FORM 10-Q
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 July 3, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-24923
CONEXANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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25-1799439 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
4000 MacArthur Boulevard
Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip code)
(949) 483-4600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 July 31, 2009, there were 49,912,788 shares of the registrants common stock outstanding.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the federal securities
laws. Any statements that do not relate to historical or current facts or matters are
forward-looking statements. You can identify some of the forward-looking statements by the use of
forward-looking words, such as may, will, could, project, believe, anticipate,
expect, estimate, continue, potential, plan, forecasts, and the like, the negatives of
such expressions, or the use of future tense. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. Examples of forward-looking
statements include, but are not limited to, statements concerning:
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our beliefs, subject to the qualifications expressed, regarding the sufficiency of our
existing sources of liquidity and cash to fund our operations, research and development,
anticipated capital expenditures and our working capital needs for at least the next 12
months and that we will be able to repatriate cash from our foreign operations on a timely
and cost effective basis and that we will be able to sustain the recoverability of our
goodwill, intangible and tangible long-term assets; |
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expectations that we will have sufficient capital needed to remain in business and
repay our indebtedness as it becomes due; |
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expectations that we will be able to continue to meet NASDAQ listing requirements; |
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expectations regarding the market share of our products, growth in the markets we serve
and our market opportunities; |
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expectations regarding price and product competition; |
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continued demand and future growth in demand for our products in the communications, PC
and consumer markets we serve; |
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our plans and expectations regarding the transition of our semiconductor products to
smaller line width geometries; |
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our product development plans; |
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our expectation that our largest customers will continue to account for a substantial
portion of our revenue; |
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expectations regarding our contractual obligations and commitments; |
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expectation that we will be able to protect our products and services with proprietary
technology and intellectual property protection; |
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expectation that we will be able to meet our lease obligations (and other financial
commitments); |
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expectation that we will be able to continue to rely on third party manufacturers to
manufacture, assemble and test our products to meet our customers demands; and |
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expectations regarding the proposed sale of our Broadband Access Products business to
Ikanos Communications, Inc. |
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the forward-looking statements. You are urged
to carefully review the disclosures we make concerning risks and other factors that may affect our
business and operating results, including those made in Part II, Item 1A of this Quarterly Report
on Form 10-Q, and any of those made in our other reports filed with the Securities and Exchange
Commission. You are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document. We do not intend, and undertake no obligation, to
publish revised forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
1
CONEXANT SYSTEMS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except for share and par value amounts)
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July 3, |
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October 3, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
123,394 |
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$ |
105,883 |
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Restricted cash |
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14,500 |
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26,800 |
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Receivables, net of allowances of $553 and $834 |
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40,588 |
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48,997 |
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Inventories, net |
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8,352 |
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19,372 |
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Other current assets |
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34,306 |
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37,938 |
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Current assets held for sale |
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16,928 |
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29,730 |
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Total current assets |
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238,068 |
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268,720 |
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Property, plant and equipment, net of accumulated depreciation of
$66,005 and $78,344 |
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12,075 |
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17,410 |
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Goodwill |
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110,094 |
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110,412 |
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Intangible assets, net |
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6,314 |
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10,611 |
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Other assets |
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33,447 |
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39,250 |
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Total assets |
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$ |
399,998 |
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$ |
446,403 |
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LIABILITIES AND SHAREHOLDERS DEFICIT |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
17,707 |
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Short-term debt |
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30,739 |
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40,117 |
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Accounts payable |
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27,086 |
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34,894 |
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Accrued compensation and benefits |
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8,070 |
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13,201 |
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Other current liabilities |
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32,787 |
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43,189 |
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Current liabilities to be assumed |
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3,446 |
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3,995 |
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Total current liabilities |
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102,128 |
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153,103 |
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Long-term debt |
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391,400 |
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373,693 |
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Other liabilities |
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68,462 |
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56,341 |
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Total liabilities |
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561,990 |
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583,137 |
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Commitments
and contingencies (Note 6) |
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Shareholders deficit: |
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Preferred and junior preferred stock |
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Common stock, $0.01 par value: 100,000 shares authorized; 49,913 and 49,601
shares issued and outstanding |
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500 |
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496 |
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Additional paid-in capital |
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4,749,152 |
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4,744,140 |
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Accumulated deficit |
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(4,907,923 |
) |
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(4,879,208 |
) |
Accumulated other comprehensive loss |
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(3,676 |
) |
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(2,083 |
) |
Shareholder notes receivable |
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(45 |
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(79 |
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Total shareholders deficit |
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(161,992 |
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(136,734 |
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Total liabilities and shareholders deficit |
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$ |
399,998 |
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$ |
446,403 |
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See accompanying notes to condensed consolidated financial statements.
3
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
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Fiscal Quarter Ended |
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Nine Fiscal Months Ended |
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July 3, |
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June 27, |
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July 3, |
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June 27, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net revenues |
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$ |
50,844 |
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$ |
73,902 |
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$ |
152,272 |
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$ |
250,389 |
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Cost of
goods sold (1) |
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20,533 |
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32,309 |
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64,409 |
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103,089 |
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Gross margin |
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30,311 |
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41,593 |
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87,863 |
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147,300 |
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Operating expenses: |
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Research and
development (1) |
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12,450 |
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10,339 |
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38,783 |
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43,368 |
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Selling,
general and administrative (1) |
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14,813 |
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22,659 |
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49,739 |
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58,733 |
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Amortization of intangible assets |
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690 |
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699 |
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2,547 |
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2,269 |
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Gain on sale of intellectual property |
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(12,858 |
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Special charges |
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1,060 |
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8,459 |
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13,653 |
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15,910 |
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Total operating expenses |
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29,013 |
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42,156 |
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91,864 |
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120,280 |
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Operating
income (loss) |
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1,298 |
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(563 |
) |
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(4,001 |
) |
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27,020 |
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Interest expense |
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5,035 |
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5,894 |
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15,634 |
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21,822 |
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Other (income) expense, net |
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(3,567 |
) |
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(2,997 |
) |
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(3,455 |
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6,766 |
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Loss from continuing operations before income taxes and (loss) gain on
equity method investments |
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(170 |
) |
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(3,460 |
) |
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(16,180 |
) |
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(1,568 |
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Provision for income taxes |
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176 |
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93 |
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819 |
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362 |
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Loss from continuing operations before (loss) gain on equity method
investments |
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(346 |
) |
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(3,553 |
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(16,999 |
) |
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(1,930 |
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(Loss) gain on equity method investments |
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(485 |
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53 |
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(2,166 |
) |
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3,612 |
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(Loss) income from continuing operations |
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(831 |
) |
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(3,500 |
) |
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(19,165 |
) |
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1,682 |
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Income
(loss) from discontinued operations, net of tax (1) |
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3,557 |
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(146,371 |
) |
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(9,554 |
) |
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(302,775 |
) |
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Net income
(loss) |
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$ |
2,726 |
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$ |
(149,871 |
) |
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$ |
(28,719 |
) |
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$ |
(301,093 |
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(Loss) income per share from continuing operations basic and diluted |
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$ |
(0.02 |
) |
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$ |
(0.07 |
) |
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$ |
(0.39 |
) |
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$ |
0.03 |
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Income (loss) per share from discontinued operations basic |
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$ |
0.07 |
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$ |
(2.96 |
) |
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$ |
(0.19 |
) |
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$ |
(6.14 |
) |
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Income (loss) per share from discontinued operations diluted |
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$ |
0.07 |
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$ |
(2.96 |
) |
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$ |
(0.19 |
) |
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$ |
(6.11 |
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Net income (loss) per share basic |
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$ |
0.05 |
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$ |
(3.03 |
) |
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$ |
(0.58 |
) |
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$ |
(6.11 |
) |
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Net income (loss) per share diluted |
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$ |
0.05 |
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$ |
(3.03 |
) |
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$ |
(0.58 |
) |
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$ |
(6.08 |
) |
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Shares used in basic per-share computations |
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49,867 |
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49,450 |
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49,760 |
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49,333 |
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Shares used in diluted per-share computations |
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49,867 |
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49,450 |
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49,760 |
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49,570 |
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(1) |
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These captions include non-cash employee stock-based compensation expense as follows
(see Note 7): |
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Fiscal Quarter Ended |
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Nine Fiscal Months Ended |
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|
July 3, |
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June 27, |
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July 3, |
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June 27, |
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|
2009 |
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2008 |
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2009 |
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2008 |
Cost of goods sold |
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$ |
77 |
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$ |
139 |
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$ |
196 |
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$ |
310 |
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Research and development |
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17 |
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290 |
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746 |
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2,024 |
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Selling, general and administrative |
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423 |
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4,879 |
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3,410 |
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|
7,854 |
|
Income (loss) from discontinued operations, net of tax |
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236 |
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|
1,395 |
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|
1,007 |
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|
3,565 |
|
See accompanying notes to condensed consolidated financial statements.
4
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
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Nine Fiscal Months Ended |
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July 3, |
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June 27, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(28,719 |
) |
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$ |
(301,093 |
) |
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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6,595 |
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16,779 |
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Amortization of intangible assets |
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6,967 |
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11,690 |
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Asset impairments |
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263,513 |
|
Reversal of provision for bad debts, net |
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(225 |
) |
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(698 |
) |
Charges for inventory provisions, net |
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46 |
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6,225 |
|
Deferred income taxes |
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|
(94 |
) |
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|
80 |
|
Stock-based compensation |
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5,359 |
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13,753 |
|
Loss on termination of defined benefit plan |
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6,294 |
|
(Increase) decrease in fair value of derivative instruments |
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(1,256 |
) |
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12,780 |
|
Losses (gains) on equity method investments |
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3,046 |
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(3,612 |
) |
Other-than-temporary impairment of marketable securities |
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2,635 |
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Other-than-temporary impairment of cost method investments |
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135 |
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Gain on sale of marketable securities |
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(1,856 |
) |
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Gain on resolution of pre-acquisition contingency |
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(1,054 |
) |
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Gain on sale of intellectual property |
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(12,858 |
) |
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Other items, net |
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1,773 |
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|
789 |
|
Changes in assets and liabilities: |
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Receivables |
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8,634 |
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|
3,058 |
|
Inventories |
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18,009 |
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|
4,406 |
|
Accounts payable |
|
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(7,808 |
) |
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|
(18,831 |
) |
Accrued expenses and other current liabilities |
|
|
(10,194 |
) |
|
|
(11,718 |
) |
Accrued restructuring expenses |
|
|
9,481 |
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|
2,696 |
|
Other, net |
|
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2,066 |
|
|
|
(19,530 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
682 |
|
|
|
(13,419 |
) |
Cash flows from investing activities: |
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|
|
|
|
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|
Purchases of property, plant and equipment |
|
|
(555 |
) |
|
|
(4,240 |
) |
Proceeds from sale of property, plant and equipment |
|
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|
|
|
|
8,949 |
|
Proceeds from resolution of pre-acquisition contingency |
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|
2,186 |
|
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Payments for acquisitions |
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(3,578 |
) |
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Purchases of equity securities |
|
|
|
|
|
|
(755 |
) |
Proceeds from sales of marketable securities |
|
|
2,310 |
|
|
|
|
|
Deposit of restricted cash |
|
|
|
|
|
|
(29,000 |
) |
Release of restricted cash |
|
|
12,570 |
|
|
|
|
|
Proceeds from sale of intellectual property, net of expenses of $132 |
|
|
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
27,481 |
|
|
|
(25,046 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net repayments of short-term debt, including debt costs of $901 and $1,118 |
|
|
(10,279 |
) |
|
|
(3,941 |
) |
Repurchases and retirements of long-term debt |
|
|
|
|
|
|
(53,600 |
) |
Proceeds from issuance of common stock |
|
|
28 |
|
|
|
710 |
|
Interest rate swap security deposit |
|
|
(437 |
) |
|
|
(4,250 |
) |
Repayment of shareholder note receivable |
|
|
36 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(10,652 |
) |
|
|
(61,056 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
17,511 |
|
|
|
(99,521 |
) |
Cash and cash equivalents at beginning of period |
|
|
105,883 |
|
|
|
234,147 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
123,394 |
|
|
$ |
134,626 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business
Conexant Systems, Inc. (Conexant or the Company) designs, develops, and sells semiconductor
system solutions comprised of silicon, hardware, software, and firmware that are used in imaging,
audio video, and various embedded-modem applications. The Companys products and technology are
used in a wide range of consumer electronics devices. In the Companys imaging business, the
Companys solutions are used in single- and multi-function printers, facsimile machines, and photo
printers. The Company also offers system-on-chip solutions for products that integrate Internet
connectivity and touch-screen technology and are used in a broad range of video, audio, telephony,
and digital signage applications. Examples of these products include digital photo frames,
speakerphones, voice-over-IP (VoIP) phones, point-of-sale terminals, and home automation,
security, and monitoring systems. The Companys audio solutions are targeted at products including
personal computers, PC peripheral sound systems, notebook docking stations, VoIP speakerphones,
intercom, door phone, and surveillance applications. The Companys video product offering is
comprised of decoders and media bridges for video surveillance and security applications, and
system solutions for analog video-based multimedia applications. The Companys embedded-modem
solutions are targeted at desktop and notebook PCs, set-top boxes, point-of-sale systems, home
automation and security systems, and other industrial applications.
2. Sale of Assets and Discontinued Operations
Sale of Broadband Media Processing
On August 11, 2008, the Company announced that it had completed the sale of its Broadband Media
Processing (BMP) product lines to NXP B.V. (NXP). Pursuant to the Asset Purchase Agreement (the
BMP Agreement), NXP acquired certain assets including, among other things, specified patents,
inventory and contracts, and assumed certain employee-related liabilities. Pursuant to the BMP
Agreement, the Company obtained a license to utilize technology that was sold to NXP and NXP
obtained a license to utilize certain intellectual property that the Company retained. In addition,
NXP agreed to provide employment to approximately 700 of the Companys employees at locations in
the United States, Europe, Israel, Asia-Pacific and Japan.
In the third fiscal quarter of 2008, in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Company determined that the BMP
business, which constituted an operating segment of the Company, qualifies as a discontinued
operation. The results of the BMP business have been reported as discontinued operations in the
condensed consolidated statements of operations for all periods presented. In accordance with the
provisions of EITF No. 87-24, Allocation of Interest to Discontinued Operations (EITF 87-24),
interest expense is allocated to discontinued operations based on the expected proceeds from the
sale, net of any expected permitted investments, over the next twelve months. For the fiscal
quarter and nine fiscal months ended June 27, 2008, interest expense allocated to discontinued
operations was $1.6 million and $6.1 million, respectively.
For the fiscal quarter ended July 3, 2009, BMP revenues and income classified as discontinued
operations was less than $0.1 million and $0.2 million, respectively. For the fiscal quarter ended
June 27, 2008, BMP revenues and loss classified as discontinued operations was $55.5 million and
$23.5 million, respectively.
For the nine fiscal months ended July 3, 2009 BMP revenues and loss classified as discontinued
operations were $3.0 million and $5.9 million, respectively. For the nine fiscal months ended June
27, 2008 BMP revenues and loss classified as discontinued operations were $162.0 million and $170.0
million, respectively.
Sale of Broadband Access Products
On April 21, 2009, the Company entered into an Asset Purchase Agreement with Ikanos Communications,
Inc. (Ikanos), pursuant to which Ikanos has agreed to acquire certain assets related to the BBA
business. Assets to be sold pursuant to the agreement include, among other things, specified
intellectual property, inventory, contracts and tangible assets. Ikanos has agreed to assume
certain liabilities, including obligations under transferred contracts and certain employee-related
liabilities. Under the terms of the agreement, Ikanos will pay the Company an aggregate of
6
$54 million upon the closing of the transaction, of which $6.75 million will be deposited into an
escrow account. The escrow account will remain in place for twelve months following the closing to
satisfy potential indemnification claims by Ikanos. The closing is subject to various conditions,
including, among other things, the closing of an equity investment in Ikanos by Tallwood III, L.P.,
Tallwood III Partners, L.P., Tallwood III Associates, L.P. and Tallwood III Annex, L.P. pursuant to
a separate Securities Purchase Agreement, and the receipt of certain third party consents. Upon the
closing, the Company has also agreed to enter into an Intellectual Property License Agreement
pursuant to which the Company will obtain a license with respect to certain technology assets sold
to Ikanos and Ikanos will obtain a license with respect to certain technology assets that the
Company will retain.
In accordance with SFAS No. 144, the Company determined that the BBA business, which constituted an
operating segment of the Company, qualifies as a discontinued operation. The results of the BBA
business have been reported as discontinued operations in the condensed consolidated statements of
operations for all periods presented. In accordance with the provisions of EITF 87-24, interest
expense is allocated to discontinued operations based on the expected proceeds from the sale, net
of any expected permitted investments, over the next twelve months. For the fiscal quarter and nine
fiscal months ended July 3, 2009, interest expense allocated to discontinued operations was $0.6
million and $2.0 million, respectively. For the fiscal quarter and nine fiscal months ended June
27, 2008, interest expense allocated to discontinued operations was $0.8 million and $2.9
million, respectively.
The sale transaction is expected to be completed during the Companys fourth fiscal quarter ended
October 2, 2009, and the Company expects to recognize a gain on the transaction. The net assets of
the BBA business, which are classified as held for sale in the Companys condensed consolidated
balance sheet as of July 3, 2009 and October 3, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Inventories, net |
|
$ |
10,930 |
|
|
$ |
17,067 |
|
Other current assets |
|
|
331 |
|
|
|
599 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
11,261 |
|
|
|
17,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
4,667 |
|
|
|
7,502 |
|
Goodwill |
|
|
1,000 |
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
4,360 |
|
Other assets |
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,928 |
|
|
$ |
29,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits |
|
$ |
2,020 |
|
|
$ |
1,788 |
|
Other current liabilities |
|
|
829 |
|
|
|
645 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,849 |
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
597 |
|
|
|
1,562 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
3,446 |
|
|
$ |
3,995 |
|
|
|
|
|
|
|
|
For the fiscal quarter ended July 3, 2009, BBA revenues and income classified as discontinued
operations was $33.8 million and $3.4 million, respectively. For the fiscal quarter ended June 27,
2008, BBA revenues and loss classified as discontinued operations was $41.7 million and $122.9
million, respectively.
For the nine fiscal months ended July 3, 2009 BBA revenues and loss classified as discontinued
operations were $93.3 million and $3.6 million, respectively. For the nine fiscal months ended
June 27, 2008, BBA revenues and loss classified as discontinued operations were $129.7 million and
$132.8 million, respectively.
7
3. Basis of Presentation and Significant Accounting Policies
Interim Reporting The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (US
GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes contained in the
Companys Annual Report on Form 10-K for the fiscal year ended October 3, 2008. The financial
information presented in the accompanying statements reflects all adjustments that are, in the
opinion of management, necessary for a fair statement of the periods indicated. All such
adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived
from the audited consolidated financial statements, but does not include all disclosures required
by US GAAP. Prior year quarterly information has been recast to reflect the reclassification of
discontinued operations described in Note 2.
Fiscal Periods The Companys fiscal year is the 52- or 53-week period ending on the Friday
closest to September 30. In a 52-week year, each fiscal quarter consists of 13 weeks. The
additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14
weeks. Fiscal 2009 is a 52-week year and fiscal 2008 consisted of 53 weeks.
Use of Estimates The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Among the significant estimates affecting the
consolidated financial statements are those related to business combinations, revenue recognition,
allowance for doubtful accounts, inventories, long-lived assets (including goodwill and intangible
assets), deferred income taxes, valuation of warrants, valuation of equity securities, stock-based
compensation, restructuring charges and litigation. On an on-going basis, management reviews its
estimates based upon currently available information. Actual results could differ materially from
those estimates.
Revenue Recognition The Company recognizes revenue when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the sales price and terms are fixed and
determinable, and (iv) the collection of the receivable is reasonably assured. These terms are
typically met upon shipment of product to the customer. The majority of the Companys distributors
have limited stock rotation rights, which allow them to rotate up to 10% of product in their
inventory two times per 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 reasonably 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 periods presented.
Prior to the fourth quarter of fiscal 2008, revenue with respect to sales to certain distributors
was deferred until the products were sold by the distributors to third parties. During the fiscal
quarter ended October 3, 2008, the Company evaluated three distributors for which revenue has
historically been recognized upon the distributors sale of the purchased products to a third party
due to the Companys inability in prior years to enforce the contractual terms related to any right
of return. The Companys evaluation revealed that it is able to enforce the contractual right of
return for the three distributors in an effective manner similar to that experienced with the other
distributor customers. As a result, in the fourth quarter of fiscal 2008, the Company commenced the
recognition of revenue on these three distributors upon shipment, which is consistent with the
revenue recognition point of other distributor customers. As a result, in the fiscal quarter ended
October 3, 2008, the Company recognized $3.9 million of revenue on sales to these three
distributors related to the change to revenue recognition upon shipment with a corresponding charge
to cost of goods sold of $1.8 million. At July 3, 2009 and October 3, 2008, there was no
significant deferred revenue related to sales to the Companys distributors.
Revenue with respect to sales to customers to whom the Company has significant obligations after
delivery is deferred until all significant obligations have been completed. At July 3, 2009, there
was no deferred revenue. At
October 3, 2008, deferred revenue related to shipments of products for which the Company had
on-going
8
performance obligations was $0.2 million. Deferred revenue is included in other current
liabilities on the accompanying condensed consolidated balance sheets.
During the nine fiscal months ended June 27, 2008, the Company recorded approximately $14.7 million
of non-recurring revenue from the buyout of a future royalty stream.
Liquidity The Company has a $50.0 million credit facility with a bank, under which it had
borrowed $30.7 million as of July 3, 2009. This credit facility matures on November 27, 2009 and is
subject to additional 364-day extensions at the discretion of the bank. At July 3, 2009, the
Company was in compliance with all required debt covenants.
The Company believes that its existing sources of liquidity, together with cash expected to be
generated from product sales, will be sufficient to fund its operations, research and development,
anticipated capital expenditures and working capital for at least the next twelve months. However,
additional operating losses or lower than expected product sales will adversely affect the
Companys cash flow and financial condition and could impair its ability to satisfy its
indebtedness obligations as such obligations come due.
Recent tightening of the credit markets and unfavorable economic conditions has led to a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. In
addition, if the economy or markets in which the Company operates continue to be subject to adverse
economic conditions, its business, financial condition, cash flow and results of operations will be
adversely affected. If the credit markets remain difficult to access or worsen or our performance
is unfavorable due to economic conditions or for any other reasons, the Company may not be able to
obtain sufficient capital to repay amounts due under (i) its credit facility expiring November 2009,
(ii) its $141.4 million floating rate senior secured notes when they become due in November 2010 or
earlier as a result of a mandatory offer to repurchase, and (iii) its $250.0 million convertible
subordinated notes when they become due in March 2026 or earlier as a result of the mandatory
repurchase requirements. The first mandatory repurchase date for the Companys convertible
subordinated notes is March 1, 2011. In the event the Company is unable to satisfy or refinance its
debt obligations as the obligations are required to be paid, the Company will be required to
consider strategic and other alternatives, including, among other things, the sale of assets to
generate funds, the negotiation of revised terms of its indebtedness, and the exchange of new
securities for existing indebtedness obligations. The Company has retained financial advisors to
assist it in considering these strategic, restructuring or other alternatives. There is no
assurance that the Company would be successful in completing any of these alternatives.
Restricted Cash The Companys short-term debt agreement requires that the Company and its
consolidated subsidiaries maintain minimum levels of cash on deposit with the bank throughout the
term of the agreement. The Company classified $8.5 million and $8.8 million as restricted cash with
respect to this debt agreement as of July 3, 2009 and October 3, 2008, respectively. See Note 5 for
further information on the Companys short-term debt.
