operations (the “2001 Restructuring Plan”) in response
to the challenging economic climate. As a result of the
prolonged downturn in the semiconductor industry, the Company
announced an additional restructuring program which it
implemented from the fourth quarter of 2002 through the second
quarter of 2003 (the “2002 Restructuring Plan”). The
plans focused on cost reductions and operating efficiencies,
including workforce reductions and lease terminations. These
restructuring plans resulted in certain business unit
realignments, workforce reductions and consolidation of excess
facilities. Approximately 510 and 160 employees were
terminated across all of the Company’s business functions
and geographic regions in connection with the 2002 and 2001
Restructuring Plans, respectively. In addition, headcount was
reduced through attrition and reductions in the number of
temporary and contract workers employed by the Company.
F-37
Activity and liability balances related to the 2002 and 2001
Restructuring Plans were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2001 Restructuring Plan |
|
2002 Restructuring Plan |
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Consolidation |
|
|
|
Consolidation |
|
|
| |
|
Workforce |
|
of Excess |
|
Workforce |
|
of Excess |
|
|
| |
|
Reductions |
|
Facilities |
|
Reductions |
|
Facilities |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Restructuring liabilities at December 31, 2001
|
|
$ |
124 |
|
|
$ |
10,470 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,594 |
|
|
|
|
|
|
|
Charged to expense in 2002
|
|
|
1,411 |
|
|
|
30,454 |
|
|
|
65,048 |
|
|
|
22,767 |
|
|
|
119,680 |
|
|
|
|
|
|
|
Liabilities assumed in acquisition
(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,815 |
|
|
|
6,815 |
|
|
|
|
|
|
|
Non-cash
costs(2)
|
|
|
(135 |
) |
|
|
(4,868 |
) |
|
|
(46,821 |
) |
|
|
(1,495 |
) |
|
|
(53,319 |
) |
|
|
|
|
|
|
Cash
payments(3)
|
|
|
(1,400 |
) |
|
|
(6,502 |
) |
|
|
(16,683 |
) |
|
|
(3,494 |
) |
|
|
(28,079 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2002
|
|
|
— |
|
|
|
29,554 |
|
|
|
1,544 |
|
|
|
24,593 |
|
|
|
55,691 |
|
|
|
|
|
|
|
Charged to expense in 2003
|
|
|
— |
|
|
|
— |
|
|
|
2,932 |
|
|
|
— |
|
|
|
2,932 |
|
|
|
|
|
|
|
Non-cash
costs(2)
|
|
|
— |
|
|
|
— |
|
|
|
(972 |
) |
|
|
— |
|
|
|
(972 |
) |
|
|
|
|
|
|
Cash
payments(3)
|
|
|
— |
|
|
|
(11,195 |
) |
|
|
(3,504 |
) |
|
|
(5,778 |
) |
|
|
(20,477 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2003
|
|
|
— |
|
|
|
18,359 |
|
|
|
— |
|
|
|
18,815 |
|
|
|
37,174 |
|
|
|
|
|
|
|
Liabilities assumed in acquisitions
(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,411 |
|
|
|
3,411 |
|
|
|
|
|
|
|
Cash
payments(3)
|
|
|
— |
|
|
|
(6,066 |
) |
|
|
— |
|
|
|
(7,402 |
) |
|
|
(13,468 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2004
|
|
$ |
— |
|
|
$ |
12,293 |
|
|
$ |
— |
|
|
$ |
14,824 |
|
|
$ |
27,117 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Although not related to the 2002 or 2001 Restructuring Plans,
the Company assumed additional liabilities of approximately
$6.8 million in connection with the Mobilink acquisition in
2002 and $3.4 million in connection with the Sand Video,
WIDCOMM, Zyray and Alphamosaic acquisitions in 2004, for the
consolidation of excess facilities, relating primarily to lease
terminations, non-cancelable lease costs and write-offs of
leasehold improvements. These costs were accounted for under
EITF Issue No. 95-3, Recognition of Liabilities in
Connection with Purchase Business Combinations, and were
recognized as liabilities assumed in the purchase business
combinations and offset by corresponding increases in goodwill.
The liabilities related to these acquisitions have been
classified as restructuring liabilities for presentation in the
consolidated balance sheets. |
| |
| (2) |
Non-cash costs related to stock-based compensation expense
resulting from an extension of the exercise period for vested
stock options of certain terminated employees and the
acceleration of the vesting period of certain options of certain
terminated employees as required by their assumed option
agreements, and the write-off of leasehold improvements. |
| |
| (3) |
Cash payments relate to severance and fringe benefits, net lease
payments on excess facilities, lease terminations and
non-cancelable lease costs. |
These restructuring charges were classified as operating
expenses in the Company’s consolidated statements of
operations.
Certain of the restructuring charges were recorded in periods
subsequent to the initial implementations of the 2001 and 2002
Restructuring Plans. These subsequent charges were primarily due
to the inability to reasonably estimate those costs at the time
of the initial implementations as the Company was still in the
process of reviewing many of its facilities to determine where
the Company could consolidate and which locations would no
longer be required. The Company does not anticipate recording
any additional charges under the 2001 and 2002 Restructuring
Plans.
The consolidation of excess facilities costs will be paid over
the respective lease terms through 2010.
F-38
The Company recorded $68.7 million in settlement costs in
2004. Of this amount, $60.0 million was related to the
settlement of various litigation matters, and the remaining
$8.7 million reflects settlement costs related to a claim
arising from an acquisition and certain indemnification costs.
For a more detailed discussion of the Company’s settled and
outstanding litigation, see Notes 3 and 12.
