e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the fiscal year ended September 30, 2005 |
Commission file number: 000-24923
CONEXANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
25-1799439 |
(State of incorporation) |
|
(I.R.S. Employer
Identification No.) |
|
4000 MacArthur Boulevard
Newport Beach, California
(Address of principal executive offices) |
|
92660-3095
(Zip code) |
Registrants telephone number, including area code:
(949) 483-4600
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 Par Value Per Share
(including associated Preferred Share Purchase Rights)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 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
Registrants 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 check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act). Yes o No þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the Registrants voting stock
held by non-affiliates of the Registrant (based on the closing
price as reported on the Nasdaq National Market on April 1,
2005) was approximately $680 million. Shares of voting
stock held by each officer and director and by each shareowner
affiliated with a director have been excluded from this
calculation because such persons may be deemed to be affiliates.
This determination of officer or affiliate status is not
necessarily a conclusive determination for other purposes. The
number of outstanding shares of the Registrants Common
Stock as of November 25, 2005 was 474,281,719.
Documents Incorporated by Reference
Portions of the Registrants Proxy Statement for the 2006
Annual Meeting of Shareowners to be held on February 22,
2006, are incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains statements
relating to future results of Conexant Systems, Inc.
(including certain projections and business trends) that are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created
by those sections. Our actual results may differ materially from
those projected as a result of certain risks and uncertainties.
These risks and uncertainties include, but are not limited to:
general economic and political conditions and conditions in the
markets we address; the substantial losses we have incurred; the
cyclical nature of the semiconductor industry and the markets
addressed by our products and our customers products;
continuing volatility in the technology sector and the
semiconductor industry; demand for and market acceptance of new
and existing products; successful development of new products;
the timing of new product introductions and product quality; our
ability to anticipate trends and develop products for which
there will be market demand; the availability of manufacturing
capacity; pricing pressures and other competitive factors;
changes in product mix; product obsolescence; the ability of our
customers to manage inventory; the ability to develop and
implement new technologies and to obtain protection for the
related intellectual property; the uncertainties of litigation
and the demands it may place on the time and attention of our
management; and possible disruptions in commerce related to
terrorist activity or armed conflict, as well as other risks and
uncertainties, including those set forth herein and those
detailed from time to time in our other Securities and Exchange
Commission filings. These forward-looking statements are made
only as of the date hereof, and we undertake no obligation to
update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
i
PART I
General
Conexant Systems, Inc. (we, Conexant or the Company) designs,
develops and sells semiconductor system solutions, comprised of
semiconductor devices, software and reference designs, for use
in broadband communications applications that enable high-speed
transmission, processing and distribution of audio, video, voice
and data to and throughout homes and business enterprises
worldwide. The Companys access solutions connect people
through personal communications access products such as personal
computers (PCs), television set-top boxes and game consoles to
audio, video, voice and data services over wireless and wire
line broadband connections as well as over dial-up Internet
connections. The Companys central office solutions are
used by service providers to deliver high-speed audio, video,
voice and data services over copper telephone lines and optical
fiber networks to homes and businesses around the globe. In
addition, the Companys media processing products enable
the capture, display, storage, playback and transfer of audio
and video content in applications throughout home and small
office environments. The Company operates in one reportable
segment (see Notes 1 and 17 of Notes to Consolidated
Financial Statements).
On February 27, 2004, we completed our merger with
GlobespanVirata, Inc. (GlobespanVirata) with GlobespanVirata
becoming a wholly-owned subsidiary of the Company. For
accounting purposes, the transaction was accounted for under the
purchase method of accounting with the Company as the acquirer.
In exchange for 100% of the outstanding shares of common stock
of GlobespanVirata (approximately 150.7 million shares), we
issued 1.198 shares of Conexant common stock for each share
of GlobespanVirata common stock outstanding (or approximately
180.6 million shares of Conexant common stock) and each
outstanding option and warrant to purchase GlobespanVirata
common stock was adjusted and converted into an option or
warrant to purchase Conexant common stock based on the 1.198
merger ratio (or approximately 43.6 million options and
warrants to purchase shares of Conexant common stock). In May
2004, the GlobespanVirata, Inc. subsidiary was renamed Conexant,
Inc., and hereinafter will be referred to as Conexant, Inc., and
the overall business combination is hereinafter referred to as
the Merger.
On June 27, 2003, we completed the distribution to our
shareholders of all outstanding shares of our wholly owned
subsidiary Mindspeed Technologies, Inc. (Mindspeed), to which we
contributed our Internet infrastructure business, including the
stock of certain subsidiaries, and certain other assets and
liabilities, including $100.0 million in cash (hereinafter,
the Mindspeed Spin). In the Mindspeed Spin, Conexant
shareholders received one share of Mindspeed common stock for
every three Conexant shares held and the Conexant shareholders
continued to hold their Conexant shares. Mindspeed issued us a
warrant to purchase 30 million shares of Mindspeed
common stock, representing approximately 20 percent of
Mindspeeds outstanding common stock on a fully diluted
basis. The warrant is exercisable until June 27, 2013 at an
exercise price of $3.408 per share. The fair value of the
warrant is recorded as an asset on our consolidated balance
sheet. Additionally, we entered into a senior secured revolving
credit facility pursuant to which Mindspeed could have borrowed
up to $50.0 million, subject to certain restrictions, for
working capital and general corporate purposes. In December
2004, the Mindspeed credit facility was terminated (see
Note 11 of Notes to Consolidated Financial Statements).
On June 25, 2002, we completed the distribution to our
shareholders of outstanding shares of our wholly owned
subsidiary Washington Sub, Inc. (Washington), to which we
contributed our wireless communications business, other than
certain assets and liabilities which we retained. Immediately
thereafter, Washington merged with and into Alpha Industries,
Inc. (Alpha), with Alpha the surviving corporation. As a result
of these transactions, Conexant shareholders received 0.351 of a
share of Alpha common stock for each Conexant share held and the
Conexant shareholders continued to hold their Conexant shares.
Upon completion of these events, Alpha and its subsidiaries
purchased our semiconductor assembly and test facility located
in Mexicali, Mexico and our package design team that supports
the Mexicali facility (together, the Mexicali Operations) for
$150.0 million. Effective June 26, 2002, Alpha changed
its name to Skyworks
1
Solutions, Inc. (Skyworks). All these transactions, on a
combined basis, are hereinafter referred to as the Skyworks Spin.
In March 2002, we and The Carlyle Group formed a new specialty
foundry company named Jazz Semiconductor, Inc. (Jazz). We
contributed our Newport Beach, California wafer fabrication
operations and related assets and liabilities and certain
intellectual property to Jazz in exchange for $19.3 million
in cash and a 45% equity interest in Jazz, having an estimated
fair value of $42.5 million. In fiscal 2003, another party
made an additional investment in Jazz thereby reducing our
equity interest to 38%.
Except where otherwise noted, the financial information
contained herein represents our continuing operations, excluding
the discontinued wireless communications business, Mexicali
Operations and the Mindspeed business, and including the results
of operations of GlobespanVirata since February 28, 2004,
following the completion of the Merger.
Our Business
We design, develop and sell semiconductor system solutions for
use in broadband communications, enterprise networks and digital
home networks worldwide. Our expertise in mixed-signal
processing, digital signal processing (DSP) and
standards-based communications protocol implementation allows us
to deliver semiconductor devices and integrated systems for
client, or end-customer, personal communications access
products. These products include PCs and PC peripheral products,
television set-top boxes, residential gateways, game consoles,
point-of-sale (POS) terminals, multi-function peripherals
(MFPs) and other types of consumer and enterprise products.
These communications access end-products connect to audio,
video, voice and data services over broadband wireline
communications networks, including digital subscriber line
(DSL), cable and Ethernet, over dial-up Internet connections,
over wireless local area networks and over direct broadcast
satellite, terrestrial and fixed wireless systems. We also
design, develop and sell semiconductor system solutions used in
telecommunications company central office (CO) equipment,
primarily in DSL access multiplexers (DSLAMs).
We organize our product lines to address four primary
communications end-markets. First, our broadband access products
include a comprehensive portfolio of DSL products designed for
customer premises equipment (CPE) and CO applications in
addition to products designed for emerging passive optical
network (PON) applications. Second, our broadband media
processing products include a variety of broadcast audio and
video decoder and encoder devices as well as front-end
communications components that enable the capture, display,
storage, playback and transfer of audio and video content in
digital home and small office products such as PCs, television
set-top boxes, gaming consoles, personal video recorders and
digital versatile disk (DVD) applications. Third, our
universal and voice access products include a broad portfolio of
analog modem chipsets and software for desktop and notebook PC
applications as well as embedded equipment applications,
including fax machines, MFPs, POS terminals, television set-top
boxes, gaming consoles and Internet terminals. This product area
also includes our voice-over-Internet protocol (VoIP) products
designed to accommodate the transmission of voice traffic within
broadband IP packet-based networks. And fourth, our wireless
networking products include various combinations of radio
frequency (RF) transceivers, analog base-band integrated
circuits and digital base-band and medium or media access
controller (MAC) chips that comply with the various
configurations of the 802.11 wireless local area networking
(WLAN) standard.
The following is a brief description of each of our target
markets and the silicon solutions that we provide for each
market.
|
|
|
Broadband Access Products |
DSL technologies enable broadband data traffic over twisted pair
copper telephone lines. Actual DSL speeds realized by the
consumer range between 128 kilobits per second (kbps) and
100 megabits per second (Mbps). Faster data rates allow local
exchange carriers to provide their customers with an array of
new broadband services, including the transport of high
definition video content in real time.
2
We possess a comprehensive portfolio of standards-based DSL line
codes, including asymmetric DSL (ADSL), symmetric DSL
(SDSL), ADSL2, ADSL2plus and both new versions of
very-high-speed DSL (VDSL and VDSL2), including the unique
configurations of DSL for North America, Europe, Japan and
China. We have shipped nearly 150 million DSL ports to
customers around the globe.
Our DSL product portfolio is comprised of a family of
System-on-Chip (SoC) integrated circuits (ICs) for use in home
and business DSL products that incorporate a combination of
multiple system functions. We offer solutions for both CO and
CPE applications. Our DSL product offerings include various
combinations of digital signal processors, network or
communication processors, integrated software on silicon, and
analog front-end chips, line drivers and reference design guides
to help our customers deploy DSL modems, routers, residential
gateways, and DSLAMs located in telephone service
providers central offices.
Our DSL engineering support includes our advanced software-based
development tools which allow original design manufacturers
(ODMs), service providers and telecom companies to analyze,
configure and troubleshoot their DSL networks remotely, saving
time and expense. Our
ISOStm
software works in combination with our semiconductor devices to
manage data, routing, bridging, switching and protocol
conversions needed to encapsulate and route information packets.
ISOStm
is available on a variety of our platforms, and facilitates the
rapid integration of new features, which enables manufacturers
to streamline the product development process and improve
time-to-market. Additional features of these products include
system management, firewall security, embedded web server,
auto-configuration of DSL services and Universal Plug-and-Play.
We also offer customers a full set of software development tools
including compilers, linkers and other special-purpose tools to
enable the customer to design additional applications.
In May 2005, we introduced our Accelity family of highly
integrated VDSL and VDSL2 CO and CPE semiconductor solutions for
asynchronous transfer mode (ATM) and packet-based DSLAMs
and client-side terminals. VDSL and VDSL2 technologies are
targeted at voice, video and data triple-play
broadband service deployments, remote terminal and fiber
extension applications. VDSL2 technology provides higher
downstream and upstream data rates than ADSL and ADSL2plus, and
longer reach connectivity than VDSL. The Accelity chipset family
is based on industry-standard discrete multi-tone
(DMT) line code technology, and is compliant with the
ratified VDSL2/ G.993.2 standard. According to industry analyst
firm IDC, VDSL integrated circuit (IC) port shipments are
expected to increase from 6.2 million ports in 2003 to
17.8 million ports in 2008, a 23 percent compound
annual growth rate.
In July 2005, we announced our entry into the fiber access
market with our integrated Xenon SoC solution. This new device
is targeted at optical network terminals on the client-side of
broadband passive optical networks (PONs). PONs provide
cost-effective, high-speed last mile broadband
connections to homes and businesses over a fiber optic cable,
and are a significant improvement over coaxial cable or
copper-based connections. The Xenon SoC solution can also be
used in conjunction with our Accelity chipset to provide
fiber-to-the-neighborhood, enabling the cost-effective delivery
of triple-play services. Xenon is the first in a
planned family of PON devices. Xenon supports downstream data
rates of 622 Mbps and upstream rates of 155 Mbps. An
optimized version for multiple dwelling unit applications
provides 25 percent greater throughput.
In October 2005, we introduced a new ADSL2plus chipset for
client-side gateway applications. Key features of the new device
include an integrated two-channel VoIP processor and dual
high-speed USB 2.0 interfaces that can be used to attach
peripherals such as WLAN devices, storage products, printers and
Web-based digital cameras directly to the DSL gateway. In
addition, the chipset is upgradeable to VDSL/ VDSL2 technology,
allowing manufacturers to maximize their engineering and
software investments while migrating to new DSL technologies.
This device is targeted at products including DSL
bridge/routers, wireless DSL routers, and DSL VoIP integrated
access devices (IADs).
|
|
|
Broadband Media Processing Products |
MPEG is a set of international digital video and audio
compression standards and file formats, and is one of the
enabling technologies for broadband multimedia delivery. There
are three major MPEG standards: MPEG-1, MPEG-2 and MPEG-4.
MPEG-4 AVC/ H.264 (also known as MPEG-4 Part 10) codecs
provide
3
compression performance that delivers more than 50 percent
greater efficiency than MPEG-2. This allows service providers to
maximize bandwidth usage and efficiently deliver sophisticated
programs containing audio, video, text, graphics and
interactivity to their subscribers. The technology has gained
wide support recently in satellite TV, IP video, video
telephony, high definition DVD and wireless consumer electronics
applications, and is emerging as the next major technology of
choice for television video transmission and storage
applications as the demand for high definition television (HDTV)
services and content rapidly increases.
Our broadband media processing product offerings include devices
and system-level solutions for the television set-top box market
as well as products for other convergence video applications.
|
|
|
Set-top Box (STB) Products |
In the STB family, we offer an extensive portfolio of components
and system level solutions enabling digital cable, satellite and
terrestrial STBs. Our product offerings include silicon tuners,
satellite demodulators, MPEG audio and video decoders, and
dial-up modems for back-channel applications. Reference designs
that help manufacturers reduce cost and speed time-to-market are
also offered, bundled with a range of operating systems,
middleware, drivers and development tools.
A typical STB is comprised of front-end components and back-end
components. Among the front-end components, sometimes referred
to as the communications portion of the design, tuners and
demodulators are employed to receive and prepare audio and video
signals from a satellite, cable or terrestrial network and
back-channel modems are used to communicate with the service
provider. In the back-end, integrated MPEG decoders are
designed to process the audio and video signals and to control
the STB application software while video encoders format the
video signal for display on either an analog or digital
television.
We built upon our customer relationships established through our
leadership in satellite front-end products to gain our first
back-end product design wins in fiscal 2004. We introduced and
began shipments of our new single-chip solution that
incorporated demodulation, MPEG processing, audio and video
outputs, graphic processing, back-channel communications
capability and a control processor. Combined with one of our
silicon tuner devices, this product offers a complete
cost-effective STB solution for satellite, cable and terrestrial
networks.
Our cable modem product portfolio includes our single-package
cable modem solution containing an embedded microprocessor-based
media access controller for North American Data Over Cable
Service Interface Specification (DOCSIS), European DOCSIS and
digital video broadcasting (DVB) applications. Our cable
modem products are DOCSIS 1.0, DOCSIS 1.1, and DOCSIS 2.0
compliant. We also offer a single-chip silicon-based digital
tuner, which supports both DOCSIS and DVB/ Digital Audio Visual
Council (DAVIC) standards for computer cable modems and
set-top boxes. This device interfaces seamlessly with our
digital cable transceiver solutions. Our cable modem technology
is capable of delivering data, video, telephone and Internet
access over existing coaxial cable networks at speeds up to
1,000 times faster than a standard voiceband analog modem. In
addition, our product supports the PCI, USB and Ethernet
interfaces for connection with a PC and our customers have used
this solution to successfully complete the rigorous
North American CableLabs and European tComLabs
certifications. These certifications give consumers and cable
operators the assurance that systems comply with DOCSIS
specifications and will be interoperable among multiple cable
modem vendors.
In late November 2004, we introduced a family of next-generation
MPEG-4 AVC/ H.264 video decoders for high-definition digital
broadcast television systems. This family of decoders enables
digital broadcast TV service providers to improve bandwidth
utilization, allowing the cost-effective delivery of a wider
range of video, voice, and data broadcast programming. H.264
compression provides greater recording capacity on STBs with
personal video recording capabilities, increases the number of
HDTV channels that a broadcaster can transmit, and enables live
broadcast-quality video content over the Internet.
In June 2005, we introduced our dual-channel RF satellite tuner.
This low-power, direct down conversion device is intended for
high-volume STB receivers used for personal and digital video
recording (PVR/ DVR)
4
applications. The highly integrated device supports 8PSK and
DVB-S2 advanced modulation and coding specifications, which
provide satellite operators with higher data rates and increased
capacity to deliver additional HDTV channels and services using
existing bandwidth and infrastructure. The dual-channel tuner
can also be used with our advanced modulation satellite
demodulators to provide a complete front- and back-end system
solution.
In June 2005, we also announced that our cumulative global
shipments of satellite tuners and demodulators surpassed the
120 million unit milestone.
In August 2005, we introduced a new family of DVB decoders for
mass market free-to-air (FTA) satellite STBs. The new SoC
decoders offer higher levels of integration and performance, and
include options for both basic and advanced functionality which
allow manufacturers and broadcasters to address a wider range of
markets and end-user demands. As an illustration, each device
within this new family of products includes an integrated
high-speed data port that easily interfaces to a variety of
broadband front-ends, allowing the decoders to serve as a common
back-end platform for terrestrial and cable services. This
flexibility provides manufacturers with economies of scale as
they can leverage a single device across multiple product
offerings. According to industry analyst firm InStat, the
worldwide market for FTA satellite STBs alone is projected to
grow to 46 million units per year in 2009.
|
|
|
Convergence Video Products |
In our convergence video family, our digital video encoder ICs
provide a combination of features, video performance and
flexibility for todays PC video, DVD and other consumer
video system products. These video encoder ICs convert digital
video stored on DVDs or on other digital media into the analog
signals which drive both standard and high definition
televisions. In addition, our line of stand-alone video decoders
and integrated PCI video decoders combine worldwide video
standard support, integration and software support. Our analog
video decoders are designed to convert analog signals received
by a set-top box, PC video system or other consumer electronic
analog video device into digital streams that can be displayed
by a digital video monitor or saved using a form of digital
recording media.
In December 2004, we launched a new MPEG-2 audio/video (A/ V)
encoder for consumer electronic products including Media Center
and entertainment personal computers, television STBs, digital
television sets and video recording/editing products such as
DVDs and PVRs. Our new A/ V encoder builds on our existing
platform and delivers improved audio and video performance for a
broad range of products commonly found in todays digital
home. Our new encoder accepts analog and digital video and audio
in a variety of formats and encodes the input using MPEG
algorithms to reduce the overall size and bandwidth of the
A/V signals, enabling storage of high-quality video and
audio on computers and other digital consumer electronics
devices. The new encoder includes several features to ensure
high-fidelity audio and superior video.
We believe our analog video decoder and A/ V decoder families
provide substantial quality advances in audio and video,
enabling the next generation of high-fidelity video and PC
products for the digital home.
|
|
|
Universal and Voice Access Products |
We have a long history of technological innovation and
leadership in modem technology, including the development of the
worlds first analog modem chip. Dial-up technology, using
the ordinary twisted pair copper telephone wire that connects
many home and business computers to the telephone company,
continues to be the worlds most ubiquitous Internet
connectivity option and it is a practical choice for
applications where high-speed connectivity is not available or a
necessity.
Our analog modem chipsets connect hundreds of millions of users
worldwide to the Internet through their desktop and notebook
PCs, and are also embedded in a host of products including fax
machines, MFPs, POS terminals, television STBs, personal digital
assistants (PDAs), and Internet appliances including
Internet-connected televisions, digital picture frames, gaming
consoles and web phones.
Our dial-up modem chipset offering encompasses all major
industry standards established by the International
Telecommunication Union (ITU) including V.22, V.22 bis,
V.32 V.34, V.44, and the
5
two 56 Kbps standards, V.90 and V.92. We supply
mixed-signal intensive, controllerless modem chipsets and
software modem solutions that take advantage of the increasing
power of PC central processors and use software to perform
functions traditionally enabled by semiconductor components.
Data bus architectures supported include the HD audio bus, PCI
bus, USB, RS-232, and audio/modem chipsets that support audio
codec (AC)-Link. Building on our expertise in modem technology,
we believe we are the only supplier shipping integrated modem
and audio combination solutions to meet the broader needs of our
customers and the industry.
In June 2005, we announced that our cumulative shipments of
dial-up modems surpassed the 750 million unit milestone.
Voice over Internet protocol (VoIP) technology enables telecom
carriers to move their voice services away from traditional
circuit-switched networks to packet-based networks, thereby
reducing operational costs and providing a lower cost
alternative to traditional telephone services. Industry analyst
firm IDC expects the VoIP semiconductor market to grow from
$352 million in 2004 to $1.7 billion in 2008. Market
drivers include increased VoIP functionality in DSL and cable
modem customer premise equipment, and increased demand for IP
phones and private branch exchanges (PBXs).
We have a long heritage in voice band processing and hold an
extensive intellectual property portfolio in voice processing
and coding technology. Our field-proven voice technology has
enabled more than 100 million voice/data modems, and has
been incorporated in millions of voice ports and wireless
cellular telephones.
In January 2005, we introduced a new suite of voice coprocessors
for consumer and small-to-medium business applications developed
using our voice band processing expertise. Targeted applications
include VoIP phones, analog terminal adaptors (ATAs), DSL voice
routers, IADs, and multi-tenant unit/multi-dwelling unit (MTU/
MDU) voice and data systems. These coprocessors have also been
specifically designed to efficiently work in conjunction with
our DSL semiconductor solutions and home network processors to
create comprehensive system solutions for VoIP-capable
terminals. And in September 2005, we introduced the first in a
family of single-chip integrated VoIP phone solutions targeted
at IP- and Web-based desktop phone terminals for business and
residential applications.
Future products are expected to focus on delivering modular,
combination products that leverage our WLAN, video and DSL
product portfolios in order to address converged voice, video,
and data triple play broadband market opportunities.
|
|
|
Wireless Networking Products |
We offer an extensive suite of WLAN solutions including
802.11a/b/g and dual-band (2.4 and 5 GHz) chipsets,
firmware, software, drivers and reference designs. These
wireless networking solutions are used by the worlds
leading telecom, networking and computer companies in a wide
range of products including access points/routers, client cards,
desktops, notebooks, PDAs, digital cameras, MP3 players and
other hand-held networking appliances. They are available as
standalone solutions or offered in conjunction with our DSL and
cable modem semiconductor system solutions, VoIP chipsets and
home network processors.
Our product offerings include various combinations of RF
transceivers, analog base-band integrated circuits and digital
base-band and medium or MAC chips and reference design guides.
Many of our chipsets utilize common circuit blocks that leverage
our overall product development resources and expedite our
overall time to market. We offer a wide variety of wireless
networking chipsets and reference designs that are enabling a
new generation of wireless connectivity in notebooks, PDAs,
digital cameras, MP3 players and other handheld networking
appliances.
Our wireless networking products address the complementary
high-growth wireless networking market by offering one of the
industrys most complete lines of the 802.11 wireless
products for all worldwide applications and standards. All
products also adhere to and are certified by the Wi-Fi Alliance
as well as other specialty certifications such as
Microsofts Windows Hardware Quality Labs, Cisco Compatible
Extensions and Wi-Fi Protected Access. With the longest history
of wireless development and deployment, our PRISM®
technology
6
has been widely utilized by industry-leading companies to enable
wireless connectivity in thousands of innovative wireless
networking products since 1996.
In fiscal 2005, we narrowed the market focus for our wireless
networking products to include primarily: 1) embedded WLAN
opportunities in cellular phones and other handheld appliances,
2) converged wireless gateway platforms including either
DSL or cable as the broadband access technology and
3) yet-to-be-released 802.11n next generation technology.
We believe that by limiting our focused efforts to these key
areas, we enhance our opportunities to secure and defend our
design positions and subsequent revenue streams by
differentiating our product performance and support levels when
compared to our competitors.
In May 2005, we introduced the worlds lowest power and
smallest form factor 802.11g WLAN radio for embedded mobile
applications. The single-chip solution is a power-efficient,
compact chip targeted at high performance, battery operated
mobile devices such as multimedia cellular phones, enterprise
handsets, PDAs, and digital cameras. This new device has been
designed into several handset models by one the worlds
largest cellular telephone manufacturers. According to industry
analyst firm InStat, shipments of Wi-Fi enabled cellular
handsets are expected to reach approximately 22 million in
2009, and dual cellular/ WLAN voice handsets are expected to
reach nearly 90 million for the same time period.
We have also developed physical layer (PHY) and analog
front-end (AFE) products to support networking in the home.
We offer a highly integrated, single-chip HomePlug semiconductor
solution for Ethernet bridges, HomePlug wireless bridges and
routers, and a variety of embedded applications such as media
adaptors for PCs. HomePlug powerline technology uses the
existing home electrical wiring to network devices such as PCs,
providing Internet access and home connectivity through power
outlets within the home. And because this solution was designed
using our building block software platform approach, our
HomePlug device can also be combined with our home network
processors, DSL and cable modem solutions to allow designers to
seamlessly incorporate HomePlug technology into a variety of
multi-functional products.
To support the distribution of broadband content throughout the
digital home, known as whole home networking, we offer products
that enable personal communications devices to share data,
voice, audio and video using existing telephone line, coaxial
cable, power line and wireless links. We have developed a
portfolio of home network processors which can be used at the
core of a variety of devices, such as residential gateways, that
consumers may use to access the Internet and share content using
a wide range of existing and emerging connectivity technologies
to link a network of home PCs and peripheral devices. In
addition to connecting broadband services to networks inside the
home, these processors offer processing power sufficient to
implement a full-featured Statefull Packet
Inspection (SPI)-based firewall. The importance of a secure
firewall is greater than ever with the increasing use of
always on Internet access in both the home and small
office environments. The scalable system architecture of our
home network processor product portfolio has also enabled
digital voice terminals for voice-over-internet protocol
applications, internet protocol-media terminals for video
distribution, wireless data networking and other emerging
connectivity applications.
Research and Development
We have significant research, development, engineering and
product design capabilities. At September 30, 2005, we had
approximately 1,780 employees engaged in research and
development activities at multiple design centers worldwide. As
part of our cost reduction initiatives, we shifted product
development resources to lower cost regions during fiscal 2005.
As of September 30, 2005, approximately 47% of our
engineering workforce is located internationally. In particular,
we have increased our engineering headcount in India from
approximately 165 employees to approximately
680 employees since the end of fiscal 2004. We expect to
continue our engineering headcount growth trend in the
Asia-Pacific region. Our design centers provide design
engineering and product application support as well as
after-sales customer service. The design centers are
strategically located around the world to be in close proximity
to our OEM customers and to take advantage of key technical and
engineering talent.
We incurred research and development expenses of
$268.0 million, $240.0 million and $159.4 million
in fiscal 2005, 2004 and 2003, respectively.
7
Manufacturing
In 2002 we contributed our Newport Beach, California wafer
fabrication operations to Jazz, a joint venture in which we hold
a minority ownership, and we contributed our Newbury Park,
California gallium arsenide wafer fabrication facility to
Washington as part of the Skyworks Spin. These transactions
completed our transition to a fully fabless business model.
Under our fabless business model, we no longer operate wafer
fabrication facilities (known as foundries or fabs) and we use
third parties for wafer fabrication services. Our primary wafer
fabrication subcontractors include Taiwan Semiconductor
Manufacturing Corporation (TSMC), United Microelectronics
Corporation (UMC), Jazz, Chartered Semiconductor Manufacturing
(Chartered), and International Business Machines Corporation
(IBM). We use complementary metal-oxide semiconductor
(CMOS) process technology for the majority of our products.
We also use bipolar and bipolar CMOS (BiCMOS) process technology
for certain mixed-signal devices and Silicon Germanium (SiGe)
for RF tuners and wireless transceivers. Our products are
currently fabricated with .5 micron, .35 micron, .25 micron, .18
micron, .15 micron and .13 micron geometry processes. We
continuously evaluate the benefits, on a product by product
basis, of migrating to smaller geometry processes and expect to
migrate certain of our products to 90 nanometer geometry
processes in the near future. We do not have any long-term wafer
supply arrangements.
Our wafer probe testing is conducted by either our wafer
fabrication subcontractors or other independent wafer probe test
subcontractors. Following completion of the wafer probe tests,
the dies are assembled into packages and the finished products
are tested by subcontractors. Our primary wafer assembly and
test subcontractors include Amkor Technology, Advanced
Semiconductor Engineering, Inc. (ASE), and STAT SChipPAC
Ltd. These vendors are located in Taiwan, Korea, Singapore,
China, the Phillipines and Malaysia.
Social and Environmental Responsibility
We share the global concerns about the impact of our products on
our environment and the working conditions under which they are
manufactured. We are committed to ensuring that working
conditions are safe, our employees are treated with respect and
dignity, and that manufacturing processes are environmentally
responsible. We have an internal team to develop a plan to
address and demonstrate our commitment to these issues. The team
recommended and we adopted three key industry standards to
demonstrate our corporate commitment to these global
initiatives: the International Organization for Standardization
(ISO) 14001, Occupational Health and Safety Assessment
Series (OHSAS) 18001 and Electronic Industry Code of
Conduct (EICC). Our goal is to achieve and maintain compliance
to these standards.
Environmental management presents a unique challenge to us and
other fabless semiconductor companies because we do not directly
manufacture semiconductor products and we rely on third party
wafer fabrication, assembly, test and packaging suppliers. Our
approach addresses both work performed both internally by the
company and by our suppliers.
We sought and achieved certification of our environmental
management system with ISO 14001-2004 for our Newport Beach and
San Diego, California sites and have plans to expand this
certification to Red Bank, New Jersey and Palm Bay, Florida
during the 2006 calendar year. We expect to further expand this
compliance to our India operations beginning in 2006 and achieve
certification of all of our key sites in 2007.
All of our key suppliers confirm annually that they are
compliant with ISO 14001 and OHSAS 18001 standards.
We also support the worldwide Lead (Pb)-free, Restriction of
Hazardous Substances (RoHS) and Waste Electrical and Electronic
Equipment (WEEE) environmental initiatives and conform to
industry standard practices wherever practical. We will continue
to qualify and provide Pb-free and RoHS compliant products to
our customers.
8
Our implementation of OHSAS and EICC is in its formative stages.
However, many of our business processes are already compliant
with these standards. We expect to begin self certifying to
these standards for selected sites by the end of calendar year
2006.
Quality and Reliability
Our quality and reliability assurance (Q&RA) systems are
designed to ensure that our products meet our customers
and our internal product performance goals. Our quality
management system achieved ISO 9001-2000 certification at
our Newport Beach, San Diego, Red Bank and Noida, India
facilities and our Reliability Assurance system follows the
appropriate Solid State Technology Association, formerly known
as the Joint Electron Device Engineering Council (JEDEC),
requirements to qualify our products.
Each business unit exercises extensive control during the
definition, development and release to production of new
products. We established a comprehensive set of design control
procedures that: a) determines the quality, reliability and
performance objectives for new products, b) provides
program/project management, resource identification and
facilities; c) ensures verification and validation
activities; d) provides criteria for acceptability; and,
d) clearly defines records that are necessary to provide
confidence of conformity of the processes and resulting product.
We qualify all key suppliers and their manufacturing processes.
Our key suppliers must agree to our quality system requirements,
pass a quality management system audit, and successfully
complete a rigorous reliability test plan (wafer foundries and
assembly subcontractors). We design these qualification
requirements as preventive actions to eliminate the causes and
occurrence of potential nonconformities. These qualification
requirements, reliability test plans, and quality system audits
are appropriate to the impact of the potential problems.
Our qualified wafer foundries and assembly subcontractors are
required to maintain their quality system compliant with ISO
9001:2000, environmental management system compliant with ISO
14001:1996 and their occupational, health and safety management
system compliant with OHSAS 18001:1999. These suppliers
demonstrate these compliances by having their systems registered
with and audited by a third party audit agency accredited
internationally by the Registrar Accreditation Board.
Customers, Marketing and Sales
We market and sell our semiconductor products and system
solutions directly to leading OEMs of communication electronics
products and indirectly through electronic components
distributors. We also sell our products to third-party
electronic manufacturing service providers, who manufacture
products incorporating our semiconductor products for OEMs.
Sales to distributors and resellers accounted for approximately
28% of our fiscal 2005 net revenues. In fiscal 2005, no
customer accounted for 10% or more of our net revenues. Our top
20 customers, which include distributors, accounted for
approximately 64% of our fiscal 2005 net revenues.
Revenues derived from customers located in the Americas, the
Asia-Pacific region and Europe were 12%, 80% and 8%,
respectively, of our net revenues in fiscal 2005. We believe a
portion of the products we sell to OEMs and third-party
manufacturing service providers in the Asia-Pacific region are
ultimately shipped to end markets in the Americas and Europe.
See Note 17 of Notes to Consolidated Financial Statements.
We have a worldwide sales and marketing organization comprised
of approximately 365 employees as of September 30, 2005 in
various domestic and international locations. To complement our
direct sales and customer support efforts, we also sell our
products through independent manufacturers
representatives, distributors and dealers. In addition, our
design and applications engineering staff is actively involved
with customers during all phases of design and production and
provides customer support through our worldwide sales offices,
which are generally in close proximity to customers
facilities.
9
Backlog
Our sales are made primarily pursuant to standard purchase
orders for delivery of products, with such purchase orders
officially acknowledged by us according to our own terms and
conditions. Because industry practice allows customers to cancel
orders with limited advance notice to us prior to shipment, we
believe that backlog as of any particular date may not be
indicative of our future revenue levels.
Competition
The communications semiconductor industry in general, and the
markets in which we compete in particular, are intensely
competitive. We compete worldwide with a number of U.S. and
international suppliers that are both larger and smaller than us
in terms of resources and market share. We anticipate that
additional competitors will enter our markets and expect intense
price and product competition to continue.
We compete primarily with Agere Systems, Inc., Atheros
Communications, Inc., Broadcom Corporation, Centillium
Communications, Inc., Infineon Technologies AG, Intel
Corporation, LSI Logic Corporation, Marvell Technology Group
Ltd., Motorola, Inc., NEC Corporation, Philips Electronics N.V.,
Silicon Laboratories, Inc., STMicroelectronics N.V. and Texas
Instruments Incorporated.
Intellectual Property and Proprietary Rights
We own or license a number of United States and foreign patents
and patent applications related to our products, processes and
technologies. We also cross-license portions of our intellectual
property and are also cross-licensed under a number of
intellectual property portfolios in the industry that are
relevant to our technologies and products. We have filed and
received federal and international trademark registrations of
our Conexant trademarks. In addition, we have registered or
applied to register a number of additional trademarks applicable
to our products. We believe that intellectual property,
including patents, patent applications, licenses and trademarks
are of material importance to our business. In addition to
protecting our proprietary technologies and processes, we
constantly strive to strengthen and enhance our intellectual
property portfolio. We use the portfolio to seek licensing
opportunities, to negotiate cross-licenses with other
intellectual property portfolios, to gain access to intellectual
property of others and to avoid, defend against, or settle
litigation. While in the aggregate our patents, patent
applications, licenses and trademarks are considered important
to our operations, they are not considered of such importance
that the loss or termination of any one of them would materially
affect our business or financial condition.
Environmental Regulation
Federal, state and local requirements relating to the discharge
of substances into the environment, the disposal of hazardous
wastes, and other activities affecting the environment have had,
and will continue to have, an impact on our former manufacturing
operations. To date, compliance with environmental requirements
and resolution of environmental claims have been accomplished
without material effect on our liquidity and capital resources,
competitive position or financial condition. See Certain
Business Risks We may be liable for penalties under
environmental laws, rules and regulations, which could adversely
impact our business.
We believe that any expenditures necessary for the resolution of
environmental claims will not have a material adverse effect on
our liquidity and capital resources, competitive position or
financial condition. We cannot assess the possible effect of
compliance with future requirements.
Cyclicality; Seasonality; Possible Significant Downturns
We operate in a highly cyclical industry. See Certain
Business Risks We operate in the highly cyclical
semiconductor industry, which is subject to significant
downturns.
Sales of certain of our products are subject to seasonal
fluctuation related to the increase in sales of end-user
products which include our products, such as PCs, STBs, game
consoles and facsimile machines, generally associated with the
holiday season in December. Our sales of semiconductor products
and system
10
solutions used in these products generally increase beginning in
August and September and continue at a higher level through the
end of the calendar year. Due to the excess channel inventory
that resulted from lower than expected customer demand, we did
not experience this seasonal demand in fiscal 2004 or in the
first quarter of fiscal 2005.
Employees
As of September 30, 2005, we had approximately 2,400
employees, of which approximately 710 are in India.
