UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2004 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
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.) |
16215 Alton Parkway
(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
As of April 30, 2004 the registrant had 253,015,347 shares of Class A common stock, $0.0001 par value, and 61,086,890 shares of Class B common stock, $0.0001 par value, outstanding.
BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Broadcom®, the pulse logo, ServerWorksTM and SystemI/OTM are trademarks of Broadcom Corporation and/or its affiliates in the United States and certain other countries. Bluetooth® is a trademark of the Bluetooth SIG. All other trademarks mentioned are the property of their respective owners.
©2004 Broadcom Corporation. All rights reserved.
1
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
BROADCOM CORPORATION
| March 31, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| (In thousands) | ||||||||||
| ASSETS | ||||||||||
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Current assets:
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||||||||||
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Cash and cash equivalents
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$ | 611,752 | $ | 558,669 | ||||||
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Short-term marketable securities
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81,207 | 47,296 | ||||||||
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Accounts receivable, net
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234,210 | 220,124 | ||||||||
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Inventory
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145,235 | 104,047 | ||||||||
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Prepaid expenses and other current assets
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86,480 | 65,667 | ||||||||
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Total current assets
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1,158,884 | 995,803 | ||||||||
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Property and equipment, net
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128,776 | 142,113 | ||||||||
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Long-term marketable securities
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72,715 | 36,405 | ||||||||
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Goodwill
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829,200 | 827,652 | ||||||||
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Purchased intangible assets, net
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7,005 | 6,667 | ||||||||
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Other assets
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17,356 | 8,982 | ||||||||
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Total assets
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$ | 2,213,936 | $ | 2,017,622 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
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Current liabilities:
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||||||||||
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Accounts payable
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$ | 231,067 | $ | 219,064 | ||||||
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Wages and related benefits
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44,013 | 33,965 | ||||||||
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Deferred revenue
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1,288 | 963 | ||||||||
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Accrued liabilities
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275,381 | 249,584 | ||||||||
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Total current liabilities
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551,749 | 503,576 | ||||||||
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Commitments and contingencies
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||||||||||
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Long-term liabilities
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27,757 | 24,241 | ||||||||
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Shareholders’ equity:
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||||||||||
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Common stock
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31 | 31 | ||||||||
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Additional paid-in capital
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8,197,558 | 8,123,941 | ||||||||
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Notes receivable from employees
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(9,713 | ) | (10,906 | ) | ||||||
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Deferred compensation
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(47,780 | ) | (77,616 | ) | ||||||
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Accumulated deficit
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(6,506,416 | ) | (6,546,280 | ) | ||||||
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Accumulated other comprehensive income
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750 | 635 | ||||||||
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Total shareholders’ equity
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1,634,430 | 1,489,805 | ||||||||
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Total liabilities and shareholders’ equity
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$ | 2,213,936 | $ | 2,017,622 | ||||||
See accompanying notes.