As of July 3, 2009 and October 3, 2008, the Company had one irrevocable stand-by letter of credit
outstanding. As of July 3, 2009 and October 3, 2008, the irrevocable stand-by letter of credit was
collateralized by restricted cash balances of $6.0 million and $18.0 million, respectively, to
secure inventory purchases from a vendor. The letter of credit expires on August 31, 2009. The
restricted cash balance securing the letter of credit is classified as current restricted cash on
the condensed consolidated balance sheets. In addition, the Company has other outstanding letters
of credit collateralized by restricted cash aggregating $6.5 million to secure various long-term
operating leases and the Companys self-insured workers compensation plan. The restricted cash
associated with these letters of credit is classified as other long-term assets on the condensed
consolidated balance sheets.
Investments The Company accounts for non-marketable investments using the equity method of
accounting if the investment gives the Company the ability to exercise significant influence over,
but not control of, an investee. Significant influence generally exists if the Company has an
ownership interest representing between 20% and 50%
of the voting stock of the investee. Under the equity method of accounting, investments are stated
at initial cost and
9
are adjusted for subsequent additional investments and the Companys
proportionate share of earnings or losses and distributions. Additional investments by other
parties in the investee will result in a reduction in the Companys ownership interest, and the
resulting gain or loss will be recorded in the consolidated statements of operations. Where the
Company is unable to exercise significant influence over the investee, investments are accounted
for under the cost method. Under the cost method, investments are carried at cost and adjusted only
for other-than-temporary declines in fair value, distributions of earnings or additional
investments.
Income Taxes The Company utilizes the asset and liability method of accounting for income taxes
as set forth in SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109
establishes financial accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entitys financial statements or tax
returns. A valuation allowance is recorded to reduce deferred tax assets when it is more likely
than not that some of the deferred tax assets will not be realized.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). Under FIN 48, which the Company adopted effective September 29, 2007, the Company may
recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition of income tax
assets and liabilities, classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and income tax disclosures.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits within operations as income tax expense. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Companys financial statements or tax
returns. Variations in the actual outcome of these future tax consequences could materially impact
our financial position, results of operations, or cash flows.
Review of Accounting for Research and Development Costs During the fiscal quarter ended December
28, 2007, the Company reviewed its methodology of capitalizing photo mask costs used in product
development. Photo mask designs are subject to significant verification and uncertainty regarding
the final performance of the related part. Due to these uncertainties, the Company reevaluated its
prior practice of capitalizing such costs and concluded that these costs should have been expensed
as research and development costs as incurred. As a result, in the nine fiscal months ended June
27, 2008, the Company recorded a correcting adjustment of $5.3 million, $1.4 million of which is
recorded in continuing operations and $3.9 million of which is recorded in discontinued operations,
representing the unamortized portion of the capitalized photo mask costs as of September 29, 2007.
Based upon an evaluation of all relevant quantitative and qualitative factors, and after
considering the provisions of Accounting Principles Board Opinion No. 28, Interim Financial
Reporting (APB 28), paragraph 29, and SEC Staff Accounting Bulletin Nos. 99, Materiality, and
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, the Company believes that this correcting adjustment was not material
to its full-year results for 2008. In addition, the Company does not believe the correcting
adjustment is material to the amounts reported in previous periods.
Derivative Financial Instruments The Companys derivative financial instruments as of July 3,
2009 principally consisted of (i) the Companys warrant to purchase six million shares of Mindspeed
Technologies, Inc. (Mindspeed) common stock and (ii) interest rate swaps. See Note 5 for
information regarding the Mindspeed warrant.
Interest Rate Swaps During fiscal 2008, the Company entered into three interest rate swap
agreements with Bear Stearns Capital Markets, Inc. (the counterparty) for a combined notional
amount of $200 million to mitigate interest rate risk on $200 million of its floating rate senior
secured notes due 2010. In December 2008, the interest rate swap agreements were assigned, without
modification, to J.P. Morgan Chase Bank, N.A. Under the terms of the swaps, the Company will pay a
fixed rate of 2.98% and receive a floating rate equal to three-month LIBOR, which will offset the
floating rate paid on the Notes. The interest rate swaps meet the criteria for designation as cash
flow
hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities
10
(SFAS No. 133). As a result of the repurchase of $80 million of the Companys floating rate
senior secured notes in the fourth quarter of fiscal 2008, one of the swap contracts with a
notional amount of $100 million was terminated. As a result of the swap contract termination, the
Company recognized a $0.3 million gain based on the fair value of the contract on the termination
date. The remaining two $50 million swap agreements terminate on the due date of the underlying
notes and require the Company to post cash collateral with the counterparty in a minimum amount of
$2.1 million. The amount of collateral will adjust monthly based on a mark-to-market of the swaps.
At July 3, 2009, the Company was required to post $3.0 million of cash collateral with the
counterparty, $0.9 million of which is included in other current assets and $2.1 million of which
is included in other non-current assets on the accompanying condensed consolidated balance sheet.
Based on the fair value of the swap agreements, the Company recorded a derivative liability of $2.8
million at July 3, 2009, which is included in other liabilities on the accompanying condensed
consolidated balance sheet. The change in fair value is recorded in accumulated other comprehensive
loss to the extent the derivative is effective in mitigating the exposure related to the underlying
notes. The gain or loss is recognized immediately in other (income) expense, net, in the statements
of operations when a designated hedging instrument is either terminated early or an improbable or
ineffective portion of the hedge is identified. Interest expense related to the swap contracts was
$0.5 million and $0.9 million for the fiscal quarter and nine fiscal months ended July 3, 2009,
respectively.
At October 3, 2008, the Company had outstanding foreign currency forward exchange contracts with a
notional amount of 210 million Indian Rupees, or approximately $4.4 million. All foreign currency
forward exchange contracts matured at various dates through December 2008 and were not renewed. At
July 3, 2009, there were no foreign currency forward exchange contracts outstanding.
The Company may use other derivatives from time to time to manage its exposure to changes in
interest rates, equity prices or other risks. The Company does not enter into derivative financial
instruments for speculative or trading purposes.
Supplemental Cash Flow Information Cash paid for interest was $12.4 million and $25.0 million
for the nine fiscal months ended July 3, 2009 and June 27, 2008, respectively. Cash paid for income
taxes for the nine fiscal months ended July 3, 2009 and June 27, 2008 was $1.6 million and $1.4
million, respectively.
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, restricted stock units and shares of stock
issuable upon conversion of the Companys convertible subordinated notes. The dilutive effect of
stock options and restricted stock units 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.
11
The following potentially dilutive securities have been excluded from the diluted net income (loss)
per share calculations because their effect would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Employee stock options |
|
|
5,054 |
|
|
|
8,426 |
|
|
|
5,905 |
|
|
|
8,917 |
|
4.00% convertible subordinated notes due March 2026 |
|
|
5,081 |
|
|
|
5,081 |
|
|
|
5,081 |
|
|
|
5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,135 |
|
|
|
13,507 |
|
|
|
10,986 |
|
|
|
13,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net income (loss) per share |
|
|
49,867 |
|
|
|
49,450 |
|
|
|
49,760 |
|
|
|
49,333 |
|
Employee stock options and restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted income (loss) per share |
|
|
49,867 |
|
|
|
49,450 |
|
|
|
49,760 |
|
|
|
58,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows The Company has reclassified the change in accrued restructuring expenses of $2,696
from accrued expenses and other current liabilities, and other, net, to accrued restructuring
expenses on its condensed consolidated statements of cash flows for
the nine fiscal months ended June
27, 2008 to conform to the current year presentation. The Company has also corrected the
classification of expenses related to short-term debt from other, net, to repayments of short-term
debt, including debt costs, for the nine fiscal months ended June 27, 2008. These changes on the
condensed consolidated statements of cash flows did not affect the Companys reported net decrease in
cash and cash equivalents for the period.
|
|
|
|
|
|
|
Nine Fiscal |
|
|
|
Months Ended |
|
|
|
June 27, |
|
|
|
2008 |
|
Accrued expenses and other current liabilities, before reclassification |
|
$ |
(13,627 |
) |
Accrued restructuring expenses |
|
|
1,909 |
|
|
|
|
|
Accrued expenses and other current liabilities, after reclassification |
|
$ |
(11,718 |
) |
|
|
|
|
Other, net, before reclassification |
|
$ |
(16,043 |
) |
Accrued restructuring expenses |
|
|
(4,605 |
) |
Expenses related to short-term debt |
|
|
1,118 |
|
|
|
|
|
Other, net, after reclassification |
|
$ |
(19,530 |
) |
|
|
|
|
Repayments of short-term debt, including debt costs, before correction |
|
$ |
(2,823 |
) |
Expenses related to short-term debt |
|
|
(1,118 |
) |
|
|
|
|
Repayments of short-term debt, including debt costs, after correction |
|
$ |
(3,941 |
) |
|
|
|
|
Business Enterprise Segments The Company operates in one reportable segment, broadband
communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises report information
about operating segments in their condensed consolidated financial statements. Pending the
completion of the sale of the Companys Broadband Access Products (BBA) operating segment, the
results of which have been classified in discontinued operations, the Company has one remaining
operating segment, Imaging and PC Media (IPM). The IPM operating segment, comprised of one
reporting unit, was identified based upon the availability of discrete financial information and
the chief operating decision makers regular review of the financial information for this reporting
unit. The Company evaluated this reporting unit for components and noted that there are none below
the IPM reporting unit.
Goodwill Goodwill is not amortized. Instead, goodwill is tested for impairment on an annual
basis and between annual tests whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable, in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). Under SFAS No. 142, goodwill is tested at the reporting unit
level, which is defined as an operating segment or one level below the operating segment. Goodwill
impairment testing is a two-step process.
The first step of the goodwill impairment test, used to identify potential impairment, compares the
fair value of a reporting unit with its carrying amount, including goodwill. We assess the fair
value of our reporting units for purposes of goodwill impairment testing based upon a weighted
average of a Discounted Cash Flow (DCF) analysis under the income approach, and a market multiple
analysis under the market approach. The resulting fair value of
12
the reporting unit is then compared
to the carrying amounts of the net assets of the reporting unit, including goodwill. Carrying
amounts of the reporting units are based upon a combination of specifically-identified assets and
liabilities allocations using guidance outlined in paragraphs 32 and 34 of SFAS No. 142. The
weighting between the two models is determined by management assessment of current internal and
external conditions.
If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test must be performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test, used to measure the amount of impairment loss, compares the
implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss must be recognized in an amount equal to that excess. Goodwill impairment testing
requires significant judgment and management estimates, including, but not limited to, the
determination of (i) the number of reporting units, (ii) the goodwill and other assets and
liabilities to be allocated to the reporting units and (iii) the fair values of the reporting
units. The estimates and assumptions described above, along with other factors such as discount
rates, will significantly affect the outcome of the impairment tests and the amounts of any
resulting impairment losses.
Goodwill is tested at the reporting unit level annually during the fourth fiscal quarter and, if
necessary, whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. The global decline in consumer confidence and spending has dramatically impacted the
Companys financial performance as well as that of many of our competitors, peers, customers, and
suppliers. This impact resulted in the Companys evaluation of the recoverability of goodwill
during the first quarter of fiscal 2009.
All of the goodwill reported on our balance sheet is attributable to the IPM reporting unit.
Overall financial performance declines in the first quarter of fiscal 2009 resulted in an interim
test for goodwill impairment. Based upon the results of the testing for the quarter ended January
2, 2009, the Company determined that despite recent declines in the IPM reporting unit, performance
levels remained sufficient to support the IPM-related goodwill balance as of January 2, 2009.
During the third fiscal quarter of 2009, we determined based on current IPM business forecasts
there were no indicators of impairment and therefore no interim goodwill impairment analysis was
considered necessary for the third fiscal quarter of 2009.
Recently Adopted Accounting Pronouncements
On January 3, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161). SFAS No. 161 requires expanded disclosures regarding the
location and amount of derivative instruments in an entitys financial statements, how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and how derivative
instruments and related hedged items affect an entitys financial position, operating results and
cash flows. As a result of the adoption of SFAS No. 161, the Company expanded its disclosures
regarding its derivative instruments. See Note 3Basis of Presentation and Significant Accounting
Policies, Note 4Fair Value of Certain Financial Assets and Liabilities, and Note 5Supplemental
Financial Information.
On January 3, 2009, the Company adopted FASB Staff Position (FSP) FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities (FSP 140-4 and FIN 46(R)-8). FSP 140-4 and FIN 46(R)-8 amends SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, to require public entities to provide additional disclosures about transfers of
financial assets. It also amends FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to require public enterprises, including sponsors that have a
variable interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this FSP requires certain disclosures to
be provided by a public enterprise that is (a) a sponsor
of a qualifying special purpose entity (SPE) that holds a variable interest in the qualifying SPE
but was not the transferor (non-transferor) of financial assets to the qualifying SPE and (b) a
servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but
was not the transferor (non-transferor) of financial assets to the qualifying SPE. The adoption of
FSP 140-4 and FIN 46(R)-8 did not have an impact on the Companys
13
condensed consolidated financial
statements because the Company does not have a variable interest in a variable interest entity or
in its SPE.
On October 4, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157),
for its financial assets and liabilities. The Companys adoption of SFAS No. 157 did not have a
material impact on its financial position, results of operations or liquidity.
SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be
received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs, where available. The following summarizes the three levels
of inputs required by the standard that the Company uses to measure fair value.
|
|
|
Level 1: Quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. |
|
|
|
|
Level 3: Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. |
SFAS No. 157 requires the use of observable market inputs (quoted market prices) when measuring
fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
In accordance with FSP FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), the
Company elected to defer until October 3, 2009 the adoption of SFAS No. 157 for all nonfinancial
assets and liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis. The adoption of SFAS No. 157 for those assets and liabilities
within the scope of FSP FAS 157-2 is not expected to have a material impact on the Companys
financial position, results of operations or liquidity.
On October 4, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Company already records marketable securities at fair value in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of SFAS No.
159 did not have an impact on the Companys condensed consolidated financial statements as
management did not elect the fair value option for any other financial instruments or certain other
assets and liabilities.
On April 4, 2009, the Company adopted FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP 107 and APB 28-1), which enhanced the disclosure of
instruments under the scope of SFAS No. 157. The Companys adoption of FSP 107-1 and APB 28-1did
not have a material impact on its financial position, results of operations or liquidity.
On April 4, 2009, the Company adopted FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4), which provides guidance on how to determine the
fair value of assets and liabilities under SFAS No. 157 in the current economic environment and
reemphasizes that the objective of a fair value measurement remains an exit price. The Companys
adoption of FSP 157-4 did not have a material impact on its financial position, results of
operations or liquidity.
On April 4, 2009, the Company adopted SFAS No. 165, Subsequent Events(SFAS No. 165), which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. In
particular SFAS No. 165 sets forth:
14
|
1. |
|
The period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements. |
|
|
2. |
|
The circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements. |
|
|
3. |
|
The disclosures that an entity should make about events or transactions that occurred
after the balance sheet date. |
The Companys adoption of SFAS No. 165 did not have a material impact on its financial
position, results of operations or liquidity.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No.
141R), which replaces SFAS No. 141. The statement requires a number of changes to the purchase
method of accounting for acquisitions, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of in-process research
and development at fair value, and requires the expensing of acquisition-related costs as incurred.
The Company will adopt SFAS No. 141R in the first quarter of fiscal 2010 and it will apply
prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements, an amendment of ARB 51 (SFAS No. 160), which changes the accounting and
reporting for minority interests. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the parents equity, and
purchases or sales of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained, will be recorded at fair value with
any gain or loss recognized in earnings. The Company will adopt SFAS No. 160 in the first quarter
of fiscal 2010 and it will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company is currently assessing the potential
impact that adoption of SFAS No. 160 would have on its financial position and results of
operations.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142. This change is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141R and other US GAAP. The requirement for
determining useful lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, which will require the Company to adopt these provisions in the first
quarter of fiscal 2010. The Company is currently evaluating the impact of adopting FSP 142-3 on its
condensed consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1
requires the issuer to separately account for the liability and equity components of convertible
debt instruments in a manner that reflects the issuers nonconvertible debt borrowing rate. The
guidance will result in companies recognizing higher interest expense in the statement of
operations due to amortization of the discount that results from separating the liability and
equity components. FSP APB 14-1 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is
not permitted. Based on its initial analysis, the Company expects that the adoption of FSP APB 14-1
will result in an increase in the interest expense recognized on its convertible subordinated
notes. See Note 5 for further information on long-term debt.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets(SFAS
No. 166), an amendment of SFAS No. 140. SFAS No. 166 improves the relevance, representational
faithfulness, and comparability
15
of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. SFAS No. 166 will be effective for financial
statements issued for fiscal years beginning after November 15, 2009, and interim periods within
those fiscal years. Early adoption is not permitted. The Company is currently assessing the
potential impact that adoption of SFAS No. 166 would have on its financial position and results of
operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)(SFAS No.
167). SFAS No. 167 improves financial reporting by enterprises involved with variable
interest entities. SFAS No. 167 will be effective for financial statements issued for fiscal
years beginning after November 15, 2009, and interim periods within those fiscal years. Early
adoption is not permitted. The Company does not believe that adoption of SFAS No. 167 will have a
material impact on its financial position and results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168). SFAS No. 168 establishes
the FASB Accounting Standards Codification (the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial standards in conformity with US GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of authoritative US GAAP for
SEC registrants. SFAS No. 168 will be effective for financial statements issued by the Company for
interim and annual periods after September 15, 2009. On the effective date of SFAS No. 168, all
then-existing non-SEC accounting and reporting standards are superseded, with the exception of
certain promulgations listed in SFAS No. 168. The Company currently anticipates that the adoption
of SFAS No. 168 will have no effect on its condensed consolidated financial statements as the
purpose of the Codification is not to create new accounting and reporting guidance. Rather, the
Codification is meant to simplify user access to all authoritative US GAAP. References to US GAAP
in the Companys published financial statements will be updated, as appropriate, to cite the
Codification following the effective date of SFAS No. 168.
16
4. Fair Value of Certain Financial Assets and Liabilities
In accordance with SFAS No. 157, the following represents the Companys fair value hierarchy for
its financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
123,394 |
|
|
$ |
|
|
|
$ |
123,394 |
|
Restricted
cash |
|
|
14,500 |
|
|
|
|
|
|
|
14,500 |
|
Other equity securities |
|
|
|
|
|
|
5,446 |
|
|
|
5,446 |
|
Mindspeed warrant |
|
|
|
|
|
|
2,307 |
|
|
|
2,307 |
|
Long-term restricted cash |
|
|
6,489 |
|
|
|
|
|
|
|
6,489 |
|
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
$ |
144,383 |
|
|
$ |
7,753 |
|
|
$ |
152,136 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap financial instruments |
|
$ |
|
|
|
$ |
2,754 |
|
|
$ |
2,754 |
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities |
|
$ |
|
|
|
$ |
2,754 |
|
|
$ |
2,754 |
|
|
|
|
|
|
|
|
|
|
|
Level 1 assets consist of the Companys cash and cash equivalents and restricted cash.
Level 2 assets consist of the Companys non-marketable investments (see Note 3) and a warrant to
purchase six million shares of Mindspeed common stock at an exercise price of $17.04 per share
through June 2013. At July 3, 2009, the warrant was valued using the Black-Scholes-Merton model
with an expected term of 4 years, expected volatility of 82%, a risk-free interest rate of 1.98%
and no dividend yield (see Note 5).
Level 2 liabilities consist of the Companys interest rate swap derivatives (see Note 5). The fair
value of interest rate swap derivatives is primarily based on third-party pricing service models.
These models use discounted cash flows that utilize the appropriate market-based forward swap
curves commensurate with the terms of the underlying instruments.
The Company had no financial assets or liabilities classified as Level 3 as of July 3, 2009.
The fair
value of other financial instruments as of July 3, 2009 are as follows:
|
|
|
|
|
|
|
Total |
|
Short-term
debt |
|
$ |
30,739 |
|
Long-term debt: senior secured notes |
|
|
140,075 |
|
Long-term debt: convertible subordinated notes |
|
|
107,813 |
|
|
|
|
|
|
|
$ |
278,627 |
|
|
|
|
|
Liabilities consist of the Companys short-term credit facility, the Companys senior secured
notes, and convertible subordinated notes (see Note 5). The fair value of the convertible
subordinated notes was calculated using a quoted market price in an active market. The fair value
of the senior secured notes was calculated using a quoted market price in a market which is not
active but which the Company believes represents an accurate exit price for the notes.
17
5. Supplemental Financial Information
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Work-in-process |
|
$ |
4,569 |
|
|
$ |
8,413 |
|
Finished goods |
|
|
3,783 |
|
|
|
10,959 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
8,352 |
|
|
$ |
19,372 |
|
|
|
|
|
|
|
|
At July 3, 2009 and October 3, 2008, inventories were net of excess and obsolete inventory reserves
of $7.9 million and $12.1 million, respectively.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2009 |
|
|
October 3, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Developed technology |
|
$ |
800 |
|
|
$ |
(462 |
) |
|
$ |
338 |
|
|
$ |
11,042 |
|
|
$ |
(9,963 |
) |
|
$ |
1,079 |
|
Product licenses |
|
|
2,400 |
|
|
|
(526 |
) |
|
|
1,874 |
|
|
|
11,032 |
|
|
|
(7,105 |
) |
|
|
3,927 |
|
Other intangible assets |
|
|
7,240 |
|
|
|
(3,138 |
) |
|
|
4,102 |
|
|
|
8,240 |
|
|
|
(2,635 |
) |
|
|
5,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,440 |
|
|
$ |
(4,126 |
) |
|
$ |
6,314 |
|
|
$ |
30,314 |
|
|
$ |
(19,703 |
) |
|
$ |
10,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
Amortization expense |
|
$ |
439 |
|
|
$ |
1,353 |
|
|
$ |
1,237 |
|
|
$ |
1,237 |
|
|
$ |
1,031 |
|
|
$ |
1,017 |
|
Amortization expense classified by cost of goods sold, research and development and selling,
general and administrative expenses is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of goods sold |
|
$ |
388 |
|
|
$ |
532 |
|
|
$ |
1,144 |
|
|
$ |
1,685 |
|
Research and development |
|
|
78 |
|
|
|
8 |
|
|
|
179 |
|
|
|
27 |
|
Selling, general and administrative |
|
|
224 |
|
|
|
159 |
|
|
|
1,224 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
690 |
|
|
$ |
699 |
|
|
$ |
2,547 |
|
|
$ |
2,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October 2008, the Company sold intellectual property to a third party (see Note 10).
Goodwill
Goodwill is tested at the reporting unit level annually and, if necessary, whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. The global
decline in consumer confidence and spending has dramatically impacted the Companys financial
performance as well as that of many of our
18
competitors, peers, customers, and suppliers. This
impact resulted in the Companys evaluation of the recoverability of goodwill during the first
quarter of fiscal 2009.
The Companys IPM reporting unit accounted for approximately 57 percent of the Companys total
revenues in the first quarter of fiscal 2009 and was associated with $110 million of the Companys
goodwill balance as of January 2, 2009. Overall financial performance declines in the first quarter
of fiscal 2009 resulted in an interim test for goodwill impairment. Based upon the results of the
testing for the quarter ended January 2, 2009, the Company determined that despite recent declines
in the IPM reporting unit, performance levels remained sufficient to support the IPM-related
goodwill balance as of January 2, 2009. The Companys fair value methods used for purposes of the
goodwill impairment tests incorporated a weighted-average of present value techniques, specifically
discounted cash flows and the use of multiples of revenues and earnings associated with comparable
companies. During the third fiscal quarter of fiscal 2009, we reviewed the IPM forecasts used in
the first quarter of fiscal 2009 interim goodwill impairment analysis and determined there were no
further declines in performance and, therefore, no interim goodwill impairment analysis was
considered necessary for the third fiscal quarter of fiscal 2009.
The changes in the carrying amounts of goodwill were as follows (in thousands):
|
|
|
|
|
Goodwill at October 3, 2008 |
|
$ |
110,412 |
|
Additions |
|
|
|
|
Other adjustments |
|
|
(318 |
) |
|
|
|
|
Goodwill at July 3, 2009 |
|
$ |
110,094 |
|
|
|
|
|
Goodwill is tested at the reporting unit level annually in the fourth fiscal quarter and, if
necessary, whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. There were no indicators of impairment requiring testing during the fiscal quarter
ended July 3, 2009.
