e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005*
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-24923
CONEXANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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25-1799439 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
4000 MacArthur Boulevard
Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip code)
(949) 483-4600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of
the Exchange Act).
Yes þ No o
Number of shares of registrants common stock outstanding as of July 29, 2005 was 473,411,213.
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* |
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For presentation purposes of this Form 10-Q, references made to the June 30, 2005 period
relate to the actual second fiscal quarter ended July 1, 2005.
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CAUTIONARY STATEMENT
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Quarterly
Report on Form 10-Q includes forward-looking statements intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally can be identified by phrases such as Conexant or the company
believes, expects, anticipates, foresees, forecasts, estimates or other words or
phrases of similar import. Similarly, statements in this Quarterly Report on Form 10-Q that
describe the companys business strategy, outlook, objectives, plans, intentions or goals also are
forward-looking statements. All such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in forward-looking
statements.
Conexants future results will be affected by the implementation of new accounting rules related to
the expensing of stock options commencing in fiscal 2006. Other risks and uncertainties include,
but are not limited to: general economic and political conditions and conditions in the markets
the company addresses; the substantial losses the company has incurred recently; the cyclical
nature of the semiconductor industry and the markets addressed by the companys and its 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; the companys 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 the companys 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 company
management; and possible disruptions in commerce related to terrorist activity or armed conflict,
as well as other risks and uncertainties, including those detailed from time to time in our
Securities and Exchange Commission filings.
These forward-looking statements are made only as of the date hereof. We undertake no obligation
to update or revise the forward-looking statements, whether as a result of new information, future
events or otherwise.
2
CONEXANT SYSTEMS, INC.
INDEX
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONEXANT SYSTEMS, INC.
Consolidated Condensed Balance Sheets
(unaudited, in thousands, except per share amounts)
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June 30, |
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September 30, |
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2005 |
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2004 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
160,496 |
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$ |
139,031 |
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Short-term investments |
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153,286 |
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163,040 |
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Receivables, net of allowance of $3,955 and $5,974 at
June 30, 2005 and September 30, 2004, respectively |
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82,345 |
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185,037 |
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Inventories |
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103,491 |
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194,754 |
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Mindspeed warrant-current portion |
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3,599 |
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Other current assets |
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19,745 |
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20,768 |
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Total current assets |
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519,363 |
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706,229 |
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Property, plant and equipment, net |
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50,333 |
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55,741 |
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Goodwill |
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718,335 |
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708,544 |
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Intangible assets, net |
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114,628 |
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135,241 |
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Mindspeed warrant |
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11,242 |
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23,000 |
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Marketable securities |
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72,024 |
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137,604 |
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Other assets |
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105,871 |
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114,163 |
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Total assets |
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$ |
1,591,796 |
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$ |
1,880,522 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
94,655 |
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$ |
141,533 |
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Accrued compensation and benefits |
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38,149 |
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40,423 |
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Restructuring and reorganization liabilities |
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25,278 |
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22,427 |
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Other current liabilities |
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58,329 |
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67,044 |
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Current portion of convertible subordinated notes |
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196,825 |
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Total current liabilities |
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413,236 |
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271,427 |
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Convertible subordinated notes, net of current portion |
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515,000 |
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711,825 |
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Other liabilities |
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97,653 |
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68,883 |
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Total liabilities |
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1,025,889 |
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1,052,135 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred and junior preferred stock |
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Common stock, $0.01 par value: 1,000,000 shares
authorized; 472,471 and 469,441 shares issued, and
471,288 shares and 468,257 shares outstanding at
June 30, 2005 and September 30, 2004,
respectively |
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4,725 |
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4,694 |
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Treasury stock: 1,184 shares at cost |
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(5,584 |
) |
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(5,584 |
) |
Additional paid-in capital |
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4,654,913 |
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4,648,325 |
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Accumulated deficit |
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(4,103,247 |
) |
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(3,877,176 |
) |
Accumulated other comprehensive income |
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30,945 |
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82,551 |
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Notes receivable from stock sales |
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(336 |
) |
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(576 |
) |
Unearned compensation |
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(15,509 |
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(23,847 |
) |
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Total shareholders equity |
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565,907 |
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828,387 |
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Total liabilities and shareholders equity |
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$ |
1,591,796 |
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$ |
1,880,522 |
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See accompanying notes to consolidated condensed financial statements.
4
CONEXANT SYSTEMS, INC.
Consolidated Condensed Statements of Operations
(unaudited, in thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Net revenues |
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$ |
197,464 |
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$ |
267,617 |
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$ |
507,823 |
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$ |
688,731 |
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Cost of goods sold |
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122,430 |
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155,136 |
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365,661 |
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395,448 |
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Gross margin |
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75,034 |
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112,481 |
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142,162 |
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293,283 |
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Operating expenses: |
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Research and development (1) |
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66,282 |
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74,317 |
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209,362 |
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167,205 |
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Selling, general and administrative (1) |
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31,081 |
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36,371 |
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89,449 |
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89,782 |
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Amortization of intangible assets |
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7,969 |
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7,956 |
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24,402 |
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12,564 |
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In-process research and development |
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160,818 |
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Special charges |
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8,409 |
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8,294 |
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41,262 |
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14,413 |
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Total operating expenses |
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113,741 |
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|
126,938 |
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364,475 |
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444,782 |
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Operating loss |
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(38,707 |
) |
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|
(14,457 |
) |
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(222,313 |
) |
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(151,499 |
) |
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Interest expense |
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8,396 |
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|
|
8,373 |
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|
25,290 |
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|
22,322 |
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Other (income) expense, net |
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(15,610 |
) |
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|
47,935 |
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(23,367 |
) |
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(1,031 |
) |
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|
|
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|
|
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Loss before income taxes |
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(31,493 |
) |
|
|
(70,765 |
) |
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(224,236 |
) |
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(172,790 |
) |
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|
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Provision for income taxes |
|
|
673 |
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|
661 |
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|
1,835 |
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|
1,368 |
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Net loss |
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$ |
(32,166 |
) |
|
$ |
(71,426 |
) |
|
$ |
(226,071 |
) |
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$ |
(174,158 |
) |
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|
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Net loss per share basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.48 |
) |
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Number of shares used in per share
computation |
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471,247 |
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|
463,804 |
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|
469,935 |
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|
363,654 |
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(1) |
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Non-cash employee stock compensation is included in the above captions as follows: |
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Three months ended |
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Nine months ended |
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June 30, |
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June 30, |
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2005 |
|
2004 |
|
2005 |
|
2004 |
Research and development |
|
$ |
2,275 |
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|
$ |
2,237 |
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|
$ |
6,795 |
|
|
$ |
3,131 |
|
Selling, general and administrative |
|
|
744 |
|
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|
743 |
|
|
|
2,232 |
|
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|
1,029 |
|
See accompanying notes to consolidated condensed financial statements.
5
CONEXANT SYSTEMS, INC.
Consolidated Condensed Statements of Cash Flows
(unaudited, in thousands)
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Nine months ended June 30, |
|
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2005 |
|
2004 |
Cash flows from operating activities: |
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Net loss |
|
$ |
(226,071 |
) |
|
$ |
(174,158 |
) |
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of
acquisitions: |
|
|
|
|
|
|
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Depreciation |
|
|
14,054 |
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|
|
11,337 |
|
Amortization of intangible assets |
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|
24,402 |
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|
12,564 |
|
In-process research and development |
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|
|
|
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|
160,818 |
|
Reduction of provision for bad debt |
|
|
(1,543 |
) |
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Inventory provisions |
|
|
50,150 |
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|
6,046 |
|
Decrease in fair value of Skyworks note and Mindspeed
warrant |
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|
14,804 |
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|
44,671 |
|
Equity in losses (earnings) of equity method investees |
|
|
8,587 |
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|
(12,750 |
) |
Gain on sale of equity securities, investments and
other assets |
|
|
(42,310 |
) |
|
|
(27,017 |
) |
Stock compensation, option modification charges and
other |
|
|
9,027 |
|
|
|
6,268 |
|
Other non-cash items, net |
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|
(299 |
) |
|
|
6,200 |
|
Changes in assets and liabilities: |
|
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|
|
|
|
|
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Receivables |
|
|
104,386 |
|
|
|
(42,174 |
) |
Inventories |
|
|
43,324 |
|
|
|
(18,631 |
) |
Accounts payable |
|
|
(47,535 |
) |
|
|
30,131 |
|
Agere patent litigation settlement |
|
|
(8,000 |
) |
|
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|
Special charges and other restructuring
related items, net of $45.5 million and $10.9
million of payments, respectively |
|
|
(4,241 |
) |
|
|
3,542 |
|
Accrued expenses and other current liabilities |
|
|
7,947 |
|
|
|
5,400 |
|
Other |
|
|
(5,348 |
) |
|
|
(10,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(58,666 |
) |
|
|
1,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(18,817 |
) |
|
|
24,752 |
|
Sales of equity securities, investments and other assets |
|
|
44,360 |
|
|
|
31,580 |
|
Purchases of marketable securities |
|
|
(45,244 |
) |
|
|
(67,816 |
) |
Sales and maturities of other marketable securities |
|
|
68,831 |
|
|
|
38,384 |
|
Net proceeds from purchase and sale-leaseback and other |
|
|
49,071 |
|
|
|
|
|
Capital expenditures |
|
|
(16,426 |
) |
|
|
(13,922 |
) |
Payment of merger costs |
|
|
|
|
|
|
(29,764 |
) |
Payment of deferred purchase consideration |
|
|
|
|
|
|
(4,000 |
) |
Investments in businesses |
|
|
(2,580 |
) |
|
|
(2,619 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
79,195 |
|
|
|
(23,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
740 |
|
|
|
24,110 |
|
Repayment of notes receivable from stock sales |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
936 |
|
|
|
24,110 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
21,465 |
|
|
|
2,363 |
|
Cash and cash equivalents at beginning of period |
|
|
139,031 |
|
|
|
76,186 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
160,496 |
|
|
$ |
78,549 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
6
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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), 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 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 its merger with GlobespanVirata, Inc. (GlobespanVirata)
with GlobespanVirata becoming a wholly-owned subsidiary of the Company. See Note 2 for further
information.
