e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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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 December 31, 2005*
OR
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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
(State of incorporation)
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25-1799439
(I.R.S. Employer Identification No.) |
4000 MacArthur Boulevard
Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip code)
(949) 483-4600
(Registrant’s 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 a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of January 27, 2006, there were 475,705,792 shares of the registrant’s common stock outstanding.
* For presentation purposes of this Form 10-Q, references made to the December 31, 2005 period
relate to the actual first fiscal quarter ended December 30, 2005.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements relating to future results of Conexant
Systems, Inc. (including certain projections and business trends) that are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe
harbor” created by those sections. Our actual results may differ materially from those projected
as a result of certain risks and uncertainties. These risks and uncertainties include, but are not
limited to: general economic and political conditions and conditions in the markets we address; the
substantial losses we have incurred; the cyclical nature of the semiconductor industry and the
markets addressed by our products and our customers’ products; continuing volatility in the
technology sector and the semiconductor industry; demand for and market acceptance of new and
existing products; successful development of new products; the timing of new product introductions
and product quality; our ability to anticipate trends and develop products for which there will be
market demand; the availability of manufacturing capacity; pricing pressures and other competitive
factors; changes in product mix; product obsolescence; the ability of our customers to manage
inventory; the ability to develop and implement new technologies and to obtain protection for the
related intellectual property; the uncertainties of litigation and the demands it may place on the
time and attention of our management; and possible disruptions in commerce related to terrorist
activity or armed conflict, as well as other risks and uncertainties, including those set forth
herein and those detailed from time to time in our other Securities and Exchange Commission
filings. These forward-looking statements are made only as of the date hereof, and we undertake no
obligation to update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise.
2
CONEXANT SYSTEMS, INC.
INDEX
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONEXANT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except par value)
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December 31, |
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September 30, |
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2005 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
299,228 |
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$ |
202,704 |
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Marketable securities |
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115,570 |
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139,306 |
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Restricted cash |
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7,500 |
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— |
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Receivables, net of allowances of $2,218 and $3,803 |
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84,586 |
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87,240 |
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Inventories |
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78,831 |
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95,329 |
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Other current assets |
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14,910 |
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14,701 |
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Total current assets |
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600,625 |
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539,280 |
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Property, plant and equipment, net |
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50,322 |
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50,700 |
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Goodwill |
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714,786 |
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717,013 |
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Intangible assets, net |
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98,803 |
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106,709 |
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Mindspeed warrant |
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28,826 |
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33,137 |
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Marketable securities – long-term |
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51,288 |
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38,485 |
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Other assets |
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93,441 |
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96,200 |
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Total assets |
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$ |
1,638,091 |
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$ |
1,581,524 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
196,825 |
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$ |
196,825 |
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Short-term debt |
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76,568 |
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— |
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Accounts payable |
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108,041 |
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108,957 |
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Accrued compensation and benefits |
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30,085 |
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27,505 |
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Restructuring and reorganization liabilities |
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27,171 |
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28,829 |
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Other current liabilities |
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64,114 |
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51,308 |
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Total current liabilities |
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502,804 |
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413,424 |
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Long-term debt |
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515,000 |
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515,000 |
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Other liabilities |
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80,177 |
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84,007 |
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Total liabilities |
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1,097,981 |
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1,012,431 |
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Commitments and contingencies (Note 5)
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Shareholders’ equity: |
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Preferred and junior preferred stock |
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— |
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— |
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Common stock, $0.01 par value: 1,000,000 shares authorized; 475,921
and 474,683 shares issued; and 474,639 and 473,500 shares
outstanding |
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4,759 |
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4,747 |
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Treasury stock: 1,282 and 1,184 shares, at cost |
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(5,823 |
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(5,584 |
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Additional paid-in capital |
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4,653,724 |
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4,657,901 |
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Accumulated deficit |
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(4,077,437 |
) |
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(4,053,166 |
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Accumulated other comprehensive loss |
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(34,807 |
) |
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(22,012 |
) |
Notes receivable from stock sales |
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(306 |
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(304 |
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Unearned compensation |
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— |
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(12,489 |
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Total shareholders’ equity |
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540,110 |
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569,093 |
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Total liabilities and shareholders’ equity |
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$ |
1,638,091 |
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$ |
1,581,524 |
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See accompanying notes to condensed consolidated financial statements.
4
CONEXANT SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
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Three Months Ended |
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December 31, |
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2005 |
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2004 |
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Net revenues |
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$ |
230,706 |
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$ |
140,621 |
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Cost of goods sold (1) |
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134,953 |
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133,465 |
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Gross margin |
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95,753 |
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7,156 |
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Operating expenses: |
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Research and development(1) |
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64,359 |
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72,541 |
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Selling, general and administrative(1) |
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38,601 |
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30,006 |
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Amortization of intangible assets |
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7,907 |
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8,293 |
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Special charges |
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915 |
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19,257 |
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Total operating expenses |
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111,782 |
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130,097 |
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Operating loss |
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(16,029 |
) |
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(122,941 |
) |
Interest expense |
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8,802 |
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8,431 |
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Other (income) expense, net |
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(1,276 |
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(11,186 |
) |
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Loss before income taxes |
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(23,555 |
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(120,186 |
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Provision for income taxes |
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716 |
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532 |
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Net loss |
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$ |
(24,271 |
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$ |
(120,718 |
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Net loss per
share — basic and diluted |
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$ |
(0.05 |
) |
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$ |
(0.26 |
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Shares used in computing basic and diluted net loss per share |
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474,043 |
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468,369 |
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| (1) These captions include non-cash employee stock-based compensation expense as
follows (see Note 1): |
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Three Months Ended |
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December 31, |
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2005 |
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2004 |
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Cost of goods
sold |
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$ |
298 |
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$ |
— |
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Research and
development |
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5,290 |
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2,245 |
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Selling,
general and administrative |
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8,728 |
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744 |
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Total |
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$ |
14,316 |
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$ |
2,989 |
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See accompanying notes to condensed consolidated financial statements.
5
CONEXANT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
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Three Months Ended |
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December 31, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(24,271 |
) |
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$ |
(120,718 |
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Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of
acquisitions: |
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Depreciation |
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4,433 |
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4,838 |
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Amortization of intangible assets |
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7,907 |
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8,293 |
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Reduction of provision for bad debt |
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(1,010 |
) |
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(500 |
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Inventory provisions |
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1,724 |
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45,001 |
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Decrease (increase) in fair value of Mindspeed warrant |
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4,311 |
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(14,773 |
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Losses of equity method investments |
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2,071 |
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3,089 |
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Gain on sale of equity securities |
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(3,837 |
) |
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— |
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Stock-based compensation |
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14,316 |
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2,989 |
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Other non-cash items, net |
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(1,012 |
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(95 |
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Changes in assets and liabilities: |
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Receivables |
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3,664 |
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92,824 |
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Inventories |
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14,734 |
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13,427 |
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Accounts payable |
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(916 |
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(53,016 |
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Agere patent litigation settlement |
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— |
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(8,000 |
) |
Special charges and other restructuring related items |
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(5,297 |
) |
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8,632 |
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Accrued expenses and other current liabilities |
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12,069 |
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(1,291 |
) |
Other |
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1,134 |
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3,250 |
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Net cash provided by (used in) operating activities |
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30,020 |
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(16,050 |
) |
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Cash flows from investing activities: |
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Payments for acquisitions, net of cash acquired |
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— |
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(14,501 |
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Restricted cash |
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(7,500 |
) |
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— |
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Proceeds from sales of equity securities and other assets |
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4,664 |
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— |
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Purchases of marketable securities |
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(3,539 |
) |
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(7,080 |
) |
Sales and maturities of marketable securities |
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2,455 |
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34,170 |
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Purchases of property, plant and equipment |
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(5,780 |
) |
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(2,082 |
) |
Investments in businesses |
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(984 |
) |
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(1,755 |
) |
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Net cash (used in) provided by investing activities |
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(10,684 |
) |
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8,752 |
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Cash flows from financing activities: |
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Proceeds from short-term debt, net of expenses of $1,044 |
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75,524 |
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— |
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Proceeds from issuance of common stock |
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1,664 |
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|
397 |
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Repayment of notes receivable from stock sales |
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— |
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|
196 |
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Net cash provided by financing activities |
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77,188 |
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|
593 |
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Net increase (decrease) in cash and cash equivalents |
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96,524 |
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(6,705 |
) |
Cash and cash equivalents at beginning of period |
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202,704 |
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139,031 |
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Cash and cash equivalents at end of period |
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$ |
299,228 |
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$ |
132,326 |
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See accompanying notes to condensed consolidated financial statements.
6
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED 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
Company’s access solutions connect people through personal communications access products such as
personal computers, television set-top boxes and game consoles to audio, video, voice and data
services over wireless and wire line broadband connections as well as over dial-up Internet
connections. The Company’s central office solutions are used by service providers to deliver
high-speed audio, video, voice and data services over copper telephone lines and fiber optic
networks to homes and businesses around the globe. In addition, the Company’s 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.
Interim Reporting – The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of
adjustments of a normal recurring nature, as well as special charges, necessary to present fairly the Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
Fiscal Periods – For presentation purposes, references made to the periods ended December 31, 2005
and 2004, relate to the actual fiscal 2006 first quarter ended December 30, 2005 and the actual
fiscal 2005 first quarter ended December 31, 2004, respectively.
Supplemental Cash Flow Information – Cash paid for interest was $4.8 million for each of the three
months ended December 31, 2005 and 2004. Cash paid for income taxes for the three months ended
December 31, 2005 and 2004 was $0.4 million and $0.3 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 or for whom the contractual terms were not enforced. Revenue with respect to these
distributors is deferred until the purchased products are sold by the distributor to a third party.
Other distributors have limited stock rotation rights, which allow them to rotate up to 10% of
product in their inventory two times a year. The Company recognizes revenue to these distributors
upon shipment of product to the distributor, as the stock rotation rights are limited and the
Company believes that it has the ability to estimate and establish allowances for expected product
returns in accordance with Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue
Recognition When Right of Return Exists”. Development revenue is recognized when services are
performed and was not significant for any of the periods presented.
Conexant has many distributor customers for whom revenue is recognized upon its shipment of product
to them, as the contractual terms provide for no or limited rights of return. During the three
months ended December 31, 2004, the Company determined that it was unable to enforce its
contractual terms with three distribution customers. As a result, from October 1, 2004, the Company
has deferred the recognition of revenue on sales to these three distributors until the purchased
products are sold by the distributors to a third party. At December 31, 2005, deferred revenue for
these three distributors was $6.0 million.
Shipping and Handling – In accordance with Emerging Issues Task Force (EITF) Issue No. 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.
7
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Recent Accounting Pronouncements – In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) FAS 115-1/124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to
when an investment is considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. This FSP also includes accounting considerations subsequent to
the recognition of an other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary impairments. The guidance
in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations,” and Accounting Principles Board (APB) Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock.” This FSP is effective for reporting periods beginning
after December 15, 2005. The Company does not expect that the adoption of this FSP will have a
material impact on its financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which
replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting
principles and requires retrospective application (a term defined by the statement) to prior
periods’ financial statements, unless it is impracticable to determine the effect of a change. It
also applies to changes required by an accounting pronouncement that does not include specific
transition provisions. SFAS No. 154 is effective for fiscal years beginning after December 15,
2005. The Company will adopt SFAS No. 154 on October 1, 2006 and does not expect that the adoption
will have a material impact on its financial position or results of operations.
Cash, Cash Equivalents and Marketable Securities – The Company considers all highly liquid
investments with insignificant interest rate risk and original maturities of three months or less
from the date of purchase to be cash equivalents. The carrying amounts of cash and cash equivalents
approximate their fair values. Short-term marketable securities consist of debt securities with
original maturity dates between ninety days and one year, and equity securities of publicly-traded
companies. Long-term marketable securities consist of debt securities with remaining maturity dates
greater than one year for which management intends to reinvest those amounts on a long-term basis
upon maturity. The Company’s marketable securities are classified as available-for-sale and are
reported at fair value on the accompanying condensed consolidated balance sheets. 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 Company’s common stock
holdings in publicly-traded companies and are classified as short-term based on the Company’s
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 December 31, 2005 and September 30, 2005
are as follows (in thousands):
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December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
299,228 |
|
|
$ |
202,704 |
|
Short-term marketable equity securities (6.2 million
shares of Skyworks Solutions, Inc. at December 31,
2005 and September 30, 2005) |
|
|
31,471 |
|
|
|
43,404 |
|
Short-term marketable debt securities (primarily
domestic government agency securities and corporate
debt securities) |
|
|
84,099 |
|
|
|
95,902 |
|
|
|
|
|
|
|
|
Subtotal- short-term marketable securities |
|
|
115,570 |
|
|
|
139,306 |
|
|
|
|
|
|
|
|
Long-term marketable securities (primarily domestic
government agency securities and corporate debt
securities) |
|
|
51,288 |
|
|
|
38,485 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
466,086 |
|
|
$ |
380,495 |
|
|
|
|
|
|
|
|
8
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED 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 any securities for speculative or trading purposes.
Restricted Cash — Restricted cash represents amounts used to collateralize a consolidated
subsidiary’s obligations under an $80 million credit facility with a bank. For further information
regarding the line of credit, see Note 3.
Stock-Based Compensation — In December 2004, the FASB issued SFAS No. 123(R), “Share-Based
Payment.” This pronouncement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires
that companies account for awards of equity instruments issued to employees under the fair value
method of accounting and recognize such amounts in their statements of operations. The Company
adopted SFAS No. 123(R) on October 1, 2005 using the modified prospective method and, accordingly,
has not restated the consolidated statements of operations for prior interim periods or fiscal
years. Under SFAS No. 123(R), the Company is required to measure compensation cost for all
stock-based awards at fair value on the date of grant and recognize compensation expense in its
consolidated statements of operations over the service period that the awards are expected to vest.
As permitted under SFAS No. 123(R), the Company has elected to recognize compensation cost for all
options with graded vesting granted on or after October 1, 2005 on a straight-line basis over the
vesting period of the entire option. For options with graded vesting granted prior to October 1,
2005, the Company will continue to recognize compensation cost over the vesting period following
the accelerated recognition method described in FASB Interpretation No. 28, “Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans,” as if each underlying vesting
date represented a separate option grant.
Prior to the adoption of SFAS No. 123(R), the Company accounted for employee stock-based
compensation using the intrinsic value method in accordance with APB Opinion No. 25, as permitted
by SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and
Disclosure.” Under the intrinsic value method, the difference between the market price on the date
of grant and the exercise price is charged to the statement of operations over the vesting period.