An adjustment of $0.3 million was recorded in the fiscal quarter ended July 3, 2009 as a result of
the resolution of a pre-acquisition tax matter related to an acquisition in 2004, which under SFAS
No. 141 resulted in an adjustment to the purchase price.
Mindspeed Warrant
The Company has a warrant to purchase six million shares of Mindspeed common stock at an exercise
price of $17.04 per share through June 2013. At July 3, 2009 and October 3, 2008, the market value
of Mindspeed common stock was $2.06 and $2.08 per share, respectively. 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 July 3, 2009 and October 3, 2008, the
aggregate fair value of the Mindspeed warrant included on the accompanying condensed consolidated
balance sheets was $2.3 million and $0.5 million, respectively. At July 3, 2009, the warrant was
valued using the Black-Scholes-Merton model with an expected term of 4 years, expected volatility
of 82%, a risk-free interest rate of 1.98% and no dividend yield. The aggregate fair value of the
warrant is reflected as a long-term asset on the accompanying condensed consolidated balance sheets
because the Company does not intend to liquidate any portion of the warrant in the next twelve
months.
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
sells, from time to time, certain accounts receivable to Conexant USA, LLC (Conexant USA), a
special purpose entity which is a consolidated subsidiary of the Company. Under the terms of the
Companys agreements with Conexant USA, the Company retains the responsibility to service and
collect accounts receivable sold to Conexant USA and receives a weekly fee from Conexant USA for
handling administrative matters which is equal to 1.0%, on a per annum basis, of the uncollected
value of the accounts receivable.
19
Concurrent with the Companys agreements with Conexant USA, Conexant USA entered into a credit
facility which is secured by the assets of Conexant USA. 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 facility, which cannot exceed the lesser of $50.0 million
and 85% of the uncollected value of purchased accounts receivable that are eligible for coverage
under an insurance policy for the receivables, bear interest equal to 7-day LIBOR (reset weekly)
plus 1.25% and was approximately 1.54% at July 3, 2009. In addition, Conexant USA pays a fee of
0.2% per annum for the unused portion of the line of credit. The credit agreement matures in
November 2009 and remains subject to additional 364-day renewal periods at the discretion of the
bank. In connection with the renewal in November 2008, the interest rate applied to borrowings
under the credit facility increased from 7-day LIBOR plus 0.6% to 7-day LIBOR plus 1.25%.
The credit facility requires the Company and its consolidated subsidiaries to maintain minimum
levels of shareholders equity or cash and cash equivalents. Further, any failure by the Company or
Conexant USA to pay their respective debts as they become due would allow the bank to terminate the
credit agreement and cause all borrowings under the credit facility to immediately become due and
payable. At July 3, 2009, Conexant USA had borrowed $30.7 million under this credit facility and
the Company was in compliance with all credit facility covenants.
Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Floating rate senior secured notes due November 2010 |
|
$ |
141,400 |
|
|
$ |
141,400 |
|
4.00% convertible subordinated notes due March 2026 with a conversion price of $49.20 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
Total |
|
|
391,400 |
|
|
|
391,400 |
|
Less: current portion of long-term debt |
|
|
|
|
|
|
(17,707 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
391,400 |
|
|
$ |
373,693 |
|
|
|
|
|
|
|
|
Floating rate senior secured notes due November 2010 In November 2006, the Company issued $275.0
million aggregate principal amount of floating rate senior secured notes due November 2010.
Proceeds from this issuance, net of fees paid or payable, were approximately $264.8 million. The
senior secured notes bear interest at three-month LIBOR (reset quarterly) plus 3.75%, and interest
is payable in arrears quarterly on each February 15, May 15, August 15 and November 15, beginning
on February 15, 2007. The senior secured notes are redeemable in whole or in part, at the option of
the Company, at any time on or after November 15, 2008 at varying redemption prices that generally
include premiums, which are defined in the indenture for the notes, plus accrued and unpaid
interest. The Company is required to offer to repurchase, for cash, notes at a price of 100% of the
principal amount, plus any accrued and unpaid interest, with the net proceeds of certain asset
dispositions if such proceeds are not used within 360 days to invest in assets (other than current
assets) related to the Companys business. In addition, upon a change of control, the Company is
required to make an offer to redeem all of the senior secured notes at a redemption price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest. The floating rate
senior secured notes rank equally in right of payment with all of the Companys existing and future
senior debt and senior to all of its existing and future subordinated debt. The notes are
guaranteed by certain of the Companys U.S. subsidiaries (the Subsidiary Guarantors). The
guarantees rank equally in right of payment with all of the Subsidiary Guarantors existing and
future senior debt and senior to all of the Subsidiary Guarantors existing and future subordinated
debt. The notes and guarantees (and certain hedging obligations that may be entered into with
respect thereto) are secured by first-priority liens, subject to permitted liens, on substantially
all of the Companys and the Subsidiary Guarantors assets (other than accounts receivable and
proceeds therefrom and subject to certain exceptions), including, but not limited to, the
intellectual property, real property, plant and equipment now owned or hereafter acquired by the
Company and the Subsidiary Guarantors. See Note 15 for financial information regarding the
Subsidiary Guarantors.
20
The indenture governing the senior secured notes contains a number of covenants that restrict,
subject to certain exceptions, the Companys ability and the ability of its restricted subsidiaries
to: incur or guarantee additional indebtedness or issue certain redeemable or preferred stock;
repurchase capital stock; pay dividends on or make other distributions in respect of its capital
stock or make other restricted payments; make certain investments; create liens; redeem junior
debt; sell certain assets; consolidate, merge, sell or otherwise dispose of all or substantially
all of its assets; enter into certain types of transactions with affiliates; and enter into
sale-leaseback transactions.
The sale of the Companys investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the
sale of two other equity investments in April 2007 qualified as asset dispositions requiring the
Company to make offers to repurchase a portion of the notes no later than 361 days following the
asset dispositions. Based on the proceeds received from these asset dispositions and the Companys
cash investments in assets (other than current assets) related to the Companys business made
within 360 days following the asset dispositions, the Company was required to make an offer to
repurchase not more than $53.6 million of the senior secured notes, at 100% of the principal amount
plus any accrued and unpaid interest in February 2008. As a result of 100% acceptance of the offer
by the Companys bondholders, $53.6 million of the senior secured notes were repurchased during the
second quarter of fiscal 2008. The Company recorded a pretax loss on debt repurchase of $1.4
million during the second quarter of fiscal 2008, which included the write-off of deferred debt
issuance costs.
Following the sale of the BMP business unit in August 2008 (see Note 2), the Company made an offer
to repurchase $80.0 million of the senior secured notes at 100% of the principal amount plus any
accrued and unpaid interest in September 2008. As a result of the 100% acceptance of the offer by
the Companys bondholders, $80.0 million of the senior secured notes were repurchased during the
fourth quarter of fiscal 2008. The Company recorded a pretax loss on debt repurchase of $1.6
million during the fourth quarter of fiscal 2008, which included the write-off of deferred debt
issuance costs. The pretax loss on debt repurchase of $1.6 million has been included in net loss
from discontinued operations. During the nine fiscal months ended July 3, 2009, we did not have
additional sufficient asset dispositions to trigger another required
repurchase offer and accordingly, none of this debt has been
classified as current.
4.00% convertible subordinated notes due March 2026 In March 2006, the Company issued $200.0
million principal amount of 4.00% convertible subordinated notes due March 2026 and, in May 2006,
the initial purchaser of the notes exercised its option to purchase an additional $50.0 million
principal amount of the 4.00% convertible subordinated notes due March 2026. Total proceeds to the
Company from these issuances, net of issuance costs, were $243.6 million. The notes are general
unsecured obligations of the Company. Interest on the notes is payable in arrears semiannually on
each March 1 and September 1, beginning on September 1, 2006. The notes are convertible, at the
option of the holder upon satisfaction of certain conditions, into shares of the Companys common
stock at a conversion price of $49.20 per share, subject to adjustment for certain events. Upon
conversion, the Company has the right to deliver, in lieu of common stock, cash or a combination of
cash and common stock. Beginning on March 1, 2011, the notes may be redeemed at the Companys
option at a price equal to 100% of the principal amount, plus any accrued and unpaid interest.
Holders may require the Company to repurchase, for cash, all or part of their notes on March 1,
2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued
and unpaid interest.
Acquisitions In the fiscal quarter ended January 2, 2009 the Company acquired certain assets from
Analog Devices Inc. (ADI) used in the operation of ADIs Integrated Audio Group (ADI Audio) and
a license to manufacture and sell certain products related to ADI Audio. The cost of the assets,
which included inventory, test equipment and photomasks, was approximately $1.3 million. The cost
of the license was $2.5 million, which will be paid over one year in four quarterly installments.
Payments through July 3, 2009 for the acquired assets totaled $2.5 million. Also in the fiscal
quarter ended April 3, 2009 the Company made a final payment of $1.0 million to Zarlink
Semiconductor Inc. (Zarlink) as part of the acquisition of Zarlinks packet switching business in
2006.
6. Commitments and Contingencies
Legal Matters
Certain claims have been asserted against the Company, including claims alleging the use of the
intellectual property rights of others in certain of the Companys products. The resolution of
these matters may entail the negotiation of a license agreement, a settlement, or the adjudication
of such claims through arbitration or litigation. 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 Companys reserves for such matters,
management believes the disposition of such matters will not have a material adverse effect on the
Companys financial condition, results of operations, or cash flows.
21
IPO Litigation In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased the common stock of GlobeSpan, Inc. (GlobeSpan, Inc. later
became GlobespanVirata, Inc., and is now the Companys Conexant, Inc. subsidiary) between June 23,
1999 and December 6, 2000, filed a complaint in the U.S. District Court for the Southern District
of New York alleging violations of federal securities laws by the underwriters of GlobeSpan, Inc.s
initial and secondary public offerings as well as by certain GlobeSpan, Inc. officers and
directors. The complaint alleges that the defendants violated federal securities laws by issuing
and selling GlobeSpan, Inc.s common stock in the initial and secondary offerings without
disclosing to investors that the underwriters had (1) solicited and received undisclosed and
excessive commissions or other compensation and (2) entered into agreements requiring certain of
their customers to purchase the stock in the aftermarket at escalating prices. The complaint seeks
unspecified damages. The complaint was consolidated for purposes of discovery and other pretrial
proceedings with class actions against approximately 300 other companies making similar allegations
regarding the public offerings of those companies during 1998 through 2000. On June 10, 2009, the
court gave preliminary approval to a proposed settlement of the consolidated class actions. For
purposes of the settlement, the plaintiff class would not include certain institutions allocated
shares from the institutional pots in any of the public offerings at issue in the consolidated
class actions and persons associated with those institutions. The court has scheduled a hearing
for September 10, 2009 to determine whether the settlement should be approved finally. If the
settlement is approved, the Company anticipates that the GlobeSpan, Inc. defendants share of the
cost of the settlement will be paid by GlobeSpan, Inc.s insurers. The Company has not recorded
any special charges with respect to this litigation.
Class Action Suit In February 2005, the Company and certain of its current and former officers
and the Companys Employee Benefits Plan Committee were named as defendants in Graden v. Conexant,
et al., a lawsuit filed on behalf of all persons who were participants in the Companys 401(k) Plan
(Plan) during a specified class period. This suit was filed in the U.S. District Court of New
Jersey and alleges that the defendants breached their fiduciary duties under the Employee
Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The
plaintiffs filed an amended complaint on August 11, 2005. The amended complaint alleged that the
plaintiffs lost money in the Plan due to (i) poor Company merger-related performance,
(ii) misleading disclosures by the Company regarding the merger, (iii) breaches of fiduciary duty
regarding management of Plan assets, (iv) being encouraged to invest in Conexant Stock Fund,
(v) being unable to diversify out of said fund and (vi) having the Company make its matching
contributions in said fund. On October 12, 2005, the defendants filed a motion to dismiss this
case. The plaintiffs responded to the motion to dismiss on December 30, 2005, and the defendants
reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered
it closed. The plaintiffs filed a notice of appeal on April 17, 2006. The appellate argument was
held on April 19, 2007. On July 31, 2007, the Third Circuit Court of Appeals vacated the District
Courts order dismissing plaintiffs complaint and remanded the case for further proceedings. On
August 27, 2008, the motion to dismiss was granted in part and denied in part. The judge left in
claims against all of the individual defendants as well as against the Company. In January 2009,
the Company and the plaintiffs agreed in principle to settle all outstanding claims in the
litigation for $3.25 million. On May 21, 2009, plaintiffs attorneys filed with the District Court
a motion asking the court to grant its preliminary approval of the proposed settlement and set a
date for a final hearing on the settlement, after notice to the class, the obtaining of an
allocation of the dollar recovery, and certain other preconditions set forth in the settlement
agreement. By order dated June 18, 2009, the District Court granted preliminary approval of the
proposed settlement and set September 11, 2009 as the date of the final Settlement Fairness
hearing. The Company recorded a special charge of $3.7 million in the first fiscal quarter of 2009
to cover this settlement and any associated costs.
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
Companys spin-off from Rockwell International Corporation (Rockwell), the Company assumed
responsibility for all contingent liabilities and then-current and future litigation (including
environmental and intellectual property proceedings) against Rockwell or its subsidiaries in
respect of the operations of the semiconductor systems business of Rockwell. In connection with the
Companys contribution of certain of its manufacturing operations to Jazz, the Company agreed to
indemnify Jazz for certain environmental matters and other customary divestiture-related matters.
In connection with the Companys sale of the BMP business to NXP, the Company agreed to indemnify
NXP for certain claims related to the transaction. 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
22
certain claims arising from the
facility or the lease. The Company indemnifies its directors and officers to the maximum extent
permitted under the laws of the State of Delaware.
The durations of the Companys guarantees and indemnities vary, and in many cases are 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 condensed consolidated balance sheets as they are not estimated to
be material. Product warranty costs are not significant.
7. Stock-Based Award 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 Companys common stock. As of July 3,
2009, approximately 9.0 million shares of the Companys common stock are available for grant under
the stock option and long-term incentive plans. Stock options are granted with exercise prices of
not less than the fair market value at grant date, generally vest over three to 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.
Stock Option Plans
The Company accounts for its stock option plans in accordance with SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)). 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 condensed consolidated statements of operations over the service period
that the awards are expected to vest. The Company measures the fair value of service-based awards
and performance-based awards on the date of grant. Performance-based awards are evaluated for
vesting probability each reporting period. Awards with market conditions are valued on the date of
grant using the Monte Carlo Simulation Method giving consideration to the range of various vesting
probabilities.
The following weighted average assumptions were used in the estimated grant date fair value
calculations for share-based payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
Nine Fiscal Months Ended |
|
|
July 3, |
|
June 27, |
|
July 3, |
|
June 27, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Stock option plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expected stock price volatility |
|
|
87 |
% |
|
|
67 |
% |
|
|
78 |
% |
|
|
68 |
% |
Risk free interest rate |
|
|
1.96 |
% |
|
|
3.20 |
% |
|
|
2.02 |
% |
|
|
3.20 |
% |
Average expected life (in years) |
|
|
5.00 |
|
|
|
5.25 |
|
|
|
4.86 |
|
|
|
5.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expected stock price volatility |
|
|
|
|
|
|
68 |
% |
|
|
74 |
% |
|
|
68 |
% |
Risk free interest rate |
|
|
|
|
|
|
3.00 |
% |
|
|
3.14 |
% |
|
|
3.00 |
% |
Average expected life (in years) |
|
|
|
|
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
The expected stock price volatility rates are based on the historical volatility of the Companys
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-
23
average period of time that options or awards granted
are expected to be outstanding, as calculated using the simplified method described in the SECs
Staff Accounting Bulletin No. 110.
A summary of stock option activity is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
Outstanding, October 3, 2008 |
|
|
7,357 |
|
|
$ |
23.54 |
|
Granted |
|
|
70 |
|
|
|
1.04 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,771 |
) |
|
|
23.26 |
|
|
|
|
|
|
|
|
|
|
Outstanding, July 3, 2009 |
|
|
4,656 |
|
|
|
23.37 |
|
|
|
|
|
|
|
|
|
|
Shares vested and expected to vest, July 3, 2009 |
|
|
4,574 |
|
|
|
23.56 |
|
|
|
|
|
|
|
|
|
|
Exercisable, July 3, 2009 |
|
|
4,123 |
|
|
$ |
24.69 |
|
|
|
|
|
|
|
|
|
|
At July 3, 2009, of the 4.7 million stock options outstanding, approximately 3.9 million
options were held by current employees and directors of the Company, and approximately 0.8 million
options were held by employees of former businesses of the Company (i.e., Mindspeed and Skyworks
Solutions, Inc.) who remain employed by one of these businesses. At July 3, 2009, stock options
outstanding had an immaterial aggregate intrinsic value and a weighted-average remaining
contractual term of 3.4 years. At July 3, 2009, exercisable stock options had an immaterial
aggregate intrinsic value and a weighted-average remaining contractual term of 3.0 years. At July
3, 2009, shares vested and expected to vest had an immaterial aggregate intrinsic value and a
weighted-average remaining contractual term of 1.3 years. The total intrinsic value of options
exercised and total cash received from employees as a result of stock option exercises during the
nine fiscal months ended July 3, 2009 and June 27, 2008 was immaterial.
During the fiscal quarter and nine fiscal months ended July 3, 2009, the Company recognized
stock-based compensation expense of $0.4 million and $2.9 million, respectively, for stock options,
in its condensed consolidated statements of operations. During the fiscal quarter and nine fiscal
months ended June 27, 2008, the Company recognized stock-based
compensation expense of $3.5 million
and $8.0 million, respectively, for stock options, in its condensed consolidated statements of
operations.
The Company classified stock-based compensation expense of $0.2 million and $1.0 million to
discontinued operations for the fiscal quarter and nine fiscal months ended July 3, 2009,
respectively. The Company classified stock-based compensation expense of $1.4 million and $3.6
million to discontinued operations for the fiscal quarter and nine fiscal months ended June 27,
2008, respectively. At July 3, 2009, the total unrecognized fair value compensation cost related to
non-vested stock option awards was $3.7 million, which is expected to be recognized over a
remaining weighted average period of approximately 1.3 years.
1999 Long Term Incentive Plan, 2001 Performance Share Plan and 2004 New Hire Equity Incentive Plan
The Companys long-term incentive plans also provide for the issuance of share-based restricted
stock unit (RSU) awards to officers and other employees and certain non-employees of the Company.
These awards are subject to forfeiture if employment terminates during the prescribed vesting
period (generally within one to two years of the date of award) or, in certain cases, if prescribed
performance criteria are not met. The Company maintains the 1999 Long Term Incentive Plan, under
which it reserved 2.8 million shares for issuance, the 2001 Performance Share Plan, under which it
reserved 0.4 million shares for issuance, as well as the 2004 New Hire Equity Incentive Plan (2004
New Hire Plan), under which it reserved 1.2 million shares for issuance.
24
1999 Long Term Incentive Plan
The awards issued under this plan may be settled, at the Companys election at the time of payment,
in cash, shares of common stock or any combination of cash and common stock. A summary of
share-based award activity under the 1999 Long Term Incentive Plan is as follows (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding, October 3, 2008 |
|
|
225 |
|
|
$ |
5.31 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(206 |
) |
|
|
5.28 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 3, 2009 |
|
|
19 |
|
|
$ |
5.67 |
|
|
|
|
|
|
|
|
|
|
During the fiscal quarter and nine fiscal months ended July 3, 2009, the Company recognized
stock-based compensation expense of $0.04 million and $0.6 million, respectively, related to the
1999 Long Term Incentive Plan. During the fiscal quarter and nine fiscal months ended June 27,
2008, the Company recognized stock-based compensation expense of $0.2 million and $0.2 million,
respectively, related to the 1999 Long Term Incentive Plan. At July 3, 2009, the total unrecognized
fair value stock-based compensation cost related to non-vested 1999 Long Term Incentive Plan share
awards was $0.1 million, which is expected to be recognized over a weighted average period of one
year. The plan expired on December 31, 2008. There are no shares available to grant.
2001 Performance Share Plan
The performance-based awards may be settled, at the Companys election at the time of payment, in
cash, shares of common stock or any combination of cash and common stock. A summary of share-based
award activity under the 2001 Performance Share Plan is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding, October 3, 2008 |
|
|
175 |
|
|
$ |
8.00 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(175 |
) |
|
|
8.00 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 3, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
During the fiscal quarter and nine fiscal months ended July 3, 2009, the Company recognized
stock-based compensation expense of $0.02 million and $0.5 million, respectively, related to the
2001 Performance Share Plan. During the fiscal quarter and nine fiscal months ended June 27, 2008,
the Company recognized stock-based compensation expense of $0.4 million and $0.4 million,
respectively, related to the 2001 Performance Share Plan. The nine fiscal months ended June 27,
2008 include a reversal of previously recognized stock-based compensation expense of $1.1 million
related to the non-achievement of certain performance criteria. At July 3, 2009, approximately 0.2
million shares of the Companys common stock were available for issuance under the 2001 Performance
Share Plan.
25
2004 New Hire Plan
The 2004 New Hire Plan provides for the grant of service-based awards. A summary of share-based
award activity under the 2004 New Hire Plan is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding, October 3, 2008 |
|
|
74 |
|
|
$ |
10.59 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(32 |
) |
|
|
11.33 |
|
Forfeited |
|
|
(25 |
) |
|
|
13.70 |
|
|
|
|
|
|
|
|
|
|
Outstanding, July 3, 2009 |
|
|
17 |
|
|
$ |
4.50 |
|
|
|
|
|
|
|
|
|
|
During the fiscal quarter and nine fiscal months ended July 3, 2009, the Company recognized $0.01
million and $0.3 million in stock-based compensation expense related to the 2004 New Hire Plan,
respectively. During the fiscal quarter and nine fiscal months ended June 27, 2008, the Company
recognized $0.1 million and $0.2 million in stock-based compensation expense related to the 2004
New Hire Plan, respectively, including $1.0 million recorded in the
fiscal quarter and nine fiscal months ended June 27, 2008 due to acceleration of awards upon
the departure of the Companys former President and CEO. At July 3, 2009, the total unrecognized fair value compensation cost
related to non-vested 2004 New Hire Plan was $0.1 million, which is expected to be recognized over
a weighted average period of 1.7 years.
Employee Stock Purchase Plan
Effective January 31, 2009, the Company suspended the Employee Stock Purchase Plan (ESPP) for all
employees. The last purchase of 49,592 shares under the ESPP occurred on January 30, 2009. The ESPP
allowed eligible employees to purchase shares of the Companys common stock at six-month intervals
during an offering period at 85% of the lower of the fair market value on the first day of the
offering period or the purchase date. Under the ESPP, employees authorized 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 were limited to the purchase of 200 shares per offering period.
Offering periods generally commenced on the first trading day of February and August of each year
and were generally six months in duration, but may have been terminated earlier under certain
circumstances.
During the fiscal quarter and nine fiscal months ended July 3, 2009, the Company recognized
stock-based compensation expense of zero and $0.1 million, respectively, for stock purchase plans,
in its condensed consolidated statements of operations. During the fiscal quarter and nine fiscal
months ended June 27, 2008, the Company recognized stock-based compensation expense of $0.1 million
and $0.4 million, respectively, for stock purchase plans, in its condensed consolidated statements
of operations.
Directors Stock Plan
Effective February 13, 2009, the Company suspended the Directors Stock Plan (DSP) that provided
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 DSP, each non-employee director could
elect to receive all or a portion of the cash retainer to which the director was entitled through
the issuance of common stock.