Interim Reporting In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting of adjustments of a normal recurring
nature, as well as the special charges, necessary to present fairly the Companys financial
position, results of operations and cash flows. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for a full year. These statements
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
Fiscal Periods For presentation purposes, references made to the periods ended June 30, 2004 and
2005, relate to the actual fiscal 2004 third quarter ended July 2, 2004 and the actual third fiscal
quarter of 2005 ended July 1, 2005, respectively.
Supplemental Cash Flow Information Cash paid for interest was $20.0 million and $16.6 million for
the nine months ended June 30, 2005 and 2004, respectively. Cash paid for income taxes for the nine
months ended June 30, 2005 and 2004 was $1.9 million and $0.2 million, respectively.
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. 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 more than 20 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.
Income (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.
7
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
(weighted-average number of shares, in thousands) |
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Stock options and warrants (under the treasury stock method) |
|
|
479 |
|
|
|
21,734 |
|
|
|
1,284 |
|
|
|
24,239 |
|
4.25% Convertible Subordinated Notes due 2006 |
|
|
7,364 |
|
|
|
7,364 |
|
|
|
7,364 |
|
|
|
7,364 |
|
5.25% Convertible Subordinated Notes due 2006 |
|
|
5,840 |
|
|
|
5,840 |
|
|
|
5,840 |
|
|
|
2,695 |
|
4.00% Convertible Subordinated Notes due 2007 |
|
|
12,137 |
|
|
|
12,137 |
|
|
|
12,137 |
|
|
|
12,137 |
|
Restricted stock |
|
|
5 |
|
|
|
10 |
|
|
|
6 |
|
|
|
15 |
|
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 net loss and pro forma net
loss per share would have been the amounts indicated below (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss, as reported |
|
$ |
(32,166 |
) |
|
$ |
(71,426 |
) |
|
$ |
(226,071 |
) |
|
$ |
(174,158 |
) |
Add: expense determined
under fair value accounting
included in net loss, as
reported |
|
|
3,019 |
|
|
|
2,980 |
|
|
|
9,027 |
|
|
|
4,160 |
|
Deduct: total expense
determined under fair value
accounting for all
awards |
|
|
(14,952 |
) |
|
|
(15,946 |
) |
|
|
(49,494 |
) |
|
|
(38,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(44,099 |
) |
|
$ |
(84,392 |
) |
|
$ |
(266,538 |
) |
|
$ |
(208,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic
and diluted, as reported |
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.48 |
) |
Pro forma net loss per
share basic and diluted |
|
$ |
(0.09 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.48 |
) |
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 assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
March 31, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Risk-free interest rate |
|
|
3.77 |
% |
|
|
3.93 |
% |
|
|
3.85 |
% |
|
|
3.33 |
% |
Expected volatility |
|
|
86 |
% |
|
|
97 |
% |
|
|
86 |
% |
|
|
97 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years) |
|
|
5.0 |
|
|
|
4.5 |
|
|
|
4.9 |
|
|
|
4.1 |
|
Weighted-average fair value
of options granted |
|
$ |
1.02 |
|
|
$ |
3.63 |
|
|
$ |
1.03 |
|
|
$ |
5.04 |
|
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. Because awards held by employees and
8
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
directors have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a reliable single measure of
the fair value of these options.
The Company accounts for non-employee stock-based compensation in accordance with the terms of SFAS
No. 123 (See Note 7 Other).
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.
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 was delayed by
the Securities and Exchange Commission and 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.
Cash, Cash Equivalents and Investments 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 maturity dates
greater than one year. 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 at June 30, 2005 and at September 30, 2004
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
September 30, |
|
|
2005 |
|
2004 |
Cash and cash equivalents |
|
$ |
160,496 |
|
|
$ |
139,031 |
|
Equity securities- Skyworks Solutions, Inc. (6.2 million shares at June 30, 2005 and September 30,
2004) |
|
|
46,248 |
|
|
|
61,767 |
|
Equity securities- SiRF Technology Holdings, Inc.
(2.8 million and 5.9 million shares at June 30, 2005
and September 30, 2004, respectively) |
|
|
48,977 |
|
|
|
87,509 |
|
Other short-term marketable securities (primarily
mutual funds, domestic government agency securities and corporate debt securities) |
|
|
58,061 |
|
|
|
13,764 |
|
|
|
|
|
|
|
|
|
|
Subtotal- short-term investments |
|
|
153,286 |
|
|
|
163,040 |
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities (primarily domestic
government agency securities and corporate debt securities) |
|
|
72,024 |
|
|
|
137,604 |
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
385,806 |
|
|
$ |
439,675 |
|
|
|
|
|
|
|
|
|
|
9
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
For all investment securities, unrealized losses that are other than temporary are recognized
in net income (loss). The Company does not hold these securities for speculative or trading
purposes. During the three and nine months ended June 30, 2005, the Company sold shares of equity
securities for cash proceeds of $32.6 million and $44.4 million, respectively, and realized gains
on the sales of these securities of $31.2 million and $42.3 million, respectively.
In July 2005, the Company sold the remaining 2.8 million shares of SiRF Technology Holdings, Inc.
for cash proceeds of $50.9 million and realized gains on the sales of these securities of $49.0
million.
2. Acquisitions
Fiscal 2005
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
$0.4 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 four year remaining vesting period of the stock
options. A total of $43,000 and $101,000 of this unearned compensation was recognized as an expense
in the three and nine months ended June 30, 2005, respectively. 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.
The Company also completed an asset acquisition in the three months ended March 31, 2005 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.
Fiscal 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 $19.4 million in
goodwill 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
10
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 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.
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.
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 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
June 30, 2005, the DSL related IPR&D projects were approximately 35% complete, 60% are expected to
be completed by the end of calendar 2005, and 5% have been abandoned due to product roadmap and
market changes. The wireless networking related IPR&D projects are approximately 50% complete and
50% are expected to be completed by the end of calendar 2005. 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. See Net Revenues portion in Results of Operations section of Managements Discussion
and Analysis for further discussion.
11
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
3. Supplemental Financial Statement Data
Marketable Securities
Marketable securities consist of short-term investments and long-term investments, all of which are
classified as available-for-sale securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
Unrealized |
|
Unrealized |
|
|
|
|
Amortized |
|
Holding |
|
Holding |
|
Fair |
Short-term investments (in thousands): |
|
Cost |
|
Gains |
|
Losses |
|
Value |
June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
24,015 |
|
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
24,012 |
|
Domestic government agency securities |
|
|
34,051 |
|
|
|
|
|
|
|
(2 |
) |
|
|
34,049 |
|
Equity securities |
|
|
54,459 |
|
|
|
47,042 |
|
|
|
(6,276 |
) |
|
|
95,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
112,525 |
|
|
$ |
47,042 |
|
|
$ |
(6,281 |
) |
|
$ |
153,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended June 30, 2005, the Company sold shares of equity
securities for cash proceeds of $32.6 million and $44.4 million, respectively. The gains on sales
of these securities were $31.2 million and $42.3 million, respectively.
The mutual fund holdings at September 30, 2004 were invested in adjustable rate mortgages and
government agency securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
Gross Unrealized |
|
|
|
|
Amortized |
|
Holding |
|
Holding |
|
Fair |
Long-term investments (in thousands): |
|
Cost |
|
Gains |
|
Losses |
|
Value |
June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic government agency securities |
|
$ |
41,974 |
|
|
$ |
|
|
|
$ |
(232 |
) |
|
$ |
41,742 |
|
Corporate debt securities |
|
|
30,564 |
|
|
|
1 |
|
|
|
(283 |
) |
|
|
30,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72,538 |
|
|
$ |
1 |
|
|
$ |
(515 |
) |
|
$ |
72,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
12
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
September 30, |
|
|
2005 |
|
2004 |
Work-in-process |
|
$ |
62,000 |
|
|
$ |
99,226 |
|
Finished goods. |
|
|
41,491 |
|
|
|
95,528 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,491 |
|
|
$ |
194,754 |
|
|
|
|
|
|
|
|
|
|
At June 30, 2005 and September 30, 2004, inventories are net of $49.8 million and $23.3
million, respectively, of allowances for excess and obsolete (E&O) inventories. In addition, at
June 30, 2005, inventories are net of $7.0 million in lower of cost or market reserves. Activity
in the E&O inventory reserves for the three and nine months ended June 30, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
E&O reserves, beginning of period |
|
$ |
53,302 |
|
|
$ |
23,319 |
|
Additions |
|
|
2,131 |
|
|
|
31,296 |
|
Release upon sales of product |
|
|
(1,298 |
) |
|
|
(2,299 |
) |
Scrap |
|
|
(3,460 |
) |
|
|
(5,502 |
) |
Standards adjustments and other |
|
|
(864 |
) |
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
E&O reserves, end of period |
|
$ |
49,811 |
|
|
$ |
49,811 |
|
|
|
|
|
|
|
|
|
|
The Company has created an action plan at a product line level to scrap approximately 30% of
the E&O products and is 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 gross margin in
the period sold. During the three and nine months ended June 30, 2005, the Company sold $1.3
million and $2.3 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.
