UNITED STATES
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended March 31, 2003 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number: 000-23993
Broadcom Corporation
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California
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33-0480482 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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16215 Alton Parkway Irvine, California 92618-3616 (Address of principal executive offices and zip code) |
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(949) 450-8700
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of April 30, 2003: 208,900,265 shares of Class A common stock and 71,194,441 shares of Class B common stock.
BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements | |||||
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Unaudited Condensed Consolidated Balance Sheets
at March 31, 2003 and December 31, 2002 |
2 | |||||
| Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 | 3 | |||||
| Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 | 4 | |||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
| Risk Factors | 31 | |||||
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk | 46 | ||||
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Item 4.
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Controls and Procedures | 47 | ||||
| PART II. OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 48 | ||||
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Item 2.
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Changes in Securities and Use of Proceeds | 48 | ||||
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Item 3.
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Defaults upon Senior Securities | 48 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 48 | ||||
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Item 5.
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Other Information | 48 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 48 | ||||
| Signatures | 49 | |||||
| Certifications | 50 | |||||
Broadcom®, the pulse logo, SystemI/ OTM and ServerWorksTM are trademarks of Broadcom Corporation and/or its affiliates in the United States and certain other countries. All other trademarks mentioned are the property of their respective owners.
©2003 Broadcom Corporation. All rights reserved.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROADCOM CORPORATION
| March 31, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (In thousands) | ||||||||||
| ASSETS | ||||||||||
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Current assets:
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||||||||||
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Cash and cash equivalents
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$ | 436,901 | $ | 389,555 | ||||||
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Short-term marketable securities
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12,594 | 56,031 | ||||||||
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Short-term restricted marketable securities
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57,922 | 57,117 | ||||||||
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Accounts receivable, net
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161,205 | 128,215 | ||||||||
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Inventory
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61,278 | 46,036 | ||||||||
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Prepaid expenses and other current assets
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43,365 | 44,830 | ||||||||
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Total current assets
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773,265 | 721,784 | ||||||||
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Property and equipment, net
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164,484 | 177,557 | ||||||||
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Long-term marketable securities
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— | 5,067 | ||||||||
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Long-term restricted marketable securities
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17,521 | 35,137 | ||||||||
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Goodwill
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1,228,603 | 1,228,603 | ||||||||
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Purchased intangible assets, net
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19,792 | 24,036 | ||||||||
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Other assets
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25,788 | 23,969 | ||||||||
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Total assets
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$ | 2,229,453 | $ | 2,216,153 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
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Current liabilities:
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||||||||||
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Accounts payable
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$ | 185,451 | $ | 168,236 | ||||||
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Wages and related benefits
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44,005 | 34,278 | ||||||||
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Deferred revenue
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13,428 | 15,129 | ||||||||
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Accrued liabilities
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217,176 | 204,116 | ||||||||
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Short-term debt and current portion of long-term
debt
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85,036 | 112,258 | ||||||||
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Total current liabilities
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545,096 | 534,017 | ||||||||
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Commitments and contingencies
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||||||||||
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Long-term restructuring liabilities
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33,201 | 36,403 | ||||||||
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Long-term debt, less current portion
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489 | 1,212 | ||||||||
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Shareholders’ equity:
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||||||||||
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Common stock
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28 | 28 | ||||||||
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Additional paid-in capital
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7,690,562 | 7,698,399 | ||||||||
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Notes receivable from employees
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(12,597 | ) | (12,847 | ) | ||||||
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Deferred compensation
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(373,293 | ) | (454,890 | ) | ||||||
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Accumulated deficit
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(5,654,321 | ) | (5,586,415 | ) | ||||||
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Accumulated other comprehensive income
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288 | 246 | ||||||||
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Total shareholders’ equity
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1,650,667 | 1,644,521 | ||||||||
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Total liabilities and shareholders’ equity
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$ | 2,229,453 | $ | 2,216,153 | ||||||
See accompanying notes.