Approximately 1,870 of our employees are engineers. None of our
employees are covered by collective bargaining agreements. We
believe our future success will depend in large part upon our
continued ability to attract, motivate, develop and retain
highly skilled and dedicated employees.
Certain Business Risks
Our business, financial condition and operating results can be
impacted by a number of factors, any one of which could cause
our actual results to vary materially from recent results or
from our anticipated future results. Any of these risks could
materially and adversely affect our business, financial
condition and results of operations, which in turn could
materially and adversely affect the price of our common stock or
other securities.
References in this section to Conexants fiscal year refer
to the fiscal year ending on the Friday nearest
September 30 of each year.
|
|
|
We have incurred substantial losses and we anticipate
additional future losses. |
Our net revenues for fiscal 2005 and 2004 were
$722.7 million and $901.9 million, respectively. Our
net losses for fiscal 2005 and 2004 were $176.0 million and
$544.6 million, respectively.
We have implemented a number of expense reduction and
restructuring initiatives to improve our operating cost
structure. The cost reduction initiatives included workforce
reductions, the closure or consolidation of certain facilities
and an increasing shift of product development resources to
lower-cost regions, among other actions. However, these expense
reduction initiatives alone will not return us to profitability.
In order to return to profitability, we must achieve substantial
revenue growth. We cannot assure you as to whether or when we
will return to profitability or whether we will be able to
sustain such profitability, if achieved. In addition, our future
results will be negatively affected by the implementation of new
accounting rules related to the expensing of stock options
commencing in the first quarter of fiscal 2006.
|
|
|
We face a risk that capital needed for our business and to
repay our convertible notes will not be available when we need
it. |
We believe that our existing sources of liquidity together with
cash expected to be generated from product sales will be
sufficient to fund our operations, research and development,
anticipated capital expenditures, working capital and other
financing requirements, including the current portion of our
convertible debt, for at least the next twelve months. However,
we cannot assure you that this will be the case and we may need
to obtain alternate sources of financing in the future. At
September 30, 2005, we have $711.8 million aggregate
principal amount of convertible subordinated notes outstanding,
of which $196.8 million is due in May 2006 and
$515.0 million is due in February 2007. The conversion
prices of the notes are currently substantially in excess of the
market value of our common stock. At September 30, 2005, we
have cash, cash equivalents and marketable securities of
$380.5 million. If we are unable to generate sufficient
cash flows from our operations and realize additional value from
our investments and other assets, we may be unable to meet our
February 2007 debt obligations without additional financing. We
cannot assure you that we will have access to additional sources
of capital, or be able to refinance our debt, on favorable terms
or at all. In periods of a depressed stock price, raising
capital through the equity markets would have a greater effect
on shareholder dilution.
11
Included in our cash, cash equivalents and marketable securities
of $380.5 million as of September 30, 2005 are
6.2 million shares of common stock of Skyworks Solutions,
Inc. valued at $43.4 million. For this equity security
holding, there is risk associated with the overall state of the
stock market, having available buyers for the shares we sell,
and ultimately being able to liquidate the securities at a
favorable price. We cannot assure you that the carrying value of
these assets will ultimately be realized.
In addition, any strategic investments and acquisitions that we
may desire to make to help us grow our business may require
additional capital resources. We cannot assure you that the
capital required to fund these investments and acquisitions will
be available in the future.
|
|
|
We operate in the highly cyclical semiconductor industry,
which is subject to significant downturns. |
The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving technical
standards, short product life cycles and wide fluctuations in
product supply and demand. From time to time these and other
factors, together with changes in general economic conditions,
cause significant upturns and downturns in the industry, and in
our business in particular. Periods of industry downturns have
been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of
average selling prices. These factors have caused substantial
fluctuations in our revenues and results of operations. We have
experienced these cyclical fluctuations in our business in the
past and may experience them in the future.
Demand for our products in each of the communications
electronics end-markets which we address is subject to a unique
set of factors, and a downturn in demand affecting one market
may be more pronounced, or last longer, than a downturn
affecting another of our markets.
|
|
|
Our operating results may be negatively affected by
substantial quarterly and annual fluctuations and market
downturns. |
Our revenues, earnings and other operating results have
fluctuated in the past and our revenues, earnings and other
operating results may fluctuate in the future. These
fluctuations are due to a number of factors, many of which are
beyond our control. These factors include, among others:
|
|
|
|
|
changes in end-user demand for the products manufactured and
sold by our customers; |
|
|
|
the timing of receipt, reduction or cancellation of significant
orders by customers; |
|
|
|
seasonal customer demand; |
|
|
|
the gain or loss of significant customers; |
|
|
|
market acceptance of our products and our customers
products; |
|
|
|
our ability to develop, introduce and market new products and
technologies on a timely basis; |
|
|
|
the timing and extent of product development costs; |
|
|
|
new product and technology introductions by competitors; |
|
|
|
changes in the mix of products we develop and sell; |
|
|
|
fluctuations in manufacturing yields; |
|
|
|
availability and cost of products from our suppliers; |
|
|
|
intellectual property disputes; and |
|
|
|
the effects of competitive pricing pressures, including
decreases in average selling prices of our products. |
The foregoing factors are difficult to forecast, and these as
well as other factors could materially adversely affect our
quarterly or annual operating results.
12
|
|
|
We are subject to intense competition. |
The communications semiconductor industry in general and the
markets in which we compete in particular are intensely
competitive. We compete worldwide with a number of United States
and international semiconductor providers that are both larger
and smaller than us in terms of resources and market share. We
currently face significant competition in our markets and expect
that intense price and product competition will continue. This
competition has resulted in and is expected to continue to
result in declining average selling prices for our products. We
also anticipate that additional competitors will enter our
markets as a result of expected growth opportunities in
communications electronics, the trend toward global expansion by
foreign and domestic competitors, technological and public
policy changes and relatively low barriers to entry in certain
markets of the industry. Moreover, as with many companies in the
semiconductor industry, customers for certain of our products
offer other products that compete with similar products offered
by us. Many of our competitors have certain advantages over us,
such as significantly greater sales and marketing,
manufacturing, distribution, technical and other resources.
We believe that the principal competitive factors for
semiconductor suppliers in our addressed markets are:
|
|
|
|
|
time-to-market; |
|
|
|
product quality, reliability and performance; |
|
|
|
level of integration; |
|
|
|
price and total system cost; |
|
|
|
compliance with industry standards; |
|
|
|
design and engineering capabilities; |
|
|
|
strategic relationships with customers; |
|
|
|
customer support; |
|
|
|
new product innovation; and |
|
|
|
access to manufacturing capacity. |
We cannot assure you that we will be able to successfully
address these factors.
Current and potential competitors also have established or may
establish financial or strategic relationships among themselves
or with our existing or potential customers, resellers or other
third parties. These relationships may affect customers
purchasing decisions. Accordingly, it is possible that new
competitors or alliances could emerge and rapidly acquire
significant market share. We cannot assure you that we will be
able to compete successfully against current and potential
competitors.
|
|
|
The loss of a key customer could seriously impact our
revenue levels 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 twenty largest customers represented approximately
64% and 59% of our net revenue in fiscal 2005 and 2004,
respectively. We expect that our largest customers will continue
to account for a substantial portion of our net revenue in
future periods. The identities of our largest customers and
their respective contributions to our net revenue have varied
and will likely continue to vary from period to period. We may
not
13
be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:
|
|
|
|
|
most of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty; |
|
|
|
our agreements with our customers typically do not require them
to purchase a minimum quantity of our products; |
|
|
|
many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products; |
|
|
|
our customers face intense competition from other manufacturers
that do not use our products; and |
|
|
|
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. 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.
|
|
|
Our success depends on our ability to timely develop
competitive new products and reduce costs. |
Our operating results will depend largely on our ability to
continue to introduce new and enhanced semiconductor products on
a timely basis. Successful product development and introduction
depends on numerous factors, including, among others:
|
|
|
|
|
our ability to anticipate customer and market requirements and
changes in technology and industry standards; |
|
|
|
our ability to accurately define new products; |
|
|
|
our ability to timely complete development of new products and
bring our products to market on a timely basis; |
|
|
|
our ability to differentiate our products from offerings of our
competitors; |
|
|
|
overall market acceptance of our products; |
|
|
|
our ability to invest in significant amounts of research and
development; and |
|
|
|
our ability to transition product development efforts between
and among our sites, particularly into India and China. |
As a result of the Paxonet Communications acquisition in
December 2004 and organic growth, we have increased our
headcount in India from approximately 180 employees to
approximately 710 employees at several design centers since the
end of fiscal 2004. We plan to continue this growth trend in
India and other international locations in the Asia-Pacific
region. Expansion and transition of product development efforts
to other locations entails risks associated with our ability to
manage the development of products at remote geographic
locations, to achieve key program milestones, and to attract and
retain qualified management, technical and other personnel
necessary for the design and development of our products. If we
experience product design or development delays as a result of
the transition, or an inability to adequately staff the
programs, there could be a material adverse effect on our
results of operations.
We cannot assure you that we will have sufficient resources to
make the substantial investment in research and development in
order to develop and bring to market new and enhanced products.
Furthermore, we are required to continually evaluate
expenditures for planned product development and to choose among
alternative technologies based on our expectations of future
market growth. We cannot assure you that we will be able to
develop and introduce new or enhanced products in a timely and
cost-effective manner, that our products will satisfy customer
requirements or achieve market acceptance, or that we will be
able to anticipate new industry standards and technological
changes. We also cannot assure you that we will be able to
respond successfully to new product announcements and
introductions by competitors.
14
In addition, prices of established products may decline,
sometimes significantly and rapidly, over time. We believe that
in order to remain competitive we must continue to reduce the
cost of producing and delivering existing products at the same
time that we develop and introduce new or enhanced products. We
cannot assure you that we will be successful and as a result
gross margins may decline in future periods.
|
|
|
Our success depends, in part, on our ability to effect
suitable investments, alliances and acquisitions. |
Although we invest significant resources in research and
development activities, the complexity and speed of
technological changes make it impractical for us to pursue
development of all technological solutions on our own. On an
ongoing basis, we review investment, alliance and acquisition
prospects that would complement our existing product offerings,
augment our market coverage or enhance our technological
capabilities. However, we cannot assure you that we will be able
to identify and consummate suitable investment, alliance or
acquisition transactions in the future.
Moreover, if we consummate such transactions, they could result
in:
|
|
|
|
|
issuances of equity securities dilutive to our existing
shareholders; |
|
|
|
large initial one-time write-offs of in-process research and
development; |
|
|
|
the incurrence of substantial debt and assumption of unknown
liabilities; |
|
|
|
the potential loss of key employees from the acquired company; |
|
|
|
amortization expenses related to intangible assets; and |
|
|
|
the diversion of managements attention from other business
concerns. |
Additionally, in periods subsequent to an acquisition, at least
on an annual basis or when indicators of impairment exist, we
must evaluate goodwill and acquisition-related intangible assets
for impairment. When such assets are found to be impaired, they
will be written down to estimated fair value, with a charge
against earnings. At September 30, 2005, we have
$717.0 million of goodwill, of which approximately
$625.2 million was generated in the Merger. When market
capitalization is below book value, it is an indicator that
goodwill may be impaired. Our market capitalization has been
below book value in the past but was above our book value at
September 30, 2005. We performed our annual evaluation of
goodwill and have determined that no impairment was required.
However, if our market capitalization drops below our book value
for a prolonged period of time, or our current assumptions
regarding our future operating performance changes, we may be
required to write down the value of our goodwill by taking a
non-cash charge against earnings.
Integrating acquired organizations and their products and
services may be expensive, time-consuming and a strain on our
resources and our relationships with employees and customers,
and ultimately may not be successful. The process of integrating
operations could cause an interruption of, or loss of momentum
in, the activities of one or more of our product lines and the
loss of key personnel. The diversion of managements
attention and any delays or difficulties encountered in
connection with acquisitions and the integration of multiple
operations could have an adverse effect on our business, results
of operations or financial condition.
|
|
|
The value of our common stock may be adversely affected by
market volatility. |
The trading price of our common stock fluctuates significantly
and may be influenced by many factors, including:
|
|
|
|
|
our operating and financial performance and prospects; |
|
|
|
our ability to repay our debt; |
|
|
|
the depth and liquidity of the market for our common stock; |
|
|
|
investor perception of us and the industry and markets in which
we operate; |
|
|
|
our inclusion in, or removal from, any equity market indices; |
|
|
|
the level of research coverage of our common stock; |
|
|
|
changes in earnings estimates or buy/sell recommendations by
analysts; and |
15
|
|
|
|
|
general financial, domestic, international, economic and other
market conditions. |
In addition, public stock markets have experienced, and are
currently experiencing, price and trading volume volatility,
particularly in the technology sectors of the market. This
volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently
unrelated to or disproportionately impacted by the operating
performance of these companies. These broad market fluctuations
may adversely affect the market price of our common stock.
|
|
|
We are subject to the risks of doing business
internationally. |
For fiscal 2005 and 2004, approximately 90% and 91%,
respectively, of our net revenues were from customers located
outside of the United States, primarily in the Asia-Pacific
region and Europe. In addition, a significant portion of our
workforce, including approximately 710 employees in India, and
many of our key suppliers are located outside the United States.
Our international operations consist of research and
development, sales offices, and other general and administrative
functions. We plan to continue our international expansion,
particularly in the Asia-Pacific region. Our international
operations are subject to a number of risks inherent in
operating abroad. These include, but are not limited to, risks
regarding:
|
|
|
|
|
currency exchange rate fluctuations; |
|
|
|
local economic and political conditions; |
|
|
|
disruptions of commerce and capital or trading markets due to or
related to terrorist activity or armed conflict; |
|
|
|
restrictive governmental actions, such as restrictions on the
transfer or repatriation of funds and trade protection measures,
including export duties and quotas and customs duties and
tariffs; |
|
|
|
changes in legal or regulatory requirements; |
|
|
|
difficulty in obtaining distribution and support; |
|
|
|
the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or
export licensing requirements; |
|
|
|
tax laws, including the cost of services provided and products
sold between Conexant and its subsidiaries which are subject to
review by taxing authorities; and |
|
|
|
limitations on our ability under local laws to protect our
intellectual property. |
Because most of our international sales are currently
denominated in U.S. dollars, our products could become less
competitive in international markets if the value of the
U.S. dollar increases relative to foreign currencies. We
cannot assure you that the factors described above will not have
a material adverse effect on our ability to increase or maintain
our foreign sales.
From time to time, we may enter into foreign currency forward
exchange contracts to minimize risk of loss from currency
exchange rate fluctuations for foreign currency commitments
entered into in the ordinary course of business. We have not
entered into foreign currency forward exchange contracts for
other purposes. Our financial condition and results of
operations could be affected (adversely or favorably) by
currency fluctuations.
We also conduct a significant portion of our international sales
through distributors. Sales to distributors and other resellers
accounted for approximately 28% and 36% of our net revenues for
fiscal 2005 and 2004, respectively. Our arrangements with these
distributors are terminable at any time, and therefore the loss
of these arrangements could have an adverse effect on our
operating results. For those international distributors that we
account for under a deferred revenue recognition model, we rely
on the distributor to provide us timely and accurate product
sell through information. No assurances can be given that these
international distributors will continue to provide us this
information. If we are unable to obtain this information on a
timely basis, or if we determine that the information we do
receive is unreliable, it may affect the accuracy of amounts
recorded in our consolidated financial statements, and therefore
have an adverse effect on our operating results.
16
|
|
|
We may not be able to keep abreast of the rapid
technological changes in our markets. |
The demand for our products can change quickly and in ways we
may not anticipate because our markets generally exhibit the
following characteristics:
|
|
|
|
|
rapid technological developments; |
|
|
|
rapid changes in customer requirements; |
|
|
|
frequent new product introductions and enhancements; |
|
|
|
short product life cycles with declining prices over the life
cycle of the products; and |
|
|
|
evolving industry standards. |
Our products could become obsolete sooner than anticipated
because of a faster than anticipated change in one or more of
the technologies related to our products or in market demand for
products based on a particular technology, particularly due to
the introduction of new technology that represents a substantial
advance over current technology. Currently accepted industry
standards are also subject to change, which may contribute to
the obsolescence of our products.
|
|
|
We may not be able to attract and retain qualified
management, technical and other personnel necessary for the
design, development and sale of our products. Our success could
be negatively affected if key personnel leave. |
Our future success depends on our ability to attract, retain and
motivate qualified personnel, including executive officers and
other key management and technical personnel. As the source of
our technological and product innovations, our key technical
personnel represent a significant asset. The competition for
such personnel can be intense in the semiconductor industry.
While we have entered into employment agreements with some of
our key personnel, we cannot assure you that we will be able to
attract and retain qualified management and other personnel
necessary for the design, development and sale of our products.
We may have particular difficulty attracting and retaining key
personnel during periods of poor operating performance. The loss
of the services of one or more of our key personnel, including
Dwight W. Decker, our Chairman of the Board and Chief Executive
Officer, F. Matthew Rhodes, our President, or certain key design
and technical personnel, or our inability to attract, retain and
motivate qualified personnel could have a material adverse
effect on our ability to operate our business.
|
|
|
If OEMs of communications electronics products do not
design our products into their equipment, we will be unable to
sell those products. Moreover, a design win from a customer does
not guarantee future sales to that customer. |
Our products are not sold directly to the end-user but are
components of other products. As a result, we rely on OEMs of
communications electronics products to select our products from
among alternative offerings to be designed into their equipment.
We may be unable to achieve these design wins.
Without design wins from OEMs, we would be unable to sell our
products. Once an OEM designs another suppliers
semiconductors into one of its product platforms, it will be
more difficult for us to achieve future design wins with that
OEMs product platform because changing suppliers involves
significant cost, time, effort and risk. Achieving a design win
with a customer does not ensure that we will receive significant
revenues from that customer and we may be unable to convert
design wins into actual sales. Even after a design win, the
customer is not obligated to purchase our products and can
choose at any time to stop using our products if, for example,
it or its own products are not commercially successful.
|
|
|
Because of the lengthy sales cycles of many of our
products, we may incur significant expenses before we generate
any revenues related to those products. |
Our customers may need six months or longer to test and evaluate
our products and an additional six months or more to begin
volume production of equipment that incorporates our products.
The lengthy period of time required also increases the
possibility that a customer may decide to cancel or change
product plans,
17
which could reduce or eliminate sales to that customer. As a
result of this lengthy sales cycle, we may incur significant
research and development, and selling, general and
administrative expenses before we generate the related revenues
for these products, and we may never generate the anticipated
revenues if our customer cancels or changes its product plans.
|
|
|
Uncertainties involving the ordering and shipment of our
products could adversely affect our business. |
Our sales are typically made pursuant to individual purchase
orders and we generally do not have long-term supply
arrangements with our customers. Generally, our customers may
cancel orders until 30 days prior to shipment. In addition,
we sell a portion of our products through distributors and other
resellers, some of whom have a right to return unsold products
to us. Sales to distributors and other resellers accounted for
approximately 28% and 36% of our net revenues for fiscal 2005
and 2004, respectively. Our distributors may offer products of
several different suppliers, including products that may be
competitive with ours. Accordingly, there is a risk that the
distributors may give priority to other supplier products and
may not sell our products as quickly as forecasted, which may
impact their future order levels. We routinely purchase
inventory based on estimates of end-market demand for our
customers products, which is difficult to predict. This
difficulty may be compounded when we sell to OEMs indirectly
through distributors and other resellers or contract
manufacturers, or both, as our forecasts of demand are then
based on estimates provided by multiple parties. In addition,
our customers may change their inventory practices on short
notice for any reason. The cancellation or deferral of product
orders, the return of previously sold products or overproduction
due to the failure of anticipated orders to materialize could
result in our holding excess or obsolete inventory, which could
result in write-downs of inventory. For example, the reduced
demand outlook for fiscal year 2005 and the further decline of
average selling prices for certain of our products resulted in
net inventory charges aggregating $44.1 million.
|
|
|
We are dependent upon third parties for the manufacture,
assembly and test of our products. |
We are entirely dependent upon outside wafer fabrication
facilities (known as foundries or fabs). Under our fabless
business model, our revenue growth is dependent on our ability
to obtain sufficient external manufacturing capacity, including
wafer production capacity. If the semiconductor industry
experiences a shortage of wafer fabrication capacity in the
future, we may experience delays in shipments or increased
manufacturing costs. We do not have any long-term supply
arrangements.
There are significant risks associated with our reliance on
third-party foundries, including:
|
|
|
|
|
the lack of assured wafer supply, potential wafer shortages and
higher wafer prices; |
|
|
|
limited control over delivery schedules, manufacturing yields,
production costs and product quality; and |
|
|
|
the unavailability of, or delays in obtaining, access to key
process technologies. |
The foundries we use may allocate their limited capacity to
fulfill the production requirements of other customers that are
larger and better financed than us. If we choose to use a new
foundry, it typically takes several months to redesign our
products for the process technology and intellectual property
cores of the new foundry and to complete the qualification
process before we can begin shipping products from the new
foundry.
We are also dependent upon third parties for the assembly and
test of our products. Our reliance on others to assemble and
test our products subjects us to many of the same risks as are
described herein with respect to our reliance on outside wafer
fabrication facilities.
Wafer fabrication processes are subject to obsolescence, and
foundries may discontinue a wafer fabrication process used for
certain of our products. In such event, we generally offer our
customers a last time buy program to satisfy their
anticipated requirements for our products. The unanticipated
discontinuation of wafer fabrication processes on which we rely
may adversely affect our revenues and our customer relationships.
18
The foundries and other suppliers on whom we rely may experience
financial difficulties or suffer disruptions in their operations
due to causes beyond our control, including labor strikes, work
stoppages, electrical power outages, fire, earthquake, flooding
or other natural disasters. Certain of our suppliers
manufacturing facilities are located near major earthquake fault
lines in California and the Asia-Pacific region. In the event of
a disruption of the operations of one or more of our suppliers,
we may not have a second manufacturing source immediately
available. Such an event could cause significant delays in
shipments until we could shift the products from an affected
facility or supplier to another facility or supplier. The
manufacturing processes we rely on are specialized and are
available from a limited number of suppliers. Alternate sources
of manufacturing capacity, particularly wafer production
capacity, may not be available to us on a timely basis. Even if
alternate wafer production capacity is available, we may not be
able to obtain it on favorable terms, or at all. Difficulties or
delays in securing an adequate supply of our products on
favorable terms, or at all, could impair our ability to meet our
customers requirements and have a material adverse effect
on our operating results.
In addition, the highly complex and technologically demanding
nature of semiconductor manufacturing has caused foundries from
time to time to experience lower than anticipated manufacturing
yields, particularly in connection with the introduction of new
products and the installation and start-up of new process
technologies. Lower than anticipated manufacturing yields may
affect our ability to fulfill our customers demands for
our products on a timely basis. Moreover, lower than anticipated
manufacturing yields may adversely affect our cost of goods sold
and our results of operations.
|
|
|
We may experience difficulties in transitioning to smaller
geometry process technologies or in achieving higher levels of
design integration, which may result in reduced manufacturing
yields, delays in product deliveries and increased
expenses. |
To remain competitive, we expect to continue to transition our
semiconductor products to increasingly smaller line width
geometries. This transition requires us to modify the
manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit
designs that we may use in multiple products. We periodically
evaluate the benefits, on a product-by-product basis, of
migrating to smaller geometry process technologies to reduce our
costs. Currently most of our products are manufactured in .35
micron, .25 micron, .18 micron, .15 micron, and .13 micron
geometry processes. In addition, we expect 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
implement this transition efficiently, 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.
|
|
|
We may be subject to claims of infringement of third-party
intellectual property rights or demands that we license
third-party technology, which could result in significant
expense and loss of our ability to use, make, sell, export or
import our products or one or more components comprising our
products. |
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights. From
time to time, third parties have asserted and may in the future
assert patent, copyright, trademark
19
and other intellectual property rights to technologies that are
important to our business and have demanded and may in the
future demand that we license their patents and technology. Any
litigation to determine the validity of claims that our products
infringe or may infringe these rights, including claims arising
through our contractual indemnification of our customers,
regardless of their merit or resolution, could be costly and
divert the efforts and attention of our management and technical
personnel. We cannot assure you that we would prevail in
litigation given the complex technical issues and inherent
uncertainties in intellectual property litigation. If litigation
results in an adverse ruling we could be required to:
|
|
|
|
|
pay substantial damages; |
|
|
|
cease the manufacture, use or sale of infringing products; |
|
|
|
discontinue the use of infringing technology; |
|
|
|
expend significant resources to develop non-infringing
technology; or |
|
|
|
license technology from the third party claiming infringement,
which license may not be available on commercially reasonable
terms, or at all. |
|
|
|
If we are not successful in protecting our intellectual
property rights, it may harm our ability to compete. |
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as nondisclosure and confidentiality
agreements and other methods, to protect our proprietary
technologies and processes. At times we incorporate the
intellectual property of our customers into our designs, and we
have obligations with respect to the non-use and non-disclosure
of their intellectual property. In the past, we have engaged in
litigation to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope
of proprietary rights of others, including our customers. We may
engage in future litigation on similar grounds, which may
require us to expend significant resources and to divert the
efforts and attention of our management from our business
operations. We cannot assure you that:
|
|
|
|
|
the steps we take to prevent misappropriation or infringement of
our intellectual property or the intellectual property of our
customers will be successful; |
|
|
|
any existing or future patents will not be challenged,
invalidated or circumvented; or |
|
|
|
any of the measures described above would provide meaningful
protection. |
Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use our technology without
authorization, develop similar technology independently or
design around our patents. If any of our patents fails to
protect our technology it would make it easier for our
competitors to offer similar products. In addition, effective
patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain countries.
|
|
|
Uncertainties involving litigation could adversely affect
our business. |
We and certain of our current and former officers and directors
have been sued in several purported securities class action
lawsuits, which have now been consolidated into a single action.
We and certain of our directors and officers have also been sued
in purported shareholder derivative actions. Although we believe
that these lawsuits are without merit, an adverse determination
could have a negative impact on the price of our stock.
Moreover, regardless of the ultimate result, the lawsuits may
divert managements attention and resources from other
matters, which could also adversely affect our business and
results of operations.
|
|
|
We may be liable for penalties under environmental laws,
rules and regulations, which could adversely impact our
business. |
Our former manufacturing operations used a variety of chemicals
and were subject to a wide range of environmental protection
regulations in the United States and Mexico. We have been
designated as a potentially responsible party and are engaged in
groundwater remediation at one Superfund site located at a
former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly
20
occupied by us. In addition, we are engaged in remediations of
groundwater contamination at our former Newport Beach,
California wafer fabrication facility. We currently estimate the
remaining costs for these remediations to be approximately
$2.7 million and have accrued for these costs as of
September 30, 2005.
In the United States, environmental regulations often require
parties to fund remedial action regardless of fault.
Consequently, it is often difficult to estimate the future
impact of environmental matters, including potential
liabilities. While we have not experienced any material adverse
effects on our operations as a result of such regulations, we
cannot assure you that the costs that might be required to
complete remedial actions, if any, will not have a material
adverse effect on our business, financial condition and results
of operations.
|
|
|
We may be limited in the future in the amount of net
operating losses that we can use to offset
taxable income. |
As of September 30, 2005, we had approximately
$1.2 billion of U.S. federal income tax net operating
loss (NOL) carry forwards that can be used to offset
taxable income in subsequent years. Approximately
$440 million of the NOL carry forwards were acquired in the
Merger and other acquisitions. The NOL carry forwards are
scheduled to expire at various dates through 2025.
Section 382 of the Internal Revenue Code could limit the
future use of some or all of the NOL carry forwards if the
ownership of our common stock changes by more than
50 percentage points in certain circumstances over a
three-year testing period. Based on information known to us, we
have not undergone such a change of ownership and the Merger did
not constitute a change of ownership, although the shares of our
common stock issued in the Merger will be taken into account in
any change of ownership computations. Direct or indirect
transfers of our common stock, when taken together with the
shift in ownership resulting from the Merger, could result in a
change of ownership that would trigger the section 382
limitation. If such an ownership change occurs, section 382
would limit our use of NOL carry forwards in each subsequent
taxable year to an amount equal to a federal long-term
tax-exempt rate published by the Internal Revenue Service at the
time of the ownership change, multiplied by our fair market
value at such time; any unused annual limitation amounts may
also be carried forward. The Merger resulted in a change of
ownership of GlobespanVirata and the future use of
GlobespanViratas NOL carry forwards is subject to the
section 382 limitation (or further limitation in the case
of NOL carry forwards already subject to limitation as a result
of previous transactions) based on the fair market value of
GlobespanVirata at the time of the Merger.
|
|
|
Provisions in our organizational documents and rights
agreement and Delaware law may make it difficult for someone to
acquire control of us. |
We have established certain anti-takeover measures that may
affect our common stock and convertible notes. Our restated
certificate of incorporation, our by-laws, our rights agreement
with Mellon Investor Services LLC, as rights agent, dated as of
November 30, 1998, as amended, and the Delaware General
Corporation Law contain several provisions that would make more
difficult an acquisition of control of us in a transaction not
approved by our board of directors. Our restated certificate of
incorporation and by-laws include provisions such as:
|
|
|
|
|
the division of our board of directors into three classes to be
elected on a staggered basis, one class each year; |
|
|
|
the ability of our board of directors to issue shares of our
preferred stock in one or more series without further
authorization of our shareholders; |
|
|
|
a prohibition on shareholder action by written consent; |
|
|
|
a requirement that shareholders provide advance notice of any
shareholder nominations of directors or any proposal of new
business to be considered at any meeting of shareholders; |
|
|
|
a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of
our restated certificate of incorporation or by-laws; |
21
|
|
|
|
|
elimination of the right of shareholders to call a special
meeting of shareholders; and |
|
|
|
a fair price provision. |
Our rights agreement gives our shareholders certain rights that
would substantially increase the cost of acquiring us in a
transaction not approved by our board of directors.
In addition to the rights agreement and the provisions in our
restated certificate of incorporation and by-laws,
Section 203 of the Delaware General Corporation Law
generally provides that a corporation shall not engage in any
business combination with any interested shareholder during the
three-year period following the time that such shareholder
becomes an interested shareholder, unless a majority of the
directors then in office approves either the business
combination or the transaction that results in the shareholder
becoming an interested shareholder or specified shareholder
approval requirements are met.
Executive Officers
Our executive officers are:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Dwight W. Decker
|
|
|
55 |
|
|
Chairman of the Board and Chief Executive Officer |
F. Matthew Rhodes
|
|
|
48 |
|
|
President |
Lewis C. Brewster
|
|
|
41 |
|
|
Executive Vice President and Chief Operating Officer |
J. Scott Blouin
|
|
|
55 |
|
|
Senior Vice President and Chief Financial Officer |
Dennis E. OReilly
|
|
|
61 |
|
|
Senior Vice President, Chief Legal Officer and Secretary |
There are no family relationships among our directors or
executive officers. Set forth below are the name, office and
position held with the Company and principal occupations and
employment during the past 5 years of each of our executive
officers.
Dwight W. Decker Chairman of the Board and
Chief Executive Officer since November 2004; non-executive
Chairman of the Board from February 2004 to November 2004; and
Chairman of the Board and Chief Executive Officer prior thereto.
Mr. Decker received a Ph.D. in applied mathematics from the
California Institute of Technology and a B.Sc. in mathematics
and physics from McGill University.
F. Matthew Rhodes President since June
2003; Senior Vice President and President of our former
Broadband Communications segment from May 2002 to June 2003; and
Senior Vice President and General Manager, Personal Computing
prior thereto. Mr. Rhodes received an M.B.A. from the
Anderson Graduate School of Management of the University of
California, Los Angeles, an M.S. in electrical engineering from
Lehigh University and a B.S. in physics from The Pennsylvania
State University.
Lewis C. Brewster Executive Vice President
and Chief Operating Officer since November 2004; Executive Vice
President, Sales, Operations and Quality from February 2004 to
November 2004; Executive Vice President and Chief Operating
Officer from June 2003 to February 2004; and Senior Vice
President, Worldwide Sales prior thereto. Mr. Brewster
received an M.B.A. from Stanford University and a B.S. in
electrical engineering and biomedical engineering from Duke
University.
J. Scott Blouin Senior Vice President
and Chief Financial Officer since August 2004; Senior Vice
President and Chief Accounting Officer from February 2004 to
August 2004; Senior Vice President and Chief Financial Officer
from June 2003 to February 2004; Senior Vice President, Chief
Accounting Officer and Controller from March 2002 to June 2003;
Senior Vice President and Chief Accounting Officer from January
2001 to March 2002; and Chief Financial Officer of Burr-Brown
Corporation (semiconductors) from February 1996 to August
2000. Mr. Blouin received an M.B.A. from Wake Forest
University and a B.S. in administration from the University of
New Hampshire at Durham.
22
Dennis E. OReilly Senior Vice
President, Chief Legal Officer and Secretary since February
2004; and Senior Vice President, General Counsel and Secretary
prior thereto. Mr. OReilly received a J.D. from
Boston University School of Law and a B.A. from the State
University of New York at Binghamton.
Available Information
We maintain an Internet website at http://www.conexant.com. Our
annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, along with our annual report to shareowners
and other information related to our company, are available free
of charge on this site as soon as reasonably practicable after
we electronically file or furnish these reports with the
Securities and Exchange Commission. Our Internet website and the
information contained therein or connected thereto are not
intended to be incorporated into this Annual Report on
Form 10-K.
Our headquarters in Newport Beach, California consists of
approximately 73,000 square feet of owned space and
approximately 197,000 square feet of leased space. We also
have facilities in San Diego, California which consists of
approximately 160,000 square feet of leased space, Red
Bank, New Jersey which consists of approximately
100,000 square feet of leased space, and Palm Bay, Florida
which consists of approximately 26,000 square feet of
leased space.
Activities at all the above locations include administration,
sales and marketing, research and development (including design
centers) and operations functions.
We also own a facility in Noida, India with approximately
23,000 square feet of space and lease additional facilities
in India which consist of approximately 173,000 square feet
of leased space.
At September 30, 2005, we also operated in an additional 11
domestic and 17 international offices. These facilities had an
aggregate of approximately 146,000 square feet of leased
floor space.
As a result of our reorganization and various restructuring
related activities, at September 30, 2005 we have an
additional 731,000 square feet of leased space and
383,000 square feet of owned space, of which approximately
77% is being subleased or leased to third parties. We lease
380,000 square feet of owned space at our Newport Beach
location to Jazz and 3,000 square feet of owned floor space
at our Newport Beach facility to Skyworks. We also sublease
176,000 square feet at our Newport Beach facility to
Mindspeed.
We believe our properties have been well maintained, are in
sound operating condition and contain all the equipment and
facilities necessary to operate at present levels. Our
California facilities, including one of our design centers, are
located near major earthquake fault lines. We maintain no
earthquake insurance with respect to these facilities. Certain
of our facilities are located in countries that may experience
civil unrest.
|
|
Item 3. |
Legal Proceedings |
IPO Litigation. In November 2001, Collegeware
Asset Management, LP, on behalf of itself and a putative class
of persons who purchased the common stock of GlobeSpan, Inc.,
(GlobeSpan, Inc. later became GlobespanVirata, Inc., and is now
our Conexant, Inc. subsidiary) between June 23, 1999 and
December 6, 2000, filed a complaint in the
U.S. District Court for the Southern District of New York
alleging violations of federal securities laws by the
underwriters of GlobeSpan, Inc.s initial and secondary
public offerings as well as by certain GlobeSpan, Inc. officers
and directors. The complaint alleges that the defendants
violated federal securities laws by issuing and selling
GlobeSpan, Inc.s common stock in the initial and secondary
offerings without disclosing to investors that the underwriters
had (1) solicited and received undisclosed and excessive
commissions or other compensation and (2) entered into
agreements requiring certain of their customers to purchase the
stock in the aftermarket at escalating prices. The complaint
seeks unspecified damages. The complaint was consolidated with
class actions against approximately 300 other companies making
similar allegations regarding the public offerings of those
companies during 1998 through 2000. In June 2003, Conexant, Inc.
and the named officers and directors entered into a memorandum of
23
understanding outlining a settlement agreement with the
plaintiffs that will, among other things, result in the
dismissal with prejudice of all the claims against the former
GlobeSpan, Inc. officers and directors. The final settlement was
executed in June 2004. On February 15, 2005, the Court
issued a decision certifying a class action for settlement
purposes and granting preliminary approval of the settlement,
subject to modification of certain bar orders contemplated by
the settlement. The bar orders have since been modified. The
settlement remains subject to a number of conditions and final
approval. It is possible that the settlement will not be
approved. Even if the settlement is approved, individual class
members will have an opportunity to opt out of the class and to
file their own lawsuits, and some may do so. In either event, we
do not anticipate that the ultimate outcome of this litigation
will have a material adverse impact on our financial condition,
results of operations, or cash flows.