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 the inventory cost,
inventory is adjusted to its current estimated market value. During the nine months ended June 30,
2005, the Company recorded $18.9 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 current estimates, which would impact gross
margin percentage in future periods. Activity in the lower of cost or market (LCM) inventory
reserves for the three and nine months ended June 30, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
LCM reserves, beginning of period |
|
$ |
11,093 |
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
18,854 |
|
Release upon sales of product |
|
|
(1,488 |
) |
|
|
(5,370 |
) |
Scrap |
|
|
|
|
|
|
|
|
Standards adjustments and other |
|
|
(2,588 |
) |
|
|
(6,467 |
) |
|
|
|
|
|
|
|
|
|
LCM reserves, end of period |
|
$ |
7,017 |
|
|
$ |
7,017 |
|
|
|
|
|
|
|
|
|
|
13
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Goodwill
During the first nine months of 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) |
|
|
(6,306 |
) |
|
|
|
|
|
Goodwill, June 30, 2005 |
|
$ |
718,335 |
|
|
|
|
|
|
|
|
|
(1) |
|
In the Merger, the Company acquired a 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 December 31, 2004, a portion of this
income tax contingency was settled with the taxing authorities, and as a result, the amount of the
liability in excess of the settlement amount, or $5.4 million, was reduced with a corresponding
reduction to goodwill. In addition, 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. A
corresponding reduction was made to goodwill. |
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
September 30, 2004 |
|
|
Gross |
|
Accumulated |
|
|
|
|
|
Gross |
|
Accumulated |
|
|
|
|
Asset |
|
Amortization |
|
Net |
|
Asset |
|
Amortization |
|
Net |
Developed technology |
|
$ |
146,146 |
|
|
$ |
(47,033 |
) |
|
$ |
99,113 |
|
|
$ |
145,946 |
|
|
$ |
(25,359 |
) |
|
$ |
120,587 |
|
Customer base |
|
|
4,660 |
|
|
|
(1,549 |
) |
|
|
3,111 |
|
|
|
2,050 |
|
|
|
(847 |
) |
|
|
1,203 |
|
Other intangible assets |
|
|
21,888 |
|
|
|
(9,484 |
) |
|
|
12,404 |
|
|
|
20,908 |
|
|
|
(7,457 |
) |
|
|
13,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172,694 |
|
|
$ |
(58,066 |
) |
|
$ |
114,628 |
|
|
$ |
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
Amortization expense |
|
$ |
7,918 |
|
|
$ |
30,701 |
|
|
$ |
29,801 |
|
|
$ |
29,334 |
|
|
$ |
13,831 |
|
|
$ |
3,043 |
|
Mindspeed Warrant
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 June 30, 2005, the aggregate fair value of
the Mindspeed warrant included on the accompanying consolidated condensed balance sheet was $11.2
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 3.2% 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 condensed
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.
14
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Convertible Subordinated Notes
At September 30, 2004 and June 30, 2005, the components of convertible subordinated notes are as
follows (in thousands):
|
|
|
|
|
4.00% 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 |
|
|
711,825 |
|
Less, current portion of convertible subordinated notes |
|
|
(196,825 |
) |
|
|
|
|
|
Long- term portion of convertible subordinated notes |
|
$ |
515,000 |
|
|
|
|
|
|
Purchase and Sale-Leaseback
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
the $60.0 million 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 condensed balance sheet, and will be recognized as a reduction to rent expense ratably
over the terms of the respective leases.
Other (Income) Expense, Net
Other (income) expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Investment and interest income |
|
$ |
(2,182 |
) |
|
$ |
(1,404 |
) |
|
$ |
(3,956 |
) |
|
$ |
(6,703 |
) |
Decrease in fair value of the conversion right under the
Skyworks 15% convertible senior subordinated notes |
|
|
|
|
|
|
17,837 |
|
|
|
|
|
|
|
6,292 |
|
Decrease in fair value of the Mindspeed warrant |
|
|
16,085 |
|
|
|
60,924 |
|
|
|
14,804 |
|
|
|
38,379 |
|
Equity in (earnings) losses of equity method investees |
|
|
2,127 |
|
|
|
(1,934 |
) |
|
|
8,587 |
|
|
|
(12,750 |
) |
Gains on sales of equity securities, investments and assets |
|
|
(31,198 |
) |
|
|
(27,107 |
) |
|
|
(42,310 |
) |
|
|
(27,017 |
) |
Other |
|
|
(442 |
) |
|
|
(471 |
) |
|
|
(492 |
) |
|
|
768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(15,610 |
) |
|
$ |
47,935 |
|
|
$ |
(23,367 |
) |
|
$ |
(1,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended June 30, 2005, the Company sold shares of equity
securities for cash proceeds of $32.6 million and $44.4 million, respectively. The gain on sales
of these securities was $31.2 million and $42.3 million, respectively.
During the nine months ended June 30, 2004, an unrelated party repaid a $30.0 million note issued
in connection with a previous equity investment in Jazz Semiconductor, Inc., 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.
15
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Skyworks Notes
In November 2002, the Company restructured its previous financing agreements with Skyworks
Solutions, Inc. (Skyworks) whereby Skyworks repaid $105.0 million of the principal amount and all
accrued interest owed to the Company under the $150.0 million promissory notes issued by Skyworks
and certain Skyworks subsidiaries and collateralized by substantially all of the assets of Skyworks
(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. At the same time, Skyworks also repaid all amounts outstanding under the
previous 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 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.
5. Commitments and Contingencies
Legal Matters
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. See Note 7- Special Charges. 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 or 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 that the ultimate outcome of this litigation will have a material
adverse impact on the Companys financial condition, results of operations, or cash flows.
16
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Texas Instruments, Inc. The Companys Conexant, Inc. subsidiary has been involved in a dispute
with Texas Instruments, Inc. (Texas Instruments) 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. 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 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.
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 to vigorously defend the litigation.
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 (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 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 is subject to approval by the 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 allowed to participate.
The defendants believe the charges in theses cases are without merit and intend to
vigorously defend the litigation.
Other
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
17
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
currently estimates the aggregate remaining costs for these remediations to be approximately $2.9
million and has accrued for these costs as of June 30, 2005.
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 $17.0 million and $15.5 million for the nine months ended June 30, 2005
and 2004, respectively.
At June 30, 2005, future minimum lease payments under operating leases, excluding any sublease
income, were as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2005 remaining 3 months |
|
$ |
8,550 |
|
2006 |
|
|
29,382 |
|
2007 |
|
|
24,732 |
|
2008 |
|
|
20,051 |
|
2009 |
|
|
17,109 |
|
Thereafter |
|
|
105,750 |
|
|
|
|
|
|
Total future minimum lease payments |
|
$ |
205,574 |
|
|
|
|
|
|
At June 30, 2005, the Company has many sublease arrangements on operating leases for terms
ranging from near term to approximately 6 years. Aggregate scheduled sublease income based on
current terms is approximately $19.7 million.
The summary of future minimum lease payments includes an aggregate gross amount of $40.9 million of
lease obligations that principally expire through fiscal 2021, which have been accrued for in
connection with the Companys reorganization and restructuring actions (see Note 7) and previous
actions taken by GlobespanVirata prior to the Merger.
At June 30, 2005, the Company is contingently liable for approximately $8.3 million in operating
lease commitments on facility leases that were assigned to Mindspeed and Skyworks at the time of
their separation from the Company.
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 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 $5.9 million as of June 30, 2005.
The Company has made commitments to certain employees in the amount of $1.3 million as of June 30,
2005. Such amounts will be earned and paid over the next six months.
18
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
6. Comprehensive Loss
Comprehensive loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Nine months ended June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss |
|
$ |
(32,166 |
) |
|
$ |
(71,426 |
) |
|
$ |
(226,071 |
) |
|
$ |
(174,158 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(481 |
) |
|
|
(556 |
) |
|
|
398 |
|
|
|
346 |
|
Change in unrealized gains on available-for-sale securities |
|
|
29,387 |
|
|
|
65,762 |
|
|
|
(13,964 |
) |
|
|
67,441 |
|
Reclassification adjustment for realized gains on
available-for-sale securities included in net loss |
|
|
(26,987 |
) |
|
|
|
|
|
|
(38,247 |
) |
|
|
|
|
Minimum pension liability adjustments |
|
|
69 |
|
|
|
87 |
|
|
|
207 |
|
|
|
260 |
|
Effect of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
1,988 |
|
|
|
65,293 |
|
|
|
(51,606 |
) |
|
|
68,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(30,178 |
) |
|
$ |
(6,133 |
) |
|
$ |
(277,677 |
) |
|
$ |
(105,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
September 30, |
|
|
2005 |
|
2004 |
Foreign currency translation adjustments |
|
$ |
(2,808 |
) |
|
$ |
(3,206 |
) |
Unrealized gains on available-for-sale securities |
|
|
40,247 |
|
|
|
92,458 |
|
Minimum pension liability adjustments |
|
|
(6,494 |
) |
|
|
(6,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
30,945 |
|
|
$ |
82,551 |
|
|
|
|
|
|
|
|
|
|
7. Special Charges
Special charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Nine months ended June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Asset impairments |
|
$ |
29 |
|
|
$ |
2,508 |
|
|
$ |
3,492 |
|
|
$ |
4,534 |
|
Restructuring charges |
|
|
6,731 |
|
|
|
3,627 |
|
|
|
24,470 |
|
|
|
4,075 |
|
Integration charges |
|
|
1,649 |
|
|
|
1,565 |
|
|
|
6,760 |
|
|
|
4,168 |
|
Other |
|
|
|
|
|
|
594 |
|
|
|
6,540 |
|
|
|
1,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,409 |
|
|
$ |
8,294 |
|
|
$ |
41,262 |
|
|
$ |
14,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairments
During the nine months ended June 30, 2005, the Company recorded asset impairment charges of $3.5
million related primarily to leasehold improvements on operating properties that have been or will
be vacated as part of the Companys restructuring actions.