2
BROADCOM CORPORATION
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| (In thousands, except per | ||||||||||
| share data) | ||||||||||
| Net revenue | $ | 327,464 | $ | 238,800 | ||||||
| Cost of revenue(a) | 172,020 | 134,122 | ||||||||
| Gross profit | 155,444 | 104,678 | ||||||||
| Operating expense: | ||||||||||
| Research and development(b) | 103,123 | 111,694 | ||||||||
| Selling, general and administrative(b) | 41,359 | 40,474 | ||||||||
| Stock-based compensation | 68,828 | 101,464 | ||||||||
| Amortization of purchased intangible assets | 1,532 | 5,384 | ||||||||
| Restructuring costs | 767 | 4,822 | ||||||||
| Loss from operations | (60,165 | ) | (159,160 | ) | ||||||
| Interest income, net | 2,190 | 3,440 | ||||||||
| Other expense, net | (616 | ) | (4,347 | ) | ||||||
| Loss before income taxes | (58,591 | ) | (160,067 | ) | ||||||
| Provision for income taxes | 9,315 | 6,000 | ||||||||
| Net loss | $ | (67,906 | ) | $ | (166,067 | ) | ||||
| Net loss per share (basic and diluted) | $ | (0.25 | ) | $ | (0.63 | ) | ||||
| Weighted average shares (basic and diluted) | 276,317 | 261,999 | ||||||||
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(a)
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Cost of revenue includes the following: | |||||||||
| Stock-based compensation expense | $ | 2,527 | $ | 3,349 | ||||||
| Amortization of purchased intangible assets | 6,053 | 13,164 | ||||||||
| $ | 8,580 | $ | 16,513 | |||||||
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(b)
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Stock-based compensation expense is excluded from the following: | |||||||||
| Research and development expense | $ | 50,933 | $ | 69,786 | ||||||
| Selling, general and administrative expense | 17,895 | 31,678 | ||||||||
| $ | 68,828 | $ | 101,464 | |||||||
| Amortization of purchased intangible assets is excluded from the following: | ||||||||||
| Research and development expense | $ | 815 | $ | 5,161 | ||||||
| Selling, general and administrative expense | 717 | 223 | ||||||||
| $ | 1,532 | $ | 5,384 | |||||||
See accompanying notes.
3
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2003 | 2002 | ||||||||||
| (In thousands) | |||||||||||
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Operating activities
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|||||||||||
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Net loss
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$ | (67,906 | ) | $ | (166,067 | ) | |||||
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Adjustments to reconcile net loss to net cash
provided by operating activities:
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Depreciation and amortization
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17,292 | 16,506 | |||||||||
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Stock-based compensation expense
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71,355 | 104,813 | |||||||||
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Amortization of purchased intangible assets
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7,585 | 18,548 | |||||||||
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Non-cash restructuring charges
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257 | 1,006 | |||||||||
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Non-cash development revenue
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(508 | ) | (3,000 | ) | |||||||
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Loss on strategic investments, net
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— | 4,146 | |||||||||
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Change in operating assets and liabilities:
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|||||||||||
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Accounts receivable
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(32,100 | ) | (20,106 | ) | |||||||
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Inventory
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(14,785 | ) | (2,607 | ) | |||||||
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Prepaid expenses and other assets
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577 | (212 | ) | ||||||||
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Accounts payable
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17,215 | 31,494 | |||||||||
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Accrued liabilities
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19,863 | 17,801 | |||||||||
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Net cash provided by operating activities
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18,845 | 2,322 | |||||||||
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Investing activities
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Purchases of property and equipment, net
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(4,905 | ) | (8,090 | ) | |||||||
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Purchases of strategic investments
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(500 | ) | (3,000 | ) | |||||||
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Net cash paid in purchase transaction
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(5,862 | ) | — | ||||||||
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Proceeds from sales of marketable securities
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48,504 | 39,822 | |||||||||
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Purchases of marketable securities
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— | (47,500 | ) | ||||||||
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Proceeds from sales of restricted marketable
securities
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16,811 | — | |||||||||
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Net cash provided by (used in) investing
activities
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54,048 | (18,768 | ) | ||||||||
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Financing activities
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Payments on debt and other obligations
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(27,945 | ) | (805 | ) | |||||||
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Net proceeds from issuances of common stock
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2,148 | 8,822 | |||||||||
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Proceeds from repayment of notes receivable from
employees
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250 | 457 | |||||||||
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Net cash provided by (used in) financing
activities
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(25,547 | ) | 8,474 | ||||||||
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Increase (decrease) in cash and cash equivalents
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47,346 | (7,972 | ) | ||||||||
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Cash and cash equivalents at beginning of year
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389,555 | 403,758 | |||||||||
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Cash and cash equivalents at end of period
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$ | 436,901 | $ | 395,786 | |||||||
See accompanying notes.