In May 2003 the Company completed a management transition at its
ServerWorks Corporation subsidiary and entered into a settlement
agreement resolving various issues and disputes raised by
certain employees and former securities holders of ServerWorks,
including issues and disputes with three departing employees,
relating to agreements entered into when the Company acquired
ServerWorks in January 2001. In connection with the settlement,
the Company incurred approximately $25.2 million in cash
payments and expenses and recorded a one-time non-cash charge of
approximately $88.1 million in May 2003, reflecting the
acceleration from future periods of stock-based compensation
expense, most of which was previously recorded as deferred
compensation established upon the acquisition of ServerWorks
(and based upon stock market valuations at the time of the
acquisition).
In August 2003 the Company and Intel Corporation agreed to
settle all litigation between the companies as well as
litigation involving their respective affiliates. In connection
with the settlement agreement, the Company paid Intel
$60.0 million in 2003.
The Company recorded an additional $21.2 million in
settlement costs in 2003 in connection with the settlement of
other litigation and third party claims.
Intellectual Property Proceedings. In April 2004 the
Company and STMicroelectronics, Inc. entered into a
comprehensive settlement agreement and patent cross-license to
settle all outstanding litigation between the companies.
Pursuant to the settlement, each of the parties dismissed all
claims and counterclaims in the litigation with prejudice. Other
terms of the settlement were not disclosed.
In June 2004 the Company and Microtune, Inc. agreed to settle
all outstanding litigation between the companies as well as
litigation involving their affiliates. As a result of the
settlement, all cases and appeals between the two companies were
dismissed with prejudice. In addition, the injunction entered in
Microtune (Texas), L.P. v. Broadcom
Corporation, United States District Court for the
Eastern District of Texas, Civil Action No. 4:01CV23,
against the Company’s BCM3415 product was vacated. The
parties also entered into reciprocal releases covering all
patent claims and certain other claims. In connection with the
settlement, the Company paid Microtune $22.5 million in
2004. The parties also entered into a patent cross-license
agreement whereby patents claiming priority prior to the
effective date of the license agreement are licensed for the
lives of the patents, and subsequently acquired patents claiming
priority within the following four years are licensed for ten
years. Under the agreement, all products of the Company are
licensed under all of Microtune’s patents and all current
products and future analog signal processing products of
Microtune are licensed under all of the Company’s analog
signal processing patents.
In September 2004 the Company entered into a settlement and
cross-license agreement with Agere Systems Inc. to settle all
outstanding litigation between the two companies. Under the
settlement, the companies agreed to dismiss all outstanding
claims and counterclaims in the litigation with prejudice and
entered into reciprocal releases covering all asserted and
unasserted patent-related claims against the other party and its
affiliates. In addition, the agreement includes a cross-license
under the respective patent portfolios of each party and its
affiliates. Other terms of the settlement were not disclosed.
In April 2004 Lonestar Inventions, L.P. filed a complaint
against the Company, Marvell Semiconductor, Inc. and Analog
Devices, Inc. in the United States District Court for the
Western District of Texas alleging that the Company and the
other named defendants (i) infringed a single patent
relating to circuit technology and (ii) induced
infringement of such patent. The complaint sought a permanent
injunction against the Company as well as the recovery of
monetary damages, including treble damages for willful
infringement, and attorneys’ fees.
F-39
In September 2004 the Company and Lonestar entered into a
settlement agreement and dismissed with prejudice all claims and
counterclaims between them. Other terms of the settlement were
not disclosed.
Securities Litigation. From March through May 2001 the
Company and three of its 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 allege had the effect of materially overstating
the Company’s reported and future financial performance. In
June 2001 the lawsuits were consolidated before the United
States District Court for the Central District of California
into a single action entitled In re Broadcom Corp. Securities
Litigation. After denying the defendants’ motion to
dismiss the complaint and a motion for partial summary judgment
as to some of the challenged disclosures, in October 2003 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
Company’s stock, between July 31, 2000 and
February 26, 2001, with certain exceptions. The parties
have completed discovery. In September 2004 defendants
filed five motions for summary judgment or partial summary
judgment. Through an order issued in November 2004, the
court granted three of those motions for partial summary
judgment, granted in part and denied in part one motion, and
denied one motion. Plaintiffs have asserted that, if liability
is found, damages may exceed $4.5 billion (taking into
account the effect of the court’s rulings granting partial
summary judgment in favor of the defendants), which the Company
vigorously disputes and believes to be substantially inflated.
The court has consolidated this action for trial with the
Arenson, et al. v. Broadcom Corp., et al.
matter described below. In February 2005 the court
scheduled trial to begin in September 2005, ruled that the
individual defendants were asserting, and were entitled to
assert, a defense of reliance upon the advice of counsel, and
reopened discovery concerning that issue. The Company believes
the allegations in the purported consolidated shareholder class
action are without merit and is defending the action vigorously.
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 executive officers. The Company removed
the lawsuit to the United States District Court for the Central
District of California. The plaintiffs subsequently filed an
amended complaint in that court that tracks the allegations of
the federal class action complaint. The parties have completed
discovery. In September 2004 defendants filed two motions
for summary judgment arguing that the plaintiffs had no damages
or could not adequately prove their damages. Through orders
issued in October and December 2004, the court denied one
of those two motions and granted the other motion as to
31 plaintiffs. By stipulation and order entered by the
court in January 2005, the parties agreed that one of the
dismissed plaintiff’s claims could be reinstated (subject
to that plaintiff’s agreement that its damages, calculated
in accordance with the court’s prior orders, did not exceed
$745) but that five additional plaintiffs should be dismissed
because they did not incur any damages. Accordingly, 35 of the
original 47 Arenson plaintiffs have been dismissed
and 12 plaintiffs remain. In addition, the parties
stipulated that the court’s rulings on defendants’
five motions for summary judgment or partial summary judgment in
the In re Broadcom Corp. Securities Litigation
class action (described above) are binding in the Arenson
matter. The court has consolidated this action for trial
with the In re Broadcom Corp. Securities Litigation
matter and has scheduled trial to begin in September 2005.
The Company believes the allegations in this lawsuit are also
without merit and is defending the action vigorously.