During the nine months ended June 30, 2004 in connection with the Merger, the Company recorded
asset impairment charges of $4.5 million related to various Conexant operating assets which were
determined to be redundant and no longer required as a result of the Merger. These assets have
been abandoned.
Restructuring Charges
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
Reorganization Plan that related to the employees and facilities of Conexant, Inc., are included in
special charges in the accompanying consolidated condensed statements of operations. The costs and
expenses resulting from the 2004 Reorganization Plan which related to the employees and facilities
of
19
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 and SFAS No. 141. 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 the fourth fiscal quarter of 2005. The components of this
plan are a shift of product development resources to lower-cost regions and cost savings from
continued Merger-related sales, general and administrative consolidation. During the nine months
ended June 30, 2005, the Company announced several other 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. Certain
employees were offered relocation opportunities. As of June 30, 2005, some of these employees have
left the Company, and others will be transitioning their work over the next three months. The
workforce reductions affected employees in all areas of the business. During the nine months
ended June 30, 2005, the Company recorded total charges of $17.8 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. The Company
will charge an additional $1.3 million to restructuring expense in the fourth fiscal quarter as
certain severance benefits are earned. Additionally, the Company has recorded restructuring
charges of $4.9 million in the first nine months of 2005 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 $2.0 million into expense over the remaining life of the
leases. The accrual for facility charges includes a $1.0 million non-cash reclassification of a
portion of the deferred gain on the previous sale-leaseback of the facility, which has now been
partially vacated.
Activity and liability balances recorded as part of the 2005 Restructuring Action through June 30,
2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
Facility |
|
|
|
|
reductions |
|
and other |
|
Total |
Charged to costs and expenses |
|
$ |
6,073 |
|
|
$ |
4,006 |
|
|
$ |
10,079 |
|
Non-cash items |
|
|
(22 |
) |
|
|
979 |
|
|
|
957 |
|
Cash payments |
|
|
(3,333 |
) |
|
|
|
|
|
|
(3,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2004 |
|
|
2,718 |
|
|
|
4,985 |
|
|
|
7,703 |
|
Charged to costs and expenses |
|
|
5,936 |
|
|
|
74 |
|
|
|
6,010 |
|
Cash payments |
|
|
(2,819 |
) |
|
|
(168 |
) |
|
|
(2,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, March 31, 2005 |
|
|
5,835 |
|
|
|
4,891 |
|
|
|
10,726 |
|
Charged to costs and expenses |
|
|
5,837 |
|
|
|
864 |
|
|
|
6,701 |
|
Non-cash items |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
Cash payments |
|
|
(3,937 |
) |
|
|
(203 |
) |
|
|
(4,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, June 30, 2005 |
|
$ |
7,712 |
|
|
$ |
5,552 |
|
|
$ |
13,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Restructuring Actions The Company approved several restructuring plans during fiscal
2004. In connection with the Merger, the Company began to formulate plans which included workforce
reductions and facility consolidation actions. These plans were communicated at the time of the
Merger and have 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 No. 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
20
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 the quarter ended March 31, 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).
Activity and liability balances recorded as part of the 2004 Merger Related Reorganization Plan
pertaining to Conexant, Inc. employees and facilities through June 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 |
|
Cash payments |
|
|
(277 |
) |
|
|
(273 |
) |
|
|
(550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2004 |
|
|
697 |
|
|
|
8,894 |
|
|
|
9,591 |
|
Adjusted to purchase price allocation |
|
|
|
|
|
|
(1,226 |
) |
|
|
(1,226 |
) |
Cash payments |
|
|
(444 |
) |
|
|
(241 |
) |
|
|
(685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, March 31, 2005 |
|
|
253 |
|
|
|
7,427 |
|
|
|
7,680 |
|
Cash payments |
|
|
(201 |
) |
|
|
(166 |
) |
|
|
(367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, June 30, 2005 |
|
$ |
52 |
|
|
$ |
7,261 |
|
|
$ |
7,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of $1.9 million relating to the
consolidation of certain facilities under non-cancelable leases which were vacated. In the quarter
ended March 31, 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 $1.6 million of net severance
benefits were earned in the nine months ended June 30, 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 as of June 30, 2005.
21
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 June 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 |
|
|
1,892 |
|
|
|
|
|
|
|
1,892 |
|
Cash payments |
|
|
(2,034 |
) |
|
|
(197 |
) |
|
|
(2,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2004 |
|
|
4,556 |
|
|
|
1,399 |
|
|
|
5,955 |
|
Charged to costs and expenses |
|
|
(350 |
) |
|
|
108 |
|
|
|
(242 |
) |
Cash payments |
|
|
(2,805 |
) |
|
|
(235 |
) |
|
|
(3,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, March 31, 2005 |
|
|
1,401 |
|
|
|
1,272 |
|
|
|
2,673 |
|
Charged to costs and expenses |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
Cash payments |
|
|
(627 |
) |
|
|
(205 |
) |
|
|
(832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, June 30, 2005 |
|
$ |
804 |
|
|
$ |
1,067 |
|
|
$ |
1,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Activity and liability balances related to the 2003 Corporate Restructuring Plan through June 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 |
|
Cash payments |
|
|
|
|
|
|
(38 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2004 |
|
|
|
|
|
|
1,957 |
|
|
|
1,957 |
|
Cash payments |
|
|
|
|
|
|
(44 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, March 31, 2005 |
|
|
|
|
|
|
1,913 |
|
|
|
1,913 |
|
Cash payments |
|
|
|
|
|
|
(110 |
) |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, June 30, 2005 |
|
$ |
|
|
|
$ |
1,803 |
|
|
$ |
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the spin-off and merger of the
Companys wireless communications business with Alpha Industries, Inc. to form Skyworks. 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
22
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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.
Activity and liability balances related to the 2002 Corporate and Manufacturing Restructuring Plan
through June 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 |
|
Cash payments |
|
|
|
|
|
|
(998 |
) |
|
|
(998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2004 |
|
|
|
|
|
|
2,999 |
|
|
|
2,999 |
|
Cash payments |
|
|
|
|
|
|
(1,072 |
) |
|
|
(1,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, March 31, 2005 |
|
|
|
|
|
|
1,927 |
|
|
|
1,927 |
|
Cash payments |
|
|
|
|
|
|
(899 |
) |
|
|
(899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, June 30, 2005 |
|
$ |
|
|
|
$ |
1,028 |
|
|
$ |
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through June 30, 2005, the Company has paid an aggregate of $57.7 million in connection with
all of its restructuring plans and has a remaining accrued restructuring balance of $25.3 million.
The Company expects to pay the amounts accrued for the workforce reductions through fiscal 2005 and
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.
Integration Charges
During the three and nine months ended June 30, 2005 and 2004, the Company recognized $1.6 million
and $6.8 million, and $1.6 million and $4.2 million, respectively, of costs committed as a result
of the integration efforts of the employees, customers, operations and other business aspects
related to the Merger.
Other
Other special charges of $6.5 million in the nine months ended June 30, 2005 consists of $3.2
million for settlements of legal matters, $2.3 million of non-employee stock option and warrant
modification charges and $1.0 million of other special charges.
Other special charges in the three months ended June 30, 2004 consisted of $0.6 million in stock
option modification charges and, in addition, the nine months ended June 30, 2004 also included
$1.0 million of one-time executive bonuses which were contractually committed in the closing of the
Merger.
8. Segment Information
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 we had four operating segments at June 30,
2005, under the aggregation criteria set forth in SFAS No. 131, we only operate in one reportable
operating segment, broadband communications.
23
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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. |
The Company meets each of the aggregation criteria for the following reasons:
|
|
the sale of semiconductor 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 a similar 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 internal sales force and common distributors. |
Because the Company meets 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.
Net revenues by geographic area, based upon country of destination, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Americas |
|
$ |
24,490 |
|
|
$ |
29,499 |
|
|
$ |
64,196 |
|
|
$ |
77,442 |
|
Asia-Pacific |
|
|
160,989 |
|
|
|
215,797 |
|
|
|
399,046 |
|
|
|
554,457 |
|
Europe, Middle East and Africa |
|
|
11,985 |
|
|
|
22,321 |
|
|
|
44,581 |
|
|
|
56,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
197,464 |
|
|
$ |
267,617 |
|
|
$ |
507,823 |
|
|
$ |
688,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 each of the three and nine months ended June 30,
2005, and the three and nine months ended June 30, 2004, no customer accounted for 10% or more of
net revenues.
9. Guarantees
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 International Corporation (now named Rockwell Automation, Inc.),
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
Semiconductor, Inc., 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 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 certain
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
guarantees and indemnities related to product sales in the accompanying consolidated balance
sheets. Product warranty costs are not significant.
24
CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
10. Stock Option Exchange Program
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.
25
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This information should be read in conjunction with our unaudited consolidated condensed financial
statements and the notes thereto included in this Quarterly Report, and our audited consolidated
financial statements and notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2004.
Except where otherwise noted, this discussion of our financial condition and results of operations
represents our current operations, which include the GlobespanVirata, Inc. business from February
28, 2004 following the completion of our merger with GlobespanVirata, Inc. (the Merger).
