e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 2, 2010
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 | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company þ |
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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 April 30, 2010, there were 81,186,507 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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expectations regarding the market share of our products, growth in the markets we serve and our market opportunities; |
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our expectation 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 be able to use our net operating losses and other tax attributes to offset future taxable income; |
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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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expectations regarding the sale of our real property in Newport Beach; |
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expectations, subject to the qualifications expressed, regarding the sufficiency of our existing sources of liquidity,
together with cash expected to be generated from operations, to fund our operations, research and development, anticipated
capital expenditures, and working capital for at least the next twelve months; |
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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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our expectation that we will be able to protect our products and services with proprietary technology and intellectual
property protection; |
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our expectation that we will be able to meet our lease obligations (and other financial commitments); and |
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our 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. |
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, but not limited to, 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 (SEC). Please consider our forward-looking statements in light
of those risks as you read this Quarterly Report on Form 10-Q. 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. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value amounts)
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April 2, |
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October 2, |
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2010 |
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2009 (1) |
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(unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
187,526 |
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$ |
125,385 |
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Restricted cash |
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8,500 |
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Receivables, net of allowances of $333 and $453 |
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27,798 |
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30,110 |
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Inventories, net |
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9,570 |
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9,216 |
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Other current assets |
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30,557 |
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26,148 |
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Assets held for sale |
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12,247 |
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Total current assets |
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267,698 |
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199,359 |
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Property, plant and equipment, net of accumulated depreciation of $39,734 and $70,139 |
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6,263 |
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15,299 |
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Goodwill |
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109,908 |
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109,908 |
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Other assets |
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47,686 |
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25,635 |
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Total assets |
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$ |
431,555 |
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$ |
350,201 |
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LIABILITIES AND SHAREHOLDERS EQUITY (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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$ |
61,400 |
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Short-term debt |
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120,817 |
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28,653 |
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Accounts payable |
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18,007 |
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24,553 |
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Accrued compensation and benefits |
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9,696 |
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8,728 |
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Other current liabilities |
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33,450 |
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33,978 |
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Total current liabilities |
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181,970 |
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157,312 |
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Long-term debt |
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173,381 |
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228,578 |
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Other liabilities |
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59,261 |
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62,089 |
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Total liabilities |
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414,612 |
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447,979 |
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Commitments and contingencies (Note 6) |
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Shareholders equity (deficit): |
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Preferred and junior preferred stock: 20,000 and 5,000 shares authorized, respectively |
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Common stock, $0.01 par value: 200,000 shares authorized; 81,187 and 56,917
shares issued and outstanding at April 2, 2010 and October 2, 2009, respectively |
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812 |
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570 |
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Additional paid-in capital |
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4,916,168 |
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4,833,919 |
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Accumulated deficit |
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(4,910,530 |
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(4,929,743 |
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Accumulated other comprehensive income (loss) |
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10,493 |
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(2,524 |
) |
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Total shareholders equity (deficit) |
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16,943 |
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(97,778 |
) |
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Total liabilities and shareholders equity (deficit) |
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$ |
431,555 |
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$ |
350,201 |
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(1) |
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Amounts reflect the retrospective application of FASB ASC 470-20 adopted
effective October 3, 2009 (See Note 3). |
See accompanying notes to consolidated financial statements
3
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
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Fiscal Quarter Ended |
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Six Fiscal Months Ended |
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April 2, |
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April 3, |
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April 2, |
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April 3, |
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2010 |
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2009 (1) |
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2010 |
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2009 (1) |
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Net revenues |
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$ |
61,868 |
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$ |
43,965 |
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$ |
123,681 |
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$ |
101,428 |
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Cost of goods sold (2) |
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24,087 |
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18,930 |
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48,291 |
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43,876 |
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Gross margin |
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37,781 |
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25,035 |
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75,390 |
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57,552 |
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Operating expenses: |
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Research and development (2) |
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14,100 |
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12,766 |
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27,345 |
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26,333 |
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Selling, general and administrative (2) |
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12,681 |
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17,060 |
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25,083 |
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34,926 |
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Amortization of intangible assets |
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284 |
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1,340 |
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680 |
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1,857 |
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Gain on sale of intellectual property |
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(12,858 |
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Special (credits) charges |
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(210 |
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2,016 |
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136 |
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12,593 |
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Total operating expenses |
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26,855 |
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33,182 |
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53,244 |
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62,851 |
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Operating income (loss) |
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10,926 |
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(8,147 |
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22,146 |
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(5,299 |
) |
Interest expense |
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7,775 |
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8,633 |
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17,278 |
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17,259 |
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Other (income) expense, net |
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(7,755 |
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(1,815 |
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(14,959 |
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112 |
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Income (loss) from continuing operations before income taxes and loss on
equity method investments |
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10,906 |
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(14,965 |
) |
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19,827 |
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(22,670 |
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Income tax provision |
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331 |
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175 |
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101 |
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643 |
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Income (loss) from continuing operations before loss on equity method
investments |
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10,575 |
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(15,140 |
) |
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19,726 |
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(23,313 |
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Income (loss) on equity method investments |
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209 |
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(835 |
) |
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(245 |
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(1,681 |
) |
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Income (loss) from continuing operations |
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10,784 |
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(15,975 |
) |
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19,481 |
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(24,994 |
) |
Income (loss) from discontinued operations, net of tax (2) |
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95 |
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(1,138 |
) |
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(268 |
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(13,111 |
) |
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Net income (loss) |
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$ |
10,879 |
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$ |
(17,113 |
) |
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$ |
19,213 |
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$ |
(38,105 |
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Income (loss) per share from continuing operations basic |
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$ |
0.16 |
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$ |
(0.32 |
) |
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$ |
0.30 |
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$ |
(0.50 |
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Income (loss) per share from continuing operations diluted |
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$ |
0.15 |
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$ |
(0.32 |
) |
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$ |
0.30 |
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$ |
(0.50 |
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Income (loss) per share from discontinued operations basic |
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$ |
0.00 |
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$ |
(0.02 |
) |
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$ |
0.00 |
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$ |
(0.27 |
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Income (loss) per share from discontinued operations diluted |
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$ |
0.00 |
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$ |
(0.02 |
) |
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$ |
(0.01 |
) |
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$ |
(0.27 |
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Net income (loss) per share basic |
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$ |
0.16 |
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$ |
(0.34 |
) |
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$ |
0.30 |
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$ |
(0.77 |
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Net income (loss) per share diluted |
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$ |
0.15 |
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$ |
(0.34 |
) |
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$ |
0.29 |
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$ |
(0.77 |
) |
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Shares used in basic per-share computations |
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69,136 |
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49,755 |
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64,579 |
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49,706 |
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Shares used in diluted per-share computations |
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70,513 |
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49,755 |
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65,273 |
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49,706 |
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(1) |
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Amounts reflect the retrospective application of FASB ASC 470-20 adopted
effective October 3, 2009 (See Note 3). |
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(2) |
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These captions include non-cash employee stock-based compensation
expense as follows (in thousands) (See Note 7): |
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Fiscal Quarter Ended |
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Six Fiscal Months Ended |
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April 2, |
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April 3, |
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April 2, |
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April 3, |
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2010 |
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2009 |
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2010 |
|
2009 |
Cost of goods sold |
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$ |
95 |
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$ |
82 |
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$ |
153 |
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$ |
119 |
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Research and development |
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544 |
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294 |
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945 |
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|
729 |
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Selling, general and administrative |
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1,216 |
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1,274 |
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2,253 |
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2,987 |
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Income (loss) from discontinued operations, net of tax |
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5 |
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583 |
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(30 |
) |
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771 |
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See accompanying notes to consolidated financial statements
4
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Six Fiscal Months Ended |
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April 2, |
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April 3, |
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2010 |
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2009 (1) |
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Cash flows from operating activities: |
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Net Income (loss) |
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$ |
19,213 |
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$ |
(38,105 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
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Depreciation |
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1,906 |
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4,659 |
|
Amortization of intangible assets |
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680 |
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6,255 |
|
Reversal of provision for bad debts, net |
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(120 |
) |
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Charges for (reversal of) inventory provisions, net |
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32 |
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(24 |
) |
Amortization of debt discount |
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6,979 |
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6,895 |
|
Deferred income taxes |
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118 |
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(158 |
) |
Stock-based compensation |
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3,321 |
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4,606 |
|
Increase in fair value of derivative instruments |
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(18,201 |
) |
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(90 |
) |
Losses on equity method investments |
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1,099 |
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2,560 |
|
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 |
|
Loss on termination of swap |
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1,728 |
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Loss on extinguishment of secured debt |
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614 |
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Loss on extinguishment of convertible debt |
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9,991 |
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Gain on sale of marketable securities |
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(7,734 |
) |
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Gain on sale of intellectual property |
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(12,858 |
) |
Other items, net |
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|
234 |
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|
1,006 |
|
Changes in assets and liabilities: |
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Receivables |
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2,432 |
|
|
|
11,825 |
|
Inventories |
|
|
(386 |
) |
|
|
19,319 |
|
Accounts payable |
|
|
(9,935 |
) |
|
|
(16,529 |
) |
Accrued expenses and other current liabilities |
|
|
1,065 |
|
|
|
(12,743 |
) |
Other, net |
|
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(1,817 |
) |
|
|
16,521 |
|
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|
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|
|
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|
Net cash provided by (used in) operating activities |
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11,219 |
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(4,091 |
) |
Cash flows from investing activities: |
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Purchases of property, plant and equipment |
|
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(525 |
) |
|
|
(347 |
) |
Proceeds from sale of property, plant and equipment |
|
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397 |
|
|
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|
Payments for acquisitions |
|
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(625 |
) |
|
|
(3,578 |
) |
Proceeds from sales of marketable securities |
|
|
8,030 |
|
|
|
|
|
Release of restricted cash |
|
|
8,500 |
|
|
|
9,300 |
|
Proceeds from sale of intellectual property, net of expenses of $132 |
|
|
|
|
|
|
14,548 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
15,777 |
|
|
|
19,923 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net repayments of short-term debt, including debt costs of $483 and $901 |
|
|
(29,136 |
) |
|
|
(11,297 |
) |
Extinguishment of long-term debt |
|
|
(166,676 |
) |
|
|
|
|
Proceeds from common stock offerings, net of expenses of $4,872 |
|
|
62,519 |
|
|
|
|
|
Proceeds from issuance of long-term bonds, net of expenses of $4,911 |
|
|
168,449 |
|
|
|
|
|
Proceeds from issuance of common stock under employee stock plans |
|
|
18 |
|
|
|
28 |
|
Repurchase of shares upon exercise of employee stock awards |
|
|
(29 |
) |
|
|
|
|
Interest rate swap security deposit |
|
|
|
|
|
|
(207 |
) |
Repayment of shareholder note receivable |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
35,145 |
|
|
|
(11,444 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
62,141 |
|
|
|
4,388 |
|
Cash and cash equivalents at beginning of period |
|
|
125,385 |
|
|
|
105,883 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
187,526 |
|
|
$ |
110,271 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts reflect the retrospective application of FASB ASC 470-20 adopted
effective October 3, 2009 (See Note 3). |
See accompanying notes to consolidated financial statements
5
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Description of Business
Conexant Systems, Inc. (Conexant, the Company, we, us or our) designs, develops and
sells semiconductor system solutions, comprised of semiconductor devices, software and reference
designs, for imaging, audio, embedded-modem, and video applications. These solutions include a
comprehensive portfolio of imaging solutions for multifunction printers (MFPs), fax platforms, and
connected frame market segments. The Companys audio solutions include high-definition (HD) audio
integrated circuits, HD audio codecs, and speakers-on-a-chip solutions for personal computers
(PCs), PC peripheral sound systems, audio subsystems, speakers, notebook docking stations,
voice-over-IP speakerphones, intercom, door phone, and audio-enabled surveillance applications. The
Company also offers a full suite of embedded-modem solutions for set-top boxes, point-of-sale
systems, home automation and security systems, and desktop and notebook PCs. Additional products
include decoders and media bridges for video surveillance and security applications, and system
solutions for analog video-based multimedia applications.
2. Sale of Assets and Discontinued Operations
Sale of Property
In November 2009, the Company committed to a plan for the sale of certain of the Companys property
located on Jamboree Road adjacent to its Newport Beach, California headquarters. The property
consists of an approximately 25-acre site, including two leased buildings, certain personal
property on the site, and all easements and other intangible rights appurtenant to the property.
The Company determined that this property met the criteria for held for sale accounting in
accordance with the accounting guidance for impairment or disposal of long-lived assets and has
presented the respective group of assets separately on the face of the consolidated balance sheet
as of April 2, 2010.
Sale of Broadband Access Business
On August 24, 2009, the Company completed the sale of its Broadband Access (BBA) business to
Ikanos Communications, Inc. (Ikanos). Assets sold pursuant to the agreement with Ikanos included,
among other things, specified patents, inventory, contracts and tangible assets. Ikanos assumed
certain liabilities, including obligations under transferred contracts and certain employee-related
liabilities. The Company also granted to Ikanos a license to use certain of the Companys retained
technology assets in connection with Ikanos current and future products in certain fields of use,
along with a patent license covering certain of the Companys retained patents to make, use, and
sell such products (or, in some cases, components of such products).
In accordance with the accounting guidance for the impairment or disposal of long-lived assets, 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 consolidated statements of operations for all periods presented.
Interest expense has been allocated based on the accounting guidance for allocation of interest to
discontinued operations. For the fiscal quarter and six fiscal months ended April 3, 2009, interest
expense allocated to discontinued operations was $0.7 million and $1.4 million, respectively.