4
BROADCOM CORPORATION
1. Summary of Significant Accounting Policies
| The Company |
Broadcom Corporation (the “Company”) uses proprietary technologies and advanced design methodologies to design, develop and supply complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. The Company’s diverse product portfolio includes solutions for digital cable and satellite set-top boxes; 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 processors; and SystemI/OTM server solutions.
| Basis of Presentation |
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at March 31, 2003, the consolidated results of operations for the three months ended March 31, 2003 and 2002, and the consolidated cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.
The accompanying unaudited condensed consolidated financial statements do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States. Therefore, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.
| Use of Estimates |
The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 during the reporting period. The Company regularly evaluates the 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 contingencies. The Company bases the estimates and assumptions on 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. 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 recognizes product revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to stocking distributors where revenue is recognized upon sale to the end customer. In addition, the Company records reductions to revenue for estimated product returns and allowances such as competitive pricing programs and rebates. Development revenue is generally recognized under the percentage-of-
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
completion method. Revenue from licensed software is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided that the fee is fixed and determinable and collectibility is probable. Revenue from post-contract customer support and any other future deliverables is deferred and earned over the support period or as contract elements are delivered.
| Inventory |
Inventory is stated at the lower of cost (first-in, first-out) or market. The Company provides inventory allowances based on estimates of excess and obsolete inventories. Shipping and handling costs are classified as a component of cost of revenue in the unaudited condensed consolidated statements of operations.
| Stock-Based Compensation |
The Company has in effect several stock-based plans under which incentive stock options have been granted to employees and non-qualified stock options have been granted to employees, non-employee board members 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 Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Options granted to non-employees, as defined, have been accounted for at fair market value in accordance with SFAS 123.
In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below are pro forma statements of operations data of the Company giving effect to the valuation of stock-based awards to employees using the Black-Scholes option pricing model instead of the guidelines provided by APB 25.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2003 | 2002 | |||||||
| (In thousands, except per | ||||||||
| share data) | ||||||||
|
Net loss — as reported
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$ | (67,906 | ) | $ | (166,067 | ) | ||
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Add: Stock-based compensation expense included in
net loss — as reported
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71,612 | 104,813 | ||||||
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Deduct: Stock-based compensation expense
determined under fair value method
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(215,975 | ) | (252,173 | ) | ||||
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Net loss — pro forma
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$ | (212,269 | ) | $ | (313,427 | ) | ||
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Net loss per share (basic and
diluted) — as reported
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$ | (0.25 | ) | $ | (0.63 | ) | ||
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Net loss per share (basic and
diluted) — pro forma
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$ | (0.77 | ) | $ | (1.20 | ) | ||
Among other factors, the Black-Scholes model considers the expected life of the option and the expected volatility of the Company’s stock price in arriving at an option valuation. For pro forma purposes, the estimated fair value of the Company’s stock-based awards to employees is amortized over the vesting period of the underlying instruments.
| Warranty |
The Company’s products typically carry a one to three year warranty. The Company provides reserves for estimated product warranty costs, based upon the Company’s historical warranty experience, at the time revenue is recognized.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Reclassifications |
Certain amounts in the 2002 unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation.
| 2. | Supplementary Financial Information |
| Inventory |
| March 31, | December 31, | |||||||
| 2003 | 2002 | |||||||
| (In thousands) | ||||||||
|
Work in process
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$ | 23,903 | $ | 15,125 | ||||
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Finished goods
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37,375 | 30,911 | ||||||
| $ | 61,278 | $ | 46,036 | |||||
| Purchased Intangible Assets |
The following table presents details of the Company’s purchased intangible assets:
| March 31, 2003 | December 31, 2002 | ||||||||||||||||||||||||
| Accumulated | Accumulated | ||||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||
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Completed technology
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$ | 133,911 | $ | (116,090 | |||||||||||||||||||||