From March through June 2001 the Company, its then directors,
and certain of its then officers were sued in five purported
shareholder derivative actions based upon the same general set
of alleged facts and circumstances as in the purported
consolidated shareholder class action. Four of these actions
were filed in the Superior Court of the State of California for
the County of Orange, and by order of the court these four
actions were consolidated into a single action entitled
David v. Wolfen, et al. One purported
derivative action was filed in the United States District Court
for the Central District of California, entitled
Aiken v. Nicholas, et al. In October 2004
the parties entered into a final stipulation of settlement of
the David and Aiken matters. Under the
stipulation, the plaintiffs agreed to dismiss the actions. The
Company, plaintiffs and settling defendants also entered into
reciprocal releases covering asserted and unasserted, known and
unknown claims relating to the actions (other than certain
rights created between the Company and settling defendants by
law, contract or the
F-40
Company’s Articles of Incorporation or Bylaws). The
settlement also provided that the Company would adopt certain
corporate governance enhancements and pay $5.3 million in
fees and expenses of the plaintiffs’ attorneys (inclusive
of fees and expenses incurred in both the David and
Aiken actions). No damages were payable under the
settlement. The settlement set forth in the stipulation was
approved by the California Superior Court at a hearing held in
November 2004, and the David and Aiken
actions were dismissed pursuant to the stipulation in
November 2004. Pursuant to a policy of indemnity, one of the
Company’s directors’ and officers’ liability
insurers paid plaintiffs’ attorneys’ fees and expenses
of $5.3 million.
The Company has entered into indemnification agreements with
each of its present and former directors and officers. Under
these agreements, the Company is required to indemnify each such
director or officer against expenses, including attorney’s
fees, judgments, fines and settlements (collectively
“Liabilities”), paid by such individual in connection
with the shareholder class action, shareholder derivative
actions and the Arenson suit (other than Liabilities
arising from willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest).
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 unsettled lawsuits involve complex questions of fact
and law and likely will require the expenditure of significant
funds and the diversion of other resources to defend. From time
to time the Company may enter into confidential discussions
regarding the potential settlement of such lawsuits; however,
there can be no assurance that any such discussions will occur
or will result in a settlement. Moreover, the settlement of any
pending litigation could require the Company to incur
substantial settlement payments and costs and, in the case of
the settlement of any intellectual property proceeding against
the Company, may require the Company to obtain a license under a
third party’s intellectual property rights that could
require royalty payments in the future and to grant a license to
certain of its intellectual property rights to a third party
under a cross-license agreement. See the discussion of recent
litigation settlements above and in Note 11. The results of
litigation are inherently uncertain, and material adverse
outcomes are possible.
|
|
| 13. |
Significant Customer, Supplier and Geographical
Information |
Sales to the Company’s significant customers, including
sales to their manufacturing subcontractors, as a percentage of
net revenue were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended |
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Hewlett-Packard(1)
|
|
|
12.9 |
% |
|
|
15.5 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
Motorola
|
|
|
12.4 |
|
|
|
* |
|
|
|
12.1 |
|
|
|
|
|
|
|
Dell
|
|
|
* |
|
|
|
11.9 |
|
|
|
11.3 |
|
|
|
|
|
|
|
Cisco(2)
|
|
|
* |
|
|
|
* |
|
|
|
10.0 |
|
|
|
|
|
|
|
Five largest customers as a group
|
|
|
51.1 |
|
|
|
51.6 |
|
|
|
52.3 |
|
|
|
| * |
Less than 10% of net revenue. |
|
|
| (1) |
Includes sales to Compaq, which was acquired by Hewlett-Packard
in May 2002, for all periods presented. |
| |
| (2) |
Includes sales to Linksys, which was acquired by Cisco in June
2003, for all periods presented. |
No other customer represented more than 10% of the
Company’s annual net revenue in these years.
F-41
Net revenue derived from all independent customers located
outside of the United States as a percent of total net revenue
was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended |
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Asia
|
|
|
15.0 |
% |
|
|
19.6 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
Europe
|
|
|
6.4 |
|
|
|
5.9 |
|
|
|
4.4 |
|
|
|
|
|
|
|
Other
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
21.6 |
% |
|
|
25.8 |
% |
|
|
25.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Such net revenue does not include revenue from products shipped
to subsidiaries or manufacturing subcontractors of customers
that have headquarters in the United States even though such
subsidiaries or manufacturing subcontractors are located outside
of the United States. Net revenue derived from actual shipments
to international destinations, primarily to Asia, represented
approximately 79.0%, 77.7% and 70.0% of the Company’s
net revenue in 2004, 2003 and 2002, respectively. All of the
Company’s revenue to date has been denominated in
U.S. dollars.
The Company does not own or operate a fabrication facility. Six
independent third-party foundries located in Asia manufacture
substantially all of the Company’s semiconductor devices in
current production. Any sudden demand for an increased amount of
semiconductor devices or sudden reduction or elimination of any
existing source or sources of semiconductor devices could result
in a material delay in the shipment of the Company’s
products. In addition, substantially all of the Company’s
products are assembled and tested by one of seven independent
third-party subcontractors in Asia. The Company does not have
long-term agreements with any of these suppliers. Any problems
associated with the fabrication facilities or the delivery,
quality or cost of the Company’s products could have a
material adverse effect on the Company’s business, results
of operations and financial condition.
The Company has an international distribution center that
includes engineering design and administrative facilities in
Singapore as well as engineering design facilities in Belgium,
Canada, China, France, India, Israel, the Netherlands, Taiwan
and the United Kingdom. At December 31, 2004
approximately $507.4 million of the Company’s net
tangible assets were located outside the United States,
primarily in Singapore.