For the fiscal quarter ended April 2, 2010, BBA revenues and pretax income classified as
discontinued operations were $0.7 million and $0.6 million, respectively. For the fiscal quarter
ended April 3, 2009, BBA revenues and pretax loss classified as discontinued operations was $30.5
million and $2.1 million, respectively.
For the six fiscal months ended April 2, 2010, BBA revenues and pretax income classified as
discontinued operations was $0.9 million and $0.7 million, respectively. For the six fiscal months
ended April 3, 2009, BBA revenues and pretax loss classified as discontinued operations was $59.5
million and $6.4 million, respectively.
The Company has entered into a short-term transitional services agreement (TSA) with Ikanos which
provides for ongoing logistical support by the Company to Ikanos, for which Ikanos will reimburse
the Company. As of April 2, 2010, the Company had a receivable under the TSA from Ikanos of
approximately $1.4 million, which is classified in other current assets.
Sale of Broadband Media Processing Business
On August 8, 2008, the Company completed the sale of its Broadband Media Processing (BMP)
business to NXP B.V. (NXP). Pursuant to the asset purchase agreement with NXP, NXP acquired
certain assets including, among other things, specified patents, inventory and contracts, and
assumed certain employee-related liabilities. Pursuant to the 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 the accounting guidance for impairment or
disposal of long-lived assets, 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 consolidated statements of operations
for all periods presented.
For the fiscal quarter ended April 2, 2010, there were no BMP revenues and the loss classified as
discontinued operations was $0.4 million. For the fiscal quarter ended April 3, 2009, BMP revenues
and income classified as discontinued operations were $2.1 million and $1.1 million, respectively.
6
For the six fiscal months ended April 2, 2010, there were no BMP revenues and the loss classified
as discontinued operations was $0.9 million. For the six fiscal months ended April 3, 2009, BMP
revenues and loss classified as discontinued operations were $3.0 million and $6.1 million,
respectively.
3. Basis of Presentation and Significant Accounting Policies
Interim Reporting The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated.
These 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 2, 2009 and the Current Report on Form 8-K filed on February 8, 2010.
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 balance sheet data was derived from
the audited consolidated financial statements. Prior year quarterly information has been recast to
reflect the reclassification of discontinued operations described in Note 2 and the
retrospective application of FASB ASC 470-20 for convertible debt instruments that may be settled
wholly or partially in cash on conversion, adopted effective October 3, 2009.
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 2010 consists of, and fiscal 2009 consisted of, 52 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 ongoing basis, management reviews its
estimates based upon currently available information. Actual results could differ materially from
those estimates.
Revenue Recognition The Company recognizes revenue when (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 the accounting guidance for revenue recognition when right of return exists. Development
revenue is recognized when services are performed and was not significant for any periods
presented.
Restricted Cash Upon the expiration of the Companys $50 million credit facility and repayment of
the amount owed under the agreement, $8.5 million of restricted cash included in the consolidated
balance sheets as of October 2, 2009 was released back to the Company.
The Company has outstanding letters of credit collateralized by restricted cash aggregating
$5.7 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 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 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.
Assets Held for Sale The Company evaluates the asset at the time an asset qualifies for held for
sale accounting, to determine whether or not the carrying value exceeds its fair value less cost
to sell. Any loss as a result of the carrying value being in excess of fair value less cost to
sell is recorded in the period the asset meets held for sale accounting. Management judgment is
required to assess the criteria required to meet held for sale accounting and estimate the
expected net amount recoverable upon sale. As of April 2, 2010, the carrying values of the
respective assets held for sale did not exceed their fair values less costs to sell.
Income Taxes The provision for income taxes is determined in accordance with accounting guidance
for income taxes. Deferred tax assets and liabilities are determined based on the temporary
differences between the financial reporting and tax bases of assets and liabilities, applying
enacted legislation and statutory tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is recorded when it is more likely than not that some or
all of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, the Company considers all positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies, and recent financial performance. Forming a conclusion that a
valuation allowance is not required is difficult when there is negative evidence, such as
cumulative losses in recent years. As a result of the Companys cumulative losses in the U.S. and
the full utilization of our loss carryback opportunities, management has concluded that a full
valuation allowance against its net deferred tax assets is appropriate in such jurisdictions. In
certain other foreign jurisdictions where the
7
Company does not have cumulative losses, a valuation allowance is recorded to reduce the net
deferred tax assets to the amount management believes is more likely than not to be realized. In
the future, if the Company realizes a deferred tax asset that currently carries a valuation
allowance, a reduction to income tax expense may be recorded in the period of such realization.
The Company recognizes 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 in accordance with the accounting guidance for uncertainty in
income taxes. 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. The Company recognizes interest and penalties related to these unrecognized
tax benefits in the income tax provision.
The accounting guidance also provides for derecognition 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.
As a multinational corporation, the Company is subject to taxation in many jurisdictions, and the
calculation of its tax liabilities involves dealing with uncertainties in the application of
complex tax laws and regulations in various taxing jurisdictions. If, based on new facts that arise
in a period, management ultimately determines that the payment of these liabilities will be
unnecessary, the liability will be reversed and the Company will recognize a tax benefit during the
period in which it is determined the liability no longer applies. Conversely, the Company records
additional tax charges in a period in which it is determined that a recorded tax liability is less
than the ultimate assessment is expected to be.
The application of tax laws and regulations is subject to legal and factual interpretation,
judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of
changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.
Therefore, the actual liability for U.S. or foreign taxes may be materially different from
managements estimates, which could result in the need to record additional tax liabilities or
potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax
expense.
Accounting for Convertible Debt On October 3, 2009, the Company adopted the accounting guidance
for convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement). The new accounting guidance requires the issuer to separately account for the
liability and equity components of convertible debt instruments in a manner that reflects the
issuers hypothetical nonconvertible debt borrowing rate. The guidance resulted in the Company
recognizing higher interest expense in the statement of operations due to amortization of the
discount that results from separating the liability and equity components. The provisions of the
new accounting guidance were retrospectively applied, and all prior period amounts have been
adjusted to apply the new method of accounting.
The new accounting guidance applies to our 4.00% convertible subordinated notes issued in 2006. In
March 2006, the Company issued $200.0 million principal amount of 4.00% convertible subordinated
notes due March 2026 (convertible notes) and, in May 2006, the initial purchaser of the
convertible notes exercised its option to purchase an additional $50.0 million principal amount of
the convertible notes. Total proceeds to the Company from these issuances, net of issuance costs,
were $243.6 million. The convertible notes are general unsecured obligations of the Company.
Interest on the convertible 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 convertible 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 convertible 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. During the fiscal quarter ended April 2, 2010, the Company repurchased by
means of a tender offer approximately $104.7 million of its convertible notes. As a result of the
repurchase the Company included $6.2 million of unamortized debt discount in the loss on
extinguishment. The remaining $127.7 million convertible notes, less debt discount of $6.9 million,
are classified as short-term debt as of April 2, 2010. Subsequent to April 2, 2010, the Company
repurchased approximately $115.2 million of its 4.00% convertible subordinated notes due March 2026
by means of a private purchase, and paid accrued and unpaid interest on the convertible notes
through the date of the repurchase. The Company will record an extinguishment loss on this
transaction, which is primarily composed of the unamortized debt discount related to the notes
repurchased.
The Company applied the accounting guidance to measure the fair value of the liability component of
the convertible notes using a discounted cash flow model. The Company assessed the expected life
and approximate discount rate of the liability component to be 5.0 years and 11.8% for the
$200.0 million convertible notes and 4.8 years and 10.3% for the $50.0 million convertible notes,
based on yields of similarly rated nonconvertible instruments. The Company determined the carrying
amount of the equity component by deducting the fair value of the liability component from the
principal amount of the convertible notes. Since the Companys effective tax rate is zero, there
was no tax effect for the temporary basis difference associated with the liability component of the
convertible notes. The Company amortizes the transaction costs related to the liability component
to interest expense over the expected life of the convertible notes.
The adoption of the new accounting guidance for convertible debt instruments that may be settled in
cash upon conversion (including partial cash settlement) resulted in the following amounts
recognized in our financial statements (in thousands):
8
|
|
|
|
|
|
|
|
|
|
|
April 2, |
|
|
October 2, |
|
|
|
2010 |
|
|
2009 |
|
Principal of the liability component of 4.00% convertible
subordinated notes |
|
$ |
127,708 |
|
|
$ |
250,000 |
|
Unamortized debt discount |
|
|
(6,891 |
) |
|
|
(21,422 |
) |
|
|
|
|
|
|
|
Net carrying amount of liability component of 4.00%
convertible subordinated notes |
|
$ |
120,817 |
|
|
$ |
228,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of equity component of 4.00% convertible
subordinated notes (net of $1,742 issuance costs) |
|
$ |
66,045 |
|
|
$ |
66,045 |
|
Interest expense related to the 4.00% convertible subordinated notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Contractual interest coupon |
|
$ |
2,326 |
|
|
$ |
2,500 |
|
|
$ |
4,798 |
|
|
$ |
5,000 |
|
Amortization of the debt discount on the liability component |
|
|
3,397 |
|
|
|
3,475 |
|
|
|
6,958 |
|
|
|
6,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,723 |
|
|
$ |
5,975 |
|
|
$ |
11,756 |
|
|
$ |
11,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate for the liability component for the period |
|
|
9.95 |
% |
|
|
9.56 |
% |
|
|
9.95 |
% |
|
|
9.52 |
% |
The estimated amortization expense for the debt discount for the 4.00% convertible
subordinated notes through the remaining expected life of 11 months is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
Estimated debt discount amortization expense |
|
$ |
3,718 |
|
|
$ |
3,173 |
|
The adoption of the new accounting guidance requires the retrospective application to all
periods presented as of the beginning of the first period presented. As of October 3, 2009, the new
accounting guidance was adopted and comparative financial statements for prior periods have been
adjusted to apply it retrospectively. The line items for the financial statements that are affected
by the change in accounting principle are indicated below (in thousands):
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2009 |
|
|
|
|
|
|
As Reported |
|
|
Effect of Change |
|
|
As Adjusted |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets: |
|
$ |
199,359 |
|
|
$ |
|
|
|
$ |
199,359 |
|
Property, plant and equipment, net |
|
|
15,299 |
|
|
|
|
|
|
|
15,299 |
|
Goodwill |
|
|
109,908 |
|
|
|
|
|
|
|
109,908 |
|
Other assets |
|
|
26,284 |
|
|
|
(649 |
) |
|
|
25,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
350,850 |
|
|
$ |
(649 |
) |
|
$ |
350,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities: |
|
$ |
157,312 |
|
|
$ |
|
|
|
$ |
157,312 |
|
Long-term debt |
|
|
250,000 |
|
|
|
(21,422 |
) |
|
|
228,578 |
|
Other liabilities |
|
|
62,089 |
|
|
|
|
|
|
|
62,089 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
469,401 |
|
|
|
(21,422 |
) |
|
|
447,979 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred and junior preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
570 |
|
|
|
|
|
|
|
570 |
|
Additional paid-in capital |
|
|
4,767,874 |
|
|
|
66,045 |
|
|
|
4,833,919 |
|
Accumulated deficit |
|
|
(4,884,471 |
) |
|
|
(45,272 |
) |
|
|
(4,929,743 |
) |
Accumulated other comprehensive loss |
|
|
(2,524 |
) |
|
|
|
|
|
|
(2,524 |
) |
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2009 |
|
|
|
|
|
|
As Reported |
|
|
Effect of Change |
|
|
As Adjusted |
|
Total shareholders deficit |
|
|
(118,551 |
) |
|
|
20,773 |
|
|
|
(97,778 |
) |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit |
|
$ |
350,850 |
|
|
$ |
(649 |
) |
|
$ |
350,201 |
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended April 3, 2009 |
|
|
Six Fiscal Months Ended April 3, 2009 |
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
As Reported |
|
|
Change |
|
|
As Adjusted |
|
|
As Reported |
|
|
Change |
|
|
As Adjusted |
|
Interest expense |
|
$ |
5,276 |
|
|
$ |
3,357 |
|
|
$ |
8,633 |
|
|
$ |
10,599 |
|
|
$ |
6,660 |
|
|
$ |
17,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and (loss) gain on equity method investments |
|
|
(11,608 |
) |
|
|
(3,357 |
) |
|
|
(14,965 |
) |
|
|
(16,010 |
) |
|
|
(6,660 |
) |
|
|
(22,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before (loss) gain on
equity method investments |
|
|
(11,783 |
) |
|
|
(3,357 |
) |
|
|
(15,140 |
) |
|
|
(16,653 |
) |
|
|
(6,660 |
) |
|
|
(23,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(12,618 |
) |
|
|
(3,357 |
) |
|
|
(15,975 |
) |
|
|
(18,334 |
) |
|
|
(6,660 |
) |
|
|
(24,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,756 |
) |
|
$ |
(3,357 |
) |
|
$ |
(17,113 |
) |
|
$ |
(31,445 |
) |
|
$ |
(6,660 |
) |
|
$ |
(38,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.28 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.77 |
) |
Shares used in basic and diluted per-share
computations |
|
|
49,755 |
|
|
|
|
|
|
|
49,755 |
|
|
|
49,706 |
|
|
|
|
|
|
|
49,706 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Fiscal Months Ended April 3, 2009 |
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
As Reported |
|
|
Change |
|
|
As Adjusted |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,445 |
) |
|
$ |
(6,660 |
) |
|
$ |
(38,105 |
) |
Debt discount amortization |
|
|
|
|
|
|
6,895 |
|
|
|
6,895 |
|
Other items, net |
|
|
1,241 |
|
|
|
(235 |
) |
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(4,091 |
) |
|
$ |
|
|
|
$ |
(4,091 |
) |
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments The Companys derivative financial instruments as of April
2, 2010 principally consisted of the Companys warrant to purchase 6.1 million shares of Mindspeed
Technologies, Inc. (Mindspeed) common stock (See Note 5).