Prior to the adoption of SFAS No. 123(R), the Company recognized compensation cost only for stock
options issued with exercise prices set below market prices on the date of grant, which consisted
principally of stock options granted to replace stock options of
acquired businesses, and provided the necessary pro forma disclosures
required under SFAS No. 123.
During the three months ended December 31, 2004, the Company recognized compensation expense of
$3.0 million for stock options under APB Opinion No. 25, which was charged to the consolidated
statement of operations. For the three months ended December 31, 2004, had stock-based compensation
been accounted for based on the estimated grant date fair values, as defined by SFAS No. 123, the
Company’s net loss and net loss per share would have been adjusted to the following pro forma
amounts (in thousands, except per share amounts):
| |
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, 2004 |
|
Net loss, as reported |
|
$ |
(120,718 |
) |
Add: stock-based compensation expense included in reported net loss, net of tax |
|
|
2,989 |
|
Deduct: stock-based compensation expense determined under fair value method, net of tax |
|
|
(18,566 |
) |
|
|
|
|
Net loss, pro forma |
|
$ |
(136,295 |
) |
|
|
|
|
Net loss per share: |
|
|
|
|
Basic — as reported |
|
$ |
(0.26 |
) |
Basic — pro forma |
|
$ |
(0.29 |
) |
Diluted — as reported |
|
$ |
(0.26 |
) |
Diluted — pro forma |
|
$ |
(0.29 |
) |
Under SFAS No. 123(R), the Company now records in its consolidated statements of operations
(i) compensation cost for options granted, modified, repurchased or cancelled on or after October
1, 2005 under the provisions of SFAS No. 123(R) and (ii) compensation cost for the unvested portion
of options granted prior to October 1, 2005 over their remaining vesting periods using the amounts
previously measured under SFAS No. 123 for pro forma disclosure purposes. During the three months
ended December 31, 2005, the Company recognized compensation
9
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
expense of $13.2 million for stock options and $1.1 million for employee stock purchase plan awards
in its consolidated statement of operations. Under the transition provisions of SFAS No. 123(R),
the Company has recognized a cumulative effect of a change in accounting principle to reduce
additional paid-in capital by $20.7 million, consisting of (i) the remaining $12.5 million deferred
stock-based compensation balance as of October 1, 2005, primarily accounted for under APB Opinion
No. 25, and (ii) the $8.2 million difference between the remaining $12.5 million deferred
stock-based compensation balance as of October 1, 2005 for the options issued in the Company’s
business combinations and the remaining unamortized grant-date fair value of these options, which
also reduced goodwill.
Consistent with the valuation method for the disclosure-only provisions of SFAS No. 123, the
Company is using the Black-Scholes-Merton model to value the compensation expense associated with
stock-based awards under SFAS No. 123(R). In addition, forfeitures are estimated when recognizing
compensation expense, and the estimate of forfeitures will be adjusted over the requisite service
period to the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up
adjustment in the period of change and will also impact the amount of compensation expense to be
recognized in future periods.
The following weighted average assumptions were used in the estimated grant date fair value
calculations for stock options and employee stock purchase plan awards:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December
31,
2005 |
|
|
December
31,
2004 |
|
Stock option plans: |
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected stock price volatility |
|
|
75 |
% |
|
|
97 |
% |
Risk free interest rate |
|
|
4.4 |
% |
|
|
3.6 |
% |
Average expected life (in years) |
|
|
5.25 |
|
|
|
4.50 |
|
Stock purchase plan: |
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected stock price volatility |
|
|
79 |
% |
|
|
97 |
% |
Risk free interest rate |
|
|
4.0 |
% |
|
|
4.2 |
% |
Average expected life (in years) |
|
|
0.50 |
|
|
|
0.50 |
|
The expected stock price volatility rates are based on the historical volatility of the
Company’s common stock. The risk free interest rates are based on the U.S. Treasury yield curve in
effect at the time of grant for periods corresponding with the expected life of the option or
award. The average expected life represents the weighted average period of time that options or
awards granted are expected to be outstanding, as calculated using the simplified method described
in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.
Net Income (Loss) Per Share – Net income (loss) per share is computed in accordance with SFAS No.
128, “Earnings Per Share.” Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by the weighted average number of
common shares outstanding and potentially dilutive securities outstanding during the period.
Potentially dilutive securities include stock options and warrants and shares of stock issuable
upon conversion of the Company’s convertible subordinated notes. The dilutive effect of stock
options and warrants is computed under the treasury stock method, and the dilutive effect of
convertible subordinated notes is computed using the if-converted method. Potentially dilutive
securities are excluded from the computations of diluted net income (loss) per share if their
effect would be antidilutive.
10
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following potentially dilutive securities have been excluded from the diluted net loss per
share calculations because their effect would have been antidilutive (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
December 31, |
| |
|
2005 |
|
2004 |
Stock options and warrants |
|
|
8,647 |
|
|
|
1,921 |
|
5.25% Convertible Subordinated Notes due May 2006 |
|
|
5,840 |
|
|
|
5,840 |
|
4.25% Convertible Subordinated Notes due May 2006 |
|
|
7,364 |
|
|
|
7,364 |
|
4.00% Convertible Subordinated Notes due February 2007 |
|
|
12,137 |
|
|
|
12,137 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
33,988 |
|
|
|
27,262 |
|
|
|
|
|
|
|
|
|
|
2. Business Combinations
Paxonet Communications, Inc.
In December 2004, the Company acquired all of the outstanding capital stock of Paxonet
Communications, Inc., a privately-held company headquartered in Fremont, California, with an
engineering workforce primarily based in India. This acquisition was accounted for using the
purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” The
Company’s statements of operations include the results of Paxonet from the date of acquisition.
The aggregate purchase price for this acquisition was $14.8 million. Of this purchase price,
approximately $0.3 million was allocated to net tangible assets, approximately $0.7 million was
allocated to unearned compensation representing the intrinsic value of unvested stock options
exchanged in the transaction, approximately $1.4 million was allocated to identifiable intangible
assets, and the remaining $12.4 million was allocated to goodwill. The identifiable intangible
assets are being amortized on a straight-line basis over their useful lives of between two and
eight years, with a weighted-average life of approximately six years. The pro forma effect of this
acquisition was not material to the Company’s results of operations for the three months ended
December 31, 2004.
3. Supplemental Financial Information
Marketable Securities
Short-term, available-for-sale securities consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
| |
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
33,802 |
|
|
$ |
— |
|
|
$ |
(37 |
) |
|
$ |
33,765 |
|
Domestic government agency securities |
|
|
50,437 |
|
|
|
— |
|
|
|
(103 |
) |
|
|
50,334 |
|
Equity securities |
|
|
52,524 |
|
|
|
— |
|
|
|
(21,053 |
) |
|
|
31,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
136,763 |
|
|
$ |
— |
|
|
$ |
(21,193 |
) |
|
$ |
115,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
37,974 |
|
|
$ |
— |
|
|
$ |
(40 |
) |
|
$ |
37,934 |
|
Domestic government agency securities |
|
|
58,137 |
|
|
|
2 |
|
|
|
(171 |
) |
|
|
57,968 |
|
Equity securities |
|
|
52,524 |
|
|
|
— |
|
|
|
(9,120 |
) |
|
|
43,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,635 |
|
|
$ |
2 |
|
|
$ |
(9,331 |
) |
|
$ |
139,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s marketable equity securities at December 31, 2005 and September 30, 2005 consist
of 6.2 million shares of Skyworks Solutions, Inc. common stock. The Company’s weighted average
cost basis in these shares is $8.49 per share, and the market values at December 31, 2005 and
September 30, 2005 were $5.09 and $7.02 per
share, respectively. The market value of these securities has been less than the Company’s cost
basis since January 2005. Based on the Company’s ability and intent to hold these shares for a
reasonable period of time sufficient for a recovery of fair value, the Company does not consider
these investments to be other-than-temporarily impaired at December 31, 2005 or September 30, 2005.
11
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Long-term, available-for-sale securities consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost or |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
| |
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic government agency securities |
|
$ |
25,826 |
|
|
$ |
— |
|
|
$ |
(191 |
) |
|
$ |
25,635 |
|
Corporate debt securities |
|
|
25,954 |
|
|
|
— |
|
|
|
(301 |
) |
|
|
25,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,780 |
|
|
$ |
— |
|
|
$ |
(492 |
) |
|
$ |
51,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic government agency securities |
|
$ |
15,964 |
|
|
$ |
— |
|
|
$ |
(102 |
) |
|
$ |
15,862 |
|
Corporate debt securities |
|
|
22,910 |
|
|
|
— |
|
|
|
(287 |
) |
|
|
22,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,874 |
|
|
$ |
— |
|
|
$ |
(389 |
) |
|
$ |
38,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s long-term marketable securities principally have original contractual maturities
from one to three years.
Inventories
Inventories consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Work-in-process |
|
$ |
61,612 |
|
|
$ |
61,535 |
|
Finished goods |
|
|
17,219 |
|
|
|
33,794 |
|
|
|
|
|
|
|
|
|
|
$ |
78,831 |
|
|
$ |
95,329 |
|
|
|
|
|
|
|
|
At December 31, 2005 and September 30, 2005, inventories are net of excess and obsolete (E&O)
inventory reserves of $42.2 million and $44.8 million, respectively. In addition, at December 31,
2005 and September 30, 2005, inventories are net of lower of cost or market (LCM) reserves of $8.9
million and $6.7 million, respectively.
Goodwill
The changes in the carrying amount of goodwill for the three months ended December 31, 2005 was as
follows (in thousands):
| |
|
|
|
|
Goodwill at September 30, 2005 |
|
$ |
717,013 |
|
Additions |
|
|
6,000 |
|
Adjustments |
|
|
(8,227 |
) |
|
|
|
|
Goodwill at December 31, 2005 |
|
$ |
714,786 |
|
|
|
|
|
During the three months ended December 31, 2005, the Company recorded an $8.2 million
adjustment to goodwill as a result of the adoption of SFAS No. 123(R) (see Note 1). The Company
also recorded $6.0 million of additional goodwill during the three months ended December 31, 2005
related to earn-outs for previous business combinations.
12
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Intangible Assets
Intangible assets consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
|
|
September 30, 2005 |
|
| |
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
| |
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
| |
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Developed technology |
|
$ |
146,146 |
|
|
$ |
(61,233 |
) |
|
$ |
84,913 |
|
|
$ |
146,146 |
|
|
$ |
(54,133 |
) |
|
$ |
92,013 |
|
Customer base |
|
|
4,660 |
|
|
|
(1,998 |
) |
|
|
2,662 |
|
|
|
4,660 |
|
|
|
(1,781 |
) |
|
|
2,879 |
|
Other intangible assets |
|
|
21,888 |
|
|
|
(10,660 |
) |
|
|
11,228 |
|
|
|
21,888 |
|
|
|
(10,071 |
) |
|
|
11,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172,694 |
|
|
$ |
(73,891 |
) |
|
$ |
98,803 |
|
|
$ |
172,694 |
|
|
$ |
(65,985 |
) |
|
$ |
106,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Amortization expense |
|
$ |
22,798 |
|
|
$ |
29,801 |
|
|
$ |
29,333 |
|
|
$ |
13,831 |
|
|
$ |
2,079 |
|
|
$ |
961 |
|
Mindspeed Warrant
The Company has a warrant to purchase 30 million shares of Mindspeed Technologies, Inc. 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 December 31, 2005, the aggregate fair
value of the Mindspeed warrant included on the accompanying condensed consolidated balance sheet
was $28.8 million. The warrant was valued using the Black-Scholes-Merton model with expected terms
for portions of the warrant varying from 1 to 5 years, expected volatility of 80%, a risk-free
interest rate of 4.4% and no dividend yield. The aggregate fair value of the warrant is reflected as a
long-term asset on the accompanying condensed consolidated balance sheet.
The valuation of this derivative instrument is subjective, and option valuation models require the
input of highly subjective assumptions, including the expected stock price volatility. Changes in
these assumptions can materially affect the fair value estimate. The Company could, at any point
in time, ultimately realize amounts significantly different than the carrying value.
Short-Term Debt
On November 29, 2005, the Company established an accounts receivable financing facility whereby it
will sell, from time to time, certain accounts receivable to Conexant USA, LLC, a special purpose
entity which is a consolidated subsidiary of the Company. Concurrently, Conexant USA entered into
an $80.0 million revolving credit agreement with a bank which is secured by the assets of Conexant
USA. This credit agreement has a term of 364 days, with 364-day renewal periods at the sole
discretion of the bank. Conexant USA is required to maintain certain minimum amounts on deposit
(restricted cash) with the bank during the term of the credit agreement. Borrowings under the
credit agreement, which cannot exceed the lesser of $80 million and 85% of the uncollected value of
purchased accounts receivable that are eligible for coverage under an insurance policy for the
receivables, will bear interest equal to the 7-day LIBOR plus 0.6%. Additionally, the Company paid
an initial program fee, and Conexant USA has the obligation to pay a final program fee and 0.2% per
annum for the unused portion of the line of credit. The credit agreement also requires certain
financial measures of the Company and its consolidated subsidiaries to be satisfied, such as
minimum levels of shareholders’ equity and cash and cash equivalents. At December 31, 2005,
Conexant USA had $7.5 million of restricted cash and $90.1 million of accounts receivable, both of
which serve as collateral under the credit agreement. At December 31, 2005, Conexant USA had
borrowed $76.6 million under this credit agreement and was in compliance with all financial
covenants.
13
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Long-Term Debt
At December 31, 2005 and September 30, 2005, long-term debt consists of the following (in
thousands):
| |
|
|
|
|
5.25%
Convertible Subordinated Notes due May 2006 with a conversion price of $22.26 |
|
$ |
130,000 |
|
4.25% Convertible Subordinated Notes due May 2006 with a conversion price of $9.08 |
|
|
66,825 |
|
4.00% Convertible Subordinated Notes due February 2007 with a conversion price of $42.43 |
|
|
515,000 |
|
|
|
|
|
Total |
|
|
711,825 |
|
Less: current portion of long-term debt |
|
|
(196,825 |
) |
|
|
|
|
Long-term debt |
|
$ |
515,000 |
|
|
|
|
|
Other (Income) Expense, Net
Other (income) expense, net consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Investment and interest income |
|
$ |
(3,265 |
) |
|
$ |
(551 |
) |
Decrease (increase) in fair value of the Mindspeed warrant |
|
|
4,311 |
|
|
|
(14,773 |
) |
Losses of equity method investments |
|
|
2,071 |
|
|
|
3,089 |
|
Gains on sales of equity securities |
|
|
(3,837 |
) |
|
|
— |
|
Other |
|
|
(556 |
) |
|
|
1,049 |
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(1,276 |
) |
|
$ |
(11,186 |
) |
|
|
|
|
|
|
|
4. Shareholders’ Equity
The Company’s authorized capital consists of 1,000,000,000 shares of common stock, par value $0.01
per share, and 25,000,000 shares of preferred stock, without par value, of which 5,000,000 shares
are designated as Series A junior participating preferred stock (the Junior Preferred Stock).