F-42
|
|
| 14. |
Quarterly Financial Data (Unaudited) |
The following table presents unaudited quarterly financial data
of the Company. In the Company’s opinion, this information
has been prepared on a basis consistent with that of its audited
consolidated financial statements and all necessary material
adjustments, consisting of normal recurring accruals and
adjustments, have been included to present fairly the unaudited
quarterly financial data. The Company’s quarterly results
of operations for these periods are not necessarily indicative
of future results of operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Diluted Net |
| |
|
|
|
|
|
|
|
Income |
| |
|
Net |
|
Gross |
|
|
|
(Loss) Per |
| |
|
Revenue |
|
Profit |
|
Net Income (Loss) |
|
Share |
| |
|
|
|
|
|
|
|
|
| |
|
(In thousands, except per share data) |
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
573,406 |
|
|
$ |
289,925 |
|
|
$ |
39,864 |
(1) |
|
$ |
.12 |
|
|
|
|
|
|
| |
Second Quarter
|
|
|
641,299 |
|
|
|
323,820 |
|
|
|
63,839 |
(2) |
|
|
.18 |
|
|
|
|
|
|
| |
Third Quarter
|
|
|
646,515 |
|
|
|
324,476 |
|
|
|
43,901 |
(3) |
|
|
.13 |
|
|
|
|
|
|
| |
Fourth Quarter
|
|
|
539,390 |
|
|
|
269,095 |
|
|
|
71,141 |
(4) |
|
|
.20 |
|
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
327,464 |
|
|
$ |
155,444 |
|
|
$ |
(67,906 |
)(5) |
|
$ |
(.25 |
) |
|
|
|
|
|
| |
Second Quarter
|
|
|
377,879 |
|
|
|
171,026 |
|
|
|
(891,742 |
)(6) |
|
|
(3.08 |
) |
|
|
|
|
|
| |
Third Quarter
|
|
|
425,633 |
|
|
|
207,925 |
|
|
|
(6,298 |
)(7) |
|
|
(.02 |
) |
|
|
|
|
|
| |
Fourth Quarter
|
|
|
479,119 |
|
|
|
235,924 |
|
|
|
6,081 |
(8) |
|
|
.02 |
|
|
|
| (1) |
Includes impairment of acquired patent portfolio of
$18.0 million, IPR&D of $2.3 million and
litigation settlement costs of $19.0 million. |
| |
| (2) |
Includes IPR&D of $24.2 million and litigation
settlement costs of $13.5 million. |
| |
| (3) |
Includes IPR&D of $37.3 million, litigation settlement
costs of $35.7 million and net gain on strategic
investments of $5.2 million. |
| |
| (4) |
Includes settlement costs of $0.5 million and a tax benefit
of $21.3 million. |
| |
| (5) |
Includes restructuring costs of $0.8 million. |
| |
| (6) |
Includes restructuring costs of $2.2 million, impairment of
goodwill of $438.6 million, stock option exchange expense
of $220.7 million and litigation settlement costs of
$178.3 million. |
| |
| (7) |
Includes net gain on strategic investments of $22.1 million. |
| |
| (8) |
Includes impairment of acquired patent portfolio of
$1.0 million and settlement costs of $16.2 million. |
In February 2005 the Company’s Board of Directors
authorized a program to repurchase shares of the Company’s
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.
F-43
Exhibits and Financial Statement Schedules
Exhibit Index
The following Exhibits are filed herewith or incorporated herein
by reference to the location indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
2 |
.1 |
|
Merger Agreement and Plan of Reorganization by and among the
registrant, RCC Acquisition Corp., Reliance Computer Corp., and
the Other Parties Signatory Thereto dated as of January 5,
2001. |
|
|
8-K |
|
|
000- 23993 |
|
|
2.1 |
|
|
|
01/31/2001 |
|
|
|
|
|
| |
3 |
.1 |
|
Amended and Restated Articles of Incorporation dated
March 3, 1998. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
3.1 |
|
|
|
03/23/1998 |
|
|
|
|
|
| |
3 |
.1.1 |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation dated December 28, 1999. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.1.2 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
3 |
.1.2 |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation dated June 26, 2000. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.1.1 |
|
|
|
04/02/2001 |
|
|
|
|
|
| |
3 |
.2 |
|
Bylaws as amended through August 21, 2003. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.2 |
|
|
|
03/15/2004 |
|
|
|
|
|
| |
10 |
.1* |
|
2004 Bonuses & 2005 Base Salaries for Certain Executive
Officers. |
|
|
8-K |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
02/07/2005 |
|
|
|
|
|
| |
10 |
.2* |
|
Form Letter Agreement for Executive Retention Program
between the registrant and the following executive officers:
David A. Dull, Bruce E. Kiddoo, Vahid Manian, Andrew J. Pease
and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.11 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.3*† |
|
Letter Agreement between the registrant and Scott A. McGregor
dated October 25, 2004. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.4* |
|
Amended and Restated 1994 Stock Option Plan, together with form
of Stock Option Agreement, form of Stock Purchase Agreement,
form of Note Secured by Stock Pledge Agreement and form of
Stock Pledge Agreement. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.3 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.5* |
|
Special Stock Option Plan, together with form of Stock Option
Agreement and form of Stock Purchase Agreement. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.12 |
|
|
|
03/23/1998 |
|
|
|
|
|
| |
10 |
.6* |
|
1998 Stock Incentive Plan (as amended and restated
March 23, 2004). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.4 |
|
|
|
05/10/2004 |
|
|
|
|
|
| |
10 |
.7* |
|
1998 Stock Incentive Plan forms of Notice of Grant of Stock
Option, Stock Issuance Agreement, Stock Purchase Agreement and
related Addenda. |
|
|
S-8 |
|
|
333- 60763 |
|
99.2 & 99.4- 99.11 |
|
|
08/06/1998 |
|
|
|
|
|
| |
10 |
.8* |
|
1998 Stock Incentive Plan form of Notice of Grant of Stock
Option for the following executive officers: David A. Dull,
Bruce E. Kiddoo, Vahid Manian, Andrew J. Pease and William J.
Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.3 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.9* |
|
1998 Stock Incentive Plan form of Notice of Grant of Stock
Option, Stock Option Agreement and Addendum to Stock Option
Agreement for Scott A. McGregor. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.10* |
|
1998 Stock Incentive Plan form of Stock Option Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
10 |
.11* |
|
1998 Stock Incentive Plan form of Automatic Stock Option
Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.12* |
|
1998 Stock Incentive Plan form of Executive Retention Program
Addendum to Stock Option Agreement for the following executive
officers: David A. Dull, Bruce E. Kiddoo, Vahid Manian, Andrew
J. Pease and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.5 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.13* |
|
1998 Stock Incentive Plan form of Special Stock Retention
Addendum to Stock Option Agreement for the registrant’s
Chief Executive Officer, Chief Financial Officer, Chief
Technical Officer and member’s of the registrant’s
Board of Directors. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.6 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.14* |
|
1998 Stock Incentive Plan form of Restricted Stock Unit Award
Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.8 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.15* |
|
1998 Stock Incentive Plan form of Executive Retention Program
Addendum to Restricted Stock Unit Award Agreement for the
following executive officers: David A. Dull, Bruce E. Kiddoo,
Vahid Manian, Andrew J. Pease and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.10 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.16* |
|
1998 Stock Incentive Plan form of Restricted Stock Unit Award
Agreement and Addendum to Restricted Stock Unit Award Agreement
for Scott A. McGregor. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.17* |
|
1998 Employee Stock Purchase Plan (as amended and restated
March 21, 2003). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
11/07/2003 |
|
|
|
|
|
| |
10 |
.18* |
|
1998 Employee Stock Purchase Plan forms of Stock Purchase
Agreements and Enrollment/ Change Form. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.5.1 |
|
|
|
03/15/2004 |
|
|
|
|
|
| |
10 |
.19 |
|
1999 Special Stock Option Plan (as amended and restated
July 18, 2003). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2 |
|
|
|
08/11/2003 |
|
|
|
|
|
| |
10 |
.20 |
|
1999 Special Stock Option Plan form of Stock Option Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2.1 |
|
|
|
08/11/2003 |
|
|
|
|
|
| |
10 |
.21 |
|
1999 Special Stock Option Plan form of Notice of Grant of Stock
Option. |
|
|
S-8 |
|
|
333- 93457 |
|
|
99.2 |
|
|
|
12/22/1999 |
|
|
|
|
|
| |
10 |
.22* |
|
Form of Indemnification Agreement for Directors of the
registrant. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.1 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.23* |
|
Form of Indemnification Agreement for Officers of the registrant. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.2 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.24†† |
|
Development, Supply and License Agreement dated
September 29, 1997 between the registrant and General
Instrument Corporation, formerly known as NextLevel Systems,
Inc. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.8 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.25†† |
|
Amendment dated November 22, 2000 to Development, Supply
and License Agreement between the registrant and General
Instrument Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.16 |
|
|
|
04/02/2001 |
|
|
|
|
|
| |
10 |
.26†† |
|
Product Purchase Agreement dated November 22, 2000,
together with Amendment dated January 1, 2002, to Product
Purchase Agreement between the registrant and General Instrument
Corporation. |
|
|
10-Q |
|
|
000- 23993. |
|
|
10.1 |
|
|
|
05/15/2002 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
10 |
.27†† |
|
Second Amendment dated December 3, 2002 to Product Purchase
Agreement between the registrant and General Instrument
Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.22 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
10 |
.28†† |
|
Third Amendment dated as of January 1, 2003 to Product
Purchase Agreement between the registrant and General Instrument
Corporation. |
|
|
8-K |
|
|
000- 23993 |
|
|
99.1 |
|
|
|
04/16/2004 |
|
|
|
|
|
| |
10 |
.29†† |
|
Fourth Amendment dated March 31, 2004 to Product Purchase
Agreement between the registrant and General Instrument
Corporation. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.25 |
|
|
|
05/10/2004 |
|
|
|
|
|
| |
10 |
.30 |
|
Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the registrant and The Irvine Company. |
|
|
S-1 |
|
|
333- 65117 |
|
|
10.15 |
|
|
|
09/30/1998 |
|
|
|
|
|
| |
10 |
.31 |
|
First Amendment dated August 27, 1999 and Second Amendment
dated December 10, 1999 to Industrial Lease (Single Tenant,
Net), between the registrant and The Irvine Company. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.20 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
10 |
.32 |
|
Third Amendment (Single Tenant, Net) dated December 19,
2003 between the registrant and the Irvine Company. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.12 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.33 |
|
Industrial Lease (Multi-Tenant; Net) dated August 1, 2000
between the registrant and the Irvine Company; First Amendment
dated October 18, 2000 and Second Amendment dated
September 18, 2003 to Industrial Lease (Multi-Tenant; Net),
between the registrant and The Irvine Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.34 |
|
Lease Agreement dated February 1, 2000 between the
registrant and Conejo Valley Development Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.17 |
|
|
|
03/19/2002 |
|
|
|
|
|
| |
10 |
.35 |
|
Lease Agreement dated May 18, 2000 between the registrant
and M-D Downtown Sunnyvale, LLC. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.21 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
10 |
.36 |
|
Lease dated November 20, 2000 together with Second
Amendment dated March 30, 2001 to Lease between the
registrant and Sobrato Interests. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.18 |
|
|
|
03/19/2002 |
|
|
|
|
|
| |
10 |
.37 |
|
Lease (Multi-Tenant; Net) dated August 12, 2001 between the
registrant and The Irvine Company; Fourth Amendment dated
April 30, 2004 to Lease (Multi-Tenant; Net) between the
registrant and The Irvine Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.38† |
|
Lease Agreement dated December 29, 2004 between the
registrant and Irvine Commercial Property Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.39 |
|
Stipulation of Settlement (shareholder derivative actions) dated
October 26, 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
21 |
.1 |
|
Subsidiaries of the Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
23 |
.1 |
|
Consent of Independent Auditors. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
31 |
.1 |
|
Certification of the Chief Executive Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
31 |
.2 |
|
Certification of the 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
| |
* |
Indicates a management contract or compensatory plan or
arrangement. |
|
|
|
| |
† |
Confidential treatment has been requested with respect to the
redacted portions of this amendment. |
|
|
| †† |
Confidential treatment has previously been granted by the SEC
for certain portions of the referenced exhibit pursuant to
Rule 406 under the Securities Act. |
Financial Statement Schedules
| |
|
|
|
|
|
|
|
|
|
|
(1) Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
|
|
|
S-1 |
|
|
|
|
|
|
|
(2) Schedule II — Consolidated Valuation and
Qualifying Accounts
|
|
|
S-2 |
|
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the Consolidated Financial Statements or Notes
thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine, State of
California, on March 1, 2005.