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 $6.2 million and $7.5 million for
the six fiscal months ended April 2, 2010 and April 3, 2009, respectively. Cash paid for income
taxes for the six fiscal months ended April 2, 2010 and April 3, 2009 was $2.5 million and $1.3
million, respectively. Non-cash financing activity associated with the equity and debt transactions
costs in the six fiscal months ended April 2, 2010 was $0.6 million and $0.6 million, respectively.
Net Income (loss) Per Share Net income (loss) per share is computed in accordance with the
accounting guidance for 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 notes. The
dilutive effect of stock options and restricted stock units is computed under the treasury stock
method, and the dilutive effect of convertible 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.
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):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
Six Fiscal Months Ended |
|
|
April 2, |
|
April 3, |
|
April 2, |
|
April 3, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Employee stock options and restricted stock units |
|
|
3,386 |
|
|
|
5,847 |
|
|
|
3,649 |
|
|
|
6,324 |
|
4.00% convertible subordinated notes due March 2026 |
|
|
4,676 |
|
|
|
5,081 |
|
|
|
4,802 |
|
|
|
5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,062 |
|
|
|
10,928 |
|
|
|
8,451 |
|
|
|
11,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potentially dilutive securities have been included in the diluted net income
(loss) per share calculations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
Six Fiscal Months Ended |
|
|
April 2, |
|
April 3, |
|
April 2, |
|
April 3, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Weighted average shares for basic net income (loss) per share |
|
|
69,136 |
|
|
|
49,755 |
|
|
|
64,579 |
|
|
|
49,706 |
|
Employee stock options and restricted stock units |
|
|
1,377 |
|
|
|
|
|
|
|
694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted income (loss) per share |
|
|
70,513 |
|
|
|
49,755 |
|
|
|
65,273 |
|
|
|
49,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Enterprise Segments The Company operates in one reportable segment, which was
determined by the Company based on the accounting guidance for disclosures about segments of an
enterprise and related information, which establishes standards for the way that public business
enterprises report information about operating segments in their annual consolidated financial
statements. Following the sale of the Companys BBA operating segment, the results of which have
been classified in discontinued operations, the Company has one remaining operating segment,
comprised of one reporting unit, which was identified based upon the availability of discrete
financial information and the chief operating decision makers regular review of the financial
information for this operating segment.
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 was paid in four quarterly installments
following completion of the acquisition. Payments through April 2, 2010 for the acquired assets
totaled $3.8 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.
Goodwill In accordance with the accounting guidance for goodwill and other intangible assets,
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. Goodwill is tested at the reporting unit level, which is defined as an
operating segment or one level below the operating segment. Goodwill is tested annually during the
fourth fiscal quarter and, if necessary, whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. During the second fiscal quarter of 2010, based on
current business forecasts, the Company determined there were no indicators of impairment and
therefore no interim goodwill impairment analysis was considered necessary for this period.
Recently Adopted Accounting Pronouncements
On October 3, 2009, the Company adopted accounting guidance for convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement), which requires the
issuer to separately account for the liability and equity components of convertible debt
instruments in a manner that reflects the issuers hypothetical nonconvertible debt borrowing rate.
The guidance resulted in the Company recognizing higher interest expense in the statement of
operations due to amortization of the discount that results from separating the liability and
equity components. The provisions of the accounting guidance were retrospectively applied, and all
prior period amounts have been adjusted to apply the new method of accounting.
Effective the first quarter of fiscal 2010, the Company adopted revised accounting guidance for
business combinations, which changed its previous accounting practices regarding business
combinations. 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 impact of this
accounting guidance and its relevant updates on the Companys results of operations or financial
position will vary depending on each specific business combination or asset purchase. The Company
did not close any business combinations or asset purchases in the second quarter of fiscal 2010.
Effective the first quarter of fiscal 2010, the Company adopted revised accounting guidance for the
determination of the useful life of intangible assets. This accounting guidance amends the factors
that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. This change is intended to improve the consistency
between the useful life of a recognized intangible asset and the period of expected cash flows used
to measure the fair value of the asset. 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. The Companys adoption of this accounting guidance did not have
a material impact on its financial position, results of operations or liquidity.
11
Effective the first quarter of fiscal 2010, the Company adopted revised accounting guidance for
measuring liabilities at fair value. This accounting guidance provides clarification that in
circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the identical liability when
traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded
as assets and/or 2) a valuation technique that is consistent with the principles of the accounting
guidance for fair value measurements and disclosures. This accounting guidance also clarifies that
when estimating the fair value of a liability, a reporting entity is not required to adjust to
include inputs relating to the existence of transfer restrictions on that liability. The Companys
adoption of this accounting guidance did not have a material impact on its financial position,
results of operations or liquidity.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued revised guidance for the accounting of transfers of financial assets.
This guidance 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.
This accounting guidance 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 this
guidance will have on its financial position and results of operations.
In June 2009, the FASB issued revised guidance for the accounting of variable interest entities,
which replaces the quantitative-based risks and rewards approach with a qualitative approach that
focuses on identifying which enterprise has the power to direct the activities of a variable
interest entity that most significantly impact the entitys economic performance. This accounting
guidance also requires an ongoing reassessment of whether an entity is the primary beneficiary and
requires additional disclosures about an enterprises involvement in variable interest entities.
This accounting guidance 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 this guidance will have a material
impact on its financial position and results of operations.
4. Fair Value of Certain Financial Assets and Liabilities
In accordance with the accounting guidance for fair value measurements, the following represents
the Companys fair value hierarchy for its financial assets and liabilities measured at fair value
on a recurring basis as of April 2, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
187,526 |
|
|
$ |
|
|
|
$ |
187,526 |
|
Marketable securities |
|
|
10,768 |
|
|
|
|
|
|
|
10,768 |
|
Mindspeed warrant |
|
|
|
|
|
|
23,254 |
|
|
|
23,254 |
|
Long-term restricted cash |
|
|
5,703 |
|
|
|
|
|
|
|
5,703 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
203,997 |
|
|
$ |
23,254 |
|
|
$ |
227,251 |
|
|
|
|
|
|
|
|
|
|
|
Level 1
assets consist of the Companys cash and cash equivalents, and
restricted cash and marketable securities with a market value listed from a
stock exchange.
Level 2 assets consist of the Companys warrant to purchase approximately 6.1 million shares of
Mindspeed common stock at an exercise price of $16.74 per share through June 2013. See Note 5 for
the fair valuation of these warrants.
The Company had no financial assets or liabilities classified as Level 3 as of April 2, 2010.
The fair value of other financial instruments, which consist of the Companys 4.00% convertible
subordinated notes due March 2026 and the Companys 11.25% senior secured notes due 2015, was
$127.3 million (for the 4.00% convertible subordinated notes) and $175 million (for the 11.25%
senior secured notes) as of April 2, 2010. The fair value of the 4.00% convertible subordinated
notes was calculated using a quoted market price in an active market. The fair value of the 11.25%
senior secured notes approximates the carrying value.
12
5. Supplemental Financial Information
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 2, |
|
|
October 2, |
|
|
|
2010 |
|
|
2009 |
|
Work-in-process |
|
$ |
6,641 |
|
|
$ |
5,002 |
|
Finished goods |
|
|
2,929 |
|
|
|
4,214 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
9,570 |
|
|
$ |
9,216 |
|
|
|
|
|
|
|
|
At April 2, 2010 and October 2, 2009, inventories were net of excess and obsolete inventory
reserves of $3.4 million and $6.4 million, respectively.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2010 |
|
|
October 2, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Product licenses |
|
|
2,400 |
|
|
|
(821 |
) |
|
|
1,579 |
|
|
$ |
2,400 |
|
|
$ |
(628 |
) |
|
$ |
1,772 |
|
Other intangible assets |
|
|
6,830 |
|
|
|
(3,533 |
) |
|
|
3,297 |
|
|
|
6,830 |
|
|
|
(3,045 |
) |
|
|
3,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,230 |
|
|
$ |
(4,354 |
) |
|
$ |
4,876 |
|
|
$ |
9,230 |
|
|
$ |
(3,673 |
) |
|
$ |
5,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over a weighted-average remaining period of approximately 4.9
years. Annual amortization expense is expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
Amortization expense |
|
$ |
568 |
|
|
$ |
1,137 |
|
|
$ |
1,137 |
|
|
$ |
1,017 |
|
|
$ |
1,017 |
|
Assets Held for Sale
In November 2009, the Company committed to a plan for the sale of certain of the Companys property
located on Jamboree Road adjacent to its Newport Beach, California headquarters. The property
consists of an approximately 25-acre site, including two leased buildings, certain personal
property on the site, and all easements and other intangible rights appurtenant to the property.
The cost of the assets classified as held for sale consists of the following (in thousands):
|
|
|
|
|
|
|
April 2, |
|
|
|
2010 |
|
Land |
|
$ |
1,662 |
|
Land and leasehold improvements, net |
|
|
307 |
|
Buildings, net |
|
|
5,312 |
|
Machinery and equipment, net |
|
|
268 |
|
Site development costs |
|
|
4,698 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,247 |
|
|
|
|
|
The Company expects that the sale of these assets will be completed within approximately a
one-year time period from the respective periods that they met the criteria for held for sale
accounting.
Mindspeed Warrant
The Company has a warrant to purchase approximately 6.1 million shares of Mindspeed common stock at
an exercise price of $16.74 per share through June 2013. At April 2, 2010 and October 2, 2009, the
market value of Mindspeed common stock was $8.04 and $3.05 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 (expense) income, net each period. At April 2, 2010 and October 2,
2009, the aggregate fair value of the Mindspeed warrant included on the accompanying consolidated
balance sheets was $23.3 million and $5.1 million, respectively. At April 2, 2010, the warrant was
valued using the Black-Scholes-Merton model with an expected term of 3.24 years, expected
volatility of 96%, a weighted average risk-free interest rate of 1.82% and no dividend yield. The
aggregate fair value of the warrant is reflected as a long-term asset on the accompanying
consolidated balance sheets because the Company does not intend to liquidate any portion of the
warrant in the next twelve months.
13
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.
Debt
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 2, |
|
|
October 2, |
|
|
|
2010 |
|
|
2009 |
|
4.00% convertible subordinated notes due March 2026, net of debt discount of $6.9 million (1) |
|
$ |
120,817 |
|
|
$ |
|
|
Accounts receivable financing facility |
|
|
|
|
|
|
28,653 |
|
Current portion of long-term debt |
|
|
|
|
|
|
61,400 |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
120,817 |
|
|
$ |
90,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate senior secured notes due November 2010 |
|
$ |
|
|
|
$ |
61,400 |
|
4.00% convertible subordinated notes due March 2026, net of debt discount of $21.4 million (1) |
|
|
|
|
|
|
228,578 |
|
11.25% senior secured notes due March 2015, net of discount of $1,619 |
|
|
173,381 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
173,381 |
|
|
|
289,978 |
|
Less: current portion of long-term debt |
|
|
|
|
|
|
(61,400 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
173,381 |
|
|
$ |
228,578 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts reflect the retrospective application of FASB ASC 470-20 adopted effective October 3, 2009 (See Note 3). |
11.25% senior secured notes due 2015 In March 2010, the Company issued $175.0 million aggregate
principal amount of senior secured notes due 2015 (senior notes) that mature on March 15, 2015.
The senior notes were sold at 99.06% of the principal amount, resulting in gross proceeds of
approximately $173.4 million. Deferred debt offering expenses were approximately $4.9 million, and
are being amortized over the term of the debt. The senior notes have not been registered under the
Securities Act of 1933, as amended, and may not be sold in the United States absent registration or
an applicable exemption from registration requirements. The senior notes accrue interest at a rate
of 11.25% per annum payable semiannually on March 15 and September 15 of each year, commencing on
September 15, 2010. The senior notes mature on March 15, 2015. The obligations under the senior
notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis,
by all of the Companys existing domestic subsidiaries (except for Conexant CF, LLC and Conexant
USA, LLC) and by all of the Companys future domestic subsidiaries (except for immaterial
subsidiaries and receivables financing subsidiaries). Conexant CF, LLC is the Companys receivables
financing subsidiary, and Conexant USA, LLC has no material assets, revenue or operations. In
addition, the senior notes and the note guarantees are secured by liens on substantially all of the
Companys and the guarantors tangible and intangible property, subject to certain exceptions and
permitted liens. On or after March 15, 2013, the Company may redeem all or a part of the
senior notes at a price of 105.625% during the remainder of 2013 and 100.00% thereafter plus
accrued and unpaid interest, if any, to the applicable redemption date. In addition, at any time
prior to March 15, 2013, the Company may, on one or more occasions, redeem all or a part of the
senior notes at any time at a redemption price equal to 100% of the principal amount of the senior
notes redeemed, plus a make-whole premium, plus accrued and unpaid interest, if any, to the
applicable redemption date. On or after January 1, 2011 until March 15, 2013, the Company may also
redeem up to 35% of the original aggregate principal amount of the senior notes, using the proceeds
of certain qualified equity offerings, at a redemption price of 111.25% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the applicable redemption date. If
a change of control occurs, the Company must offer to repurchase the senior notes at a repurchase
price equal to 101% of the principal amount of the senior notes repurchased, plus accrued and
unpaid interest, if any, to the applicable repurchase date. In addition, certain asset dispositions
will be triggering events that may require the Company to use the proceeds from those sales to make
an offer to repurchase the senior notes at a repurchase price equal to 100% of the principal amount
of the senior notes repurchased, plus accrued and unpaid interest, if any, to the applicable
repurchase date if such proceeds are not otherwise invested in the Companys business within a
specific period of time. The senior notes and the note guarantees rank senior to all of the
Companys and the guarantors existing and future subordinated indebtedness, including
the convertible notes, but they are structurally subordinated to all existing and future
indebtedness and other liabilities (including non-trade payables) of the Companys non-guarantor
subsidiaries.