We are a leading provider of integrated circuits and software for broadband communications
solutions addressing consumer, business enterprise and service provider markets. Our expertise in
mixed-signal processing allows us to deliver semiconductor devices and complete integrated systems
that connect the client, or end-customer, side of personal communications access products such as
PCs, set-top boxes, residential gateways and game consoles to audio, video, voice and data services
over broadband wire line communications networks, including virtually all varieties of digital
subscriber line (DSL), cable and Ethernet networks, over wireless local area networks (LAN) and
over direct broadcast satellite, terrestrial and fixed wireless systems. We also deliver highly
integrated, system-level solutions for telephone company central office equipment, such as DSL
access multiplexers (DSLAMs) used in the provisioning of broadband audio, video, voice and data
services. Our dial-up access products include a broad portfolio of modem chipsets and software for
desktop and notebook PC applications as well as embedded equipment applications including fax
machines, multifunction peripherals (MFPs), point-of-sale (POS) terminals, set-top boxes, gaming
consoles and Internet terminals. Our wide variety of wireless networking chipsets and reference
designs enable wireless connectivity in notebooks, PDAs, digital cameras, MP3 players and other
handheld networking appliances in the home and business enterprise environments. And our media
processing solutions include silicon tuners, demodulators and a variety of broadcast audio and
video decoder and encoder devices that enable the capture, display, storage, playback and transfer
of audio and video content in consumer-oriented products such as PCs, set-top boxes, gaming
consoles, personal video recorders and digital versatile disk (DVD) applications. We operate in one
reportable business segment.
We market and sell our semiconductor products and system solutions directly to leading original
equipment manufacturers (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 other resellers accounted for approximately 28% of net revenues
in the first nine months of fiscal 2005, as compared to 35% for the similar period of fiscal 2004.
No customer accounted for 10% of our net revenues in the first nine months of fiscal 2005. Our top
20 customers accounted for approximately 65% of net revenues for the first nine months of fiscal
2005. Revenues derived from customers located in the Asia-Pacific region, the Americas, and Europe
were 79%, 13%, and 8%, respectively, of our net revenues for the first nine months of 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.
Overview of Expense Reduction Initiatives
Since the completion of the Merger in the March 2004 quarter, we have announced several workforce
reductions and facilities consolidation actions in order to achieve operational efficiencies. In
the fourth quarter of fiscal 2004, we announced additional workforce reductions to implement
further Merger synergies and to align our operating expenses to lower revenue forecasts. These
actions have been completed. In November 2004, we announced a plan to reduce quarterly operating
expenses by an additional $15.0 million. The primary drivers of the expense reductions are expected
to be an increasing shift of product development resources to lower-cost regions and cost savings
from continued Merger-related selling, general and administrative consolidation. In December 2004,
we completed the acquisition of Paxonet Communications, a semiconductor product development company
with an experienced and lower-cost engineering team based in India. As a result of this
acquisition and organic growth, we have more than tripled our headcount in India to approximately
540 engineers since the end of fiscal 2004.
26
In the March and June quarters of fiscal 2005, we launched additional sets of headcount reduction
actions, and closed additional operating sites, to bring us closer to our operating expense
objectives. See Note 7 of Notes to Consolidated Condensed Financial Statements for further
information. The cost savings of these actions are expected to be fully reflected in the quarter
ending December 31, 2005. We continuously evaluate our business in light of current market and
competitive conditions 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.
Results of Operations
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Change from |
|
Change from |
|
|
June 30, |
|
March 31, |
|
June 30, |
|
March 2005 |
|
June 2004 |
(in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Net revenues |
|
$ |
197.5 |
|
|
$ |
169.7 |
|
|
$ |
267.6 |
|
|
|
16 |
% |
|
|
(26 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
June 30, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
Change |
Net revenues |
|
$ |
507.8 |
|
|
$ |
688.7 |
|
|
|
(26 |
)% |
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. 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.
Our net revenues for the third fiscal quarter of 2005 were $197.5 million or an increase of 16%
over second fiscal quarter 2005 revenues of $169.7 million and a 26% decrease from third fiscal
quarter 2004 net revenues of $267.6 million.
During fiscal 2004, we experienced lower than expected end customer demand which resulted in excess
channel inventory build up at our direct customers, distributors and resellers. During the six
months ended March 31, 2005, there was an approximate $70.0 million reduction in channel
inventories at our distributors and direct customers, of which $20.0 million occurred in the
quarter ended March 31, 2005. The net revenue increase in the quarter ended June 30, 2005 as
compared to the quarter ended March 31, 2005 is primarily attributable to a 20% increase in end
customer demand based on units sold, including the $20.0 million channel inventory reduction in the
prior quarter, offset by price erosion of less than 5%.
The 26% decrease in net revenues from the quarter ended June 30, 2004 to the quarter ended June 30,
2005, and the 26% decrease in net revenues for the nine months ended June 30, 2004 to the nine
months ended June 30, 2005 is primarily due to average selling price erosion.
27
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Change from |
|
Change from |
|
|
June 30, |
|
March 31, |
|
June 30, |
|
March 2005 |
|
June 2004 |
(in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Gross margin |
|
$ |
75.0 |
|
|
$ |
60.0 |
|
|
$ |
112.5 |
|
|
|
25 |
% |
|
|
(33 |
)% |
Percent of net revenues |
|
|
38 |
% |
|
|
35 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
June 30, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
Change |
Gross margin |
|
$ |
142.2 |
|
|
$ |
293.3 |
|
|
|
(52 |
)% |
Percent of net revenues |
|
|
28 |
% |
|
|
43 |
% |
|
|
|
|
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 and
other intellectual property costs and labor and overhead associated with product procurement.
Our gross margin for the third fiscal quarter of 2005 was 38% compared with the 35% for the second
fiscal quarter of 2005 and 42% for the similar period of fiscal 2004. The conclusion of the
channel inventory reduction in the second quarter of fiscal 2005 required $9.6 million in out of
the ordinary channel inventory pricing actions which decreased our gross margin in the second
fiscal quarter to 35% and subsequently resulted in an increase on a sequential basis. This
increase was partially offset by the impact of additional inventory reserves of $2.1 million, net
of a benefit of $1.3 million for the sale of previously reserved inventory products. The decrease
as compared to the third fiscal quarter of 2004 is attributable to the 26% decrease in average
selling prices and partially offset by lower inventory costs.
Our gross margin for the first nine months of fiscal 2005 was 28% compared with the similar period
of fiscal 2004 gross margin of 43%. The gross margin percentage decrease from the first nine months
of fiscal 2004 is attributable to the effects of (i) net inventory charges of $42.5 million, (ii)
the re-establishment of $17.5 million of revenue reserves, which are maintained by the Company 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 the first six months of
fiscal 2005, and (iii) the 26% decrease in average selling prices which were partially offset by
lower inventory costs.
We expect that our gross margin percentage will increase in future periods in relation to our gross
margin percentage for the quarter ended June 30, 2005 as a result of product cost reduction
programs and product mix.
28
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 nine months ended June 30, 2005, we recorded $31.3 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 Networking products. Activity in our E&O inventory
reserves for the three and nine months ended June 30, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
E&O reserves, beginning of period |
|
$ |
53,302 |
|
|
$ |
23,319 |
|
Additions |
|
|
2,131 |
|
|
|
31,296 |
|
Release upon sales of product |
|
|
(1,298 |
) |
|
|
(2,299 |
) |
Scrap |
|
|
(3,460 |
) |
|
|
(5,502 |
) |
Standards adjustments and other |
|
|
(864 |
) |
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
E&O reserves, end of period |
|
$ |
49,811 |
|
|
$ |
49,811 |
|
|
|
|
|
|
|
|
|
|
We have created an action plan at a product line level to scrap approximately 30% 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 three and nine months ended June 30, 2005, we sold $1.3 million and
$2.3 million, respectively, of reserved products which benefited our gross margin in the associated
period.
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 nine months ended June
30, 2005, we recorded $18.9 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 three and nine months ended June 30, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
LCM reserves, beginning of period |
|
$ |
11,093 |
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
18,854 |
|
Release upon sales of product |
|
|
(1,488 |
) |
|
|
(5,370 |
) |
Scrap |
|
|
|
|
|
|
|
|
Standards adjustments and other |
|
|
(2,588 |
) |
|
|
(6,467 |
) |
|
|
|
|
|
|
|
|
|
LCM reserves, end of period |
|
$ |
7,017 |
|
|
$ |
7,017 |
|
|
|
|
|
|
|
|
|
|
29
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Change from |
|
Change from |
|
|
June 30, |
|
March 31, |
|
June 30, |
|
March 2005 |
|
June 2004 |
(in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Research and development |
|
$ |
66.3 |
|
|
$ |
70.5 |
|
|
$ |
74.3 |
|
|
|
(6 |
)% |
|
|
(11 |
)% |
Percent of net revenues |
|
|
34 |
% |
|
|
42 |
% |
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
June 30, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
Change |
Research and development |
|
$ |
209.4 |
|
|
$ |
167.2 |
|
|
|
25 |
% |
Percent of net revenues |
|
|
41 |
% |
|
|
24 |
% |
|
|
|
|
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 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 $8.0 million decrease in R&D expenses for the third quarter of fiscal 2005 compared to the
similar period of fiscal 2004 primarily reflects the impact of our restructuring efforts which
shifted resources to lower cost regions. As a result of cost reduction initiatives, we expect
that quarterly R&D expenses will be lower in future periods, except for the impact of stock option
expense charges under SFAS No. 123 (R) commencing in the first fiscal quarter of 2006.
The $42.2 million increase in R&D expenses for the nine months ended June 30, 2005 compared to the
similar period of fiscal 2004 primarily reflects additional development costs associated with DSL
and Wireless Networking products as a result of the Merger (9 months in the 2005 period and only 4
months in comparable 2004 period), and an increase of $3.6 million in stock compensation charges
primarily as a result of the Merger, partially offset by the recent favorable impact of our
shifting of resources to lower cost regions. As a result of cost reduction initiatives, we expect
that quarterly R&D expenses will be lower in future periods, except for the impact of stock option
expense charges under SFAS No. 123 (R) commencing in the first fiscal quarter of 2006.