The Company has a preferred share purchase rights plan to protect shareholders’ rights in the event
of a proposed takeover of the Company. A preferred share purchase right (a Right) is attached to
each share of common stock pursuant to which the holder may, in certain takeover-related
circumstances, become entitled to purchase from the Company 1/200th of a share of Junior
Preferred Stock at a price of $300, subject to adjustment. Also, in certain takeover-related
circumstances, each Right (other than those held by an acquiring person) will generally be
exercisable for shares of the Company’s common stock or stock of the acquiring person having a
market value of twice the exercise price. In certain events, each Right may be exchanged by the
Company for one share of common stock or 1/200th of a share of Junior Preferred Stock.
The Rights expire on December 31, 2008, unless earlier exchanged or redeemed at a redemption price
of $0.01 per Right, subject to adjustment.
Stock Option Plans
The Company has stock option plans and long-term incentive plans under which employees and
directors may be granted options to purchase shares of the Company’s common stock. As of December
31, 2005, approximately 61.8 million shares are available for grant under the stock option and
long-term incentive plans. Stock options are generally granted with exercise prices of not less
than the fair market value at grant date, generally vest over four years and expire eight or ten
years after the grant date. The Company settles stock option exercises with newly issued shares of
common stock. The Company has also assumed stock option plans in connection with business
combinations.
14
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of stock option activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Average Exercise |
|
|
Contractual |
|
|
Value |
|
| |
|
(in thousands) |
|
|
Price Per Share |
|
|
Term (in years) |
|
|
(in thousands) |
|
Outstanding, September 30, 2005 |
|
|
111,195 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
526 |
|
|
|
2.18 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,083 |
) |
|
|
1.77 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(5,297 |
) |
|
|
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
105,341 |
|
|
$ |
2.71 |
|
|
|
4.83 |
|
|
$ |
81,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2005 |
|
|
70,743 |
|
|
$ |
3.15 |
|
|
|
3.66 |
|
|
$ |
72,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted during the three months ended
December 31, 2005 was $1.43 per share. The total intrinsic value of options exercised during the
three months ended December 31, 2005 was $0.6 million. The total cash received from employees as a
result of stock option exercises was $1.7 million for the three months ended December 31, 2005.
At December 31, 2005, the total unrecognized fair value compensation cost related to unvested stock
options and employee stock purchase plan awards was $44.1 million, which is expected to be
recognized over a remaining weighted average period of approximately one year.
Directors Stock Plan
The Company has a Directors Stock Plan which provides for each non-employee director to receive
specified levels of stock option grants upon election to the Board of Directors and periodically
thereafter. Under the Directors Stock Plan, each non-employee director may elect to receive all or
a portion of the cash retainer to which the director is entitled through the issuance of common
stock. During the three months ended December 31, 2005, no stock options or shares of common stock
were issued under the Directors Stock Plan.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (ESPP) which allows eligible employees to purchase
shares of the Company’s common stock at a price equal to 85% of the lower of fair market value at
the beginning or end of each offering period. Under the ESPP, employees may authorize the Company
to withhold up to 15% of their compensation for each pay period to purchase shares under the plan,
subject to certain limitations, and employees are limited to the purchase of 2,000 shares per
offering period. Offering periods generally commence on the first trading day of February and
August of each year and are generally six months in duration, but may be terminated earlier under
certain circumstances.
At
December 31, 2005, approximately 27.3 million shares of the
Company’s common stock were reserved
for future issuance under the ESPP, of which 17.5 million shares become available in 2.5 million
share annual increases, subject to the Board of Directors selecting a lower amount.
Performance Share Plan
The Company has a Performance Share Plan. On November 2, 2005, the Company issued performance
shares at a fair value of $2.16 per share to an executive in satisfaction of his fiscal 2005
performance share award granted under his employment agreement. The total fair value of the award
was $0.6 million and was paid with 154,879 shares of common stock and cash. At December 31, 2005,
approximately 3.3 million shares of the Company’s common stock are available for issuance under
this plan.
15
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Commitments and Contingencies
Lease Commitments
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 $4.3 million and $5.7 million for the three months ended December 31, 2005
and 2004, respectively.
At December 31, 2005, future minimum lease payments under operating leases, excluding any sublease
income, were as follows (in thousands):
| |
|
|
|
|
| Fiscal Year |
|
|
|
|
Remainder of 2006 |
|
$ |
24,969 |
|
2007 |
|
|
28,490 |
|
2008 |
|
|
22,618 |
|
2009 |
|
|
15,441 |
|
2010 |
|
|
15,337 |
|
Thereafter |
|
|
77,220 |
|
|
|
|
|
Total future minimum lease payments |
|
$ |
184,075 |
|
|
|
|
|
At December 31, 2005, the Company has many sublease arrangements on operating leases for terms
ranging from near term to approximately 10 years. Aggregate scheduled sublease income based on
current terms is approximately $35.7 million.
The summary of future minimum lease payments includes an aggregate gross amount of $67.6 million of
lease obligations that principally expire through fiscal 2021, which have been accrued for in
connection with the Company’s reorganization and restructuring actions (see Note 7) and previous
actions taken by GlobespanVirata, Inc. prior to its merger with the Company in February 2004.
At December 31, 2005, the Company is contingently liable for approximately $6.6 million in
operating lease commitments on facility leases that were assigned to Mindspeed and Skyworks
Solutions, Inc. at the time of their separation from the Company.
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 Company’s products. The resolution of
these matters may entail the negotiation of a license agreement, a settlement, or the adjudication
of such claims through arbitration or litigation. The outcome of litigation cannot be predicted
with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably for 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 Company’s 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 Company’s 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
16
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
compensation and (2) entered into agreements requiring certain of their customers to purchase the
stock in the aftermarket at escalating prices. The complaint seeks unspecified damages. The
complaint was consolidated with class actions against approximately 300 other companies making
similar allegations regarding the public offerings of those companies during 1998 through 2000. In
June 2003, Conexant, Inc. and the named officers and directors entered into a memorandum of
understanding outlining a settlement agreement with the plaintiffs that will, among other things,
result in the dismissal with prejudice of all the claims against the former GlobeSpan, Inc.
officers and directors. The final settlement was executed in June 2004. On February 15, 2005, the
Court issued a decision certifying a class action for settlement purposes and granting preliminary
approval of the settlement, subject to modification of certain bar orders contemplated by the
settlement. The bar orders have since been modified. The settlement remains subject to a number
of conditions and final approval. It is possible that the settlement will not be approved. Even if
the settlement is approved, individual class members will have an opportunity to opt out of the
class and to file their own lawsuits, and some may do so. In either event, the Company does not
anticipate that the ultimate outcome of this litigation will have a material adverse impact on the
Company’s financial condition, results of operations, or cash flows.
Texas Instruments, Inc. – The Company’s Conexant, Inc. subsidiary has been involved in a dispute
with Texas Instruments, Inc., Stanford University and its Board of Trustees, and Stanford
University OTL, LLC (collectively, the Defendants) over a group of patents (and related foreign
patents) that Texas Instruments alleges are essential to certain industry standards for
implementing ADSL technology. On June 12, 2003, Conexant, Inc. filed a complaint against the
Defendants in the U.S. District Court of New Jersey. The complaint asserts, among other things,
that the Defendants have violated the antitrust laws by creating an illegal patent pool, by
manipulating the patent process and by abusing the process for setting industry standards related
to ADSL technology. The complaint also asserts that the Defendants’ patents relating to ADSL are
unenforceable, invalid and/or not infringed by Conexant, Inc. products. Conexant, Inc. is seeking,
among other things, (i) a finding that the Defendants have violated the federal antitrust laws and
treble damages based upon such a finding, (ii) an injunction prohibiting the Defendants from
engaging in anticompetitive practices, (iii) a declaratory judgment that the claims of the
Defendants’ ADSL patents are invalid, unenforceable, void, and/or not infringed by Conexant, Inc.
and (iv) an injunction prohibiting the Defendants from pursuing patent litigation against Conexant,
Inc. and its customers. On August 11, 2003 and September 9, 2003, the Defendants answered the
complaint, denied Conexant, Inc.’s claims and filed counterclaims alleging that Conexant, Inc. has
infringed certain of their ADSL patents. In addition to other relief, the Defendants are seeking
to collect damages for alleged past infringement and to enjoin Conexant, Inc. from continuing to
use the Defendants’ ADSL patents. The case has been bifurcated into a patent module and an
antitrust module, with the patent module being tried first. Trial on the patent module commenced
on January 4, 2006 in the U.S. District Court of New Jersey. Although the Company believes that
Conexant, Inc. has strong arguments in favor of its position in this dispute, it can give no
assurance that Conexant, Inc. will prevail in the litigation. If the 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 Company’s
business, financial condition, results of operations and cash flows.
Class Action Suits – In December 2004 and January 2005, the Company and certain current and former
officers and directors were named as defendants in several complaints seeking monetary damages
filed on behalf of all persons who purchased Company common stock during a specified class period.
These suits were filed in the U.S. District Court of New Jersey (New Jersey cases) and the U.S.
District Court for the Central District of California (California cases), alleging that the
defendants violated the Securities Exchange Act of 1934 by allegedly disseminating materially false
and misleading statements and/or concealing material adverse facts. The California cases have now
been consolidated with the New Jersey cases so that all of the class action suits, now known as
Witriol v. Conexant, et al., are being heard in the U.S. District Court of New Jersey by the same
judge. The defendants believe these charges are without merit and intend to vigorously defend the
litigation. On September 1, 2005, the defendants filed their motion to dismiss the case. On
November 23, 2005, the court granted the plaintiff’s motion to file a second amended complaint,
which was filed on December 5, 2005. The defendants plan to file an amended motion to dismiss the
case, which motion will be due by February 6, 2006.
In addition, in February 2005, the Company and certain of its current and former officers and the
Company’s 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 Company’s 401(k) Plan (Plan)
during a specified class period.
17
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. The plaintiff filed an amended complaint on August
11, 2005. On October 12, 2005, the defendants filed a motion to dismiss this case. The plaintiff
responded to the motion to dismiss on December 30, 2005, and the defendants’ reply is due on
February 17, 2006.
Shareholder Derivative Suits – In January 2005, the Company and certain current and former
directors and officers were named as defendants in purported shareholder derivative actions seeking
monetary damages (now consolidated) in the 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
the U.S. District Court of New Jersey in May 2005. On July 28, 2005, the California court approved
a stay of the actions filed in California pending the outcome of the motion to dismiss in Witriol
v. Conexant, et al. The Company has negotiated a similar stay agreement with the plaintiffs in the
New Jersey case, which has also been approved by the New Jersey court. Pursuant to the stay
agreements, in the event that the parties in the Witriol case engage in any negotiations,
plaintiffs’ counsel in the derivative cases will be kept informed. The defendants believe the
charges in theses cases are without merit and intend to vigorously defend the litigation.
Guarantees and Indemnifications
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
Company’s spin-off from Rockwell International Corporation, 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 Company’s
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 facility or the lease. The Company
indemnifies its directors and officers to the maximum extent permitted under the laws of the State
of Delaware.
In connection with the Company’s acquisition of Amphion Semiconductor, the Company guaranteed the
value of the 600,000 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 Conexant’s 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.
The duration of the Company’s guarantees and indemnities varies, and in many cases is indefinite.
The guarantees and indemnities to customers in connection with product sales generally are subject
to limits based upon the amount of the related product sales. The majority of other guarantees and
indemnities do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for these guarantees and
indemnities in the accompanying consolidated balance sheets. Product warranty costs are not
significant.
18
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 currently estimates the aggregate remaining costs
for these remediations to be approximately $2.6 million and has accrued for these costs as of
December 31, 2005.
In connection with certain non-marketable equity investments, the Company may be required to invest
up to an additional $4.9 million as of December 31, 2005.
These additional investments are subject to capital calls, and a
decision by the Company not to participate would result in an
impairment of the investments.
6. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Net loss |
|
$ |
(24,271 |
) |
|
$ |
(120,718 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(901 |
) |
|
|
1,628 |
|
Unrealized losses on available-for-sale securities |
|
|
(11,967 |
) |
|
|
(15,464 |
) |
Minimum pension liability adjustments |
|
|
73 |
|
|
|
87 |
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(12,795 |
) |
|
|
(13,749 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(37,066 |
) |
|
$ |
(134,467 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Foreign currency translation adjustments |
|
$ |
(4,321 |
) |
|
$ |
(3,420 |
) |
Unrealized losses on available-for-sale securities |
|
|
(21,685 |
) |
|
|
(9,718 |
) |
Minimum pension liability adjustments |
|
|
(8,801 |
) |
|
|
(8,874 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(34,807 |
) |
|
$ |
(22,012 |
) |
|
|
|
|
|
|
|
7. Special Charges
Special charges consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Restructuring charges |
|
$ |
930 |
|
|
$ |
11,971 |
|
Integration (credits) charges |
|
|
(400 |
) |
|
|
3,525 |
|
Asset impairments |
|
|
85 |
|
|
|
455 |
|
Other |
|
|
300 |
|
|
|
3,306 |
|
|
|
|
|
|
|
|
|
|
$ |
915 |
|
|
$ |
19,257 |
|
|
|
|
|
|
|
|
19
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
Merger Related Reorganization Plan (described below) that related to the employees and facilities
of GlobespanVirata, are included in special charges in the accompanying consolidated statements of
operations. The costs and expenses that relate to the employees and facilities of GlobespanVirata
have been recorded as acquired liabilities in the merger and included as part of the purchase price
allocation in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a
Business Combination,” and SFAS No. 141, “Business Combinations”. In May 2004, the GlobespanVirata
subsidiary was renamed Conexant, Inc. Subsequent actions that impacted the employees and facilities
of Conexant, Inc. have been included in special charges in the Company’s consolidated statements of
operations.
2006 Restructuring Action – In November 2005, the Company announced an operating site closure and
further workforce reductions. In total, the Company notified approximately 20 domestic employees
of their involuntary termination. During the three months ended December 31, 2005, the Company
recorded total charges of $0.3 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.