Floating rate senior secured notes due November 2010 In December 2009, the Company repurchased
all outstanding floating rate senior secured notes due November 2010 at a price of 101% of par and
recorded a loss on extinguishment of $0.6 million. The notes were guaranteed by certain of the
Companys U.S. subsidiaries. The guarantee was released on December 22, 2009.
4.00% convertible subordinated notes due March 2026 In March 2006, the Company issued
$200.0 million principal amount of convertible notes and, in May 2006, the initial purchaser of the
convertible notes exercised its option to purchase an additional $50.0 million principal amount of
the convertible notes. Total proceeds to the Company from these issuances, net of issuance costs,
were $243.6 million. The convertible notes are general unsecured obligations of the Company.
Interest on the convertible notes is payable in arrears semiannually on each March 1 and
September 1, beginning on September 1, 2006. The convertible 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
14
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 convertible 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 convertible 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.
During the fiscal quarter ended January 1, 2010, the Company exchanged 7.1 million shares of the
Companys common stock for $17.6 million aggregate principal amount of the convertible notes and
recorded an extinguishment loss of $0.5 million on the exchange. The Company also paid accrued and
unpaid interest in cash on the convertible notes exchanged through the settlement date of the
exchange.
During the fiscal quarter ended April 2, 2010, the Company repurchased approximately $104.7 million
of its 4.00% convertible subordinated notes due March 2026 by means of a tender offer. The
remaining $120.8 million balance of 4.00% convertible subordinated notes, net of unamortized debt
discount of $6.9 million, is classified as short term on the Companys consolidated balance sheets
because it is the intention of the Company to repurchase or redeem all of the remaining 4.00%
convertible subordinated notes on or before March 1, 2011. Subsequent to April 2, 2010, the Company
repurchased approximately $115.2 million of its 4.00% convertible subordinated notes due March 2026
by means of a private purchase, and paid accrued and unpaid interest on the convertible notes
through the date of the repurchase. The Company will record an extinguishment loss on this
transaction, which is primarily composed of the unamortized debt discount related to the notes
repurchased.
Accounts Receivable Financing Facility
On November 29, 2005, the Company established an accounts receivable financing facility whereby it
sold, from time to time, certain accounts receivable to Conexant USA, LLC (Conexant USA), a
special purpose entity that is a consolidated subsidiary of the Company. Under the terms of the
Companys agreements with Conexant USA, the Company retained the responsibility to service and
collect accounts receivable sold to Conexant USA and received a weekly fee from Conexant USA for
handling administrative matters, which equaled to 1.0%, on a per annum basis, of the uncollected
value of the accounts receivable. The Companys $50.0 million credit facility secured by the assets
of Conexant USA expired on November 27, 2009. All amounts owed on the credit facility were repaid
as of January 1, 2010.
On December 22, 2009, the Company established a new accounts receivable financing facility whereby
it sells, from time to time, certain accounts receivable to Conexant CF, LLC (Conexant CF), a
special purpose entity which is a consolidated subsidiary of the Company. Under the terms of the
Companys agreements with Conexant CF, the Company retains the responsibility to service and
collect accounts receivable sold to Conexant CF and receives a weekly fee from Conexant CF for
handling administrative matters which is equal to 1.0%, on a per annum basis, of the uncollected
value of the purchased accounts receivable.
Concurrently with entering into the new accounts receivable financing facility, Conexant CF entered
into a new credit facility with a bank to finance the cash portion of the purchase price of
eligible receivables. The new credit facility is secured by the assets of Conexant CF. Conexant CF
is required to maintain certain minimum amounts on deposit (restricted cash) of approximately $0.8
million with the bank during the term of the credit agreement. Borrowings under the credit
facility, which cannot exceed the lesser of $15.0 million (which may be increased up to $20 million
pursuant to certain conditions set forth in the Credit Agreement) or 60% of the uncollected value
of purchased accounts receivable that are eligible for coverage under an insurance policy for the
receivables and bear interest equal to the bank Prime Rate (minimum of 4%) plus applicable margins
(between 1.5% to 2.25%). In addition, if the aggregate amount of interest earned by the bank in any
month is less than $20,000, Conexant CF pays an amount equal to the minimum monthly interest of
$20,000 minus the aggregate amount of all interest earned by the bank. The credit agreement matures
on December 31, 2010 and remains subject to additional 364-day renewal periods at the discretion of
the bank.
The credit facility is subject to financial covenants including a minimum level of shareholders
equity covenant, an adjusted quick ratio covenant, and a minimum cash and cash equivalents
covenant. Further, any failure by the Company or Conexant CF 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 April 2, 2010, Conexant CF had not
borrowed any amounts under this credit facility.
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
that are pending or asserted and taking into account the Companys reserves for such matters,
management believes that the disposition of such matters will not have a material adverse effect on
the Companys financial condition, results of operations, or cash flows.
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 Semiconductor, Inc.
(Jazz), the Company agreed to
15
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 Companys sale of the BBA business to Ikanos, the Company agreed to indemnify
Ikanos 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 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 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 April 2,
2010, approximately 9.8 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 Options
The Company accounts for its stock options in accordance with the accounting guidance for
share-based payments. The Company is required to measure compensation cost for all stock-based
awards at fair value on the date of grant and recognize compensation expense in its consolidated
statements of operations over the service period that the awards are expected to vest. The Company
measures the fair value of service-based awards on the date of grant.
The following weighted average assumptions were used in the estimated grant date fair value
calculations for share-based payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
Six Fiscal Months Ended |
|
|
April 2, |
|
April 3, |
|
April 2, |
|
April 3, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Stock option plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
Expected stock price volatility |
|
|
|
|
|
|
79 |
% |
|
|
|
|
|
|
77 |
% |
Risk free interest rate |
|
|
|
|
|
|
1.80 |
% |
|
|
|
|
|
|
2.00 |
% |
Average expected life (in years) |
|
|
|
|
|
|
4.68 |
|
|
|
|
|
|
|
4.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
Expected stock price volatility |
|
|
94 |
% |
|
|
74 |
% |
|
|
94 |
% |
|
|
74 |
% |
Risk free interest rate |
|
|
0.17 |
% |
|
|
3.14 |
% |
|
|
0.17 |
% |
|
|
3.14 |
% |
Average expected life (in years) |
|
|
0.50 |
|
|
|
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 average period of time that options or
awards granted are expected to be outstanding.
16
A summary of stock option activity is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Exercise |
|
|
Shares |
|
Price |
Outstanding, October 2, 2009 |
|
|
4,210 |
|
|
$ |
23.20 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(30 |
) |
|
|
0.59 |
|
Forfeited |
|
|
(1,021 |
) |
|
|
18.40 |
|
|
|
|
|
|
|
|
|
|
Outstanding, April 2, 2010 |
|
|
3,159 |
|
|
|
24.92 |
|
|
|
|
|
|
|
|
|
|
Shares vested and expected to vest, April 2, 2010 |
|
|
3,156 |
|
|
|
24.94 |
|
|
|
|
|
|
|
|
|
|
Exercisable, April 2, 2010 |
|
|
2,989 |
|
|
$ |
25.76 |
|
|
|
|
|
|
|
|
|
|
At April 2, 2010, of the 3.2 million stock options outstanding, approximately 2.4 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, Skyworks) who
remain employed by one of these businesses. At April 2, 2010, stock options outstanding had an
aggregate intrinsic value of approximately $0.1 million and a weighted-average remaining
contractual term of 2.1 years. At April 2, 2010, exercisable stock options had an immaterial
aggregate intrinsic value and a weighted-average remaining contractual term of 1.9 years. Options
exercised during the fiscal quarter ended April 2, 2010 had an intrinsic value of $0.1 million. No
options were exercised during the fiscal quarter ended April 3, 2009. At April 2, 2010, the total
unrecognized fair value compensation cost related to non-vested stock option awards was $0.4
million, which is expected to be recognized over a remaining weighted average period of
approximately one year.
During the fiscal quarter and six fiscal months ended April 2, 2010, the Company recognized
stock-based compensation expense of $0.6 million and $1.2 million, respectively, for stock options,
in its consolidated statements of operations. During the fiscal quarter and six fiscal months ended
April 3, 2009, the Company recognized stock-based compensation expense of $1.7 million and
$3.1 million, respectively, for stock options, in its consolidated statements of operations.
Restricted Stock Units
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). The Company maintains the 2010
Equity Incentive Plan, which was approved by stockholders in February 2010 and under which the
Company has reserved 12 million shares for issuance and the 2004 New Hire Equity Incentive Plan,
under which it reserved 1.2 million shares for issuance. The 2000 Non-Qualified plan expired in the
fiscal quarter ended January 1, 2010 and the Company may not make new awards under that plan after
its expiration. All awards granted under these plans are service-based awards. Awards issued under
the 2000 Non-Qualified Plan and the 2004 New Hire Equity Incentive Plan are settled in shares of
common stock.
A summary of RSU award activity under the Companys plans is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant |
|
|
Shares |
|
Date Fair Value |
Outstanding, October 2, 2009 |
|
|
165 |
|
|
$ |
2.82 |
|
Granted |
|
|
3,575 |
|
|
|
2.87 |
|
Vested |
|
|
(42 |
) |
|
|
2.80 |
|
Forfeited |
|
|
(88 |
) |
|
|
2.79 |
|
|
|
|
|
|
|
|
|
|
Outstanding, April 2, 2010 |
|
|
3,610 |
|
|
$ |
2.87 |
|
|
|
|
|
|
|
|
|
|
During the fiscal quarter and six fiscal months ended April 2, 2010, the Company recognized
stock-based compensation expense of $1.3 million and $2.1 million, respectively, related to RSU
awards. During the fiscal quarter and six fiscal months ended April 3, 2009, the Company recognized
stock-based compensation expense of $0.5 million and $1.4 million, respectively, related to RSU
awards. At April 2, 2010, the total unrecognized fair value stock-based compensation cost related
to RSU awards was $8.3 million, which is expected to be recognized over a weighted average period
of 1.3 years.
Employee Stock Purchase Plan
In the first fiscal quarter of 2010, the Company reinstated the 2001 Employee Stock Purchase Plan
(ESPP) for eligible domestic employees and the 1999 Non Qualified ESPP for eligible international
employees. The first purchase period commenced February 1, 2010. The ESPP allows eligible employees
to purchase shares of the Companys common stock at six-month intervals during an offering period
at 85% of the lower of the fair market value on the first day of the offering period or the
purchase date. Under the ESPP, employees authorize the Company to withhold up to 15% of their
compensation for each pay period, up to a maximum annual amount of $25,000, to purchase shares
under the plan, subject to
17
certain limitations, and employees are limited to the purchase of 600
shares per offering period. Offering periods generally
commence on the first trading day of February and August of each year and are generally six months
in duration, but may be terminated earlier under certain circumstances.
During the fiscal quarter and six fiscal months ended April 2, 2010, the Company recognized
stock-based compensation expense of $40 thousand for stock purchase plans in its consolidated
statements of operations. During the fiscal quarter and six fiscal months ended April 3, 2009, the
Company recognized stock-based compensation expense of $34 thousand and $0.1 million, respectively,
for stock purchase plans in its consolidated statements of operations.
8. Comprehensive Income (Loss)
Comprehensive income (loss) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
10,879 |
|
|
$ |
(17,113 |
) |
|
$ |
19,213 |
|
|
$ |
(38,105 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
427 |
|
|
|
(660 |
) |
|
|
820 |
|
|
|
(1,755 |
) |
Unrealized gains on marketable securities |
|
|
10,469 |
|
|
|
664 |
|
|
|
10,469 |
|
|
|
650 |
|
Unrealized losses on foreign currency forward hedge contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153 |
) |
Unrealized losses on interest rate swap contracts |
|
|
|
|
|
|
(408 |
) |
|
|
|
|
|
|
(2,592 |
) |
Realized loss on impairment of marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,986 |
|
Realized loss on interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
1,728 |
|
|
|
|
|
Gains on settlement of foreign currency forward hedge contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
10,896 |
|
|
|
(404 |
) |
|
|
13,017 |
|
|
|
(1,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
21,775 |
|
|
$ |
(17,517 |
) |
|
$ |
32,230 |
|
|
$ |
(39,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 2, |
|
|
October 2, |
|
|
|
2010 |
|
|
2009 |
|
Unrealized gain on marketable securities |
|
$ |
10,469 |
|
|
$ |
|
|
Foreign currency translation adjustments |
|
|
24 |
|
|
|
(796 |
) |
Unrealized losses on derivative instruments |
|
|
|
|
|
|
(1,728 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
10,493 |
|
|
$ |
(2,524 |
) |
|
|
|
|
|
|
|
9. Income Taxes
The Company recorded a tax provision of $0.3 million and $0.1 million for the fiscal quarter and
six fiscal months ended April 2, 2010, respectively, primarily reflecting income taxes imposed on
our foreign subsidiaries. The Company recorded a tax provision of $0.2 million and $0.6 million for
the fiscal quarter and six fiscal months ended April 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 for the quarter ended January 2, 2009. 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 April 2, 2010, special credits consisted of $0.2 million for
restructuring expense credits primarily related to an adjustment as a result of re-utilization of a
portion of a facility. For the six fiscal months ended April 2, 2010, special charges consisted of
$0.1 million for restructuring charges primarily related to accretion of lease liability offset by
the utilization adjustment in the second fiscal quarter. For the fiscal quarter ended April 3,
2009, special charges consisted primarily of $1.9 million of restructuring charges. For the six
fiscal months ended April 3, 2009, special charges primarily consisted of $8.4 million for
restructuring charges related to revised sublease assumptions associated with vacated facilities
and a $3.7 million charge for a legal settlement.