26
8. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
2,726 |
|
|
$ |
(149,871 |
) |
|
$ |
(28,719 |
) |
|
$ |
(301,093 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
525 |
|
|
|
(797 |
) |
|
|
(1,230 |
) |
|
|
706 |
|
Unrealized gains on marketable securities |
|
|
|
|
|
|
480 |
|
|
|
650 |
|
|
|
480 |
|
Unrealized losses on foreign currency forward hedge contracts |
|
|
|
|
|
|
4,154 |
|
|
|
(153 |
) |
|
|
1,972 |
|
Unrealized losses on interest rate swap contracts |
|
|
(211 |
) |
|
|
|
|
|
|
(2,803 |
) |
|
|
|
|
Realized loss on impairment of marketable securities |
|
|
|
|
|
|
|
|
|
|
1,986 |
|
|
|
|
|
Realized gain on sale of marketable securities |
|
|
(702 |
) |
|
|
|
|
|
|
(702 |
) |
|
|
|
|
Gains on settlement of foreign currency forward hedge contracts |
|
|
|
|
|
|
|
|
|
|
659 |
|
|
|
|
|
Minimum pension liability adjustments |
|
|
|
|
|
|
4,832 |
|
|
|
|
|
|
|
3,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
|
(388 |
) |
|
|
8,669 |
|
|
|
(1,593 |
) |
|
|
6,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
2,338 |
|
|
$ |
(141,202 |
) |
|
$ |
(30,312 |
) |
|
$ |
(294,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Foreign currency translation adjustments |
|
$ |
(922 |
) |
|
$ |
308 |
|
Unrealized losses on marketable securities |
|
|
|
|
|
|
(1,934 |
) |
Unrealized losses on derivative instruments |
|
|
(2,754 |
) |
|
|
(457 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(3,676 |
) |
|
$ |
(2,083 |
) |
|
|
|
|
|
|
|
9. Income Taxes
The Company recorded a tax provision of $0.2 million and $0.8 million for the fiscal quarter and
nine fiscal months ended July 3, 2009, respectively, primarily reflecting income taxes imposed on
our foreign subsidiaries. All of our U.S. federal income taxes and the majority of our state income
taxes are offset by fully reserved deferred tax assets.
10. Gain on Sale of Intellectual Property
In October 2008, the Company sold a portfolio of patents, including patents related to its prior
wireless networking technology, to a third party for cash of $14.5 million, net of costs, and
recognized a gain of $12.9 million on the transaction. In accordance with the terms of the
agreement with the third party, the Company retains a cross-license to this portfolio of patents.
11. Special Charges
For the fiscal quarter ended July 3, 2009, special charges consisted primarily of $0.5 million of
restructuring charges related to workforce reductions implemented during the quarter and $0.5
million related to accretion of lease liability. For the nine fiscal months ended July 3, 2009,
special charges of $13.7 million consisted primarily of restructuring charges of $2.7 million
related to workforce reductions, $6.9 million related to revised sublease assumptions and accretion
of lease liability associated with vacated facilities, a $3.7 million charge for a legal settlement
(See Note 6) and $0.4 million of loss on disposal of property, plant and equipment. For the fiscal
quarter and nine fiscal months ended June 27, 2008, special charges of $8.5 million and $15.9
million, respectively, consisted primarily of restructuring charges and a $6.3 million charge
related to the termination of our voluntary early retirement plan.
27
Restructuring Charges
The Company has implemented a number of cost reduction initiatives since fiscal 2005 to improve its
operating cost structure. The cost reduction initiatives included workforce reductions and the
closure or consolidation of certain facilities, among other actions.
As of July 3, 2009, the Company has remaining restructuring accruals of $38.1 million, of which
$0.4 million relates to workforce reductions and $37.7 million relates to facility and other costs.
Of the $38.1 million of restructuring accruals at July 3, 2009, $4.6 million is included in other
current liabilities and $33.5 million is included in other non-current liabilities in the
accompanying condensed consolidated balance sheets. The Company expects to pay the amounts accrued
for the workforce reductions through fiscal 2009 and expects to pay the obligations for the
non-cancelable lease and other commitments over their respective terms, which expire at various
dates through fiscal 2021. The facility charges were determined in accordance with the provisions
of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Companys
accrued liabilities include the net present value of the future lease obligations of $77.7 million,
net of contracted sublease income of $11.6 million, and projected sublease income of $28.4 million,
and the Company will accrete the remaining amounts into expense over the remaining terms of the
non-cancellable leases. Cash payments to complete the restructuring actions will be funded from
available cash reserves and funds from product sales, and are not expected to significantly impact
the Companys liquidity.
Fiscal 2009 Restructuring Actions During the fiscal quarter ended April 3, 2009, the Company
completed actions that resulted in the elimination of 138 positions worldwide. In relation to this
restructuring action in fiscal 2009, the Company recorded $2.7 million of total charges for the
cost of severance benefits for the affected employees, $0.6 million of which were included in
discontinued operations related to our BBA business.
Activity and liability balances recorded as part of the fiscal 2009 restructuring actions through
July 3, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
Workforce |
|
|
|
Reductions |
|
Charged to costs and expenses |
|
$ |
2,709 |
|
Cash payments |
|
|
(2,278 |
) |
|
|
|
|
Restructuring balance, July 3, 2009 |
|
$ |
431 |
|
|
|
|
|
Fiscal 2008 Restructuring Actions During fiscal 2008, the Company announced its decision to
discontinue investments in standalone wireless networking solutions and other product areas. In
relation to these announcements in fiscal 2008, the Company recorded $6.3 million of total charges
for the cost of severance benefits for the affected employees. Additionally, the Company recorded
charges of $1.8 million relating to the consolidation of certain facilities under non-cancelable
leases that were vacated.
Restructuring charges in the nine fiscal months ended July 3, 2009 related to the fiscal 2008
restructuring actions included $0.6 million of additional severance charges.
28
Activity and liability balances recorded as part of the Fiscal 2008 restructuring actions through
July 3, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
6,254 |
|
|
$ |
1,762 |
|
|
$ |
8,016 |
|
Cash payments |
|
|
(6,161 |
) |
|
|
(731 |
) |
|
|
(6,892 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
93 |
|
|
|
1,031 |
|
|
|
1,124 |
|
Charged to costs and expenses |
|
|
583 |
|
|
|
(16 |
) |
|
|
567 |
|
Reclassification to other current liabilities and other liabilities |
|
|
|
|
|
|
(175 |
) |
|
|
(175 |
) |
Cash payments |
|
|
(676 |
) |
|
|
(440 |
) |
|
|
(1,116 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, July 3, 2009 |
|
$ |
|
|
|
$ |
400 |
|
|
$ |
400 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Restructuring Actions During fiscal 2007, the Company announced several facility
closures and workforce reductions. In total, the Company notified approximately 670 employees of
their involuntary termination and recorded $9.5 million of total charges for the cost of severance
benefits for the affected employees. Additionally, the Company recorded charges of $2.0 million
relating to the consolidation of certain facilities under non-cancelable leases which were vacated.
The non-cash facility accruals resulted from the reclassification of deferred gains on the previous
sale-leaseback of two facilities totaling $8.0 million in fiscal 2008 and $4.9 million in fiscal
2007. As a result of the Companys sale of its BMP business unit in fiscal 2008, $2.9 million and
$2.2 million, incurred in fiscal 2008 and 2007, respectively, related to fiscal 2007 restructuring
actions were reclassified to discontinued operations in the condensed consolidated statements of
operations. The domestic economic downturn experienced during the fiscal quarter ended January 2,
2009 resulted in declines in real estate lease rates and adversely impacted the Companys ability
to secure sub tenants for a facility located in San Diego. These declines resulted in a decrease in
estimated future projected sub lease rental income causing a $9.1 million additional restructuring
charge for the facility. The remaining additional facility restructuring charge of $1.5 million is
due to accretion of lease liability. The majority of the facility supported the operations of the
BMP business sold in August 2008. The additional restructuring charge of $10.6 million was
allocated between the BMP business and continuing operations based upon the historical use of the
facility. Of the $10.6 million restructuring charge, $8.0 million was included in discontinued
operations and $2.6 million was charged to operating expenses.
Activity and liability balances recorded as part of the Fiscal 2007 restructuring actions through
July 3, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
9,477 |
|
|
$ |
2,040 |
|
|
$ |
11,517 |
|
Non-cash items |
|
|
|
|
|
|
4,868 |
|
|
|
4,868 |
|
Cash payments |
|
|
(5,841 |
) |
|
|
(268 |
) |
|
|
(6,109 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007 |
|
|
3,636 |
|
|
|
6,640 |
|
|
|
10,276 |
|
Charged to costs and expenses |
|
|
11 |
|
|
|
6,312 |
|
|
|
6,323 |
|
Non-cash items |
|
|
|
|
|
|
8,039 |
|
|
|
8,039 |
|
Cash payments |
|
|
(3,631 |
) |
|
|
(4,309 |
) |
|
|
(7,940 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
16 |
|
|
|
16,682 |
|
|
|
16,698 |
|
Charged to costs and expenses |
|
|
(1 |
) |
|
|
10,577 |
|
|
|
10,576 |
|
Cash payments |
|
|
(15 |
) |
|
|
(4,014 |
) |
|
|
(4,029 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, July 3, 2009 |
|
$ |
|
|
|
$ |
23,245 |
|
|
$ |
23,245 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 and 2005 Restructuring Actions During fiscal years 2006 and 2005, the Company
announced operating site closures and workforce reductions. In total, the Company notified
approximately 385 employees of their involuntary termination. During fiscal 2006 and 2005, the
Company recorded total charges of $24.1 million based on the estimates of the cost of severance
benefits for the affected employees and the estimated relocation
29
benefits for those employees who
were offered and accepted relocation assistance. Additionally, the Company recorded charges of
$21.3 million relating to the consolidation of certain facilities under non-cancelable leases that
were vacated. Restructuring charges in the nine fiscal months ended July 3, 2009 related to the
fiscal 2006 and 2005 restructuring actions included $3.7 million due to a decrease in estimated
future rental income from sub-tenants resulting from declines in sub lease activity and $0.6
million due to accretion of lease liability.
Activity and liability balances recorded as part of the Fiscal 2006 and 2005 restructuring actions
through July 3, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
Facility |
|
|
|
and Other |
|
Restructuring balance, October 3, 2008 |
|
$ |
11,037 |
|
Charged to costs and expenses |
|
|
4,317 |
|
Cash payments |
|
|
(1,355 |
) |
|
|
|
|
Restructuring balance, July 3, 2009 |
|
$ |
13,999 |
|
|
|
|
|
30
12. Other (income) expense, net
Other (income) expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Investment and interest income |
|
$ |
(281 |
) |
|
$ |
(1,171 |
) |
|
$ |
(1,589 |
) |
|
$ |
(5,990 |
) |
Gain on sale of investments |
|
|
(1,803 |
) |
|
|
(145 |
) |
|
|
(1,856 |
) |
|
|
(874 |
) |
Other-than-temporary impairment of marketable securities
and cost based investments |
|
|
|
|
|
|
|
|
|
|
2,770 |
|
|
|
|
|
(Increase) decrease in the fair value of derivative instruments |
|
|
(1,166 |
) |
|
|
(1,881 |
) |
|
|
(1,762 |
) |
|
|
12,662 |
|
Other |
|
|
(317 |
) |
|
|
200 |
|
|
|
(1,018 |
) |
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(3,567 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,455 |
) |
|
$ |
6,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income), net during the fiscal quarter ended July 3, 2009 was primarily comprised of a $1.8
million gain on sale of equity investments, a $1.2 million increase in the fair value of the
Companys warrant to purchase six million shares of Mindspeed common stock and $0.3 million of
investment and interest income on invested cash balances. Other (income), net during the nine
fiscal months ended July 3, 2009 was primarily comprised of a $1.9 million gain on sale of equity
investments, a $1.8 million increase in the fair value of the Companys warrant to purchase six
million shares of Mindspeed common stock, $1.6 million of investment and interest income on
invested cash balances and $1.0 million of other gains offset by other-than-temporary impairments
of marketable securities and cost method investments of $2.8 million.
Other (income), net during the fiscal quarter ended June 27, 2008 was primarily comprised of a $1.9
million increase in the fair value in the fair value of the Companys warrant to purchase six
million shares of Mindspeed common stock, $1.2 million of investment and interest income on
invested cash balances and a $0.1 million gain on sale of equity investments. Other expense, net
during the nine fiscal months ended June 27, 2008 was primarily comprised of a $12.7 million
decrease in the fair value of the Companys warrant to purchase six million shares of Mindspeed
common stock and other expenses of $1.0 million, offset by $6.0 million of investment and interest
income on invested cash balances and a $0.9 million gain on sale of equity investments.
13. Related Party Transactions
Mindspeed Technologies, Inc.
As of July 3, 2009, the Company holds a warrant to purchase six million shares of Mindspeed common
stock at an exercise price of $17.04 per share exercisable through June 2013. In addition, two
members of the Companys Board of Directors also serve on the Board of Mindspeed. No significant
amounts were due to or receivable from Mindspeed at July 3, 2009 or at October 3, 2008.
Lease Agreement The Company subleases an office building to Mindspeed. Under the sublease
agreement, Mindspeed pays amounts for rental expense and operating expenses, which include
utilities, common area maintenance, and security services. During the fiscal quarter and nine
fiscal months ended July 3, 2009 and June 27, 2008, the Company recorded income related to the
Mindspeed sublease agreement of $0.5 million and $0.6 million, and $1.3 million and $1.9 million,
respectively. Additionally, Mindspeed made payments directly to the Companys landlord totaling
$0.9 million and $1.1 million during the fiscal quarter ended July 3, 2009 and June 27, 2008,
respectively, and $2.5 million and $2.5 million during the nine fiscal months ended July 3, 2009 and
June 27, 2008, respectively.
31
14. Geographic Information
Net revenues by geographic area, based upon country of destination, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
715 |
|
|
$ |
2,556 |
|
|
$ |
4,391 |
|
|
$ |
7,070 |
|
Other Americas |
|
|
536 |
|
|
|
2,128 |
|
|
|
2,682 |
|
|
|
7,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
|
1,251 |
|
|
|
4,684 |
|
|
|
7,073 |
|
|
|
14,112 |
|
China |
|
|
33,522 |
|
|
|
50,175 |
|
|
|
97,360 |
|
|
|
160,923 |
|
Taiwan |
|
|
3,989 |
|
|
|
4,629 |
|
|
|
11,041 |
|
|
|
13,871 |
|
Japan |
|
|
3,075 |
|
|
|
3,230 |
|
|
|
8,896 |
|
|
|
14,078 |
|
Malaysia |
|
|
2,838 |
|
|
|
1,963 |
|
|
|
8,006 |
|
|
|
5,276 |
|
Thailand |
|
|
751 |
|
|
|
2,138 |
|
|
|
4,250 |
|
|
|
8,431 |
|
Singapore |
|
|
3,292 |
|
|
|
4,673 |
|
|
|
8,804 |
|
|
|
21,616 |
|
South Korea |
|
|
1,468 |
|
|
|
788 |
|
|
|
3,252 |
|
|
|
6,160 |
|
Other Asia-Pacific |
|
|
54 |
|
|
|
107 |
|
|
|
1,234 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific |
|
|
48,989 |
|
|
|
67,703 |
|
|
|
142,843 |
|
|
|
230,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
|
|
604 |
|
|
|
1,515 |
|
|
|
2,356 |
|
|
|
5,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,844 |
|
|
$ |
73,902 |
|
|
$ |
152,272 |
|
|
$ |
250,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. One distributor accounted for 22% and 20% of net
revenues for the fiscal quarter and nine fiscal months ended July 3, 2009, respectively, and 29%
and 23% of net revenues for the fiscal quarter and nine fiscal months ended June 27, 2008,
respectively. Sales to the Companys twenty largest customers represented approximately 85% and 76%
of net revenues for the fiscal quarter and nine fiscal months ended July 3, 2009, respectively, and
approximately 93% and 84% of net revenues for the fiscal quarter and nine fiscal months ended June
27, 2008, respectively.
Long-lived assets consist of property, plant and equipment and certain other long-term assets.
Long-lived assets by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
39,772 |
|
|
$ |
49,240 |
|
India |
|
|
1,329 |
|
|
|
2,627 |
|
Other Asia-Pacific |
|
|
2,058 |
|
|
|
4,208 |
|
Europe, Middle East and Africa |
|
|
21 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
$ |
43,180 |
|
|
$ |
56,110 |
|
|
|
|
|
|
|
|
15. Supplemental Guarantor Financial Information
In November 2006, the Company issued $275.0 million of floating rate senior secured notes due
November 2010. The floating rate senior secured notes rank equally in right of payment with all of
the Companys existing and future senior debt and senior to all of its existing and future
subordinated debt. The notes are also jointly, severally and unconditionally guaranteed, on a
senior basis, by three of the Companys wholly owned U.S. subsidiaries: Conexant, Inc., Brooktree
Broadband Holding, Inc., and Ficon Technology, Inc. (collectively, the Subsidiary Guarantors).
32
The guarantees rank equally in right of payment with all of the Subsidiary Guarantors existing and
future senior debt and senior to all of the Subsidiary Guarantors existing and future subordinated
debt.
The notes and guarantees (and certain hedging obligations that may be entered into with respect
thereto) are secured by first-priority liens, subject to permitted liens, on substantially all of
the Companys and the Subsidiary Guarantors assets (other than accounts receivable and proceeds
therefrom and subject to certain exceptions), including, but not limited to, the intellectual
property, owned real property, plant and equipment now owned or hereafter acquired by the Company
and the Subsidiary Guarantors.
In lieu of providing separate financial statements for the Subsidiary Guarantors, the Company has
included the accompanying condensed consolidating financial statements. These condensed
consolidating financial statements are presented on the equity method of accounting. Under this
method, the Companys and Subsidiary Guarantors investments in their subsidiaries are recorded at
cost and adjusted for their share of the subsidiaries cumulative results of operations, capital
contributions and distributions and other equity changes. The financial information of the three
Subsidiary Guarantors has been combined in the condensed consolidating financial statements.
The following guarantor financial information has been adjusted to reflect the Companys
discontinued operations. See Note 3 for further information regarding the sale of the Companys BMP
product line during fiscal 2008 and the pending sale of the Companys BBA business.
In addition, subsequent to the issuance of the Companys condensed consolidated interim financial
statements for the fiscal quarter ended June 27, 2008, the Company corrected its guarantor
financial information to: (1) properly apply the equity method of accounting and properly allocate
amortization of certain intangible assets in its condensed consolidating statements of operations
for the fiscal quarter and nine fiscal months ended June 27, 2008; and (2) properly present the
results of its intercompany transactions within its condensed consolidating statements of cash
flows (as financing activities rather than operating activities) for the nine fiscal months ended
June 27, 2008 in accordance with SEC Regulation S-X, Rule 3-10(f).