2
BROADCOM CORPORATION
| Three Months | |||||||||||
| Ended | |||||||||||
| March 31, | |||||||||||
| 2004 | 2003 | ||||||||||
| (In thousands, except per | |||||||||||
| share data) | |||||||||||
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Net revenue
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$ | 573,406 | $ | 327,464 | |||||||
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Cost of revenue(1)
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283,481 | 172,020 | |||||||||
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Gross profit
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289,925 | 155,444 | |||||||||
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Operating expense:
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|||||||||||
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Research and development(2)
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118,949 | 103,123 | |||||||||
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Selling, general and administrative(2)
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52,095 | 41,359 | |||||||||
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Stock-based compensation
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27,757 | 68,828 | |||||||||
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Amortization of purchased intangible assets
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— | 1,532 | |||||||||
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Settlement costs
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19,000 | — | |||||||||
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Impairment of intangible assets
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18,000 | — | |||||||||
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In-process research and development
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2,260 | — | |||||||||
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Restructuring costs
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— | 767 | |||||||||
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Income (loss) from operations
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51,864 | (60,165 | ) | ||||||||
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Interest income, net
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1,903 | 2,190 | |||||||||
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Other expense, net
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(992 | ) | (616 | ) | |||||||
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Income (loss) before income taxes
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52,775 | (58,591 | ) | ||||||||
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Provision for income taxes
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12,911 | 9,315 | |||||||||
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Net income (loss)
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$ | 39,864 | $ | (67,906 | ) | ||||||
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Net income (loss) per share (basic)
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$ | .13 | $ | (.25 | ) | ||||||
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Net income (loss) per share (diluted)
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$ | .12 | $ | (.25 | ) | ||||||
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Weighted average shares (basic)
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309,019 | 276,317 | |||||||||
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Weighted average shares (diluted)
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342,598 | 276,317 | |||||||||
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(1) Cost of revenue includes the
following:
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|||||||||||
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Stock-based compensation expense
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$ | 671 | $ | 2,527 | |||||||
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Amortization of purchased intangible assets
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2,092 | 6,053 | |||||||||
| $ | 2,763 | $ | 8,580 | ||||||||
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(2) Stock-based compensation expense is
excluded from the following:
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|||||||||||
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Research and development expense
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$ | 24,056 | $ | 50,933 | |||||||
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Selling, general and administrative expense
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3,701 | 17,895 | |||||||||
| $ | 27,757 | $ | 68,828 | ||||||||
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Amortization of purchased intangible assets is
excluded from the following:
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|||||||||||
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Research and development expense
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$ | — | $ | 815 | |||||||
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Selling, general and administrative expense
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— | 717 | |||||||||
| $ | — | $ | 1,532 | ||||||||
See accompanying notes.
3
BROADCOM CORPORATION
| Three Months | |||||||||||
| Ended | |||||||||||
| March 31, | |||||||||||
| 2004 | 2003 | ||||||||||
| (In thousands) | |||||||||||
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Operating activities
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|||||||||||
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Net income (loss)
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$ | 39,864 | $ | (67,906 | ) | ||||||
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Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
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Depreciation and amortization
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21,853 | 17,292 | |||||||||
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Stock-based compensation expense
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28,428 | 71,355 | |||||||||
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Amortization of purchased intangible assets
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2,092 | 7,585 | |||||||||
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Impairment of intangible assets
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18,000 | — | |||||||||
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In-process research and development
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2,260 | — | |||||||||
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Tax benefit from stock plans
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11,799 | — | |||||||||
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Non-cash restructuring charges
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— | 257 | |||||||||
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Non-cash development revenue
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— | (508 | ) | ||||||||
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Change in operating assets and liabilities:
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Accounts receivable
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(14,020 | ) | (32,100 | ) | |||||||
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Inventory
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(41,188 | ) | (14,785 | ) | |||||||
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Prepaid expenses and other assets
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(44,952 | ) | 577 | ||||||||
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Accounts payable
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11,948 | 17,215 | |||||||||
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Other accrued liabilities
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42,016 | 19,863 | |||||||||
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Net cash provided by operating activities
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78,100 | 18,845 | |||||||||
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Investing activities
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Purchases of property and equipment
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(8,516 | ) | (4,905 | ) | |||||||
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Purchases of strategic investments
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(2,216 | ) | (500 | ) | |||||||
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Net cash paid in purchase transactions
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(9,858 | ) | (5,862 | ) | |||||||
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Purchases of marketable securities
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(134,509 | ) | — | ||||||||
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Proceeds from sale of available for sale
marketable securities
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39,200 | — | |||||||||
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Proceeds from maturities of marketable securities
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25,088 | 65,315 | |||||||||
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Net cash provided by (used in) investing
activities
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(90,811 | ) | 54,048 | ||||||||
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Financing activities
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|||||||||||
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Payments on debt and other obligations
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— | (27,945 | ) | ||||||||
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Net proceeds from issuance of common stock
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64,601 | 2,148 | |||||||||
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Proceeds from repayment of notes receivable from
employees
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1,193 | 250 | |||||||||
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Net cash provided by (used in) financing
activities
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65,794 | (25,547 | ) | ||||||||
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Increase in cash and cash equivalents
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53,083 | 47,346 | |||||||||
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Cash and cash equivalents at beginning of period
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558,669 | 389,555 | |||||||||
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Cash and cash equivalents at end of period
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$ | 611,752 | $ | 436,901 | |||||||
See accompanying notes.