18
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 April 2, 2010, the Company has remaining restructuring accruals of $38.5 million, of which
$0.3 million relates to workforce reductions and $38.2 million relates to facility and other costs.
Of the $38.5 million of restructuring accruals at April 2, 2010, $7.2 million is included in other
current liabilities and $31.3 million is included in other non-current liabilities in the
accompanying consolidated balance sheets. The Company expects to pay the amounts accrued for the
workforce reductions through fiscal 2010 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 accounting guidance for
accounting for costs associated with exit or disposal activities. The Companys accrued liabilities
include the net present value of the future lease obligations of $68.9 million, net of contracted
sublease income of $16.4 million, and projected sublease income of $14.3 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 operating activities and are not expected to significantly impact the
Companys liquidity. In the six fiscal months ended April 2, 2010, the Company recorded $0.8
million additional restructuring expense, primarily due to accretion of lease liability on
restructured facilities. Of this amount, $0.7 million was classified in discontinued operations.
Fiscal 2009 Restructuring Actions As part of a workforce reduction implemented during fiscal
2009, the Company completed actions that resulted in the elimination of 183 positions worldwide. In
relation to these restructuring actions in fiscal 2009, the Company recorded $4.9 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. In the six fiscal months ended
April 2, 2010, the Company recorded an adjustment to severance expense of $0.1 million related to
the 2009 restructuring action.
Activity and liability balances recorded as part of the fiscal 2009 restructuring actions through
April 2, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
Workforce |
|
|
|
Reductions |
|
Charged to costs and expenses |
|
$ |
4,893 |
|
Cash payments |
|
|
(3,311 |
) |
|
|
|
|
Restructuring balance, October 2, 2009 |
|
|
1,582 |
|
Charged to costs and expenses |
|
|
(69 |
) |
Cash payments |
|
|
(1,227 |
) |
|
|
|
|
Restructuring balance, April 2, 2010 |
|
$ |
286 |
|
|
|
|
|
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, the Company has 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
which were vacated. As a result of the sale of the BBA business, restructuring expenses of $0.8
million incurred in fiscal 2008, which related to fiscal 2008 restructuring actions, were
reclassified to discontinued operations in the consolidated statements of operations.
Restructuring charges in the fiscal year ended October 2, 2009 related to the fiscal 2008
restructuring actions included $0.6 million of additional severance charges.
Restructuring charges in the six fiscal months ended April 2, 2010 related to the fiscal 2008
restructuring actions included $0.1 million of additional facility charges.
Activity and liability balances recorded as part of the fiscal 2008 restructuring actions through
April 2, 2010 were as follows (in thousands):
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
580 |
|
|
|
36 |
|
|
|
616 |
|
Reclassification to other current liabilities and other liabilities |
|
|
|
|
|
|
(127 |
) |
|
|
(127 |
) |
Cash payments |
|
|
(673 |
) |
|
|
(876 |
) |
|
|
(1,549 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009 |
|
|
|
|
|
|
64 |
|
|
|
64 |
|
Charged to costs and expenses |
|
|
|
|
|
|
94 |
|
|
|
94 |
|
Cash payments |
|
|
|
|
|
|
(44 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, April 2, 2010 |
|
$ |
|
|
|
$ |
114 |
|
|
$ |
114 |
|
|
|
|
|
|
|
|
|
|
|
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 that 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 the fiscal 2007
restructuring actions and were reclassified to discontinued operations in the consolidated
statements of operations. The domestic economic downturn experienced during fiscal 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 $14.3 million additional restructuring charge
for the facility. The remaining additional facility restructuring charge of $1.8 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 $16.1 million was allocated
between the BMP business and continuing operations based upon the historical use of the facility.
Of the $16.1 million restructuring charge, $10.8 million was included in discontinued operations
and $5.3 million was charged to operating expenses.
As a result of the sale of the BBA business, restructuring expenses of $2.7 million, incurred in
fiscal 2007, which related to fiscal 2007 restructuring actions, were reclassified to discontinued
operations in the consolidated statements of operations.
Restructuring charges in the six fiscal months ended April 2, 2010 related to the fiscal 2007
restructuring actions included $1.1 million of a credit to facility charges due to re-utilization
of the facility offset by $0.6 million additional facility charges resulting from accretion of
lease liability on restructured facilities. Of these amounts, $0.7 million was classified in
discontinued operations because it related to the BMP facility.
Activity and liability balances recorded as part of the fiscal 2007 restructuring actions through
April 2, 2010 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 |
) |
|
|
16,130 |
|
|
|
16,129 |
|
Cash payments |
|
|
(15 |
) |
|
|
(5,579 |
) |
|
|
(5,594 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009 |
|
|
|
|
|
|
27,233 |
|
|
|
27,233 |
|
Charged to costs and expenses |
|
|
|
|
|
|
495 |
|
|
|
495 |
|
Cash payments |
|
|
|
|
|
|
(2,882 |
) |
|
|
(2,882 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, April 2, 2010 |
|
$ |
|
|
|
$ |
24,846 |
|
|
$ |
24,846 |
|
|
|
|
|
|
|
|
|
|
|
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
20
estimated relocation 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 fiscal 2009 related to the fiscal 2006 and 2005
restructuring actions included $4.2 million due to a decrease in estimated future rental income
from sub-tenants resulting from declines in sub lease activity and $0.8 million due to accretion of
lease liability.
Restructuring charges in six fiscal months ended April 2, 2010 related to the fiscal 2006 and 2005
restructuring actions included $0.3 million of additional facility charges due to accretion of
lease liability.
Activity and liability balances recorded as part of the fiscal 2006 and fiscal 2005 restructuring
actions through April 2, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Restructuring balance, October 1, 2005 |
|
$ |
3,609 |
|
|
$ |
25,220 |
|
|
$ |
28,829 |
|
Charged to costs and expenses |
|
|
1,852 |
|
|
|
1,407 |
|
|
|
3,259 |
|
Reclassification from accrued compensation and benefits and other |
|
|
1,844 |
|
|
|
55 |
|
|
|
1,899 |
|
Cash payments |
|
|
(5,893 |
) |
|
|
(8,031 |
) |
|
|
(13,924 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 29, 2006 |
|
|
1,412 |
|
|
|
18,651 |
|
|
|
20,063 |
|
Reclassification to other current liabilities and other liabilities |
|
|
|
|
|
|
(2,687 |
) |
|
|
(2,687 |
) |
Charged to costs and expenses |
|
|
55 |
|
|
|
559 |
|
|
|
614 |
|
Cash payments |
|
|
(1,336 |
) |
|
|
(4,007 |
) |
|
|
(5,343 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007 |
|
|
131 |
|
|
|
12,516 |
|
|
|
12,647 |
|
Reclassification from other current liabilities and other liabilities |
|
|
|
|
|
|
3,359 |
|
|
|
3,359 |
|
Charged to costs and expenses |
|
|
(130 |
) |
|
|
285 |
|
|
|
155 |
|
Cash payments |
|
|
(1 |
) |
|
|
(5,123 |
) |
|
|
(5,124 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
|
|
|
|
11,037 |
|
|
|
11,037 |
|
Charged to costs and expenses |
|
|
|
|
|
|
4,989 |
|
|
|
4,989 |
|
Cash payments |
|
|
|
|
|
|
(2,175 |
) |
|
|
(2,175 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009 |
|
|
|
|
|
|
13,851 |
|
|
|
13,851 |
|
Charged to costs and expenses |
|
|
|
|
|
|
293 |
|
|
|
293 |
|
Cash payments |
|
|
|
|
|
|
(906 |
) |
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, April 2, 2010 |
|
$ |
|
|
|
$ |
13,238 |
|
|
$ |
13,238 |
|
|
|
|
|
|
|
|
|
|
|
12. Other (Income) Expense, net
Other (income) expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Investment and interest income |
|
$ |
(64 |
) |
|
$ |
(451 |
) |
|
$ |
(120 |
) |
|
$ |
(1,308 |
) |
Gain on sale of investments |
|
|
(3,621 |
) |
|
|
|
|
|
|
(7,734 |
) |
|
|
(53 |
) |
Loss on extinguishment of secured debt |
|
|
|
|
|
|
|
|
|
|
614 |
|
|
|
|
|
Loss on extinguishment of convertible debt |
|
|
9,481 |
|
|
|
|
|
|
|
9,991 |
|
|
|
|
|
Other-than-temporary impairment of marketable securities
and cost based investments |
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
2,770 |
|
Increase in the fair value of derivative instruments |
|
|
(13,916 |
) |
|
|
(1,078 |
) |
|
|
(18,201 |
) |
|
|
(596 |
) |
Other |
|
|
365 |
|
|
|
(421 |
) |
|
|
491 |
|
|
|
(701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(7,755 |
) |
|
$ |
(1,815 |
) |
|
$ |
(14,959 |
) |
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income), net during the fiscal quarter ended April 2, 2010 was primarily comprised of a
$3.6 million gain on sale of equity investments and a $13.9 million increase in the fair value of
the Companys warrant to purchase 6.1 million shares of Mindspeed common stock, offset by a loss of
$9.5 million on extinguishment of convertible debt, which consists of $6.2 million of unamortized
debt discount and $3.3 million of transaction costs. Other (income), net during the six fiscal
months ended April 2, 2010 was primarily comprised of a $7.7 million gain on sale of equity
investments and a $18.2 million increase in the fair value of the Companys warrant to purchase
6.1 million shares of Mindspeed common stock, offset by a loss of $10.0 million on extinguishment
of convertible debt, which consists of $7.6 million of unamortized debt discount, $3.4 million of
transaction costs offset by $1.0 million of gain on exchange below par value, and a loss of
$0.6 million on extinguishment of secured debt.
21
Other (income), net during the fiscal quarter ended April 3, 2009 was primarily comprised of
investment and interest income on invested cash balances of $0.5 million and a $1.1 million
increase in the fair value of the Companys warrant to purchase 6.1 million shares of Mindspeed
common stock, offset by an other-than-temporary impairment of cost based investments of
$0.1 million. Other expense, net during the six fiscal months ended April 3, 2009 was primarily
comprised of an other-than-temporary impairment of marketable and cost based investments of
$2.7 million, offset by investment and interest income on invested cash balances of $1.3 million
and a $0.6 million increase in the fair value of the Companys warrant to purchase 6.1 million
shares of Mindspeed common stock.
13. Related Party Transactions
Mindspeed Technologies, Inc.
As of April 2, 2010, the Company holds a warrant to purchase 6.1 million shares of Mindspeed common
stock at an exercise price of $16.74 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 April 2, 2010 or at October 2, 2009.
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 six fiscal
months ended April 2, 2010 and April 3, 2009, the Company recorded income related to the Mindspeed
sublease agreement of $0.4 million and $0.8 million, and $0.4 million and $0.8 million,
respectively. Additionally, Mindspeed made payments directly to the Companys landlord totaling
$0.9 million and $0.8 million during the fiscal quarters ended April 2, 2010 and April 3, 2009,
respectively, and $1.8 million and $1.6 million during the six fiscal months ended April 2, 2010
and April 3, 2009, respectively.
14. Geographic Information
Net revenues by geographic area, based upon country of destination, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
United States |
|
$ |
3,103 |
|
|
$ |
1,449 |
|
|
$ |
5,841 |
|
|
$ |
3,676 |
|
Other Americas |
|
|
1,129 |
|
|
|
656 |
|
|
|
2,385 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
|
4,232 |
|
|
|
2,105 |
|
|
|
8,226 |
|
|
|
5,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
35,461 |
|
|
|
28,551 |
|
|
|
71,211 |
|
|
|
63,838 |
|
Other Asia-Pacific |
|
|
21,486 |
|
|
|
12,558 |
|
|
|
42,541 |
|
|
|
30,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific |
|
|
56,947 |
|
|
|
41,109 |
|
|
|
113,752 |
|
|
|
93,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
|
|
689 |
|
|
|
751 |
|
|
|
1,703 |
|
|
|
1,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61,868 |
|
|
$ |
43,965 |
|
|
$ |
123,681 |
|
|
$ |
101,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company believes that a portion of the products sold to original equipment manufacturers
(OEMs) and third-party manufacturing service providers in the Asia-Pacific region is ultimately
shipped to end-markets in the Americas and Europe. One distributor, Sertek Incorporated, accounted
for 14% and 22% of net revenues for the fiscal quarter ended April 2, 2010 and April 3, 2009,
respectively, and 14% and 19% for the six fiscal months ended April 2, 2010 and April 3, 2009,
respectively. Sales to the Companys twenty largest customers represented approximately 85% and 77%
of net revenues for the fiscal quarter ended April 2, 2010 and April 3, 2009, respectively, and 81%
and 72% for the six fiscal months ended April 2, 2010 and April 3, 2009, 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):
|
|
|
|
|
|
|
|
|
|
|
April 2, |
|
|
October 2, |
|
|
|
2010 |
|
|
2009 |
|
United States |
|
$ |
22,620 |
|
|
$ |
26,064 |
|
India |
|
|
1,125 |
|
|
|
1,971 |
|
China |
|
|
960 |
|
|
|
2,309 |
|
Other Asia-Pacific |
|
|
1,108 |
|
|
|
610 |
|
Europe, Middle East and Africa |
|
|
4 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
$ |
25,817 |
|
|
$ |
30,972 |
|
|
|
|
|
|
|
|
The following have been excluded from long-lived assets by geographic area: Goodwill
totaling $109.9 million, Intangible assets totaling $4.9 million and $5.6 million and the Mindspeed
warrant totaling $23.3 million and $5.1 million as of April 2, 2010 and October 2, 2009,
respectively. These items are located in the United States and disclosed separately.