When compared to the immediately preceding quarter, R&D expenses for the quarter ended June 30,
2005 decreased $4.2 million. This decrease is reflective of our cost reduction initiatives.
30
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Change from |
|
Change from |
|
|
June 30, |
|
March 31, |
|
June 30, |
|
March 2005 |
|
June 2004 |
(in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Selling, general and administrative |
|
$ |
31.1 |
|
|
$ |
28.4 |
|
|
$ |
36.4 |
|
|
|
10 |
% |
|
|
(15 |
)% |
Percent of net revenues |
|
|
16 |
% |
|
|
17 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
June 30, |
|
June 30, |
|
|
(in millions) |
|
2005 |
|
2004 |
|
Change |
Selling, general and administrative |
|
$ |
89.4 |
|
|
$ |
89.8 |
|
|
nm |
Percent of net revenues |
|
|
18 |
% |
|
|
13 |
% |
|
|
|
|
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 $5.3 million decrease in SG&A expenses for the quarter ended June 30, 2005 compared to the same
period of fiscal 2004 is attributable to a $0.4 million reduction in our accounts receivable bad
debt allowance which was based on improved collections experience, and the realization of a portion
of our cost reduction initiatives.
SG&A expenses for the nine months ended June 30, 2005 compared to the similar period of fiscal 2004
stayed approximately flat and was the result of a $1.0 million increase in legal expenses, a $1.2
million increase in stock compensation charges as a result of the Merger, and additional SG&A costs
as a result of the Merger (9 months in the 2005 period and only 4 months in comparable 2004
period), partially offset by the second quarters $1.3 million refund of previously expensed and
remitted sales taxes and a $1.5 million reduction in accounts receivable bad debt allowance which
was based on improved collections experience.
When compared to the immediately preceding quarter, SG&A expenses for the quarter ended June 30,
2005 increased $2.7 million. This increase is primarily a result of the second quarters refund
of $1.3 million in previously remitted sales taxes and approximately $1.4 million in higher legal
expenses. As a result of our cost reduction initiatives, we expect that quarterly SG&A expenses
will be lower in future periods, except for the impact of stock option expense charges under SFAS
No. 123 (R) commencing in the first fiscal quarter of 2006.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Amortization of intangible assets |
|
$ |
8.0 |
|
|
|
|
|
|
$ |
8.0 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Amortization of intangible assets |
|
$ |
24.4 |
|
|
nm |
|
$ |
12.6 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
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 and provides
31
criteria for recording intangible assets separately from goodwill. Goodwill must be tested at least
annually for impairment and written down when impaired.
The increased amortization expense in the nine months ended June 30, 2005 compared to the nine
months ended June 30, 2004 is primarily attributable to the significant intangible assets we
acquired in the Merger. See Note 2 of Notes to Consolidated Condensed Financial Statements for
further information. We expect that amortization of intangible assets will be approximately $7.9
million for the remainder of fiscal 2005.
In-Process Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Amortization of intangible assets |
|
$ |
|
|
|
nm |
|
$ |
160.8 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
The in-process research and development (IPR&D) charge of $160.8 million in the nine months
ended June 30, 2004 is related to the Merger completed on February 27, 2004. See Note 2 of Notes
to the Consolidated Condensed Financial Statements for a discussion of the IPR&D charge.
Special Charges
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Nine months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
|
2005 |
|
Change |
|
2004 |
Restructuring charges |
|
$ |
6.7 |
|
|
nm |
|
$ |
3.6 |
|
|
$ |
24.5 |
|
|
nm |
|
$ |
4.1 |
|
Asset impairment charges |
|
|
0.1 |
|
|
nm |
|
|
2.5 |
|
|
|
3.5 |
|
|
nm |
|
|
4.5 |
|
Integration charges |
|
|
1.6 |
|
|
nm |
|
|
1.6 |
|
|
|
6.8 |
|
|
nm |
|
|
4.2 |
|
Other special charges |
|
|
|
|
|
nm |
|
|
0.6 |
|
|
|
6.5 |
|
|
nm |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8.4 |
|
|
|
|
|
|
$ |
8.3 |
|
|
$ |
41.3 |
|
|
|
|
|
|
$ |
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 7 of Notes to Consolidated Condensed Financial Statements for a discussion of asset
impairment charges, restructuring charges, integration charges and other special charges.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Interest expense |
|
$ |
8.4 |
|
|
|
|
|
|
$ |
8.4 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Interest expense |
|
$ |
25.3 |
|
|
nm |
|
$ |
22.3 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
Interest expense is primarily related to our convertible subordinated notes. See Note 3 of
Notes to Consolidated Condensed 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 in the nine months ended June 30, 2005 was higher
than in the nine months ended June 30, 2004.
32
Other (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Other (income) expense, net |
|
$ |
(15.6 |
) |
|
nm |
|
$ |
47.9 |
|
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
(in millions) |
|
2005 |
|
Change |
|
2004 |
Other (income) expense, net |
|
$ |
(23.4 |
) |
|
nm |
|
$ |
(1.0 |
) |
Percent of net revenues |
|
nm |
|
|
|
|
|
nm |
Other (income) expense, net for the first nine months of fiscal 2005 was primarily comprised
of $4.0 million of investment and interest income on invested cash balances, and $42.3 million in
gains on sales of equity securities, offset by $8.6 million of loss in our equity method
investments and a $14.8 million decrease in the fair value of the Mindspeed warrant. 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 can be liquidated.
Other (income) expense, net for the first nine months of fiscal 2004 was comprised of $12.8 million
of income in our equity method investments (including a $11.4 million gain in accordance with Staff
Accounting Bulletin No. 51 for the realization of an additional investment made by another party in
Jazz), gains of sales of investments of $27.0 million and $6.7 million of investment and interest
income on invested cash balances, offset by a $38.4 million decrease in the fair value of the
Mindspeed warrant, a $6.3 million decrease in the fair value of the conversion right under the
Skyworks 15% convertible senior subordinated notes, impairments of non-marketable equity
investments of $0.6 million, and other expense of $0.2 million.
In July 2005, we sold the remaining 2.8 million shares of SiRF Technology Holdings, Inc. for cash
proceeds of $50.9 million and realized gains on the sales of these securities of $49.0 million.
The carrying values of non-marketable investments are at cost, or their estimated fair values, if
lower. These investments consist of equity interests in early stage technology companies which we
account for under the cost method. We estimate 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 when we determine that the decline in the fair value of
these investments is other than temporary, they are written down to fair value.
Provision for Income Taxes
We recorded income tax expense of $1.8 million and $1.4 million for the nine months ended June 30,
2005 and 2004, respectively, primarily reflecting income taxes imposed on our foreign subsidiaries.
No federal income tax expense was recorded for the first nine months of fiscal 2005 or 2004 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). To reduce our future expected AMT,
during the quarter ended June 30, 2005, we capitalized R&D expenses of approximately $581.0 million
out of our previously reported $1.75 billion in NOLs to create future tax deductions. This
adjustment was made for tax reporting purposes and had no impact on the accompanying financial
statements.
As of June 30, 2005, Conexant had $1.3 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 if Conexant receives a tax benefit from their utilization, the benefit will be
recorded as a reduction to goodwill. The deferred tax assets
33
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.
In connection with the divestiture of certain businesses in prior years, we retained tax
liabilities and the rights to tax refunds for periods prior to the respective divestitures. As a
result, from time to time, we may receive refunds or may be required to make payments related to
tax matters associated with these divested businesses. Amounts recorded for these matters, if any,
are based on estimates. We review and revise these estimates as appropriate to take into account
all information we have available. Actual amounts received or paid, if any, could differ materially
from those estimates and would accordingly result in an adjustment to results of operations in the
period the refunds are received or payments are made.
Liquidity and Capital Resources
Our cash and cash equivalents increased by $21.5 million during the first nine months of fiscal
2005. Cash used by operating activities was $58.7 million for the first nine months of fiscal 2005,
compared to cash provided by operating activities of $1.7 million for the comparable period in
fiscal 2004. Cash flows used in operations for the first nine months of fiscal 2005 were $105.4
million, before $100.2 million of net favorable changes in working capital, an $8.0 million payment
to Agere for the settlement of patent litigation, and $45.5 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 in the September 2004 quarter to 38 days in the June 2005 quarter, and (ii) improved inventory
turns from 2.6 turns in the September 2004 quarter to 4.7 turns in the June 2005 quarter.
Cash provided by investing activities of $79.2 million for the first nine months of fiscal 2005
includes net proceeds of $49.1 million received from the purchase and sale-leaseback of our
headquarters facility and other assets, proceeds from the sale of equity securities, primarily in
SiRF Technology Holdings, Inc., of $44.4 million, and net sales of other marketable securities of
$23.6 million. These cash flows from investing activities of approximately $117.0 million were
offset by cash used in investing activities for acquisitions of $18.8 million, capital expenditures
of $16.4 million, and investments of $2.6 million. Cash used in investing activities of $23.4
million in the first nine months of fiscal 2004 principally consisted of $29.4 million of net
purchases of marketable securities, capital expenditures of $13.9 million, payment of deferred
purchase consideration of $4.0 million, payment of acquisition costs of $29.8 million, and
investments of $2.6 million, partially offset by $24.8 million of net cash and cash equivalents
acquired in acquisitions (primarily in the Merger). In July 2005, we sold the remaining 2.8
million shares of SiRF Technology Holdings, Inc. for cash proceeds of $50.9 million.
Cash provided by financing activities of $1.0 million for the first nine months of fiscal 2005
consisted of $0.8 million in proceeds from the exercise of stock options and $0.2 million from
repayment of an employee loan. The $24.1 million in cash provided by financing activities for the
comparable period of fiscal 2004 consisted of proceeds from the exercise of stock options. The
decrease in proceeds from the exercise of stock options reflects the decrease in our stock price in
the similar periods. Our stock price at June 30, 2005 and 2004 was $1.65 and $4.08, respectively.