Activity and liability balances recorded as part of the 2006 Restructuring Action through December
31, 2005 were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce |
|
|
Facility |
|
|
|
|
| |
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
278 |
|
|
$ |
— |
|
|
$ |
278 |
|
Cash payments |
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
273 |
|
|
$ |
— |
|
|
$ |
273 |
|
|
|
|
|
|
|
|
|
|
|
2005 Restructuring Action – In November 2004, the Company announced plans to further reduce
its operating expense level by the end of 2005. The components of this plan were a shift of
product development resources to lower-cost regions and cost savings from continued merger-related
sales, general and administrative consolidation. During fiscal year 2005, the Company announced
several operating site closures and workforce reductions. In total, the Company notified
approximately 255 employees of their involuntary termination, including approximately 175 domestic
and 80 international employees. The Company recorded charges of $19.7 million based on the
estimates of the cost of severance benefits for the affected employees and the estimated relocation
benefits for those employees who have been offered and have commenced the relocation process.
Additionally, the Company has recorded charges of $7.2 million relating to the consolidation of
certain facilities under non-cancelable leases which were vacated. The facility charges were
determined in accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities”. As a result, the Company recorded the present value of the future
lease obligations, in excess of the expected future sublease income, using a discount rate of 8.0%,
and will accrete the remaining approximate $8.7 million into expense over the remaining terms of
the leases. The non-cash facility accruals include $7.0 million of reclassifications of the
deferred gains on the previous sale-leaseback of two facilities and $6.6 million of
reclassifications from earlier restructuring actions for another facility. During the three months
ended December 31, 2005, the Company increased its facilities related charges by $0.3 million as a
result of the accretion of rent expense and increased its workforce related charges by $0.2
million.
20
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Activity and liability balances recorded as part of the 2005 Restructuring Action through December
31, 2005 were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce |
|
|
Facility |
|
|
|
|
| |
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
19,708 |
|
|
$ |
7,244 |
|
|
$ |
26,952 |
|
Non-cash items |
|
|
(46 |
) |
|
|
13,629 |
|
|
|
13,583 |
|
Cash payments |
|
|
(16,118 |
) |
|
|
(1,535 |
) |
|
|
(17,653 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005 |
|
|
3,544 |
|
|
|
19,338 |
|
|
|
22,882 |
|
Charged to costs and expenses |
|
|
191 |
|
|
|
346 |
|
|
|
537 |
|
Reclassification to accrued compensation and benefits |
|
|
1,899 |
|
|
|
— |
|
|
|
1,899 |
|
Cash payments |
|
|
(1,626 |
) |
|
|
(1,675 |
) |
|
|
(3,301 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
4,008 |
|
|
$ |
18,009 |
|
|
$ |
22,017 |
|
|
|
|
|
|
|
|
|
|
|
2004 Restructuring Actions — The Company approved several restructuring plans during fiscal
2004. In connection with its merger with GlobespanVirata, the Company began to formulate a plan
which included workforce reductions and facility consolidation actions. This plan was communicated
at the time of the merger and has been completed (the 2004 Merger Related Restructuring and
Reorganization Plans). During the fourth fiscal quarter of 2004, the Company announced additional
workforce reduction and facility consolidation actions in response to lower than anticipated
revenue levels.
In connection with its merger with GlobespanVirata, 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 Issue 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 others. The facility consolidation plan
resulted in an initial charge of $13.5 million and included assumptions regarding sublease rates
and time periods and other costs to prepare and sublease the applicable spaces. Additionally, at
the date of the merger, there had been a decline in the real estate market in certain geographic
regions in which Conexant, Inc. had leased facilities. A portion of the facilities related charges
represent adjustments to the fair market value rates of those leases. These non-cancelable lease
commitments range from near term to 17 years in length. In fiscal 2004, the Company reduced the
original facility consolidation charge by approximately $3.6 million and increased the workforce
related charge by approximately $0.2 million as a result of finalizing the 2004 Merger Related
Reorganization Plan and recorded these changes as adjustments to the purchase price allocation
(goodwill). In fiscal 2005, as a result of finalizing facilities consolidation actions, the
Company reduced its facilities reserves by a total of $1.2 million as adjustments to the purchase
price allocation (goodwill). Additionally, in fiscal 2005, as a result of the final closure of a
facility in Europe, $3.7 million of reserves were transferred from the 2004 Merger Related
Reorganization Plan to the 2005 Restructuring Action. During the three months ended December 31,
2005, the Company decreased its facilities related charges by $0.1 million.
21
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Activity and liability balances recorded as part of the 2004 Merger Related Reorganization Plan
pertaining to Conexant, Inc. employees and facilities through December 31, 2005 were as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce |
|
|
Facility |
|
|
|
|
| |
|
Reductions |
|
|
and Other |
|
|
Total |
|
Recorded in purchase price allocation |
|
$ |
1,300 |
|
|
$ |
13,509 |
|
|
$ |
14,809 |
|
Adjusted to purchase price allocation |
|
|
210 |
|
|
|
(3,554 |
) |
|
|
(3,344 |
) |
Cash payments |
|
|
(536 |
) |
|
|
(788 |
) |
|
|
(1,324 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004 |
|
|
974 |
|
|
|
9,167 |
|
|
|
10,141 |
|
Adjusted to purchase price allocation |
|
|
12 |
|
|
|
(4,967 |
) |
|
|
(4,955 |
) |
Cash payments |
|
|
(986 |
) |
|
|
(855 |
) |
|
|
(1,841 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005 |
|
|
— |
|
|
|
3,345 |
|
|
|
3,345 |
|
Credited to costs and expenses |
|
|
— |
|
|
|
(55 |
) |
|
|
(55 |
) |
Cash payments |
|
|
— |
|
|
|
(141 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
— |
|
|
$ |
3,149 |
|
|
$ |
3,149 |
|
|
|
|
|
|
|
|
|
|
|
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. During fiscal
2005, one additional facility was vacated which resulted in an additional charge of $0.1 million in
accordance with SFAS No. 146.
During the fourth fiscal quarter of 2004, the Company announced additional workforce reduction
actions in response to lower than anticipated revenue levels. The Company recorded an additional
$5.1 million (for a total of $7.0 million in fiscal 2004) based on the estimates of the cost of
severance benefits for the affected employees. An additional $1.5 million of net severance
benefits was earned in fiscal 2005 based on the passage of time in the notification period, net of
resignations and favorable adjustments of final settlement amounts. In total, the Company notified
approximately 230 employees of their involuntary termination, including approximately 180 domestic
and 50 international employees. The workforce reductions affected employees in all areas of the
business and are complete. During the three months ended December 31, 2005, the Company increased
its workforce related charges by $0.2 million.
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 December 31, 2005 were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce |
|
|
Facility |
|
|
|
|
| |
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
7,066 |
|
|
$ |
1,877 |
|
|
$ |
8,943 |
|
Cash payments |
|
|
(2,368 |
) |
|
|
(281 |
) |
|
|
(2,649 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004 |
|
|
4,698 |
|
|
|
1,596 |
|
|
|
6,294 |
|
Charged to costs and expenses |
|
|
1,504 |
|
|
|
(11 |
) |
|
|
1,493 |
|
Cash payments |
|
|
(6,137 |
) |
|
|
(754 |
) |
|
|
(6,891 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005 |
|
|
65 |
|
|
|
831 |
|
|
|
896 |
|
Charged to costs and expenses |
|
|
170 |
|
|
|
— |
|
|
|
170 |
|
Cash payments |
|
|
(224 |
) |
|
|
(183 |
) |
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
11 |
|
|
$ |
648 |
|
|
$ |
659 |
|
|
|
|
|
|
|
|
|
|
|
22
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2003 Corporate Restructuring Plan — In the fourth quarter of fiscal 2003, the Company initiated a
workforce reduction, closed a design center and consolidated some facilities. The Company
involuntarily terminated employees in the sales and administration areas and recorded charges
aggregating $1.2 million based upon estimates of the cost of severance benefits for the affected
employees. The Company also recorded restructuring costs of $2.8 million relating to the
consolidation of certain facilities under non-cancelable leases which were vacated. In fiscal
2005, as a result of favorable sublease experience, the Company reduced its facilities reserve by
$1.0 million.
Activity and liability balances related to the 2003 Corporate Restructuring Plan through December
31, 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 |
|
Credited to costs and expenses |
|
|
(81 |
) |
|
|
— |
|
|
|
(81 |
) |
Cash payments |
|
|
(1,086 |
) |
|
|
(933 |
) |
|
|
(2,019 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004 |
|
|
— |
|
|
|
1,995 |
|
|
|
1,995 |
|
Credited to costs and expenses |
|
|
— |
|
|
|
(950 |
) |
|
|
(950 |
) |
Cash payments |
|
|
— |
|
|
|
(329 |
) |
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005 |
|
|
— |
|
|
|
716 |
|
|
|
716 |
|
Cash payments |
|
|
— |
|
|
|
(144 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
— |
|
|
$ |
572 |
|
|
$ |
572 |
|
|
|
|
|
|
|
|
|
|
|
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 its
wireless communications business with Alpha Industries, Inc. to form Skyworks Solutions, Inc. In
connection with the fiscal 2002 corporate and manufacturing restructuring actions, the Company
terminated approximately 120 employees and recorded charges aggregating $2.4 million based upon
estimates of the cost of severance benefits for the affected employees. The Company completed these
actions in fiscal 2002. In addition, the Company recorded restructuring charges of $12.5 million
for costs associated with the consolidation of certain facilities and commitments under license
obligations that management determined would not be used in the future.
As part of the 2002 Corporate and Manufacturing Restructuring Plan, during the first quarter of
fiscal 2003, the Company initiated a further workforce reduction affecting 58 employees and
recorded additional charges of $1.9 million based upon estimates of the cost of severance benefits
for the affected employees. During the third quarter of fiscal 2003, the Company revised its
estimate of liabilities for severance benefits and facility costs due to unfavorable sublease
experience to date, and charged an additional $1.5 million to restructuring. In the fourth quarter
of 2003, the Company reversed $1.1 million of the estimated cost to settle the remaining commitment
under a license obligation after its favorable resolution, and increased the estimate of remaining
facility costs due to unfavorable sublease experience. In fiscal 2005, as a result of unfavorable
sublease experience, the Company increased its facilities reserve by $0.6 million.
23
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Activity and liability balances related to the 2002 Corporate and Manufacturing Restructuring Plan
through December 31, 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 |
|
Credited to costs and expenses |
|
|
(46 |
) |
|
|
— |
|
|
|
(46 |
) |
Cash payments |
|
|
(452 |
) |
|
|
(3,949 |
) |
|
|
(4,401 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004 |
|
|
— |
|
|
|
3,997 |
|
|
|
3,997 |
|
Charged to costs and expenses |
|
|
— |
|
|
|
554 |
|
|
|
554 |
|
Cash payments |
|
|
— |
|
|
|
(3,561 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005 |
|
|
— |
|
|
|
990 |
|
|
|
990 |
|
Cash payments |
|
|
— |
|
|
|
(489 |
) |
|
|
(489 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, December 31, 2005 |
|
$ |
— |
|
|
$ |
501 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
Through December 31, 2005, the Company has paid an aggregate of $69.4 million in connection
with all of its restructuring plans and has remaining accrued restructuring and reorganization
liabilities of $27.2 million, of which $4.3 million relates to workforce reductions and $22.9
million relates to facility and other costs. The Company expects to pay the amounts accrued for the
workforce reductions through fiscal 2006 and expects to pay the obligations for the non-cancelable
lease and other commitments over their respective terms, which expire at various times 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 Company’s
liquidity.
Integration (Credits) Charges
The integration credit of $0.4 million in the three months ended December 31, 2005 resulted from a
true-up of previously accrued retention bonus amounts for individuals who left the Company prior to
earning the benefit.
Integration charges of $3.5 million in the three months ended December 31, 2004 consisted of costs
committed as a result of the integration efforts of the employees, customers, operations and other
business aspects related to the merger with GlobespanVirata.
Asset Impairments
During the three months ended December 31, 2005, the Company recorded asset impairment charges of
$0.1 million related to prior facility closures.
During the three months ended December 31, 2004, the Company recorded asset impairment charges of
$0.5 million related to various operating assets which were determined to be redundant and no
longer required as a result of restructuring activities. These assets have been abandoned.
Other
During the three months ended December 31, 2005, the Company recorded other special charges of $0.3
million related to prior facility closures.
During the three months ended December 31, 2004, the Company recorded other special charges of $3.3
million, consisting primarily of $2.3 million of stock option and warrant modification charges.
24
CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Segment and Geographic 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 December
31, 2005, under the aggregation criteria set forth in SFAS No. 131, we only operate in one
reportable operating segment, broadband communications.
Under SFAS No. 131, two or more operating segments may be aggregated into a single operating
segment for financial reporting purposes if aggregation is consistent with the objective and basic
principles of SFAS No. 131, if the segments have similar economic characteristics, and if the
segments are similar in each of the following areas:
| • |
|
the nature of products and services; |
| |
| • |
|
the nature of the production processes; |
| |
| • |
|
the type or class of customer for their products and services; and |
| |
| • |
|
the methods used to distribute their products or provide their services. |
We meet each of the aggregation criteria for the following reasons:
| • |
|
the sale of semiconductor products is the only material source of revenue for each of our four operating segments; |
| |
| • |
|
the products sold by each of our operating segments use the same standard manufacturing process; |
| |
| • |
|
the products marketed by each of our operating segments are sold to similar customers; and |
| |
| • |
|
all of our products are sold through our internal sales force and common distributors. |
Because we meet each of the criteria set forth above and each of our operating segments has similar
economic characteristics, we aggregate our results of operations in one reportable operating
segment.
Net revenues by geographic area, based upon country of destination, are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Americas |
|
$ |
19,210 |
|
|
$ |
18,439 |
|
Asia-Pacific |
|
|
196,864 |
|
|
|
105,472 |
|
Europe, Middle East and Africa |
|
|
14,632 |
|
|
|
16,710 |
|
|
|
|
|
|
|
|
|
|
$ |
230,706 |
|
|
$ |
140,621 |
|
|
|
|
|
|
|
|
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 the three months ended December 31, 2005 and 2004,
no customer accounted for 10% or more of net revenues. Sales to the Company’s twenty largest
customers represented approximately 67% and 74% of net revenues for the three months ended December
31, 2005 and 2004, respectively.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This information should be read in conjunction with our unaudited condensed consolidated financial
statements and the notes thereto included in this Quarterly Report, and our audited consolidated
financial statements and notes thereto and Management’s 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, 2005.