Texas Instruments, Inc. Our Conexant, Inc.
subsidiary has been involved in a dispute with Texas
Instruments, Inc. (Texas Instruments) and Stanford University
and its Board of Trustees, and Stanford University OTL, LLC
(Stanford)(and collectively, the Defendants) over a group of
patents (and related foreign patents) that Texas Instruments
alleges are essential to certain industry standards for
implementing ADSL technology. On June 12, 2003, Conexant,
Inc. filed a complaint against Texas Instruments, Stanford
University and its Board of Trustees, and Stanford University
OTL, LLC (collectively, the Defendants) in the
U.S. District Court of New Jersey. The complaint asserts,
among other things, that the Defendants have violated the
antitrust laws by creating an illegal patent pool, by
manipulating the patent process and by abusing the process for
setting industry standards related to ADSL technology. The
complaint also asserts that the Defendants patents
relating to ADSL are unenforceable, invalid and/or not infringed
by Conexant, Inc. products. Conexant, Inc. is seeking, among
other things, (i) a finding that the Defendants have
violated the federal antitrust laws and treble damages based
upon such a finding, (ii) an injunction prohibiting the
Defendants from engaging in anticompetitive practices,
(iii) a declaratory judgment that the claims of the
Defendants ADSL patents are invalid, unenforceable, void,
and/or not infringed by Conexant, Inc. and (iv) an
injunction prohibiting the Defendants from pursuing patent
litigation against Conexant, Inc. and its customers. On
August 11, 2003 and September 9, 2003, the Defendants
answered the complaint, denied Conexant, Inc.s claims and
filed counterclaims alleging that Conexant, Inc. has infringed
certain of their ADSL patents. In addition to other relief, the
Defendants are seeking to collect damages for alleged past
infringement and to enjoin Conexant, Inc. from continuing to use
the Defendants ADSL patents. The case has been bifurcated
into a patent module and an antitrust module, with the patent
module being tried first. Trial on the patent module will
commence on January 4, 2006 in the U.S. District Court of
New Jersey. Although we believe that Conexant, Inc. has strong
arguments in favor of its position in this dispute, we can give
no assurance that Conexant, Inc. will prevail on any of these
grounds in litigation. If any such litigation is adversely
resolved, Conexant, Inc. could be held responsible for the
payment of damages and/or future royalties and/or have the sale
of certain of Conexant, Inc. products stopped by an injunction,
any of which could have a material adverse effect on our
business, financial condition and results of operations.
Class Action Suits. In December 2004 and
January 2005, the Company and certain current and former
officers were named as defendants in several complaints seeking
monetary damages filed on behalf of all persons who purchased
Company common stock during a specified class period. These
suits were filed in the U.S. District Court of New Jersey
(New Jersey cases) and the U.S. District Court for the
Central District of California (California cases), alleging that
the defendants violated the Securities Exchange Act of 1934 (the
Exchange Act) by allegedly disseminating materially false and
misleading statements and/or concealing material adverse facts.
The California cases have now been consolidated with the New
Jersey cases so that all of the class action suits, now known as
Witriol v. Conexant, et al., are being heard in
the U.S. District Court of New Jersey by the same judge.
The defendants believe these charges are without merit and
intend to vigorously defend the litigation. On September 1,
2005, the defendants filed their motion to dismiss the case. On
November 23, 2005, the court granted the plaintiffs
motion to file a Second Amended Complaint, which was filed on
December 5, 2005. Thereafter, the defendants plan to file a
motion to dismiss the case, which motion will be due by
February 6, 2006.
In addition, in February 2005, the Company and certain of its
current and former officers and the Companys Employee
Benefits Plan Committee were named as defendants in
Graden v. Conexant, et al., a
24
lawsuit filed on behalf of all persons who were participants in
the Companys 401(k) Plan (Plan) during a
specified class period. This suit seeking monetary damages was
filed in the U.S. District Court of New Jersey and alleges
that the defendants breached their fiduciary duties under the
Employee Retirement Income Security Act, as amended, to the Plan
and the participants in the Plan. The defendants believe these
charges are without merit and intend to vigorously defend the
litigation. The plaintiff filed an Amended Complaint on
August 11, 2005. On October 12, 2005, the defendants
filed a motion to dismiss this case.
Shareholder Derivative Suits. In January 2005, the
Company and certain current and former directors and officers
were named as defendants in purported shareholder derivative
actions seeking monetary damages (now consolidated) in
California Superior Court for the County of Orange, alleging
that the defendants breached their fiduciary duties, abused
control, mismanaged the Company, wasted corporate assets and
unjustly enriched themselves. A similar lawsuit was filed in
U.S. District Court of New Jersey in May 2005. On
July 28, 2005, the California court approved a stay of the
action filed in California pending the outcome of the motion to
dismiss in Witriol v. Conexant, et al. The
Company has negotiated a similar agreement with the plaintiffs
in the New Jersey case, which has also been approved by the New
Jersey court. Pursuant to the stay agreements, in the event that
the parties in the Witriol case engage in any
negotiations, plaintiffs counsel in the derivative cases
will be kept informed. The defendants believe the charges in
theses cases are without merit and intend to vigorously defend
the litigation.
Various other lawsuits, claims and proceedings have been or may
be instituted or asserted against us or our subsidiaries,
including those pertaining to product liability, intellectual
property, environmental, safety and health, and employment
matters. The outcome of litigation cannot be predicted with
certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company. Many intellectual
property disputes have a risk of injunctive relief and there can
be no assurance that a license will be granted. Injunctive
relief could have a material adverse effect on the financial
condition or results of operations of the Company. Based on its
evaluation of matters which are pending or asserted and taking
into account the Companys reserves for such matters,
management believes the disposition of such matters will not
have a material adverse effect on the financial condition or
results of operations of the Company.
|
|
Item 4. |
Submission of Matters to Vote of Security Holders |
No matters were submitted to a vote of our shareholders during
the quarter ended September 30, 2005.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is traded on the Nasdaq National Market under
the symbol CNXT. The following table lists the high
and low per share sale prices for our common stock as reported
by the Nasdaq National Market for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
Fiscal year ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
2.23 |
|
|
$ |
1.50 |
|
|
Second quarter
|
|
|
2.05 |
|
|
|
1.36 |
|
|
Third quarter
|
|
|
1.75 |
|
|
|
0.95 |
|
|
Fourth quarter
|
|
|
2.17 |
|
|
|
1.57 |
|
Fiscal year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
6.42 |
|
|
$ |
4.64 |
|
|
Second quarter
|
|
|
7.85 |
|
|
|
5.16 |
|
|
Third quarter
|
|
|
6.70 |
|
|
|
3.72 |
|
|
Fourth quarter
|
|
|
2.65 |
|
|
|
1.37 |
|
At November 25, 2005, there were approximately 42,241
holders of record of our common stock.
25
We have never paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business
and to repay our indebtedness, and do not anticipate paying cash
dividends in the foreseeable future.
|
|
Item 6. |
Selected Financial Data |
The following selected financial data for the five years ended
September 30, 2005 was derived from the audited
consolidated financial statements of Conexant and its
subsidiaries. In June 2002, Conexant completed the spin-off of
its wireless communications business and the sale of its
Mexicali Operations, and in June 2003, Conexant completed the
spin-off of its Mindspeed Technologies Internet infrastructure
business. The selected financial data for all periods have been
restated to reflect these businesses as discontinued operations.
In February 2004, Conexant completed the merger with
GlobespanVirata, Inc. The results of GlobespanVirata, Inc. have
been included in the consolidated results since
February 28, 2004.
The selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial
statements and notes thereto appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net revenues
|
|
$ |
722,739 |
|
|
$ |
901,854 |
|
|
$ |
599,977 |
|
|
$ |
521,726 |
|
|
$ |
541,688 |
|
Cost of goods sold
|
|
|
493,973 |
|
|
|
523,129 |
|
|
|
338,161 |
|
|
|
317,921 |
|
|
|
522,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
228,766 |
|
|
|
378,725 |
|
|
|
261,816 |
|
|
|
203,805 |
|
|
|
19,128 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
267,996 |
|
|
|
239,971 |
|
|
|
159,354 |
|
|
|
156,350 |
|
|
|
175,026 |
|
|
Selling, general and administrative
|
|
|
117,861 |
|
|
|
125,474 |
|
|
|
93,426 |
|
|
|
95,750 |
|
|
|
141,276 |
|
|
Amortization of intangible assets
|
|
|
32,322 |
|
|
|
20,769 |
|
|
|
3,437 |
|
|
|
19,489 |
|
|
|
19,814 |
|
|
In-process research and
development(1)
|
|
|
|
|
|
|
160,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges(2)
|
|
|
45,977 |
|
|
|
32,801 |
|
|
|
18,379 |
|
|
|
30,499 |
|
|
|
369,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
464,156 |
|
|
|
579,833 |
|
|
|
274,596 |
|
|
|
302,088 |
|
|
|
705,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(235,390 |
) |
|
|
(201,108 |
) |
|
|
(12,780 |
) |
|
|
(98,283 |
) |
|
|
(686,246 |
) |
Debt conversion costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,435 |
|
|
|
42,584 |
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(42,021 |
) |
|
|
|
|
|
|
(11,710 |
) |
Interest expense
|
|
|
33,691 |
|
|
|
30,708 |
|
|
|
28,120 |
|
|
|
31,069 |
|
|
|
33,597 |
|
Other (income) expense, net(3)
|
|
|
(95,413 |
) |
|
|
69,100 |
|
|
|
(22,312 |
) |
|
|
5,801 |
|
|
|
(34,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(173,668 |
) |
|
|
(300,916 |
) |
|
|
23,433 |
|
|
|
(145,588 |
) |
|
|
(716,283 |
) |
Provision (benefit) for income taxes(1)
|
|
|
2,322 |
|
|
|
243,733 |
|
|
|
(129 |
) |
|
|
(1,838 |
) |
|
|
(55,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(175,990 |
) |
|
|
(544,649 |
) |
|
|
23,562 |
|
|
|
(143,750 |
) |
|
|
(660,910 |
) |
Loss from discontinued operations(4)
|
|
|
|
|
|
|
|
|
|
|
(728,877 |
) |
|
|
(737,017 |
) |
|
|
(784,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
(705,315 |
) |
|
$ |
(880,767 |
) |
|
$ |
(1,445,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
0.09 |
|
|
$ |
(0.56 |
) |
|
$ |
(2.70 |
) |
|
Diluted
|
|
|
(0.37 |
) |
|
|
(1.40 |
) |
|
|
0.09 |
|
|
|
(0.56 |
) |
|
|
(2.70 |
) |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
125,856 |
|
|
$ |
434,802 |
|
|
$ |
233,017 |
|
|
$ |
443,948 |
|
|
$ |
444,974 |
|
Total assets
|
|
|
1,581,524 |
|
|
|
1,880,522 |
|
|
|
931,707 |
|
|
|
1,911,035 |
|
|
|
2,815,480 |
|
Current portion of convertible subordinated notes
|
|
|
196,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
|
599,007 |
|
|
|
780,708 |
|
|
|
643,260 |
|
|
|
743,523 |
|
|
|
761,927 |
|
Shareholders equity
|
|
|
569,093 |
|
|
|
828,387 |
|
|
|
166,766 |
|
|
|
947,827 |
|
|
|
1,773,176 |
|
|
|
(1) |
In fiscal 2004, we recorded $160.8 million of in-process
research and development expenses related to the Merger and a
$255.7 million charge for the impairment of deferred tax
assets. |
|
(2) |
See Note 15 of Notes to Consolidated Financial Statements
for components of special charges. In fiscal 2001, we recorded
special charges of $369.3 million, principally related to
the impairment of certain manufacturing assets and restructuring
activities. |
|
(3) |
See Note 7 of Notes to Consolidated Financial Statements
for components of other (income) expense, net. |
|
(4) |
Loss from discontinued operations (net of income taxes) for all
periods represents the operating results of our former wireless
communications business and our Mexicali Operations which we
disposed of in June 2002 and the Mindspeed Technologies
Internet infrastructure business which we disposed of in
June 2003. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Except where otherwise noted, this discussion of our financial
condition and results of operations represents our continuing
operations, excluding our discontinued Mindspeed Technologies
business which we disposed of in June 2003, and including the
GlobespanVirata, Inc. business from February 28, 2004,
following completion of our merger with GlobespanVirata, Inc.
(the Merger).
|
|
|
Merger with GlobespanVirata |
On February 27, 2004, we completed the Merger with
GlobespanVirata, Inc., or GlobespanVirata, a provider of
broadband communications solutions for consumer, enterprise and
service provider markets. In May 2004, GlobespanVirata was
renamed Conexant, Inc. See Note 2 of Notes to Consolidated
Financial Statements for further information.
|
|
|
Spin-off of Mindspeed Technologies Business |
On June 27, 2003, we completed the distribution to Conexant
shareholders of all outstanding shares of Mindspeed, our wholly
owned subsidiary, to which we contributed our Internet
infrastructure business, including the stock of certain
subsidiaries, and certain other assets and liabilities,
including $100.0 million in cash (the Mindspeed Spin). In
the Mindspeed Spin, Conexant shareholders received one share of
Mindspeed common stock for every three Conexant shares held and
the Conexant shareholders continued to hold their Conexant
shares. Mindspeed issued to us a warrant to
purchase 30 million shares of Mindspeed common stock,
representing approximately 20 percent of Mindspeeds
outstanding common stock on a fully diluted basis. The warrant
is exercisable until June 27, 2013 at an exercise price of
$3.408 per share. The fair value of the warrant is
presented as an asset on our consolidated balance sheet.
Additionally, we entered into a senior secured revolving credit
facility pursuant to which Mindspeed could have borrowed up to
$50.0 million for working capital and general corporate
purposes. On December 8, 2004, the Mindspeed credit
facility was terminated (see Note 11 of Notes to
Consolidated Financial Statements).
|
|
|
Business Enterprise Segments |
We operate in one reportable operating segment, broadband
communications. Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), Disclosures about
Segments of an Enterprise and Related
27
Information, establishes standards for the way that public
business enterprises report information about operating segments
in annual consolidated financial statements. Although we had
four operating segments at September 30, 2005, under the
aggregation criteria set forth in SFAS No. 131, we
only operate in one reportable operating segment, broadband
communications.
Under SFAS No. 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 No. 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 products is the only material source of revenue for
each of our four operating segments; |
|
|
|
the products sold by each of our operating segments use the same
standard manufacturing process; |
|
|
|
the products marketed by each of our operating segments are sold
to similar customers; and |
|
|
|
all of our products are sold through our internal sales force
and common distributors. |
Because we meet each of the criteria set forth above and each of
our operating segments has similar economic characteristics, we
aggregate our results of operations in one reportable operating
segment.
Net revenues by our product lines are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Broadband Access Products
|
|
$ |
192.0 |
|
|
$ |
254.6 |
|
|
$ |
64.3 |
|
Broadband Media Processing Products
|
|
|
155.4 |
|
|
|
214.2 |
|
|
|
165.5 |
|
Universal and Voice Access Products
|
|
|
289.2 |
|
|
|
323.1 |
|
|
|
325.2 |
|
Wireless Networking Products and other
|
|
|
86.1 |
|
|
|
110.0 |
|
|
|
45.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
722.7 |
|
|
$ |
901.9 |
|
|
$ |
600.0 |
|
|
|
|
|
|
|
|
|
|
|
Overview of 2005 Financial Performance
Our net revenues for fiscal 2005 and 2004 were
$722.7 million and $901.9 million, respectively, which
represents a decrease of $179.2 million or 20%. This
decrease resulted from an annual average selling price
(ASP) erosion of approximately 24% which was only slightly
offset by a year over year volume increase of approximately 4%.
The ASP erosion was most significant in our Broadband Access and
Wireless Networking businesses. The year over year volume
increase would have been much larger if we had not experienced a
decrease in demand for our products in the first half of fiscal
2005 as a result of the excess channel inventory build-up more
fully described below. We also had less demand for our Wireless
Networking products as a result of a loss of market share in the
latter part of fiscal 2004.
Our quarterly revenues increased sequentially each quarter
during fiscal 2005. In the first quarter of fiscal 2005, our net
revenues were $140.6 million or a 34% decline from the
fourth quarter of fiscal 2004 revenues of $213.1 million.
The decline in revenues from the fourth quarter of fiscal 2004
to the first quarter of fiscal 2005 was the result of lower than
expected end-customer demand during fiscal 2004 which resulted
in approximately $70.0 million of excess channel inventory
build-up at our direct customers, distributors and resellers and
lower net revenues in our Broadband Access business as a result
of ASP erosion. Channel inventory was reduced by approximately
$50.0 million in the first fiscal quarter of 2005 and by an
additional $20.0 million in the second quarter of fiscal
2005. We experienced increased demand throughout fiscal 2005 as
a result of the
28
decrease in channel inventory build-up which occurred early in
the fiscal year and other increases in demand for our products.
In the fourth quarter of fiscal 2005, we recorded net revenues
of $214.9 million or a 53% increase over our first quarter
of fiscal 2005 revenues. We expect our fiscal 2006 net
revenues to increase over our fiscal 2005 net revenues as a
result of the channel inventory reduction that we experienced in
early fiscal 2005 and increased demand for our products, in
particular STB products within our Broadband Media business.
We have implemented a number of cost reduction initiatives since
the time of the Merger. Most of these actions were completed by
the end of fiscal 2005. The cost savings of these actions will
be fully reflected in our results for the first quarter of
fiscal 2006. Our research and development and selling general
and administrative expenses declined by $21.5 million or
20% from $108.5 million in the fourth quarter of fiscal
2004 to $87.0 million in the fourth quarter of fiscal 2005.
This reduction in expenses primarily reflects our shift of
product development resources to lower cost regions and selling,
general and administrative function consolidation. We
continuously evaluate our business in light of current market
and competitive conditions and to ensure that our operating
expenses are in line with our expected revenue forecasts. As a
result, future periods may require further actions to reduce
operating expenses. We do not believe that these actions have or
will inhibit our ability to invest in appropriate levels of
research and development.
We expect our research and development and selling, general and
administrative operating expenses to increase from the fourth
quarter of fiscal 2005 levels as a result of the impact of stock
option expense charges under SFAS 123(R) commencing in the
first quarter of fiscal 2006 and increased incentive based
performance and compensation costs.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
(In millions) | |
Net revenues
|
|
$ |
722.7 |
|
|
|
(20 |
)% |
|
$ |
901.9 |
|
|
|
50 |
% |
|
$ |
600.0 |
|
We recognize revenue when (i) the risk of loss has been
transferred to the customer, (ii) price and terms are
fixed, (iii) no significant vendor obligation exists, and
(iv) collection of the receivable is reasonably assured.
These terms are typically met upon shipment of product to the
customer, except for certain distributors who have a contractual
right of return or for which the contractual terms were not
enforced. Revenue with respect to these distributors is deferred
until the purchased products are sold through by the distributor
to a third party. Other distributors have limited stock rotation
rights, which allow them to rotate up to 10% of product in their
inventory two times a year. We recognize revenue to these
distributors upon shipment of product to the distributor, as the
stock rotation rights are limited and we believe that we have
the ability to estimate and establish allowances for expected
product returns in accordance with SFAS No. 48,
Revenue Recognition When Right of Return Exists.
Development revenue is recognized when services are performed
and was not significant for any of the periods presented.
Conexant has many distributor customers for whom revenue is
recognized upon shipment of its product to them, as the
contractual terms provide for no or limited rights of return.
During the three months ended December 31, 2004, we
determined that we were unable to enforce our contractual terms
with three distribution customers. As a result, from
October 1, 2004, we have deferred the recognition of
revenue on sales to these three distributors until the purchased
products are sold by the distributors to a third party. At
September 30, 2005, deferred revenue for these three
distributors was $6.5 million.
See Overview of 2005 Financial Performance above for
a discussion of net revenues for fiscal 2005.
Our net revenues for fiscal 2004 increased 50% over fiscal 2003.
The increase is primarily associated with increased unit
shipments of our Broadband Access and Wireless Networking
products associated with the Merger, and to a lesser extent the
increase in sales of satellite set-top box solutions, and
convergence video products using MPEG codec technology.
Partially offsetting the increase in revenues from increased
unit shipments is the erosion of average selling prices
beginning in the fourth quarter of fiscal 2004 due to
29
(i) unfavorable product mix as newer, higher margin
products experienced slower than expected growth in the latter
portion of fiscal 2004 and (ii) intense competition in
certain of our product lines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
(In millions) | |
Gross margin
|
|
$ |
228.8 |
|
|
|
(40 |
)% |
|
$ |
378.7 |
|
|
|
45 |
% |
|
$ |
261.8 |
|
Percent of net revenues
|
|
|
32 |
% |
|
|
|
|
|
|
42 |
% |
|
|
|
|
|
|
44 |
% |
Gross margin represents net revenues less cost of goods sold. As
a fabless semiconductor company, we use third parties for wafer
production, assembly and test services. Our cost of goods sold
consists predominantly of purchased finished wafers, assembly
and test services, royalty, amortization of production photo
mask costs, other intellectual property costs and labor and
overhead associated with product procurement.
Our gross margin for fiscal 2005 was 32% compared to the fiscal
2004 gross margin of 42%. The gross margin percentage decrease
from fiscal 2004 is attributable to the effects of (i) net
inventory charges of $44.1 million, and (ii) a 24% decrease
in ASPs which were partially offset by lower inventory costs.
Contributing to the 24% ASP decline was the re-establishment of
$17.1 million of net revenue reserves, which we maintain to
estimate customer pricing adjustments, and were depleted as a
result of special pricing given to select customers to
facilitate the reduction of channel inventory during fiscal
2005. We expect that our gross margin percentage will increase
in future periods as compared to our gross margin percentage for
the fourth quarter of fiscal 2005 of 40.3% as a result of
product cost reduction programs that are expected to exceed
price erosion.
Gross margin percentage decreased from 44% in 2003 to 42% in
2004. This decrease resulted from the effects of revenues in
fiscal 2003 for products that we had written down to zero cost
basis during fiscal 2001.
Our gross margin for fiscal 2003 benefited from the sale of
inventories with an original cost of $10.9 million that we
had written down to a zero cost basis during fiscal year 2001.
These sales resulted from renewed demand for certain products
that was not anticipated at the time of the write-downs. The
previously written-down inventories were generally sold at
prices which exceeded their original cost. Had we not previously
written down the cost basis of these goods, our cost of goods
sold would include the original cost of these items, and our
gross margin for 2003 would have been $250.9 million (42%
of our net revenues).
We assess the recoverability of our inventories at least
quarterly through a review of inventory levels in relation to
foreseeable demand, generally over nine to twelve months.
Foreseeable demand is based upon all available information,
including sales backlog and forecasts, product marketing plans
and product life cycle information. When the inventory on hand
exceeds the foreseeable demand, we write down the value of those
inventories which, at the time of our review, we expect to be
unable to sell. The amount of the inventory write-down is the
excess of historical cost over estimated realizable value. Once
established, these write-downs are considered permanent
adjustments to the cost basis of the excess inventory. Demand
for our products may fluctuate significantly over time, and
actual demand and market conditions may be more or less
favorable than those projected by management. In the event that
actual demand is lower than originally projected, additional
inventory write-downs may be required. Similarly, in the event
that actual demand exceeds original projections, gross margins
may be favorably impacted in future periods. During the year
ended September 30, 2005, we recorded $35.9 million in
inventory charges for excess and obsolete (E&O) inventory
primarily as a result of the reduced demand outlook for fiscal
year 2005 related to Broadband Access and Wireless
30
Networking products. Activity in our E&O inventory reserves
for the years ended September 30, 2005 and 2004 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
E&O reserves, beginning of period
|
|
$ |
23,319 |
|
|
$ |
25,177 |
|
Additions
|
|
|
35,944 |
|
|
|
11,586 |
|
Release upon sales of product
|
|
|
(5,864 |
) |
|
|
(7,123 |
) |
Scrap
|
|
|
(11,319 |
) |
|
|
(3,792 |
) |
Standards adjustments and other
|
|
|
2,753 |
|
|
|
(2,529 |
) |
|
|
|
|
|
|
|
E&O reserves, end of period
|
|
$ |
44,833 |
|
|
$ |
23,319 |
|
|
|
|
|
|
|
|
We have created an action plan at a product line level to scrap
approximately 25% of the E&O products and we are still in
the process of evaluating the remaining reserved products. It is
possible that some of these reserved products will be sold which
will benefit our gross margin in the period sold. During the
years ended September 30, 2005 and 2004, we sold
$5.9 million and $7.1 million, respectively, of
reserved products.
Our products are used by communications electronics OEMs that
have designed our products into communications equipment. For
many of our products, we gain these design wins through a
lengthy sales cycle, which often includes providing technical
support to the OEM customer. Moreover, once a customer has
designed a particular suppliers components into a product,
substituting another suppliers components often requires
substantial design changes which involve significant cost, time,
effort and risk. In the event of the loss of business from
existing OEM customers, we may be unable to secure new customers
for our existing products without first achieving new design
wins. When the quantities of inventory on hand exceed
foreseeable demand from existing OEM customers into whose
products our products have been designed, we generally will be
unable to sell our excess inventories to others, and the
estimated realizable value of such inventories to us is
generally zero.
Further, on a quarterly basis, we assess the net realizable
value of our inventories. When the estimated average selling
price, plus costs to sell our inventory falls below our
inventory cost, we adjust our inventory to its current estimated
market value. During the year ended September 30, 2005, we
recorded $20.2 million in inventory charges to adjust
certain Wireless Networking products to their estimated market
value. Increases to this inventory reserve may be required based
upon actual average selling prices and changes to our current
estimates, which would impact our gross margin percentage in
future periods. Activity in our lower of cost or market
(LCM) inventory reserves for the year ended
September 30, 2005 was as follows (in thousands). There
were no LCM reserves in fiscal 2004.
|
|
|
|
|
|
|
2005 | |
|
|
| |
LCM reserves, beginning of period
|
|
$ |
|
|
Additions
|
|
|
20,179 |
|
Release upon sales of product
|
|
|
(6,175 |
) |
Standards adjustments and other
|
|
|
(7,265 |
) |
|
|
|
|
LCM reserves, end of period
|
|
$ |
6,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
(In millions) | |
Research and development
|
|
$ |
268.0 |
|
|
|
12 |
% |
|
$ |
240.0 |
|
|
|
51 |
% |
|
$ |
159.4 |
|
Percent of net revenues
|
|
|
37 |
% |
|
|
|
|
|
|
27 |
% |
|
|
|
|
|
|
27 |
% |
Our research and development (R&D) expenses consist
principally of direct personnel costs to develop new
communications and semiconductor products, allocated direct
costs of the R&D function, photo mask and other costs for
pre-production evaluation and testing of new devices and design
and test tool costs. Our
31
R&D expenses also include the costs for design automation
and advanced package development, and non-cash stock
compensation charges related to the amortization of unvested
stock options exchanged in the Merger and other acquisitions.
The $28.0 million increase in R&D expenses for fiscal
2005 compared to fiscal 2004 primarily reflects additional
development costs associated with DSL and Wireless products as a
result of the timing of the Merger (seven months of expenses in
fiscal 2004 compared to twelve months in fiscal 2005) and an
increase of $3.7 million in stock compensation charges as a
result of the Merger. These increases were partially offset by
the shift of product development resources to lower cost regions
during fiscal 2005. As a result of the impact of stock option
expense charges under SFAS No. 123(R) commencing in
the first quarter of fiscal 2006 and increased incentive based
performance and compensation costs, we expect quarterly R&D
expenses to increase in future periods.
The $80.6 million increase in R&D expenses for fiscal
2004 compared to fiscal 2003 primarily reflects additional
development costs associated with DSL and Wireless products as a
result of the Merger, an increase of $4.9 million in stock
compensation charges primarily as a result of the Merger, and to
a much lesser extent, increased R&D project costs associated
with purchased R&D and electronic design automation tools.
|
|
|
Selling, General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
(In millions) | |
Selling, general and administrative
|
|
$ |
117.9 |
|
|
|
(6 |
)% |
|
$ |
125.5 |
|
|
|
34 |
% |
|
$ |
93.4 |
|
Percent of net revenues
|
|
|
16 |
% |
|
|
|
|
|
|
14 |
% |
|
|
|
|
|
|
16 |
% |
Our selling, general and administrative (SG&A) expenses
include personnel costs, sales representative commissions,
advertising and other marketing costs. Our SG&A expenses
also include costs of corporate functions including legal,
accounting, treasury, human resources, customer service, sales,
marketing, field application engineering, allocated indirect
costs of the SG&A function, and other services, and non-cash
stock compensation charges related to the amortization of
unvested stock options exchanged in the Merger and other
acquisitions.
The $7.6 million decrease in SG&A expense for fiscal
2005 compared to fiscal 2004 is attributable to a
$6.1 million reduction of accounts receivable bad debt
expense as a result of improved collections experience, a
$1.3 million refund of previously remitted sales taxes, and
$1.4 million of other net decreases primarily related to
our cost reduction programs associated with the Merger, offset
by additional expenses associated with the timing of the Merger
(including a $1.2 million increase in stock compensation
charges). We expect that fiscal 2006 SG&A expenses will be
approximately flat with fiscal 2005 levels as a result of
additional expenses from the implementation of
SFAS No. 123(R) commencing in the first quarter of
fiscal 2006 and increased incentive based performance and
compensation costs, which are expected to offset the savings
generated by our cost reduction programs which were implemented
in fiscal 2005.
The $32.1 million increase in SG&A expense for fiscal
2004 compared to fiscal 2003 is attributable to additional
SG&A costs as a result of the Merger in February 2004, an
increase of $1.8 million in stock compensation charges as a
result of the Merger, and $4.5 million in additional bad
debt reserves, partially offset by $1.3 million in stock
compensation benefits associated with an employee bonus plan in
prior years which had variable accounting.
|
|
|
Amortization of Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
(In millions) | |
Amortization of intangible assets
|
|
$ |
32.3 |
|
|
$ |
20.8 |
|
|
$ |
3.4 |
|
Amortization expense is recorded for intangible assets other
than goodwill pursuant to SFAS Nos. 141 and 142.
SFAS No. 141 requires that all business combinations
be accounted for using the purchase method
32
and provides criteria for recording intangible assets separately
from goodwill. Goodwill must be tested at least annually for
impairment and written down when impaired.
Amortization expense of $32.3 million in fiscal 2005
increased by $11.5 million over the $20.8 million
recorded in fiscal 2004. This increase is attributable to the
significant intangible assets we acquired in the Merger.
Amortization expense of $20.8 million in fiscal 2004
increased by $17.4 million over the $3.4 million
recorded in fiscal 2003. This increase is attributable to the
significant intangible assets we acquired in the Merger. See
Note 2 of Notes to Consolidated Financial Statements.
|
|
|
In-Process Research and Development |
The in-process research and development (IPR&D) charge of
$160.8 million in fiscal 2004 is related to the Merger
completed on February 27, 2004. See Note 2 of Notes to
Consolidated Financial Statements for a discussion of the
IPR&D charge.
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
(In millions) | |
Asset impairments
|
|
$ |
3.8 |
|
|
$ |
5.4 |
|
|
$ |
9.6 |
|
Restructuring charges
|
|
|
28.0 |
|
|
|
9.3 |
|
|
|
5.2 |
|
Integration costs
|
|
|
7.7 |
|
|
|
7.3 |
|
|
|
|
|
Other
|
|
|
6.5 |
|
|
|
10.8 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46.0 |
|
|
$ |
32.8 |
|
|
$ |
18.4 |
|
|
|
|
|
|
|
|
|
|
|
See Note 15 of Notes to Consolidated Financial Statements
for a discussion of asset impairment charges, restructuring
charges, integration costs and other special charges.
|
|
|
Gain on Extinguishment of Debt |
During fiscal 2003, we purchased $100.0 million principal
amount of our 4% Convertible Subordinated Notes due 2007 at
prevailing market prices, resulting in a net gain of
$42.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
(In millions) | |
Interest expense
|
|
$ |
33.7 |
|
|
$ |
30.7 |
|
|
$ |
28.1 |
|
Interest expense is primarily related to our convertible
subordinated notes. See Note 9 of Notes to Consolidated
Financial Statements for further description of the notes.
As a result of the acquisition of $130.0 million of the
5.25% convertible subordinated notes of Conexant, Inc. in
the Merger, interest expense for fiscal 2005 was higher than
fiscal 2004. As $196.8 million of our convertible
subordinated notes are due in May 2006, and notwithstanding any
changes in our long-term debt arrangements, we expect interest
expense to be lower in fiscal 2006 as compared to fiscal 2005.
|
|
|
Other (Income) Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
(In millions) | |
Other (income) expense, net
|
|
$ |
(95.4 |
) |
|
$ |
69.1 |
|
|
$ |
(22.3 |
) |
Other (income) expense, net for fiscal 2005 was primarily
comprised of $91.3 million of gains on sales of equity
securities (primarily our investment in SiRF Technologies
Holdings, Inc. or SiRF), a $7.1 million
33
increase in the fair value of the Mindspeed warrant,
$6.5 million of investment and interest income on invested
cash balances, offset by $10.6 million of losses in our
equity method investees. Due to variations in the fair value of
the common stock underlying the Mindspeed warrant, we expect
that other (income) expense, net may fluctuate significantly in
future periods until this derivative instrument is liquidated or
expires.
Other (income) expense, net for fiscal 2004 was comprised of a
$13.4 million write-down of certain non-marketable
investments, a $6.3 million decrease in the fair value of
the conversion right under the Skyworks 15% convertible
senior subordinated note prior to its conversion into Skyworks
common stock in May 2004, and a $92.7 million decrease in
the fair value of the Mindspeed warrant, offset by
$7.7 million of investment and interest income on invested
cash balances, $14.4 million of income in our equity method
investees, and $24.1 million of gains on sales of
investments (primarily our investment in SiRF).
Other (income) expense, net for fiscal 2003 was comprised of a
$30.2 million increase in the fair value of the Mindspeed
warrant, a $9.4 million increase in the fair value of the
conversion right under the Skyworks 15% convertible senior
subordinated notes, $8.6 million of gains on sales of
investments and $15.6 million of investment income and
interest income on invested cash balances, offset by a
$39.4 million write-down of certain non-marketable
investments, and $3.1 million of losses in our equity
method investments.
The carrying values of certain non-marketable investments were
written down to their estimated fair values (in most cases,
zero). These investments consist of equity interests in early
stage technology companies which we had accounted for under the
cost method. We estimated the fair value of these investments
based upon available financial and other information, including
the then-current and projected business prospects for the
subject companies, and determined that the decline in the fair
value of these investments was other than temporary.
|
|
|
Provision (Benefit) for Income Taxes |
In fiscal 2005, we recorded an income tax provision of
$2.3 million primarily reflecting income taxes imposed on
our foreign subsidiaries. No federal income tax expense was
recorded for fiscal 2005 due to our net losses for the period.
Except to the extent of the federal alternative minimum tax
(AMT), we expect this will continue for the foreseeable future.
We do not expect to recognize any income tax benefits relating
to future operating losses until we believe that such tax
benefits are more likely than not to be realized. Under the AMT
system, a current year deduction is somewhat more beneficial
than utilization of a net operating loss (NOL). During fiscal
2005, to reduce our future expected AMT, we amended certain
prior year tax returns and elected to capitalize and amortize
over 10 years $581.0 million of R&D expenses that
were treated as current year deductions on the returns
previously filed. These amended returns reduced the
$1.75 billion of NOLs previously reported. This adjustment
was made for tax reporting purposes and had no impact on the
accompanying financial statements.
In fiscal 2004, we recorded an income tax provision of
$243.7 million. This provision is comprised of an increase
in the valuation allowance on deferred tax assets of
$255.7 million and a current provision of $2.0 million
primarily reflecting income taxes imposed on our foreign
subsidiaries, partially offset by a $14.0 million credit
related to a federal income tax refund received in September
2004 related to the carryback of a portion of our fiscal year
2001 net operating loss. The loss was carried back under
the five-year carryback provision enacted in 2002 and income
taxes paid while Conexant was a subsidiary of Rockwell
Automation, Inc. were recovered.
In fiscal 2004, as a result of our cumulative operating losses,
we determined that it is more likely than not that the
additional income tax benefits (principally net operating losses
we can carry forward to future years) will not be realized.
Accordingly, we increased our valuation allowance by
approximately $255.7 million during fiscal 2004 for the
deferred tax assets which we do not expect to realize through
the reduction of future income tax payments. See Note 8 of
Notes to Consolidated Financial Statements for further
information. We do not expect to recognize any income tax
benefits relating to future operating losses until we believe
that such tax benefits are more likely than not to be realized.
While we will continue to be subject to foreign income taxes and
federal alternative minimum tax, we expect those taxes will be
insignificant.
34
As of September 30, 2005, we had $1.2 billion of fully
reserved deferred tax assets which are available to offset
future tax obligations, of which approximately
$440.0 million were acquired in the Merger and other
acquisitions, and if we receive a tax benefit from their
utilization, the benefit will be recorded as a reduction to
goodwill. The deferred tax assets acquired in the Merger are
subject to limitations imposed by section 382 of the
Internal Revenue Code. Such limitations are not expected to
impair our ability to utilize these deferred tax assets.
We are subject to income taxes in both the United States and
numerous foreign jurisdictions and have also acquired and
divested certain businesses for which we have retained certain
tax liabilities. In the ordinary course of our business, there
are many transactions and calculations where the ultimate tax
determination is uncertain and significant judgment is required
in determining our worldwide provision for income taxes. We and
our acquired and divested businesses are regularly under audit
by tax authorities. Although we believe our tax estimates are
reasonable, the final determination of tax audits could be
different than that which is reflected in historical income tax
provisions and accruals. Based on the results of an audit, a
material effect on our income tax provision, net income, or cash
flows in the period or periods for which that determination is
made could result.