33
The following tables present the Companys condensed consolidating balance sheets as of July 3,
2009 and October 3, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
94,238 |
|
|
$ |
|
|
|
$ |
29,156 |
|
|
$ |
|
|
|
$ |
123,394 |
|
Restricted cash |
|
|
6,000 |
|
|
|
|
|
|
|
8,500 |
|
|
|
|
|
|
|
14,500 |
|
Receivables, net |
|
|
3,428 |
|
|
|
169,158 |
|
|
|
37,160 |
|
|
|
(169,158 |
) |
|
|
40,588 |
|
Inventories |
|
|
8,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,352 |
|
Other current assets |
|
|
28,181 |
|
|
|
|
|
|
|
6,125 |
|
|
|
|
|
|
|
34,306 |
|
Current assets held for sale |
|
|
14,034 |
|
|
|
|
|
|
|
2,894 |
|
|
|
|
|
|
|
16,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
154,233 |
|
|
|
169,158 |
|
|
|
83,835 |
|
|
|
(169,158 |
) |
|
|
238,068 |
|
Property and equipment, net |
|
|
9,157 |
|
|
|
|
|
|
|
2,918 |
|
|
|
|
|
|
|
12,075 |
|
Goodwill |
|
|
17,910 |
|
|
|
89,087 |
|
|
|
3,097 |
|
|
|
|
|
|
|
110,094 |
|
Intangible assets, net |
|
|
5,962 |
|
|
|
|
|
|
|
352 |
|
|
|
|
|
|
|
6,314 |
|
Other assets |
|
|
31,142 |
|
|
|
|
|
|
|
2,305 |
|
|
|
|
|
|
|
33,447 |
|
Investments in subsidiaries |
|
|
274,592 |
|
|
|
19,851 |
|
|
|
|
|
|
|
(294,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
492,996 |
|
|
$ |
278,096 |
|
|
$ |
92,507 |
|
|
$ |
(463,601 |
) |
|
$ |
399,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
30,739 |
|
|
|
|
|
|
|
30,739 |
|
Accounts payable |
|
|
159,687 |
|
|
|
|
|
|
|
36,557 |
|
|
|
(169,158 |
) |
|
|
27,086 |
|
Accrued compensation and benefits |
|
|
5,415 |
|
|
|
|
|
|
|
2,655 |
|
|
|
|
|
|
|
8,070 |
|
Other current liabilities |
|
|
28,613 |
|
|
|
932 |
|
|
|
3,242 |
|
|
|
|
|
|
|
32,787 |
|
Current liabilities to be assumed |
|
|
2,893 |
|
|
|
|
|
|
|
553 |
|
|
|
|
|
|
|
3,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
196,608 |
|
|
|
932 |
|
|
|
73,746 |
|
|
|
(169,158 |
) |
|
|
102,128 |
|
Long-term debt |
|
|
391,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
391,400 |
|
Other liabilities |
|
|
66,980 |
|
|
|
|
|
|
|
1,482 |
|
|
|
|
|
|
|
68,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
654,988 |
|
|
|
932 |
|
|
|
75,228 |
|
|
|
(169,158 |
) |
|
|
561,990 |
|
Shareholders (deficit) equity |
|
|
(161,992 |
) |
|
|
277,164 |
|
|
|
17,279 |
|
|
|
(294,443 |
) |
|
|
(161,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit) |
|
$ |
492,996 |
|
|
$ |
278,096 |
|
|
$ |
92,507 |
|
|
$ |
(463,601 |
) |
|
$ |
399,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69,738 |
|
|
$ |
|
|
|
$ |
36,145 |
|
|
$ |
|
|
|
$ |
105,883 |
|
Restricted cash |
|
|
18,000 |
|
|
|
|
|
|
|
8,800 |
|
|
|
|
|
|
|
26,800 |
|
Receivables |
|
|
|
|
|
|
169,158 |
|
|
|
57,584 |
|
|
|
(177,745 |
) |
|
|
48,997 |
|
Inventories |
|
|
19,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,372 |
|
Other current assets |
|
|
32,998 |
|
|
|
3 |
|
|
|
4,937 |
|
|
|
|
|
|
|
37,938 |
|
Current assets held for sale |
|
|
25,248 |
|
|
|
|
|
|
|
4,482 |
|
|
|
|
|
|
|
29,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
165,356 |
|
|
|
169,161 |
|
|
|
111,948 |
|
|
|
(177,745 |
) |
|
|
268,720 |
|
Property and equipment, net |
|
|
11,292 |
|
|
|
|
|
|
|
6,118 |
|
|
|
|
|
|
|
17,410 |
|
Goodwill |
|
|
17,911 |
|
|
|
89,404 |
|
|
|
3,097 |
|
|
|
|
|
|
|
110,412 |
|
Intangible assets, net |
|
|
4,167 |
|
|
|
5,992 |
|
|
|
452 |
|
|
|
|
|
|
|
10,611 |
|
Other assets |
|
|
36,753 |
|
|
|
|
|
|
|
2,497 |
|
|
|
|
|
|
|
39,250 |
|
Investments in subsidiaries |
|
|
291,511 |
|
|
|
19,188 |
|
|
|
|
|
|
|
(310,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
526,990 |
|
|
$ |
283,745 |
|
|
$ |
124,112 |
|
|
$ |
(488,444 |
) |
|
$ |
446,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
17,707 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,707 |
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
40,117 |
|
|
|
|
|
|
|
40,117 |
|
Accounts payable |
|
|
164,057 |
|
|
|
|
|
|
|
48,582 |
|
|
|
(177,745 |
) |
|
|
34,894 |
|
Accrued compensation and benefits |
|
|
10,841 |
|
|
|
|
|
|
|
2,360 |
|
|
|
|
|
|
|
13,201 |
|
Other current liabilities |
|
|
39,592 |
|
|
|
932 |
|
|
|
2,665 |
|
|
|
|
|
|
|
43,189 |
|
Current liabilities to be assumed |
|
|
3,135 |
|
|
|
|
|
|
|
860 |
|
|
|
|
|
|
|
3,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
235,332 |
|
|
|
932 |
|
|
|
94,584 |
|
|
|
(177,745 |
) |
|
|
153,103 |
|
Long-term debt |
|
|
373,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,693 |
|
Other liabilities |
|
|
54,699 |
|
|
|
|
|
|
|
1,642 |
|
|
|
|
|
|
|
56,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
663,724 |
|
|
|
932 |
|
|
|
96,226 |
|
|
|
(177,745 |
) |
|
|
583,137 |
|
Shareholders (deficit) equity |
|
|
(136,734 |
) |
|
|
282,813 |
|
|
|
27,886 |
|
|
|
(310,699 |
) |
|
|
(136,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit) |
|
$ |
526,990 |
|
|
$ |
283,745 |
|
|
$ |
124,112 |
|
|
$ |
(488,444 |
) |
|
$ |
446,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following tables present the Companys condensed consolidating statements of operations for the
fiscal quarter ended July 3, 2009 and June 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended July 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
44,161 |
|
|
$ |
360 |
|
|
$ |
6,323 |
|
|
$ |
|
|
|
$ |
50,844 |
|
Cost of goods sold |
|
|
14,806 |
|
|
|
|
|
|
|
5,727 |
|
|
|
|
|
|
|
20,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
29,355 |
|
|
|
360 |
|
|
|
596 |
|
|
|
|
|
|
|
30,311 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
12,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,450 |
|
Selling, general and administrative |
|
|
13,980 |
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
14,813 |
|
Amortization of intangible assets |
|
|
665 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
690 |
|
Special charges |
|
|
(201 |
) |
|
|
|
|
|
|
1,261 |
|
|
|
|
|
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
26,894 |
|
|
|
|
|
|
|
2,119 |
|
|
|
|
|
|
|
29,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,461 |
|
|
|
360 |
|
|
|
(1,523 |
) |
|
|
|
|
|
|
1,298 |
|
Equity (loss) in income of subsidiaries |
|
|
962 |
|
|
|
1,147 |
|
|
|
|
|
|
|
(2,109 |
) |
|
|
|
|
Interest expense |
|
|
4,632 |
|
|
|
|
|
|
|
403 |
|
|
|
|
|
|
|
5,035 |
|
Other income, net |
|
|
(865 |
) |
|
|
|
|
|
|
(2,702 |
) |
|
|
|
|
|
|
(3,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income
taxes and loss on equity method investments |
|
|
(344 |
) |
|
|
1,507 |
|
|
|
776 |
|
|
|
(2,109 |
) |
|
|
(170 |
) |
Provision for income taxes |
|
|
156 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before loss on
equity method investments |
|
|
(500 |
) |
|
|
1,507 |
|
|
|
756 |
|
|
|
(2,109 |
) |
|
|
(346 |
) |
Loss on equity method investments |
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(985 |
) |
|
|
1,507 |
|
|
|
756 |
|
|
|
(2,109 |
) |
|
|
(831 |
) |
Income (loss) from discontinued operations |
|
|
3,711 |
|
|
|
|
|
|
|
(154 |
) |
|
|
|
|
|
|
3,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,726 |
|
|
$ |
1,507 |
|
|
$ |
602 |
|
|
$ |
(2,109 |
) |
|
$ |
2,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended June 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
68,763 |
|
|
$ |
1,503 |
|
|
$ |
3,636 |
|
|
$ |
|
|
|
$ |
73,902 |
|
Cost of goods sold |
|
|
29,060 |
|
|
|
|
|
|
|
3,249 |
|
|
|
|
|
|
|
32,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
39,703 |
|
|
|
1,503 |
|
|
|
387 |
|
|
|
|
|
|
|
41,593 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
9,844 |
|
|
|
|
|
|
|
495 |
|
|
|
|
|
|
|
10,339 |
|
Selling, general and administrative |
|
|
21,453 |
|
|
|
|
|
|
|
1,206 |
|
|
|
|
|
|
|
22,659 |
|
Amortization of intangible assets |
|
|
673 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
699 |
|
Special charges |
|
|
8,301 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
8,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
40,271 |
|
|
|
|
|
|
|
1,885 |
|
|
|
|
|
|
|
42,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(568 |
) |
|
|
1,503 |
|
|
|
(1,498 |
) |
|
|
|
|
|
|
(563 |
) |
(Loss) equity in income of subsidiaries |
|
|
(88,792 |
) |
|
|
5,237 |
|
|
|
|
|
|
|
83,555 |
|
|
|
|
|
Interest expense |
|
|
4,940 |
|
|
|
|
|
|
|
954 |
|
|
|
|
|
|
|
5,894 |
|
Other expense (income), net |
|
|
7,618 |
|
|
|
|
|
|
|
(10,615 |
) |
|
|
|
|
|
|
(2,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuting operations before income
taxes and gain on equity method investments |
|
|
(101,918 |
) |
|
|
6,740 |
|
|
|
8,163 |
|
|
|
83,555 |
|
|
|
(3,460 |
) |
Provision for income taxes |
|
|
(1,679 |
) |
|
|
|
|
|
|
1,772 |
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuting operations before gain on
equity method investments |
|
|
(100,239 |
) |
|
|
6,740 |
|
|
|
6,391 |
|
|
|
83,555 |
|
|
|
(3,553 |
) |
Gain on equity method investments |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(100,186 |
) |
|
|
6,740 |
|
|
|
6,391 |
|
|
|
83,555 |
|
|
|
(3,500 |
) |
Loss from discontinued operations |
|
|
(49,685 |
) |
|
|
(96,468 |
) |
|
|
(218 |
) |
|
|
|
|
|
|
(146,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(149,871 |
) |
|
$ |
(89,728 |
) |
|
$ |
6,173 |
|
|
$ |
83,555 |
|
|
$ |
(149,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
The following tables present the Companys condensed consolidating statements of operations for the
nine fiscal months ended July 3, 2009 and June 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Fiscal Months Ended July 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
136,586 |
|
|
$ |
1,859 |
|
|
$ |
13,827 |
|
|
$ |
|
|
|
$ |
152,272 |
|
Cost of goods sold |
|
|
51,709 |
|
|
|
|
|
|
|
12,700 |
|
|
|
|
|
|
|
64,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
84,877 |
|
|
|
1,859 |
|
|
|
1,127 |
|
|
|
|
|
|
|
87,863 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
38,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,783 |
|
Selling, general and administrative |
|
|
46,441 |
|
|
|
|
|
|
|
3,298 |
|
|
|
|
|
|
|
49,739 |
|
Amortization of intangible assets |
|
|
2,471 |
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
2,547 |
|
Gain on sale of intellectual property |
|
|
(12,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,858 |
) |
Special charges |
|
|
11,529 |
|
|
|
|
|
|
|
2,124 |
|
|
|
|
|
|
|
13,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
86,366 |
|
|
|
|
|
|
|
5,498 |
|
|
|
|
|
|
|
91,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income |
|
|
(1,489 |
) |
|
|
1,859 |
|
|
|
(4,371 |
) |
|
|
|
|
|
|
(4,001 |
) |
(Loss) equity in income of subsidiaries |
|
|
(807 |
) |
|
|
663 |
|
|
|
|
|
|
|
144 |
|
|
|
|
|
Interest expense |
|
|
14,209 |
|
|
|
|
|
|
|
1,425 |
|
|
|
|
|
|
|
15,634 |
|
Other expense (income), net |
|
|
5,261 |
|
|
|
|
|
|
|
(8,716 |
) |
|
|
|
|
|
|
(3,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income
taxes and loss on equity method investments |
|
|
(21,766 |
) |
|
|
2,522 |
|
|
|
2,920 |
|
|
|
144 |
|
|
|
(16,180 |
) |
Provision for income taxes |
|
|
(325 |
) |
|
|
|
|
|
|
1,144 |
|
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before
loss on equity method investments |
|
|
(21,441 |
) |
|
|
2,522 |
|
|
|
1,776 |
|
|
|
144 |
|
|
|
(16,999 |
) |
Loss on equity method investments |
|
|
(2,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(23,607 |
) |
|
|
2,522 |
|
|
|
1,776 |
|
|
|
144 |
|
|
|
(19,165 |
) |
Loss from discontinued operations |
|
|
(5,112 |
) |
|
|
(4,302 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
(9,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(28,719 |
) |
|
$ |
(1,780 |
) |
|
$ |
1,636 |
|
|
$ |
144 |
|
|
$ |
(28,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Fiscal Months Ended June 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
222,264 |
|
|
$ |
6,726 |
|
|
$ |
21,399 |
|
|
$ |
|
|
|
$ |
250,389 |
|
Cost of goods sold |
|
|
83,838 |
|
|
|
|
|
|
|
19,251 |
|
|
|
|
|
|
|
103,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
138,426 |
|
|
|
6,726 |
|
|
|
2,148 |
|
|
|
|
|
|
|
147,300 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
42,264 |
|
|
|
|
|
|
|
1,104 |
|
|
|
|
|
|
|
43,368 |
|
Selling, general and administrative |
|
|
52,371 |
|
|
|
|
|
|
|
6,362 |
|
|
|
|
|
|
|
58,733 |
|
Amortization of intangible assets |
|
|
2,193 |
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
2,269 |
|
Special charges |
|
|
14,866 |
|
|
|
|
|
|
|
1,044 |
|
|
|
|
|
|
|
15,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
111,694 |
|
|
|
|
|
|
|
8,586 |
|
|
|
|
|
|
|
120,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
26,732 |
|
|
|
6,726 |
|
|
|
(6,438 |
) |
|
|
|
|
|
|
27,020 |
|
(Loss) equity in income of subsidiaries |
|
|
(208,534 |
) |
|
|
6,564 |
|
|
|
|
|
|
|
201,970 |
|
|
|
|
|
Interest expense |
|
|
18,298 |
|
|
|
|
|
|
|
3,524 |
|
|
|
|
|
|
|
21,822 |
|
Other expense (income), net |
|
|
27,305 |
|
|
|
|
|
|
|
(20,539 |
) |
|
|
|
|
|
|
6,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income
taxes and gain on equity method investments |
|
|
(227,405 |
) |
|
|
13,290 |
|
|
|
10,577 |
|
|
|
201,970 |
|
|
|
(1,568 |
) |
Provision for income taxes |
|
|
(2,742 |
) |
|
|
|
|
|
|
3,104 |
|
|
|
|
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before gain on
equity method investments |
|
|
(224,663 |
) |
|
|
13,290 |
|
|
|
7,473 |
|
|
|
201,970 |
|
|
|
(1,930 |
) |
Gain on equity method investments |
|
|
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(221,051 |
) |
|
|
13,290 |
|
|
|
7,473 |
|
|
|
201,970 |
|
|
|
1,682 |
|
Loss from discontinued operations |
|
|
(80,042 |
) |
|
|
(222,078 |
) |
|
|
(655 |
) |
|
|
|
|
|
|
(302,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(301,093 |
) |
|
$ |
(208,788 |
) |
|
$ |
6,818 |
|
|
$ |
201,970 |
|
|
$ |
(301,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The following tables present the Companys condensed consolidating statements of cash flows for the
nine fiscal months ended July 3, 2009 and June 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Fiscal Months Ended July 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash (used in) provided by operating activities |
|
$ |
(13,550 |
) |
|
$ |
4,104 |
|
|
$ |
17,967 |
|
|
$ |
(7,674 |
) |
|
$ |
847 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(221 |
) |
|
|
|
|
|
|
(334 |
) |
|
|
|
|
|
|
(555 |
) |
Proceeds from release of escrow |
|
|
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,075 |
|
Payments for acquisitions |
|
|
(3,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,578 |
) |
Purchases of accounts receivable |
|
|
|
|
|
|
|
|
|
|
(188,532 |
) |
|
|
188,532 |
|
|
|
|
|
Proceeds from collection of purchased accounts receivable |
|
|
|
|
|
|
|
|
|
|
180,858 |
|
|
|
(180,858 |
) |
|
|
|
|
Proceeds from sales of equity securities |
|
|
2,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256 |
|
Release of restricted cash |
|
|
12,270 |
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
12,570 |
|
Proceeds from sale of intellectual property, net |
|
|
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
27,350 |
|
|
|
|
|
|
|
(7,708 |
) |
|
|
7,674 |
|
|
|
27,316 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term debt, net of expenses |
|
|
|
|
|
|
|
|
|
|
(10,279 |
) |
|
|
|
|
|
|
(10,279 |
) |
Proceeds from issuance of company stock |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Intercompany, net |
|
|
11,073 |
|
|
|
(4,104 |
) |
|
|
(6,969 |
) |
|
|
|
|
|
|
|
|
Interest rate swap security deposit |
|
|
(437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(437 |
) |
Repayment of shareholder note receivable |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
10,700 |
|
|
|
(4,104 |
) |
|
|
(17,248 |
) |
|
|
|
|
|
|
(10,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
24,500 |
|
|
|
|
|
|
|
(6,989 |
) |
|
|
|
|
|
|
17,511 |
|
Cash and cash equivalents at beginning of period |
|
|
69,738 |
|
|
|
|
|
|
|
36,145 |
|
|
|
|
|
|
|
105,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
94,238 |
|
|
$ |
|
|
|
$ |
29,156 |
|
|
$ |
|
|
|
$ |
123,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Fiscal Months Ended June 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash (used in) provided by operating activities |
|
$ |
(35,881 |
) |
|
$ |
3,122 |
|
|
$ |
10,353 |
|
|
$ |
8,987 |
|
|
$ |
(13,419 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(2,437 |
) |
|
|
|
|
|
|
(1,803 |
) |
|
|
|
|
|
|
(4,240 |
) |
Proceeds from sale of property, plant and equipment |
|
|
574 |
|
|
|
|
|
|
|
8,375 |
|
|
|
|
|
|
|
8,949 |
|
Purchases of equity securites and other assets |
|
|
(755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(755 |
) |
Purchases of accounts receivable |
|
|
|
|
|
|
|
|
|
|
(404,533 |
) |
|
|
404,533 |
|
|
|
|
|
Proceeds from collection of purchased accounts receivable |
|
|
|
|
|
|
|
|
|
|
413,520 |
|
|
|
(413,520 |
) |
|
|
|
|
Increase in restricted cash |
|
|
(29,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(31,618 |
) |
|
|
|
|
|
|
15,559 |
|
|
|
(8,987 |
) |
|
|
(25,046 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term debt, net of expenses |
|
|
|
|
|
|
|
|
|
|
(3,941 |
) |
|
|
|
|
|
|
(3,941 |
) |
Repayment of long-term debt |
|
|
(53,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,600 |
) |
Intercompany, net |
|
|
16,341 |
|
|
|
(3,122 |
) |
|
|
(13,219 |
) |
|
|
|
|
|
|
|
|
Interest rate swap security deposit |
|
|
(4,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,250 |
) |
Proceeds from common stock |
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710 |
|
Proceeds from shareholder loans |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(40,774 |
) |
|
|
(3,122 |
) |
|
|
(17,160 |
) |
|
|
|
|
|
|
(61,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(108,273 |
) |
|
|
|
|
|
|
8,752 |
|
|
|
|
|
|
|
(99,521 |
) |
Cash and cash equivalents at beginning of period |
|
|
199,263 |
|
|
|
|
|
|
|
34,884 |
|
|
|
|
|
|
|
234,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
90,990 |
|
|
$ |
|
|
|
$ |
43,636 |
|
|
$ |
|
|
|
$ |
134,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
The Company has evaluated events subsequent to July 3, 2009 to assess the need for potential
recognition or disclosure in this Report. Such events were evaluated through August 12, 2009, the
date these financial statements were issued. Based upon this evaluation, it was determined that no
subsequent events occurred that require recognition in the financial statements and that the
following item represents an event that merits disclosure herein:
On July 22, 2009, the Company received a letter from NXP referring to the April 29, 2008 Asset
Purchase Agreement between the Company and NXP, as amended August 8 and September 17, 2008
(collectively, the Agreement). NXP seeks indemnification for losses that it asserts it has
suffered in connection with the Companys alleged breach of certain representations and warranties
made in the Agreement related to certain parts. NXP asserts that its current estimated losses from
the purported defect in such parts amounts to approximately $5.1 million and it has filed a claim
against the escrow fund (which consists of $11.0 million) to cover these losses. The Company does
not believe that NXP has any substantial claims to the escrowed funds, but there can be no
assurances that NXP will not succeed in being indemnified for some or all of its claims (with or
without the added expense of litigation). As of August 12, 2009, no amounts have been recorded by
the Company related to the claim.
41
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included in Part I Item 1 of this Quarterly
Report, as well as other cautionary statements and risks described elsewhere in this Quarterly
Report, and our audited consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K for the fiscal year ended October 3, 2008.
Overview
We design, develop and sell semiconductor solutions comprised of silicon, hardware, software, and
firmware that are used in imaging, audio video, and various embedded-modem applications. Our
products and technology are used in a wide range of consumer electronics devices. In our imaging
business, our solutions are used in single- and multi-function printers, facsimile machines, and
photo printers. We also offer system-on-chip solutions for products that integrate Internet
connectivity and touch-screen technology, and are used in a broad range of video, audio, telephony,
and digital signage applications. Examples of these products include digital photo frames,
speakerphones, VoIP phones, point-of-sale terminals, and home automation, security, and monitoring
systems. Our audio solutions are targeted at products including personal computers, PC peripheral
sound systems, notebook docking stations, VoIP speakerphones, intercom, door phone, and
surveillance applications. Our video product offering is comprised of decoders and media bridges
for video surveillance and security applications, and system solutions for analog video-based
multimedia applications. The Companys embedded-modem solutions are targeted at desktop and
notebook PCs, set-top boxes, point-of-sale systems, home automation and security systems, and other
industrial applications.
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 36% and 30% of our
net revenues in the fiscal quarter and nine fiscal months ended July 3, 2009, respectively,
compared to 40% and 34% of our net revenues in the fiscal quarter and nine fiscal months ended June
27, 2008, respectively. One distributor accounted for 22% and 29% of net revenues for the fiscal
quarter ended July 3, 2009 and June 27, 2008, respectively. The same distributor accounted for 20%
and 23% of net revenues for the nine fiscal months ended July 3, 2009 and June 27, 2008,
respectively. Our top 20 customers accounted for approximately 85% and 93% of net revenues for the
fiscal quarter ended July 3, 2009 and June 27, 2008, respectively, and 76% and 84% of net revenues
for the nine fiscal months ended July 3, 2009 and June 27, 2008, respectively. Revenues derived
from customers located in the Americas, the Asia-Pacific region and Europe (including the Middle
East and Africa) were 3%, 96% and 1%, respectively, of our net revenues for the fiscal quarter
ended July 3, 2009 and were 6%, 92% and 2%, respectively, of our net revenues for the fiscal
quarter ended June 27, 2008. Revenues derived from customers located in the Americas, the
Asia-Pacific region and Europe (including the Middle East and Africa) were 5%, 94% and 1%,
respectively, of our net revenues for the nine fiscal months ended July 3, 2009 and were 6%, 92%
and 2%, respectively, of our net revenues for the nine fiscal months ended June 27, 2008. 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.
Critical Accounting Policies
The condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (US GAAP), which require us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
condensed consolidated financial statements, revenues and expenses during the periods reported and
related disclosures. Actual results could differ from those estimates. Information with respect to
our critical accounting policies that we believe have the most significant effect on our reported
results and require subjective or complex judgments of management is contained on pages 36-48 of
the Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual
42
Report on Form 10-K for the fiscal year ended October 3, 2008. Management believes that at July 3,
2009, there has been no material change to this information.
Goodwill Impairment Testing
Goodwill is tested for impairment on an annual basis and between annual tests whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable, in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is tested at the reporting unit level, which is defined as an
operating segment or one level below the operating segment. Goodwill impairment testing is a
two-step process. We have determined that substantially all of the goodwill reported on our balance
sheet is attributable to the IPM reporting unit and, accordingly, the IPM reporting unit is the
primary focus of our goodwill impairment testing. Due to global and domestic economic concerns
emerging in the first quarter of fiscal 2009, IPM experienced revenue declines and we anticipated
these declines would carry into the second quarter of fiscal 2009. These economic influences
resulted in an interim goodwill impairment analysis of the IPM reporting unit in the first quarter
of fiscal 2009.
We assess the fair value of our reporting units for purposes of goodwill impairment testing based
upon a weighted average of a Discounted Cash Flow (DCF) analysis under the income approach, and a
market multiple analysis under the market approach. The resulting fair value of the reporting unit
is then compared to the carrying amounts of the net assets of the reporting unit, including
goodwill. Carrying amounts of the reporting units are based upon a combination of
specifically-identified assets and liabilities allocations using guidance outlined in paragraphs 32
and 34 of SFAS No. 142.
Discounted Cash Flow Analysis: Our DCF analysis reflects Company-prepared forecasts of cash flows
discounted to present value at a discount rate commensurate with our assessment of relative risk,
including information from a number of market-based sources. Management prepares long-range plans
(LRPs) for the reporting units. These forecasts give consideration to anticipated revenue
fluctuations. In the first quarter of fiscal 2009, IPM experienced revenue declines and we expected
that these declines would carry into the second quarter of fiscal 2009. The forecast, therefore,
reflected our expectations based on current and anticipated market conditions. We adjusted the
revenue forecasts downward to reflect the anticipated impact of the current economic conditions and
the Companys assessment of those factors on current revenue levels and anticipated recovery in
future years.
We apply a discount rate to the LRPs which represents the combined impact of industry-level
weighted average cost of capital adjusted for the return that both debt and equity investors would
require for an investment in the entire company compared to our peers after considering such
factors as the stage of development for our products and market entrance capabilities and the
relative risk of our business unit. For the first quarter of fiscal 2009, we used a discount rate
of 23% to calculate the present value of the related cash flows compared to a 20% discount rate
applied for the annual goodwill analysis completed in the fourth quarter of fiscal 2008. The
increase in discount rate reflected our views regarding future economic uncertainty as of the first
quarter of fiscal 2009.
A 50% weighting to the DCF results as of the first fiscal quarter of 2009 was applied to give
effect to the impact of market conditions existing in the first quarter of fiscal 2009. For the
fiscal 2008 annual goodwill impairment analysis, we applied an 80% weighting on the DCF for the
annual goodwill impairment analysis performed in the fourth quarter of fiscal 2008. The weighting
between the DCF and Market Multiple Analysis reflects managements evaluation of external market
valuations as compared to managements expectations for internal performance. When external market
comparisons yield valuations that do not support what management believes to be the reasonable
expectations for internal performance, management places a relatively higher weighting on the DCF
results. During the annual goodwill impairment test in late fiscal 2008, market comparisons
significantly exceeded managements expectations for internal performance which resulted in a
weighting on the DCF of 80%. In the interim goodwill testing in early fiscal 2009, management
believed that external market valuations were more in line with expected internal performance and,
therefore, weighted the DCF and Market Multiple Analysis equally.
Market Multiple Analysis: We select several comparable companies for a reporting unit and calculate
their revenue multiples (market cap divided by annual revenue) based on available revenue
information and related stock prices as of the date of the goodwill impairment analysis. The
comparable companies are selected based upon similarity of product lines. We used a revenue
multiple of 1.4 in our analysis of comparable companies multiples for the IPM reporting unit as of
January 2, 2009 compared to a revenue multiple of 4.3 in our 2008 annual goodwill evaluation. This
significant decline reflects the downward impact of the economic environment during the period.