Overview
We design, develop and sell semiconductor system solutions for use in broadband communications,
enterprise networks and digital home networks worldwide. Our expertise in mixed-signal processing,
digital signal processing and standards-based communications protocol implementation allows us to
deliver semiconductor devices and integrated systems for client, or end-customer, personal
communications access products. These products include PCs and PC peripheral products, television
set-top boxes, residential gateways, game consoles, point-of-sale (POS) terminals, multi-function
peripherals (MFPs) and other types of consumer and enterprise products. These communications
access end-products connect to audio, video, voice and data services over broadband wireline
communications networks, including digital subscriber line (DSL), cable and Ethernet, over dial-up
Internet connections, over wireless local area networks and over direct broadcast satellite,
terrestrial and fixed wireless systems. We also design, develop and sell semiconductor system
solutions used in telecommunications company central office equipment, primarily in DSL access
multiplexers.
We organize our product lines to address four primary communications end-markets. First, our
broadband access products include a comprehensive portfolio of DSL products designed for customer
premises equipment and central office applications in addition to products designed for emerging
passive optical network applications. Second, our broadband media processing products include a
variety of broadcast audio and video decoder and encoder devices as well as front-end
communications components that enable the capture, display, storage, playback and transfer of audio
and video content in digital home and small office products such as PCs, television set-top boxes,
gaming consoles, personal video recorders and digital versatile disk (DVD) applications. Third,
our universal and voice access products include a broad portfolio of analog modem chipsets and
software for desktop and notebook PC applications as well as embedded equipment applications,
including fax machines, MFPs, POS terminals, television set-top boxes, gaming consoles and Internet
terminals. This product area also includes our voice-over-Internet protocol (VoIP) products
designed to accommodate the transmission of voice traffic within broadband IP packet-based
networks. And fourth, our wireless networking products include various combinations of radio
frequency transceivers, analog base-band integrated circuits, and digital base-band and medium or
media access controller (MAC) chips that comply with the various configurations of the 802.11
wireless local area networking (WLAN) standard.
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 33% of net revenues
in the first quarter of fiscal 2006, as compared to 26% for the similar period of fiscal 2005. No
customer accounted for 10% of our net revenues in the first quarters of fiscal 2006 or 2005. Our
top 20 customers accounted for approximately 67% and 74% of net revenues for the first quarters of
fiscal 2006 and 2005, respectively. Revenues derived from customers located in the Asia-Pacific
region, the Americas, and Europe were 86%, 8%, and 6%, respectively, of our net revenues for the
first quarter of fiscal 2006, and 75%, 13%, and 12%, respectively, of our net revenues for the
first quarter 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.
26
Results of Operations
Net Revenues
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Change from |
|
Change from |
| |
|
December 31, |
|
September 30, |
|
December 31, |
|
September 2005 |
|
December 2004 |
| (in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Net revenues |
|
$ |
230.7 |
|
|
$ |
214.9 |
|
|
$ |
140.6 |
|
|
|
7 |
% |
|
|
64 |
% |
Net revenues increased 7% in the first quarter of fiscal 2006 compared to the fourth quarter of
fiscal 2005 primarily as a result of a 15% increase in unit volume shipments, driven by demand in
our broadband media business as satellite set-top box (STB) design wins begin to ramp into
production and stronger-than-anticipated demand in the PC market of the universal access business.
This increase in unit volume shipments was offset by average selling price (ASP) erosion. We
expect revenues to increase in the second quarter of fiscal 2006 as a result of continued growth in
our broadband media business as additional satellite STB designs ramp into production both
domestically and internationally.
Net revenues increased 64% in the first quarter of fiscal 2006 compared to the first quarter of
fiscal 2005. 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 quarter ended December 31, 2004, we reduced channel inventory at our distributors by
approximately $40.0 million, and we believe that there was an approximate $10.0 million reduction
of channel inventory at our direct customers. Excluding this approximate $50.0 million channel
inventory reduction, net revenues would have increased approximately $40.0 million, or 21% in the
first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005. This $40.0 million
increase is primarily a result of increased demand in our (i) broadband media processing business
due to the factors described above and (ii) broadband access business as a result of a return to
strong demand in the China market, where demand for our broadband access products had significantly
slowed in the second half of calendar 2004.
Gross Margin
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Change from |
|
Change from |
| |
|
December 31, |
|
September 30, |
|
December 31, |
|
September 2005 |
|
December 2004 |
| (in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Gross margin |
|
$ |
95.8 |
|
|
$ |
86.6 |
|
|
$ |
7.2 |
|
|
|
11 |
% |
|
|
1,238 |
% |
Percent of net revenues |
|
|
42 |
% |
|
|
40 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
27
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, royalties,
amortization of production photo mask costs, other intellectual property costs, labor and overhead
associated with product procurement, and non-cash stock-based compensation charges for procurement
personnel.
Our gross margin percentage for the first quarter of fiscal 2006 was 42% compared with 40% for the
fourth quarter of fiscal 2005. This gross margin percentage increase is attributable to continuing
benefits from our manufacturing cost-reduction initiatives, which more than offset the impact of
ASP erosion. Our gross margin was negatively impacted by $1.8 million and $1.6 million of net
inventory reserve additions in the first quarter of fiscal 2006 and the fourth quarter of fiscal
2005, respectively.
Our gross margin percentage for the first quarter of fiscal 2005 was 5% of net revenues. This
gross margin percentage includes the effects of $45.0 million of inventory charges, which were
recorded against cost of goods sold, and $7.9 million of a reduction to revenue to adjust revenue
reserves maintained by us to estimate customer pricing adjustments. Excluding these charges and
adjustments, our gross margin percentage for the first quarter of fiscal 2005 would have been 40%,
compared to a gross margin percentage of 42% in the first quarter of fiscal 2006. The higher gross
margin percentage in the first quarter of fiscal 2006 is due to the benefits of our manufacturing
cost-reduction initiatives.
We assess the recoverability of our inventories at least quarterly through a review of inventory
levels in relation to foreseeable demand, generally over twelve months. Foreseeable demand is based
upon all available information, including sales backlog and forecasts, product marketing plans and
product life cycle information. When the inventory on hand exceeds the foreseeable demand, we write
down the value of those inventories which, at the time of our review, we expect to be unable to
sell. The amount of the inventory write-down is the excess of historical cost over estimated
realizable value. Once established, these write-downs are considered 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 three months
ended December 31, 2005 and 2004, we recorded $2.6 million and $28.2 million, respectively, in
inventory charges for excess and obsolete (E&O) inventory. The $28.2 million charge recorded in
the first quarter of fiscal 2005 was primarily as a result of the reduced demand outlook for fiscal
year 2005 related to our broadband access and wireless networking products. Activity in our E&O
inventory reserves for the three months ended December 31, 2005 and 2004 was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| (in millions) |
|
2005 |
|
|
2004 |
|
E&O reserves at beginning of period |
|
$ |
44.8 |
|
|
$ |
23.3 |
|
Additions |
|
|
2.6 |
|
|
|
28.2 |
|
Release upon sales of product |
|
|
(3.0 |
) |
|
|
— |
|
Scrap |
|
|
(1.6 |
) |
|
|
— |
|
Standards adjustments and other |
|
|
(0.6 |
) |
|
|
— |
|
|
|
|
|
|
|
|
E&O reserves at end of period |
|
$ |
42.2 |
|
|
$ |
51.5 |
|
|
|
|
|
|
|
|
We have created an action plan at a product line level to scrap approximately 20% of the
remaining 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.
28
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 supplier’s components into a product, substituting another
supplier’s 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 three months ended
December 31, 2005 and 2004, we recorded $3.0 million and $18.9 million, respectively, 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 months ended December 31,
2005 and 2004 was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| (in millions) |
|
2005 |
|
|
2004 |
|
LCM reserves at beginning of period |
|
$ |
6.7 |
|
|
$ |
— |
|
Additions |
|
|
3.0 |
|
|
|
18.9 |
|
Release upon sales of product |
|
|
(0.8 |
) |
|
|
— |
|
|
|
|
|
|
|
|
LCM reserves at end of period |
|
$ |
8.9 |
|
|
$ |
18.9 |
|
|
|
|
|
|
|
|
Research and Development
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Change from |
|
Change from |
| |
|
December 31, |
|
September 30, |
|
December 31, |
|
September 2005 |
|
December 2004 |
| (in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Research and development |
|
$ |
64.4 |
|
|
$ |
58.6 |
|
|
$ |
72.5 |
|
|
|
10 |
% |
|
|
(11 |
)% |
Percent of net revenues |
|
|
28 |
% |
|
|
27 |
% |
|
|
52 |
% |
|
|
|
|
|
|
|
|
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 advanced package
development and non-cash stock-based compensation charges for R&D personnel.
When compared to the immediately preceding quarter, R&D expenses for the first quarter of fiscal
2006 increased $5.7 million. The increase is primarily due to a $3.0 million increase in non-cash
stock-based compensation expense due to our adoption of Statement of
Financial Accounting Standards (SFAS) No. 123(R),
“Share-Based Payment,” in the first quarter
of fiscal 2006, a $1.5 million increase in compensation related expenses primarily as a result of
higher incentive-based performance costs, and a $1.1 million increase in project related expenses.
The $8.2 million decrease in R&D expenses for the first quarter of fiscal 2006 compared to the
similar period of fiscal 2005 is primarily due to our restructuring efforts which streamlined R&D
projects and shifted resources to lower cost regions. These decreases were partially offset by a
$3.0 million increase in non-cash stock-based compensation expense due to our implementation of
SFAS No. 123(R) in the first quarter of fiscal 2006.
29
Selling, General and Administrative
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Change from |
|
Change from |
| |
|
December 31, |
|
September 30, |
|
December 31, |
|
September 2005 |
|
December 2004 |
| (in millions) |
|
2005 |
|
2005 |
|
2004 |
|
Quarter |
|
Quarter |
Selling, general and administrative |
|
$ |
38.6 |
|
|
$ |
28.4 |
|
|
$ |
30.0 |
|
|
|
36 |
% |
|
|
29 |
% |
Percent of net revenues |
|
|
17 |
% |
|
|
13 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
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-based compensation charges for SG&A personnel.
When compared to the immediately preceding quarter, SG&A expenses for the first quarter of fiscal
2006 increased $10.2 million. This increase is primarily attributable to an $8.0 million
increase in non-cash stock-based compensation expense due to our
implementation of SFAS No. 123(R)
in the first quarter of fiscal 2006, a $1.9 million increase in
legal fees primarily related to on-going
intellectual property litigation, and a $1.4 million increase in incentive-based performance costs.
These increases were partially offset by a $1.0 million reduction of our accounts receivable bad
debt expense as a result of improved collections experience.
The $8.6 million increase in SG&A expenses for the first quarter of fiscal 2006 compared to the
same period of fiscal 2005 is primarily attributable to an $8.0 million increase in non-cash
stock-based compensation expense due to our adoption of SFAS No. 123(R) in the first fiscal
quarter of 2006 and a $2.6 million increase in legal fees
primarily related to on-going intellectual
property litigation. These increases were partially offset by decreases in various other expenses
as a result of our restructuring efforts and expense reduction initiatives.
Amortization of Intangible Assets
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
December 31, |
|
December 31, |
| (in millions) |
|
2005 |
|
2004 |
Amortization of intangible assets |
|
$ |
7.9 |
|
|
$ |
8.3 |
|
Amortization of intangible assets consists of amortization expense for intangible assets
acquired in various business combinations. Our intangible assets are being amortized over a
weighted-average period of approximately five years.
The decreased amortization expense for the first quarter of fiscal 2006 compared to the similar
period in fiscal 2005 is primarily attributable to several intangible assets becoming fully
amortized during fiscal 2005.
Special Charges
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| (in millions) |
|
2005 |
|
|
2004 |
|
Restructuring charges |
|
$ |
0.9 |
|
|
$ |
12.0 |
|
Asset impairment charges |
|
|
0.1 |
|
|
|
0.5 |
|
Integration (credits) charges |
|
|
(0.4 |
) |
|
|
3.5 |
|
Other special charges |
|
|
0.3 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
$ |
0.9 |
|
|
$ |
19.3 |
|
|
|
|
|
|
|
|
Restructuring charges in the first quarter of fiscal 2006 related to our November 2005
announcement of an operating site closure and the related employee severance and other termination benefit costs of $0.3 million,
as well as adjustments to accruals for previous restructuring actions totaling $0.6 million.
Restructuring charges in the first quarter of fiscal 2005 primarily related
to the restructuring actions initiated in November 2004, which included employee severance and other termination benefit costs of
$6.1 million, as well as charges of $4.0 million related to facility closures. Restructuring charges in the first quarter of
fiscal 2005 also included adjustments to accruals for previous restructuring actions totaling $1.9 million. In the first quarter
of fiscal 2005, integration charges consisted of costs committed as a result of the integration efforts of the employees, customers,
operations and other business aspects related to the merger with GlobespanVirata, and other special charges consisted primarily of stock
option and warrant modification charges.
30
Interest Expense
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
December 31, |
|
December 31, |
| (in millions) |
|
2005 |
|
2004 |
Interest expense |
|
$ |
8.8 |
|
|
$ |
8.4 |
|
Interest expense is primarily related to our convertible subordinated notes and, beginning in
the first quarter of fiscal 2006, to borrowings under a new credit
facility. See Liquidity and Capital Resources for further information
regarding the new credit facility.
Other (Income) Expense, Net
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
| (in millions) |
|
2005 |
|
|
2004 |
|
Investment and interest income |
|
$ |
(3.3 |
) |
|
$ |
(0.5 |
) |
Decrease (increase) in fair value of the Mindspeed warrant |
|
|
4.3 |
|
|
|
(14.8 |
) |
Losses of equity method investments |
|
|
2.1 |
|
|
|
3.1 |
|
Gains on sales of equity securities |
|
|
(3.8 |
) |
|
|
— |
|
Other |
|
|
(0.6 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(1.3 |
) |
|
$ |
(11.2 |
) |
|
|
|
|
|
|
|
Other (income) expense, net for the first quarter of fiscal 2006 was primarily comprised of
$3.8 million of gains on sales of investments and assets and $3.3 million of investment and
interest income on invested cash balances, partially offset by a $4.3 million decrease in the fair value of
the Mindspeed warrant and $2.1 million of losses from our equity method investments.
Other (income) expense, net for the first quarter of fiscal 2005 was primarily comprised of a $14.8
million increase in the fair value of the Mindspeed warrant,
partially offset by $3.1 million of losses from
our equity method investments.
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 $0.7 million and $0.5 million for the first quarters of fiscal
2006 and 2005, respectively, primarily reflecting income taxes imposed on our foreign subsidiaries.
No U.S. Federal income tax expense was recorded for the first quarters of fiscal 2006 or 2005 due
to our net losses for the periods. Except to the extent of the Federal alternative minimum tax
(AMT), we expect this will continue for the foreseeable future. We do not expect to recognize any
income tax benefits relating to future operating losses until we believe that such tax benefits are
more likely than not to be realized. Under the AMT system, a current year deduction is somewhat
more beneficial than utilization of a net operating loss (NOL). During fiscal 2005, to reduce our
future expected AMT, we amended certain prior year tax returns and elected to capitalize and
amortize over 10 years $581.0 million of R&D expenses that were treated as current year deductions
on the returns previously filed. These amended returns reduced the $1.75 billion of NOLs
previously reported. This adjustment was made for tax reporting purposes and had no impact on the
accompanying consolidated financial statements.