Quarterly Results of Operations
The following table presents our operating results for each of
the eight fiscal quarters in the period ended September 30,
2005. The information for each of these quarters is derived from
our unaudited interim financial statements which have been
prepared on the same basis as the audited consolidated financial
statements included in this report. In our opinion, all
necessary adjustments, which consist only of normal and
recurring accruals as well as the special charges, in-process
research and development, debt conversion costs, the gain on
extinguishment of debt, and the deferred tax asset valuation
allowance have been included to fairly present our unaudited
quarterly results. In February 2004, Conexant completed the
merger with GlobespanVirata, Inc. The results of
GlobespanVirata, Inc. have been included in the consolidated
results since February 28, 2004. This data should be read
together with our consolidated financial statements and the
notes thereto included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
214,916 |
|
|
$ |
197,464 |
|
|
$ |
169,738 |
|
|
$ |
140,621 |
|
|
$ |
213,123 |
|
|
$ |
267,617 |
|
|
$ |
243,781 |
|
|
$ |
177,333 |
|
Cost of goods sold
|
|
|
128,312 |
|
|
|
122,430 |
|
|
|
109,766 |
|
|
|
133,465 |
|
|
|
127,681 |
|
|
|
155,136 |
|
|
|
142,116 |
|
|
|
98,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
86,604 |
|
|
|
75,034 |
|
|
|
59,972 |
|
|
|
7,156 |
|
|
|
85,442 |
|
|
|
112,481 |
|
|
|
101,665 |
|
|
|
79,137 |
|
Research and development
|
|
|
58,634 |
|
|
|
66,282 |
|
|
|
70,539 |
|
|
|
72,541 |
|
|
|
72,766 |
|
|
|
74,317 |
|
|
|
53,734 |
|
|
|
39,154 |
|
Selling, general and administrative
|
|
|
28,412 |
|
|
|
31,081 |
|
|
|
28,362 |
|
|
|
30,006 |
|
|
|
35,692 |
|
|
|
36,371 |
|
|
|
30,602 |
|
|
|
22,809 |
|
Amortization of intangible assets
|
|
|
7,920 |
|
|
|
7,969 |
|
|
|
8,140 |
|
|
|
8,293 |
|
|
|
8,205 |
|
|
|
7,956 |
|
|
|
3,653 |
|
|
|
955 |
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,818 |
|
|
|
|
|
Special charges
|
|
|
4,715 |
|
|
|
8,409 |
|
|
|
13,596 |
|
|
|
19,257 |
|
|
|
18,388 |
|
|
|
8,294 |
|
|
|
5,514 |
|
|
|
605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99,681 |
|
|
|
113,741 |
|
|
|
120,637 |
|
|
|
130,097 |
|
|
|
135,051 |
|
|
|
126,938 |
|
|
|
254,321 |
|
|
|
63,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(13,077 |
) |
|
|
(38,707 |
) |
|
|
(60,665 |
) |
|
|
(122,941 |
) |
|
|
(49,609 |
) |
|
|
(14,457 |
) |
|
|
(152,656 |
) |
|
|
15,614 |
|
Interest expense
|
|
|
8,401 |
|
|
|
8,396 |
|
|
|
8,463 |
|
|
|
8,431 |
|
|
|
8,386 |
|
|
|
8,373 |
|
|
|
7,260 |
|
|
|
6,689 |
|
Other (income) expense, net
|
|
|
(72,046 |
) |
|
|
(15,610 |
) |
|
|
3,429 |
|
|
|
(11,186 |
) |
|
|
70,131 |
|
|
|
47,935 |
|
|
|
(16,996 |
) |
|
|
(31,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Income (loss) before income taxes
|
|
|
50,568 |
|
|
|
(31,493 |
) |
|
|
(72,557 |
) |
|
|
(120,186 |
) |
|
|
(128,126 |
) |
|
|
(70,765 |
) |
|
|
(142,920 |
) |
|
|
40,895 |
|
Provision for income taxes
|
|
|
487 |
|
|
|
673 |
|
|
|
630 |
|
|
|
532 |
|
|
|
242,365 |
|
|
|
661 |
|
|
|
459 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
50,081 |
|
|
$ |
(32,166 |
) |
|
$ |
(73,187 |
) |
|
$ |
(120,718 |
) |
|
$ |
(370,491 |
) |
|
$ |
(71,426 |
) |
|
$ |
(143,379 |
) |
|
$ |
40,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, basic
|
|
$ |
0.11 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.41 |
) |
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, diluted
|
|
$ |
0.10 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.41 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per share-basic
|
|
|
472,828 |
|
|
|
471,247 |
|
|
|
470,189 |
|
|
|
468,369 |
|
|
|
467,556 |
|
|
|
463,804 |
|
|
|
349,968 |
|
|
|
277,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per share-diluted
|
|
|
484,825 |
|
|
|
471,247 |
|
|
|
470,189 |
|
|
|
468,369 |
|
|
|
467,556 |
|
|
|
463,804 |
|
|
|
349,968 |
|
|
|
307,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughout fiscal 2005 and 2004 we recorded special charges
primarily related to our restructuring initiatives. We also
recorded special charges for asset impairments and litigation
settlements. See Note 15 of Notes to Consolidated Financial
Statements.
In the first quarter of fiscal 2005, in response to lower market
prices and reduced end-customer demand for our products, we
recorded $47.0 million of inventory charges to establish
additional excess and obsolete and lower of cost or market
inventory reserves. In the fourth quarter of fiscal 2005, these
inventory reserves were increased by a net of $2.4 million.
In each of the quarters in fiscal 2005, we recorded
$7.9 million, $9.6 million, $4.6 million and
$(5.0) million, sequentially, against (to) revenue to
establish or adjust revenue reserves maintained by the Company
to estimate customer pricing adjustments.
In the fourth quarter of fiscal 2005, we reduced certain
reserves, primarily related to compensation and benefits, by
approximately $2.4 million, as it was determined that such
amounts would not be paid.
In the second quarter of fiscal 2004, we recorded a
$160.8 million non-cash charge related to IPR&D
acquired in the Merger, and in the fourth quarter of 2004, we
recorded a $255.7 million non-cash charge for the
impairment of our deferred tax assets.
In the past, our quarterly operating results have fluctuated due
to a number of factors, many of which are outside our control.
These include changes in the overall demand for communications
electronics equipment, changes in product mix, the timing of new
product introductions, the timing of receipt, reduction or
cancellation of significant orders by customers, and other
factors that have had a significant impact on our revenues and
gross margins. Significant quarterly fluctuations in results of
operations have also caused significant fluctuations in our
liquidity and working capital, including our cash and cash
equivalents, accounts receivable and payable and inventories.
Liquidity and Capital Resources
Our cash and cash equivalents increased by $63.7 million
during fiscal 2005. Cash used by operating activities was
$59.8 million for fiscal 2005, compared to cash used by
operating activities of $31.0 million in fiscal 2004. Cash
flows used in operations for fiscal 2005 was
$105.2 million, before $112.0 million of net favorable
changes in accounts receivable, inventories and accounts payable
(exclusive of related provisions), an $8.0 million payment
to Agere for the settlement of patent litigation, and
$58.6 million of payments related to special charges and
other restructuring related items. The favorable working capital
changes were driven by (i) improved days sales outstanding
primarily the result of increased cash collections, from
79 days for the fourth quarter of fiscal 2004 to
37 days in the fourth quarter of fiscal 2005, and
(ii) improved inventory turns from 2.6 turns in the fourth
quarter of fiscal 2004 to 5.4 turns in the fourth quarter of
fiscal 2005.
36
Cash provided by investing activities of $122.2 million for
fiscal 2005 includes net proceeds of $49.0 million received
from the purchase and sale-leaseback of our headquarters
facility and other assets, proceeds from the sale of equity
securities, investments and other assets, primarily the equity
securities in SiRF of $97.2 million, and net sales of other
marketable securities of $19.4 million. These cash flows
from investing activities of approximately $165.6 million
were offset by cash used in investing activities for
acquisitions of $18.8 million, capital expenditures of
$21.8 million, and investments in businesses of
$2.8 million. Cash provided by investing activities of
$67.0 million in fiscal 2004 principally consisted of net
cash and cash equivalents acquired in acquisitions of
$24.8 million (primarily in the Merger), net proceeds from
the sale of assets and investments of $57.2 million, and
the net sales of marketable securities of $39.7 million,
partially offset by capital expenditures of $17.6 million,
payment of deferred purchase consideration of $4.0 million,
payment of acquisition costs of $30.2 million, and
investments of $3.0 million.
Cash provided by financing activities of $1.2 million for
fiscal 2005 consisted principally of $1.0 million in
proceeds from the exercise of stock options. The
$26.9 million in cash provided by financing activities for
the comparable period of fiscal 2004 consisted of proceeds from
the exercise of stock options and warrants of
$24.6 million, and $2.3 million in proceeds upon
repayment of notes receivable from shareholders. The decrease in
proceeds from the exercise of stock options reflects the
depressed state of our stock price during fiscal 2005 and the
impact of our option exchange program beginning in November 2004.
Cash used in the discontinued operations of Mindspeed in fiscal
2003 was $202.3 million, which included the
$100.0 million of cash contributed to Mindspeed prior to
the Mindspeed Spin.
Total cash, cash equivalents and marketable securities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
September 30, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Cash and cash equivalents
|
|
$ |
202.7 |
|
|
$ |
139.0 |
|
Other short-term marketable securities (primarily mutual funds,
domestic government agencies and corporate debt securities)
|
|
|
95.9 |
|
|
|
13.8 |
|
Long-term marketable securities (primarily domestic government
agencies and corporate debt securities)
|
|
|
38.5 |
|
|
|
137.6 |
|
|
|
|
|
|
|
|
Subtotal
|
|
|
337.1 |
|
|
|
290.4 |
|
|
|
|
|
|
|
|
Equity securities Skyworks Solutions, Inc.
(6.2 million shares at September 30, 2005 and
September 30, 2004)
|
|
|
43.4 |
|
|
|
61.8 |
|
Equity securities SiRF Technology Holdings, Inc.
(zero shares at September 30, 2005 and 5.9 million
shares at September 30, 2004)
|
|
|
|
|
|
|
87.5 |
|
|
|
|
|
|
|
|
Subtotal Skyworks and SiRF
|
|
|
43.4 |
|
|
|
149.3 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$ |
380.5 |
|
|
$ |
439.7 |
|
|
|
|
|
|
|
|
The decrease in our cash, cash equivalents and marketable
securities from fiscal 2004 to fiscal 2005 is a result of
$58.6 million of restructuring and other related payments,
$21.8 million of capital expenditures, $18.8 million
for acquisitions, and an $11.6 million decline in the fair
value of our marketable equity securities mainly in SiRF and
Skyworks, offset by $49.0 of cash from our purchase and sale
leaseback of our Newport Beach headquarters facility, and
positive cash from operations and other net changes of
approximately $2.6 million driven by favorable working
capital management during fiscal 2005.
Included in our cash, cash equivalents and marketable securities
of $380.5 million as of September 30, 2005 are
6.2 million shares of common stock of Skyworks Solutions,
Inc. valued at $43.4 million. For this equity security
holding, there is risk associated with the overall state of the
stock market, having available buyers for the shares we sell,
and ultimately being able to liquidate the securities at a
favorable price. We cannot assure you that the carrying value of
these assets will ultimately be realized.
37
As of September 30, 2005, our principal sources of
liquidity are our existing cash reserves, marketable securities,
cash generated from product sales and our investments in third
parties, such as Jazz and our Mindspeed warrant. Given current
market conditions relating to the Mindspeed warrant, we have
determined that at this time, we do not have the ability to
liquidate a portion of the warrant in the next twelve months.
Consequently, all amounts related to the value of the Mindspeed
warrant are reflected as long-term on our consolidated balance
sheet. Our working capital at September 30, 2005 was
$125.9 million compared to $434.8 million at
September 30, 2004. The decrease in working capital was
partially attributable to the reclassification of
$196.8 million of our convertible subordinated notes which
are due in May 2006 as short-term.
The fair value of the Mindspeed warrant at September 30,
2005 is $33.1 million. The valuation of this derivative
instrument is subjective, and at any point in time could
ultimately result in the realization of amounts significantly
different than the carrying value. Further, there is no
assurance that the equity markets would allow us to liquidate a
substantial portion of these warrants within a short time period
without significantly impacting the market value.
We believe that our existing sources of liquidity, together with
cash expected to be generated from product sales, will be
sufficient to fund our operations, research and development,
anticipated capital expenditures, working capital and other
financing requirements, including the current portion of our
convertible debt, for at least the next twelve months. At
September 30, 2005, we have $711.8 million aggregate
principal amount of convertible subordinated notes outstanding,
of which $196.8 million is due in May 2006 and
$515.0 million is due in February 2007. The conversion
prices of the notes are currently substantially in excess of the
market value of our common stock. At September 30, 2005, we
have cash, cash equivalents and marketable securities of
$380.5 million. If we are unable to generate sufficient
cash flows from our operations and realize additional value from
our investments and other assets, we may be unable to meet our
February 2007 debt obligations without additional financing. We
cannot assure you that we will have access to additional sources
of capital, or be able to refinance our debt, on favorable terms
or at all.
Commitments
The following summarizes our contractual obligations at
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
|
|
More Than | |
|
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Convertible subordinated notes(1)
|
|
$ |
711.8 |
|
|
$ |
196.8 |
|
|
$ |
515.0 |
|
|
$ |
|
|
|
$ |
|
|
Operating leases
|
|
|
193.1 |
|
|
|
34.0 |
|
|
|
51.1 |
|
|
|
30.8 |
|
|
|
77.2 |
|
Assigned leases
|
|
|
7.2 |
|
|
|
2.6 |
|
|
|
2.2 |
|
|
|
1.3 |
|
|
|
1.1 |
|
Contingent consideration on acquisitions
|
|
|
6.0 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital commitments
|
|
|
5.7 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
923.8 |
|
|
$ |
245.1 |
|
|
$ |
568.3 |
|
|
$ |
32.1 |
|
|
$ |
78.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes interest. See Note 9 of Notes to Consolidated
Financial Statements for interest terms. |
At September 30, 2005, we have many sublease arrangements
on operating leases for terms ranging from near term to
approximately 10 years. Aggregate scheduled sublease income
based on current terms is approximately $35.7 million.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of conventional
operating leases and capital commitments as described in
Notes 10 and 11 of Notes to Consolidated Financial
Statements. We also have contingent liabilities for other items
assigned to Mindspeed and Skyworks at the time of their
separation from Conexant.
38
See Note 10 of Notes to the Consolidated Financial
Statements. We do not have variable interest entities as of
September 30, 2005.
Special Purpose Entities
We have one special purpose entity, Conexant USA, LLC, formed in
September 2005 in anticipation of completion of an accounts
receivable financing facility. This special purpose entity is a
wholly-owned consolidated subsidiary of the Company.
On November 29, 2005, we completed an accounts receivable
financing facility whereby we will sell, from time to time,
certain insured accounts receivable to Conexant USA, LLC, and
Conexant USA, LLC entered into an $80.0 million credit
agreement with a bank which is secured by the assets of the
special purpose entity. See Note 18 of Notes to the
Consolidated Financial Statements for further information.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based
Payment. This pronouncement amends SFAS No. 123,
and supersedes APB Opinion No. 25.
SFAS No. 123(R) requires that public companies account
for awards of equity instruments issued to employees under the
fair value method of accounting and recognize such amounts in
the statement of operations. The implementation of this
statement will be effective beginning with our first quarter of
fiscal 2006. We expect the impact of this new pronouncement,
which will be adopted using the modified prospective method, to
be significant to our results of operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4.
SFAS No. 151 amends the guidance in ARB No. 43 to
clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition,
SFAS No. 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the
normal capacity of the production facilities. We must adopt
SFAS No. 151 as of the beginning of fiscal 2006 and do
not expect that the adoption of SFAS No. 151 will have
a material impact on our financial condition or results of
operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a
term defined by the statement) to prior periods financial
statements, unless it is impracticable to determine the effect
of a change. It also applies to changes required by an
accounting pronouncement that does not include specific
transition provisions. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. We will adopt
SFAS No. 154 as of the beginning of fiscal 2007 and do
not expect that the adoption of SFAS No. 154 will have
a material impact on our financial condition or results of
operations.
Critical Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates
affecting our consolidated financial statements are those
relating to allowances for doubtful accounts, inventories,
long-lived assets, in-process research and development
(IPR&D), valuation of and estimated lives of identifiable
intangible assets, income taxes, valuation of derivative
instruments, restructuring costs, long-term employee benefit
plans and other contingencies. We regularly evaluate our
estimates and assumptions based upon 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. To the extent
actual results differ from those estimates, our future results
of operations may be affected.
39
We account for acquired businesses using the purchase method of
accounting which requires that the assets and liabilities
assumed be recorded at the date of acquisition at their
respective fair values. Because of the expertise required to
value intangible assets and IPR&D, we typically engage a
third party valuation firm to assist management in determining
those values. Valuation of intangible assets and IPR&D
entails significant estimates and assumptions including, but not
limited to: determining the timing and expected costs to
complete projects, estimating future cash flows from product
sales, and developing appropriate discount rates and probability
rates by project. We believe that the fair values assigned to
the assets acquired and liabilities assumed are based on
reasonable assumptions. To the extent actual results differ from
those estimates, our future results of operations may be
affected by incurring charges to our statements of operations.
Additionally, estimates for purchase price allocations may
change as subsequent information becomes available.
|
|
|
Impairment of long-lived assets |
Long-lived assets, including fixed assets and intangible assets
(other than goodwill), are continually monitored and are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such
asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its
eventual disposition. The estimate of cash flows is based upon,
among other things, certain assumptions about expected future
operating performance, growth rates and other factors. Our
estimates of undiscounted cash flows may differ from actual cash
flows due to, among other things, technological changes,
economic conditions, changes to our business model or changes in
our operating performance. If the sum of the undiscounted cash
flows (excluding interest) is less than the carrying value, we
recognize an impairment loss, measured as the amount by which
the carrying value exceeds the fair value of the asset. We
determine fair value by using available market data, comparable
asset quotes and/or discounted cash flow models.
Goodwill is tested for impairment annually, or when a possible
impairment is indicated, using the fair value based test
prescribed by SFAS No. 142. The estimates and
assumptions described above (along with other factors such as
discount rates) will affect the outcome of our impairment tests
and the amounts of any resulting impairment losses.
We evaluate the realizability of our deferred tax assets and
assess the need for a valuation allowance quarterly. We record a
valuation allowance to reduce our deferred tax assets to the net
amount that is more likely than not to be realized. Our
assessment of the need for a valuation allowance is based upon
our history of operating results, expectations of future taxable
income and the ongoing prudent and feasible tax planning
strategies available to us. In the event that we determine that
we will not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets
would be charged against income in the period such determination
is made. Likewise, in the event we were to determine that we
will be able to realize our deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred
tax assets would increase income in the period such
determination is made. To the extent that we realize a benefit
from reducing the valuation allowance on acquired deferred tax
assets, the benefit will be credited to goodwill.
We assess the recoverability of our inventories at least
quarterly through a review of inventory levels in relation to
foreseeable demand, generally over twelve months. Foreseeable
demand is based upon all available information, including sales
backlog and forecasts, product marketing plans and product life
cycle information. When the inventory on hand exceeds the
foreseeable demand, we write down the value of those inventories
which, at the time of our review, we expect to be unable to
sell. The amount of the inventory write-down is the excess of
historical cost over estimated realizable value. Once
established, these write-downs are considered
40
permanent adjustments to the cost basis of the excess inventory.
Demand for our products may fluctuate significantly over time,
and actual demand and market conditions may be more or less
favorable than those projected by management. In the event that
actual demand or product pricing is lower than originally
projected, additional inventory write-downs may be required.
Further, on a quarterly basis, we assess the net realizable
value of our inventories. When the estimated average selling
price, plus costs to sell our inventory, falls below our
inventory cost, we adjust our inventory to its current estimated
market value.
|
|
|
Allowance for doubtful accounts |
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We use a specific identification method for
some items, and a percentage of aged receivables for others. The
percentages are determined based on our past experience. If the
financial condition of our customers were to deteriorate, our
actual losses may exceed our estimates, and additional
allowances would be required.
|
|
|
Non-marketable equity securities |
We have a portfolio of strategic investments in non-marketable
equity securities. Our ability to recover our investments in
private, non-marketable equity securities and to earn a return
on these investments is primarily dependent on how successfully
these companies are able to execute to their business plans and
how well their products are accepted, as well as their ability
to obtain venture capital funding to continue operations and to
grow. We review all of our investments periodically for
impairment and an impairment analysis of non-marketable equity
securities requires significant judgment. This analysis includes
assessment of each investees financial condition, the
business outlook for its products and technology, its projected
results and cash flows, the likelihood of obtaining subsequent
rounds of financing and the impact of any relevant contractual
equity preferences held by us or by others. Overall business
valuations have declined significantly over the past two years,
and as a result we have experienced substantial impairments in
the value of non-marketable equity securities investments we
hold. Future adverse changes in market conditions or poor
operating results of underlying investments could result in an
inability to recover the carrying value of our investments that
may not be reflected in their current carrying values, which
could require additional impairment charges to write down the
carrying values of such investments.
Revenue is recognized when (i) the risk of loss has been
transferred to the customer, (ii) price and terms are
fixed, (iii) no significant vendor obligation exists, and
(iv) collection of the receivable is reasonably assured.
These terms are typically met upon shipment of product to the
customer, except for certain distributors who have a contractual
right of return or for which the contractual terms were not
enforced. Revenue with respect to these distributors is deferred
until the purchased products are sold through by the distributor
to a third party. Other distributors have limited stock rotation
rights, which allow them to rotate up to 10% of product in their
inventory two times a year. We recognize revenue to these
distributors upon shipment of product to the distributor, as the
stock rotation rights are limited and we believe that we have
the ability to estimate and establish allowances for expected
product returns in accordance with SFAS No. 48,
Revenue Recognition When Right of Return Exists. Our
revenue recognition policy is significant because our revenue is
a key component of our operations and the timing of revenue
recognition determines the timing of certain expenses, such as
sales commissions. Revenue results are difficult to predict, and
any shortfall in revenues could cause our operating results to
vary significantly from period to period.
Conexant has many distributor customers for whom revenue is
recognized upon its shipment of product to them, as the
contractual terms provide for limited or no rights of return.
During the three months ended December 31, 2004, we
determined that we were unable to enforce our contractual terms
with three distribution customers. As a result, from
October 1, 2004, we have deferred the recognition of
revenue on sales to these three distributors until the purchased
products are sold by the distributors to a third party. At
September 30, 2005, deferred revenue for these three
distributors was $6.5 million.
41
|
|
|
Valuation of derivative instruments |
We had two primary types of derivatives our
warrant to purchase shares of common stock of Mindspeed and the
conversion right of the Skyworks 15% convertible senior
subordinated notes. Until its conversion to common stock in May
2004, we determined the fair value of the conversion right of
the Skyworks notes using the actual trading price of the
underlying shares of Skyworks common stock. The fair value of
the Mindspeed warrant is determined using a standard
Black-Scholes pricing model with assumptions consistent with
current market conditions and our intent to liquidate the
warrant over a specified time period. The Black-Scholes pricing
model requires the input of highly subjective assumptions
including expected stock price volatility. Changes in these
assumptions, or in the underlying valuation model, could cause
the fair value of the Mindspeed warrant to vary significantly
from period to period.
We recorded $28.0 million, $9.3 million, and
$5.2 million of restructuring charges in fiscal years 2005,
2004 and 2003, respectively. These charges relate to reductions
in our workforce and related impact on the use of facilities.
The estimated charges contain estimates and assumptions made by
management about matters which are uncertain at the time that
the assumptions are made, for example the timing and amount of
sublease income that will be achieved on vacated property and
the operating costs to be paid until lease termination, and the
discount rates used in determining the present value (fair
value) of remaining minimum lease payments on vacated
properties. While we have used our best estimates based on facts
and circumstances available at the time, different estimates
reasonably could have been used in the relevant periods, and the
actual results may be different, and those differences could
have a material impact on the presentation of our financial
condition or results of operations. Our policies require us to
review the estimates and assumptions periodically and reflect
the effects of any revisions in the period that they are
determined to be necessary. Such amounts also contain estimates
and assumptions made by management, and are reviewed
periodically and adjusted accordingly.
We have long-term liabilities recorded for a retirement medical
plan and a pension plan. These obligations and the related
effects on operations are determined using actuarial valuations.
There are critical assumptions used in these valuation models
such as the discount rate, expected return on assets,
compensation levels, turnover rates and mortality rates. The
discount rates used are representative of high-quality fixed
income investments. The other assumptions do not tend to change
materially over time. We evaluate all assumptions annually and
they are updated to reflect our experience.
Through September 30, 2005, we accounted for employee
stock-based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and therefore no compensation expense has
been recognized for fixed stock option plans as options are
granted at fair market value on the date of grant. We also have
an employee stock purchase plan for all eligible employees. We
have adopted the pro forma disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. In
December 2004, the Financial Accounting Standards Board issued
SFAS No. 123(R), Share-Based Payment. This
pronouncement amends SFAS No. 123 and supersedes
APB 25. SFAS No. 123(R) requires that companies
account for awards of equity instruments issued to employees
under the fair value method of accounting and recognize such
amounts in the statement of operations. The implementation of
this statement will be effective beginning with our first
quarter of fiscal 2006. We expect the impact of this new
pronouncement, which will be adopted using the modified
prospective method, to be approximately $25.0 million for
fiscal 2006.
42
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Our financial instruments include cash and cash equivalents,
marketable debt securities, the Mindspeed warrant, equity
securities in Skyworks, and our long-term debt. Our main
investment objectives are the preservation of investment capital
and the maximization of after-tax returns on our investment
portfolio. Consequently, we invest with only high-credit-quality
issuers and we limit the amount of our credit exposure to any
one issuer.
Our cash and cash equivalents, and short-term marketable
securities are not subject to significant interest rate risk due
to the short maturities of these instruments. As of
September 30, 2005, the carrying value of our cash and cash
equivalents and short-term marketable securities approximates
fair value. Our long-term marketable securities (consisting of
corporate bonds and government agency securities) principally
have remaining terms of 1 to 3 years. Such securities are
subject to interest rate risk. At September 30, 2005, a 10%
adverse change in interest rates would result in a
$3.8 million decrease in the value of our long-term
marketable securities.
Marketable equity securities are subject to equity price risk.
For our equity security holdings, there are risks associated
with the overall state of the stock market, having available
buyers for shares we sell, and ultimately being able to
liquidate the securities at a favorable price. As of
September 30, 2005, a 10% adverse change in equity prices
would result in a $4.3 million decrease in the value of our
marketable equity securities.
We classify all of our marketable debt and equity securities as
available-for-sale securities. As of September 30, 2005,
the carrying value of these securities included net unrealized
losses of $9.7 million.
We hold a warrant to purchase 30 million shares of
common stock of Mindspeed. For financial accounting purposes,
this is a derivative instrument and the fair value of the
warrant is subject to significant risk related to changes in the
market price of Mindspeeds common stock. As of
September 30, 2005, a 10% decrease in the market price of
Mindspeeds common stock would decrease the fair value of
this warrant by approximately $4.6 million. At
September 30, 2005, the market price of Mindspeeds
common stock was $2.41 per share. For fiscal 2005, the
market price of Mindspeeds common stock ranged from a low
of $1.14 per share to a high of $2.98 per share.
Our long-term debt consists of convertible subordinated notes
with interest at fixed rates. Consequently, we do not have
significant cash flow exposure on our long-term debt. However,
the fair value of our convertible subordinated notes is subject
to significant fluctuation due to their convertibility into
shares of our common stock.
The following table shows the fair values of our financial
instruments as of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Carrying Value | |
|
Fair Value | |
|
|
| |
|
| |
|
|
(In millions) | |
Cash and cash equivalents
|
|
$ |
202.7 |
|
|
$ |
202.7 |
|
Marketable debt securities
|
|
|
60.6 |
|
|
|
60.6 |
|
Marketable government agency securities
|
|
|
73.8 |
|
|
|
73.8 |
|
Marketable equity securities
|
|
|
43.4 |
|
|
|
43.4 |
|
Mindspeed warrant
|
|
|
33.1 |
|
|
|
33.1 |
|
Current portion of long-term debt
|
|
|
196.8 |
|
|
|
194.7 |
|
Long-term debt
|
|
|
515.0 |
|
|
|
499.5 |
|
We transact business in various foreign currencies, and we have
established a foreign currency hedging program utilizing foreign
currency forward exchange contracts to hedge certain foreign
currency transaction exposures. Under this program, from time to
time, we offset foreign currency transaction gains and losses
with gains and losses on the forward contracts, so as to
mitigate our overall risk of foreign transaction gains and
losses. We do not enter into forward contracts for speculative
or trading purposes. At September 30, 2005, we held no
foreign currency forward exchange contracts. Based on our
overall currency rate exposure at September 30, 2005, a 10%
change in the currency rates would not have a material effect on
our consolidated financial position, results of operations or
cash flows.
43
|
|
Item 8. |
Financial Statements and Supplementary Data |
CONEXANT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except per share | |
|
|
amounts) | |
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
202,704 |
|
|
$ |
139,031 |
|
|
Short-term investments
|
|
|
139,306 |
|
|
|
163,040 |
|
|
Receivables, net of allowance of $3,803 (2005) and $5,974
(2004)
|
|
|
87,240 |
|
|
|
185,037 |
|
|
Inventories
|
|
|
95,329 |
|
|
|
194,754 |
|
|
Mindspeed warrant-current portion
|
|
|
|
|
|
|
3,599 |
|
|
Other current assets
|
|
|
14,701 |
|
|
|
20,768 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
539,280 |
|
|
|
706,229 |
|
Property, plant and equipment, net
|
|
|
50,700 |
|
|
|
55,741 |
|
Goodwill
|
|
|
717,013 |
|
|
|
708,544 |
|
Intangible assets, net
|
|
|
106,709 |
|
|
|
135,241 |
|
Mindspeed warrant
|
|
|
33,137 |
|
|
|
23,000 |
|
Marketable securities
|
|
|
38,485 |
|
|
|
137,604 |
|
Other assets
|
|
|
96,200 |
|
|
|
114,163 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,581,524 |
|
|
$ |
1,880,522 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
108,957 |
|
|
$ |
141,533 |
|
|
Accrued compensation and benefits
|
|
|
27,505 |
|
|
|
40,423 |
|
|
Restructuring and reorganization liabilities
|
|
|
28,829 |
|
|
|
22,427 |
|
|
Other current liabilities
|
|
|
51,308 |
|
|
|
67,044 |
|
|
Current portion of convertible subordinated notes
|
|
|
196,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
413,424 |
|
|
|
271,427 |
|
Convertible subordinated notes, net of current portion
|
|
|
515,000 |
|
|
|
711,825 |
|
Other liabilities
|
|
|
84,007 |
|
|
|
68,883 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,012,431 |
|
|
|
1,052,135 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
Preferred and junior preferred stock, no par value:
25,000 shares authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: 1,000,000 authorized shares;
474,683 (2005) and 469,441 (2004) shares issued and 473,500
(2005) and 468,257 (2004) shares outstanding
|
|
|
4,747 |
|
|
|
4,694 |
|
|
Treasury stock, 1,184 shares at cost
|
|
|
(5,584 |
) |
|
|
(5,584 |
) |
|
Additional paid-in capital
|
|
|
4,657,901 |
|
|
|
4,648,325 |
|
|
Accumulated deficit
|
|
|
(4,053,166 |
) |
|
|
(3,877,176 |
) |
|
Accumulated other comprehensive income (loss)
|
|
|
(22,012 |
) |
|
|
82,551 |
|
|
Notes receivable from stock sales
|
|
|
(304 |
) |
|
|
(576 |
) |
|
Unearned compensation
|
|
|
(12,489 |
) |
|
|
(23,847 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
569,093 |
|
|
|
828,387 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
1,581,524 |
|
|
$ |
1,880,522 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net revenues
|
|
$ |
722,739 |
|
|
$ |
901,854 |
|
|
$ |
599,977 |
|
Cost of goods sold
|
|
|
493,973 |
|
|
|
523,129 |
|
|
|
338,161 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
228,766 |
|
|
|
378,725 |
|
|
|
261,816 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
267,996 |
|
|
|
239,971 |
|
|
|
159,354 |
|
|
Selling, general and administrative(1)
|
|
|
117,861 |
|
|
|
125,474 |
|
|
|
93,426 |
|
|
Amortization of intangible assets
|
|
|
32,322 |
|
|
|
20,769 |
|
|
|
3,437 |
|
|
In-process research and development
|
|
|
|
|
|
|
160,818 |
|
|
|
|
|
|
Special charges
|
|
|
45,977 |
|
|
|
32,801 |
|
|
|
18,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
464,156 |
|
|
|
579,833 |
|
|
|
274,596 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(235,390 |
) |
|
|
(201,108 |
) |
|
|
(12,780 |
) |
Interest expense
|
|
|
33,691 |
|
|
|
30,708 |
|
|
|
28,120 |
|
Other (income) expense, net
|
|
|
(95,413 |
) |
|
|
69,100 |
|
|
|
(22,312 |
) |
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(42,021 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(173,668 |
) |
|
|
(300,916 |
) |
|
|
23,433 |
|
Provision (benefit) for income taxes
|
|
|
2,322 |
|
|
|
243,733 |
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(175,990 |
) |
|
|
(544,649 |
) |
|
|
23,562 |
|
Loss from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(728,877 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
(705,315 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
0.09 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(2.72 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
(2.63 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
0.09 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(2.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
(2.56 |
) |
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation-basic
|
|
|
470,658 |
|
|
|
389,630 |
|
|
|
268,586 |
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation-diluted
|
|
|
470,658 |
|
|
|
389,630 |
|
|
|
275,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Non-cash employee stock compensation is included in the above
captions as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Research and development
|
|
$ |
9,070 |
|
|
$ |
5,364 |
|
|
$ |
477 |
|
Selling, general and administrative
|
|
|
2,976 |
|
|
|
1,773 |
|
|
|
1,272 |
|
See accompanying notes to consolidated financial statements.