Management believes this multiple is indicative of market conditions in effect during the first
quarter of fiscal 2009 and as such
43
applied a 50% weighting to these results. For the fiscal 2008 annual goodwill impairment analysis,
we applied a 20% weighting to the market multiple factor as we believed this to be indicative of
market conditions in the fourth quarter of fiscal 2008.
Interim Goodwill Test: Our IPM business unit accounted for approximately 57% of the Companys total
revenues in the first quarter of fiscal 2009 and was associated with $110 million of goodwill as of
January 2, 2009. Overall financial performance declines in the first quarter of fiscal 2009
resulted in an interim test for goodwill impairment. Based upon the results of the testing for the
quarter ended January 2, 2009, the Company determined that despite recent declines in the IPM
business unit of 21%, performance levels remain sufficient to support the current IPM related
goodwill. The Companys fair value methods used for purposes of the goodwill impairment tests
incorporated the valuation techniques discussed above. Based upon the assumptions discussed above
for the annual goodwill impairment testing performed in the fourth quarter of fiscal 2008 and the
interim goodwill impairment testing performed in the first fiscal quarter of 2009, the current IPM
performance levels are substantially above those which would result in a possible impairment. If
all other variables considered in the IPM goodwill evaluation remained constant, IPM performance
declines of greater than 50% from current and projected cash flows levels would be necessary to
result in a potential impairment of IPM goodwill. During the third fiscal quarter of 2009, we
determined based on current IPM business forecasts there were no indicators of impairment and
therefore no interim goodwill impairment analysis was considered necessary for the third fiscal
quarter of 2009.
Business Enterprise Segments The Company operates in one reportable segment, broadband
communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131), establishes standards for the way that public business enterprises report
information about operating segments in its condensed consolidated financial statements. Pending
the completion of the sale of the Companys Broadband Access Products (BBA) operating segment,
the results of which have been classified in discontinued operations, the Companys has one
remaining operating segment, Imaging and PC Media (IPM). The IPM operating segment, comprised of
one reporting unit, was identified based upon the availability of discrete financial information
and the chief operating decision makers regular review of the financial information for this
reporting unit. The Company evaluated this reporting unit for components and noted that there are
none below the IPM reporting unit.
Sale of Broadband Media Processing Business
In early fiscal 2008, we decided to discontinue our investments in stand-alone wireless networking
products and technologies. As a result, we moved gateway-oriented embedded wireless networking
products and technologies, which enable and support our DSL gateway solutions, into our BBA product
line beginning in fiscal 2008. In August 2008, we completed the sale of our Broadband Media
Processing (BMP) product lines to NXP B.V. (NXP). As a result, the revenues generated by sales
of BMP products have been reported as discontinued operations for all periods presented.
Sale of Broadband Access Products Business
On April 21, 2009, we entered into an Asset Purchase Agreement with Ikanos Communications, Inc.
(Ikanos), pursuant to which Ikanos has agreed to acquire certain assets related to our BBA
business. Assets to be sold pursuant to the agreement include, among other things, specified
intellectual property, inventory, contracts and tangible assets. Ikanos has agreed to assume
certain liabilities, including obligations under transferred contracts and certain employee-related
liabilities. Under the terms of the agreement, Ikanos will pay to us an aggregate of $54 million
upon the closing of the transaction, of which $6.75 million will be deposited into an escrow
account. The escrow account will remain in place for twelve months following the closing to satisfy
potential indemnification claims by Ikanos. The closing is subject to various conditions,
including, among other things, the closing of an equity investment in Ikanos by Tallwood III, L.P.,
Tallwood III Partners, L.P., Tallwood III Associates, L.P. and Tallwood III Annex, L.P. pursuant to
a separate Securities Purchase Agreement, and the receipt of certain third party consents. Upon the
closing, we have also agreed to enter into an Intellectual Property License Agreement pursuant to
which we will obtain a license with respect to certain technology assets sold to Ikanos and Ikanos
will obtain a license with respect to certain technology assets that we will retain. The sale
transaction is expected to be completed during our fourth fiscal quarter ending October 2, 2009.
Following the completion of the transaction, we will no
44
longer generate revenues from sales of BBA products nor incur related costs. The operating results
from the BBA business have been classified as discontinued operations for all periods presented.
Results of Operations
Net Revenues
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred, (iii) the sales price and terms are fixed and determinable, and (iv) the collection of
the receivable is reasonably assured. These terms are typically met upon shipment of product to the
customer. The majority of our distributors have limited stock rotation rights, which allow them to
rotate up to 10% of product in their inventory two times per 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 reasonably estimate and establish allowances for
expected product returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return
Exists. Development revenue is recognized when services are performed and was not significant for
any periods presented.
Prior to the fourth quarter of fiscal 2008, revenue with respect to sales to certain distributors
was deferred until the products were sold by the distributors to third parties. During the fourth
fiscal quarter ended October 3, 2008, we evaluated three distributors for which revenue has
historically been recognized upon the distributors sale of the purchased products to a third party
due to our inability in prior years to enforce the contractual terms related to any right of
return. Our evaluation revealed that we are able to enforce the contractual right of return for the
three distributors in an effective manner, similar to that experienced with the other distributor
customers. As a result, in the fourth quarter of fiscal 2008, we commenced the recognition of
revenue on these three distributors upon shipment, which is consistent with the revenue recognition
point of other distributor customers. At July 3, 2009 and October 3, 2008, there was no significant
deferred revenue related to sales to our distributors.
Revenue with respect to sales to customers to whom we have significant obligations after delivery
is deferred until all significant obligations have been completed. At July 3, 2009, there was no
deferred revenue. At October 3, 2008, deferred revenue related to shipments of products for which
the Company had on-going performance obligations was $0.2 million.
Our net revenues decreased 31% to $50.8 million in the fiscal quarter ended July 3, 2009 from $73.9
million in the fiscal quarter ended June 27, 2008. This decline was driven by a 14% decrease in
unit volume shipments and a 20% decrease in average selling prices (ASPs). The revenue decreases
are primarily attributable to our personal computer modem business, due to deteriorating global
economic conditions and the modem de-bundling trend in the computer segment, and to our legacy
wireless components business.
Our net revenues decreased 39% to $152.3 million in the nine fiscal months ended July 3, 2009 from
$250.4 million in the nine fiscal months ended June 27, 2008. The nine fiscal months ended June
27, 2008 included approximately $14.7 million of non-recurring revenue from the buyout of a future
royalty stream. The decline in net revenues, excluding the impact of the non-recurring revenue,
was driven by a 26% decrease in unit volume shipments and an 13% decrease in ASPs. The revenue
decreases are primarily attributable to the global economic recession and the modem de-bundling
trend in the computer segment, and to our legacy wireless components business.
The global economic recession severely dampened semiconductor industry sales in the first nine
fiscal months of fiscal 2009. Weakening demand for the major drivers of semiconductor sales, which
includes automotive products, personal computers, cell phones, and corporate information technology
products, resulted in a sharp drop in semiconductor industry sales. More than 50% of semiconductor
demand and the fortunes of the semiconductor industry are increasingly linked to macroeconomic
conditions such as gross domestic product, consumer confidence, and disposable income. Demand for
all of our products has experienced significant decline in line with the industry decline. Revenues
in the nine fiscal months ended July 3, 2009 were lower compared to the nine fiscal months ended
June 27, 2008 as a result of the effects of the overall economic environment. Facing these
challenges, the Company has been working to reduce operating costs and actively manage working
capital, while continuing to focus on delivering innovative products to gain market share.
Management believes it reached the bottom of its revenue cycle in the fiscal quarter ended April 3,
2009 and sees signs of market stabilization, evidenced by stronger quarter-over-quarter orders,
that support this belief.
45
Gross Margin
Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company,
we use third parties for wafer production and assembly and test services. Our cost of goods sold
consists predominantly of purchased finished wafers, assembly and test services, royalties, 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 fiscal quarter ended July 3, 2009 was 59.6% compared with 56.3%
for the fiscal quarter ended June 27, 2008. The 3.3 point gross margin percentage increase in the
fiscal quarter ended July 3, 2009 is primarily attributable to lower manufacturing costs and lower
excess inventory provisions related to improvement in inventory turnover management.
Our gross margin percentage for the nine fiscal months ended July 3, 2009 was 57.7% compared with
58.8% for the nine fiscal months ended June 27, 2008. Our gross margin percentage for the nine
fiscal months ended June 27, 2008 included a $14.7 million royalty buy-out, which contributed 2.5%
to our gross margin percentage for the nine fiscal months ended June 27, 2008. The remaining gross
margin percentage increase in the nine fiscal months ended July 3, 2009 is primarily attributable
to a shift in product mix and lower manufacturing costs.
We assess the recoverability of our inventories on a quarterly basis through a review of inventory
levels in relation to foreseeable demand, generally over the following twelve months. Foreseeable
demand is based upon 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 will not be sold. 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
fiscal quarter and nine fiscal months ended July 3, 2009, we recorded $0.2 million of net charges
and $0.03 million of net credits, respectively for excess and obsolete (E&O) inventory. During
the fiscal quarter and nine fiscal months ended June 27, 2008, we recorded $1.5 million and $4.9
million, respectively, of net charges of E&O inventory. Activity in our E&O inventory reserves for
the applicable periods in fiscal 2009 and 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
E&O reserves at beginning of period |
|
$ |
9,193 |
|
|
$ |
13,884 |
|
|
$ |
12,579 |
|
|
$ |
11,986 |
|
Additions |
|
|
634 |
|
|
|
1,845 |
|
|
|
1,949 |
|
|
|
6,173 |
|
Release upon sales of product |
|
|
(399 |
) |
|
|
(338 |
) |
|
|
(1,978 |
) |
|
|
(1,274 |
) |
Scrap |
|
|
(1,537 |
) |
|
|
(1,610 |
) |
|
|
(4,564 |
) |
|
|
(3,023 |
) |
Standards adjustments and other |
|
|
25 |
|
|
|
(958 |
) |
|
|
(70 |
) |
|
|
(1,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
E&O reserves at end of period |
|
$ |
7,916 |
|
|
$ |
12,823 |
|
|
$ |
7,916 |
|
|
$ |
12,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review our E&O inventory balances at the product line level on a quarterly basis and regularly
evaluate the disposition of all E&O inventory products. It is possible that some of these reserved
products will be sold, which will benefit our gross margin in the period sold. During the fiscal
quarter ended July 3, 2009 and June 27, 2008, we sold $0.4 million and $0.3 million, respectively,
of reserved products. During the nine fiscal months ended July 3, 2009 and June 27, 2008, we sold
$2.0 million and $1.3 million, respectively, of reserved products.
Our products are used by communications electronics OEMs that have designed our products into
communications equipment. For many of our products, we gain these design wins through a lengthy
sales cycle, which often includes
providing technical support to the OEM customer. Moreover, once a customer has designed a
particular suppliers
46
components into a product, substituting another suppliers components often
requires substantial design changes, which involve significant cost, time, effort and risk. In the
event of the loss of business from existing OEM customers, we may be unable to secure new customers
for our existing products without first achieving new design wins. When the quantities of inventory
on hand exceed foreseeable demand from existing OEM customers into whose products our products have
been designed, we generally will be unable to sell our excess inventories to others, and the
estimated realizable value of such inventories to us is generally zero.
On a quarterly basis, we also assess the net realizable value of our inventories. When the
estimated ASP, less costs to sell our inventory, falls below our inventory cost, we adjust our
inventory to its current estimated market value. During the fiscal quarter and nine fiscal months
ended July 3, 2009 and June 27, 2008, credits to adjust certain products to their estimated market
values were immaterial. Increases to the lower of cost or market inventory reserves may be required
based upon actual ASPs and changes to our current estimates, which would impact our gross margin
percentage in future periods.
Research and Development
Our research and development (R&D) expenses consist principally of direct personnel costs to
develop new semiconductor products, allocated indirect 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.
R&D expense increased $2.1 million, or 20%, in the fiscal quarter ended July 3, 2009 compared to
the fiscal quarter ended June 27, 2008. The increase is due primarily to our acquisition of the
Sigmatel imaging product line and engineering team and our continued investment in our product
roadmap and innovation.
R&D expense decreased $4.6 million, or 11%, in the nine fiscal months ended July 3, 2009 compared
to the nine fiscal months ended June 27, 2008. The decrease is due to lower non-cash stock
compensation of $1.3 million and a correcting adjustment of $1.4 million in the nine fiscal months
ended June 27, 2008, representing the unamortized portion of the capitalized photo mask costs as of
September 29, 2007. Based upon an evaluation of all relevant quantitative and qualitative factors,
and after considering the provisions of APB 28, paragraph 29, and SAB Nos. 99 and 108, we believe
that this correcting adjustment is not material to our full year results for fiscal 2008. In
addition, we do not believe the correcting adjustment is material to the amounts reported in
previous periods.
Selling, General and Administrative
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 non-cash stock-based compensation charges for SG&A personnel.
SG&A expense decreased $7.8 million, or 35%, in the fiscal quarter ended July 3, 2009 compared to
the fiscal quarter ended June 27, 2008. The decrease is primarily due to a 29% decline in SG&A
headcount from March 2008 to June 2009, as well as restructuring measures and other cost cutting
efforts and a decrease in non-cash stock compensation expense of $4.5 million.
SG&A expense decreased $9.0 million, or 15%, in the nine fiscal months ended July 3, 2009 compared
to the nine fiscal months ended June 27, 2008. The decrease is primarily due to a 29% decline in
SG&A headcount from March 2008 to June 2009, as well as restructuring measures and other cost
cutting efforts and a decrease in non-cash stock compensation expense of $4.4 million.
47
Amortization of Intangible Assets
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 two years.
Amortization expense decreased by less than $0.1 million, or 1%, in the fiscal quarter ended July
3, 2009 compared to the fiscal quarter ended June 27, 2008.
Amortization expense increased $0.3 million, or 12%, in the nine fiscal months ended July 3, 2009
compared to the nine fiscal months ended June 27, 2008.
Gain on Sale of Intellectual Property
In October 2008, the Company sold a portfolio of patents including patents related to its prior
wireless networking technology to a third party for cash of $14.5 million, net of costs, and
recognized a gain of $12.9 million on the transaction during the
nine fiscal months ended July 3, 2009.
In accordance with the terms of the agreement with the third party, the Company retains a
cross-license to this portfolio of patents.
Special Charges
For the fiscal quarter ended July 3, 2009, special charges consisted primarily of $0.5 million of
restructuring charges related to workforce reductions implemented during and $0.5 million related
to accretion of lease liability. For the nine fiscal months ended July 3, 2009, special charges of
$13.7 million consisted primarily of restructuring charges of $2.7 million related to workforce
reductions, $6.9 million related to revised sublease assumptions and accretion of lease liability
associated with vacated facilities, a $3.7 million charge for a legal settlement (See Note 6
in the Notes to Condensed Consolidated Financial Statements included herein) and $0.4
million of loss on disposal of property, plant and equipment. For the fiscal quarter and nine fiscal
months ended June 27, 2008, special charges of $8.5 million and $15.9 million, respectively,
consisted primarily of restructuring charges and a $6.3 million charge related to the termination
of our voluntary early retirement plan.
Interest Expense
Interest expense decreased $0.9 million, or 15%, in the fiscal quarter ended July 3, 2009 compared
to the fiscal quarter ended June 27, 2008. The decrease is primarily attributable to the repurchase
of $53.6 million and $80.0 million of our senior secured notes in September 2008, respectively,
debt refinancing activities implemented in fiscal 2007, and declines in interest rates on our
variable rate debt.
Interest expense decreased $6.2 million, or 28%, in the nine fiscal months ended July 3, 2009
compared to the nine fiscal months ended June 27, 2008. The decrease is primarily attributable to
the repurchase of $53.6 million and $80.0 million of our senior secured notes in March and
September 2008, respectively, debt refinancing activities implemented in fiscal 2007, and declines
in interest rates on our variable rate debt.
48
Other (income) expense, net
Other (income) expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Investment and interest income |
|
$ |
(281 |
) |
|
$ |
(1,171 |
) |
|
$ |
(1,589 |
) |
|
$ |
(5,990 |
) |
Gain on sale of investments |
|
|
(1,803 |
) |
|
|
(145 |
) |
|
|
(1,856 |
) |
|
|
(874 |
) |
Other-than-temporary impairment of marketable securities
and cost based investments |
|
|
|
|
|
|
|
|
|
|
2,770 |
|
|
|
|
|
(Increase) decrease in the fair value of derivative instruments |
|
|
(1,166 |
) |
|
|
(1,881 |
) |
|
|
(1,762 |
) |
|
|
12,662 |
|
Other |
|
|
(317 |
) |
|
|
200 |
|
|
|
(1,018 |
) |
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(3,567 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,455 |
) |
|
$ |
6,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income), net during the fiscal quarter ended July 3, 2009 was primarily comprised of a $1.8
million gain on sale of equity investments, a $1.2 million increase in the fair value of the
Companys warrant to purchase six million shares of Mindspeed common stock and $0.3 million of
investment and interest income on invested cash balances. Other (income), net during the nine
fiscal months ended July 3, 2009 was primarily comprised of a $1.9 million gain on sale of equity
investments, a $1.8 million increase in the fair value of the Companys warrant to purchase six
million shares of Mindspeed common stock, $1.6 million of investment and interest income on
invested cash balances and $1.0 million of other gains offset by other-than-temporary impairments
of marketable securities and cost method investments of $2.8 million.
Other (income), net during the fiscal quarter ended June 27, 2008 was primarily comprised of a $1.9
million increase in the fair value in the fair value of the Companys warrant to purchase six
million shares of Mindspeed common stock, $1.2 million of investment and interest income on
invested cash balances and a $0.1 million gain on sale of equity investments. Other expense, net
during the nine fiscal months ended June 27, 2008 was primarily comprised of a $12.7 million
decrease in the fair value of the Companys warrant to purchase six million shares of Mindspeed
common stock and other expenses of $1.0 million, offset by $6.0 million of investment and interest
income on invested cash balances and a $0.9 million gain on sale of equity investments.
Provision for Income Taxes
We recorded a tax provision of $0.2 million and $0.8 million for the fiscal quarter and nine fiscal
months ended July 3, 2009, as compared to $0.1 million and $0.4 million for the fiscal quarter and
nine fiscal months ended June 27, 2008, primarily reflecting income taxes imposed on our foreign
subsidiaries. All of our U.S. federal income taxes and the majority of our state income taxes are
offset by fully reserved deferred tax assets
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, proceeds from the sale of
non-core assets, our operating cash flow and borrowings under our credit facility. In addition,
additional financing may be available to the Company through a shelf registration statement the
Company filed in July 2009, which registered shares of our common stock, preferred stock, warrants
to purchase common stock and/or preferred stock, and units consisting of two or more of these
classes or series of securities. We may sell any combination of these securities in one or more
offerings, over a period of up to 3 years, up to an aggregate offering price of $20,000,000, on
terms to be determined at the time of offering.
We believe that our existing sources of liquidity will be sufficient to fund our operations,
research and development, anticipated capital expenditures and working capital needs for at least
the next twelve months. However, additional operating losses or lower than expected product sales
will adversely affect our cash flow and financial condition and could impair our ability to satisfy
our indebtedness obligations as such obligations come due.
Recent tightening of the credit markets and unfavorable economic conditions has led to a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. In
addition, if the economy or markets in which we operate continue to be subject to adverse economic
conditions, our business, financial condition, cash flow and results of operations will be
adversely affected. If the credit markets remain difficult to
49
access or worsen or our performance
is unfavorable due to economic conditions or for any other reasons, we may not be able to obtain
sufficient capital to repay amounts due under (i) our credit
facility expiring November 2009, (ii)
our $141.4 million floating rate senior secured notes when they become due in November 2010 or
earlier as a result of a mandatory offer to repurchase, and (iii) our $250.0 million convertible
subordinated notes when they become due in March 2026 or earlier as a result of the mandatory
repurchase requirements. The first mandatory repurchase date for our convertible subordinated notes
is March 1, 2011. In the event we are unable to satisfy or refinance our debt obligations as the
obligations are required to be paid, we will be required to consider strategic and other
alternatives, including, among other things, the sale of assets to generate funds, the negotiation
of revised terms of our indebtedness, and the exchange of new securities for existing indebtedness
obligations. We have retained financial advisors to assist us in considering these strategic,
restructuring or other alternatives. There is no assurance
that we would be successful in completing any of these alternatives. Further, we may not be able to
refinance any portion of this debt on favorable terms or at all. Our failure to satisfy or
refinance any of our indebtedness obligations as they come due, including through an exchange of
new securities for existing indebtedness obligations, would result in a cross default and potential
acceleration of our remaining indebtedness obligations, would have a material adverse effect on our
business, and could potentially force us to restructure our
indebtedness through a filing under the U.S. Bankruptcy
Code.
Our cash and cash equivalents increased $17.5 million between October 3, 2008 and July 3, 2009. The
increase was primarily due to $14.5 million in net cash proceeds from the sale of intellectual
property related to our prior wireless networking technology plus $12.6 million released from
standby letters of credit, $2.3 million from sales of equity securities and $2.1 million release of
escrow funds, offset by $10.3 million of net repayments on the credit facility and payments for
acquisitions of $3.6 million.
At July 3, 2009, we had a total of $250.0 million aggregate principal amount of convertible
subordinated notes outstanding. These notes are due in March 2026, but the holders may require us
to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and March 1,
2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest.
At July 3, 2009, we also had a total of $141.4 million aggregate principal amount of floating rate
senior secured notes outstanding. These notes are due in November 2010, but we are required to
offer to repurchase, for cash, the notes at a price of 100% of the principal amount, plus any
accrued and unpaid interest, with the net proceeds of certain asset dispositions if such proceeds
are not used within 360 days to invest in assets (other than current assets) related to our
business. The sale of our investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the
sale of two other equity investments in April 2007 qualified as asset dispositions requiring us to
make offers to repurchase a portion of the notes no later than 361 days following the asset
dispositions. Based on the proceeds received from these asset dispositions and our cash investments
in assets (other than current assets) related to our business made within 360 days following the
asset dispositions, we were required to make an offer to repurchase not more than $53.6 million of
the senior secured notes, at 100% of the principal amount plus any accrued and unpaid interest in
February 2008. As a result of 100% acceptance of the offer by our bondholders, $53.6 million of the
senior secured notes were repurchased during the second quarter of fiscal 2008. We recorded a
pretax loss on debt repurchase of $1.4 million during the second quarter of fiscal 2008, which
included the write-off of deferred debt issuance costs.
Following the sale of the BMP business unit, we made an offer to repurchase $80.0 million of the
senior secured notes at 100% of the principal amount plus any accrued and unpaid interest in
September 2008. As a result of the 100% acceptance of the offer by our bondholders, $80.0 million
of the senior secured notes were repurchased during the fourth quarter of fiscal 2008. We recorded
a pretax loss on debt repurchase of $1.6 million during the fourth quarter of fiscal 2008, which
included the write-off of deferred debt issuance costs. The pretax loss on debt repurchase of $1.6
million has been included in net loss from discontinued operations. During the nine fiscal months
ended July 3, 2009, we did not have sufficient additional asset dispositions to trigger another
required repurchase offer.
We also have a $50.0 million credit facility with a bank, under which we had borrowed $30.7 million
as of July 3, 2009. The term of this credit facility has been extended through November 27, 2009,
and the facility remains subject to additional 364-day extensions at the discretion of the bank.
At July 3, 2009, we were in compliance with all required debt covenants.
50
Cash flows are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Fiscal Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
Net cash provided by (used in) operating activities |
|
$ |
682 |
|
|
$ |
(13,419 |
) |
Net cash provided by (used in) investing activities |
|
|
27,481 |
|
|
|
(25,046 |
) |
Net cash used in financing activities |
|
|
(10,652 |
) |
|
|
(61,056 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
17,511 |
|
|
$ |
(99,521 |
) |
|
|
|
|
|
|
|
Cash provided by operating activities was $0.7 million for the nine fiscal months ended July 3,
2009 compared to cash used in operations of $13.4 million for the nine fiscal months ended June 27,
2008. Cash provided by operating activities during the nine fiscal months ended July 3, 2009 is net
of $18.8 million in working capital improvements (accounts receivable, inventories and accounts
payable). The cash generated from working capital was primarily driven by an $8.4 million decrease
in accounts receivable and an $11.0 million decrease in inventory levels due to the overall lower
business volumes and the general economic downturn.