As of June 30, 2005, our principal sources of liquidity are our existing cash reserves and
marketable securities, our investments in third parties, such as Jazz, our Mindspeed warrant and
cash generated from product sales. Given current market conditions relating to the Mindspeed
warrant, we 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 condensed consolidated balance sheet. Our working capital
at June 30, 2005 was $106.1 million compared to $434.8 million at September 30, 2004. The decrease
is attributable to the reclassification of $196.8 million of our convertible subordinated notes
which are due in May 2006 to current liabilities, and our loss from operations. In addition, at
June 30, 2005 we held $72.0 million in long-term marketable securities which we could liquidate to
fund operations and/or future acquisitions.
34
Total cash, cash equivalents and marketable securities are as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
June 30, |
|
September 30, |
|
|
2005 |
|
2004 |
Cash and cash equivalents |
|
$ |
160.5 |
|
|
$ |
139.0 |
|
Other short-term marketable securities (primarily
mutual funds, domestic government agencies and
corporate debt securities) |
|
|
58.1 |
|
|
|
13.8 |
|
Long-term marketable securities (primarily domestic
government agencies and corporate debt securities) |
|
|
72.0 |
|
|
|
137.6 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
290.6 |
|
|
|
290.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities- Skyworks Solutions, Inc. (6.2 million shares at June 30, 2005 and September 30,
2004) |
|
|
46.2 |
|
|
|
61.8 |
|
Equity securities- SiRF Technology Holdings, Inc.
(2.8 million shares at June 30, 2005 and 5.9 million
shares at September 30, 2004) |
|
|
49.0 |
|
|
|
87.5 |
|
|
|
|
|
|
|
|
|
|
Subtotal Skyworks and SiRF |
|
|
95.2 |
|
|
|
149.3 |
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
385.8 |
|
|
$ |
439.7 |
|
|
|
|
|
|
|
|
|
|
The fair value of the Mindspeed warrant at June 30, 2005 is $11.2 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 for the Company 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 will be sufficient to fund our operations, research
and development efforts, anticipated capital expenditures, and other liabilities and commitments,
and other capital requirements, for at least the next twelve months. We will need to continue a
focused program of capital expenditures to meet our research and development and corporate
requirements. We may also consider additional acquisition opportunities to extend our technology
portfolio and design expertise and to expand our product offerings. In order to fund capital
expenditures, increase our working capital or complete any acquisitions, we may seek to obtain
additional debt financing or issue additional shares of our common stock. However, we cannot assure
you that such financing will be available to us on favorable terms, or at all.
We have $711.8 million aggregate principal amount of convertible subordinated notes outstanding, of
which $196.8 million is current and is due in May 2006 and the remainder becomes due in February
2007. The conversion prices of the notes are currently substantially in excess of the market value
of our common stock. As of June 30, 2005, we had $385.8 million of cash and investments. We
believe that we will repay the $196.8 million of the notes coming due in May 2006 with existing
cash resources, marketable securities and cash generated from operations and our investments and
other assets. If we are unable to generate sufficient cash flows from our operations or realize
additional value from our investments and other assets, we may have to seek additional sources of
financing to satisfy the amounts coming due in February 2007. We cannot assure you that such
financing will be available to us on favorable terms, or at all.
The following summarizes our contractual obligations at June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
More than 5 |
(in millions) |
|
Total |
|
Year |
|
1-3 years |
|
3-5 years |
|
years |
Convertible subordinated notes (1) |
|
$ |
711.8 |
|
|
$ |
196.8 |
|
|
$ |
515.0 |
|
|
$ |
|
|
|
$ |
|
|
Operating leases |
|
|
205.6 |
|
|
|
30.6 |
|
|
|
47.1 |
|
|
|
35.0 |
|
|
|
92.9 |
|
Assigned leases |
|
|
8.3 |
|
|
|
0.4 |
|
|
|
3.4 |
|
|
|
|
|
|
|
4.5 |
|
Contingent consideration on acquisitions |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital commitments |
|
|
5.9 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee commitments |
|
|
1.3 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
938.9 |
|
|
$ |
241.0 |
|
|
$ |
565.5 |
|
|
$ |
35.0 |
|
|
$ |
97.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Excludes interest. See Note 3 of Notes to Consolidated Condensed Financial Statements
for interest terms. |
At June 30, 2005, the Company has many sublease arrangements on operating leases for terms ranging
from near term to approximately 6 years. Aggregate scheduled sublease income based on current
terms is approximately $19.7 million.
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Off-Balance Sheet Arrangements
Our off-balance arrangements consist of conventional operating leases, capital commitments,
employee commitments, and purchase commitments as described in Note 5 of Notes to Consolidated
Condensed Financial Statements. We also have contingent liabilities for other items assigned to
Mindspeed and Skyworks at the time of their separation from Conexant. See Note 5 of Notes to
Consolidated Condensed Financial Statements. We do not have any special purpose entities or
variable interest entities as of June 30, 2005.
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 was delayed by the Securities and Exchange
Commission and will be effective beginning with our first quarter of fiscal 2006. We expect the
impact of this new pronouncement to be significant to our 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.
Business combinations
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
36
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.
Deferred income taxes
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.
Inventories
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 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
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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 recognition
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. 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 more than 20 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.
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. We determine the fair value of the current portion of the Mindspeed warrant using
current pricing data. The fair value of the long-term portion 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.
Restructuring charges
We recorded $24.5 million of restructuring charges in the nine months ended June 30, 2005. 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, 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.
Employee benefit plans
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 rate used is
representative of a high-quality fixed income investment. The other
38
assumptions do not tend to change materially over time. We evaluate all assumptions annually and
they are updated to reflect our experience.
Stock-based compensation
We account 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 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 was delayed by the Securities and Exchange Commission and will be effective
beginning with our first quarter of fiscal 2006. We expect the impact of this new pronouncement to
be significant to our results of operations.
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.
Unless the context otherwise indicates, as used in this section, the terms Conexant and
GlobespanVirata refer to the separate businesses of Conexant Systems, Inc. and GlobespanVirata,
Inc., respectively, as they were conducted for periods prior to the completion of the merger of
Conexant and GlobespanVirata on February 27, 2004. References to we, us, our, the combined
company and other similar terms refer to the combined Conexant and GlobespanVirata business from
and after the completion of the merger.
References in this section to Conexants fiscal year refer to the fiscal year ending on the Friday
nearest September 30 of each year and references to GlobespanViratas fiscal year refer to the
fiscal year ending December 31 of each year.
We have recently incurred substantial losses and we anticipate additional future losses.
Our net revenues for the first nine months of fiscal 2005 and for fiscal 2004 were $507.8 million
and $688.7 million, respectively. Our net loss for the first nine months of fiscal 2005 and for
fiscal 2004 was $226.1 million and $174.2 million, respectively.
We have implemented a number of expense reduction and restructuring initiatives since late fiscal
2001 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. We expect that reduced end-customer demand
as compared to the prior year, price erosion, changes in our revenue mix and other factors will
continue to adversely affect our operating results in the near term. In order to return to
profitability, we must achieve substantial revenue growth and currently we continue to face an
environment of uncertain demand in many of the markets our products address. 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.
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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 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 June 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 in excess of the market value of our common stock. If we are unable to generate
sufficient cash flows from our operations or realize additional value from our investments and
other assets, we may be unable to meet our debt obligations as they become due. 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.
We hold as marketable securities available for sale a significant amount of equity securities in
publicly traded companies. For most of our equity security holdings, there are risks 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 and those of Conexant and
GlobespanVirata. Conexant and GlobespanVirata experienced these cyclical fluctuations in their
businesses in the past and we have experienced, and may in the future experience, cyclical
fluctuations.
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.
The revenues, earnings and other operating results of Conexant and GlobespanVirata 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:
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changes in end-user demand for the products manufactured and sold by our customers; |
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the timing of receipt, reduction or cancellation of significant orders by customers; |
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seasonal customer demand; |
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the gain or loss of significant customers; |
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market acceptance of our products and our customers products; |
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our ability to develop, introduce and market new products and technologies on a timely basis; |
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the timing and extent of product development costs; |
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new product and technology introductions by competitors; |
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changes in the mix of products we develop and sell; |
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fluctuations in manufacturing yields; |
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availability and cost of products from our suppliers; |
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intellectual property disputes; and |
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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.
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:
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time-to-market; |
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product quality, reliability and performance; |
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level of integration; |
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price and total system cost; |
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compliance with industry standards; |
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design and engineering capabilities; |
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strategic relationships with customers; |
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customer support; |
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new product innovation; and |
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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.
We may have difficulty integrating businesses we acquire. In particular, we may be unable to
integrate successfully the operations of Conexant and GlobespanVirata and realize the full cost
savings we anticipated.
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 merger of Conexant and GlobespanVirata involves the integration of two companies that
previously operated independently. The difficulties of combining the operations of the companies
include:
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the challenge of effecting integration while carrying on an ongoing business; |
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the necessity of coordinating geographically separate organizations; |
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retaining and integrating personnel with diverse business backgrounds; |
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the challenge of realizing expected operating efficiencies of combining two companies; |
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retaining existing customers and strategic partners of each company; and |
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implementing and maintaining consistent standards, controls, procedures, policies and information systems. |
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 the merger and
the integration of the two operations could have an adverse effect on our business, results of
operations or financial condition. We cannot assure you that the economies of scale and operating
efficiencies that we expected to result from the merger will be realized within the time periods
contemplated or at all.