4
BROADCOM CORPORATION
| 1. | Summary of Significant Accounting Policies |
| The Company |
Broadcom Corporation (the “Company”) is a leading provider of highly integrated semiconductor solutions that enable broadband communications and networking of voice, video and data services. The Company designs, develops and supplies complete system-on-a-chip (“SOC”) solutions incorporating digital, analog, radio frequency (“RF”), microprocessor and digital signal processing (“DSP”) technologies, as well as related hardware and software system-level applications. The Company’s diverse product portfolio addresses every major broadband communications market and includes solutions for digital cable and satellite set-top boxes; high definition television (“HDTV”); cable and digital subscriber line (“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 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, 2004 and December 31, 2003 and the consolidated results of its operations and cash flows for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for future quarters or 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, 2003, included in the Company’s Annual Report on Form 10-K filed March 15, 2004 with the Securities and Exchange Commission (“SEC”).
| 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 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 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.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
| Revenue Recognition |
The Company’s net revenue is principally generated by sales of its semiconductor products. Such sales represented over 97% of total net revenue in the first quarter of 2004 and 2003. The Company generates the remaining balance of its net revenue mainly from development agreements, software licenses and maintenance agreements, and system-level reference designs.
The vast majority of the Company’s sales occur through its direct sales force. However, the Company derived approximately 7.9% and 8.5% of its total net revenue from sales made through distributors in the first quarter of 2004 and 2003, respectively.
In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”) as well as the recently issued SAB No. 104, Revenue Recognition, the Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (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. 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 return. Product revenue on sales made through these distributors is deferred until the distributors sell the product to end 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 Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contacts (“SOP 81-1”). The costs associated with development agreements are included in cost of revenue. Revenue from licensed software 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. Revenue from cancellation fees is recognized when cash is received from the customer.
| Inventory |
Inventory consists of work in process and finished goods and is stated at the lower of cost (first-in, first-out) or market. The Company establishes inventory 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.
| Rebates |
The Company accounts for rebates in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the 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.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
| Warranty |
The Company’s products typically carry a one to three year warranty. The Company establishes reserves for estimated product warranty costs, based upon its historical warranty experience, at the time revenue is recognized and for any known product warranty issues.
| 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 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 has adopted the disclosure-only alternative of Statement of Financial Accounting Standards (“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 the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net income (loss) and net income (loss) per share 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.
| Three Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2004 | 2003 | |||||||
| (In thousands, except per | ||||||||
| share data) | ||||||||
|
Net income (loss) — as reported
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$ | 39,864 | $ | (67,906 | ) | |||
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Add: Stock-based compensation expense included in
net loss — as reported
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28,428 | 71,612 | ||||||
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Deduct: Stock-based compensation expense
determined under fair value method
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(213,451 | ) | (215,975 | ) | ||||
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Net loss — pro forma
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$ | (145,159 | ) | $ | (212,269 | ) | ||
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Net income (loss) per share (basic) —
as reported
|
$ | .13 | $ | (.25 | ) | |||
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Net income (loss) per share (diluted) —
as reported
|
$ | .12 | $ | (.25 | ) | |||
|
Net loss per share (basic and
diluted) — pro forma
|
$ | (.47 | ) | $ | (.77 | ) | ||
In arriving at an option valuation, the Black-Scholes model considers, among other factors, the expected life of the option and the expected volatility of the Company’s stock price. For pro forma illustration purposes, the estimated fair value of the Company’s stock-based awards to employees is assumed to be amortized over the vesting periods of the underlying instruments.
| 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 consoli-
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
dated 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 March 31, 2004, under the aggregation criteria