22
15. Subsequent Events
Subsequent to April 2, 2010, the Company repurchased approximately $115.2 million of its 4.00%
convertible subordinated notes due March 2026 by means of a private purchase, and paid accrued and
unpaid interest on the convertible notes through the date of the repurchase. The Company will
record an extinguishment loss on this transaction, which is primarily composed of the unamortized
debt discount related to the notes repurchased.
The Company has evaluated events subsequent to assess the need for potential recognition or
disclosure in this Quarterly Report on Form 10-Q. Such events were evaluated till 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.
23
|
|
|
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 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 2, 2009.
Overview
We design, develop and sell semiconductor system solutions, comprised of semiconductor devices,
software and reference designs, for imaging, audio, embedded-modem, and video applications. These
solutions include a comprehensive portfolio of imaging solutions for multifunction printers (MFPs),
fax platforms, and connected frame market segments. Our audio solutions include high-definition
(HD) audio integrated circuits, HD audio codecs, and speakers-on-a-chip solutions for personal
computers (PCs), PC peripheral sound systems, audio subsystems, speakers, notebook docking
stations, voice-over-IP speakerphones, intercom, door phone, and audio-enabled surveillance
applications. We also offer a full suite of embedded-modem solutions for set-top boxes,
point-of-sale systems, home automation and security systems, and desktop and notebook PCs.
Additional products include decoders and media bridges for video surveillance and security
applications, and system solutions for analog video-based multimedia 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 25% of our net
revenues in the fiscal quarter and six fiscal months ended April 2, 2010, compared to 30% and 28%
of our net revenues in the fiscal quarter and six fiscal months ended April 3, 2009, respectively.
One distributor, Sertek Incorporated, accounted for 14% and 22% of net revenues for the fiscal
quarters ended April 2, 2010 and April 3, 2009, respectively. The same distributor accounted for
14% and 19% of net revenues for the six fiscal months ended April 2, 2010 and April 3, 2009,
respectively. Our top 20 customers accounted for approximately 85% and 77% of net revenues for the
fiscal quarters ended April 2, 2010 and April 3, 2009, respectively, and 81% and 72% of net
revenues for the six fiscal months ended April 2, 2010 and April 3, 2009, respectively. Revenues
derived from customers located in the Americas, the Asia-Pacific region and Europe (including the
Middle East and Africa) accounted for 7%, 92% and 1%, respectively, of our net revenues for the
fiscal quarter ended April 2, 2010 compared to 5%, 93% and 2%, respectively, of our net revenues
for the fiscal quarter ended April 3, 2009. Revenues derived from customers located in the
Americas, the Asia-Pacific region and Europe (including the Middle East and Africa) accounted for
7%, 92% and 1%, respectively, of our net revenues for the six fiscal months ended April 2, 2010
compared to 6%, 92% and 2%, respectively, of our net revenues for the six fiscal months ended April
3, 2009. We believe a portion of the products we sell to OEMs and third-party manufacturing service
providers in the Asia-Pacific region is ultimately shipped to end-markets in the Americas and
Europe.
Critical Accounting Policies
The 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
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 41-46 of
the Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the fiscal year ended October 2, 2009. Management believes that at
April 2, 2010, there has been no material change to this information.
Sale of Property
In November 2009, we committed to a plan for the sale of certain of our property located on
Jamboree Road adjacent to our Newport Beach, California headquarters. The property consists of an
approximately 25-acre site, including two leased buildings, certain personal property on the site,
and all easements and other intangible rights appurtenant to the property. We determined that this
property met the criteria for held for sale accounting in accordance with the accounting guidance
for impairment or disposal of long-lived assets and have presented the respective group of assets
separately on the face of the consolidated balance sheet as of April 2, 2010. We expect that the
sale of these assets will be completed within approximately a one-year time period from the
respective periods that they met the criteria for held for sale accounting.
Sale of Broadband Access Products Business
On August 24, 2009, we completed the sale of our Broadband Access (BBA) business to Ikanos
Communications, Inc. (Ikanos). Assets sold pursuant to the agreement with Ikanos included, among
other things, specified patents, inventory, contracts and tangible assets. Ikanos assumed certain
liabilities, including obligations under transferred contracts and certain employee-related
liabilities. We also granted to Ikanos a license to use certain of our retained technology assets
in connection with Ikanos current and future products in certain fields of use, along with a
patent license covering certain of our retained patents to make, use, and sell such products (or,
in some cases, components of such products). The results of the BBA business have been reported as
discontinued operations in the consolidated statements of operations for all periods presented.
24
Sale of Broadband Media Processing Business
On August 8, 2008, we completed the sale of our Broadband Media Processing (BMP) business to NXP
B.V. (NXP). Pursuant to the asset purchase agreement with NXP, NXP acquired certain assets
including, among other things, specified patents, inventory and
contracts and assumed certain
employee-related liabilities. Pursuant to the agreement, we obtained a license to utilize
technology that was sold to NXP and NXP obtained a license to utilize certain intellectual property
that we retained. In addition, NXP agreed to provide employment to approximately 700 of our
employees at locations in the United States, Europe, Israel, Asia-Pacific and Japan. The results of
the BMP business have been reported as discontinued operations in the consolidated statements of
operations for all periods presented.
Recent Financing Activities
In March 2010, we raised net proceeds of approximately $60.0 million in a common stock offering and
sold $175.0 million of 11.25% senior secured notes due 2015 at a price of 99.06% raising proceeds
of $168.4 million, net of expenses of $4.9 million. Also during the fiscal quarter ended April 2,
2010, we repurchased by means of a tender offer approximately $104.7 million of its 4.00%
convertible subordinated notes due March 2026. In October 2009, we raised additional net proceeds
of approximately $2.6 million from the exercise of the over-allotment option in connection with the
September common stock offering.
At April 2, 2010, we had a total of $127.7 million aggregate principal amount of 4.00% 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. It is our
intention to repurchase or redeem the remaining 4.00% convertible subordinated notes on or before
March 1, 2011. Subsequent to April 2, 2010, we repurchased
approximately $115.2 million of our
4.00% convertible subordinated notes due March 2026 by means of a private purchase, and paid
accrued and unpaid interest on the convertible notes through the date
of the repurchase. We will record an extinguishment loss on this transaction, which is primarily composed of the
unamortized debt discount related to the notes repurchased.
We believe that our existing sources of liquidity, together with cash expected to be generated from
operations, will be sufficient to fund our operations, research and development, anticipated
capital expenditures and working capital for at least the next twelve months.
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 the accounting guidance for revenue recognition.
Development revenue is recognized when services are performed and was not significant for any
periods presented.
Our net revenues increased 41% to $61.8 million in the fiscal quarter ended April 2, 2010 from
$44.0 million in the fiscal quarter ended April 3, 2009. The increase in net revenues was driven by
a 39% increase in unit volume shipments and a 1% increase in average selling prices (ASPs). The
volume increase between the fiscal quarter ended April 2, 2010 and the fiscal quarter ended April
3, 2009 was driven by the shipment growth of our imaging, audio, and video solutions.
Our net revenues increased 22% to $123.7 million in the six fiscal months ended April 2, 2010 from
$101.4 million in the six fiscal months ended April 3, 2009. The increase in net revenues was
driven by a 40% increase in unit volume shipments offset by a 13% decrease in average selling price
(ASPs). The increase in volume was driven by the shipment growth of our imaging, audio, and
video solutions, while the decrease in ASPs was attributable to a change in product mix.
We remain focused on capturing market share for the existing products and delivering new solutions
for imaging, audio, embedded modem, and video surveillance applications. It also plans to apply
core capabilities in analog and mixed-signal design and firmware and software development to
capitalize on new opportunities in adjacent markets. Management anticipates, however, that our
legacy businesses, which include wireless networking solutions, computer modems, and modems for
digital television platforms in Japan will decline rapidly over the next few quarters, masking the
growth of the imaging, audio, embedded modem, and video businesses.
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 April 2, 2010 was 61% compared with 57%
for the fiscal quarter ended April 3, 2009. The four point gross margin percentage increase is
attributable to a favorable product mix coupled with lower product costs in the fiscal quarter
ended April 2, 2010.
Our gross margin percentage for the six fiscal months ended April 2, 2010 was 61% compared with 57%
for the six fiscal months ended April 3, 2009. The four point gross margin percentage increase is
attributable to a favorable product mix coupled with lower product costs in the six fiscal months
ended April 2, 2010.
25
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, that 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 six fiscal months ended April 2, 2010, we recorded $0.8 million and $1.1
million, respectively, of net charges for excess and obsolete (E&O) inventory. During the fiscal
quarter and six fiscal months ended April 3, 2009, we recorded $0.7 million and $1.3 million,
respectively, of net charges for E&O inventory. Activity in our E&O inventory reserves for the
applicable periods in fiscal 2010 and 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
E&O reserves at beginning of period |
|
$ |
4,297 |
|
|
$ |
10,576 |
|
|
$ |
6,392 |
|
|
$ |
12,579 |
|
Additions |
|
|
841 |
|
|
|
696 |
|
|
|
1,069 |
|
|
|
1,315 |
|
Release upon sales of product |
|
|
(615 |
) |
|
|
(915 |
) |
|
|
(1,034 |
) |
|
|
(1,579 |
) |
Scrap |
|
|
(1,245 |
) |
|
|
(1,313 |
) |
|
|
(3,136 |
) |
|
|
(3,026 |
) |
Standards adjustments and other |
|
|
|
|
|
|
150 |
|
|
|
(13 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
E&O reserves at end of period |
|
$ |
3,278 |
|
|
$ |
9,194 |
|
|
$ |
3,278 |
|
|
$ |
9,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review our E&O inventory balances at a product 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 April 2, 2010 and April 3, 2009, we sold $0.6 million and $0.9 million, respectively,
of reserved products. During the six fiscal months ended April 2, 2010 and April 3, 2009, we sold
$1.0 million and $1.6 million, respectively, of reserved products.
Our products are used by electronics OEMs that have designed our products into
equipment. For many of our products, we gain these design wins through a lengthy
sales cycle, which often includes providing technical support to the OEM customer. Moreover, once a
customer has designed a particular suppliers components into a product, substituting another
suppliers components often requires substantial design changes, which involve significant cost,
time, effort and risk. In the event of the loss of business from existing OEM customers, we may be
unable to secure new customers for our existing products without first achieving new design wins.
When the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into
whose products our products have been designed, we generally will be unable to sell our excess
inventories to others, and the estimated realizable value of such inventories to us is generally
zero.
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 ended April 2, 2010 and
April 3, 2009, 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 $1.3 million, or 10%, in the fiscal quarter ended April 2, 2010 compared to
the fiscal quarter ended April 3, 2009. The increase is due to higher compensation and higher
project expenses.
R&D expense increased $1.0 million, or 4%, in the six fiscal months ended April 2, 2010 compared to
the six fiscal months ended April 3, 2009. The increase is due to higher compensation expenses.
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.
26
SG&A expense decreased $4.4 million, or 26%, in the fiscal quarter ended April 2, 2010 compared to
the fiscal quarter ended April 3, 2009. The decrease is primarily due to a 23% decline in SG&A
headcount resulting from restructuring measures and other cost cutting efforts.
SG&A expense decreased $9.8 million, or 28%, in the six fiscal months ended April 2, 2010 compared
to the six fiscal months ended April 3, 2009. The decrease is primarily due to a 23% decline in
SG&A headcount from March 2009 to March 2010, as well as restructuring measures and other cost
cutting efforts.
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
remaining period of approximately 4.9 years.
Amortization expense decreased by $1.1 million, or 79%, in the fiscal quarter ended April 2, 2010
compared to the fiscal quarter ended April 3, 2009. The decrease in amortization expense is
primarily attributable to the intangible assets that became fully amortized in fiscal 2009.
Amortization expense decreased $1.2 million, or 63%, in the six fiscal months ended April 2, 2010
compared to the six fiscal months ended April 3, 2009. The decrease in amortization expense is
primarily attributable to the intangible assets that became fully amortized in fiscal 2009.
Gain on Sale of Intellectual Property
In October 2008, we 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 fiscal quarter ended January 2, 2009. In
accordance with the terms of the agreement with the third party, we retain a cross-license to this
portfolio of patents.