45
CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
23,562 |
|
Adjustments required to reconcile income (loss) from continuing
operations to net cash used in operating activities, net of
effects of acquisition/dispositions of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
18,594 |
|
|
|
16,151 |
|
|
|
16,828 |
|
|
Amortization of intangible assets
|
|
|
32,322 |
|
|
|
20,769 |
|
|
|
3,437 |
|
|
In-process research and development
|
|
|
|
|
|
|
160,818 |
|
|
|
|
|
|
Write-down of non-marketable investments
|
|
|
|
|
|
|
13,423 |
|
|
|
39,402 |
|
|
Provision for (recovery of) losses on accounts receivable
|
|
|
(1,587 |
) |
|
|
4,475 |
|
|
|
(3,958 |
) |
|
Inventory provisions
|
|
|
56,123 |
|
|
|
11,586 |
|
|
|
14,451 |
|
|
Deferred income taxes
|
|
|
|
|
|
|
256,041 |
|
|
|
682 |
|
|
Stock compensation, option modification charges and other
|
|
|
14,340 |
|
|
|
9,616 |
|
|
|
2,520 |
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(42,021 |
) |
|
Decrease (increase) in fair value of derivative instruments
|
|
|
(7,147 |
) |
|
|
98,955 |
|
|
|
(39,632 |
) |
|
Gain on sales of equity securities, investments and other assets
|
|
|
(91,264 |
) |
|
|
(24,071 |
) |
|
|
(8,618 |
) |
|
Other non-cash charges, net
|
|
|
6,054 |
|
|
|
(9,868 |
) |
|
|
6,103 |
|
|
Changes in assets and liabilities, net of
acquisitions/dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
99,535 |
|
|
|
(17,782 |
) |
|
|
(14,621 |
) |
|
|
Inventories
|
|
|
45,747 |
|
|
|
(73,524 |
) |
|
|
(21,910 |
) |
|
|
Accounts payable
|
|
|
(33,249 |
) |
|
|
43,453 |
|
|
|
(27,166 |
) |
|
|
Agere patent litigation settlement
|
|
|
(8,000 |
) |
|
|
|
|
|
|
|
|
|
|
Special charges and other restructuring related items, net of
$58.6 million, $25.2 million and $9.3 million of
payments, respectively
|
|
|
(14,953 |
) |
|
|
6,839 |
|
|
|
9,070 |
|
|
|
Accrued expenses and other current liabilities
|
|
|
(4,973 |
) |
|
|
1,474 |
|
|
|
(9,599 |
) |
|
|
Other
|
|
|
4,690 |
|
|
|
(4,719 |
) |
|
|
19,313 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(59,758 |
) |
|
|
(31,013 |
) |
|
|
(32,157 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(49,628 |
) |
|
|
(74,586 |
) |
|
|
(79,632 |
) |
Sales and maturities of marketable securities
|
|
|
68,985 |
|
|
|
114,323 |
|
|
|
142,143 |
|
Proceeds from sale of equity securities, assets and investments
|
|
|
97,244 |
|
|
|
57,236 |
|
|
|
18,228 |
|
Capital expenditures
|
|
|
(21,791 |
) |
|
|
(17,563 |
) |
|
|
(19,844 |
) |
Net proceeds from purchase and sale-leaseback and other
|
|
|
49,014 |
|
|
|
|
|
|
|
|
|
Advances to Skyworks
|
|
|
|
|
|
|
|
|
|
|
(35,000 |
) |
Repayment of Term Notes and advances by Skyworks
|
|
|
|
|
|
|
|
|
|
|
170,000 |
|
Cash received from (paid for) acquisitions, net
|
|
|
(18,817 |
) |
|
|
24,752 |
|
|
|
(7,714 |
) |
Payment of acquisition related costs
|
|
|
|
|
|
|
(30,196 |
) |
|
|
|
|
Payment of deferred purchase consideration
|
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
Investments in businesses
|
|
|
(2,817 |
) |
|
|
(3,015 |
) |
|
|
(4,500 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
122,190 |
|
|
|
66,951 |
|
|
|
183,681 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and warrants
|
|
|
1,045 |
|
|
|
24,559 |
|
|
|
22,293 |
|
Repayment of notes receivable from stock sales and other
employee notes
|
|
|
196 |
|
|
|
2,348 |
|
|
|
|
|
Repurchase of convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(56,378 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,241 |
|
|
|
26,907 |
|
|
|
(34,085 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(202,341 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
63,673 |
|
|
|
62,845 |
|
|
|
(84,902 |
) |
Cash and cash equivalents at beginning of year
|
|
|
139,031 |
|
|
|
76,186 |
|
|
|
161,088 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
202,704 |
|
|
$ |
139,031 |
|
|
$ |
76,186 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Notes | |
|
|
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
Receivable | |
|
|
|
|
|
Total | |
|
|
| |
|
Paid-In | |
|
Accumulated | |
|
Comprehensive | |
|
from Stock | |
|
Treasury | |
|
Unearned | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Income (Loss) | |
|
Sales | |
|
Stock | |
|
Compensation | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at September 30, 2002
|
|
|
265,676 |
|
|
$ |
265,676 |
|
|
$ |
3,219,044 |
|
|
$ |
(2,507,407 |
) |
|
$ |
(28,077 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,409 |
) |
|
$ |
947,827 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(705,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(705,315 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,211 |
|
Change in unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388 |
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(704,447 |
) |
Effect of change in par value
|
|
|
|
|
|
|
(263,779 |
) |
|
|
263,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase acquisitions
|
|
|
150 |
|
|
|
2 |
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
814 |
|
Issuance of common stock
|
|
|
10,308 |
|
|
|
862 |
|
|
|
21,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
|
|
22,679 |
|
Tax benefits from stock plans
|
|
|
|
|
|
|
|
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,521 |
|
|
|
1,521 |
|
Distribution of business (discontinued operations)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,805 |
) |
|
|
17,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003
|
|
|
276,134 |
|
|
|
2,761 |
|
|
|
3,506,070 |
|
|
|
(3,332,527 |
) |
|
|
(9,496 |
) |
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
166,766 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(544,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(544,649 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183 |
) |
Change in unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,551 |
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(452,602 |
) |
Purchase acquisitions
|
|
|
180,553 |
|
|
|
1,805 |
|
|
|
1,108,138 |
|
|
|
|
|
|
|
|
|
|
|
(2,469 |
) |
|
|
(4,778 |
) |
|
|
(30,948 |
) |
|
|
1,071,748 |
|
Issuance of common stock
|
|
|
12,754 |
|
|
|
128 |
|
|
|
32,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,987 |
|
Interest earned on notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
(39 |
) |
Settlement of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,932 |
|
|
|
(806 |
) |
|
|
|
|
|
|
1,126 |
|
Tax benefits from stock plans
|
|
|
|
|
|
|
|
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462 |
|
Stock option modifications
|
|
|
|
|
|
|
|
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,143 |
|
|
|
7,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2004
|
|
|
469,441 |
|
|
|
4,694 |
|
|
|
4,648,325 |
|
|
|
(3,877,176 |
) |
|
|
82,551 |
|
|
|
(576 |
) |
|
|
(5,584 |
) |
|
|
(23,847 |
) |
|
|
828,387 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175,990 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
Reclassification adjustment for realized gains on
available-for-sale securities included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,290 |
) |
Change in unrealized losses on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,886 |
) |
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280,553 |
) |
Purchase acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692 |
) |
|
|
(692 |
) |
Issuance of common stock
|
|
|
5,242 |
|
|
|
53 |
|
|
|
6,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,015 |
|
Interest earned on notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Settlement of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
292 |
|
Stock option modifications
|
|
|
|
|
|
|
|
|
|
|
2,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,614 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,050 |
|
|
|
12,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
474,683 |
|
|
$ |
4,747 |
|
|
$ |
4,657,901 |
|
|
$ |
(4,053,166 |
) |
|
$ |
(22,012 |
) |
|
$ |
(304 |
) |
|
$ |
(5,584 |
) |
|
$ |
(12,489 |
) |
|
$ |
569,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Basis of Presentation and Significant Accounting Policies |
Conexant Systems, Inc. (Conexant or the Company) designs,
develops and sells semiconductor system solutions, comprised of
semiconductor devices, software and reference designs, for use
in broadband communications applications that enable high-speed
transmission, processing and distribution of audio, video, voice
and data to and throughout homes and business enterprises
worldwide. The Companys access solutions connect people
through personal communications access products such as personal
computers (PCs), television set-top boxes and game consoles to
audio, video, voice and data services over wireless and wire
line broadband connections as well as over dial-up Internet
connections. The Companys central office solutions are
used by service providers to deliver high-speed audio, video,
voice and data services over copper telephone lines and fiber
optic networks to homes and businesses around the globe. In
addition, the Companys media processing products enable
the capture, display, storage, playback and transfer of audio
and video content in applications throughout home and small
office environments. The Company operates in one reportable
segment.
On February 27, 2004, the Company completed a merger with
GlobespanVirata, Inc. (GlobespanVirata) with GlobespanVirata
becoming a wholly-owned subsidiary of the Company. For
accounting purposes, the transaction was accounted for under the
purchase method of accounting with the Company as the acquiror.
In exchange for 100% of the outstanding shares of common stock
of GlobespanVirata (approximately 150.7 million shares),
Conexant issued 1.198 shares of its common stock for each
share of GlobespanVirata common stock outstanding (or
approximately 180.6 million shares of Conexant common
stock) and each outstanding option and warrant to purchase
GlobespanVirata common stock was adjusted and converted into an
option or warrant to purchase Conexant common stock based on the
1.198 merger ratio (or approximately 43.6 million options
to purchase shares of Conexant common stock). In May 2004, the
GlobespanVirata, Inc. subsidiary was renamed Conexant, Inc., and
hereinafter will be referred to as Conexant, Inc., and the
overall business combination is hereinafter referred to as the
Merger.
On June 27, 2003, the Company completed the distribution to
its shareholders of all outstanding shares of its wholly owned
subsidiary Mindspeed Technologies, Inc. (Mindspeed), to which
Conexant contributed its Internet infrastructure business,
including the stock of certain subsidiaries, and certain other
assets and liabilities, including $100.0 million in cash
(hereinafter, the Mindspeed Spin). In the Mindspeed Spin,
Conexant shareholders received one share of Mindspeed common
stock for every three Conexant shares held and the Conexant
shareholders continued to hold their Conexant shares. Mindspeed
issued the Company a warrant to purchase 30 million
shares of Mindspeed common stock, representing approximately
20 percent of Mindspeeds then outstanding common
stock on a fully diluted basis. The warrant is exercisable until
June 27, 2013 at an exercise price of $3.408 per
share. The fair value of the warrant is recorded as an asset on
the Companys consolidated balance sheet. Additionally, the
Company entered into a senior secured revolving credit facility
pursuant to which Mindspeed could have borrowed up to
$50.0 million, subject to certain restrictions, for working
capital and general corporate purposes. In December 2004, the
Mindspeed credit facility was terminated.
On June 25, 2002, the Company completed the distribution to
its shareholders of outstanding shares of its wholly owned
subsidiary Washington Sub, Inc. (Washington), to which the
Company contributed its wireless communications business, other
than certain assets and liabilities which the Company retained.
Immediately thereafter, Washington merged with and into Alpha
Industries, Inc. (Alpha), with Alpha the surviving corporation.
As a result of these transactions, Conexant shareholders
received 0.351 of a share of Alpha common stock for each
Conexant share held and the Conexant shareholders continued to
hold their Conexant shares. Upon completion of these events,
Alpha and its subsidiaries purchased the Companys
semiconductor assembly and test facility located in Mexicali,
Mexico and the Companys package design team that supports
the Mexicali facility (together, the Mexicali Operations) for
$150.0 million. Effective June 26, 2002, Alpha
48
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
changed its name to Skyworks Solutions, Inc. (Skyworks). All
these transactions, on a combined basis, are hereinafter
referred to as the Skyworks Spin.
Except where otherwise noted, the financial information
contained herein represents the Companys continuing
operations, excluding the discontinued wireless communications
business, Mexicali Operations and the Mindspeed business, and
including the results of operations of GlobespanVirata since
February 28, 2004, following the completion of the Merger.
Basis of Presentation The consolidated
financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America,
include the accounts of the Company and each of its
subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year The Company maintains a
fifty-two/fifty-three week fiscal year ending on the Friday
closest to September 30. Fiscal year 2005 comprised
52 weeks and ended on September 30. Fiscal 2004
comprised 52 weeks and ended on October 1. Fiscal year 2003
comprised 53 weeks and ended on October 3. For
convenience, the accompanying consolidated financial statements
have been shown as ending on the last day of the calendar month.
Use of Estimates The preparation of
financial statements in conformity with generally accepted
accounting principles accepted in the United States of America
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Among the significant
estimates affecting the financial statements are those related
to the allowance for doubtful accounts, inventories, long-lived
assets, valuation of derivative financial instruments and
investments, restructuring reserves, in-process research and
development, valuation of and estimated useful lives of
identifiable intangible assets, long-term employee benefit
plans, income taxes and litigation. On an ongoing basis,
management reviews its estimates based upon currently available
information. Actual results could differ materially from those
estimates.
Revenue Recognition The Company
recognizes revenue when (1) the risk of loss has been
transferred to the customer, (2) price and terms are fixed,
(3) no significant vendor obligation exists, and
(4) collection of the receivable is reasonably assured.
These terms are typically met upon shipment of product to the
customer, except for certain distributors who have a contractual
right of return or for which the contractual terms were not
enforced. Revenue with respect to these distributors is deferred
until the purchased products are sold through by the distributor
to a third party. Other distributors have limited stock rotation
rights, which allow them to rotate up to 10% of product in their
inventory two times a year. The Company recognizes revenue to
these distributors upon shipment of product to the distributor,
as the stock rotation rights are limited and the Company
believes that it has the ability to estimate and establish
allowances for expected product returns in accordance with
Statement of Financial Accounting Standards
(SFAS) No. 48, Revenue Recognition When Right of
Return Exists. Development revenue is recognized when
services are performed and was not significant for any of the
periods presented.
Conexant has many distributor customers for whom revenue is
recognized upon its shipment of product to them, as the
contractual terms provide for no or limited rights of return.
During the three months ended December 31, 2004, the
Company determined that it was unable to enforce its contractual
terms with three distribution customers. As a result, from
October 1, 2004, the Company has deferred the recognition
of revenue on sales to these three distributors until the
purchased products are sold by the distributors to a third
party. At September 30, 2005, deferred revenue for these
three distributors was $6.5 million.
Shipping and Handling In
accordance with EITF 00-10, Accounting for Shipping
and Handling Fees and Costs, the Company includes shipping
and handling fees billed to customers in net revenues. Amounts
incurred by the Company for freight are included in cost of
goods sold.
49
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash, Cash Equivalents and Marketable
Securities The Company considers all highly
liquid investments with insignificant interest rate risk and
original maturities of three months or less from the date of
purchase to be cash equivalents. The carrying amounts of cash
and cash equivalents approximate their fair values. Short-term
marketable securities consist of mutual funds, debt securities
with original maturity dates between ninety days and one year,
and equity securities. Long-term marketable securities consist
of debt securities with original or remaining maturity dates
greater than one year for which management intends to reinvest
those amounts on a long-term basis upon maturity. The
Companys investments are classified as available-for-sale,
and are reported at fair value at the balance sheet date. The
unrealized gains and losses are reported as a component of
accumulated other comprehensive income (loss). Management
determines the appropriate classification of debt securities at
the time of purchase and reassesses the classification at each
reporting date. Gains and losses on the sale of
available-for-sale investments are determined using the
specific-identification method.
Equity securities included in short-term marketable securities
represent the Companys common stock holdings in publicly
traded companies and are classified as short-term based on the
Companys ability and intent to liquidate the securities as
necessary to meet liquidity requirements. The reported fair
value of these equity securities is based on the quoted market
prices of the securities at each reporting date. Based on the
overall state of the stock market, the availability of buyers
for the shares when the Company wants to sell, and other
restrictions, at any point in time the amounts ultimately
realized upon liquidation of these securities may be
significantly different than the carrying value.
Total cash, cash equivalents and marketable securities are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
September 30, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
202,704 |
|
|
$ |
139,031 |
|
Equity securities Skyworks Solutions, Inc.
(6.2 million shares at September 30, 2005 and 2004)
|
|
|
43,404 |
|
|
|
61,767 |
|
Equity securities SiRF Technology Holdings, Inc.
(zero and 5.9 million shares at September 30, 2005 and
2004, respectively)
|
|
|
|
|
|
|
87,509 |
|
Other short-term marketable securities (primarily domestic
government agency securities and corporate debt securities)
|
|
|
95,902 |
|
|
|
13,764 |
|
|
|
|
|
|
|
|
|
Subtotal- short-term investments
|
|
|
139,306 |
|
|
|
163,040 |
|
|
|
|
|
|
|
|
Long-term marketable securities (primarily domestic government
agency securities and corporate debt securities)
|
|
|
38,485 |
|
|
|
137,604 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$ |
380,495 |
|
|
$ |
439,675 |
|
|
|
|
|
|
|
|
For all investment securities, unrealized losses that are other
than temporary are recognized in net income. The Company does
not hold these securities for speculative or trading purposes.
Inventories Inventories are stated at
the lower of cost or market. Cost is computed using the average
cost method on a currently adjusted standard basis (which
approximates actual cost); market is based upon estimated net
realizable value. The valuation of inventories at the lower of
cost or market requires the use of estimates as to the amounts
of current inventories that will be sold and the estimated
average selling price. These estimates are dependent on the
Companys assessment of current and expected orders from
its customers, and orders generally are subject to cancellation
with limited advance notice prior to shipment.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is based on estimated useful lives (principally 10 to
27 years for buildings and improvements; 3 to 5 years
for machinery and equipment; and the shorter of the remaining
terms of the leases or the estimated economic
50
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
useful lives of the improvements for land and leasehold
improvements). Significant renewals and betterments are
capitalized and replaced units are written off. Maintenance and
repairs are charged to expense.
Investments The Company accounts for
non-marketable investments using the equity method of accounting
if the investment gives the Company the ability to exercise
significant influence, but not control, over an investee.
Significant influence generally exists if the Company has an
ownership interest representing between 20% and 50% of the
voting stock of the investee. Under the equity method of
accounting, investments are stated at initial cost and are
adjusted for subsequent additional investments and the
Companys proportionate share of income or losses and
distributions. The Company records its share of the
investees earnings or losses in other (income) expense,
net in the consolidated statement of operations. Additional
investments by other parties in the investee will result in a
reduction in the Companys ownership interest, and the
resulting gain or loss will be recorded in other (income)
expense, net in the consolidated statement of operations. Where
the Company is unable to exercise significant influence over the
investee, investments are accounted for under the cost method.
Under the cost method, investments are carried at cost and
adjusted only for other-than-temporary declines in fair value,
distributions of earnings or additional investments. See
Note 7, Other Assets, for further information on
investments.
Impairment of Long-Lived Assets
Long-lived assets, including fixed assets and intangible assets
(other than goodwill), are continually monitored and are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such
asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its
eventual disposition. The estimate of cash flows is based upon,
among other things, certain assumptions about expected future
operating performance, growth rates and other factors. Estimates
of undiscounted cash flows may differ from actual cash flows due
to, among other things, technological changes, economic
conditions, changes to the business model or changes in
operating performance. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, an
impairment loss will be recognized, measured as the amount by
which the carrying value exceeds the fair value of the asset.
See Note 15, Special Charges, for discussion of impairment
charges for long-lived assets in fiscal years 2005, 2004, and
2003.
Goodwill is tested for impairment annually, or when a possible
impairment is indicated, using the fair value based test
prescribed by SFAS No. 142, Goodwill and Other
Intangible Assets. The estimates and assumptions described
above (along with other factors such as discount rates) will
affect the outcome of the impairment tests and the amounts of
any resulting impairment losses. The Company performed its
annual assessment of goodwill and determined that no impairment
exists as of September 30, 2005.
Foreign Currency Translation and
Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign
currency transaction costs. The functional currency of the
Companys principal foreign subsidiaries is the local
currency. Assets and liabilities denominated in foreign
functional currencies are translated into U.S. dollars at
the rates of exchange in effect at the balance sheet dates and
income and expense items are translated at the average exchange
rates prevailing during the period. The resulting foreign
currency translation adjustments are accumulated as a component
of other comprehensive income. For the remainder of the
Companys foreign subsidiaries, the functional currency is
the U.S. dollar. Inventories, property, plant and
equipment, cost of goods sold, and depreciation for those
operations are remeasured from foreign currencies into
U.S. dollars at historical exchange rates; other accounts
are translated at current exchange rates. Gains and losses
resulting from those remeasurements are included in earnings.
Gains and losses resulting from foreign currency transactions
are recognized currently in earnings.
Derivative Financial Instruments
Derivative financial instruments are recognized as either assets
or liabilities in the balance sheet and are measured at fair
value. The Companys derivative financial instruments
principally consist of foreign currency forward exchange
contracts which the Company uses to manage its exposure to
foreign currency risks, the Mindspeed warrant, and prior to its
conversion to Skyworks common
51
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock, the conversion rights of the Skyworks convertible notes.
The Companys objectives are to reduce the volatility of
earnings and cash flows associated with changes in foreign
currency exchange rates. The Company may use other derivatives
from time to time to manage its exposure to changes in interest
rates, equity prices or other risks. The Company does not enter
into derivative financial instruments for speculative or trading
purposes.
The Company designates certain forward contracts as hedges of
forecasted intercompany transactions. Unrealized gains and
losses on these contracts are recorded as a component of
accumulated other comprehensive income. Other forward contracts
are designated as hedges of intercompany accounts of the
Companys foreign subsidiaries. Unrealized gains and losses
on these forward contracts are recorded currently through
earnings and offset the corresponding losses and gains on the
assets and liabilities being hedged. At September 30, 2005,
the Company had no foreign currency forward contracts
outstanding. During fiscal 2005, 2004 and 2003, there were no
significant gains or losses recognized in earnings for hedge
ineffectiveness.
Prior to its conversion to Skyworks common stock in May 2004,
the Company accounted for the right to convert the Skyworks
15% convertible senior subordinated notes into shares of
Skyworks common stock as an embedded derivative instrument.
Changes in the fair value of the Skyworks 15% convertible
senior subordinated notes resulting from changes in the value of
the conversion right were included in other (income) expense,
net each period. The Company also accounts for the Mindspeed
warrant as a derivative instrument (see Note 7), and
changes in the fair value of the warrant are included in other
(income) expense, net each period.
Earnings (Loss) Per Share Basic income
(loss) per share is based on the weighted-average number of
shares of common stock outstanding during the period. Diluted
loss per share also includes the effect of stock options and
other common stock equivalents outstanding during the period,
and assumes the conversion of the Companys convertible
subordinated notes for the period of time such notes were
outstanding, if such stock options and convertible notes are
dilutive. In periods of a net loss position, basic and diluted
weighted average shares are the same.
The following table sets forth the computation of the numerator
and denominator of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Numerator (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
23,562 |
|
|
Loss from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(728,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
(705,315 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator (weighted-average number of shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
470,658 |
|
|
|
389,630 |
|
|
|
268,586 |
|
|
Stock options and warrants (under the treasury stock method)
|
|
|
|
|
|
|
|
|
|
|
6,644 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
470,658 |
|
|
|
389,630 |
|
|
|
275,230 |
|
|
|
|
|
|
|
|
|
|
|
52
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The potential dilutive effect of the common stock equivalents
shown below was not included in the denominator for the
computation of diluted earnings per share for the respective
periods, as the effect of these securities was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Weighted-average number of | |
|
|
shares, in thousands) | |
Stock options and warrants (under the treasury stock method)
|
|
|
2,094 |
|
|
|
18,255 |
|
|
|
|
|
4.25% Convertible Subordinated Notes due 2006
|
|
|
7,364 |
|
|
|
7,364 |
|
|
|
6,242 |
|
4.0% Convertible Subordinated Notes due 2007
|
|
|
12,137 |
|
|
|
12,137 |
|
|
|
11,178 |
|
5.25% Convertible Subordinated Notes due 2006
|
|
|
5,840 |
|
|
|
3,482 |
|
|
|
|
|
Restricted stock
|
|
|
5 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,440 |
|
|
|
41,251 |
|
|
|
17,420 |
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation The Company
accounts for employee stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and therefore no compensation
expense has been recognized for fixed stock option plans as
options are granted at fair market value on the date of grant.
The Company also has an employee stock purchase plan for all
eligible employees. The Company has adopted the pro forma
disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.
Had stock-based compensation been determined based on the fair
value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Companys pro
forma loss from continuing operations and pro forma loss from
continuing operations per share would have been the amounts
indicated below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income (loss) from continuing operations, as reported
|
|
$ |
(175,990 |
) |
|
$ |
(544,649 |
) |
|
$ |
23,562 |
|
Add: expense determined under fair value accounting included in
income (loss) from continuing operations, as reported
|
|
|
12,050 |
|
|
|
7,137 |
|
|
|
1,749 |
|
Deduct: total expense determined under fair value accounting for
all awards
|
|
|
(61,805 |
) |
|
|
(57,068 |
) |
|
|
(60,105 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma loss from continuing operations
|
|
$ |
(225,745 |
) |
|
$ |
(594,580 |
) |
|
$ |
(34,794 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per
share basic, as reported
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
0.09 |
|
Pro forma loss from continuing operations per
share basic
|
|
$ |
(0.48 |
) |
|
$ |
(1.53 |
) |
|
$ |
(0.13 |
) |
Income (loss) from continuing operations per
share diluted, as reported
|
|
$ |
(0.37 |
) |
|
$ |
(1.40 |
) |
|
$ |
0.09 |
|
Pro forma loss from continuing operations per
share diluted
|
|
$ |
(0.48 |
) |
|
$ |
(1.53 |
) |
|
$ |
(0.13 |
) |
53
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For purposes of pro forma disclosures under
SFAS No. 123, the estimated fair value of the
stock-based awards is assumed to be amortized to expense over
the instruments vesting period. The fair value has been
estimated at the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.8 |
% |
|
|
3.3 |
% |
|
|
3.2 |
% |
Expected volatility
|
|
|
85 |
% |
|
|
97 |
% |
|
|
97 |
% |
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.9 |
|
|
|
4.1 |
|
|
|
4.5 |
|
Weighted-average fair value of options granted
|
|
$ |
1.04 |
|
|
$ |
4.91 |
|
|
$ |
2.27 |
|
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123(R), Share-Based
Payment. This pronouncement amends SFAS No. 123
and supersedes APB 25. SFAS No. 123(R) requires
that companies account for awards of equity instruments issued
to employees under the fair value method of accounting and
recognize such amounts in the statement of operations. The
implementation of this statement will be effective beginning
with the Companys first quarter of fiscal 2006, and will
be adopted using the modified prospective method.
Income Taxes The provision (benefit)
for income taxes is determined in accordance with
SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on the
temporary differences between the financial reporting and tax
bases of assets and liabilities, applying enacted statutory tax
rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is recorded when it
is more likely than not that some or all of the deferred tax
assets will not be realized.
Concentrations Financial
instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and
cash equivalents, investments, and trade accounts receivable.
The Company invests its cash balances through high-credit
quality financial institutions. The Company places its
investments in investment-grade debt securities and limits its
exposure to any one issuer. The Companys trade accounts
receivable primarily are derived from sales to manufacturers of
communications products, consumer products and personal
computers and distributors. Management believes that credit
risks on trade accounts receivable are moderated by the
diversity of its products and end customers. The Company
performs ongoing credit evaluations of its customers
financial condition and requires collateral, such as letters of
credit and bank guarantees, whenever deemed necessary.
At September 30, 2005 and 2004, no customer accounted for
more than 10% of the Companys accounts receivable. In
fiscal 2005 and 2004, no customer accounted for 10% or more of
net revenues. In fiscal 2003, one customer (a distributor)
accounted for 11% of net revenues and no other customer
accounted for 10% or more of net revenues.
Supplemental Cash Flow Information
Interest paid was $30.3 million, $26.9 million and
$25.9 million during fiscal 2005, 2004 and 2003,
respectively. Net income taxes paid (refunds received) were
$2.1 million, $(14.9) million and $2.5 million
during fiscal 2005, 2004 and 2003, respectively.
Non-cash activities: The Company satisfied
$6.0 million, $7.5 million and $2.1 million of
liabilities from employee payroll deductions by issuing shares
of its common stock in connection with its Employee Stock
Purchase Plan (see Note 13) and its Retirement Savings
Plan (see Note 14), in fiscal years 2005, 2004
54
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2003, respectively. See Note 2 for a discussion of
common stock, common stock options, net assets acquired, and
other items in the Companys acquisitions.
Comprehensive Income (Loss) Other
comprehensive income (loss) includes foreign currency
translation adjustments, unrealized holding gains (losses) on
available-for-sale marketable securities, unrealized gains
(losses) on forward exchange contracts, and minimum pension
liability adjustments. The components of accumulated other
comprehensive income (loss) at fiscal year-ends are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Foreign currency translation adjustments
|
|
$ |
(3,420 |
) |
|
$ |
(3,206 |
) |
Unrealized gains (losses) on available-for-sale securities
|
|
|
(9,718 |
) |
|
|
92,458 |
|
Minimum pension liability adjustments
|
|
|
(8,874 |
) |
|
|
(6,701 |
) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$ |
(22,012 |
) |
|
$ |
82,551 |
|
|
|
|
|
|
|
|
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,
establishes standards for the way that public business
enterprises report information about operating segments in
annual consolidated financial statements. Although the Company
had four operating segments at September 30, 2005, under
the aggregation criteria set forth in SFAS No. 131,
the Company only operates in one reportable operating segment,
broadband communications.
Under SFAS No. 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 products is the only material source of revenue for
each of its four operating segments; |
|
|
|
the products sold by each of its operating segments use the same
standard manufacturing process; |
|
|
|
the products marketed by each of its operating segments are sold
to similar customers; and |
|
|
|
all of its products are sold through an internal sales force and
common distributors. |
Because the Company met each of the criteria set forth above and
each of its operating segments has similar economic
characteristics, the Company aggregates its results of
operations in one reportable operating segment.
Change in Accounting Principle The
Company adopted SFAS No. 141, Business
Combinations for acquisitions initiated after
June 30, 2001 and SFAS No. 142, Goodwill
and Other Intangible Assets as of the beginning of fiscal
2003. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for
using the purchase method and provides new criteria for
recording intangible assets separately from goodwill. Upon
adoption, the existing goodwill and intangible assets were
evaluated against the new criteria, which resulted in certain
intangible assets with a carrying value of $0.4 million
being subsumed into goodwill. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill
55
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and other intangible assets and requires that goodwill and
intangible assets that have indefinite useful lives no longer be
amortized into results of operations, but instead be tested at
least annually for impairment and written down when impaired.
Upon adoption of SFAS No. 142, the Company ceased
amortizing goodwill against its results of operations.
During the second quarter of fiscal 2003, the Company completed
the transition impairment test of its goodwill (as of the
beginning of fiscal 2003) required by SFAS No. 142.
The Company determined that it has a single reporting unit (as
defined in SFAS No. 142). For purposes of the
impairment test, the fair value of the reporting unit was
determined considering both an income approach and a market
approach. Management determined that the recorded value of its
goodwill at the transition date was not impaired. See
Note 3 for the transitional impairment charge recorded by
Mindspeed and included in the Companys loss from
discontinued operations of Mindpseed in fiscal 2003.
Recent Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board issued
SFAS No. 123(R), Share-Based Payment. This
pronouncement amends SFAS No. 123, and supersedes APB
Opinion No. 25. SFAS No. 123(R) requires that
public companies account for awards of equity instruments issued
to employees under the fair value method of accounting and
recognize such amounts in the statement of operations. The
implementation of this statement will be effective beginning
with the Companys first quarter of fiscal 2006. The
Company expects the impact of this new pronouncement to be
significant to its results of operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4.
SFAS No. 151 amends the guidance in ARB No. 43 to
clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition,
SFAS No. 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the
normal capacity of the production facilities. The Company must
adopt SFAS No. 151 as of the beginning of fiscal 2006
and does not expect that the adoption of SFAS No. 151
will have a material impact on its financial condition or
results of operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a
term defined by the statement) to prior periods financial
statements, unless it is impracticable to determine the effect
of a change. It also applies to changes required by an
accounting pronouncement that does not include specific
transition provisions. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company will
adopt SFAS No. 154 as of the beginning of fiscal 2007
and does not expect that the adoption of SFAS No. 154
will have a material impact on its financial condition or
results of operations.
|
|
|
Acquisition of Paxonet Communications, Inc. |
On December 3, 2004, the Company acquired all of the
outstanding capital stock of Paxonet Communications, Inc.
(Paxonet), a privately held company headquartered in Fremont,
California, with an engineering workforce primarily based in
India.
The consideration for this purchase was $14.8 million in
cash. Net tangible assets acquired were $0.3 million.
Approximately $0.7 million of the purchase price was
allocated to unearned compensation representing the intrinsic
value of unvested stock options exchanged in the transaction and
the remainder to identifiable intangible assets and goodwill.
The unearned compensation is being amortized to expense over the
56
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
four year remaining vesting period of the stock options. A total
of $0.1 million of this unearned compensation was
recognized as an expense in the year ended September 30,
2005. The identifiable intangible assets of $1.4 million
are being amortized on a straight-line basis over a period of
two to eight years, with a weighted-average life of
approximately six years. The $12.4 million in goodwill is
not deductible for tax purposes.
During fiscal 2005, the Company also completed an asset
acquisition which was not material to its consolidated financial
statements.
The pro forma effects of these acquisitions were not material to
the Companys results of operations for fiscal 2005 or 2004.
|
|
|
Acquisition of Amphion Semiconductor |
On June 29, 2004, the Company purchased all the outstanding
capital stock of Amphion Semiconductor Limited (Amphion), a
company located in Belfast, Northern Ireland specializing in
developing video compression technology. The Company completed
this strategic acquisition as a complement to existing products.
The consideration for this purchase was $20.0 million in
cash, 600,000 shares of common stock (valued at
$6.0 million) and $0.4 million in transaction costs.
Net tangible assets acquired were $2.4 million. The excess
of the purchase price over the net tangible assets was assigned
to developed technology of $4.2 million and
$19.4 million to goodwill. The developed technology will be
amortized on a straight-line basis over five years. The amount
recorded as goodwill of $19.4 million is not deductible for
tax purposes.
Under the stock purchase agreement, the Company guaranteed the
value of the shares issued to the former Amphion shareholders
for a defined period through June 29, 2006 (subject to
certain conditions and elections). The guaranty is subject to
adjustment for any stock split, stock dividend,
recapitalization, merger or similar transaction. In the event
that the market price of the Conexant common stock does not
equal or exceed $10.00 for at least five consecutive trading
days during this period, Conexant would be required to make an
additional payment (in cash or additional shares of common stock
at Conexants option) to former Amphion shareholders for
the difference between the $10.00 and the market price per share
of such shares as of specified dates. Consequently, the Company
has valued the shares delivered to the former Amphion
shareholders at the guaranteed value of $10.00 per share,
or a total of $6.0 million. To the extent the Company is
required to make an additional payment under the guaranty, the
payment will not increase the total purchase price.
The terms of this acquisition include provisions under which the
former shareholders of Amphion could receive additional
consideration of up to $3.0 million through
December 31, 2005 if certain technology milestones are
achieved. This contingent consideration has not been included in
the purchase price allocation and if earned, such amounts will
be capitalized as an addition to goodwill.
|
|
|
Merger with GlobespanVirata, Inc. |
On February 27, 2004, the Company completed its merger with
GlobespanVirata, with GlobespanVirata becoming a wholly-owned
subsidiary of the Company. In exchange for 100% of the
outstanding shares of common stock of GlobespanVirata
(approximately 150.7 million shares), the Company issued
1.198 shares of Conexant common stock for each share of
GlobespanVirata common stock outstanding (or approximately
180.6 million shares of Conexant common stock) and each
outstanding option and warrant to purchase GlobespanVirata
common stock was adjusted and converted into an option or
warrant to purchase Conexant common stock based on the 1.198
merger ratio (or approximately 43.6 million options and
warrants to purchase shares of Conexant common stock). In May
2004, the GlobespanVirata, Inc. subsidiary was renamed Conexant,
Inc., and hereinafter will be referred to as Conexant, Inc., and
the overall business combination is hereinafter referred to as
the Merger.
57
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Merger was accounted for as a purchase and the operating
results of the former GlobespanVirata have been included in the
Companys operations from the closing date.
The purchase consideration is summarized as follows (in
thousands):
|
|
|
|
|
Fair market value of Conexant common stock issued
|
|
$ |
1,027,342 |
|
Fair value of Conexant common stock options issued
|
|
|
81,011 |
|
Transaction costs
|
|
|
12,900 |
|
|
|
|
|
Total purchase consideration
|
|
$ |
1,121,253 |
|
|
|
|
|
The fair value of Conexant common stock and stock options issued
of $1.1 billion has been allocated to common stock and
additional paid-in capital. The fair market value of the
180.6 million shares of common stock issued was determined
using a per share price of $5.69 (the average of the closing
market prices of Conexant common stock on the day of the
announcement of the Merger, November 3, 2003, and on the
three business days before and after the announcement date). In
accordance with FASB Interpretation No. 44 Accounting
for Certain Transactions Involving Stock Compensation, the
$111.9 million fair value of the 43.6 million Conexant
common stock options granted to replace the acquired common
stock options was determined using a Black-Scholes option
pricing model with the following assumptions: market price of
$5.69 per share, volatility of 97%, risk-free rate of
return of 3.2%, expected lives of 4.5 years and no dividend
yield. Approximately $30.9 million in intrinsic value
associated with the unvested stock options has been allocated to
unearned compensation and will be amortized to expense over the
average remaining vesting period of approximately
2.6 years. A total of $11.9 and $7.1 million of this
unearned compensation was recognized as an expense in the years
ended September 30, 2005 and 2004.
In connection with the Merger, the Company began to formulate a
reorganization and restructuring plan (the Reorganization Plan).
As a result of the Reorganization Plan, the Company recorded
restructuring and asset impairment charges related to
Conexants operations of $14.6 million during the year
ended September 30, 2004. These charges are included in
Special Charges and Cost of Goods Sold in the accompanying
consolidated statement of operations. Additionally, the Company
initially recognized $14.8 million as liabilities assumed
in the purchase business combination related to restructuring
liabilities for estimated costs related to Conexant, Inc.
facilities consolidation and the related impact on Conexant,
Inc. outstanding real estate leases and Conexant, Inc.
involuntary employee terminations and relocations. Subsequent to
the Merger, but prior to September 30, 2004, these
liabilities were reduced by $3.3 million against the
purchase price allocation (goodwill) for certain facilities
related decisions and revised estimates of severance and
relocation costs. These liabilities were included in the
allocation of the purchase price in accordance with
SFAS No. 141 entitled Business
Combinations and EITF 95-3 entitled Recognition
of Liabilities in Connection with a Purchase Business
Combination. The Reorganization Plan is complete as of
September 30, 2005. See Note 15 for a further
description of the Companys reorganization and
restructuring plans.
In the Merger, the Company acquired a $4.8 million reserve
for income tax contingencies for foreign income tax matters
which arose due to items recorded in the income tax returns of
the former GlobespanVirata subsidiaries. In the quarter ended
September 30, 2004, upon further review of the information,
the Company increased the reserve for these income tax
contingencies against the purchase price allocation
(goodwill) by an additional $3.4 million.
During fiscal 2005, certain of these income tax contingencies
were settled with the taxing authorities, and as a result, the
amount of the liability in excess of the settlement amount, or
$6.3 million, was reduced with a corresponding reduction to
goodwill.
58
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following sets forth the Companys estimates of the
fair values of the assets acquired and liabilities assumed in
the Merger as of February 27, 2004, as revised for matters
discussed above (in thousands).