Cash provided by investing activities was $27.5 million for the nine fiscal months ended July 3,
2009 compared to cash used in investing activities of $25.0 million for the nine fiscal months
ended June 27, 2008. In the nine fiscal months ended July 3, 2009, we sold intellectual property
for net proceeds of $14.5 million related to our prior wireless networking technology and $12.6
million of restricted cash was released associated with standby letters of credit. These cash
inflows were partially offset by payments for acquisitions of $3.6 million. Cash used by investing
activities in the nine fiscal months ended June 27, 2008 consisted primarily of deposits of
restricted cash of $29 million, purchases of property, plant and equipment of $4.2 million offset
by proceeds from sales of property, plant and equipment of $8.9 million.
Cash used in financing activities was $10.7 million for the nine fiscal months ended July 3, 2009
compared to $61.1 million for the nine fiscal months ended June 27, 2008. Cash used in the nine
fiscal months ended July 3, 2009 was primarily repayments of short-term debt. Cash used in the nine
fiscal months ended June 27, 2008 consisted primarily of repurchase of our senior secured notes and
repayments of short-term debt.
Contractual Obligations
There have been no material changes to our contractual obligations from those previously disclosed
in our Annual Report on Form 10-K for our fiscal year ended October 3, 2008. For a summary of the
contractual commitments at October 3, 2008, see Part II, Item 7, page 36 in our 2008 Annual Report
on Form 10-K.
Off-Balance Sheet Arrangements
We have made guarantees and indemnities, under which we may be required to make payments to a
guaranteed or indemnified party, in relation to certain transactions. In connection with our
spin-off from Rockwell International Corporation (Rockwell), we 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 our contribution
of certain of our manufacturing operations to Jazz, we agreed to indemnify Jazz for certain
environmental matters and other customary divestiture-related matters. In connection with the
Companys sale of the BMP business to NXP, the Company agreed to indemnify NXP for certain claims
related to the transaction. In connection with the sales of our products, we provide intellectual
property indemnities to our customers. In connection with certain facility leases, we have
indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our
directors and officers to the maximum extent permitted under the laws of the State of Delaware.
The durations of our guarantees and indemnities vary, and in many cases are 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
51
maximum potential future payments we could be obligated to make. We have not recorded any liability
for these guarantees and indemnities in our condensed consolidated balance sheets. Product warranty
costs are not significant.
As of July 3, 2009 and October 3, 2008, the Company had one irrevocable stand-by letter of credit
outstanding. As of July 3, 2009 and October 3, 2008, the irrevocable stand-by letter of credit was
collateralized by restricted cash balances of $6.0 million and $18.0 million, respectively, to
secure inventory purchases from a vendor. The letter of credit expires on August 31, 2009. The
restricted cash balance securing the letter of credit is classified as current restricted cash on
the condensed consolidated balance sheets. In addition, the Company has other outstanding letters
of credit collateralized by restricted cash aggregating $6.5 million to secure various long-term
operating leases and the Companys self-insured workers compensation plan. The restricted cash
associated with these letters of credit is classified as other long-term assets on the condensed
consolidated balance sheets.
Special Purpose Entities
We have one special purpose entity (SPE), Conexant USA, LLC, which was formed in September 2005
in anticipation of establishing the credit facility. This special purpose entity is a wholly-owned,
consolidated subsidiary of ours. Conexant USA, LLC is not permitted, nor may its assets be used, to
guarantee or satisfy any of our obligations or those of our subsidiaries.
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, LLC, and Conexant
USA, LLC entered into a revolving credit agreement with a bank that is secured by the assets of the
special purpose entity. The revolving credit facility currently matures on November 27, 2009 and is
subject to annual renewal. Our borrowing limit on the revolving credit agreement is $50.0 million,
of which $30.7 million was outstanding at July 3, 2009.
Recently Adopted Accounting Pronouncements
On January 3, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161). SFAS No. 161 requires expanded disclosures regarding the
location and amount of derivative instruments in an entitys financial statements, how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and how derivative
instruments and related hedged items affect an entitys financial position, operating results and
cash flows. As a result of the adoption of SFAS No. 161, the Company expanded its disclosures
regarding its derivative instruments. See Note 2Basis of Presentation and Significant Accounting
Policies, Note 4Fair Value of Certain Financial Assets and Liabilities, and Note 5Supplemental
Financial Information in the Notes to Condensed Consolidated Financial Statements included herein.
On January 3, 2009, the Company adopted FASB Staff Position (FSP) FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities (FSP 140-4 and FIN 46(R)-8). FSP 140-4 and FIN 46(R)-8 amends SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, to require public entities to provide additional disclosures about transfers of
financial assets. It also amends FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to require public enterprises, including sponsors that have a
variable interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this FSP requires certain disclosures to
be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity
(SPE) that holds a variable interest in the qualifying SPE but was not the transferor
(non-transferor) of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the transferor
(non-transferor) of financial assets to the qualifying SPE. The adoption of FSP 140-4 and FIN
46(R)-8 did not have an impact on the Companys condensed consolidated financial statements because
the Company does not have a variable interest in a variable interest entity or in its SPE.
On October 4, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157),
for its financial assets and liabilities. The Companys adoption of SFAS No. 157 did not have a
material impact on its financial position, results of operations or liquidity.
52
SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be
received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs, where available. The following summarizes the three levels
of inputs required by the standard that the Company uses to measure fair value.
|
|
|
Level 1: Quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. |
|
|
|
Level 3: Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. |
SFAS No. 157 requires the use of observable market inputs (quoted market prices) when measuring
fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
In accordance with FSP FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), the
Company elected to defer until October 3, 2009 the adoption of SFAS No. 157 for all nonfinancial
assets and liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis. The adoption of SFAS No. 157 for those assets and liabilities
within the scope of FSP FAS 157-2 is not expected to have a material impact on the Companys
financial position, results of operations or liquidity.
On October 4, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Company already records marketable securities at fair value in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of SFAS No.
159 did not have an impact on the Companys condensed consolidated financial statements as
management did not elect the fair value option for any other financial instruments or certain other
assets and liabilities.
On April 4, 2009, the Company adopted FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP 107 and APB 28-1), which enhanced the disclosure of
instruments under the scope of SFAS No. 157. The Companys adoption of FSP 107-1 and APB 28-1did
not have a material impact on its financial position, results of operations or liquidity.
On April 4, 2009, the Company adopted FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4), which provides guidance on how to determine the
fair value of assets and liabilities under SFAS No. 157 in the current economic environment and
reemphasizes that the objective of a fair value measurement remains an exit price. The Companys
adoption of FSP 157-4 did not have a material impact on its financial position, results of
operations or liquidity.
On April 4, 2009, the Company adopted SFAS No. 165, Subsequent Events(SFAS No. 165), which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. In
particular SFAS No. 165 sets forth:
|
1. |
|
The period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements. |
|
2. |
|
The circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements. |
|
3. |
|
The disclosures that an entity should make about events or transactions that occurred
after the balance sheet date. |
53
The Companys adoption of SFAS No. 165 did not have a material impact on its financial position,
results of operations or liquidity.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No.
141R), which replaces SFAS No. 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way assets and liabilities
are recognized in the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of in-process research
and development at fair value, and requires the expensing of acquisition-related costs as incurred.
The Company will adopt SFAS No. 141R in the first quarter of fiscal 2010 and it will apply
prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements, an amendment of ARB 51 (SFAS No. 160), which changes the accounting and
reporting for minority interests. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the parents equity, and
purchases or sales of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained, will be recorded at fair value with
any gain or loss recognized in earnings. The Company will adopt SFAS No. 160 in the first quarter
of fiscal 2010 and it will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company is currently assessing the potential
impact that adoption of SFAS No. 160 would have on its financial position and results of
operations.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142. This change is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141R and other US GAAP. The requirement for
determining useful lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, which will require the Company to adopt these provisions in the first
quarter of fiscal 2010. The Company is currently evaluating the impact of adopting FSP 142-3 on its
condensed consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1
requires the issuer to separately account for the liability and equity components of convertible
debt instruments in a manner that reflects the issuers nonconvertible debt borrowing rate. The
guidance will result in companies recognizing higher interest expense in the statement of
operations due to amortization of the discount that results from separating the liability and
equity components. FSP APB 14-1 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is
not permitted. Based on its initial analysis, the Company expects that the adoption of FSP APB 14-1
will result in an increase in the interest expense recognized on its convertible subordinated
notes. See Note 5 in the Notes to Condensed Consolidated Financial Statements included herein for
further information on long-term debt.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets"(SFAS
No. 166), an amendment of SFAS No. 140. SFAS No. 166 improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. SFAS No. 166 will be effective for financial
statements issued for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal years. Early adoption is
not permitted. The Company is currently assessing the potential impact that adoption of SFAS No.
166 would have on its financial position and results of operations.
54
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)(SFAS No.
167). SFAS No. 167 improves financial reporting by enterprises involved with variable interest
entities. SFAS No. 167 will be effective for financial statements issued for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal years. Early adoption is
not permitted. The Company does not believe that adoption of SFAS No. 167 will have a material
impact on its financial position and results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168). SFAS No. 168 establishes
the FASB Accounting Standards Codification (the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial standards in conformity with US GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of authoritative US GAAP for
SEC registrants. SFAS No. 168 will be effective for financial statements issued by the Company for
interim and annual periods after September 15, 2009. On the effective date of SFAS No. 168, all
then-existing non-SEC accounting and reporting standards are superseded, with the exception of
certain promulgations listed in SFAS No. 168. The Company currently anticipates that the adoption
of SFAS No. 168 will have no effect on its condensed consolidated financial statements as the
purpose of the Codification is not to create new accounting and reporting guidance. Rather, the
Codification is meant to simplify user access to all authoritative US GAAP. References to US GAAP
in the Companys published financial statements will be updated, as appropriate, to cite the
Codification following the effective date of SFAS No. 168.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, 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.
Our cash and cash equivalents are not subject to significant interest rate risk due to the short
maturities of these instruments. As of July 3, 2009, the carrying value of our cash and cash
equivalents approximated fair value.
We hold a warrant to purchase six million shares of Mindspeed common stock at an exercise price of
$17.04 per share through June 2013. 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 common stock. As of July 3, 2009, a 10% decrease in the market price
of Mindspeed common stock would result in a decrease of $0.4 million in the fair value of this
warrant. At July 3, 2009, the market price of Mindspeed common stock was $2.06 per share. During
the fiscal quarter ended July 3, 2009, the market price of Mindspeed common stock ranged from a low
of $1.50 per share to a high of $2.45 per share.
Our short-term debt consists of borrowings under a 364-day credit facility. Interest related to our
short-term debt is at 7-day LIBOR plus 1.25%, which is reset weekly and was approximately 1.54% at
July 3, 2009. In connection with our extension of the term of this credit facility through November
27, 2009, the interest rate applied to our borrowings under the facility increased from 7-day LIBOR
plus 0.6% to 7-day LIBOR plus 1.25%. 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 and
floating rate senior secured notes. Interest related to our floating rate senior secured notes is
at three-month LIBOR plus 3.75%, which is reset quarterly and was approximately 4.63% at July 3,
2009. At July 3, 2009, we were party to two interest rate swap agreements for a combined notional
amount of $100 million to eliminate interest rate risk on $100 million of our floating rate senior
secured notes due 2010. Under the terms of the swaps, we will pay a fixed rate of 2.98% and receive
a floating rate equal to three-month LIBOR, which will offset the floating rate paid on the notes.
The fair
value of our convertible subordinated notes is subject to significant fluctuation due to their
convertibility into shares of our common stock.
55
The following table shows the fair values of our financial instruments as of July 3, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
Fair Value |
Cash and cash equivalents |
|
$ |
123,394 |
|
|
$ |
123,394 |
|
Restricted
cash |
|
|
14,500 |
|
|
|
14,500 |
|
Other equity
securities |
|
|
5,446 |
|
|
|
5,446 |
|
Mindspeed
warrant |
|
|
2,307 |
|
|
|
2,307 |
|
Long-term restricted
cash |
|
|
6,489 |
|
|
|
6,489 |
|
Short-term
debt |
|
|
30,739 |
|
|
|
30,739 |
|
Interest rate swap financial instruments |
|
|
2,754 |
|
|
|
2,754 |
|
Long-term debt: senior secured notes |
|
|
141,400 |
|
|
|
140,075 |
|
Long-term debt: convertible subordinated notes |
|
|
250,000 |
|
|
|
107,813 |
|
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently,
sales to customers and arrangements with third-party manufacturers provide for pricing and payment
in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases
in the value of the United States dollar relative to other currencies could make our products more
expensive, which could negatively impact our ability to compete. Conversely, decreases in the value
of the United States dollar relative to other currencies could result in our suppliers raising
their prices to continue doing business with us. Fluctuations in currency exchange rates could
affect our business in the future.
Approximately $23.0 million of our $123.4 million of cash and cash equivalents at July 3, 2009 was
located in foreign countries where we conduct business, including approximately $17.5 million in
India and $3.1 million in China. These amounts are not freely available for dividend repatriation
to the United States without the imposition and payment, where applicable, of local taxes. Further,
the repatriation of these funds is subject to compliance with applicable local government laws and
regulations, and in some cases, requires governmental consent, including in India and China. Our
inability to repatriate these funds quickly and without any required governmental consents may
limit the resources available to us to fund our operations in the United States and other locations
or to pay indebtedness.
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, 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, as
of the end of the period covered by this report, our disclosure controls and procedures were
effective.
There were
no changes in our internal control over financial reporting during
the fiscal quarter ended
July 3, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IPO Litigation In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased the common stock of GlobeSpan, Inc. (GlobeSpan, Inc. later
became GlobespanVirata, Inc., and is now the Companys Conexant, Inc. subsidiary) between June 23,
1999 and December 6, 2000, filed a complaint in the U.S. District Court for the Southern District
of New York alleging violations of federal securities
56
laws by the underwriters of GlobeSpan, Inc.s
initial and secondary public offerings as well as by certain GlobeSpan, Inc. officers and
directors. The complaint alleges that the defendants violated federal securities laws by issuing
and selling GlobeSpan, Inc.s common stock in the initial and secondary offerings without
disclosing to investors that the underwriters had (1) solicited and received undisclosed and
excessive commissions or other compensation and (2) entered into agreements requiring certain of
their customers to purchase the stock in the aftermarket at escalating prices. The complaint seeks
unspecified damages. The complaint was consolidated for purposes of discovery and other pretrial
proceedings with class actions against approximately 300 other companies making similar allegations
regarding the public offerings of those companies during 1998 through 2000. On June 10, 2009 the
court gave preliminary approval to a proposed settlement of the consolidated class actions. For
purposes of the settlement, the plaintiff class would not include certain institutions allocated
shares from the institutional pots in any of the public offerings at issue in the consolidated
class actions and persons associated with those institutions. The court has scheduled a hearing
for September 10, 2009, to determine whether the settlement should be approved finally. If the
settlement is approved, the Company anticipates that the GlobeSpan, Inc. defendants share of the
cost of the settlement will be paid by GlobeSpan, Inc.s insurers. The Company has not recorded
any special charges with respect to this litigation.
Class Action Suit In February 2005, the Company and certain of its current and former officers
and the Companys Employee Benefits Plan Committee were named as defendants in Graden v. Conexant,
et al., a lawsuit filed on behalf of all persons who were participants in the Companys 401(k) Plan
(Plan) during a specified class period. This suit was filed in the U.S. District Court of New
Jersey and alleges that the defendants breached their fiduciary duties under the Employee
Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The
plaintiffs filed an amended complaint on August 11, 2005. The amended complaint alleged that the
plaintiffs lost money in the Plan due to (i) poor Company merger-related performance,
(ii) misleading disclosures by the Company regarding the merger, (iii) breaches of fiduciary duty
regarding management of Plan assets, (iv) being encouraged to invest in Conexant Stock Fund,
(v) being unable to diversify out of said fund and (vi) having the Company make its matching
contributions in said fund. On October 12, 2005, the defendants filed a motion to dismiss this
case. The plaintiffs responded to the motion to dismiss on December 30, 2005, and the defendants
reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered
it closed. The plaintiffs filed a notice of appeal on April 17, 2006. The appellate argument was
held on April 19, 2007. On July 31, 2007, the Third Circuit Court of Appeals vacated the District
Courts order dismissing plaintiffs complaint and remanded the case for further proceedings. On
August 27, 2008, the motion to dismiss was granted in part and denied in part. The judge left in
claims against all of the individual defendants as well as against the Company. In January 2009,
the Company and the plaintiffs agreed in principle to settle all outstanding claims in the
litigation for $3.25 million. On May 21, 2009, plaintiffs attorneys filed with the District Court
a motion asking the court to grant its preliminary approval of the proposed settlement and set a
date for a final hearing on the settlement, after notice to the class, the obtaining of an
allocation of the dollar recovery, and certain other preconditions set forth in the settlement
agreement. By order dated June 18, 2009, the District Court granted preliminary approval of the
proposed settlement and set September 11, 2009 as the date of the final Settlement Fairness
hearing. The Company recorded a special charge of $3.7 million in the first fiscal quarter of 2009
to cover this settlement and any associated costs.
ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations 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.
We have updated the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for
the year ended October 3, 2008, as set forth below. Other than the first, second, fifth and
twenty-sixth risk factors below we do not believe any of the updates constitute material changes
from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended
October 3, 2008.
If our sale of the Broadband Access (BBA) business is not completed, our stock price and ability
to repay our debt obligations could be harmed.
On April 22, 2009, we entered into a definitive agreement with Ikanos Communications, Inc.
(Ikanos) under which Ikanos will purchase our BBA product lines. If this transaction is not
completed, we could be subject to a number of material risks, including:
|
|
|
a decline in our stock price; |
|
|
|
|
an inability to generate sufficient funds to repay our debt obligations; |
|
|
|
|
an inability to renew or successfully negotiate new credit facilities and/or refinance
our debt obligations; |
|
|
|
|
liability for the costs related to this transaction, which must be paid even if the
transaction is not completed; and |
|
|
|
|
possible litigation related to the failure to complete the transaction. |
After the anticipated completion of the sale of the BBA business, we will be a much smaller company
and will be more dependent on fewer product lines for our success.
After completion of the sale of the BBA business and product lines, we will be a much smaller
company with a narrower, less diversified portfolio of products. This could cause our cash flow
and growth prospects to be more volatile and make the Company more vulnerable to focused
competition. As a smaller company, we will have less capital available for research and
development or for strategic investments and acquisitions. We could also face greater challenges
in satisfying or refinancing our debt obligations as they become due. In addition, we may not be
able to appropriately restructure the supporting functions of the Company to fit the needs of a
smaller company.
We face a risk that capital needed for our business and to repay our debt obligations will not be
available when we need it.
At July 3, 2009, we had $141.4 million aggregate principal amount of floating rate senior secured
notes outstanding due November 2010 and $250.0 million aggregate principal amount of convertible
subordinated notes outstanding. The convertible notes are due in March 2026, but the holders may
require us to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and
March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest.
We also have a $50.0 million credit facility with a bank, under which we had borrowed $30.7 million
as of July 3, 2009. The term of this credit facility has been extended through November 27, 2009,
and the facility remains subject to additional 364-day extensions at the discretion of the bank.
However, as a smaller company, after the anticipated completion of the sale of the Broadband Access
business, we may not be able to maintain a credit facility of this size on terms and conditions no
less favorable than the ones currently available, or may not be able to extend the term of the
facility at all.
Recent tightening of the credit markets and unfavorable economic conditions has led to a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. In
addition, if the economy or markets in which we operate continue to be subject to adverse economic
conditions, our business, financial condition, cash flow and results of operations will be
adversely affected. If the credit markets remain difficult to access or worsen or our performance
is unfavorable due to economic conditions or for any other reasons, including the failure to
complete the sale of our BBA business, we may not be able to obtain sufficient capital to repay
amounts due under (i) our credit facility expiring
November 2009, (ii) our $141.4 million floating
rate senior secured notes when they become due in November 2010 or earlier as a result of a
mandatory offer to repurchase, and (iii) our $250.0 million convertible subordinated notes when
they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. The
first mandatory repurchase date for our convertible subordinated notes is March 1, 2011. In the
event we are unable to satisfy or refinance our debt obligations as the obligations are required to
be paid, we will be required to consider strategic and other alternatives, including, among other
things, the sale of assets to generate funds, the negotiation of revised terms of our indebtedness,
and the exchange of new securities for existing indebtedness obligations. We have retained
financial advisors to assist us in considering these strategic, restructuring or other
alternatives. There is no assurance that we would be successful in completing any of these
alternatives. Further, we may not be able to refinance any portion of this debt on favorable terms
or at all. Our failure to satisfy or refinance any of our indebtedness obligations as they come
due, including through an exchange of new securities for existing indebtedness obligations, would
result in a cross default and potential acceleration of
our remaining indebtedness obligations, would have a material adverse effect on our business, and
could potentially force us to restructure our indebtedness through a filing under the U.S. Bankruptcy Code.
58
In addition, in the future, we may need to make strategic investments and acquisitions to help us
grow our business, which 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.
Our operating and financial flexibility is limited by the terms of our senior notes and our credit
facility.
The terms of our credit facility and floating rate senior notes contain financial and other
covenants that may limit our ability or prevent us from taking certain actions that we believe are
in the best interests of our business and our stockholders. For example, our floating rate secured
senior notes indenture contains covenants that restrict, subject to certain exceptions, the
Companys ability and the ability of its restricted subsidiaries to: incur or guarantee additional
indebtedness or issue certain redeemable or preferred stock; repurchase capital stock; pay
dividends on or make other distributions in respect of its capital stock or make other restricted
payments; make certain investments; create liens; redeem junior debt; sell certain assets;
consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; enter into
certain types of transactions with affiliates; and enter into sale-leaseback transactions. These
restrictions may prevent us from taking actions that could help to grow our business or increase
the value of our securities.
There could be a negative effect on the price of our common stock if we sell stock under our shelf
registration statement or if we issue equity securities in connection with a restructuring of any
or all of our floating rate notes or our convertible subordinated notes.
On July 17, 2009, the Company filed a registration statement on Form S-3 to register shares of our
common stock, preferred stock, warrants to purchase common stock and/or preferred stock, and units
consisting of two or more of these classes or series of securities. We may sell any combination of
these securities in one or more offerings, over a period of up to 3 years, up to an aggregate
offering price of $20,000,000, on terms to be determined at the time of offering. If all of the
securities included in the shelf registration were issued and sold, there could be a substantial
dilutive effect on our common stock and an adverse effect on the price of our common stock. Even
without our selling any shares, the existence of the shelf registration could also have an adverse
impact on our share price if the market expects an increase in our shares outstanding.
Furthermore, if we determine to issue any equity securities in connection with a restructuring of
our floating rate notes or our convertible subordinated notes, there could also be a substantial
dilutive effect on our common stock and an adverse effect on the price of our common stock.
If we fail to continue to meet all applicable continued listing requirements of The NASDAQ Global
Market and NASDAQ determines to delist our common stock, the market liquidity and market price of
our common stock could decline.