Special Charges (Credits)
For the fiscal quarter ended April 2, 2010, special credits primarily consisted of $0.2 million,
for net restructuring credits due to re-utilization of a restructured facility offset by accretion
of lease liability. For the six fiscal months ended April 2, 2010, special charges of $0.1 million
consisted primarily of restructuring charges.
For the fiscal quarter ended April 3, 2009, special charges primarily consisted of $2.0 million of
restructuring charges related to workforce reductions implemented during the quarter. For the six
fiscal months ended April 3, 2009, special charges of $12.6 million consisted of restructuring
charges of $8.4 million and $3.7 million charges for a legal settlement.
Interest Expense
Interest expense decreased $0.9 million, or 10%, in the fiscal quarter ended April 2, 2010 compared
to the fiscal quarter ended April 3, 2009. The decrease is primarily attributable to lower debt
balances. Interest expense in the fiscal quarters ended April 2, 2010 and April 3, 2009 includes
debt discount amortization of $3.4 million and $3.5 million, respectively.
Interest expense for the six fiscal months ended April 2, 2010 compared to the six fiscal months
ended April 3, 2009 remained unchanged. Interest expense in the six fiscal months ended April 2,
2010 and April 3, 2009 includes debt discount amortization of $7.0 million and $6.9 million,
respectively.
Other (income) expense, net
Other (income) expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Investment and interest income |
|
$ |
(64 |
) |
|
$ |
(451 |
) |
|
$ |
(120 |
) |
|
$ |
(1,308 |
) |
Gain on sale of investments |
|
|
(3,621 |
) |
|
|
|
|
|
|
(7,734 |
) |
|
|
(53 |
) |
Loss on extinguishment of secured debt |
|
|
|
|
|
|
|
|
|
|
614 |
|
|
|
|
|
Loss on extinguishment of convertible debt |
|
|
9,481 |
|
|
|
|
|
|
|
9,991 |
|
|
|
|
|
Other-than-temporary impairment of marketable securities
and cost based investments |
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
2,770 |
|
Increase in the fair value of derivative instruments |
|
|
(13,916 |
) |
|
|
(1,078 |
) |
|
|
(18,201 |
) |
|
|
(596 |
) |
Other |
|
|
365 |
|
|
|
(421 |
) |
|
|
491 |
|
|
|
(701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(7,755 |
) |
|
$ |
(1,815 |
) |
|
$ |
(14,959 |
) |
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income), net during the fiscal quarter ended April 2, 2010 was primarily comprised of a
$3.6 million gain on sale of equity investments and a $13.9 million increase in the fair value of
our warrant to purchase 6.1 million shares of Mindspeed common stock, offset by a loss of
$9.5 million on extinguishment of convertible debt, which consists of $6.2 million of unamortized
debt discount and $3.3 million of transaction costs. Other (income), net during the six fiscal
months ended April 2, 2010 was primarily comprised of a $7.7 million gain on sale of equity
27
investments and a $18.2 million increase in the fair value of our warrant to purchase 6.1 million
shares of Mindspeed common stock, offset by a loss of $10.0 million on extinguishment of
convertible debt, which consists of $7.6 million of unamortized debt discount, $3.4 million of
transaction costs offset by $1.0 million of gain on exchange below par value, and a loss of
$0.6 million on extinguishment of secured debt.
Other (income), net during the fiscal quarter ended April 3, 2009 was primarily comprised of
investment and interest income on invested cash balances of $0.5 million and a $1.1 million
increase in the fair value of our warrant to purchase 6.1 million shares of Mindspeed common stock
offset by an other-than-temporary impairment of cost based investments of $0.1 million. Other
expense, net during the six fiscal months ended April 3, 2009 was primarily comprised of an
other-than-temporary impairment of marketable and cost based investments of $2.7 million offset by
investment and interest income on invested cash balances of $1.3 million and a $0.6 million
increase in the fair value of our warrant to purchase 6.1 million shares of Mindspeed common stock.
Provision for Income Taxes
We recorded a tax provision of $0.3 million and $0.1 million for the fiscal quarter and six fiscal
months ended April 2, 2010, primarily reflecting income taxes imposed on our foreign subsidiaries.
We recorded a tax provision of $0.2 million and $0.6 million for the fiscal quarter and six fiscal
months ended April 3, 2009, 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, sales of non-core assets,
borrowings and operating cash flow. In addition, we have generated additional liquidity in the past
through the sale of equity securities and may from time to time do so in the future.
Our cash and cash equivalents increased $62.1 million between October 2, 2009 and April 2, 2010.
The increase was primarily due to (i) the common stock offering and issuance of long-term bonds,
net of expenses, of $62.5 million and $168.4 million, respectively, partially offset by the
repurchase of our remaining $61.4 million senior secured notes for a price of 101% of par,
extinguishment of our convertible debt for $104.7 million and repayment of $29.1 million of our
short-term debt; (ii) $11.2 million of cash generated by operations; (iii) $8.5 million of
restricted cash released upon repayment of our short-term debt and (iv) $8.0 million of proceeds
from sale of marketable securities.
At April 2, 2010, we had a total of $127.7 million aggregate principal amount of 4.00% 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. It is our
intention to repurchase or redeem the remaining 4.00% convertible subordinated notes on or before
March 1, 2011. Subsequent to April 2, 2010, we repurchased
approximately $115.2 million of our
4.00% convertible subordinated notes due March 2026 by means of a private purchase, and paid
accrued and unpaid interest on the convertible notes through the date of the repurchase. The
Company will record an extinguishment loss on this transaction, which is primarily composed of the
unamortized debt discount related to the notes repurchased.
As further described below, our wholly-owned subsidiary, Conexant CF, LLC, has a $15.0 million
credit facility with a bank. We are required to maintain certain minimum amounts on deposit
(restricted cash) of approximately $0.8 million with the bank during the term of the credit
agreement. As of April 2, 2010, no amounts had been borrowed under this facility.
In March 2010, we raised net proceeds of approximately $60.0 million in a common stock offering and
sold $175.0 million of 11.25% senior secured notes due 2015 at a price of 99.06% raising proceeds
of $168.4 million, net of expenses of $4.9 million. Also during the fiscal quarter ended April 2,
2010, we repurchased by means of a tender offer approximately $104.7 million of its 4.00%
convertible subordinated notes due March 2026. In October 2009, we raised additional net proceeds
of approximately $2.6 million from the exercise of the over-allotment option in connection with the
September common stock offering.
We believes that its existing sources of liquidity, together with cash expected to be generated
from operations, will be sufficient to fund its operations, research and development, anticipated
capital expenditures and working capital for at least the next twelve months.
Cash flows are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Fiscal Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by (used in) operating activities |
|
$ |
11,219 |
|
|
$ |
(4,091 |
) |
Net cash provided by investing activities |
|
|
15,777 |
|
|
|
19,923 |
|
Net cash provided by (used in) financing activities |
|
|
35,145 |
|
|
|
(11,444 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
62,141 |
|
|
$ |
4,388 |
|
|
|
|
|
|
|
|
Cash provided by operating activities was $11.2 million for the six fiscal months ended April
2, 2010 compared to cash used in operations of $4.1 million for the six fiscal months ended April
3, 2009. The increase in cash generated by operating activities was primarily driven by $19.2
million in net income adjusted for non-cash items offset by a decrease in working capital of
$6.8 million.
28
Cash provided by investing activities was $15.8 million for the six fiscal months ended April 2,
2010 compared to cash provided by investing activities of $19.9 million for the six fiscal months
ended April 3, 2009. In the six fiscal months ended April 2, 2010, $8.5 million of restricted cash
was released associated with our repayment of short-term debt and we generated $8.0 million
proceeds from the sale of marketable securities. Cash provided by investing activities in the six
fiscal months ended April 3, 2009 was primarily due to $14.5 million proceeds from sale of
intellectual property and $9.3 million of restricted cash released.
Cash provided by financing activities was $35.1 million for the six fiscal months ended April 2,
2010 compared to $11.4 million used in financing activities for the six fiscal months ended April
3, 2009. In the six fiscal months ended April 2, 2010, we issued common stock and long-term bonds,
net of expenses, of $62.5 million and $168.4 million, respectively, partially offset by the
repurchase of our remaining $61.4 million senior secured notes for a price of 101% of par, the
repurchase of our convertible debt for $104.7 million and the repayment of $28.7 million of our
short-term debt. Cash used in investing activities in the six fiscal months ended April 3, 2009
was primarily due to net 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 2, 2009. For a summary of the
contractual commitments at October 2, 2009, see Part II, Item 7, page 37 in our 2009 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, 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 our sale of the BMP business to NXP, we 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 maximum potential future payments we could be
obligated to make. We have not recorded any liability for these guarantees and indemnities in our
consolidated balance sheets. Product warranty costs are not significant.
We have other outstanding letters of credit collateralized by restricted cash aggregating
$5.7 million to secure various long-term operating leases and our self-insured workers
compensation plan. The restricted cash associated with these letters of credit is classified as
other long-term assets on the consolidated balance sheets.
Special Purpose Entities
We have two special purpose entities, Conexant USA, LLC (Conexant USA), and Conexant CF, LLC
(Conexant CF) who are our wholly-owned, consolidated subsidiaries. Neither Conexant USA nor
Conexant CF is 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 sold,
from time to time, certain accounts receivable to Conexant USA. Under the terms of our agreements
with Conexant USA, we retained the responsibility to service and collect accounts receivable sold
to Conexant USA and received a weekly fee from Conexant USA for handling administrative matters
that equaled 1.0%, on a per annum basis, of the uncollected value of the accounts receivable. Our
$50.0 million credit facility secured by the assets of Conexant USA expired on November 27, 2009.
All amounts owed on the credit facility were repaid as of January 1, 2010.
On December 22, 2009, we established a new accounts receivable financing facility whereby it sells,
from time to time, certain accounts receivable to Conexant CF. Under the terms of our agreements
with Conexant CF, we retain the responsibility to service and collect accounts receivable sold to
Conexant CF and receive a weekly fee from Conexant CF for handling administrative matters which is
equal to 1.0%, on a per annum basis, of the uncollected value of the purchased accounts receivable.
Concurrently with entering into the new accounts receivable financing facility, Conexant CF entered
into a new credit facility to finance the cash portion of the purchase price of eligible
receivables. The new credit facility is secured by the assets of Conexant CF. Conexant CF is
required to maintain certain minimum amounts on deposit (restricted cash) of approximately $0.8
million with the bank during the term of the credit agreement. Borrowings under the credit
facility, which cannot exceed the lesser of $15.0 million or 60% of the uncollected value of
purchased accounts receivable that are eligible for coverage under an insurance policy for the
receivables, bear interest equal to the bank Prime Rate (minimum of 4%) plus applicable margins
(between 1.5% to 2.25%). In addition, if the aggregate amount of interest earned by the bank in any
month is less than $20,000, Conexant CF pays an amount equal to the minimum monthly interest of
$20,000 minus the aggregate amount of all interest earned by the bank. The credit agreement matures
on December 31, 2010 and remains subject to additional 364-day renewal periods at the discretion of
the bank.
29
The credit facility is subject to financial covenants including a minimum level of shareholders
equity covenant, an adjusted quick ratio covenant, and a minimum cash and cash equivalents
covenant. Further, any failure by us or Conexant CF 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 April 2, 2010, Conexant CF had not
borrowed any amounts under this credit facility and was in compliance with all covenants under the
credit facility.
Recently Issued and Adopted Accounting Pronouncements
See Note 3Basis of Presentation and Significant Accounting Policies to the consolidated financial
statements in Part I, Item 1 for information related to recently issued and adopted accounting
pronouncements.
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ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash and cash equivalents, equity securities, our warrant to
purchase Mindspeed common stock, restricted cash 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 April 2, 2010, the carrying value of our cash and cash
equivalents approximated fair value.
Other
equity securities include marketable securities with a
market value listed from a stock exchange as of April 2, 2010. We hold a
warrant to purchase 6.1 million shares of Mindspeed common stock at an exercise price of $16.74 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 April 2, 2010, a 10% decrease in the market price of Mindspeed common
stock would result in a decrease of $3.1 million in the fair value of this warrant. At April 2,
2010, the market price of Mindspeed common stock was $8.04 per share. During the fiscal quarter
ended April 2, 2010, the market price of Mindspeed common stock ranged from a low of $4.65 per
share to a high of $8.79 per share.
Our short-term debt consists of 4.00% convertible subordinated notes with interest at fixed rates.
The fair value of our 4.00% convertible subordinated notes is subject to significant fluctuation
due to their convertibility into shares of our common stock.
The following table shows the fair values of our financial instruments as of April 2, 2010 (in
thousands):
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Carrying Value |
|
Fair Value |
Cash and cash equivalents |
|
$ |
187,526 |
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|
$ |
187,526 |
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Other equity securities |
|
|
13,879 |
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|
|
13,879 |
|
Mindspeed warrant |
|
|
23,254 |
|
|
|
23,254 |
|
Long-term restricted cash |
|
|
5,703 |
|
|
|
5,703 |
|
Short-term debt: convertible subordinated notes |
|
|
127,708 |
|
|
|
127,282 |
|
Long-term debt: Senior Secured Notes |
|
|
175,000 |
|
|
|
175,000 |
|
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. At April 2, 2010, we did not have any foreign currency forward
exchange contracts outstanding.
Approximately $9.2 million of our $187.5 million of cash and cash equivalents at April 2, 2010 was
located in foreign countries where we conduct business, including approximately $3.3 million in
India and $1.9 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.