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
42,515 |
|
Short-term and long-term investments
|
|
|
153,099 |
|
Accounts receivable
|
|
|
91,259 |
|
Inventories
|
|
|
73,281 |
|
Prepaids and other current assets
|
|
|
4,345 |
|
Property and equipment
|
|
|
46,883 |
|
Other long-term assets
|
|
|
20,600 |
|
Identifiable intangible assets
|
|
|
137,931 |
|
In-process research and development
|
|
|
160,818 |
|
Goodwill
|
|
|
625,181 |
|
Accounts payable
|
|
|
(41,580 |
) |
Accrued expenses
|
|
|
(72,161 |
) |
Accrued restructuring and reorganization liabilities
|
|
|
(10,239 |
) |
Long-term debt
|
|
|
(130,000 |
) |
Other long-term liabilities
|
|
|
(23,284 |
) |
Treasury stock
|
|
|
9,188 |
|
Notes receivable from stock sales
|
|
|
2,469 |
|
Unearned compensation
|
|
|
30,948 |
|
|
|
|
|
Net assets acquired
|
|
$ |
1,121,253 |
|
|
|
|
|
The excess of the purchase price over the fair value of the net
tangible assets acquired has been reflected as identifiable
intangible assets and goodwill. The identifiable intangible
assets and respective useful lives are as follows (in thousands):
|
|
|
|
|
Product licenses (7 years)
|
|
$ |
10,964 |
|
Trademark (7 years)
|
|
|
2,006 |
|
Developed technologies (2 5 years)
|
|
|
124,961 |
|
|
|
|
|
Total identifiable intangible assets
|
|
$ |
137,931 |
|
|
|
|
|
The identifiable intangible assets were valued using the income
approach and a discount rate of 18%. The developed technologies
consist of eight products in the digital subscriber line
(DSL) and wireless local area network
(LAN) categories. Under the income approach, the fair value
reflects the present value of the projected cash flows that are
expected to be generated by the products incorporating the
current technology. The type of income approach utilized for the
trademark was the relief from royalty methodology, under which
an estimate is made as to the appropriate royalty income that
would be negotiated in an arms length transaction if the
subject intangible asset were licensed from an independent
third-party owner. These assets are being amortized on a
straight-line basis over their estimated useful lives ranging
from 2 to 7 years, with a weighted-average life of
approximately 5 years. Amortization expense for these
intangible assets was $27.8 million and $16.6 million
for the years ended September 30, 2005 and 2004,
respectively. The amount recorded as goodwill of
$625.2 million is not deductible for tax purposes.
A portion of the Merger purchase price was allocated to in
process research and development (IPR&D).
$160.8 million was expensed upon completion of the Merger
(as a charge not deductible for tax purposes) as it was
determined that the underlying products had not reached
technological feasibility, had no alternative uses
59
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and successful development was uncertain. The Company identified
and valued IPR&D projects relating to the development of DSL
and wireless networking products. The DSL projects represented
70% of the total IPR&D acquired. The estimated costs to
complete for the DSL and wireless networking projects were
approximately $14.1 million and $6.2 million,
respectively. The fair values assigned to these projects were
based on the income approach and used projected cash flows which
were discounted at a rate of 19%. The discount rate was derived
from a weighted-average cost of capital analysis, adjusted
upwards to reflect additional risks inherent in the development
process, including the probability of achieving technological
success and market acceptance. Each of the IPR&D projects
was analyzed considering technological innovations, the
existence and utilization of core technology, the complexity,
costs and time to complete the remaining development efforts,
and stage of completion. The discount rate reflects the stage of
completion and other risks inherent in the projects. The
material risks associated with the incomplete projects are the
ability to complete the items within the outlined timeframes and
within the allocated cost guidelines, and ultimately to sell the
products to end-users. As of September 30, 2005, the DSL
related IPR&D projects were approximately 85% complete, 10%
are expected to be completed in fiscal 2006, and 5% have been
abandoned due to product roadmap and market changes. As of
September 30, 2005, 75% of the wireless networking related
IPR&D projects were complete and 25% were abandoned due to
product roadmap and market changes. Completion costs to date on
all projects have been consistent with estimates made at the
time of the Merger. However, revenue projections for the sale of
DSL and wireless networking products have declined since the
time of the Merger. As a result of revenue declines in the
Broadband Access and Wireless Networking businesses during
fiscal 2005, management performed an assessment of the
recoverability of the intangible assets acquired in the Merger
and determined that no impairment exists as of
September 30, 2005.
|
|
3. |
Discontinued Operations |
On June 27, 2003, Conexant completed the distribution to
Conexant shareholders of all outstanding shares of Mindspeed
Technologies, Inc. (Mindspeed), a wholly owned subsidiary of
Conexant to which Conexant contributed its Internet
infrastructure business, including the stock of certain
subsidiaries, and certain other assets and liabilities,
including $100.0 million in cash (hereinafter, the
Mindspeed Spin). In the Mindspeed Spin, Conexant shareholders
received one share of Mindspeed common stock for every three
Conexant shares held and the Conexant shareholders continued to
hold their Conexant shares. Mindspeed issued to Conexant a
warrant to purchase 30 million shares of Mindspeed
common stock, representing approximately 20 percent of
Mindspeeds outstanding common stock on a fully diluted
basis. The warrant is exercisable until June 27, 2013 at an
exercise price of $3.408 per share (the fair market value on the
date of grant of the warrant). The warrant was initially
assigned a fair value of $89.0 million (recorded as a
return of capital to Conexant) using the Black-Scholes option
pricing model (assuming volatility of 90%, a risk-free interest
rate of 3.5%, and no dividend yield), and is presented as an
asset on the consolidated balance sheet. The carrying value of
the net assets which the Company contributed to Mindspeed in
June 2003 was $193.4 million. Additionally, Conexant
entered into a senior secured revolving credit facility pursuant
to which Mindspeed was able to borrow up to $50.0 million
for working capital and general corporate purposes. In December
2004, the Mindspeed credit facility was terminated (see
Note 11).
The accompanying consolidated financial statements have been
restated to reflect the Mindspeed Technologies business, which
was completed in fiscal 2003, as discontinued operations.
60
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The operating results of the discontinued Mindspeed Technologies
business, including the separation costs paid by the Company,
included in the accompanying consolidated statements of
operations were as follows (in thousands):
|
|
|
|
|
|
|
2003 | |
|
|
| |
Net revenues
|
|
$ |
58,719 |
|
|
|
|
|
Loss before income taxes
|
|
$ |
(155,231 |
) |
Provision for income taxes
|
|
|
462 |
|
Cumulative effect of change in accounting for goodwill
|
|
|
(573,184 |
) |
|
|
|
|
Loss from discontinued operations
|
|
$ |
(728,877 |
) |
|
|
|
|
In March 2005, the Company completed the purchase and
sale-leaseback of two buildings in Newport Beach, California. In
August 2004, the Company exercised its approximate
$60.0 million purchase option on these buildings under its
then existing lease agreement. Concurrent with the payment of
$60.0 million for the purchase option in March 2005, the
Company sold the buildings to a third party for
$110.0 million. Net cash proceeds from this transaction,
after closing costs of approximately $1.0 million, were
approximately $49.0 million. The net deferred gain on the
sale was $43.6 million, excluding $5.4 million of
leasehold improvements and other property associated with these
buildings.
The Company will continue to occupy one of the buildings under a
ten year lease. The other building will be leased back by the
Company for a period of 39 months, and Mindspeed will
continue to occupy that space as a subtenant for the entire term
of the lease. The net gain on the sale of $43.6 million has
been deferred and is included in other long-term liabilities on
the accompanying consolidated balance sheet, and will be
recognized as a reduction to rent expense ratably over the terms
of the respective leases. As of September 30, 2005, the
unamortized deferred gain is $40.3 million, the future
minimum lease payments on these buildings are
$54.6 million, and the expected sublease income from
Mindspeed is $11.3 million.
In fiscal 2005, the Company sold its remaining common stock
ownership in SiRF Technology Holdings, Inc. (SiRF), representing
approximately 5.9 million shares, for net proceeds of
$93.8 million, which resulted in a gain of
$89.8 million.
In fiscal 2004, the Company sold a portion of its common stock
ownership in SiRF after SiRFs initial public offering in
April 2004. The Company sold approximately 2.5 million
shares in SiRF for net proceeds of $28.2 million, which
resulted in a gain of $26.5 million. At September 30,
2004, the Company continued to hold approximately
5.9 million shares of common stock of SiRF as a short-term
investment which was included in marketable securities.
In fiscal 2004, the Company sold several of its cost basis
investments in early stage technology companies for cash of
$5.9 million, with an additional $1.0 million to be
held in escrow for a period of eighteen to twenty four months
for potential buyer indemnity claims. A total loss of
$3.0 million was recognized on these sales. In addition,
the Company sold a building for net cash proceeds totaling
$22.8 million. A loss of $3.2 million was recognized
on the sale.
61
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In fiscal 2003, the Company sold certain manufacturing assets to
Jazz Semiconductor, Inc. (Jazz) for $1.0 million payable
over four quarters. A $4.8 million impairment loss was
recognized on these assets.
In fiscal 2003, the Company sold two of its cost basis
investments in early stage technology companies for cash of
$15.0 million, with an additional $2.1 million to be
held in escrow for a period of twelve to eighteen months for
potential buyer indemnity claims. A total gain of
$8.6 million was recognized on these sales. In addition,
the Company accrued $2.0 million for non-cancelable
commitments related to one of these transactions for losses to
complete the production of certain inventory items and the
rendering of future services.
Marketable securities include asset-backed securities, mutual
funds, corporate bonds, government securities and marketable
equity securities. All of the Companys marketable
securities are classified as available for sale and are recorded
at fair value, based upon quoted market prices. As of
September 30, 2005, net unrealized losses of
$9.7 million on these securities are included in
accumulated other comprehensive income.
Marketable securities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Amortized | |
|
Holding | |
|
Holding | |
|
|
Short-Term Investments |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$ |
37,974 |
|
|
$ |
|
|
|
$ |
(40 |
) |
|
$ |
37,934 |
|
Domestic government agency securities
|
|
|
58,137 |
|
|
|
2 |
|
|
|
(171 |
) |
|
|
57,968 |
|
Equity securities
|
|
|
52,524 |
|
|
|
|
|
|
|
(9,120 |
) |
|
|
43,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,635 |
|
|
$ |
2 |
|
|
$ |
(9,331 |
) |
|
$ |
139,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$ |
10,837 |
|
|
$ |
|
|
|
$ |
(125 |
) |
|
$ |
10,712 |
|
Corporate debt securities
|
|
|
2,274 |
|
|
|
|
|
|
|
(3 |
) |
|
|
2,271 |
|
Equity securities
|
|
|
56,524 |
|
|
|
93,533 |
|
|
|
|
|
|
|
150,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,635 |
|
|
$ |
93,533 |
|
|
$ |
(128 |
) |
|
$ |
163,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The mutual fund holdings at September 30, 2004 were
invested in adjustable rate mortgages and government agency
securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross | |
|
|
|
|
|
|
Unrealized |
|
Unrealized | |
|
|
|
|
Amortized | |
|
Holding |
|
Holding | |
|
|
Long-Term Investments |
|
Cost | |
|
Gains |
|
Losses | |
|
Fair Value | |
|
|
| |
|
|
|
| |
|
| |
|
|
(In thousands) | |
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic government agency securities
|
|
$ |
15,964 |
|
|
$ |
|
|
|
$ |
(102 |
) |
|
$ |
15,862 |
|
Corporate debt securities
|
|
|
22,910 |
|
|
|
|
|
|
|
(287 |
) |
|
|
22,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,874 |
|
|
$ |
|
|
|
$ |
(389 |
) |
|
$ |
38,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic government agency securities
|
|
$ |
105,956 |
|
|
$ |
|
|
|
$ |
(800 |
) |
|
$ |
105,156 |
|
Corporate debt securities
|
|
|
32,595 |
|
|
|
|
|
|
|
(147 |
) |
|
|
32,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
138,551 |
|
|
$ |
|
|
|
$ |
(947 |
) |
|
$ |
137,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys long-term marketable securities principally
have original contractual maturities from one to three years.
The amortized cost and estimated fair value of debt securities
and government agency securities at September 30, 2005, by
contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay
obligations without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized | |
|
|
|
|
Cost | |
|
Fair Value | |
|
|
| |
|
| |
Due in 1 year or less
|
|
$ |
96,111 |
|
|
$ |
95,902 |
|
Due in 1 2 years
|
|
|
17,301 |
|
|
|
17,194 |
|
Due in 2 5 years
|
|
|
19,397 |
|
|
|
19,130 |
|
Due after 5 years
|
|
|
2,176 |
|
|
|
2,161 |
|
|
|
|
|
|
|
|
|
|
$ |
134,985 |
|
|
$ |
134,387 |
|
|
|
|
|
|
|
|
As of September 30, 2002, the Company held notes receivable
from Skyworks with an aggregate principal amount of
$180.0 million, including promissory notes for
$150.0 million guaranteed by Skyworks and certain Skyworks
subsidiaries and secured by substantially all of the assets of
Skyworks (the Term Notes) and $30.0 million outstanding
under the $100.0 million credit facility which the Company
had made available to Skyworks. In November 2002, the Company
restructured the financing agreements with Skyworks. Skyworks
repaid $105.0 million of the principal amount and all
accrued interest owed to the Company under the Term Notes and
the remaining principal amount of the Term Notes was exchanged
for $45.0 million principal amount of the Skyworks
15% convertible senior subordinated notes with a maturity
date of June 30, 2005. Skyworks also repaid all amounts
outstanding under the credit facility, the credit facility was
cancelled and the Company released all security interests in
Skyworks assets and properties.
The Company received a notice dated April 22, 2004 from
Skyworks advising that on May 12, 2004, Skyworks would
redeem in full the 15% convertible senior subordinated
notes held by the Company. The Company exercised its right to
convert all of the notes into shares of Skyworks common stock
prior to the
63
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
scheduled redemption date at the conversion price of
$7.87 per share. On May 10, 2004, the Company received
5.7 million shares of Skyworks common stock in full
satisfaction of the notes.
|
|
7. |
Supplemental Financial Statement Data |
Inventories at fiscal year-ends consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Work-in-process
|
|
$ |
61,535 |
|
|
$ |
99,226 |
|
Finished goods
|
|
|
33,794 |
|
|
|
95,528 |
|
|
|
|
|
|
|
|
|
|
$ |
95,329 |
|
|
$ |
194,754 |
|
|
|
|
|
|
|
|
At September 30, 2005 and 2004, inventories are net of
$44.8 million and $23.3 million, respectively, of
allowances for excess and obsolete (E&O) inventories. In
addition, at September 30, 2005, inventories are net of
$6.7 million in lower of cost or market
(LCM) reserves. Activity in the E&O inventory reserves
for the years ended September 30, 2005 and 2004 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
E&O reserves, beginning of period
|
|
$ |
23,319 |
|
|
$ |
25,177 |
|
Additions
|
|
|
35,944 |
|
|
|
11,586 |
|
Release upon sales of product
|
|
|
(5,864 |
) |
|
|
(7,123 |
) |
Scrap
|
|
|
(11,319 |
) |
|
|
(3,792 |
) |
Standards adjustments and other
|
|
|
2,753 |
|
|
|
(2,529 |
) |
|
|
|
|
|
|
|
E&O reserves, end of period
|
|
$ |
44,833 |
|
|
$ |
23,319 |
|
|
|
|
|
|
|
|
During the years ended September 30, 2005, 2004, and 2003,
the Company sold $5.9 million, $7.1 million, and
$10.9 million respectively, of reserved products which
benefited gross margin in the associated period.
The Companys products are used by communications
electronics OEMs that have designed the products into
communications equipment. For many of the products, the Company
gains design wins through a lengthy sales cycle, which often
includes providing technical support to the OEM customer.
Moreover, once a customer has designed a particular
suppliers components into a product, substituting another
suppliers components often requires substantial design
changes which involve significant cost, time, effort and risk.
In the event of the loss of business from existing OEM
customers, the Company may be unable to secure new customers for
the existing products without first achieving new design wins.
When the quantities of inventory on hand exceed foreseeable
demand from existing OEM customers into whose products our
products have been designed, the Company generally will be
unable to sell the excess inventories to others, and the
estimated realizable value of such inventories is generally zero.
Further, on a quarterly basis, the Company assesses the net
realizable value of its inventories. When the estimated average
selling price, plus costs to sell the inventory falls below
cost, the Company adjusts its inventory to the current estimated
market value. During the year ended September 30, 2005, the
Company recorded $20.2 million in inventory charges to
adjust certain Wireless Networking products to their estimated
market value. Increases to this inventory reserve may be
required based upon actual average selling prices and changes to
the current estimates, which would impact the gross margin
percentage in future periods. Activity
64
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the LCM inventory reserves for the year ended
September 30, 2005 was as follows (in thousands). There
were no LCM reserves in fiscal 2004.
|
|
|
|
|
|
|
2005 | |
|
|
| |
LCM reserves, beginning of period
|
|
$ |
|
|
Additions
|
|
|
20,179 |
|
Release upon sales of product
|
|
|
(6,175 |
) |
Standards adjustments and other
|
|
|
(7,265 |
) |
|
|
|
|
LCM reserves, end of period
|
|
$ |
6,739 |
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
Property, plant and equipment at fiscal year-ends consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
1,973 |
|
|
$ |
1,960 |
|
Land and leasehold improvements
|
|
|
10,346 |
|
|
|
17,678 |
|
Buildings
|
|
|
34,610 |
|
|
|
35,133 |
|
Machinery and equipment
|
|
|
167,217 |
|
|
|
152,617 |
|
Construction in progress
|
|
|
2,825 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
216,971 |
|
|
|
207,566 |
|
Accumulated depreciation and amortization
|
|
|
(166,271 |
) |
|
|
(151,825 |
) |
|
|
|
|
|
|
|
|
|
$ |
50,700 |
|
|
$ |
55,741 |
|
|
|
|
|
|
|
|
Other assets at fiscal year-ends consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Investments
|
|
$ |
61,083 |
|
|
$ |
69,555 |
|
Other
|
|
|
35,117 |
|
|
|
44,608 |
|
|
|
|
|
|
|
|
|
|
$ |
96,200 |
|
|
$ |
114,163 |
|
|
|
|
|
|
|
|
Investments consist of non-marketable equity interests in early
stage technology companies and the Companys investment in
Jazz.
During fiscal 2005, goodwill was adjusted as follows (in
thousands):
|
|
|
|
|
Goodwill, September 30, 2004
|
|
$ |
708,544 |
|
Acquisitions
|
|
|
16,097 |
|
Adjustments to prior purchase price allocation(1)
|
|
|
(7,628 |
) |
|
|
|
|
Goodwill, September 30, 2005
|
|
$ |
717,013 |
|
|
|
|
|
|
|
(1) |
In the Merger, the Company acquired reserves for income tax
contingencies for foreign income tax matters which arose due to
items recorded in the income tax returns of the former
GlobespanVirata |
65
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
subsidiaries. During fiscal 2005, certain of these income tax
contingencies were settled with the taxing authorities, and as a
result, the amount of the liability in excess of the settlement
amount, or $6.3 million, was reduced with a corresponding
reduction to goodwill. In the fourth quarter of fiscal 2005, the
Company realized a $0.4 million income tax refund related
to R&D credits of the Amphion subsidiary. This amount was
recorded as a reduction of goodwill as the deferred tax assets
in the Amphion acquisition were assigned a zero fair value.
Additionally, in the quarter ended March 31, 2005, as a
result of subsequent decisions on the consolidation of
facilities, the Company reduced certain restructuring and other
facilities reserves established at the time of the Merger by a
net of $0.9 million, with a corresponding reduction to
goodwill. |
Intangible assets at fiscal year-ends consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
Accumulated | |
|
|
|
Gross | |
|
Accumulated | |
|
|
|
|
Asset | |
|
Amortization | |
|
Net | |
|
Asset | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Developed technology
|
|
$ |
146,146 |
|
|
$ |
(54,133 |
) |
|
$ |
92,013 |
|
|
$ |
145,946 |
|
|
$ |
(25,359 |
) |
|
$ |
120,587 |
|
Customer base
|
|
|
4,660 |
|
|
|
(1,781 |
) |
|
|
2,879 |
|
|
|
2,050 |
|
|
|
(847 |
) |
|
|
1,203 |
|
Other intangible assets
|
|
|
21,888 |
|
|
|
(10,071 |
) |
|
|
11,817 |
|
|
|
20,908 |
|
|
|
(7,457 |
) |
|
|
13,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172,694 |
|
|
$ |
(65,985 |
) |
|
$ |
106,709 |
|
|
$ |
168,904 |
|
|
$ |
(33,663 |
) |
|
$ |
135,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over a weighted-average period
of approximately five years. Annual amortization expense is
expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Amortization expense
|
|
$ |
30,701 |
|
|
$ |
29,801 |
|
|
$ |
29,333 |
|
|
$ |
13,831 |
|
|
$ |
3,043 |
|
The Company has a warrant to purchase 30 million
shares of Mindspeed Technologies, Inc. (Mindspeed) common stock
at an exercise price of $3.408 per share through June 2013.
The Company accounts for the Mindspeed warrant as a derivative
instrument, and changes in the fair value of the warrant are
included in other (income) expense, net each period. At
September 30, 2005, the fair value of the Mindspeed warrant
included on the accompanying consolidated balance sheet was
$33.1 million. The warrant was valued using a Black-Scholes
model with terms for portions of the warrant varying from 1 to
5 years, expected volatility of 90%, a risk-free interest
rate of 4.0% and no dividend yield. Given current market
conditions, the Company has determined that at this time, it
does not have the ability to liquidate a portion of the warrant
in the next twelve months. Consequently, all amounts are
reflected as long-term on the accompanying consolidated balance
sheet.
The valuation of this derivative instrument is subjective, and
option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Changes in these assumptions can materially affect the fair
value estimate. The Company could, at any point in time,
ultimately realize amounts significantly different than the
carrying value.
66
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other liabilities at fiscal year-ends consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred gains on sale-leaseback transactions
|
|
$ |
48,557 |
|
|
$ |
16,367 |
|
Employee benefit plan liabilities
|
|
|
14,982 |
|
|
|
19,038 |
|
Other
|
|
|
20,468 |
|
|
|
33,478 |
|
|
|
|
|
|
|
|
|
|
$ |
84,007 |
|
|
$ |
68,883 |
|
|
|
|
|
|
|
|
|
|
|
Other (Income) Expense, Net |
Other (income) expense, net consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Investment and interest income
|
|
$ |
(6,457 |
) |
|
$ |
(7,742 |
) |
|
$ |
(15,622 |
) |
Change in the fair value of the conversion right under the
Skyworks 15% convertible senior subordinated notes
|
|
|
|
|
|
|
6,292 |
|
|
|
(9,402 |
) |
Change in the fair value of the Mindspeed warrant
|
|
|
(7,147 |
) |
|
|
92,663 |
|
|
|
(30,230 |
) |
Gain on sales of investments
|
|
|
(91,285 |
) |
|
|
(24,071 |
) |
|
|
(8,618 |
) |
Equity in (earnings) losses of equity method investees
|
|
|
10,642 |
|
|
|
(14,422 |
) |
|
|
3,119 |
|
Write down of non-marketable investments
|
|
|
|
|
|
|
13,423 |
|
|
|
39,402 |
|
Other, net
|
|
|
(1,166 |
) |
|
|
2,957 |
|
|
|
(961 |
) |
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
$ |
(95,413 |
) |
|
$ |
69,100 |
|
|
$ |
(22,312 |
) |
|
|
|
|
|
|
|
|
|
|
In fiscal 2004, SiRF Technology Holdings, Inc. (SiRF) completed
its initial public offering of shares of its common stock at a
public offering price of $12.00 per share. The Company sold
approximately 2.5 million shares in the SiRF offering for
net proceeds of $28.2 million and recorded a related gain
of $26.5 million. In fiscal 2005, the Company sold its
remaining 5.9 million shares in SiRF for $93.8 million
and recorded a $89.8 million gain. The gains in both years
are included in gains on sales of investments above.
In fiscal 2004, an unrelated party repaid a $30.0 million
note issued in connection with a previous equity investment in
an entity in which the Company owns a 38% interest. In
accordance with Staff Accounting Bulletin No. 51, the
Company recognized an $11.4 million gain upon the payment
of this note, which is included in equity in earnings of equity
method investees.
In fiscal 2004, the Company sold a building for net cash
proceeds of $22.8 million. A loss of $3.2 million was
recognized on the sale.
In fiscal 2003, the Company sold two of its investments in early
stage technology companies for cash of $15.0 million. A
gain of $8.6 million was recognized on these sales.
During fiscal 2004 and 2003, the Company recorded charges of
$13.4 million and $39.4 million, respectively, to
write down the carrying values of certain non-marketable
investments to their estimated fair values (in most cases,
zero). The investments consisted of equity interests in early
stage technology companies which the Company had accounted for
under the cost method. Management estimated the fair value of
these investments based upon available financial and other
information, including then-current and projected business
prospects for the subject companies, and determined that the
decline in the fair value of these investments was other than
temporary.
67
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision (benefit) for income taxes on
continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
|
|
|
$ |
(12,890 |
) |
|
$ |
(668 |
) |
|
Foreign
|
|
|
1,842 |
|
|
|
1,565 |
|
|
|
457 |
|
|
State and local
|
|
|
480 |
|
|
|
198 |
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
2,322 |
|
|
|
(11,127 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
254,286 |
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
574 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
254,860 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,322 |
|
|
$ |
243,733 |
|
|
$ |
(129 |
) |
|
|
|
|
|
|
|
|
|
|
The total provision (benefit) for income taxes is recorded as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Continuing operations
|
|
$ |
2,322 |
|
|
$ |
243,733 |
|
|
$ |
(129 |
) |
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,322 |
|
|
$ |
243,733 |
|
|
$ |
333 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities at fiscal year-ends
consist of the tax effects of temporary differences related to
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
77,437 |
|
|
$ |
64,781 |
|
|
Intangible assets
|
|
|
161,251 |
|
|
|
167,402 |
|
|
Capitalized research and development
|
|
|
290,330 |
|
|
|
117,635 |
|
|
Net operating losses
|
|
|
428,362 |
|
|
|
566,148 |
|
|
Research and development and investment credits
|
|
|
149,366 |
|
|
|
138,376 |
|
|
Other, net
|
|
|
151,475 |
|
|
|
130,980 |
|
|
Valuation allowance
|
|
|
(1,192,971 |
) |
|
|
(1,123,077 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
65,250 |
|
|
|
62,245 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred state taxes
|
|
|
(65,250 |
) |
|
|
(62,245 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(65,250 |
) |
|
|
(62,245 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
SFAS No. 109 establishes a more likely than not
standard. If it is determined that it is more likely than not
that deferred tax assets will not be realized, a valuation
allowance must be established against the deferred tax assets.
The ultimate realization of the assets
68
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is dependent on the generation of future taxable income during
the periods in which the associated temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and
tax planning strategies when making this assessment.
SFAS No. 109 further states that forming a conclusion
that a valuation allowance is not required is difficult when
there is negative evidence such as cumulative losses in recent
years. As a result of the Companys recent cumulative
losses, the Company concluded that a full valuation allowance
was required as of September 30, 2004.
The valuation allowance as of September 30, 2005 and 2004
was $1.2 billion and $1.1 billion, respectively. The
net change in the valuation allowance for fiscal 2005 was
$69.9 million, which includes $4.4 million related to
stock option exercises. The deferred tax assets include
$430 million of deferred tax assets acquired in the Merger
and $18 million of deferred tax assets, resulting from the
exercise of stock options. To the extent the Company recognizes
a future benefit from net deferred tax assets acquired in the
Merger, the benefit will be recorded to goodwill. To the extent
the Company obtains a tax benefit for the net operating losses
attributable to the stock option exercises, such amounts will be
recorded to shareholders equity.
As of September 30, 2005, the Company has U.S. Federal
net operating loss carryforwards of approximately
$1.2 billion which expire at various dates through 2025 and
aggregate state net operating loss carryforwards of
approximately $483.6 million which expire at various dates
through 2015. The Company also has U.S. Federal and state
income tax credit carryforwards of approximately
$74.8 million and $74.5 million, respectively. The
U.S. Federal credits expire at various dates through 2023.
The state credit carryforwards include California
Manufacturers Investment Credits of approximately
$17.0 million which expire at various dates through 2011,
while the remaining state credits have no expiration date.
Tax benefits from the exercise of stock options (including
payments received from former affiliated companies, primarily
Rockwell and Boeing, under tax allocation agreements) totaling
$0.5 million and $0.4 million for fiscal 2004 and
2003, respectively, were credited directly to shareholders
equity.
During 2005, the Company and Rockwell received California sales
tax refunds totaling $11.9 million that were received in
lieu of claiming California Manufacturers Investment.
Credits generated by the Company prior its spin-off from
Rockwell. Pursuant to the Tax Allocation Agreement between the
two companies, Rockwell and Conexant retained $10.6 million
and $1.3 million, respectively of these sales tax refunds.
A reconciliation of income taxes computed at the
U.S. Federal statutory income tax rate to the provision
(benefit) for income taxes on continuing operations follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
U.S. Federal statutory tax at 35%
|
|
$ |
(60,784 |
) |
|
$ |
(105,321 |
) |
|
$ |
8,202 |
|
State taxes, net of federal effect
|
|
|
(7,102 |
) |
|
|
(8,567 |
) |
|
|
(3,444 |
) |
U.S. and foreign income taxes on foreign earnings
|
|
|
5,834 |
|
|
|
(3,874 |
) |
|
|
(822 |
) |
Research and development credits
|
|
|
(8,014 |
) |
|
|
(9,682 |
) |
|
|
(7,876 |
) |
In-process research and development
|
|
|
|
|
|
|
56,286 |
|
|
|
|
|
Valuation allowance
|
|
|
74,287 |
|
|
|
314,569 |
|
|
|
3,569 |
|
Other
|
|
|
(1,899 |
) |
|
|
322 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ |
2,322 |
|
|
$ |
243,733 |
|
|
$ |
(129 |
) |
|
|
|
|
|
|
|
|
|
|
69
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income (loss) before income taxes from continuing operations
consists of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
(174,229 |
) |
|
$ |
(318,097 |
) |
|
$ |
19,160 |
|
Foreign
|
|
|
561 |
|
|
|
17,181 |
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(173,668 |
) |
|
$ |
(300,916 |
) |
|
$ |
23,433 |
|
|
|
|
|
|
|
|
|
|
|
Certain of the Companys foreign income tax returns for the
years 2001 through 2002 are currently under examination.
Management believes that adequate provision for income taxes has
been made for all years, and the results of the examinations
will not have a material impact on the Companys financial
position, cash flows or results of operations.
No provision has been made for U.S. Federal, state or
additional foreign income taxes which would be due upon the
actual or deemed distribution of approximately
$21.0 million and $38.0 million of undistributed
earnings of foreign subsidiaries as of September 30, 2005
and 2004, respectively, which have been or are intended to be
permanently reinvested.
The Company and its consolidated subsidiaries have three issues
of convertible subordinated notes, including the
5.25% Convertible Subordinated Notes which were acquired in
the Merger. At September 30, 2005, the components of
convertible subordinated notes are as follows (in thousands):
|
|
|
|
|
4.0% Convertible Subordinated Notes due February 2007 with
a conversion price of $42.43
|
|
$ |
515,000 |
|
4.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $9.08
|
|
|
66,825 |
|
5.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $22.26
|
|
|
130,000 |
|
|
|
|
|
Total convertible subordinated notes
|
|
|
711,825 |
|
Less, current portion of convertible subordinated notes
|
|
|
(196,825 |
) |
|
|
|
|
Long-term portion of convertible subordinated notes
|
|
$ |
515,000 |
|
|
|
|
|
In February 2004 in connection with the Merger, the Company
assumed $130.0 million principal of 5.25% Convertible
Subordinated Notes, which are unsecured obligations of Conexant,
Inc., are contractually subordinated in right of payment to all
senior indebtedness of Conexant, Inc., and mature on
May 15, 2006. The holders may convert the notes into shares
of Conexant common stock at any time prior to maturity at a
conversion price of $22.262 per share, subject to
adjustment. Conexant, Inc., at its option, may redeem the notes
at any time, in whole or in part, at the redemption price shown
in the notes, plus accrued interest, if any.
In February 2000, the Company issued $650.0 million
principal amount of its 4% Convertible Subordinated Notes
due February 2007 for net proceeds (after costs of issuance) of
approximately $631.0 million. The notes are general
unsecured obligations of the Company. Interest on the notes is
payable in arrears semiannually on each February 1 and August 1.
The notes are convertible, at the option of the holder, at any
time prior to redemption or maturity into shares of the
Companys common stock at a conversion price of
$42.432 per share, subject to adjustment for certain
events. The notes may be redeemed at the Companys option
at a declining premium to par. During fiscal 2001 and 2003, the
Company purchased $35.0 million and $100.0 million,
respectively, principal amount of its 4% Convertible
Subordinated Notes at prevailing market prices.
70
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 1999, the Company issued $350.0 million principal
amount of its 4.25% Convertible Subordinated Notes due May
2006 for net proceeds (after costs of issuance) of approximately
$339.6 million. The notes are general unsecured obligations
of the Company. Interest on the notes is payable in arrears
semiannually on each May 1 and November 1. The notes are
convertible, at the option of the holder, at any time prior to
redemption or maturity into shares of the Companys common
stock at a conversion price of $9.075 per share, subject to
adjustment for certain events. The notes may be redeemed at the
Companys option at a declining premium to par. During
fiscal 2001, approximately $255.2 million principal amount
of the Companys 4.25% Convertible Subordinated Notes
was converted into approximately 11.0 million shares of
common stock at a cost to the Company of $42.6 million.
During fiscal 2002, the Company exchanged 2.2 million
shares of its common stock for approximately $28.0 million
principal amount of its 4.25% Convertible Subordinated
Notes. In connection with the exchanges in fiscal 2002, the
Company recognized debt conversion costs of $10.4 million
for the fair value of the shares issued in excess of the number
of shares issuable in a conversion of the notes pursuant to
their original terms.
At September 30, 2005, the fair value of the convertible
subordinated notes (based on quoted market prices) was
approximately $694.2 million compared to their carrying
value of $711.8 million.
The Company leases certain facilities and equipment under
non-cancelable operating leases which expire at various dates
through 2021 and contain various provisions for rental
adjustments including, in certain cases, adjustments based on
increases in the Consumer Price Index. The leases generally
contain renewal provisions for varying periods of time. Rental
expense under operating leases was approximately
$21.1 million, $21.3 million and $16.8 million
during fiscal 2005, 2004 and 2003, respectively.
At September 30, 2005, future minimum lease payments under
operating leases, excluding any sublease income, were as follows
(in thousands):
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
2006
|
|
$ |
33,975 |
|
2007
|
|
|
28,490 |
|
2008
|
|
|
22,618 |
|
2009
|
|
|
15,441 |
|
2010
|
|
|
15,337 |
|
Thereafter
|
|
|
77,220 |
|
|
|
|
|
|
Total future minimum lease payments
|
|
$ |
193,081 |
|
|
|
|
|
At September 30, 2005, the Company has many sublease
arrangements on operating leases for terms ranging from near
term to approximately 10 years. Aggregate scheduled
sublease income based on current terms is approximately
$35.7 million.
The summary of future minimum lease payments includes an
aggregate of $71.7 million of lease obligations that
principally expire through fiscal 2021, which have been accrued
for in connection with the Companys restructuring actions
(see Note 15) and previous actions taken by GlobespanVirata
prior to the Merger.
At September 30, 2005, the Company is contingently liable
for approximately $7.2 million in operating lease
commitments on facility leases that were assigned to Mindspeed
and Skyworks at the time of their separation from the Company.
71
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with acquisitions in fiscal 2004 and 2005, the
Company is contingently liable for an aggregate of up to
$6.0 million of milestone and earn-out payments through
January of 2006. In addition, see Note 2 regarding the
contingent amounts for the stock price guarantee in the Amphion
acquisition.
In connection with certain non-marketable equity investments,
the Company may be required to invest up to an additional
$5.7 million as of September 30, 2005.
|
|
11. |
Mindspeed Credit Facility |
In connection with the spin-off of the Mindspeed Technologies
business in June 2003, the Company entered into a senior secured
revolving credit facility pursuant to which Mindspeed could have
borrowed up to $50.0 million for working capital and
general corporate purposes. On December 2, 2004, the
Company and Mindspeed amended the credit facility. On
December 8, 2004 Mindspeed completed a $46.0 million
convertible subordinated note offering, thereby terminating the
credit facility in accordance with the amended agreement.
Certain claims have been asserted against the Company, including
claims alleging the use of the intellectual property rights of
others in certain of the Companys products. The resolution
of these matters may entail the negotiation of a license
agreement, a settlement, or the adjudication of such claims
through arbitration or litigation. The outcome of litigation
cannot be predicted with certainty and some lawsuits, claims or
proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief
and there can be no assurance that a license will be granted.
Injunctive relief could have a material adverse effect on the
financial condition or results of operations of the Company.
Based on its evaluation of matters which are pending or asserted
and taking into account the Companys reserves for such
matters, management believes the disposition of such matters
will not have a material adverse effect on the financial
condition, results of operations, or cash flows of the Company.