As of December 31, 2005, we had $1.2 billion of fully reserved deferred tax assets which are
available to offset future tax obligations, of which approximately $440.0 million were acquired in
business combinations, and if we receive a tax benefit from their utilization, the benefit will be
recorded as a reduction to goodwill. The deferred tax assets acquired in the merger with
GlobespanVirata 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.
31
We are subject to income taxes in both the United States and numerous foreign jurisdictions and
have also acquired and divested certain businesses for which we have retained certain tax
liabilities. In the ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain and significant judgment is required in
determining our worldwide provision for income taxes. We and our acquired and divested businesses
are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable,
the final determination of tax audits could be different than that which is reflected in historical
income tax provisions and accruals. Based on the results of an audit, a material effect on our
income tax provision, net income, or cash flows in the period or periods for which that
determination is made could result.
Liquidity and Capital Resources
Our cash and cash equivalents increased by $96.5 million during the first quarter of fiscal 2006.
Cash provided by operating activities was $30.0 million for the first quarter of fiscal 2006,
compared to cash used in operating activities of $16.1 million for the comparable period in fiscal
2005. Cash flows generated from operations during the first quarter of fiscal 2006 were $19.3
million, an additional $17.5 million was generated as a result of favorable changes in accounts
receivable, inventories and accounts payable (exclusive of related provisions), offset by $6.8
million of payments related to special charges and other restructuring related items. The
favorable changes in working capital were driven by (i) improved days sales outstanding from 37
days at the end of fiscal 2005 to 33 days at the end of the first quarter of fiscal 2006 and (ii)
improved inventory turns from 5.4 turns in the fourth quarter of fiscal 2005 to 6.8 turns at the
end of the first quarter of fiscal 2006. During the first quarter of fiscal 2005, cash generated
from operations was $4.0 million, excluding the impact of an $8.0 million payment to Agere Systems,
Inc. for the settlement of patent litigation and $12.0 million of payments related to special
charges and other restructuring related items. The $4.0 million of cash generated from operations
was primarily the result of more than $50.0 million of favorable changes in accounts receivable,
inventories and accounts payable, offset by losses generated during the first quarter of fiscal
2005.
Cash used in investing activities was $10.7 million for the first quarter of fiscal 2006 compared
to cash provided by investing activities of $8.8 million for the comparable period in fiscal 2005.
The net cash used in investing activities in the first quarter of fiscal 2006 was attributable to
$7.5 million of restricted cash as required under our new credit facility, capital
expenditures of $5.8 million primarily due to our expansion efforts in India and China, net
purchases of marketable securities of $1.1 million, and investments in privately-held companies of
$1.0 million, partially offset by proceeds from sales of equity securities of $4.7 million. The
cash provided by investing activities in the first quarter of fiscal 2005 resulted from net
proceeds of $27.1 million from sales and maturities of marketable securities, partially offset by
net cash paid for the Paxonet acquisition of $14.5 million, capital expenditures of $2.1 million,
and investments in privately-held companies of $1.8 million.
Cash provided by financing activities was $77.2 million and $0.6 million for the first quarters of
fiscal 2006 and 2005, respectively. The cash provided by financing activities in in the first
quarter of fiscal 2006 consisted of net proceeds of
$75.5 million from our new credit facility and $1.7
million of proceeds from the issuance of common stock. The cash provided by financing activities
in the first quarter of fiscal 2005 consisted of $0.4 million of proceeds from the issuance of
common stock and $0.2 million from the repayment of an employee loan.
As of December 31, 2005, our principal sources of liquidity are our existing cash reserves and
marketable securities, cash generated from product sales, our investments in third parties, such as
Jazz, and our Mindspeed warrant. All amounts related to the value of the Mindspeed
warrant are reflected as long-term on our condensed consolidated balance sheet. Further, Jazz is a
privately-held company and, as a result, our ability to liquidate this investment is limited. Our
working capital at December 31, 2005 was $97.8 million compared to $125.9 million at September 30,
2005. The decrease in working capital is primarily attributable to a $12.8 million increase in our
long-term marketable securities, which decreased our short-term portfolio, due to the purchase of
debt securities with longer stated maturities. Working capital also decreased due to higher
accrued expense levels, in part due to accruals for increased legal fees and contingent
consideration for business combinations. We expect our working capital to become negative as the
remaining portion of our long-term convertible notes will be reclassified to short-term during the
quarter ended March 31, 2006.
32
Total cash, cash equivalents and marketable securities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| (in millions) |
|
2005 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
299.2 |
|
|
$ |
202.7 |
|
Short-term marketable debt securities (primarily
domestic government agency securities and corporate
debt securities) |
|
|
84.1 |
|
|
|
95.9 |
|
Long-term marketable debt securities (primarily
domestic government agency securities and corporate
debt securities) |
|
|
51.3 |
|
|
|
38.5 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
434.6 |
|
|
|
337.1 |
|
|
|
|
|
|
|
|
Short-term marketable equity securities (6.2 million
shares of Skyworks Solutions, Inc. at December 31,
2005 and September 30, 2005) |
|
|
31.5 |
|
|
|
43.4 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
466.1 |
|
|
$ |
380.5 |
|
|
|
|
|
|
|
|
Included in our cash, cash equivalents and marketable securities of $466.1 million as of
December 31, 2005 are 6.2 million shares of common stock of Skyworks Solutions, Inc. valued at
$31.5 million. For these securities, there is risk associated with the overall state of the stock
market, having available buyers for the shares we may want to sell, and ultimately being able to
liquidate the securities at a favorable price. There can be no assurance that the carrying value
of these assets will ultimately be realized.
The fair value of the Mindspeed warrant at December 31, 2005 was $28.8 million and is not included
in the above total for cash, cash equivalents and marketable securities. The valuation of this
derivative instrument is subjective, and at any point in time could ultimately result in the
realization of amounts significantly different than the carrying value. Further, there is no
assurance that the equity markets would allow us to liquidate a substantial portion of these
warrants within a short time period without significantly impacting the market value.
We believe that our existing sources of liquidity, together with cash expected to be generated from
product sales, will be sufficient to fund our operations, research and development, anticipated
capital expenditures, working capital and other financing requirements, including the current
portion of our long-term debt, through at least December 31, 2006. At December 31, 2005, we had
$711.8 million aggregate principal amount of convertible subordinated notes outstanding, of which
$196.8 million is due in May 2006 and $515.0 million is due in February 2007. The conversion
prices of the notes are currently substantially in excess of the market value of our common stock.
In November 2005, we established an $80.0 million credit
facility with a bank, under which we had borrowed $76.6 million
as of December 31, 2005. This credit facility has a term of
364 days, with 364-day renewal periods at the sole discretion of
the bank. At December 31, 2005, we have cash, cash equivalents
and marketable securities of $466.1 million. If we are unable to generate sufficient cash flows
from our operations and realize additional value from our investments and other assets, we may be
unable to meet our February 2007 debt obligations without additional financing. We cannot assure
you that we will have access to additional sources of capital, or be able to refinance our debt, on
favorable terms or at all.
The following summarizes our contractual obligations at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period |
|
| |
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
| (in millions) |
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Long-term debt |
|
$ |
711.8 |
|
|
$ |
196.8 |
|
|
$ |
515.0 |
|
|
$ |
— |
|
|
$ |
— |
|
Short-term debt |
|
|
76.6 |
|
|
|
76.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest on
debt |
|
|
41.4 |
|
|
|
29.5 |
|
|
|
11.9 |
|
|
|
— |
|
|
|
— |
|
Operating leases |
|
|
184.1 |
|
|
|
25.0 |
|
|
|
51.1 |
|
|
|
30.8 |
|
|
|
77.2 |
|
Assigned leases |
|
|
6.6 |
|
|
|
2.6 |
|
|
|
1.8 |
|
|
|
1.3 |
|
|
|
0.9 |
|
Capital commitments |
|
|
4.9 |
|
|
|
4.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,025.4 |
|
|
$ |
335.4 |
|
|
$ |
579.8 |
|
|
$ |
32.1 |
|
|
$ |
78.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had many sublease arrangements on operating leases for terms
ranging from near term to approximately ten years. Aggregate scheduled sublease income based on
current terms is approximately $35.7 million.
33
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of conventional operating leases and capital
commitments. We also have contingent liabilities for other items assigned to Mindspeed and
Skyworks at the time of their separation from the Company. See Note 5 of Notes to Condensed
Consolidated Financial Statements. We do not have any variable interest entities as of December
31, 2005.
In connection with our acquisition of Amphion Semiconductor, we guaranteed the value of the 600,000 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 our common stock does
not equal or exceed $10.00 for at least five consecutive trading days during this period,
we would be required to make an additional payment (in cash or additional shares of common stock at our 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.
Special Purpose Entities
We have one special purpose entity, Conexant USA, LLC, which was formed in September 2005 in
anticipation of establishing an accounts receivable financing facility. This special purpose
entity is a wholly-owned, consolidated subsidiary of the Company. Neither Conexant USA’s assets
nor its credit may be used to satisfy the obligations of the Company or any other subsidiaries of
the Company.
On November 29, 2005, we established an accounts receivable financing facility whereby we will
sell, from time to time, certain insured accounts receivable to Conexant USA, and Conexant USA
entered into an $80.0 million revolving credit agreement with a bank which is secured by the assets
of the special purpose entity. See Note 3 of Notes to Condensed Consolidated Financial Statements
for further information.
Recent Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.” This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement of an impairment
loss. This FSP also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 124, “Accounting
for Certain Investments Held by Not-for-Profit Organizations,” and Accounting Principles Board
(APB) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” This FSP
is effective for reporting periods beginning after December 15, 2005. We do not expect that the
adoption of this FSP will have a material impact on our financial position or results of
operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which
replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting
principles and requires retrospective application (a term defined by the statement) to prior
periods’ financial statements, unless it is impracticable to determine the effect of a change. It
also applies to changes required by an accounting pronouncement that does not include specific
transition provisions. SFAS No. 154 is effective for fiscal years beginning after December 15,
2005. We will adopt SFAS No. 154 on October 1, 2006 and do not expect that the adoption will have a
material impact on our financial position or results of operations.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Among the significant estimates affecting our consolidated financial statements are those relating
to revenue recognition, 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, stock-based compensation,
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.
34
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 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.
35
Inventories
We assess the recoverability of our inventories at least quarterly through a review of inventory
levels in relation to foreseeable demand, generally over twelve months. Foreseeable demand is based
upon all available information, including sales backlog and forecasts, product marketing plans and
product life cycle information. When the inventory on hand exceeds the foreseeable demand, we write
down the value of those inventories which, at the time of our review, we expect to be unable to
sell. The amount of the inventory write-down is the excess of historical cost over estimated
realizable value. Once established, these write-downs are considered 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 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 investee’s financial condition, the business
outlook for its products and technology, its projected results and cash flows, the likelihood of
obtaining subsequent rounds of financing and the impact of any relevant contractual equity
preferences held by us or by others. Overall business valuations have declined significantly over
the past two years, and as a result we have experienced substantial impairments in the value of
non-marketable equity securities investments we hold. Future adverse changes in market conditions
or poor operating results of underlying investments could result in an inability to recover the
carrying value of our investments that may not be reflected in their current carrying values, which
could require additional impairment charges to write down the carrying values of such investments.
Revenue 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 or for whom the
contractual terms were not enforced. Revenue with respect to these distributors is deferred until
the purchased products are sold 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.
36
Conexant has many distributor customers for whom revenue is recognized upon its shipment of product
to them, as the contractual terms provide for limited or no rights of return. During the three
months ended December 31, 2004, we determined that we were unable to enforce our contractual terms
with three distribution customers. As a result, from October 1, 2004, we have deferred the
recognition of revenue on sales to these three distributors until the purchased products are sold
by the distributors to a third party. At December 31, 2005, deferred revenue for these three
distributors was $6.0 million.
Valuation of derivative instruments
Our derivative instruments consist of a warrant to purchase shares of common stock of Mindspeed.
The fair value of the Mindspeed warrant is determined using a standard Black-Scholes-Merton
valuation model with assumptions consistent with current market conditions and our intent to
liquidate the warrant over a specified time period. The Black-Scholes-Merton valuation 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
From time to time we announce restructuring activities and record related charges in our
consolidated statements of operations. To date, these charges have related primarily to reductions
in our workforce and related impact on the use of facilities. The estimated charges contain
estimates and assumptions made by management about matters which are uncertain at the time that the
assumptions are made, for example the timing and amount of sublease income that will be achieved on
vacated property and the operating costs to be paid until lease termination, and the discount rates
used in determining the present value (fair value) of remaining minimum lease payments on vacated
properties. While we have used our best estimates based on facts and circumstances available at
the time, different estimates reasonably could have been used in the relevant periods, and the
actual results may be different, and those differences could have a material impact on the
presentation of our financial position 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 rates used are
representative of high-quality fixed income investments. The other assumptions do not tend to
change materially over time. We evaluate all assumptions annually and they are updated to reflect
our experience.
Stock-based compensation
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” This pronouncement amends
SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that companies account for
awards of equity instruments issued to employees under the fair value method of accounting and
recognize such amounts in their statements of operations. We adopted SFAS No. 123(R) on October 1,
2005 using the modified prospective method and, accordingly, have not restated the consolidated
statements of operations for prior interim periods or fiscal years. Under SFAS No. 123(R), we are
required to measure compensation cost for all stock-based awards at fair value on the date of grant
and recognize compensation expense in our consolidated statements of operations over the service
period that the awards are expected to vest. As permitted under SFAS No. 123(R), we have elected
to recognize compensation cost for all options with graded vesting granted on or after October 1,
2005 on a straight-line basis over the vesting period of the entire option. For options with
graded vesting granted prior to October 1, 2005, we will continue to recognize compensation cost
over the vesting period following the accelerated recognition method described in FASB
Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans,” as if each underlying vesting date represented a separate option grant.
37
Prior to the adoption of SFAS No. 123(R), we accounted for employee stock-based compensation using
the intrinsic value method in accordance with APB Opinion No. 25, as permitted by SFAS No. 123 and
SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the
intrinsic value method, the difference between the market price on the date of grant and the
exercise price is charged to the statement of operations over the vesting period. Prior to the
adoption of SFAS No. 123(R), we recognized compensation cost only for stock options issued with
exercise prices set below market prices on the date of grant, which consisted principally of stock
options granted to replace stock options of acquired businesses, and
provided the necessary pro forma disclosures required under SFAS
No. 123.