|
|
|
| |
By: |
/s/ Scott A. McGregor
|
|
|
| |
|
| |
Scott A. McGregor |
| |
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
/s/ Scott A. McGregor
Scott
A. McGregor |
|
President and Chief Executive Officer and Director
(Principal Executive Officer) |
|
March 1, 2005 |
| |
/s/ Henry Samueli
Henry
Samueli, Ph.D. |
|
Chairman of the Board and Chief Technical Officer |
|
March 1, 2005 |
| |
/s/ William J. Ruehle
William
J. Ruehle |
|
Vice President and Chief Financial Officer (Principal Financial
Officer) |
|
March 1, 2005 |
| |
/s/ Bruce E. Kiddoo
Bruce
E. Kiddoo |
|
Vice President and Corporate Controller (Principal Accounting
Officer) |
|
March 1, 2005 |
| |
/s/ George L. Farinsky
George
L. Farinsky |
|
Director |
|
March 1, 2005 |
| |
/s/ John Major
John
Major |
|
Director |
|
March 1, 2005 |
| |
/s/ Alan E. Ross
Alan
E. Ross |
|
Director |
|
March 1, 2005 |
| |
/s/ Robert E. Switz
Robert
E. Switz |
|
Director |
|
March 1, 2005 |
| |
/s/ Werner F. Wolfen
Werner
F. Wolfen |
|
Director |
|
March 1, 2005 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL
STATEMENT SCHEDULE
Board of Directors and Shareholders
Broadcom Corporation
We have audited the consolidated financial statements of
Broadcom Corporation as of December 31, 2004 and 2003, and
for each of the three years in the period ended
December 31, 2004, and have issued our report thereon dated
February 25, 2005. Our audits also included the financial
statement schedule listed in Item 15(a). This schedule is
the responsibility of the Company’s management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
Orange County, California
February 25, 2005
S-1
SCHEDULE II — CONSOLIDATED VALUATION AND
QUALIFYING ACCOUNTS
BROADCOM CORPORATION
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
Balance at |
| |
|
Beginning of |
|
Costs and |
|
Other |
|
|
|
End of |
| Description |
|
Year |
|
Expenses |
|
Accounts(a) |
|
Deductions |
|
Year |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands) |
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
6,493 |
|
|
$ |
1,793 |
|
|
$ |
300 |
|
|
$ |
(1,686 |
) |
|
$ |
6,900 |
|
|
|
|
|
|
| |
|
Sales returns
|
|
|
655 |
|
|
|
16,236 |
|
|
|
— |
|
|
|
(13,199 |
) |
|
|
3,692 |
|
|
|
|
|
|
| |
|
Pricing allowances
|
|
|
444 |
|
|
|
2,507 |
|
|
|
— |
|
|
|
(1,956 |
) |
|
|
995 |
|
|
|
|
|
|
| |
|
Reserve for excess and obsolete inventory
|
|
|
25,111 |
|
|
|
26,224 |
|
|
|
2,217 |
|
|
|
(8,801 |
) |
|
|
44,751 |
|
|
|
|
|
|
| |
Reserve for warranty
|
|
|
5,996 |
|
|
|
14,812 |
|
|
|
157 |
|
|
|
(1,780 |
) |
|
|
19,185 |
|
|
|
|
|
|
| |
Restructuring liabilities
|
|
|
37,174 |
|
|
|
— |
|
|
|
3,411 |
|
|
|
(13,468 |
) |
|
|
27,117 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total
|
|
$ |
75,873 |
|
|
$ |
61,572 |
|
|
$ |
6,085 |
|
|
$ |
(40,890 |
) |
|
$ |
102,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
4,553 |
|
|
$ |
1,752 |
|
|
$ |
637 |
|
|
$ |
(449 |
) |
|
$ |
6,493 |
|
|
|
|
|
|
| |
|
Sales returns
|
|
|
762 |
|
|
|
16,772 |
|
|
|
— |
|
|
|
(16,879 |
) |
|
|
655 |
|
|
|
|
|
|
| |
|
Pricing allowances
|
|
|
306 |
|
|
|
4,601 |
|
|
|
— |
|
|
|
(4,463 |
) |
|
|
444 |
|
|
|
|
|
|
| |
|
Reserve for excess and obsolete inventory
|
|
|
15,898 |
|
|
|
11,069 |
|
|
|
2,908 |
|
|
|
(4,764 |
) |
|
|
25,111 |
|
|
|
|
|
|
| |
Reserve for warranty
|
|
|
3,881 |
|
|
|
8,325 |
|
|
|
— |
|
|
|
(6,210 |
) |
|
|
5,996 |
|
|
|
|
|
|
| |
Restructuring liabilities
|
|
|
55,691 |
|
|
|
2,932 |
|
|
|
— |
|
|
|
(21,449 |
) |
|
|
37,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total
|
|
$ |
81,091 |
|
|
$ |
45,451 |
|
|
$ |
3,545 |
|
|
$ |
(54,214 |
) |
|
$ |
75,873 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Allowance for doubtful accounts