IPO Litigation. In November 2001, Collegeware
Asset Management, LP, on behalf of itself and a putative class
of persons who purchased the common stock of GlobeSpan, Inc.,
(GlobeSpan, Inc. later became GlobespanVirata, Inc., and is now
the Companys Conexant, Inc. subsidiary) between
June 23, 1999 and December 6, 2000, filed a complaint
in the U.S. District Court for the Southern District of New
York alleging violations of federal securities laws by the
underwriters of GlobeSpan, Inc.s initial and secondary
public offerings as well as by certain GlobeSpan, Inc. officers
and directors. The complaint alleges that the defendants
violated federal securities laws by issuing and selling
GlobeSpan, Inc.s common stock in the initial and secondary
offerings without disclosing to investors that the underwriters
had (1) solicited and received undisclosed and excessive
commissions or other compensation and (2) entered into
agreements requiring certain of their customers to purchase the
stock in the aftermarket at escalating prices. The complaint
seeks unspecified damages. The complaint was consolidated with
class actions against approximately 300 other companies making
similar allegations regarding the public offerings of those
companies during 1998 through 2000. In June 2003, Conexant, Inc.
and the named officers and directors entered into a memorandum
of understanding outlining a settlement agreement with the
plaintiffs that will, among other things, result in the
dismissal with prejudice of all the claims against the former
GlobeSpan, Inc. officers and directors. The final settlement was
executed in June 2004. On February 15, 2005, the Court
issued a decision certifying a class action for settlement
purposes and granting preliminary approval of the settlement,
subject to modification of certain bar orders contemplated by
the settlement. The bar orders have since been modified. The
settlement remains subject to a number of conditions and final
approval. It is possible that the settlement will not be
approved. Even if the settlement is approved, individual class
members will have an opportunity to opt out of the class and to
file their own lawsuits, and some may do so. In either event,
the Company does not anticipate
72
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that the ultimate outcome of this litigation will have a
material adverse impact on the Companys financial
condition, results of operations, or cash flows.
Texas Instruments, Inc. The Companys
Conexant, Inc. subsidiary has been involved in a dispute with
Texas Instruments, Inc. (Texas Instruments) and Stanford
University and its Board of Trustees, and Stanford University
OTL, LLC (Stanford) (and collectively, the Defendants) over a
group of patents (and related foreign patents) that Texas
Instruments alleges are essential to certain industry standards
for implementing ADSL technology. On June 12, 2003,
Conexant, Inc. filed a complaint against Texas Instruments,
Stanford University and its Board of Trustees, and Stanford
University OTL, LLC (collectively, the Defendants) in the
U.S. District Court of New Jersey. The complaint asserts,
among other things, that the Defendants have violated the
antitrust laws by creating an illegal patent pool, by
manipulating the patent process and by abusing the process for
setting industry standards related to ADSL technology. The
complaint also asserts that the Defendants patents
relating to ADSL are unenforceable, invalid and/or not infringed
by Conexant, Inc. products. Conexant, Inc. is seeking, among
other things, (i) a finding that the Defendants have
violated the federal antitrust laws and treble damages based
upon such a finding, (ii) an injunction prohibiting the
Defendants from engaging in anticompetitive practices,
(iii) a declaratory judgment that the claims of the
Defendants ADSL patents are invalid, unenforceable, void,
and/or not infringed by Conexant, Inc. and (iv) an
injunction prohibiting the Defendants from pursuing patent
litigation against Conexant, Inc. and its customers. On
August 11, 2003 and September 9, 2003, the Defendants
answered the complaint, denied Conexant, Inc.s claims and
filed counterclaims alleging that Conexant, Inc. has infringed
certain of their ADSL patents. In addition to other relief, the
Defendants are seeking to collect damages for alleged past
infringement and to enjoin Conexant, Inc. from continuing to use
the Defendants ADSL patents. The case has been bifurcated
into a patent module and an antitrust module, with the patent
module being tried first. Trial on the patent module will
commence on January 4, 2006 in the U.S. District Court of
New Jersey. Although the Company believes that Conexant, Inc.
has strong arguments in favor of its position in this dispute,
it can give no assurance that Conexant, Inc. will prevail on any
of these grounds in litigation. If any such litigation is
adversely resolved, Conexant, Inc. could be held responsible for
the payment of damages and/or future royalties and/or have the
sale of certain of Conexant, Inc. products stopped by an
injunction, any of which could have a material adverse effect on
the Companys business, financial condition and results of
operations.
Class Action Suits. In December 2004 and
January 2005, the Company and certain current and former
officers were named as defendants in several complaints seeking
monetary damages filed on behalf of all persons who purchased
Company common stock during a specified class period. These
suits were filed in the U.S. District Court of New Jersey
(New Jersey cases) and the U.S. District Court for the
Central District of California (California cases), alleging that
the defendants violated the Securities Exchange Act of 1934 (the
Exchange Act) by allegedly disseminating materially false and
misleading statements and/or concealing material adverse facts.
The California cases have now been consolidated with the New
Jersey cases so that all of the class action suits, now known as
Witriol v. Conexant, et al., are being heard in
the U.S. District Court of New Jersey by the same judge.
The defendants believe these charges are without merit and
intend to vigorously defend the litigation. On September 1,
2005, the defendants filed their motion to dismiss the case. On
November 23, 2005, the court granted the plaintiffs
motion to file a Second Amended Complaint, which was filed on
December 5, 2005. Thereafter, the defendants plan to file a
motion to dismiss the case, which motion will be due by
February 6, 2006.
In addition, in February 2005, the Company and certain of its
current and former officers and the Companys Employee
Benefits Plan Committee were named as defendants in
Graden v. Conexant, et al., a lawsuit filed on
behalf of all persons who were participants in the
Companys 401(k) Plan (Plan) during a specified
class period. This suit was filed in the U.S. District
Court of New Jersey and alleges that the defendants breached
their fiduciary duties under the Employee Retirement Income
Security Act, as amended, to the Plan and the participants in
the Plan. The defendants believe these charges are without merit
and intend
73
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to vigorously defend the litigation. The plaintiff filed an
Amended Complaint on August 11, 2005. On October 12,
2005, the defendants filed a motion to dismiss this case.
Shareholder Derivative Suits. In January 2005, the
Company and certain current and former directors and officers
were named as defendants in purported shareholder derivative
actions seeking monetary damages (now consolidated) in
California Superior Court for the County of Orange, alleging
that the defendants breached their fiduciary duties, abused
control, mismanaged the Company, wasted corporate assets and
unjustly enriched themselves. A similar lawsuit was filed in
U.S. District Court of New Jersey in May 2005. On
July 28, 2005, the California court approved a stay of the
action filed in California pending the outcome of the motion to
dismiss in Witriol v. Conexant, et al. The
Company has negotiated a similar agreement with the plaintiffs
in the New Jersey case, which has also been approved by the New
Jersey court. Pursuant to the stay agreements, in the event that
the parties in the Witriolcase engage in any
negotiations, plaintiffs counsel in the derivative cases
will be kept informed. The defendants believe the charges in
theses cases are without merit and intend to vigorously defend
the litigation.
The Company has been designated as a potentially responsible
party and is engaged in groundwater remediation at one Superfund
site located at a former silicon wafer manufacturing facility
and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by the Company. In addition, the Company is
engaged in remediation of groundwater contamination at its
former Newport Beach, California wafer fabrication facility.
Management currently estimates the aggregate remaining costs for
these remediations to be approximately $2.7 million and has
accrued for these costs as of September 30, 2005.
The Company has made guarantees and indemnities, under which it
may be required to make payments to a guaranteed or indemnified
party, in relation to certain transactions. In connection with
the Companys spin-off from Rockwell, the Company assumed
responsibility for all contingent liabilities and then-current
and future litigation (including environmental and intellectual
property proceedings) against Rockwell or its subsidiaries in
respect of the operations of the semiconductor systems business
of Rockwell. In connection with the Companys contribution
of certain of its manufacturing operations to Jazz, the Company
agreed to indemnify Jazz for certain environmental matters and
other customary divestiture-related matters. In connection with
the sales of its products, the Company provides intellectual
property indemnities to its customers. In connection with
certain facility leases, the Company has indemnified its lessors
for certain claims arising from the facility or the lease. The
Company indemnifies its directors and officers to the maximum
extent permitted under the laws of the State of Delaware. The
duration of the guarantees and indemnities varies, and in many
cases is indefinite. The guarantees and indemnities to customers
in connection with product sales generally are subject to limits
based upon the amount of the related product sales. The majority
of other guarantees and indemnities do not provide for any
limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any
liability for these guarantees and indemnities in the
accompanying consolidated balance sheets. Product warranty costs
are not significant.
The Companys authorized capital consists of
1,000,000,000 shares of common stock, par value
$0.01 per share, and 25,000,000 shares of preferred
stock, without par value, of which 1,500,000 shares are
designated as Series A junior participating preferred stock
(the Junior Preferred Stock).
The Company has a preferred share purchase rights plan to
protect shareholders rights in the event of a proposed
takeover of the Company. A preferred share purchase right (a
Right) is attached to each share of common stock pursuant to
which the holder may, in certain takeover-related circumstances,
become entitled to purchase from the Company
1/200th
of a share of Junior Preferred Stock at a price of $300, subject
to
74
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adjustment. Also, in certain takeover-related circumstances,
each Right (other than those held by an acquiring person) will
generally be exercisable for shares of the Companys common
stock or stock of the acquiring person having a market value of
twice the exercise price. In certain events, each Right may be
exchanged by the Company for one share of common stock or
1/200th
of a share of Junior Preferred Stock. The Rights expire on
December 31, 2008, unless earlier exchanged or redeemed at
a redemption price of $0.01 per Right, subject to
adjustment.
The Company has stock option plans and long-term incentive plans
under which employees and directors may be granted options to
purchase shares of the Companys common stock. As of
September 30, 2005, approximately 57.0 million shares
are available for grant under the stock option and long-term
incentive plans. Stock options are generally granted with
exercise prices at not less than the fair market value at grant
date, generally vest over four years and expire eight or ten
years after the grant date. The Company has also assumed stock
option plans in connection with business combinations.
On November 12, 2004, the Company commenced an offer to its
employees to voluntarily exchange certain outstanding stock
options. Under the terms of the offer, employees holding stock
options having an exercise price equal to or greater than
$5.00 per share could exchange their options for new
options to purchase an equal number of shares of the
Companys common stock (subject to adjustment in certain
circumstances). Employees accepting the exchange offer were also
required to exchange all options granted within six months of
the exchange offer, regardless of the exercise price. The
offering period expired on December 13, 2004 and
approximately 32.7 million common stock options, with a
weighted-average exercise price of $8.00 per share, were
tendered to the Company, accepted and cancelled. The Company
offered to grant new options to the affected employees, on a
one-for-one basis, at a date that was at least six months and
one day after the acceptance of the old options for exchange and
cancellation. The exercise price of the new options was equal to
the closing market price of Company common stock on such date.
If the cancelled options were granted on or before
December 31, 2002 or the eligible employee is a senior
executive of the Company, the new options will vest in three
equal installments on the first, second and third anniversaries
of the grant date; otherwise the new options will vest 50% on
the first anniversary of the grant date and 25% on each of the
second and third anniversaries of the grant date.
On June 14, 2005, the Company granted new options to
purchase an aggregate of 31.0 million shares of its common
stock at an exercise price of $1.49 per share (based on the
closing market price of the Companys common stock on the
grant date), with vesting provisions as described above.
In connection with the Mindspeed Spin in June 2003, holders of
options to purchase Conexant common stock received options to
purchase shares of Mindspeed common stock. The number and
exercise prices of the outstanding Conexant options and the new
Mindspeed options were adjusted so that the aggregate intrinsic
value of the options was equal to the intrinsic value of the
Conexant options immediately prior to the Mindspeed Spin.
In connection with the Merger in February 2004, the Company
issued 43.6 million options to purchase Conexant common
stock in exchange for the stock options former GlobespanVirata
employees held to purchase GlobespanVirata common stock, and in
December 2004, the Company issued 0.6 million options to
purchase Conexant common stock in exchange for the stock options
former Paxonet employees held to purchase Paxonet common stock.
(see Note 2 of Notes to Consolidated Financial Statements).
75
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
127,120 |
|
|
$ |
4.78 |
|
|
|
81,089 |
|
|
$ |
3.02 |
|
|
|
88,805 |
|
|
$ |
3.90 |
|
Granted
|
|
|
35,342 |
|
|
|
1.51 |
|
|
|
19,984 |
|
|
|
7.16 |
|
|
|
16,529 |
|
|
|
3.13 |
|
Adjustments for the Mindspeed Spin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,451 |
) |
|
|
|
|
Assumed/exchanged in business combinations
|
|
|
590 |
|
|
|
0.87 |
|
|
|
43,602 |
|
|
|
3.45 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(831 |
) |
|
|
1.23 |
|
|
|
(8,015 |
) |
|
|
2.73 |
|
|
|
(8,320 |
) |
|
|
2.85 |
|
Cancelled
|
|
|
(51,026 |
) |
|
|
5.65 |
|
|
|
(9,540 |
) |
|
|
9.74 |
|
|
|
(14,474 |
) |
|
|
4.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
111,195 |
|
|
|
2.81 |
|
|
|
127,120 |
|
|
|
4.78 |
|
|
|
81,089 |
|
|
|
3.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
72,235 |
|
|
|
3.34 |
|
|
|
83,024 |
|
|
|
4.57 |
|
|
|
52,109 |
|
|
|
3.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock options outstanding at
September 30, 2005 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.20 - 1.48
|
|
|
11,845 |
|
|
|
5.07 |
|
|
$ |
1.33 |
|
|
|
5,280 |
|
|
$ |
1.29 |
|
1.49
|
|
|
29,069 |
|
|
|
7.25 |
|
|
|
1.49 |
|
|
|
3,736 |
|
|
|
1.49 |
|
1.50 - 2.60
|
|
|
8,379 |
|
|
|
3.90 |
|
|
|
2.12 |
|
|
|
5,671 |
|
|
|
2.29 |
|
2.63
|
|
|
16,105 |
|
|
|
3.19 |
|
|
|
2.63 |
|
|
|
16,094 |
|
|
|
2.63 |
|
2.63 - 2.76
|
|
|
1,143 |
|
|
|
1.52 |
|
|
|
2.68 |
|
|
|
1,142 |
|
|
|
2.68 |
|
2.76
|
|
|
7,269 |
|
|
|
5.69 |
|
|
|
2.76 |
|
|
|
6,357 |
|
|
|
2.76 |
|
2.77
|
|
|
6,142 |
|
|
|
2.80 |
|
|
|
2.77 |
|
|
|
6,136 |
|
|
|
2.77 |
|
2.78 - 3.44
|
|
|
3,775 |
|
|
|
3.66 |
|
|
|
3.11 |
|
|
|
3,217 |
|
|
|
3.10 |
|
3.45
|
|
|
14,407 |
|
|
|
4.13 |
|
|
|
3.45 |
|
|
|
14,339 |
|
|
|
3.45 |
|
3.45 - 96.93
|
|
|
13,061 |
|
|
|
3.66 |
|
|
|
6.99 |
|
|
|
10,263 |
|
|
|
7.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.20 - 96.93
|
|
|
111,195 |
|
|
|
4.09 |
|
|
|
2.81 |
|
|
|
72,235 |
|
|
|
3.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2005, of the 111.2 million stock
options outstanding, approximately 80.9 million were held
by current employees and directors of the Company, and
approximately 30.3 million were held by employees of
Rockwell, a former Rockwell business, or a former business of
the Company (i.e. Mindspeed, Skyworks, etc.) who remain employed
by one of these businesses.
The Companys long-term incentive plans also provide for
awards of restricted shares of common stock and other
stock-based incentive awards to officers and other employees and
certain non-employees of the Company. Restricted stock awards
are subject to forfeiture if employment terminates during the
prescribed period (generally within four years of the date of
award) or, in certain cases, if prescribed performance criteria
are not met. During fiscal 2003, the Company issued
approximately 22,000 restricted shares of common stock
76
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
at weighted-average fair values per share of $2.06. No shares of
restricted stock were granted in fiscal 2005 and 2004. The fair
value of restricted stock awards is charged to expense over the
vesting period. In fiscal 2003, the Company recorded
compensation expense of $0.7 million for the value of
restricted stock awards.
The Company has a Directors Stock Plan which provides for each
non-employee director to receive specified levels of stock
option grants upon election to the Board of Directors and
periodically thereafter. Under the Directors Stock Plan, each
non-employee director may elect to receive all or a portion of
the cash retainer to which the director is entitled through the
issuance of common stock. During fiscal 2005, 2004 and 2003, the
Company issued approximately 8,400, 21,000 and
60,000 shares, respectively, of common stock and
approximately 180,000, 380,000, and 460,000 options,
respectively, under the Director Stock Plan. As of
September 30, 2005, an aggregate of approximately
275,700 shares of the Companys common stock are
available for grant under the Directors Stock Plan.
|
|
|
Employee Stock Purchase Plan |
The Company has an employee stock purchase plan
(ESPP) which allows eligible employees to purchase shares
of the Companys common stock at six-month intervals during
an offering period at 85% of the lower of the fair market value
on the first day of the offering period or on the purchase date.
The Company has reserved 42.1 million shares for delivery
under the ESPP. Under the ESPP, employees may authorize the
Company to withhold up to 15% of their compensation for each pay
period to purchase shares under the plan, subject to certain
limitations, and employees are limited to the purchase of
2,000 shares per offering period. Offering periods
generally commence on the first trading day of February and
August of each year and are generally 6 months in duration,
but may be terminated earlier under certain circumstances.
During fiscal 2005, 2004 and 2003, the Company issued
4.4 million, 4.0 million and 1.7 million shares
of common stock under the ESPP at weighted-average prices per
share of $1.35, $1.88 and $1.19, respectively. The weighted
average per share fair values of the employees purchase
rights granted in fiscal 2005, 2004 and 2003 were $0.58, $0.85,
and $0.51 using the Black-Scholes model. Other than an expected
life of six months, assumptions used are consistent with those
used for the Companys stock options plans (see
Note 1). At September 30, 2005, an aggregate of
25.8 million shares of the Companys common stock are
reserved for future purchases under the ESPP, of which
20.0 million shares become available in 2.5 million
share annual increases, subject to the Board of Directors
selecting a lower amount.
In fiscal 2002, the Company reserved 4.0 million shares of
common stock for issuance under an employee performance shares
plans. During fiscal 2004 and 2003, the Company issued 256,987,
and 75,674 shares of common stock at weighted-average per
share prices of $6.31 and $1.25, respectively, under employee
performance plans. No performance shares were issued in fiscal
2005. At September 30, 2005, approximately 3.2 million
shares of the Companys common stock are available for
future grant, excluding approximately 0.2 million shares
reserved for an executives expected fiscal 2005
performance award. Awards granted under the performance plans
are generally subject to variable accounting.
On November 2, 2005, the Company issued performance shares
at a fair value of $2.16 per share to an executive in
satisfaction of his fiscal 2005 performance share award granted
under his employment agreement. The total fair value of the
award was $0.6 million and was paid with
154,879 shares of common stock and cash.
77
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14. |
Employee Benefit Plans |
The Company sponsors 401(k) retirement savings plans that allow
eligible U.S. employees to contribute a portion of their
compensation, on a pre-tax or after-tax basis, subject to annual
limits. The Company may match employee contributions in whole or
part up to specified levels, and the Company may make an
additional discretionary contribution at fiscal year-end, based
on the Companys performance. Prior to June 4, 2004,
all Company contributions to the retirement savings plans were
invested in shares of the Companys common stock and were
vested immediately. Since June 4, 2004, Company
contributions are made in cash, and are allocated based on the
employees current investment elections. Participants may
choose to purchase shares of Company common stock as one of
their investment options in the plan. Expense under the
retirement savings plans was $5.2 million,
$4.8 million and $3.7 million for fiscal 2005, 2004
and 2003, respectively.
The Company has a retirement medical plan which covers certain
of its employees and provides for medical payments to eligible
employees and dependents upon retirement. At the time of the
spin-off from Rockwell, the Company ceased offering retirement
medical coverage to active salaried employees. Effective
January 1, 2003, the Company elected to wind-down this plan
and it will be phased out after December 31, 2007.
Retirement medical expense (credit), consisting principally of
interest accrued on the accumulated retirement medical
obligation and the effects of the wind-down of the plan
beginning in fiscal 2003, was approximately $(3.4) million,
$(3.2) million and $(1.5) million in fiscal 2005, 2004
and 2003, respectively.
The following tables represent activity for the Retirement
Medical Plan for the fiscal years ended September 30 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
1.9 |
|
|
$ |
3.8 |
|
Interest cost
|
|
|
0.1 |
|
|
|
0.1 |
|
Plan participants contributions
|
|
|
1.2 |
|
|
|
1.0 |
|
Amendments
|
|
|
0.7 |
|
|
|
|
|
Actuarial (gain) loss
|
|
|
|
|
|
|
(0.3 |
) |
Benefits paid
|
|
|
(2.3 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
1.6 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
|
|
|
$ |
|
|
Employer contribution
|
|
|
1.1 |
|
|
|
1.6 |
|
Plan participants contributions
|
|
|
1.2 |
|
|
|
1.1 |
|
Benefits paid, including expenses
|
|
|
(2.3 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
78
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Reconciliation of funded status to accrued benefit cost:
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(1.6 |
) |
|
$ |
(1.9 |
) |
Unrecognized net actuarial loss
|
|
|
4.9 |
|
|
|
6.7 |
|
Unrecognized prior service cost
|
|
|
(12.5 |
) |
|
|
(18.5 |
) |
Adjustment for fourth quarter contributions
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$ |
(9.0 |
) |
|
$ |
(13.7 |
) |
|
|
|
|
|
|
|
Weighted average assumptions as of September 30:
|
|
|
|
|
|
|
|
|
Measurement date
|
|
|
06/30/05 |
|
|
|
06/30/04 |
|
Discount rate
|
|
|
3.00 |
% |
|
|
3.00 |
% |
Expected return on plan assets
|
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
Weighted average assumptions for net periodic benefit
costs:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.00 |
% |
|
|
3.25 |
% |
Expected return on plan assets
|
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Amortization of prior service costs
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
Recognized net actuarial loss
|
|
|
1.8 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
(3.4 |
) |
|
$ |
(3.3 |
) |
|
|
|
|
|
|
|
Expected benefit payouts:
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
0.8 |
|
|
|
|
|
2007
|
|
|
0.5 |
|
|
|
|
|
2008
|
|
|
0.1 |
|
|
|
|
|
In connection with a restructuring plan initiated in September
1998, the Company offered a voluntary early retirement program
(VERP) to certain salaried employees. Pension benefits
under the VERP are paid from a newly established pension plan
(the VERP Plan) of Conexant. Benefits payable under the VERP
Plan are equal to the excess of the total early retirement
pension benefit over the vested benefit obligation retained by
Rockwell under a pension plan sponsored by Rockwell prior to the
Distribution. The Company also has certain pension plans
covering its non-U.S. employees and retirees. Prior to the
formation of Jazz in March 2002, the Company also had a pension
plan covering certain hourly employees, principally in its
manufacturing operations, which was assumed by Jazz.
79
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables represent activity for the VERP Plan for
the fiscal years ended September 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
22.3 |
|
|
$ |
23.5 |
|
Interest cost
|
|
|
1.3 |
|
|
|
1.3 |
|
Actuarial (gain) loss
|
|
|
2.8 |
|
|
|
(0.5 |
) |
Benefits paid
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
24.4 |
|
|
$ |
22.3 |
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
14.2 |
|
|
$ |
10.6 |
|
Actual return on plan assets
|
|
|
1.0 |
|
|
|
1.4 |
|
Employer contribution
|
|
|
2.4 |
|
|
|
4.2 |
|
Benefits paid, including expenses
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$ |
15.6 |
|
|
$ |
14.2 |
|
|
|
|
|
|
|
|
Reconciliation of funded status to net amounts recognized:
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(8.8 |
) |
|
$ |
(8.1 |
) |
Unrecognized net actuarial loss
|
|
|
9.1 |
|
|
|
7.0 |
|
Adjustment for fourth quarter expenses
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
Adjustment for fourth quarter contributions
|
|
|
1.2 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
1.3 |
|
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position:
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$ |
(7.6 |
) |
|
$ |
(7.0 |
) |
Accumulated other comprehensive loss
|
|
|
8.9 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
1.3 |
|
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
Accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$ |
24.4 |
|
|
$ |
22.3 |
|
Accumulated benefit obligation
|
|
|
24.4 |
|
|
|
22.3 |
|
Fair value of plan assets at end of year
|
|
|
15.6 |
|
|
|
14.2 |
|
Weighted average assumptions as of September 30:
|
|
|
|
|
|
|
|
|
Measurement date
|
|
|
06/30/05 |
|
|
|
06/30/04 |
|
Discount rate
|
|
|
5.00 |
% |
|
|
6.25 |
% |
Expected return on plan assets
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Rate of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
Weighted average assumptions for net periodic benefit
costs:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.00 |
% |
Expected return on plan assets
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Rate of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
80
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Unfunded accumulated benefit obligation at
September 30:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$ |
24.4 |
|
|
$ |
22.3 |
|
Fair value of plan assets at end of year
|
|
|
15.6 |
|
|
|
14.2 |
|
Increase (decrease) in other comprehensive loss
|
|
|
2.2 |
|
|
|
(1.7 |
) |
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$ |
1.3 |
|
|
$ |
1.3 |
|
Expected return on plan assets
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Recognized net actuarial loss
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
1.0 |
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
Weighted average asset allocation at September 30:
|
|
|
|
|
|
|
|
|
Asset Class
|
|
|
|
|
|
|
|
|
Domestic equity funds
|
|
|
67.4 |
% |
|
|
63.7 |
% |
Domestic fixed income funds
|
|
|
31.6 |
% |
|
|
35.1 |
% |
Other
|
|
|
1.0 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Expected benefit payouts:
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
1.9 |
|
|
|
|
|
2007
|
|
|
1.8 |
|
|
|
|
|
2008
|
|
|
1.7 |
|
|
|
|
|
2009
|
|
|
1.7 |
|
|
|
|
|
2010
|
|
|
1.7 |
|
|
|
|
|
2011 - 2015
|
|
|
8.1 |
|
|
|
|
|
The Companys expected contribution to the plan for fiscal
2006 is $1.5 million. Net pension expense was approximately
$1.0 million, $1.2 million and $1.1 million for
fiscal 2005, 2004 and 2003, respectively.
Special charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Asset impairments
|
|
$ |
3,761 |
|
|
$ |
5,435 |
|
|
$ |
9,575 |
|
Restructuring charges
|
|
|
28,049 |
|
|
|
9,264 |
|
|
|
5,215 |
|
Integration charges
|
|
|
7,748 |
|
|
|
7,310 |
|
|
|
|
|
Other
|
|
|
6,419 |
|
|
|
10,792 |
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,977 |
|
|
$ |
32,801 |
|
|
$ |
18,379 |
|
|
|
|
|
|
|
|
|
|
|
2005 Impairments During fiscal 2005, the
Company recorded impairment charges of $3.8 million,
related primarily to leasehold improvements on operating
properties that have been vacated as part of the Companys
restructuring actions.
81
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 Impairments During fiscal 2004, the
Company recorded impairment charges of $5.4 million,
related to various Conexant operating assets which were
determined to be redundant and no longer required as a result of
the Merger and other subsequent actions. These assets have been
abandoned.
2003 Impairments During fiscal 2003, the
Company recorded impairment charges of $4.8 million,
related to leasehold improvements associated with properties no
longer occupied by the Company and other assets that management
determined to abandon or scrap.
In fiscal 2003, the Company sold certain manufacturing assets to
Jazz for $1.0 million and recognized a $4.8 million
impairment loss on these assets.
The Company has implemented a number of cost reduction
initiatives since late fiscal 2001 to improve its operating cost
structure. The cost reduction initiatives included workforce
reductions, and the closure or consolidation of certain
facilities, among other actions. The costs and expenses
associated with the restructuring activities, except for the
liabilities associated with the 2004 Merger Related
Reorganization Plan (described below) that related to the
employees and facilities of Conexant, Inc., are included in
special charges in the accompanying consolidated statements of
operations. The costs and expenses that relate to the employees
and facilities of Conexant, Inc. have been recorded as acquired
liabilities in the Merger and included as part of the purchase
price allocation in accordance with EITF 95-3
Recognition of Liabilities in Connection with a Business
Combination and SFAS No. 141 Business
Combinations. Subsequent actions that impacted the
employees and facilities of Conexant, Inc. have been included in
special charges on the Companys statements of operations.
2005 Restructuring Action In November 2004,
the Company announced additional plans to reduce its operating
expense level by the end of 2005. The components of this plan
were a shift of product development resources to lower-cost
regions and cost savings from continued Merger-related sales,
general and administrative consolidation. During fiscal year
2005, the Company announced several operating site closures and
further workforce reductions. In total, the Company notified
approximately 255 employees of their involuntary termination,
including approximately 175 domestic and 80 international
employees. The Company recorded total charges of
$19.7 million based on the estimates of the cost of
severance benefits for the affected employees, and the estimated
relocation benefits for those employees who have been offered
and have commenced the relocation process. Additionally, the
Company has recorded restructuring charges of $7.2 million
relating to the consolidation of certain facilities under
non-cancelable leases which were vacated. The facility charges
were determined in accordance with the provisions of
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. As a result, the Company
recorded the present value of the future lease obligations, in
excess of the expected future sublease income, using a discount
rate of 8.0%, and will accrete the remaining approximate
$9.0 million into expense over the remaining life of the
leases. The non-cash facility accruals include $7.0 million
of reclassifications of the deferred gains on the previous
sale-leaseback of two facilities, and $6.6 million of
reclassifications from earlier restructuring actions for another
facility.
Activity and liability balances recorded as part of the 2005
Restructuring Action through September 30, 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
19,708 |
|
|
$ |
7,244 |
|
|
$ |
26,952 |
|
Non-cash items
|
|
|
(46 |
) |
|
|
13,629 |
|
|
|
13,583 |
|
Cash payments
|
|
|
(16,118 |
) |
|
|
(1,535 |
) |
|
|
(17,653 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
3,544 |
|
|
$ |
19,338 |
|
|
$ |
22,882 |
|
|
|
|
|
|
|
|
|
|
|
82
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 Restructuring Actions The Company
approved several restructuring plans during fiscal 2004. In
connection with the Merger, the Company began to formulate a
plan which included workforce reductions and facility
consolidation actions. This plan was communicated at the time of
the Merger and has been completed (the 2004 Merger Related
Restructuring and Reorganization Plans). During the fourth
fiscal quarter of 2004, the Company announced additional
workforce reduction and facility consolidation actions in
response to lower than anticipated revenue levels.
In connection with the Merger, the Company began to formulate
the 2004 Merger Related Reorganization Plan which consisted
primarily of workforce reductions to eliminate redundant
positions and consolidation of worldwide facilities. The
portions of the plan that pertained to Conexant, Inc. employees
and facilities were recorded as acquired liabilities in the
Merger and included as part of the purchase price allocation, in
accordance with EITF 95-3 and SFAS No. 141. This
plan consisted of an involuntary workforce reduction which
affected approximately 35 employees of Conexant, Inc. These
employees were located in the United States in sales and
administrative functions. The charge associated with these
workforce reductions of approximately $1.3 million was
based upon estimates of the severance and fringe benefits for
the affected employees, in addition to relocation benefits for
others. The facility consolidation plan resulted in an initial
charge of $13.5 million and included assumptions regarding
sublease rates and time periods and other costs to prepare and
sublease the applicable spaces. Additionally, at the date of the
Merger, there had been a decline in the real estate market in
certain geographic regions in which Conexant, Inc. had leased
facilities. A portion of the facilities related charges
represent adjustments to the fair market value rates of those
leases. These non-cancelable lease commitments range from near
term to 17 years in length. In fiscal 2004, the Company
reduced the original facility consolidation charge by
approximately $3.6 million and increased the workforce
related charge by approximately $0.2 million as a result of
finalizing the 2004 Merger Related Reorganization Plan and
recorded these changes as adjustments to the purchase price
allocation (goodwill). In fiscal 2005, as a result of finalizing
facilities consolidation actions, the Company reduced its
facilities reserves by a total of $1.2 million as
adjustments to the purchase price allocation (goodwill).
Additionally, in fiscal 2005, as a result of the final closure
of a facility in Europe, $3.7 million of reserves were
transferred from the 2004 Merger Related Reorganization Plan to
the 2005 Restructuring Action.
Activity and liability balances recorded as part of the 2004
Merger Related Reorganization Plan pertaining to Conexant, Inc.
employees and facilities through September 30, 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Recorded in purchase price allocation
|
|
$ |
1,300 |
|
|
$ |
13,509 |
|
|
$ |
14,809 |
|
Adjusted to purchase price allocation
|
|
|
210 |
|
|
|
(3,554 |
) |
|
|
(3,344 |
) |
Cash payments
|
|
|
(536 |
) |
|
|
(788 |
) |
|
|
(1,324 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
974 |
|
|
|
9,167 |
|
|
|
10,141 |
|
Adjusted to purchase price allocation
|
|
|
12 |
|
|
|
(4,967 |
) |
|
|
(4,955 |
) |
Cash payments
|
|
|
(986 |
) |
|
|
(855 |
) |
|
|
(1,841 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
3,345 |
|
|
$ |
3,345 |
|
|
|
|
|
|
|
|
|
|
|
The portion of the 2004 restructuring actions pertaining to
Conexant Systems, Inc. employees and facilities was recorded to
special charges during fiscal 2004 (the 2004 Merger Related
Restructuring Plan). Approximately 90 employees in the sales and
administrative and information technology areas were
involuntarily terminated shortly after the completion of the
Merger, resulting in initial charges of $1.9 million, which
was based upon estimates of severance benefits for the affected
employees. These employees left the Company through December
2004. Additionally, in fiscal 2004, the Company recorded
restructuring charges
83
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of $1.9 million relating to the consolidation of certain
facilities under non-cancelable leases which were vacated.
During fiscal 2005, one additional facility was vacated which
resulted in an additional charge of $0.1 million in
accordance with SFAS No. 146.
During the fourth fiscal quarter of 2004, the Company announced
additional workforce reduction actions in response to lower than
anticipated revenue levels. The Company recorded an additional
$5.1 million (for a total of $7.0 million in fiscal
2004) based on the estimates of the cost of severance benefits
for the affected employees. An additional $1.5 million of
net severance benefits were earned in fiscal 2005 based on the
passage of time in the notification period, net of resignations
and favorable adjustments of final settlement amounts. In total,
the Company notified approximately 230 employees of their
involuntary termination, including approximately 180 domestic
and 50 international employees. The workforce reductions
affected employees in all areas of the business and are complete.
Activity and liability balances recorded as part of the 2004
Merger Related Restructuring Plan pertaining to Conexant
Systems, Inc. employees and facilities and the additional fourth
fiscal quarter of 2004 restructuring action through
September 30, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
7,066 |
|
|
$ |
1,877 |
|
|
$ |
8,943 |
|
Cash payments
|
|
|
(2,368 |
) |
|
|
(281 |
) |
|
|
(2,649 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
4,698 |
|
|
|
1,596 |
|
|
|
6,294 |
|
Charged to costs and expenses
|
|
|
1,504 |
|
|
|
(11 |
) |
|
|
1,493 |
|
Cash payments
|
|
|
(6,137 |
) |
|
|
(754 |
) |
|
|
(6,891 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
65 |
|
|
$ |
831 |
|
|
$ |
896 |
|
|
|
|
|
|
|
|
|
|
|
2003 Corporate Restructuring Plan In the
fourth quarter of fiscal 2003, the Company initiated a workforce
reduction, closed a design center and consolidated some
facilities. The Company involuntarily terminated employees in
the sales and administration areas and recorded charges
aggregating $1.2 million based upon estimates of the cost
of severance benefits for the affected employees. The Company
also recorded restructuring costs of $2.8 million relating
to the consolidation of certain facilities under non-cancelable
leases which were vacated. In fiscal 2005, as a result of
favorable sublease experience, the Company reduced its
facilities reserve by $1.0 million.
Activity and liability balances related to the 2003 Corporate
Restructuring Plan through September 30, 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
1,181 |
|
|
$ |
2,830 |
|
|
$ |
4,011 |
|
Cash payments
|
|
|
(364 |
) |
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
817 |
|
|
|
2,830 |
|
|
|
3,647 |
|
Charged to costs and expenses
|
|
|
350 |
|
|
|
98 |
|
|
|
448 |
|
Expense reversal
|
|
|
(81 |
) |
|
|
|
|
|
|
(81 |
) |
Cash payments
|
|
|
(1,086 |
) |
|
|
(933 |
) |
|
|
(2,019 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
|
|
|
|
1,995 |
|
|
|
1,995 |
|
Charged to costs and expenses
|
|
|
|
|
|
|
(950 |
) |
|
|
(950 |
) |
Cash payments
|
|
|
|
|
|
|
(329 |
) |
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
716 |
|
|
$ |
716 |
|
|
|
|
|
|
|
|
|
|
|
84
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002 Corporate and Manufacturing Restructuring
Plan During fiscal 2002, the Company initiated a
reduction of its workforce throughout its operations primarily
as a result of the divestiture of its Newport Beach wafer
fabrication operations and Skyworks Spin. In connection with the
fiscal 2002 corporate and manufacturing restructuring actions,
the Company terminated approximately 120 employees and recorded
charges aggregating $2.4 million based upon estimates of
the cost of severance benefits for the affected employees. The
Company completed these actions in fiscal 2002. In addition, the
Company recorded restructuring charges of $12.5 million for
costs associated with the consolidation of certain facilities
and commitments under license obligations that management
determined would not be used in the future.