Under SFAS No. 123(R), we now record in our consolidated statements of operations (i) compensation
cost for options granted, modified, repurchased or cancelled on or after October 1, 2005 under the
provisions of SFAS No. 123(R) and (ii) compensation cost for the unvested portion of options
granted prior to October 1, 2005 over their remaining vesting periods using the amounts previously
measured under SFAS No. 123 for pro forma disclosure purposes. During the three months ended
December 31, 2005, we recognized compensation expense of $13.2 million for stock options and $1.1
million for employee stock purchase plan awards in our consolidated statement of operations. Under
the transition provisions of SFAS No. 123(R), we have recognized a cumulative effect of a change in
accounting principle to reduce additional paid-in capital by $20.7 million, consisting of (i) the
remaining $12.5 million deferred stock-based compensation balance as of October 1, 2005, primarily
accounted for under APB Opinion No. 25, and (ii) the $8.2 million difference between the remaining
$12.5 million deferred stock-based compensation balance as of October 1, 2005 for the options
issued in our business combinations and the remaining unamortized grant-date fair value of these
options, which also reduced goodwill.
Consistent with the valuation method for the disclosure-only provisions of SFAS No. 123, we are
using the Black-Scholes-Merton model to value the compensation expense associated with stock-based
awards under SFAS No. 123(R). In addition, forfeitures are estimated when recognizing compensation
expense, and the estimate of forfeitures will be adjusted over the requisite service period to the
extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in
estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of
change and will also impact the amount of compensation expense to be recognized in future periods.
The
Black-Scholes-Merton model requires certain assumptions to determine
an option fair value, including expected stock price volatility,
risk-free interest rate, and expected life of the option. The expected stock price volatility rates are based on the historical volatility of our common
stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected life of the option or award. The average
expected life represents the weighted average period of time that options or awards granted are
expected to be outstanding, as calculated using the simplified method
described in the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107.
Risk Factors
Our business, financial condition and operating results can be impacted by a number of risk
factors, any one of which could cause our actual results to vary materially from recent results or
from our anticipated future results. Any of these risks could materially and adversely affect our
business, financial condition and results of operations, which in turn could materially and
adversely affect the price of our common stock or other securities.
References in this section to Conexant’s fiscal year refer to the fiscal year ending on the Friday
nearest September 30 of each year.
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, including our
current litigation with Texas Instruments, Inc. et al. in which trial
has commenced, results in an adverse ruling we could be
required to:
| |
• |
|
pay substantial damages; |
| |
| |
• |
|
cease the manufacture, use or sale of infringing products; |
| |
| |
• |
|
discontinue the use of infringing technology; |
| |
| |
• |
|
expend significant resources to develop non-infringing technology; or |
| |
| |
• |
|
license technology from the third party claiming infringement, which license may not
be available on commercially reasonable terms, or at all. |
38
We face a risk that capital needed for our business and to repay our convertible notes will not be
available when we need it.
At
December 31, 2005, we had $711.8 million aggregate principal amount of convertible subordinated
notes outstanding, of which $196.8 million is due in May 2006 and $515.0 million is due in February
2007. The conversion prices of the notes are currently substantially in excess of the market value
of our common stock. We also have $76.6 million of short-term debt which expires in November 2006
and is subject to extension at the discretion of the lender. At December 31, 2005, we had cash,
cash equivalents and marketable securities of $466.1 million. We
expect our working capital to become negative as the remaining
portion of our long-term convertible notes will be reclassified to
short-term during the quarter ended March 31, 2006. If we are unable to generate
sufficient cash flows from our operations and realize additional value from our investments and
other assets, we may be unable to meet our February 2007 debt obligations without additional
financing. We cannot assure you that we will have access to additional sources of capital, or be
able to refinance our debt, on favorable terms or at all. In periods of a depressed stock price,
raising capital through the equity markets would have a greater effect on shareholder dilution.
Included in our cash, cash equivalents and marketable securities of $466.1 million as of December
31, 2005 are 6.2 million shares of common stock of Skyworks Solutions, Inc. valued at $31.5
million. For these securities, there is risk associated with the overall state of the stock
market, having available buyers for the shares we may want to 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.
The value of our common stock may be adversely affected by market volatility.
The trading price of our common stock fluctuates significantly and may be influenced by many
factors, including:
| |
• |
|
our operating and financial performance and prospects; |
| |
| |
• |
|
our ability to repay our debt; |
| |
| |
• |
|
the depth and liquidity of the market for our common stock; |
| |
| |
• |
|
investor perception of us and the industry and markets in which we operate; |
| |
| |
• |
|
our inclusion in, or removal from, any equity market indices; |
| |
| |
• |
|
the level of research coverage of our common stock; |
| |
| |
• |
|
changes in earnings estimates or buy/sell recommendations by analysts; |
| |
| |
• |
|
general financial, domestic, international, economic and
other market conditions; and |
| |
| |
• |
|
judgments favorable or adverse to us. |
In addition, public stock markets have experienced, and are currently experiencing, price and
trading volume volatility, particularly in the technology sectors of the market. This volatility
has significantly affected the market prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately impacted by the operating performance of these
companies. These broad market fluctuations may adversely affect the market price of our common
stock.
We have recently incurred substantial losses and we anticipate additional future losses.
Our net losses for the first three months of fiscal 2006 and for fiscal 2005 were $24.3 million and
$176.0 million, respectively.
We have implemented a number of expense reduction and restructuring initiatives to improve our
operating cost structure. The cost reduction initiatives included workforce reductions, the
closure or consolidation of certain facilities and an increasing shift of product development
resources to lower-cost regions, among other actions. However, these expense reduction initiatives
alone will not return us to profitability. In order to return to profitability, we must achieve
substantial revenue growth. We cannot assure you as to whether or when we will return to
profitability or whether we will be able to sustain such profitability, if achieved.
We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns.
The semiconductor industry is highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price erosion, evolving technical standards,
short product life cycles and wide fluctuations in product supply and demand. From time to time
these and other factors, together with changes in general economic conditions, cause significant
upturns and downturns in the industry, and in our business in particular. Periods of industry
downturns have been characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. These factors have caused
substantial fluctuations in our revenues and results of operations. We have experienced these
cyclical fluctuations in our business in the past and may experience them in the future.
Demand for our products in each of the communications electronics end-markets which we address is
subject to a unique set of factors, and a downturn in demand affecting one market may be more
pronounced, or last longer, than a downturn affecting another of our markets.
39
Our operating results may be negatively affected by substantial quarterly and annual fluctuations
and market downturns.
Our revenues, earnings and other operating results have fluctuated in the past and 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, financial 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.
40
Current and potential competitors also have established or may establish financial or strategic
relationships among themselves or with our existing or potential customers, resellers or other
third parties. These relationships may affect customers’ purchasing decisions. Accordingly, it is
possible that new competitors or alliances could emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against current and
potential competitors.
The loss of a key customer could seriously impact our revenue levels and harm our business. In
addition, if we are unable to continue to sell existing and new products to our key customers in
significant quantities or to attract new significant customers, our future operating results could
be adversely affected.
We have derived a substantial portion of our past revenue from sales to a relatively small number
of customers. As a result, the loss of any significant customer could materially and adversely
affect our financial condition and results of operations.
Sales to our twenty largest customers represented approximately 67% and 64% of our net revenues in
the first fiscal quarter of 2006 and for fiscal 2005, respectively. We expect that our largest
customers will continue to account for a substantial portion of our net revenue in future periods.
The identities of our largest customers and their respective contributions to our net revenue have
varied and will likely continue to vary from period to period. We may not be able to maintain or
increase sales to certain of our key customers for a variety of reasons, including the following:
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most of our customers can stop incorporating our products into their own products with limited notice
to us and suffer little or no penalty; |
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our agreements with our customers typically do not require them to purchase a minimum quantity of our
products; |
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many of our customers have pre-existing or concurrent relationships with our current or
potential competitors that may affect the customers’ decisions to purchase our products; |
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our customers face intense competition from other manufacturers that do not use our products; and |
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some of our customers offer or may offer products that compete with our products. |
In addition, our longstanding relationships with some larger customers may also deter other
potential customers who compete with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain customers favorable prices on our
products. The loss of a key customer, a reduction in sales to any key customer or our inability to
attract new significant customers could seriously impact our revenue and materially and adversely
affect our results of operations.
Our success depends on our ability to timely develop competitive new products and reduce costs.
Our operating results will depend largely on our ability to continue to introduce new and enhanced
semiconductor products on a timely basis. Successful product development and introduction depends
on numerous factors, including, among others:
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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 our sites,
particularly into India and China. |
41
As a result of the Paxonet Communications acquisition in December 2004 and organic growth, we have
increased our headcount in India from approximately 180 employees to approximately 770 employees at
several design centers since the end of fiscal 2004. We plan to continue this growth trend in
India and other international locations in the Asia-Pacific region. Expansion and transition of
product development efforts to other locations entails risks associated with our ability to manage
the development of products at remote geographic locations, to achieve key program milestones, and
to attract and retain qualified management, technical and other personnel necessary for the design
and development of our products. If we experience product design or development delays as a result
of the transition, or an inability to adequately staff the programs, there could be a material
adverse effect on our results of operations.
We cannot assure you that we will have sufficient resources to make the substantial investment in
research and development in order to develop and bring to market new and enhanced products.
Furthermore, we are required to continually evaluate expenditures for planned product development
and to choose among alternative technologies based on our expectations of future market growth. We
cannot assure you that we will be able to develop and introduce new or enhanced products in a
timely and cost-effective manner, that our products will satisfy customer requirements or achieve
market acceptance, or that we will be able to anticipate new industry standards and technological
changes. We also cannot assure you that we will be able to respond successfully to new product
announcements and introductions by competitors.
In addition, prices of established products may decline, sometimes significantly and rapidly, over
time. We believe that in order to remain competitive we must continue to reduce the cost of
producing and delivering existing products at the same time that we develop and introduce new or
enhanced products. We cannot assure you that we will be successful and as a result gross margins
may decline in future periods.
Our success depends, in part, on our ability to effect suitable investments, alliances and
acquisitions.
Although we invest significant resources in research and development activities, the complexity and
speed of technological changes make it impractical for us to pursue development of all
technological solutions on our own. On an ongoing basis, we review investment, alliance and
acquisition prospects that would complement our existing product offerings, augment our market
coverage or enhance our technological capabilities. However, we cannot assure you that we will be
able to identify and consummate suitable investment, alliance or acquisition transactions in the
future.
Moreover, if we consummate such transactions, they could result in:
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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 management’s 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 December 31, 2005, we have $714.8 million of
goodwill, of which approximately $616.8 million was generated in our merger with GlobespanVirata in
February 2004. When market capitalization is below book value, it is an indicator that goodwill
may be impaired. Although our market capitalization was above our book value at December 31, 2005,
it has been below book value in the recent past. We performed our annual evaluation of goodwill
and have determined that no impairment was required. However, if our market capitalization drops
below our book value for a prolonged period of time or our current assumptions regarding our future
operating performance change, we may be required to write down the value of our goodwill by taking
a non-cash charge against earnings.
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Integrating acquired organizations and their products and services may be expensive, time-consuming
and a strain on our resources and our relationships with employees and customers, and ultimately
may not be successful. The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of one or more of our product lines and the loss of key
personnel. The diversion of management’s attention and any delays or difficulties encountered in
connection with acquisitions and the integration of multiple operations could have an adverse
effect on our business, results of operations or financial condition.
We are subject to the risks of doing business internationally.
For the first fiscal quarter of 2006 and for fiscal 2005, approximately 94% and 90%, respectively,
of our net revenues were from customers located outside of the United States, primarily in the
Asia-Pacific region and Europe. In addition, a significant portion of our workforce, including
approximately 770 employees in India, and many of our key suppliers are located outside the United
States. Our international operations consist of research and development, sales offices, and other
general and administrative functions. We plan to continue our international expansion,
particularly in the Asia-Pacific region. Our international operations are subject to a number of
risks inherent in operating abroad. These include, but are not limited to, risks regarding:
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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 the
Company 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.
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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 33% and 28% of our net revenues for
the first fiscal quarter of 2006 and for fiscal 2005, respectively. Our arrangements with these
distributors are terminable at any time, and the loss of these arrangements could have an adverse
effect on our operating results. For those international distributors that we account for under a
deferred revenue recognition model, we rely on the distributor to provide us timely and accurate
product sell through information. No assurances can be given that these international distributors
will continue to provide us this information. If we are unable to obtain this information on a
timely basis, or if we determine that the information we do receive is unreliable, it may affect
the accuracy of amounts recorded in our consolidated financial statements, and therefore have an
adverse effect on our operating results.
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 and to retain the continued service and
availability of skilled personnel, including our Chairman of the Board and Chief Executive Officer,
members of our executive team, and those in design, technical, marketing and staff positions. 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. In addition, the Company
has relied on its ability to grant stock options as one mechanism for recruiting and retaining this
highly skilled talent. Recent accounting regulations requiring the expensing of stock options may
impair the Company’s future ability to provide these incentives without incurring significant
compensation costs. There can be no assurance that the Company will continue to successfully
attract, motivate, and retain key personnel.
44
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 supplier’s semiconductors into one of its product platforms, it will be more
difficult for us to achieve future design wins with that OEM’s 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.
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 33% and 28% of our net revenues for the first
fiscal quarter of 2006 and for fiscal 2005, respectively. Our distributors may offer products of
several different suppliers, including products that may be competitive with ours. Accordingly,
there is a risk that the distributors may give priority to other supplier products and may not sell
our products as quickly as forecasted, which may impact their future order levels. We routinely
purchase inventory based on estimates of end-market demand for our customers’ products, which is
difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through
distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are
then based on estimates provided by multiple parties. In addition, our customers may change their
inventory practices on short notice for any reason. The cancellation or deferral of product orders,
the return of previously sold products or overproduction due to the failure of anticipated orders
to materialize could result in our holding excess or obsolete inventory, which could result in
write-downs of inventory. For example, the reduced demand outlook for fiscal year 2005 and the
further decline of average selling prices for certain of our products resulted in net inventory
charges aggregating $44.1 million.
We are dependent upon third parties for the manufacture, assembly and test of our products.
We are entirely dependent upon outside wafer fabrication facilities (known as foundries or fabs).
Under our fabless business model, our revenue growth is dependent on our ability to obtain
sufficient external manufacturing capacity, including wafer production capacity. If the
semiconductor industry experiences a shortage of wafer fabrication capacity in the future, we may
experience delays in shipments or increased manufacturing costs. We do not have any long-term
supply arrangements.