Our common stock is listed on the NASDAQ Global Select Market. In order to maintain that listing,
we must satisfy minimum financial and other continued listing requirements. For example, NASDAQ
rules require that we maintain a minimum bid price of $1.00 per share for our common stock. Our
common stock has in the past fallen below this minimum bid price requirement and it may do so again
in the future. If our stock price falls below $1.00 or if we fail to meet other requirements for
continued listing on the NASDAQ Global Select Market, our common stock could be delisted from The
NASDAQ Global Select Market if we are unable to cure the events of noncompliance in a timely or
effective manner. If our common stock were threatened with delisting from The NASDAQ Global Market,
we may, depending on the circumstances, seek to extend the period for regaining compliance with
NASDAQ listing requirements by moving our common stock to the NASDAQ Capital Market. For example,
if appropriate, we may request, as we have done in the past, approval by our stockholders to
implement a reverse stock split in order to regain compliance with NASDAQs minimum bid price
requirement. If our common stock is not eligible for quotation on another market or exchange,
trading of our common stock could be conducted in the over-the-counter market or on an electronic
bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin
Board. In such event, it could become more difficult to dispose of, or obtain accurate quotations
for the price of, our common stock, and there would likely also be a reduction in our coverage by
security analysts and the news media, which could cause the price of our common stock to decline
further. In addition, in the event that our common stock is delisted, we would be in default under
the terms and conditions of our floating rate senior secured notes as well as our convertible
subordinated notes.
The value of our common stock may be adversely affected by market volatility and other factors.
The trading price of our common stock fluctuates significantly and may be influenced by
many factors, including:
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our operating and financial performance and prospects; |
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our ability to repay or restructure our debt; |
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the depth and liquidity of the market for our common stock; |
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our shelf registration statement on Form S-3 pursuant to which we may sell securities up
to an aggregate offering price of $20,000,000; |
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investor perception of us and the industry and markets in which we operate; |
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investor perception of us as a going concern and of our ability to operate successfully
as a company with a smaller cash flow and with significant debt obligations; |
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judgments favorable or adverse to us; |
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the level of research coverage of our common stock; |
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changes in earnings estimates or buy/sell recommendations by analysts; |
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our inclusion in, or removal from, any equity market indices; and |
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general financial, domestic, international, economic and other market conditions. |
We are subject to the risks of doing business internationally.
For the fiscal quarters ended July 3, 2009 and June 27, 2008, net revenues from customers located
outside of the United States, primarily in the Asia-Pacific region, represented 99% and 97% of our
total net revenues, respectively. For the nine fiscal months ended July 3, 2009 and June 27, 2008,
net revenues from customers located outside of the United States, primarily in the Asia-Pacific
region represented 97% and 97% of our total net revenues, respectively. In addition, a significant
portion of our workforce and many of our key suppliers are located outside of the United States.
Our international operations consist of research and development, sales offices, and other general
and administrative functions. 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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difficulty in obtaining distribution and support; |
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local economic and political conditions; |
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limitations on our ability under local laws to protect our intellectual property; |
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currency exchange rate fluctuations; |
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disruptions of commerce and capital or trading markets due to or related to terrorist
activity, armed conflict, or natural disasters; |
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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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the laws and policies of the United States and other countries affecting trade, foreign
investment and loans, and import or export licensing requirements; and |
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tax laws, including the cost of services provided and products sold between us and our
subsidiaries which are subject to review by taxing authorities. |
Approximately $23.0 million of our $123.4 million of cash and cash equivalents at July 3, 2009 was
located in foreign countries where we conduct business, including approximately $17.5 million in
India and $3.1 million in China. These amounts are not freely available for dividend repatriation
to the United States without the imposition and payment, where applicable, of local taxes. Further,
the repatriation of these funds is subject to compliance with
applicable local government laws and regulations, and in some cases, requires governmental consent,
including in India and China. Our inability to repatriate these funds quickly and without any
required governmental consents may
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limit the resources available to us to fund our operations in
the United States and other locations or to pay indebtedness.
In addition, U.S. President Barack Obamas administration recently proposed significant changes to
the U.S. international tax laws that would limit U.S. deductions for expenses related to
unrepatriated foreign-source income and modify the U.S. foreign tax credit and check-the-box
rules. We cannot determine whether these proposals will be enacted into law or what, if any,
changes may be made to such proposals prior to their being enacted into law. If the U.S. tax laws
change in a manner that increases our tax obligation, it could result in a material adverse impact
on our net income and our financial position.
Further, 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. 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 36% and 40% of our net revenues in the
fiscal quarters ended July 3, 2009 and June 27, 2008, and 30% and 34% of our net revenues in the
nine fiscal months ended July 3, 2009 and June 27, 2008, 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.
We operate in the highly cyclical semiconductor industry, which is subject to significant downturns
that may negatively impact our business, financial condition, cash flow and results of operations.
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 (for semiconductors and for the end-user products in which they are used)
and wide fluctuations in product supply and demand. Recent domestic and global economic conditions
have presented unprecedented and challenging conditions reflecting continued concerns about the
availability and cost of credit, the U.S. mortgage market, declining real estate values, increased
energy costs, decreased consumer confidence and spending and added concerns fueled by the U.S.
federal governments interventions in the U.S. financial and credit markets. These conditions have
contributed to instability in both U.S. and international capital and credit markets and diminished
expectations for the U.S. and global economy. In addition, these conditions make it extremely
difficult for our customers to accurately forecast and plan future business activities and could
cause U.S. and foreign businesses to slow spending on our products, which could cause our sales to
decrease or result in an extension of our sales cycles. Further, given the current unfavorable
economic environment, our customers may have difficulties obtaining capital at adequate or
historical levels to finance their ongoing business and operations, which could impair their
ability to make timely payments to us. If that were to occur, we may be required to increase our
allowance for doubtful accounts and our days sales outstanding would be negatively impacted. We
cannot predict the timing, strength or duration of any economic slowdown or subsequent economic
recovery, worldwide or within our industry. If the economy or markets in which we operate continue
to be subject to these adverse economic conditions, our business, financial condition, cash flow
and results of operations will be adversely affected.
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 U.S. and international
semiconductor providers that are both larger and smaller than us in terms of resources and market
share. We continually face significant competition in our markets. This competition results 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, technological and public
policy changes and relatively low barriers to entry in certain markets of the industry. Many of our
competitors have certain advantages over us, such as significantly greater sales and marketing,
manufacturing, distribution, technical, financial and other resources. In addition, many of our
current and potential competitors have a stronger financial position, less indebtedness and greater
financial resources than we do. These competitors may be able to devote greater financial resources
to the development, promotion and sale of their
products than we can. The advantages of our competitors may increase as we become a significantly
smaller company after the completion of our sale of the BBA business.
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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. |
In addition, the financial stability of suppliers is an important consideration in our customers
purchasing decisions. Our relationship with existing and potential customers could be adversely
affected if our customers perceive that we lack an appropriate level of financial liquidity or
stability or if they think we are too small to do business with.
Current and potential competitors also have established or may establish financial or strategic
relationships among themselves or with our existing or potential customers, resellers or other
third parties. These relationships may affect customers purchasing decisions. Accordingly, it is
possible that new competitors or alliances could emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against current and
potential competitors.
We own or lease a significant amount of space in which we do not conduct operations and doing so
exposes us to the financial risks of default by our tenants and subtenants.
As a result of our various reorganization and restructuring related activities, we lease or own a
number of domestic facilities in which we do not operate. At July 3, 2009, we had 554,000 square
feet of vacant leased space and 456,000 square feet of owned space, of which approximately 88% is
being sub-leased to third parties and 12% is currently vacant and offered for sublease. Included in
these amounts are 389,000 square feet of owned space in Newport Beach that we have leased to Jazz
Semiconductor, Inc. and 126,000 square feet of leased space in Newport Beach that we have
sub-leased to Mindspeed Technologies, Inc. As of July 3, 2009 the aggregate amount owed to
landlords under space we lease but do not operate over the remaining terms of the leases is
approximately $106 million and, of this amount, we have subtenants that currently have lease
obligations to us in the aggregate amount of $29 million. The space we have subleased to others is,
in some cases, at rates less than the amounts we are required to pay landlords and, of the
aggregate obligations we have to landlords for unused space, approximately $33 million is
attributable to space we are attempting to sublease. In the event one or more of our subtenants
fails to make lease payments to us or otherwise defaults on their obligations to us, we could incur
substantial unanticipated payment obligations to landlords. In addition, in the event tenants of
space we own fail to make lease payments to us or otherwise default on their obligations to us, we
could be required to seek new tenants and we cannot assure that our efforts to do so would be
successful or that the rates at which we could do so would be attractive. In the event our
estimates regarding our ability to sublet our available space are incorrect, we would be required
to adjust our restructuring reserves which could have a material impact on our financial results in
the future.
Our revenues, cash flow from operations and results of operations have fluctuated in the past and
may fluctuate in the future, particularly given adverse domestic and global economic conditions.
Our revenues, cash flow and results of operations 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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adverse economic conditions, including the unavailability or high cost of credit to our
customers; |
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the inability of our customers to forecast demand based on adverse economic conditions; |
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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 effect 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 business, financial condition, cash flow and results of operations.
We have recently incurred substantial losses and may incur additional future losses.
Our loss from continuing operations for the nine fiscal months ended July 3, 2009 was $19.2
million. Our income from continuing operations for fiscal 2008, 2007 and 2006 was $0.2 million,
$(167.4) million, and $10.0 million, respectively. These results have had a negative impact on our
financial condition and operating cash flows. Our primary sources of liquidity include borrowing
under our credit facility and available cash and cash equivalents. 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 and
working capital for at least the next twelve months. However, we cannot provide any assurance that
our business will become profitable or that we will not incur additional substantial losses in the
future. Additional operating losses or lower than expected product sales will adversely affect our
cash flow and financial condition and could impair our ability to satisfy our indebtedness
obligations as such obligations come due.
Our success depends on our ability to timely develop competitive new products and reduce costs.
Our operating results depend largely on our ability to introduce new and enhanced semiconductor
products on a timely basis. Successful product development and introduction depends on numerous
factors, including, among others, our ability to:
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anticipate customer and market requirements and changes in technology and industry
standards; |
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accurately define new products; |
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complete development of new products and bring our products to market on a timely basis; |
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differentiate our products from offerings of our competitors; |
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achieve overall market acceptance of our products; and |
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coordinate product development efforts between and among our sites, particularly in
India and China, to manage the development of products at remote geographic locations. |
We may not have sufficient resources to make the substantial investment in research and development
in order to develop and bring to market new and enhanced products, and our recent reductions in our
R&D headcount and other cost savings initiatives could further hinder our ability to invest in
research and development. 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
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our products will satisfy customer
requirements or achieve market acceptance, or that we will be able to anticipate new industry
standards and technological changes. The complexity of our products may lead to errors, defects and
bugs which could subject us to significant costs or damages and adversely affect market acceptance
of our products. We also cannot assure you that we will be able to respond successfully to new
product announcements and introductions by competitors.
In addition, prices of established products may decline, sometimes significantly and rapidly, over
time. We believe that in order to remain competitive we must continue to reduce the cost of
producing and delivering existing products at the same time that we develop and introduce new or
enhanced products. We cannot assure you that we will be successful and as a result gross margins
may decline in future periods.
We have significant goodwill and intangible assets, and future impairment of our goodwill and
intangible assets could have a material negative impact on our financial condition and results of
operations.
At July 3, 2009, we had $110.1 million of goodwill and $6.3 million of intangible assets, net,
which together represented approximately 29% of our total assets. 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. If our
market capitalization drops below our book value for a prolonged period of time, if our assumptions
regarding our future operating performance change or if other indicators of impairment are present,
we may be required to write-down the value of our goodwill and acquisition-related intangible
assets by taking a non-cash charge against earnings. Because of the significance of our remaining
goodwill and intangible asset balances, any future impairment of these assets could also have a
material adverse effect on our financial condition and results of operations, although, as a
non-cash charge, it would have no effect on our cash flow. Significant impairments may also impact
shareholders equity.
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, including distributors, represented approximately 85% and
93% of our net revenues in the fiscal quarters ended July 3, 2009 and June 27, 2008, respectively.
For the nine fiscal months ended July 3, 2009 and June 27, 2008, sales to our twenty largest
customers, including distributors, represented approximately 76% and 84% of our net revenues. For
the fiscal quarters ended July 3, 2009 and June 27, 2008, there was one distribution customer that
accounted for 22% and 29% of our net revenues, respectively. For the nine fiscal months ended July
3, 2009 and June 27, 2008, there was one distribution customer that accounted for 20% and 23% of
our net revenues, 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; |
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some of our customers offer or may offer products that compete with our products; |
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some of our customers liquidity may be negatively affected by the recent domestic and
global credit crisis; |
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our customers perceptions of our liquidity and viability may have a negative impact on
their decisions to incorporate our products into their own products; and |
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our smaller size after the completion of our sale of the BBA business may limit our
ability to develop and deliver new products to customers. |
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.
Further, our product portfolio consists predominantly of semiconductor solutions for the
communications, PC, and consumer markets. Recent unfavorable domestic and global economic
conditions have had an adverse impact on demand in these end-user markets by reducing overall
consumer spending or shifting consumer spending to products other than those made by our customers.
Continued reduced sales by our customers in these end-markets will adversely impact demand by our
customers for our products and could also slow new product introductions by our customers and by
us. Lower net sales of our products would have an adverse effect on our revenue, cash flow and
results of operations.
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. |
For example, a portion of our analog modem business that is bundled into PCs is becoming debundled
as broadband communications become more ubiquitous. Several of our PC OEM customers have indicated
that the trend toward debundling may become more significant, which may have an adverse effect on
both our revenues and profitability. Further, 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. Furthermore, as a smaller company following completion of our
sale of the BBA business, we might not be able to fund sufficient research and development to keep
up with technological developments.
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. We have incurred substantial expense
settling certain intellectual property litigation in the past, such as our $70.0 million charge in
fiscal 2006 related to the settlement of our patent infringement litigation with Texas Instruments
Incorporated. If litigation results in an adverse ruling we could be required to:
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pay substantial damages; |
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cease the manufacture, use or sale of infringing products, processes or technologies; |
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discontinue the use of infringing technology; |
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expend significant resources to develop non-infringing technology; or |
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license technology from the third party claiming infringement, which license may not be
available on commercially reasonable terms, or at all. |
If 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 components of other products. As a result, we rely on OEMs of communications
electronics products to select our products from among alternative offerings to be designed into
their equipment. We may be unable to achieve these design wins. Without design wins from OEMs, we
would be unable to sell our products. Once an OEM designs another suppliers semiconductors into
one of its product platforms, it will be more difficult for us to achieve future design wins with
that OEMs product platform because changing suppliers involves significant cost, time, effort and
risk. Achieving a design win with a customer does not ensure that we will receive significant
revenues from that customer and we may be unable to convert design wins into actual sales. Even
after a design win, the customer is not obligated to purchase our products and can choose at any
time to stop using our products if, for example, it or its own products are not commercially
successful.
Because of the lengthy sales cycles of many of our products, we may incur significant expenses
before we generate any revenues related to those products.
Our customers may need six months or longer to test and evaluate our products and an additional six
months or more to begin volume production of equipment that incorporates our products. The lengthy
period of time required also increases the possibility that a customer may decide to cancel or
change product plans, which could reduce or eliminate sales to that customer. Thus, 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. As a smaller company following
completion of our sale of the BBA business, exposure to lengthy sales cycles may increase the
volatility of our revenue stream and common stock price.
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 36% and 40% of our net revenues in the fiscal
quarters ended July 3, 2009 and June 27, 2008, respectively, and 30% and 34% in the nine fiscal
months ended July 3, 2009 and June 27, 2008, 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 suppliers products and may not
sell our products as quickly as forecasted, which may impact the distributors 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.
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).
Therefore, our revenue growth is dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer fabrication capacity. If the semiconductor industry
experiences a shortage of wafer fabrication capacity in the future, we risk experiencing delays in
access to key process technologies, production or shipments and increased
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manufacturing costs.
Moreover, our foundry partners often require significant amounts of financing in order to build or
expand wafer fabrication facilities. However, current unfavorable economic conditions have also
resulted in a tightening in the credit markets, decreased the level of liquidity in many financial
markets and resulted in significant volatility in the credit and equity markets. These conditions
may make it difficult for foundries to obtain adequate or historical levels of capital to finance
the building or expansion of their wafer fabrication facilities, which would have an adverse impact
on their production capacity and could in turn negatively impact our wafer output. In addition,
certain of our suppliers have required that we keep in place standby letters of credit for all or
part of the products we order. Such requirement, or a requirement that we shorten our payment cycle
times in the future, may negatively impact our liquidity and cash position, or may not be available
to us due to our then current liquidity or cash position, and would have a negative impact on our
ability to produce and deliver products to our customers on a timely basis.
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 testing of our products. Our reliance
on others to assemble and test our products subjects us to many of the same risks that we have with
respect to our reliance on outside wafer fabrication facilities.
Wafer fabrication processes are subject to obsolescence, and foundries may discontinue a wafer
fabrication process used for certain of our products. In such event, we generally offer our
customers a last time buy program to satisfy their anticipated requirements for our products. The
unanticipated discontinuation of wafer fabrication processes on which we rely may adversely affect
our revenues and our customer relationships.
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
fabrication capacity, may not be available to us on a timely basis. Even if alternate wafer
fabrication capacity is available, we may not be able to obtain it on favorable terms, or at all.
All such delays or disruptions 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 and 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, increased expenses and loss of design wins to our competitors.
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. In the past, we have experienced some difficulties in shifting to smaller
geometry process technologies or new manufacturing processes, which resulted in reduced
manufacturing yields, delays in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to smaller geometry
processes. We are dependent on our relationships with our foundries to transition to smaller
geometry processes successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our existing foundry
relationships or develop
new ones. If our foundries or we experience significant delays in this transition or fail to
implement this transition efficiently, we could experience reduced manufacturing yields, delays in
product deliveries and increased expenses, all of which could negatively affect our relationships
with our customers and result in the loss of design wins to our competitors, which in turn would
adversely affect our results of operations. As smaller geometry processes become
67
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 use a significant amount of intellectual property in our business. 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.
Our success depends, in part, on our ability to effect suitable investments, alliances,
acquisitions and where appropriate, divestitures and restructurings.
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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large initial one-time write-offs of in-process research and development; |
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the incurrence of substantial debt and assumption of unknown liabilities; |
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the potential loss of key employees from the acquired company; |
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amortization expenses related to intangible assets; and |
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the diversion of managements attention from other business concerns. |
Integrating acquired organizations and their products and services may be expensive, time-consuming
and a strain on our resources and our relationships with employees and customers, and ultimately
may not be successful. The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of one or more of our product lines and the loss of key
personnel. The diversion of managements attention and any delays or difficulties encountered in
connection with acquisitions and the integration of multiple operations could have an adverse
effect on our business, results of operations or financial condition. Moreover, in the event that
we have
unprofitable operations or product lines we may be forced to restructure or divest such operations
or product lines. There is no guarantee that we will be able to restructure or divest such
operations or product lines on a timely basis or at a value that will avoid further losses or that
will successfully mitigate the negative impact on our overall operations or financial results.
68
We may not be able to successfully protect our interests in the escrowed funds related to our sale
of assets to NXP B.V.
On July 22, 2009, we received a letter from NXP B.V. (NXP) referring to the April 29, 2008 Asset
Purchase Agreement the Company entered into with NXP, as amended August 8 and September 17, 2008
(collectively, the Agreement). NXP seeks indemnification for losses that it asserts it has
suffered in connection with Conexants alleged breach of certain representations and warranties
made in the Agreement related to certain parts. NXP asserts that its current estimated losses from
the purported defect in such parts amounts to approximately $5.1 million, and it has filed a claim
against the escrow fund (which consists of $11 million) to cover these losses. We do not believe
that NXP has any substantial claims to the escrowed funds, but there can be no assurances that NXP
will not succeed in being indemnified for some or all of its claims (with or without the added
expense of litigation).
We are required to use proceeds of certain asset dispositions to offer to repurchase our floating
rate senior secured notes due November 2010 if we do not use the proceeds within 360 days to invest
in assets (other than current assets), and this requirement limits our ability to use asset sale
proceeds to fund our operations.
At July 3, 2009, we had $141.4 million aggregate principal amount of floating rate senior secured
notes outstanding. We are required to repurchase, for cash, notes at a price of 100% of the
principal amount, plus any accrued and unpaid interest, with the net proceeds of certain asset
dispositions if such proceeds are not used within 360 days to invest in assets (other than current
assets) related to our business. The sale of our Broadband Media Processing business in August 2008
qualified as an asset disposition requiring us to make offers to repurchase a portion of the notes
no later than 361 days following the respective asset dispositions. In September 2008, we completed
a tender offer for $80 million of the senior secured notes. In April 2009, we announced plans to
sell our BBA product lines to Ikanos for $54 million. We currently expect to close the transaction
in the fourth fiscal quarter subject to satisfaction of all applicable closing conditions,
including receipt by Ikanos of stockholder approval. We would then have 360 days to invest in
assets (other than current assets) related to our business. We do not currently anticipate having
sufficient excess proceeds from asset dispositions to trigger another required repurchase offer
through the fourth quarter of fiscal 2009.
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 at all levels of our business. 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. 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.
Uncertainties involving litigation could adversely affect our business.
We and certain of our current and former officers and our Employee Benefits Plan Committee have
been named as defendants in a purported breach of fiduciary duties class action lawsuit. While the
parties have reached a settlement in principle, this or other lawsuits may divert managements
attention and resources from other matters, which could also adversely affect our business,
financial position and results of operations.
We currently operate under tax holidays and favorable tax incentives in certain foreign
jurisdictions.
While we believe we qualify for these incentives that reduce our income taxes and operating costs,
the incentives require us to meet specified criteria which are subject to audit and review. We
cannot assure that we will continue to meet such criteria and enjoy such tax holidays and
incentives. If any of our tax holidays or incentives are terminated, our results of operations may
be materially and adversely affected.
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ITEM 6. EXHIBITS
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Exhibit No. |
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Description |
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2.1
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Asset Purchase Agreement, dated as of April 21, 2009, by and between
Conexant Systems, Inc. and Ikanos Communications, Inc. (incorporated by
reference to Exhibit 2.1 of the Companys Current Report on Form 8-K filed
on April 24, 2009). |
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3.1
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Bylaws of the Company, as of July 15, 2009 (incorporated by reference to
Exhibit 99.1 of the Companys amended Current Report on Form 8-K filed on
July 16, 2009). |
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*10.1
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Amendment to Employment Agreement by and between D. Scott Mercer and
Conexant Systems, Inc., dated April 22, 2009 (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April
24, 2009). |
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*10.2
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Amendment to Employment Agreement between Conexant Systems, Inc. and Mark
Peterson, dated April 22, 2009 (incorporated by reference to Exhibit 10.2
of the Companys Current Report on Form 8-K filed on April 24, 2009). |
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31.1
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Certification of the Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-15(a) or 15d-15(a). |
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31.2
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Certification of the Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-15(a) or 15d-15(a). |
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32
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Certification by Chief Executive Officer and Chief Financial Officer of
Periodic Report Pursuant to 18 U.S.C. Section 1350. |
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* |
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Management contract or compensatory plan or arrangement |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CONEXANT SYSTEMS, INC.
(Registrant)
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Date: August 12, 2009 |
By |
/s/ JEAN HU
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Jean Hu |
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Chief Financial Officer, Treasurer and Senior Vice
President, Corporate Development
(principal financial officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description |
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2.1
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Asset Purchase Agreement, dated as of April 21,
2009, by and between Conexant Systems, Inc. and
Ikanos Communications, Inc. (incorporated by
reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed on April 24, 2009). |
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3.1
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Bylaws of the Company, as of July 15, 2009 (incorporated by
reference to Exhibit 99.1 of the Companys Current Report on Form
8-K filed on July 16, 2009). |
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*10.1
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Amendment to Employment Agreement by and between D.
Scott Mercer and Conexant Systems, Inc., dated
April 22, 2009 (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on April 24, 2009). |
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*10.2
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Amendment to Employment Agreement by and between
Mark Peterson, dated April 22, 2009 (incorporated
by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K filed on April 24,
2009). |
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31.1
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Certification of the Chief Executive Officer of
Periodic Report Pursuant to Rule 13a-14(a) or
15d-14(a). |
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31.2
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Certification of the Chief Financial Officer of
Periodic Report Pursuant to Rule 13a-15(a) or
15d-14(a). |
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32
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Certification by Chief Executive Officer and Chief
Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. |
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* |
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Management contract or compensatory plan or arrangement |
72