As part of the 2002 Corporate and Manufacturing Restructuring
Plan, during the first quarter of fiscal 2003, the Company
initiated a further workforce reduction affecting 58 employees
and recorded additional charges of $1.9 million based upon
estimates of the cost of severance benefits for the affected
employees. During the third quarter of fiscal 2003, the Company
revised its estimate of liabilities for severance benefits and
facility costs due to unfavorable sublease experience to date,
and charged an additional $1.5 million to restructuring. In
the fourth quarter of 2003, the Company reversed
$1.1 million of the estimated cost to settle the remaining
commitment under a license obligation after its favorable
resolution, and increased the estimate of remaining facility
costs due to unfavorable sublease experience. In fiscal 2005, as
a result of unfavorable sublease experience, the Company
increased its facilities reserve by $0.6 million.
Activity and liability balances related to the 2002 Corporate
and Manufacturing Restructuring Plan through September 30,
2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
2,437 |
|
|
$ |
12,519 |
|
|
$ |
14,956 |
|
Cash payments
|
|
|
(1,664 |
) |
|
|
(431 |
) |
|
|
(2,095 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2002
|
|
|
773 |
|
|
|
12,088 |
|
|
|
12,861 |
|
Charged to costs and expenses
|
|
|
2,898 |
|
|
|
888 |
|
|
|
3,786 |
|
Expense reversal
|
|
|
|
|
|
|
(1,100 |
) |
|
|
(1,100 |
) |
Cash payments
|
|
|
(3,173 |
) |
|
|
(3,930 |
) |
|
|
(7,103 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
498 |
|
|
|
7,946 |
|
|
|
8,444 |
|
Expense reversal
|
|
|
(46 |
) |
|
|
|
|
|
|
(46 |
) |
Cash payments
|
|
|
(452 |
) |
|
|
(3,949 |
) |
|
|
(4,401 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
|
|
|
|
3,997 |
|
|
|
3,997 |
|
Charged to costs and expenses
|
|
|
|
|
|
|
554 |
|
|
|
554 |
|
Cash payments
|
|
|
|
|
|
|
(3,561 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
990 |
|
|
$ |
990 |
|
|
|
|
|
|
|
|
|
|
|
Through September 30, 2005, the Company has paid an
aggregate of $66.8 million in connection with all of its
restructuring plans and has remaining accrued restructuring and
reorganization liabilities of $28.8 million. The Company
expects to pay the amounts accrued for the workforce reductions
through fiscal 2006 and expects to pay the obligations for the
non-cancelable lease and other commitments over their respective
terms, which expire through fiscal 2021. Cash payments to
complete the restructuring actions will be funded from available
cash reserves and funds from product sales, and are not expected
to significantly impact the Companys liquidity.
85
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In fiscal 2005 and 2004, the Company incurred $7.7 million
and $7.3 million of costs related to the integration
efforts of the employees, customers, operations and other
business aspects related to the Merger.
Other special charges for fiscal 2005 principally consist of
$3.2 million for settlements of legal matters,
$2.3 million of non-employee stock option and warrant
modification charges, and $0.9 million of other special
charges.
Other special charges for fiscal 2004 principally consist of
stock option modification charges of $0.8 million,
approximately $1.2 million of one-time executive bonuses
which were contractually committed in the closing of the Merger,
$3.0 million related to a litigation settlement, and
$5.8 million in other special charges.
Other special charges for fiscal 2003 principally consist of a
$2.7 million loss on the sale of certain semiconductor test
equipment.
|
|
16. |
Related Party Transaction |
In connection with the Merger, the Company assumed loans
originally made in 1999 by former GlobespanVirata, Inc. to
certain executives of the Company. Upon maturation of these
loans, in fiscal 2004, the full principal and interest amounts
owed, aggregating approximately $3.5 million, were settled
with the Company receiving $2.1 million in cash, taking
back 0.5 million shares of common stock valued at
$0.8 million, and canceling $0.6 million of other
liabilities owing to those executives.
Net revenues by geographic area are presented based upon the
country of destination. No other foreign country represented 10%
or more of net revenues for any of the fiscal years presented.
Net revenues by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
70,192 |
|
|
$ |
82,508 |
|
|
$ |
57,652 |
|
Other Americas
|
|
|
14,988 |
|
|
|
18,756 |
|
|
|
11,086 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
85,180 |
|
|
|
101,264 |
|
|
|
68,738 |
|
Taiwan
|
|
|
96,026 |
|
|
|
140,257 |
|
|
|
88,369 |
|
China
|
|
|
332,441 |
|
|
|
327,267 |
|
|
|
211,642 |
|
Other Asia-Pacific
|
|
|
124,186 |
|
|
|
200,674 |
|
|
|
96,101 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific
|
|
|
552,653 |
|
|
|
668,198 |
|
|
|
396,112 |
|
Japan
|
|
|
27,704 |
|
|
|
53,495 |
|
|
|
84,943 |
|
Europe, Middle East and Africa
|
|
|
57,202 |
|
|
|
78,897 |
|
|
|
50,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
722,739 |
|
|
$ |
901,854 |
|
|
$ |
599,977 |
|
|
|
|
|
|
|
|
|
|
|
The Company believes a portion of the products sold to original
equipment manufacturers (OEMs) and third-party manufacturing
service providers in the Asia-Pacific region are ultimately
shipped to end-markets in the Americas and Europe. For fiscal
2005 and fiscal 2004, no customer accounted for 10% or more of
net revenues, and for fiscal 2003, one customer (a foreign
distributor) accounted for 11% of net revenues. No other
customer accounted for 10% or more of the Companys net
revenues for fiscal 2003.
86
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net revenues by product lines are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Broadband Access Products
|
|
$ |
192,038 |
|
|
$ |
254,581 |
|
|
$ |
64,310 |
|
Broadband Media Processing Products
|
|
|
155,394 |
|
|
|
214,186 |
|
|
|
165,493 |
|
Universal and Voice Access Products
|
|
|
289,223 |
|
|
|
323,073 |
|
|
|
325,220 |
|
Wireless Networking Products and Other
|
|
|
86,084 |
|
|
|
110,014 |
|
|
|
44,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
722,739 |
|
|
$ |
901,854 |
|
|
$ |
599,977 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets consist of property, plant and equipment,
marketable securities and other tangible assets. Long-lived
assets by geographic area at fiscal year ends were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
76,270 |
|
|
$ |
86,564 |
|
|
$ |
63,027 |
|
Europe, Middle East and Africa
|
|
|
2,702 |
|
|
|
9,577 |
|
|
|
2,159 |
|
Other
|
|
|
6,845 |
|
|
|
4,209 |
|
|
|
1,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,817 |
|
|
$ |
100,350 |
|
|
$ |
66,795 |
|
|
|
|
|
|
|
|
|
|
|
On November 29, 2005, the Company completed an accounts
receivable financing facility whereby it will sell, from time to
time, certain accounts receivable to Conexant USA, LLC (Conexant
USA), a special purpose entity, which is a consolidated
subsidiary of the Company. Concurrently, Conexant USA entered
into an $80.0 million credit agreement with a bank which is
secured by the assets of Conexant USA. This credit agreement has
a term of one year, with one year renewal periods at the sole
discretion of the bank. Conexant USA is required to maintain
certain minimum amounts on deposit (restricted cash) with the
bank during the duration of the credit agreement. Borrowings
under the credit agreement, which cannot exceed the lesser of
85% of the uncollected value of eligible accounts receivable
which are eligible for coverage under the insurance policy for
the receivables and $80.0 million, will bear interest equal
to the 7-day LIBOR plus 0.6%. Additionally, the Company will pay
an initial program fee and a final program fee and Conexant USA
will pay 0.2% per annum for the unused portion of the line
of credit. The credit agreement also requires the Company and
its consolidated subsidiaries to comply with certain financial
covenants, such as minimum levels of shareholders equity
and cash and cash equivalents.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of
Conexant Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Conexant Systems, Inc. and subsidiaries (the
Company) as of September 30, 2005 and 2004, and
the related consolidated statements of operations, cash flows,
and shareholders equity and comprehensive loss for each of
the three years in the period ended September 30, 2005. Our
audits also included the financial statement schedule listed at
Item 15(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries at
September 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2005, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
goodwill and intangible assets during the year ended
September 30, 2003 as a result of adopting Statement of
Financial Accounting Standards No. 142, Goodwill and
Intangible Assets.
As discussed in Note 3 to the consolidated financial
statements, on June 27, 2003, the Company completed the
spin-off of its Mindspeed Technologies business. The
consolidated financial statements referred to above have been
restated to report the Mindspeed Technologies business as a
discontinued operation for all periods presented.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2005, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 30, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
November 30, 2005
88
|
|
Item 9. |
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
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 in
Rule 13a-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act), as of the end of the
period covered by this report. Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were
effective as of September 30, 2005.
Managements 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
as of the end of the period covered by this report 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 September 30, 2005. Our managements
assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2005 has been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
which is included herein.
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To The Board of Directors and Shareholders of
Conexant Systems, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting appearing above, that Conexant Systems, Inc.
and subsidiaries (the Company) maintained effective
internal control over financial reporting as of
September 30, 2005, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys 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 managements assessment and an
opinion on the effectiveness of the companys 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
managements 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 companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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 companys
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
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the 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, managements assessment that the Company
maintained effective internal control over financial reporting
as of September 30, 2005 is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2005,
based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule of Conexant Systems, Inc. and subsidiaries as of
September 30, 2005 and our report dated November 30,
2005 expressed an unqualified opinion on those financial
statements and the financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
November 30, 2005
90
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended September 30, 2005 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B. |
Other Information |
Not applicable.
PART III
Certain information required by Part III is omitted from
this Annual Report in that the Registrant will file its
definitive Proxy Statement for the Annual Meeting of Shareowners
to be held on February 22, 2006 pursuant to
Regulation 14A of the Exchange Act (the Proxy Statement)
not later than 120 days after the end of the fiscal year
covered by this Annual Report, and certain information included
in the Proxy Statement is incorporated herein by reference.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
(a) Executive Officers See
Executive Officers in Part I, Item 1
hereof.
(b) Directors The information required
by this Item is incorporated herein by reference to the section
entitled Election of Directors in the Proxy
Statement.
(c) Audit Committee Financial Expert The
board of directors has determined that D. Scott Mercer, Chairman
of the Audit Committee, is an audit committee financial
expert and independent as defined under
applicable SEC and Nasdaq rules. The boards affirmative
determination was based, among other things, upon his extensive
experience as chief financial officer of Western Digital
Corporation and, prior to that, as Vice President, Finance,
European Operations of Dell Inc.
(d) We adopted our Standards of Business
Conduct, a code of ethics that applies to all employees,
including its executive officers. A copy of the Standards of
Business Conduct is posted on our Internet site at
www.conexant.com. In the event that we make any amendment
to, or grant any waivers of, a provision of the Standards of
Business Conduct that applies to the principal executive
officer, principal financial officer, or principal accounting
officer that requires disclosure under applicable SEC rules, we
intend to disclose such amendment or waiver and the reasons
therefor on our Internet site.
(e) Section 16(a) Beneficial Ownership Reporting
Compliance The information required by this Item is
incorporated by reference to the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.
|
|
Item 11. |
Executive Compensation |
The information required by this Item is incorporated herein by
reference to the sections entitled Executive
Compensation and Directors Compensation
in the Proxy Statement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by
reference to the sections entitled Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information in the Proxy Statement.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is incorporated herein by
reference to the section entitled Certain Relationships
and Related Transactions in the Proxy Statement.
91
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by
reference to the section entitled Principal Accountant
Fees and Services in the Proxy Statement.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements
The following consolidated financial statements of the Company
for the fiscal year ended September 30, 2005 are included
herewith:
|
|
|
Consolidated Balance Sheets, Consolidated Statements of
Operations, Consolidated Statements of Cash Flows, Consolidated
Statements of Shareholders Equity and Comprehensive Loss,
Notes to Consolidated Financial Statements, and Report of
Deloitte & Touche LLP, Independent Registered Public
Accounting Firm. |
(2) Supplemental Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is not present in amounts sufficient to require
submission of the schedule, or because the required information
is included in the consolidated financial statements or notes
thereto.
(3) Exhibits
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
3-a-1 |
|
|
Amended and Restated Certificate of Incorporation of the
Company, as amended, filed as Exhibit 3.a.1 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, is incorporated herein by
reference. |
|
|
3-a-2 |
|
|
Amended By-Laws of the Company, filed as
Exhibit 3.(ii) to the Companys Current Report on
Form 8-K dated February 28, 2005, is incorporated
herein by reference. |
|
|
4-a-1 |
|
|
Rights Agreement, dated as of November 30, 1998, by and
between the Company and Mellon Investor Services, L.L.C.
(formerly ChaseMellon Shareholder Services, L.L.C.), as rights
agent, filed as Exhibit 4.4 to the Companys
Registration Statement on Form S-8 (Registration
No. 333-68755), is incorporated herein by reference. |
|
|
4-a-2 |
|
|
First Amendment to Rights Agreement, dated as of
December 9, 1999, filed as Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999, is incorporated herein by
reference. |
|
|
4-b-1 |
|
|
Indenture, dated as of May 1, 1999, between the Company and
Bank One Trust Company, National Association, as successor to
The First National Bank of Chicago, as trustee, including the
form of the Companys
41/4% Convertible
Subordinated Notes Due May 1, 2006 attached as
Exhibit A thereto, filed as Exhibit 4.1 to the
Companys Registration Statement on Form S-3
(Registration No. 333-82399), is incorporated herein by
reference. |
|
|
4-b-2 |
|
|
Indenture, dated as of February 1, 2000, between the
Company and Bank One Trust Company, National Association, as
trustee, including the form of the Companys
4% Convertible Subordinated Notes Due February 1, 2007
attached as Exhibit A thereto, filed as Exhibit 4.04
to the Companys Registration Statement on Form S-4
(Registration No. 333-96033), is incorporated herein by
reference. |
92
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
4-b-3 |
|
|
Indenture, dated as of May 11, 2001, between
GlobespanVirata, Inc. (now named Conexant, Inc.) and The Bank of
New York (successor to United States Trust Company of New York),
as Trustee, including the form of 5.25% Convertible
Subordinated Note due 2006 of GlobespanVirata, Inc. attached as
Exhibit A thereto, filed as Exhibit 4.1 to
GlobespanVirata, Inc.s Current Report on Form 8-K
dated May 15, 2001 (File No. 000-26401), is incorporated
herein by reference. |
|
|
4-b-4 |
|
|
First Supplemental Indenture, dated as of February 27,
2004, between GlobespanVirata, Inc. (now named Conexant, Inc.)
and The Bank of New York (successor to United States Trust
Company of New York), as Trustee, filed as Exhibit 4.2 to
the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, is incorporated herein by
reference. |
|
|
*10-a-1 |
|
|
Conexant Systems, Inc. 1998 Stock Option Plan, filed as
Exhibit 10.6 to the Companys Registration Statement
on Form 10 (File No. 000-24923), is incorporated herein by
reference. |
|
|
*10-a-2 |
|
|
Copy of resolution of the Board of Directors of the Company,
adopted March 1, 1999, amending the Companys 1998
Stock Option Plan, filed as Exhibit 10-b-2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by
reference. |
|
|
*10-a-3 |
|
|
Forms of Stock Option Agreements under Rockwells 1988
Long-Term Incentives Plan for options granted after
December 1, 1994, filed as Exhibit 10-d-7 to
Rockwells Annual Report on Form 10-K for the year
ended September 30, 1994 (File No. 1-1035), are
incorporated herein by reference. |
|
|
*10-a-4 |
|
|
Forms of Stock Option Agreements under Rockwells 1995
Long-Term Incentives Plan for options granted prior to
December 3, 1997, filed as Exhibit 10-e-2 to
Rockwells Annual Report on Form 10-K for the year
ended September 30, 1994 (File No. 1-1035), are
incorporated herein by reference. |
|
|
*10-a-5 |
|
|
Forms of Stock Option Agreements under Rockwells 1995
Long-Term Incentives Plan for options granted between
December 3, 1997 and August 31, 1998, filed as
Exhibit 10-b-3 to Rockwells Annual Report on
Form 10-K for the year ended September 30, 1998 (File
No. 1-12383), are incorporated herein by reference. |
|
|
*10-a-6 |
|
|
Form of Stock Option Agreement under Rockwells 1995
Long-Term Incentives Plan for options granted on April 23,
1998, filed as Exhibit 10-b-4 to Rockwells Annual
Report on Form 10-K for the year ended September 30,
1998 (File No. 1-12383), is incorporated herein by
reference. |
|
|
*10-a-7 |
|
|
Form of Stock Option Agreement under Rockwells 1995
Long-Term Incentives Plan for options granted on August 31,
1998, filed as Exhibit 10-b-5 to Rockwells Annual
Report on Form 10-K for the year ended September 30,
1998 (File No. 1-12383), is incorporated herein by
reference. |
|
|
*10-a-8 |
|
|
Form of Stock Option Agreement under Rockwells Directors
Stock Plan, filed as Exhibit 10-d to Rockwells
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 (File No. 1-1035), is incorporated
herein by reference. |
|
|
*10-a-9 |
|
|
Copy of resolution of the Board of Directors of Rockwell,
adopted November 6, 1996, adjusting outstanding awards
under Rockwells (i) 1988 Long-Term Incentives Plan,
(ii) 1995 Long-Term Incentives Plan and
(iii) Directors Stock Plan, filed as Exhibit 4-g-2 to
Rockwells Registration Statement on Form S-8
(Registration No. 333-17055), is incorporated herein by
reference. |
|
|
*10-a-10 |
|
|
Copy of resolution of the Board of Directors of Rockwell,
adopted September 3, 1997, adjusting outstanding awards
under Rockwells (i) 1988 Long-Term Incentives Plan,
(ii) 1995 Long-Term Incentives Plan and
(iii) Directors Stock Plan, filed as Exhibit 10-e-3 to
Rockwells Annual Report on Form 10-K for the year
ended September 30, 1997 (File No. 1-12383), is
incorporated herein by reference. |
|
|
*10-a-11 |
|
|
Copy of resolution of the Board of Directors of Rockwell,
adopted December 2, 1998, assigning to the Company
outstanding options to purchase shares of Company Common Stock,
filed as Exhibit 4.f.4 to the Companys Registration
Statement on Form S-3 (Registration No. 333-70085), is
incorporated herein by reference. |
93
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
*10-a-12 |
|
|
Copy of resolution of the Board of Directors of the Company,
adopted November 30, 1998, assuming outstanding options to
purchase shares of Company Common Stock, filed as
Exhibit 4.f.5 to the Companys Registration Statement
on Form S-3 (Registration No. 333-70085), is incorporated
herein by reference. |
|
*10-b-1 |
|
|
Conexant Systems, Inc. 1999 Long-Term Incentives Plan, as
amended, filed as Exhibit 4.7 to the Companys
Registration Statement on Form S-8 (Registration
No. 333-37918), is incorporated herein by reference. |
|
|
*10-b-2 |
|
|
Copy of resolution of the Board of Directors of the Company,
adopted April 20, 1999, amending the Companys 1999
Long-Term Incentives Plan, filed as Exhibit 10-c-2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by
reference. |
|
|
*10-b-3 |
|
|
Form of Stock Option Agreement under the Companys 1999
Long-Term Incentives Plan, filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by
reference. |
|
|
*10-b-4 |
|
|
Form of Restricted Stock Agreement (Performance Vesting) under
the Companys 1999 Long-Term Incentives Plan, filed as
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference. |
|
|
*10-b-5 |
|
|
Form of Restricted Stock Agreement (Time Vesting) under the
Companys 1999 Long-Term Incentives Plan, filed as
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference. |
|
|
*10-b-6 |
|
|
Memorandum of Adjustments to Outstanding Options Under the
Conexant Stock Plans approved and adopted by the Board of
Directors of the Company on May 9, 2002, as amended
June 13, 2002, in connection with the Skyworks Spin, filed
as Exhibit 10-b-9 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2002, is
incorporated herein by reference. |
|
|
*10-b-7 |
|
|
Memorandum of Proposed Amendments to the Conexant Systems, Inc.
Stock Option Plans adopted by the Board of Directors of the
Company on June 13, 2002 in connection with the Skyworks
Spin, filed as Exhibit 10-b-10 to the Companys Annual
Report on Form 10-K for the year ended September 30,
2002, is incorporated herein by reference. |
|
|
*10-b-8 |
|
|
Memorandum of Adjustments to Outstanding Options Under the
Conexant Stock Plans approved and adopted by the Board of
Directors of the Company on June 5, 2003 in connection with
the Mindspeed Spin, filed as Exhibit 10-b-11 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 2003, is incorporated herein by
reference. |
|
|
*10-b-9 |
|
|
Memorandum of Proposed Amendments to the Conexant Systems, Inc.
Stock Option Plans adopted by the Board of Directors of the
Company on June 5, 2003 in connection with the Mindspeed
Spin, filed as Exhibit 10-b-12 to the Companys Annual
Report on Form 10-K for the year ended September 30,
2003, is incorporated herein by reference. |
|
|
*10-c-1 |
|
|
Conexant Systems, Inc. Retirement Savings Plan, as amended,
filed as Exhibit 4.5 to the Companys Registration
Statement on Form S-8 (Registration No. 333-73142), is
incorporated herein by reference. |
|
|
*10-d-1 |
|
|
Copy of resolutions of the Board of Directors of the Company,
adopted August 13, 1999 amending, among other things, the
Companys 1999 Long-Term Incentives Plan, filed as
Exhibit 10-e-1 to the Companys Annual Report on
Form 10-K for the year ended September 30, 1999, is
incorporated herein by reference. |
|
|
*10-e-1 |
|
|
Conexant Systems, Inc. Directors Stock Plan, as amended, filed
as Exhibit 4.5 to the Companys Registration Statement
on Form S-8 (Registration No. 333-113395), is
incorporated herein by reference. |
|
|
*10-f-1 |
|
|
Conexant Systems, Inc. 2000 Non-Qualified Stock Plan, as
amended, filed as Exhibit (D) (2) to the Companys
Amendment No. 2 to Schedule TO dated December 1, 2004,
is incorporated herein by reference. |
94
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
*10-f-2 |
|
|
Resolutions adopted by the Board of Directors of the Company on
February 25, 2004 with respect to the use of shares
available under certain GlobespanVirata, Inc. stock plans for
future grants under the Conexant Systems, Inc. 2000
Non-Qualified Stock Plan, filed as Exhibit 4.5.2 to the
Companys Registration Statement on Form S-8
(Registration No. 333-113595), is incorporated herein by
reference. |
|
|
*10-f-3 |
|
|
Form of Stock Option Agreement under the Conexant Systems, Inc.
2000 Non-Qualified Stock Plan, as amended, filed as
Exhibit 10-f-3 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2004, is
incorporated herein by reference. |
|
|
*10-g-1 |
|
|
Conexant Systems, Inc. GlobespanVirata, Inc. 1999 Equity
Incentive Plan, as amended, filed as Exhibit 4.5.1 to the
Companys Registration Statement on Form S-8
(Registration No. 333-113399), is incorporated herein by
reference. |
|
|
*10-h-1 |
|
|
Conexant Systems, Inc. GlobespanVirata, Inc. 1999 Supplemental
Stock Option Plan, as amended, filed as Exhibit 4.5.2 to
the Companys Registration Statement on Form S-8
(Registration No. 333-113399), is incorporated herein by
reference. |
|
|
*10-i-1 |
|
|
Conexant Systems, Inc. Amended and Restated GlobespanVirata,
Inc. 1999 Stock Incentive Plan, as amended, filed as
Exhibit 4.5.3 to the Companys Registration Statement
on Form S-8 (Registration No. 333-113399), is incorporated
herein by reference. |
|
|
*10-j-1 |
|
|
Conexant Systems, Inc. 2004 New-Hire Equity Incentive Plan,
filed as Exhibit 99.1 to the Companys Registration
Statement on Form S-8 (Registration No. 333-115983),
is incorporated herein by reference. |
|
|
*10-j-2 |
|
|
Form of Stock Option Agreement under the Conexant Systems, Inc.
2004 New-Hire Equity Incentive Plan, filed as
Exhibit 10-j-2 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2004, is
incorporated herein by reference. |
|
|
*10-k-1 |
|
|
Employment Agreement dated December 15, 1998 filed as
Exhibit 10.5 to the Companys Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998, is
incorporated herein by reference. |
|
|
*10-k-2 |
|
|
Schedule identifying agreements substantially identical to the
Employment Agreement constituting Exhibit 10-k-1 hereto
entered into by the Company with L.C. Brewster, D.E.
OReilly and F.M. Rhodes, filed as Exhibit 10-f-2 to
the Companys Annual Report on Form 10-K for the year
ended September 30, 2003, is incorporated herein by
reference. |
|
|
*10-k-3 |
|
|
Employment Agreement dated December 15, 1998 between the
Company and D.W. Decker, filed as Exhibit 10.7 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998, is incorporated herein by
reference. |
|
|
*10-k-4 |
|
|
Agreement dated March 28, 2003 between the Company and B.S.
Iyer, filed as Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31,
2003, is incorporated herein by reference.** |
|
|
*10-k-5 |
|
|
Employment Agreement dated as of December 18, 2002 by and
between the Company and J.S. Blouin, filed as
Exhibit 10-f-5 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2003, is
incorporated herein by reference. |
|
|
*10-k-6 |
|
|
General Agreement dated as of September 30, 2003 by and
between the Company and D.E. OReilly, filed as
Exhibit 10-f-6 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2003, is
incorporated herein by reference. |
|
|
*10-k-7 |
|
|
Employment Agreement between the Company and A. Geday dated as
of January 15, 2004, filed as Exhibit 10.b to the
Companys Registration Statement on Form S-4
(Registration No. 333-111179), is incorporated herein by
reference. |
|
|
*10-k-8 |
|
|
Employment Agreement between the Company and F.M. Rhodes dated
as of January 15, 2004, filed as Exhibit 10.c to the
Companys Registration Statement on Form S-4
(Registration No. 333-111179), is incorporated herein by
reference. |
|
|
*10-k-9 |
|
|
Employment Agreement between the Company and D.E. OReilly
dated as of January 15, 2004, filed as Exhibit 10.e to
the Companys Registration Statement on Form S-4
(Registration No. 333-111179), is incorporated herein by
reference. |
95
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
*10-k-10 |
|
|
Amendment dated as of February 27, 2004 to Employment
Agreement between the Company and J.S. Blouin, filed as
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004, is
incorporated herein by reference. |
|
|
*10-k-11 |
|
|
Employment Agreement between the Company and L.C. Brewster dated
as of February 27, 2004, filed as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, is incorporated herein by
reference. |
|
|
*10-k-12 |
|
|
Amendment dated November 12, 2004 between the Company and
F.M. Rhodes to Employment Agreement dated as of January 15,
2004 between the Company and F.M. Rhodes, filed as
Exhibit 10 to the Companys Current Report on
Form 8-K dated November 15, 2004, is incorporated
herein by reference. |
|
|
*10-k-13 |
|
|
Amended and Restated Employment Agreement by and between the
Company and D. W. Decker, filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated
March 14, 2005, is incorporated herein by reference. |
|
|
*10-k-14 |
|
|
D. W. Decker Performance Share Award Grant Letter and Terms and
Conditions, filed as Exhibit 10.2 to the Companys
Current Report on Form 8-K dated May 9, 2005, is
incorporated herein by reference. |
|
|
*10-k-15 |
|
|
Separation Agreement by and between the Company and A. Geday,
filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K dated December 22, 2004, is incorporated
herein by reference. |
|
|
*10-l-1 |
|
|
Conexant Systems, Inc. 2001 Performance Share Plan and related
Performance Share Award Terms and Conditions, filed as
Exhibit 99.1 to the Companys Registration Statement
on Form S-8 (Registration Statement No. 333-73858), is
incorporated herein by reference. |
|
|
10-m-1 |
|
|
Contribution and Distribution Agreement dated as of
December 16, 2001, as amended as of June 25, 2002, by
and between the Company and Washington Sub, Inc. (excluding
schedules) filed as Exhibit 2.2 to the Companys
Current Report on Form 8-K dated July 1, 2002, is
incorporated herein by reference. |
|
|
10-m-2 |
|
|
Employee Matters Agreement dated as of June 25, 2002 by and
among the Company, Washington Sub, Inc. and Alpha Industries,
Inc. (excluding schedules) filed as Exhibit 2.3 to the
Companys Current Report on Form 8-K dated
July 1, 2002, is incorporated herein by reference. |
|
|
10-m-3 |
|
|
Tax Allocation Agreement dated as of June 25, 2002 by and
among the Company, Washington Sub, Inc. and Alpha Industries,
Inc. (excluding schedules) filed as Exhibit 2.4 to the
Companys Current Report on Form 8-K dated
July 1, 2002, is incorporated herein by reference. |
|
|
10-n-1 |
|
|
Distribution Agreement dated as of June 25, 2003, by and
between the Company and Mindspeed Technologies, Inc. (excluding
schedules) filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K dated July 1, 2003, is
incorporated herein by reference. |
|
|
10-n-2 |
|
|
Employee Matters Agreement dated as of June 27, 2003 by and
between the Company and Mindspeed Technologies, Inc. (excluding
schedules) filed as Exhibit 2.2 to the Companys
Current Report on Form 8-K dated July 1, 2003, is
incorporated herein by reference. |
|
|
10-n-3 |
|
|
Tax Allocation Agreement dated as of June 27, 2003 by and
between the Company and Mindspeed Technologies, Inc. (excluding
schedules) filed as Exhibit 2.3 to the Companys
Current Report on Form 8-K dated July 1, 2003, is
incorporated herein by reference. |
|
|
10-o-1 |
|
|
Capacity & Reservation Deposit Agreement dated as of
March 20, 2000 by and between the Company and UMC Group
(USA), filed as Exhibit 10-k-1 to the Companys Annual
Report on Form 10-K for the year ended September 30,
2002, is incorporated herein by reference.** |
|
|
10-o-2 |
|
|
Amendment No. 1 to Capacity & Reservation Deposit
Agreement dated as of March 24, 2000 between the Company
and UMC Group (USA), filed as Exhibit 10-k-2 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 2002, is incorporated herein by
reference. |
|
|
10-o-3 |
|
|
Amendment No. 2 to Capacity & Reservation Deposit
Agreement dated as of August 1, 2000 between the Company
and UMC Group (USA), filed as Exhibit 10-k-3 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 2002, is incorporated herein by
reference.** |
96
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
10-o-4 |
|
|
Amendment No. 3 to Capacity & Reservation Deposit
Agreement dated as of May 17, 2001 between the Company and
UMC Group (USA), filed as Exhibit 10-k-4 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 2002, is incorporated herein by
reference.** |
|
|
10-o-5 |
|
|
Amendment No. 4 to Capacity & Reservation Deposit
Agreement dated as of August 24, 2001 between the Company
and UMC Group (USA), filed as Exhibit 10-k-5 to the
Companys Annual Report on Form 10-K for the year
ended September 30, 2002, is incorporated herein by
reference.** |
|
|
10-o-6 |
|
|
Foundry Agreement dated as of July 27, 2000 by and between
the Company and UMC Group (USA), filed as Exhibit 10-k-6 to
the Companys Annual Report on Form 10-K for the year
ended September 30, 2002, is incorporated herein by
reference.** |
|
|
*10-p-1 |
|
|
Form of Indemnity Agreement between the Company and the
directors and certain executives of the Company, filed as
Exhibit 10-q-1 to the Companys Annual Report on
Form 10-K for the year ended September 30, 2004, is
incorporated herein by reference. |
|
|
*10-p-2 |
|
|
Schedule identifying agreements substantially identical to the
Form of Indemnity Agreement constituting Exhibit 10-p-1
hereto entered into by the Company and the directors and certain
executives of the Company. |
|
|
*10-q-1 |
|
|
Summary of Non-Employee Director Compensation and Benefits,
filed as Exhibit 99 to the Companys Quarterly Report
on Form 10-Q for the quarter ended December 31, 2004,
is incorporated herein by reference. |
|
|
10-r-1 |
|
|
Receivables Purchase Agreement, dated as of November 29,
2005, by and between Conexant USA, LLC and the Company, filed as
Exhibit 99.1 to the Companys Current Report on
Form 8-K dated December 1, 2005. |
|
|
10-r-2 |
|
|
Credit and Security Agreement, dated as of November 29,
2005, by and between Conexant USA, LLC and Wachovia Bank,
National Association, filed as Exhibit 99.2 to the
Companys Current Report on Form 8-K dated
December 1, 2005. |
|
|
10-r-3 |
|
|
Servicing Agreement, dated as of November 29, 2005, by and
between the Company and Conexant USA, LLC, filed as
Exhibit 99.3 to the Companys Current Report on
Form 8-K dated December 1, 2005. |
|
|
21 |
|
|
List of Subsidiaries of the Company. |
|
|
23 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
24 |
|
|
Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company. |
|
|
31.1 |
|
|
Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e). |
|
|
31.2 |
|
|
Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e). |
|
|
32 |
|
|
Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350. |
|
|
|
|
* |
Management contract or compensatory plan or arrangement. |
|
|
** |
Certain confidential portions of this Exhibit have been omitted
pursuant to a request for confidential treatment. Omitted
portions have been filed separately with the Securities and
Exchange Commission. |
(b) Exhibits
See subsection (a) (3) above.
(c) Financial Statement Schedules
See subsections (a) (1) and (2) above.
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport
Beach, State of California, on this 8th day of December,
2005.
|
|
|
|
|
Dwight W. Decker |
|
Chairman of the Board and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed on the
8th day of December, 2005 by the following persons on
behalf of the Registrant and in the capacities indicated:
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
/s/ Dwight W. Decker
Dwight
W. Decker |
|
Chairman of the Board and Chief Executive Officer (Principal
Executive Officer) |
|
/s/ J. Scott Blouin*
J.
Scott Blouin |
|
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer) |
|
/s/ Donald R. Beall*
Donald
R. Beall |
|
Director |
|
/s/ Steven J. Bilodeau*
Steven
J. Bilodeau |
|
Director |
|
/s/ Dipanjan Deb*
Dipanjan
Deb |
|
Director |
|
/s/ F. Craig Farrill
F.
Craig Farrill |
|
Director |
|
/s/ Balakrishnan S.
Iyer*
Balakrishnan
S. Iyer |
|
Director |
|
/s/ John W. Marren*
John
W. Marren |
|
Director |
|
/s/ D. Scott Mercer*
D.
Scott Mercer |
|
Director |
|
/s/ Jerre L. Stead*
Jerre
L. Stead |
|
Director |
|
/s/ Giuseppe Zocco*
Giuseppe
Zocco |
|
Director |
|
|
* By: |
/s/ Dennis E. OReilly
|
Dennis E. OReilly
Attorney-in-Fact**
|
|
** |
By authority of the power of attorney filed as Exhibit 24
hereto |
98
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions | |
|
|
|
|
|
|
Balance at | |
|
Charged to | |
|
|
|
|
|
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
Description |
|
of Year | |
|
Expenses | |
|
Deductions(1) | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
5,974 |
|
|
$ |
(1,587 |
) |
|
$ |
(584 |
) |
|
$ |
3,803 |
|
|
Reserve for sales returns and allowances
|
|
|
9,474 |
|
|
|
24,179 |
|
|
|
(27,864 |
) |
|
|
5,789 |
|
|
Allowance for excess and obsolete inventories
|
|
|
23,319 |
|
|
|
35,944 |
|
|
|
(14,430 |
) |
|
|
44,833 |
|
|
Allowance for lower of cost or market inventories
|
|
|
|
|
|
|
20,179 |
|
|
|
(13,440 |
) |
|
|
6,739 |
|
Year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
1,547 |
|
|
$ |
4,475 |
|
|
$ |
(48 |
) |
|
$ |
5,974 |
|
|
Reserve for sales returns and allowances
|
|
|
1,891 |
|
|
|
14,504 |
|
|
|
(6,921 |
) |
|
|
9,474 |
|
|
Allowance for excess and obsolete inventories
|
|
|
25,177 |
|
|
|
11,586 |
|
|
|
(13,444 |
) |
|
|
23,319 |
|
Year ended September 30, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
6,508 |
|
|
$ |
(3,958 |
)(2) |
|
$ |
(1,003 |
) |
|
$ |
1,547 |
|
|
Reserve for sales returns and allowances
|
|
|
2,660 |
|
|
|
3,636 |
|
|
|
(4,405 |
) |
|
|
1,891 |
|
|
Allowance for excess and obsolete inventories
|
|
|
23,401 |
|
|
|
14,451 |
|
|
|
(12,675 |
) |
|
|
25,177 |
|
|
|
(1) |
Deductions in the allowance for doubtful accounts reflect
amounts written off. |
|
(2) |
Additions charged to costs and expenses in the allowance for
doubtful accounts reflect a credit balance recorded in fiscal
2003 resulting from reductions in the allowance account
associated with overall collections experience more favorable
than previously estimated. |
99
EXHIBIT INDEX
|
|
|
|
|
Exhibits |
|
Description |
|
|
|
|
*10-p-2 |
|
|
Schedule identifying agreements substantially identical to the
Form of Indemnity Agreement constituting Exhibit 10-p-1
hereto entered into by the Company and the directors and certain
executives of the Company. |
|
|
21 |
|
|
List of Subsidiaries of the Company. |
|
|
23 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
24 |
|
|
Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company. |
|
|
31.1 |
|
|
Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e). |
|
|
31.2 |
|
|
Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e). |
|
|
32 |
|
|
Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350. |
|
|
* |
Management contract or compensatory plan or arrangement. |
100