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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 facilities and assembly and test
companies are currently experiencing increased demand for their
capacity.
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 supplier to another facility or supplier. The manufacturing processes we rely
on are specialized and are available from a limited number of suppliers. Alternate sources of
manufacturing capacity, particularly wafer production capacity, may not be available to us on a
timely basis. Even if alternate wafer production capacity is available, we may not be able to
obtain it on favorable terms, or at all. Difficulties or delays in securing an adequate supply of
our products on favorable terms, or at all, could impair our ability to meet our customers’
requirements and have a material adverse effect on our operating results.
In addition, the highly complex and technologically demanding nature of semiconductor manufacturing
has caused foundries from time to time to experience lower than anticipated manufacturing yields,
particularly in connection with the introduction of new products and the installation and start-up
of new process technologies. Lower than anticipated manufacturing yields may affect our ability to
fulfill our customers’ demands for our products on a timely basis. Moreover, lower than anticipated
manufacturing yields may adversely affect our cost of goods sold and our results of operations.
We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
To remain competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to modify the manufacturing
processes for our products and to redesign some products as well as standard cells and other
integrated circuit designs that we may use in multiple products. We periodically evaluate the
benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to
reduce our costs. Currently most of our products are manufactured in .35 micron, .25 micron, .18
micron, .15 micron, and .13 micron geometry processes. In addition, we expect to migrate some of
our products to 90 nanometer process technology. In the past, we have experienced some difficulties
in shifting to smaller geometry process technologies or new manufacturing processes, which resulted
in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face
similar difficulties, delays and expenses as we continue to transition our products to smaller
geometry processes. We are dependent on our relationships with our foundries to transition to
smaller geometry processes successfully. We cannot assure you that our foundries will be able to
46
effectively manage the transition or that we will be able to maintain our existing foundry
relationships or develop new ones. If our foundries or we experience significant delays in this
transition or fail to implement this transition efficiently, we could experience reduced
manufacturing yields, delays in product deliveries and increased expenses, all of which could
adversely affect our relationships with our customers and our results of operations. As smaller
geometry processes become more prevalent, we expect to continue to integrate greater levels of
functionality, as well as customer and third party intellectual property, into our products.
However, we may not be able to achieve higher levels of design integration or deliver new
integrated products on a timely basis, or at all. Moreover, even if we are able to achieve higher
levels of design integration, such integration may have a short-term adverse impact on our
operating results, as we may reduce our revenue by integrating the functionality of multiple chips
into a single chip.
If we are not successful in protecting our intellectual property rights, it may harm our ability to
compete.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure
and confidentiality agreements and other methods, to protect our proprietary technologies and
processes. At times we incorporate the intellectual property of our customers into our designs, and
we have obligations with respect to the non-use and non-disclosure of their intellectual property.
In the past, we have engaged in litigation to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of proprietary rights of others, including
our customers. We may engage in future litigation on similar grounds, which may require us to
expend significant resources and to divert the efforts and attention of our management from our
business operations. We cannot assure you that:
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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.
47
Uncertainties involving litigation could adversely affect our business.
We and certain of our current and former officers and directors have been sued in several purported
securities class action lawsuits, which have now been consolidated into a single action. We and
certain of our directors and officers have also been sued in purported shareholder derivative
actions. Although we believe that these lawsuits are without merit, an adverse determination could
have a negative impact on the price of our stock. Moreover, regardless of the ultimate result, the
lawsuits may divert management’s attention and resources from other matters, which could also
adversely affect our business and results of operations.
We may be liable for penalties under environmental laws, rules and regulations, which could
adversely impact our business.
Our former manufacturing operations used a variety of chemicals and were subject to a wide range of
environmental protection regulations in the United States and Mexico. We have been designated as a
potentially responsible party and are engaged in groundwater remediation at one Superfund site
located at a former silicon wafer manufacturing facility and steel fabrication plant in Parker
Ford, Pennsylvania formerly occupied by us. In addition, we are engaged in remediations of
groundwater contamination at our former Newport Beach, California wafer fabrication facility. We
currently estimate the remaining costs for these remediations to be approximately $2.6 million and
have accrued for these costs as of December 31, 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 December 31, 2005, we had approximately $1.2 billion of U.S. Federal income tax net operating
loss (NOL) carry forwards that can be used to offset taxable income in subsequent years.
Approximately $440 million of the NOL carry forwards were acquired in the merger with
GlobespanVirata and other acquisitions. The NOL carry forwards are scheduled to expire at various
dates through 2026. Section 382 of the Internal Revenue Code could limit the future use of some or
all of the NOL carry forwards if the ownership of our common stock changes by more than 50
percentage points in certain circumstances over a three-year testing period. Based on information
known to us, we have not undergone such a change of ownership and the merger did not constitute a
change of ownership, although the shares of our common stock issued in the merger will be taken
into account in any change of ownership computations. Direct or indirect transfers of our common
stock, when taken together with the shift in ownership resulting from the merger, could result in a
change of ownership that would trigger the section 382 limitation. If such an ownership change
occurs, section 382 would limit our use of NOL carry forwards in each subsequent taxable year to an
amount equal to a federal long-term tax-exempt rate published by the Internal Revenue Service at
the time of the ownership change, multiplied by our fair market value at such time; any unused
annual limitation amounts may also be carried forward. The merger resulted in a change of ownership
of GlobespanVirata and the future use of GlobespanVirata’s NOL carry forwards is subject to the
section 382 limitation (or further limitation in the case of NOL carry forwards already subject to
limitation as a result of previous transactions) based on the fair market value of GlobespanVirata
at the time of the merger.
48
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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• |
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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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• |
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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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• |
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a prohibition on shareholder action by written consent; |
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• |
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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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• |
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elimination of the right of shareholders to call a special meeting of shareholders; and |
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• |
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a fair price provision. |
Our rights agreement gives our shareholders certain rights that would substantially increase the
cost of acquiring us in a transaction not approved by our board of directors.
In addition to the rights agreement and the provisions in our restated certificate of incorporation
and by-laws, Section 203 of the Delaware General Corporation Law generally provides that a
corporation shall not engage in any business combination with any interested shareholder during the
three-year period following the time that such shareholder becomes an interested shareholder,
unless a majority of the directors then in office approves either the business combination or the
transaction that results in the shareholder becoming an interested shareholder or specified
shareholder approval requirements are met.
49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, marketable debt securities, marketable
equity securities, the Mindspeed warrant, short-term debt, and 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 our Annual Report on Form 10-K for the year ended
September 30, 2005.
Our cash and cash equivalents, and short-term marketable debt securities are not subject to
significant interest rate risk due to the short maturities of these instruments. As of December 31,
2005, the carrying value of our cash and cash equivalents and short-term marketable debt securities
approximates fair value. Our long-term marketable debt securities (consisting of corporate bonds
and government agency securities) principally have remaining terms of 1 to 3 years. Such securities
are subject to interest rate risk. At December 31, 2005, a 10% increase in interest rates would
result in a $5.1 million decrease in the value of our long-term marketable debt securities.
Our marketable equity securities consist of 6.2 million shares of Skyworks Solutions, Inc.
Marketable equity securities are subject to equity price risk. For our equity security holdings,
there are risks associated with the overall state of the stock market, having available buyers for
shares we may sell, and ultimately being able to liquidate the securities at a favorable price. As
of December 31, 2005, a 10% decrease in equity prices would result in a $3.1 million decrease in
the value of our marketable equity securities.
We classify all of our marketable debt and equity securities as available-for-sale securities. As
of December 31, 2005, the carrying value of these securities included net unrealized losses of
$21.7 million.
We hold a warrant to purchase 30 million shares of common stock of Mindspeed. For financial
accounting purposes, this is a derivative instrument and the fair value of the warrant is subject
to significant risk related to changes in the market price of Mindspeed’s common stock. As of
December 31, 2005, a 10% decrease in the market price of Mindspeed’s common stock would decrease
the fair value of this warrant by approximately $4.1 million. At December 31, 2005, the market
price of Mindspeed’s common stock was $2.35 per share. For the quarter ended December 31, 2005,
the market price of Mindspeed’s common stock ranged from a low of $1.68 per share to a high of
$2.47 per share.
Our short-term debt consists of borrowings under a 364-day credit facility. Interest related to
our short-term debt is at the 7-day LIBOR plus 0.6% and was approximately 5.1% at December 31,
2005. Consequently, we do not believe our short-term debt is subject to significant market risk.
Our long-term debt consists of convertible subordinated notes with interest at fixed rates.
Consequently, we do not believe our long-term debt is subject to significant market risk. 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 December 31, 2005:
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| (in millions) |
|
Carrying Value |
|
Fair Value |
Cash and cash equivalents |
|
$ |
299.2 |
|
|
$ |
299.2 |
|
Marketable debt securities |
|
|
59.4 |
|
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|
59.4 |
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Marketable government agency securities |
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|
76.0 |
|
|
|
76.0 |
|
Marketable equity securities |
|
|
31.5 |
|
|
|
31.5 |
|
Mindspeed warrant |
|
|
28.8 |
|
|
|
28.8 |
|
Short-term debt |
|
|
76.6 |
|
|
|
76.6 |
|
Current portion of long-term debt |
|
|
196.8 |
|
|
|
194.9 |
|
Long-term debt |
|
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515.0 |
|
|
|
499.6 |
|
50
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 December 31, 2005, we held no foreign currency forward exchange
contracts. Based on our overall currency rate exposure at December 31, 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.
51
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.
Based on this evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting during the quarter
ended December 31, 2005 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Texas Instruments, Inc. — The Company’s Conexant, Inc. subsidiary has been involved in a dispute
with Texas Instruments, Inc., Stanford University and its Board of Trustees, and Stanford
University OTL, LLC (collectively, the Defendants) over a group of patents (and related foreign
patents) that Texas Instruments alleges are essential to certain industry standards for
implementing ADSL technology. On June 12, 2003, Conexant, Inc. filed a complaint against the
Defendants in the U.S. District Court of New Jersey. The complaint asserts, among other things,
that the Defendants have violated the antitrust laws by creating an illegal patent pool, by
manipulating the patent process and by abusing the process for setting industry standards related
to ADSL technology. The complaint also asserts that the Defendants’ patents relating to ADSL are
unenforceable, invalid and/or not infringed by Conexant, Inc. products. Conexant, Inc. is seeking,
among other things, (i) a finding that the Defendants have violated the federal antitrust laws and
treble damages based upon such a finding, (ii) an injunction prohibiting the Defendants from
engaging in anticompetitive practices, (iii) a declaratory judgment that the claims of the
Defendants’ ADSL patents are invalid, unenforceable, void, and/or not infringed by Conexant, Inc.
and (iv) an injunction prohibiting the Defendants from pursuing patent litigation against Conexant,
Inc. and its customers. On August 11, 2003 and September 9, 2003, the Defendants answered the
complaint, denied Conexant, Inc.’s claims and filed counterclaims alleging that Conexant, Inc. has
infringed certain of their ADSL patents. In addition to other relief, the Defendants are seeking
to collect damages for alleged past infringement and to enjoin Conexant, Inc. from continuing to
use the Defendants’ ADSL patents. The case has been bifurcated into a patent module and an
antitrust module, with the patent module being tried first. Trial on the patent module commenced
on January 4, 2006 in the U.S. District Court of New Jersey. Although the Company believes that
Conexant, Inc. has strong arguments in favor of its position in this dispute, it can give no
assurance that Conexant, Inc. will prevail in the litigation. If the 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 Company’s
business, financial condition, results of operations and cash flows.
Class Action Suits — In December 2004 and January 2005, the Company and certain current and former
officers and directors were named as defendants in several complaints seeking monetary damages
filed on behalf of all persons who purchased Company common stock during a specified class period.
These suits were filed in the U.S. District Court of New Jersey (New Jersey cases) and the U.S.
District Court for the Central District of California (California cases), alleging that the
defendants violated the Securities Exchange Act of 1934 by allegedly disseminating materially false
and misleading statements and/or concealing material adverse facts. The California cases have now
been consolidated with the New Jersey cases so that all of the class action suits, now known as
Witriol v. Conexant, et al., are being heard in the U.S. District Court of New Jersey by the same
judge. The defendants believe these charges are without merit and intend to vigorously defend the
litigation. On September 1, 2005, the defendants filed their motion to dismiss the case. On
November 23, 2005, the court granted the plaintiff’s motion to file a second amended complaint,
which was filed on December 5, 2005. The defendants plan to file an amended motion to dismiss the
case, which motion will be due by February 6, 2006.
In addition, in February 2005, the Company and certain of its current and former officers and the
Company’s 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 Company’s 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. The plaintiff
filed an amended complaint on August 11, 2005. On October 12, 2005, the defendants filed a motion
to dismiss this case. The plaintiff responded to the motion to dismiss on December 30, 2005, and
the defendants’ reply is due on February 17, 2006.
53
ITEM 6. EXHIBITS
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10.1
|
|
Deferred Compensation Plan II, effective January 1, 2005, filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K filed on January 5, 2006 is incorporated by reference. |
|
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|
10.2
|
|
Receivables Purchase Agreement, dated as of November 29, 2005, by and between Conexant USA, LLC and the
Company, filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 1, 2005 is
incorporated by reference. |
|
|
|
10.3
|
|
Credit and Security Agreement, dated as of November 29, 2005, by and between Conexant USA, LLC and
Wachovia Bank, National Association, filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on December 1, 2005 is incorporated by reference. |
|
|
|
10.4
|
|
Servicing Agreement, dated as of November 29, 2005, by and between the Company and Conexant USA, LLC,
filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 1, 2005 is
incorporated by reference. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. |
54
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.
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(Registrant) |
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Date: February 3, 2006
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By
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/s/J. Scott Blouin |
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J. Scott Blouin
Senior Vice President and
Chief Financial Officer
(principal financial officer) |
|
|
55
EXHIBIT INDEX
| |
|
|
10.1
|
|
Deferred Compensation Plan II, effective January 1, 2005, filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K filed on January 5, 2006 is incorporated by reference. |
|
|
|
10.2
|
|
Receivables Purchase Agreement, dated as of November 29, 2005, by and between Conexant USA, LLC and the
Company, filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 1, 2005 is
incorporated by reference. |
|
|
|
10.3
|
|
Credit and Security Agreement, dated as of November 29, 2005, by and between Conexant USA, LLC and
Wachovia Bank, National Association, filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on December 1, 2005 is incorporated by reference. |
|
|
|
10.4
|
|
Servicing Agreement, dated as of November 29, 2005, by and between the Company and Conexant USA, LLC,
filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 1, 2005 is
incorporated by reference. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e). |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. |
56