|
|
$ |
5,375 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(822 |
) |
|
$ |
4,553 |
|
|
|
|
|
|
| |
|
Sales returns
|
|
|
2,232 |
|
|
|
6,834 |
|
|
|
— |
|
|
|
(8,304 |
) |
|
|
762 |
|
|
|
|
|
|
| |
|
Pricing allowances
|
|
|
8,143 |
|
|
|
(725 |
) |
|
|
— |
|
|
|
(7,112 |
) |
|
|
306 |
|
|
|
|
|
|
| |
|
Reserve for excess and obsolete inventory
|
|
|
17,117 |
|
|
|
5,705 |
|
|
|
429 |
|
|
|
(7,353 |
) |
|
|
15,898 |
|
|
|
|
|
|
| |
Reserve for warranty
|
|
|
5,663 |
|
|
|
1,299 |
|
|
|
— |
|
|
|
(3,081 |
) |
|
|
3,881 |
|
|
|
|
|
|
| |
Restructuring liabilities
|
|
|
10,594 |
|
|
|
126,495 |
|
|
|
— |
|
|
|
(81,398 |
) |
|
|
55,691 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total
|
|
$ |
49,124 |
|
|
$ |
139,608 |
|
|
$ |
429 |
|
|
$ |
(108,070 |
) |
|
$ |
81,091 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Amounts represent beginning balances acquired through purchase
acquisitions. |
S-2
Exhibit Index
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
2 |
.1 |
|
Merger Agreement and Plan of Reorganization by and among the
registrant, RCC Acquisition Corp., Reliance Computer Corp., and
the Other Parties Signatory Thereto dated as of January 5,
2001. |
|
|
8-K |
|
|
000- 23993 |
|
|
2.1 |
|
|
|
01/31/2001 |
|
|
|
|
|
| |
3 |
.1 |
|
Amended and Restated Articles of Incorporation dated
March 3, 1998. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
3.1 |
|
|
|
03/23/1998 |
|
|
|
|
|
| |
3 |
.1.1 |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation dated December 28, 1999. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.1.2 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
3 |
.1.2 |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation dated June 26, 2000. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.1.1 |
|
|
|
04/02/2001 |
|
|
|
|
|
| |
3 |
.2 |
|
Bylaws as amended through August 21, 2003. |
|
|
10-K |
|
|
000- 23993 |
|
|
3.2 |
|
|
|
03/15/2004 |
|
|
|
|
|
| |
10 |
.1* |
|
2004 Bonuses & 2005 Base Salaries for Certain Executive
Officers. |
|
|
8-K |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
02/07/2005 |
|
|
|
|
|
| |
10 |
.2* |
|
Form Letter Agreement for Executive Retention Program
between the registrant and the following executive officers:
David A. Dull, Bruce E. Kiddoo, Vahid Manian, Andrew J. Pease
and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.11 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.3*† |
|
Letter Agreement between the registrant and Scott A. McGregor
dated October 25, 2004. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.4* |
|
Amended and Restated 1994 Stock Option Plan, together with form
of Stock Option Agreement, form of Stock Purchase Agreement,
form of Note Secured by Stock Pledge Agreement and form of
Stock Pledge Agreement. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.3 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.5* |
|
Special Stock Option Plan, together with form of Stock Option
Agreement and form of Stock Purchase Agreement. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.12 |
|
|
|
03/23/1998 |
|
|
|
|
|
| |
10 |
.6* |
|
1998 Stock Incentive Plan (as amended and restated
March 23, 2004). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.4 |
|
|
|
05/10/2004 |
|
|
|
|
|
| |
10 |
.7* |
|
1998 Stock Incentive Plan forms of Notice of Grant of Stock
Option, Stock Issuance Agreement, Stock Purchase Agreement and
related Addenda. |
|
|
S-8 |
|
|
333- 60763 |
|
99.2 & 99.4- 99.11 |
|
|
08/06/1998 |
|
|
|
|
|
| |
10 |
.8* |
|
1998 Stock Incentive Plan form of Notice of Grant of Stock
Option for the following executive officers: David A. Dull,
Bruce E. Kiddoo, Vahid Manian, Andrew J. Pease and William J.
Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.3 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.9* |
|
1998 Stock Incentive Plan form of Notice of Grant of Stock
Option, Stock Option Agreement and Addendum to Stock Option
Agreement for Scott A. McGregor. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.10* |
|
1998 Stock Incentive Plan form of Stock Option Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.11* |
|
1998 Stock Incentive Plan form of Automatic Stock Option
Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
10 |
.12* |
|
1998 Stock Incentive Plan form of Executive Retention Program
Addendum to Stock Option Agreement for the following executive
officers: David A. Dull, Bruce E. Kiddoo, Vahid Manian, Andrew
J. Pease and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.5 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.13* |
|
1998 Stock Incentive Plan form of Special Stock Retention
Addendum to Stock Option Agreement for the registrant’s
Chief Executive Officer, Chief Financial Officer, Chief
Technical Officer and member’s of the registrant’s
Board of Directors. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.6 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.14* |
|
1998 Stock Incentive Plan form of Restricted Stock Unit Award
Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.8 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.15* |
|
1998 Stock Incentive Plan form of Executive Retention Program
Addendum to Restricted Stock Unit Award Agreement for the
following executive officers: David A. Dull, Bruce E. Kiddoo,
Vahid Manian, Andrew J. Pease and William J. Ruehle. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.10 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.16* |
|
1998 Stock Incentive Plan form of Restricted Stock Unit Award
Agreement and Addendum to Restricted Stock Unit Award Agreement
for Scott A. McGregor. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.17* |
|
1998 Employee Stock Purchase Plan (as amended and restated
March 21, 2003). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.1 |
|
|
|
11/07/2003 |
|
|
|
|
|
| |
10 |
.18* |
|
1998 Employee Stock Purchase Plan forms of Stock Purchase
Agreements and Enrollment/ Change Form. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.5.1 |
|
|
|
03/15/2004 |
|
|
|
|
|
| |
10 |
.19 |
|
1999 Special Stock Option Plan (as amended and restated
July 18, 2003). |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2 |
|
|
|
08/11/2003 |
|
|
|
|
|
| |
10 |
.20 |
|
1999 Special Stock Option Plan form of Stock Option Agreement. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.2.1 |
|
|
|
08/11/2003 |
|
|
|
|
|
| |
10 |
.21 |
|
1999 Special Stock Option Plan form of Notice of Grant of Stock
Option. |
|
|
S-8 |
|
|
333- 93457 |
|
|
99.2 |
|
|
|
12/22/1999 |
|
|
|
|
|
| |
10 |
.22* |
|
Form of Indemnification Agreement for Directors of the
registrant. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.1 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.23* |
|
Form of Indemnification Agreement for Officers of the registrant. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.2 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.24†† |
|
Development, Supply and License Agreement dated
September 29, 1997 between the registrant and General
Instrument Corporation, formerly known as NextLevel Systems,
Inc. |
|
|
S-1/A |
|
|
333- 45619 |
|
|
10.8 |
|
|
|
02/27/1998 |
|
|
|
|
|
| |
10 |
.25†† |
|
Amendment dated November 22, 2000 to Development, Supply
and License Agreement between the registrant and General
Instrument Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.16 |
|
|
|
04/02/2001 |
|
|
|
|
|
| |
10 |
.26†† |
|
Product Purchase Agreement dated November 22, 2000,
together with Amendment dated January 1, 2002, to Product
Purchase Agreement between the registrant and General Instrument
Corporation. |
|
|
10-Q |
|
|
000- 23993. |
|
|
10.1 |
|
|
|
05/15/2002 |
|
|
|
|
|
| |
10 |
.27†† |
|
Second Amendment dated December 3, 2002 to Product Purchase
Agreement between the registrant and General Instrument
Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.22 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Where Located |
| |
|
|
|
|
| Exhibit |
|
|
|
|
|
File |
|
Exhibit |
|
|
|
Filed |
| Number |
|
Description |
|
Form |
|
No. |
|
No. |
|
Filing Date |
|
Herewith |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
10 |
.28†† |
|
Third Amendment dated as of January 1, 2003 to Product
Purchase Agreement between the registrant and General Instrument
Corporation. |
|
|
8-K |
|
|
000- 23993 |
|
|
99.1 |
|
|
|
04/16/2004 |
|
|
|
|
|
| |
10 |
.29†† |
|
Fourth Amendment dated March 31, 2004 to Product Purchase
Agreement between the registrant and General Instrument
Corporation. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.25 |
|
|
|
05/10/2004 |
|
|
|
|
|
| |
10 |
.30 |
|
Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the registrant and The Irvine Company. |
|
|
S-1 |
|
|
333- 65117 |
|
|
10.15 |
|
|
|
09/30/1998 |
|
|
|
|
|
| |
10 |
.31 |
|
First Amendment dated August 27, 1999 and Second Amendment
dated December 10, 1999 to Industrial Lease (Single Tenant,
Net), between the registrant and The Irvine Company. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.20 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
10 |
.32 |
|
Third Amendment (Single Tenant, Net) dated December 19,
2003 between the registrant and the Irvine Company. |
|
|
10-Q |
|
|
000- 23993 |
|
|
10.12 |
|
|
|
11/09/2004 |
|
|
|
|
|
| |
10 |
.33 |
|
Industrial Lease (Multi-Tenant; Net) dated August 1, 2000
between the registrant and the Irvine Company; First Amendment
dated October 18, 2000 and Second Amendment dated
September 18, 2003 to Industrial Lease (Multi-Tenant; Net),
between the registrant and The Irvine Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
| |
10 |
.34 |
|
Lease Agreement dated February 1, 2000 between the
registrant and Conejo Valley Development Corporation. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.17 |
|
|
|
03/19/2002 |
|
|
|
|
|
| |
10 |
.35 |
|
Lease Agreement dated May 18, 2000 between the registrant
and M-D Downtown Sunnyvale, LLC. |
|
|
10-K |
|
|
000- 23993 |
|
|
10.21 |
|
|
|
03/31/2003 |
|
|
|
|
|
| |
10 |
.36 |
|
Lease dated November 20, 2000 together with Second
Amendment dated March 30, 2001 to Lease between the
registrant and Sobrato Interests. |
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10-K |
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000- 23993 |
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10.18 |
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03/19/2002 |
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10 |
.37 |
|
Lease (Multi-Tenant; Net) dated August 12, 2001 between the
registrant and The Irvine Company; Fourth Amendment dated
April 30, 2004 to Lease (Multi-Tenant; Net) between the
registrant and The Irvine Company. |
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X |
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10 |
.38† |
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Lease Agreement dated December 29, 2004 between the
registrant and Irvine Commercial Property Company. |
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X |
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10 |
.39 |
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Stipulation of Settlement (shareholder derivative actions) dated
October 26, 2005. |
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X |
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21 |
.1 |
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Subsidiaries of the Company. |
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X |
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23 |
.1 |
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Consent of Independent Auditors. |
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X |
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31 |
.1 |
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Certification of the Chief Executive Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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X |
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Where Located |
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| Exhibit |
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File |
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Exhibit |
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Filed |
| Number |
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Description |
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Form |
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No. |
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No. |
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Filing Date |
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Herewith |
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31 |
.2 |
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Certification of the Chief Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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X |
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32 |
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Certifications of the Chief Executive Officer and Chief
Financial Officer, as required pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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X |
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* |
Indicates a management contract or compensatory plan or
arrangement. |
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† |
Confidential treatment has been requested with respect to the
redacted portions of this amendment. |
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| †† |
Confidential treatment has previously been granted by the SEC
for certain portions of the referenced exhibit pursuant to
Rule 406 under the Securities Act. |