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
rapidity 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:
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issuances of equity securities dilutive to our existing shareholders; |
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large initial one-time write-offs of in-process research and development; |
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the incurrence of substantial debt and assumption of unknown liabilities; |
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the potential loss of key employees from the acquired company; |
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amortization expenses related to intangible assets; and |
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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 June 30, 2005, we have $718.3 million of goodwill,
of which $626.1 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 June 30, 2005. We performed our annual
evaluation of goodwill at June 30, 2005 and determined that as of that date, 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.
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:
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our operating and financial performance and prospects; |
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the depth and liquidity of the market for our common stock; |
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investor perception of us and the industry and markets in which we operate; |
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our inclusion in, or removal from, any equity market indices; |
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the level of research coverage of our common stock; |
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changes in earnings estimates or buy/sell recommendations by analysts; and |
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general financial, domestic, international, economic and other market conditions. |
In addition, public stock markets have experienced, and are currently experiencing, extreme 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.
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:
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our ability to anticipate customer and market requirements and changes in technology and industry standards; |
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our ability to accurately define new products; |
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our ability to timely complete development of new products and bring our products to market on a timely basis; |
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our ability to differentiate our products from offerings of our competitors; |
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overall market acceptance of our products; |
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our ability to invest in significant amounts of research and development; and |
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our ability to transition product development efforts between and among sites, particularly into India, as we complete
our restructuring actions. |
As a result of the Paxonet Communications acquisition in December 2004 and organic growth, we have
more than tripled our headcount in India to approximately 540 engineers at several design centers
since the end of fiscal 2004. We plan to continue this growth trend in India. Expansion and
transition of product development efforts to India 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.
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.
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:
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rapid technological developments; |
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rapid changes in customer requirements; |
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frequent new product introductions and enhancements; |
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short product life cycles with declining prices over the life cycle of the products; and |
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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, 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.
44
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 35% of our net revenues for the first nine
months of fiscal 2005 and for fiscal 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 inventory charges
aggregating $50.2 million for the first nine months of fiscal 2005. Inventory charges included
$31.3 million for excess and obsolete inventory primarily related to Broadband Access and Wireless
Networking products and $18.9 million of lower of cost or market write-downs for Wireless
Networking inventory.
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). 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.
There are significant risks associated with our reliance on third-party foundries, including:
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the lack of assured wafer supply, potential wafer shortages and higher wafer prices; |
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limited control over delivery schedules, manufacturing yields, production costs and product quality; and |
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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.
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
45
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 are subject to the risks of doing business internationally.
For the first nine months of fiscal 2005 and for fiscal 2004, approximately 89% and 91%,
respectively, of our net revenues were from customers located outside of the United States,
primarily in the Asia-Pacific region and Europe. Approximately 90% of Conexants net revenues for
fiscal 2003 and approximately 92% of GlobespanViratas net revenues for fiscal 2003 were from
customers located outside the United States, primarily in the Asia-Pacific region and Europe. In
addition, we have design centers, sales offices and suppliers located outside the United States,
including significant design centers and a workforce of approximately 540 engineers in India, and
assembly and test service providers and foundries located in the Asia-Pacific region. Our
international sales and operations are subject to a number of risks inherent in selling and
operating abroad. These include, but are not limited to, risks regarding:
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currency exchange rate fluctuations; |
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local economic and political conditions; |
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disruptions of commerce and capital or trading markets due to or related to terrorist activity or armed conflict; |
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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; |
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changes in legal or regulatory requirements; |
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difficulty in obtaining distribution and support; |
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the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and
import or export licensing requirements; |
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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 |
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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 35% of our net revenues for
the first nine months of fiscal 2005 and fiscal 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
46
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.
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 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:
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pay substantial damages; |
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cease the manufacture, use or sale of infringing products; |
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discontinue the use of infringing technology; |
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expend significant resources to develop non-infringing technology; or |
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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, Conexant and GlobespanVirata have engaged in litigation to enforce their intellectual
property rights, to protect their trade secrets or to determine the validity and scope of
proprietary rights of others, including their 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:
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the steps we take to prevent misappropriation or infringement of our intellectual property or the intellectual property
of our customers will be successful; |
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any existing or future patents will not be challenged, invalidated or circumvented; or |
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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 an 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.
47
We may be liable for penalties under environmental laws, rules and regulations, which could
adversely impact our business.
Conexants 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 occupied by Conexant. In addition, we are engaged in
remediations of groundwater contamination at Conexants former Newport Beach, California wafer
fabrication facility. We currently estimate the remaining costs for these remediations to be
approximately $2.9 million and have accrued for these costs as of June 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 June 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. The NOL
carry forwards are scheduled to expire at various dates through 2023. 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 of Conexant and GlobespanVirata 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 are 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:
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the division of our board of directors into three classes to be elected on a staggered basis, one class each year; |
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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; |
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a prohibition on shareholder action by written consent; |
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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; |
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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; |
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elimination of the right of shareholders to call a special meeting of shareholders; and |
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a fair price provision. |
48
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.
Our internal control over financial reporting may not be considered effective, which could result
in a loss of investor confidence in our financial reports and in turn have an adverse effect on our
stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form
10-K for the fiscal year ending September 30, 2005, we will be required to furnish a report by our
management on our internal control over financial reporting. Such report will contain, among other
matters, an assessment of the effectiveness of our internal control over financial reporting as of
the end of our fiscal year, including a statement as to whether or not our internal control over
financial reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by management. The report
will also contain a statement that our independent registered public accounting firm has issued an
attestation report on managements assessment of internal controls.
We are currently performing the system and process documentation needed to comply with Section 404
and the standards issued by the Public Company Accounting Oversight Board. This process is both
costly and challenging. During the performance of this process, if our management identifies one
or more material weaknesses in our internal control over financial reporting, we may be unable to
assert that such internal control is effective. If we are unable to assert that our internal
control is effective as of September 30, 2005 (or if our independent registered public accounting
firm is unable to attest that our managements report is fairly stated or they are unable to
express an opinion on our managements evaluation or on the effectiveness of our internal
controls), investors could lose confidence in the accuracy and completeness of our financial
reports, which in turn could have an adverse effect on our stock price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, marketable debt securities, the
Mindspeed warrant, equity securities 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. See also Part I, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk in the Companys Annual Report on Form 10-K for the year ended
September 30, 2004.
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 June 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 commercial paper, corporate bonds
and government securities) principally have remaining terms of 1 to 3 years. Such securities are
subject to interest rate risk. At June 30, 2005, a 10% adverse change in interest rates would
result in an $7.2 million decrease in the value of our long-term marketable securities.
Marketable equity securities are subject to equity price risk. For most of 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 June 30, 2005, a 10% adverse change in equity prices would result in a $9.5 million
decrease in the value of our marketable equity securities.
49
We classify all of our marketable debt and equity securities as available-for-sale securities. As
of June 30, 2005, the carrying value of these securities included net unrealized gains of $40.2
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 June
30, 2005, a 10% decrease in the market price of Mindspeeds common stock would decrease the fair
value of this warrant by approximately $1.7 million. At June 30, 2005, the market price of
Mindspeeds common stock was $1.22 per share. For the quarter ended June 30, 2005, the market
price of Mindspeeds common stock ranged from a low of $1.14 per share to a high of $2.22 per
share.
Our long-term debt consists of convertible subordinated notes with interest at fixed rates.
Consequently, we do not have significant cash flow exposure on our long-term debt. However, the
fair value of our convertible subordinated notes is subject to significant fluctuation due to their
convertibility into shares of our common stock.
The following table shows the fair values of our financial instruments as of June 30, 2005:
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(in millions) |
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Carrying Value |
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Fair Value |
Cash and cash equivalents |
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$ |
160.5 |
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$ |
160.5 |
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Marketable debt securities |
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54.3 |
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54.3 |
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Marketable government agency securities |
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75.8 |
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75.8 |
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Marketable equity securities |
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95.2 |
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95.2 |
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Mindspeed warrant |
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11.2 |
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11.2 |
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Current portion of long-term debt |
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196.8 |
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193.3 |
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Long-term debt |
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515.0 |
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476.4 |
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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 June 30, 2005, we held no foreign currency forward exchange
contracts. Based on our overall currency rate exposure at June 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.
50
ITEM 4. CONTROLS AND PROCEDURES
An evaluation as of the end of the period covered by this report was carried out under the
supervision and with the participation of the Companys management, including the Companys
Chairman and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure controls and
procedures, which are defined under Securities and Exchange Commission rules as controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Securities Exchange Act of 1934 (the Exchange Act)
is recorded, processed, summarized and reported within required time periods. Based upon that
evaluation, the Companys Chairman and Chief Executive Officer and its Senior Vice President and
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective.
There were no changes in the Companys internal control over financial reporting during the quarter
ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
51
PART II. OTHER INFORMATION
ITEM 1. 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 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 or 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 that the ultimate outcome of this litigation will have a material
adverse impact on the Companys financial condition, results of operations, or cash flows.
Class Action Suits . In December 2004 and January 2005, the Company and certain current
and former officers were named as defendants in several complaints 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.
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 to vigorously defend the litigation.
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 (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 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 is subject to approval by the 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 allowed to participate.
The defendants believe the charges in theses cases are without merit and intend to
vigorously defend the litigation.
52
ITEM 6. EXHIBITS
Exhibits:
10.1 |
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Dwight 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 (File No. 000-24923), is incorporated herein
by reference. |
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31.1 |
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Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
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31.2 |
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Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
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32 |
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Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. |
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CONEXANT SYSTEMS, INC.
(Registrant)
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Date: August 9, 2005 |
By /s/ J. Scott Blouin
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J. Scott Blouin |
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Senior Vice President and
Chief Financial Officer
(principal financial officer) |
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EXHIBIT INDEX
31.1 |
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Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
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31.2 |
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Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
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32 |
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Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350.
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55