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ITEM 4. |
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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.
30
There were no changes in our internal control over financial reporting during the fiscal quarter
ended April 2, 2010 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
None
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 2, 2009, as set forth below. Other than the addition of the first risk
factor below, the addition of our risk factor regarding our Mindspeed warrant, the deletion of a
risk factor regarding the refinancing of our indebtedness and the deletion of a risk factor
regarding the dilutive effect of the issuance of equity securities by us, 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 2, 2009.
References in this section to our fiscal year refer to the fiscal year ending on the Friday nearest
September 30 of each year.
Our operating and financial flexibility is limited by the terms of the agreement governing our
accounts receivable financing facility and the terms of the indenture governing our senior secured
notes due in 2015.
The agreement governing our accounts receivable financing facility and the indenture governing our
senior secured notes due in 2015 contain financial and other covenants that may limit our ability
to take, or prevent us from taking certain actions that we believe are in the best interests of our
business and our stockholders. For example, the indenture governing our senior secured notes
contains covenants that restrict, subject to certain exceptions, our ability and the ability of our
subsidiaries who are guarantors of our senior secured notes 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 our 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 our assets; enter into
certain types of transactions with affiliates; and enter into sale-leaseback transactions. In
addition, we are required to use the proceeds of certain asset dispositions to offer to repurchase
our senior secured notes if we do not use the proceeds within 360 days to invest in assets (other
than current assets) to be used in our business; and this requirement limits our ability to use
asset sale proceeds to fund our operations. The restrictions imposed by the agreement governing
our accounts receivable financing facility and the indenture governing our senior secured notes may
prevent us from taking actions that could help to grow our business or increase the value of our
securities.
We are a much smaller company than in the recent past and dependent on fewer products for our
success.
We are a much smaller company than in the recent past with a narrower, less diversified and more
focused portfolio of products. Our smaller size could cause our cash flow and growth prospects to
be more volatile and make us more vulnerable to focused competition. As a smaller company, we will
have less capital available for research and development and for strategic investments and
acquisitions. As a smaller company, we will be subject to greater revenue fluctuations if our older
product lines sales were to decline faster than we anticipate. 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 our supporting functions to fit the needs of a smaller
company.
We are subject to the risks of doing business internationally.
For the fiscal quarters ended April 2, 2010 and April 3, 2009, net revenues from customers located
outside of the United States (U.S.), primarily in the Asia-Pacific region, represented
approximately 95% and 97%, respectively, of our total net revenues. For the six fiscal months ended
April 2, 2010 and April 3, 2009, net revenues from customers located outside of the U.S., primarily
in the Asia-Pacific region, represented approximately 95% and 96%, respectively, of our total net
revenues. In addition, many of our key suppliers are located outside of the U.S. 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; |
31
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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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|
the laws and policies of the U.S. 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 $9.2 million of our $187.5 million of cash and cash equivalents at April 2, 2010 was
located in foreign countries where we conduct business, including approximately $3.3 million in
India and $1.9 million in China. These amounts are not freely available for dividend repatriation
to the U.S. 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 U.S. and other locations or to
pay indebtedness.
Recently proposed significant changes to the U.S. international tax laws would limit
U.S. deductions for expenses related to un-repatriated 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 during the ordinary course of business. We have not
entered into foreign currency forward exchange contracts for other purposes. As of April 2, 2010,
we did not have any outstanding foreign currency forward exchange contracts. 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 25% and 30% of our net revenues in the
fiscal quarters ended April 2, 2010 and April 3, 2009, respectively, and 25% and 28% in the six
fiscal months ended April 2, 2010 and April 3, 2009, 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 uncertainty in the
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
32
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.
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 and expenses related to
carrying vacant property.
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
April 2, 2010, we had
554,000 square feet of leased space and 456,000 square feet of owned space, of which
approximately 89% was being subleased to third parties and 11% was vacant and offered for
sublease. Included in these amounts are 389,000 square feet of owned space in Newport Beach,
California that we have leased to TowerJazz and 126,000 square feet of leased space in
Newport Beach, California that we have subleased to Mindspeed. As of April 2, 2010, the
aggregate amount owed to landlords under space we lease but do not operate over the
remaining terms of the leases was approximately $68.9 million and, of this amount,
subtenants had lease obligations to us in the aggregate amount of $16.4 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 had to landlords for unused
space at April 2, 2010, approximately $14.3 million was attributable to space we were
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 you 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; |
33
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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 historically incurred substantial losses and may incur additional future losses.
Our loss from continuing operations for the fiscal years ended October 2, 2009, October 3, 2008 and
September 28, 2007 was $40.5 million, $12.7 million, and $179.3 million, respectively. These
results have had a negative impact on our financial condition and operating cash flows. We cannot
assure you that our business will be 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.
The value of our warrant to purchase 6.1 million shares of Mindspeed common stock is subject to
material increases and decreases in value based on factors beyond our control.
We have a warrant to purchase approximately 6.1 million shares of Mindspeed common stock at an
exercise price of $16.74 per share through June 2013. At April 2, 2010 and October 2, 2009, the
market value of Mindspeed common stock was $8.04 and $3.05 per share, respectively. We account for
the Mindspeed warrant as a derivative instrument, and changes in the fair value of the warrant are
included in other (expense) income, net each period. At April 2, 2010 and October 2, 2009, the
aggregate fair value of the Mindspeed warrant included on the accompanying consolidated balance
sheets was $23.3 million and $5.1 million, respectively. At April 2, 2010, the warrant was valued
using the Black-Scholes-Merton model with an expected term of 3.24 years, expected volatility of
96%, a weighted average risk-free interest rate of 1.82% and no dividend yield. The aggregate fair
value of the warrant is reflected as a long-term asset on the accompanying consolidated balance
sheets because we do not intend to liquidate any portion of the warrant in the next twelve months.
At April 2, 2010 and October 2, 2009, the value of the
warrant represented 5% and 1%, respectively,
of total assets.
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. We could, at any point in time,
ultimately realize amounts significantly different than the carrying value.
Our ability to use our net operating losses (NOLs) and other tax attributes to offset future
taxable income could be limited by an ownership change and/or decisions by California and other
states to suspend the use of NOLs.
We have significant NOLs, research and development (R&D) tax credits, capitalized R&D and
amortizable goodwill available to offset our future U.S. federal and state taxable income. A
significant amount of our NOLs were acquired in the acquisition of certain of our subsidiaries.
Those NOLs are subject to limitations imposed by Section 382 of the Internal Revenue Code (and
applicable state law). In addition, our ability to utilize any of our NOLs and other tax attributes
may be subject to significant limitations under Section 382 of the Internal Revenue Code (and
applicable state law) if we undergo an ownership change. An ownership change occurs for purposes of
Section 382 of the Internal Revenue Code
34
if, among other things, 5% stockholders (i.e.,
stockholders who own or have owned 5% or more of our stock (with certain groups of less-than-5%
stockholders treated as single stockholders for this purpose)) increase their aggregate percentage
ownership of our common stock by more than fifty percentage points above the lowest percentage of
the stock owned by these stockholders at any time during the relevant testing period. An issuance
of our common stock in connection with or as part of an exchange offer for our debt securities or
any other issuance of our common stock can also contribute to or result in an ownership change
under Section 382. Stock ownership for purposes of Section 382 of the Internal Revenue Code is
determined under a complex set of attribution rules, so that a person is treated as owning stock
directly, indirectly (i.e., through certain entities) and constructively (through certain related
persons and certain unrelated persons acting as a group). In the event of an ownership change,
Section 382 imposes an annual limitation (based upon our value at the time of the ownership change,
as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income a
corporation may offset with NOLs. If we undergo an ownership change, Section 383 would also limit
our ability to use R&D tax credits. In addition, if the tax basis of our assets exceeded the fair
market value of our assets at the time of the ownership change, Section 382 could also limit our
ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first
five years following an ownership change. Any unused annual limitation may be carried over to later
years until the applicable expiration date for the respective NOLs. As a result, our inability to
utilize these NOLs, credits or amortization as a result of any ownership changes could adversely
impact our operating results and financial condition.
In addition, California and certain states have suspended use of NOLs for certain taxable years,
and other states are considering similar measures. As a result, we may incur higher state income
tax expense in the future. Depending on our future tax position, continued suspension of our
ability to use NOLs in states in which we are subject to income tax could have an adverse impact on
our operating results and financial condition.
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 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 as we develop and introduce new or
enhanced products. We cannot assure you that we will be successful and, as a result, our 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 April 2, 2010, we had $109.9 million of goodwill and $4.9 million of intangible assets, net,
which together represented approximately 27% 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, our assumptions
regarding our future operating performance change or 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 charge against earnings.
Our remaining goodwill is associated with our business. 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. During the fourth fiscal
quarter of 2009, we determined that the fair value of our business was greater than its carrying
value and therefore there was no impairment of goodwill as of October 2, 2009. There were no
indicators of impairment requiring testing during the fiscal quarter ended April 2, 2010. Because
of
35
the significance of our remaining goodwill and intangible asset balances, any future impairment
of these assets could have a material adverse effect on our financial condition and results of
operations, although, as a charge, it would have no effect on our cash flow. Significant
impairments may also impact shareholders equity (deficit).
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 20 largest customers, including distributors, represented approximately 85% and 77% of
our net revenues in the fiscal quarters ended April 2, 2010 and April 3, 2009, respectively, and
approximately 81% and 72% of our net revenues in the six fiscal months ended April 2, 2010 and
April 3, 2009, respectively. Sales to our 20 largest customers, including distributors,
represented approximately 87%, 83% and 82% of our net revenues in the fiscal years ended October 2,
2009, October 3, 2008 and September 28, 2007, respectively. For the fiscal quarters ended April 2,
2010 and April 3, 2009, one distributor accounted for 14% and 22%, respectively, of our net
revenues. For the six fiscal months ended April 2, 2010 and April 3, 2009, one distributor
accounted for 14% and 19%, respectively, of our net revenues. For each of the fiscal years ended
October 2, 2009, October 3, 2008 and September 28, 2007, one distributor accounted for 23% of our
net revenues. 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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our customers perceptions of our liquidity and viability may have a negative impact on
their decisions to incorporate our products into their own 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 continued uncertainty in
global economic conditions; and |
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our small size, our cost-savings efforts and any future liquidity constraints 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. Recently, 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.
Any prolonged or significant decrease in consumer spending by 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 the
markets we operate in generally exhibit the following characteristics:
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rapid technological developments; |
36
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rapid changes in customer requirements; |
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frequent new product introductions and enhancements; |
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short product life cycles with declining prices over the life cycle of the products; and |
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evolving industry standards. |
Our products could become obsolete sooner than anticipated because of a faster than anticipated
change in one or more of the technologies related to our products or in market demand for products
based on a particular technology, particularly due to the introduction of new technology that
represents a substantial advance over current technology. Currently accepted industry standards are
also subject to change, which may contribute to the obsolescence of our products.
We may 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 technologies. Any litigation to determine the validity of claims that our products
infringe or may infringe these rights, including claims arising through our contractual
indemnification of our customers, regardless of their merit or resolution, could be costly and
divert the efforts and attention of our management and technical personnel. We cannot assure you
that we would prevail in litigation given the complex technical issues and inherent uncertainties
in intellectual property litigation. If litigation results in an adverse ruling we could be
required to:
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pay substantial damages; |
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cease the manufacture, use or sale of infringing products, 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, which we may not
be successful in developing; 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 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
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 the
sale of our BBA business, exposure to lengthy sales cycles may increase the volatility of our
revenue stream and common stock price.
37
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 25% and 30% of our net revenues in the fiscal
quarters ended April 2, 2010 and April 3, 2009, respectively, and 25% and 28% in the six fiscal
months ended April 2, 2010 and April 3, 2009, 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 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 pre-pay for all or part
of vendor invoices or 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
38
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 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
intellectual property licensed from our customers and other third parties 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.
A significant portion of our intellectual property rights is located in foreign jurisdictions.
Because of the differences in foreign patent, trademark and other laws concerning proprietary
rights, our intellectual property rights frequently do not receive the same degree of protection in
foreign jurisdictions as they would in the U.S. Our failure to obtain or maintain adequate
protection of our intellectual property rights for any reason could have a material adverse effect
on our business, results of operations and financial condition.
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.
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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 products 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.
39
Moreover, in the event that we have unprofitable operations or products we may be forced to
restructure or divest such operations or products. There is no guarantee that we will be able to
restructure or divest such operations or products 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.
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.
Litigation could be costly and harmful to our business.
We are involved in various claims and lawsuits from time to time. For example, in February 2005,
certain of our current and former officers and our Employee Benefits Plan Committee were named as
defendants in a purported breach of fiduciary duties class action lawsuit that we recently settled
for $3.25 million. Any of these claims or legal actions could adversely affect our business,
financial position and results of operations and divert managements attention and resources from
other matters.
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.
The price of our common stock may fluctuate significantly, which may make it difficult for you to
resell your common stock when you want or at prices you find attractive.
The price of our common stock is volatile and may fluctuate significantly. For example, since
September 29, 2007, the price of our stock has ranged from a high of $14.80 per share to a low of
$0.26 per share. We cannot assure you as to the prices at which our common stock will trade or that
an active trading market in our common stock will be sustained in the future. In addition to the
matters discussed in other risk factors included herein, some of the reasons for fluctuations in
our stock price could include:
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our operating and financial performance and prospects; |
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the depth and liquidity of the market for our common stock; |
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investor perception of us and the industry in which we operate; |
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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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general financial, domestic, international, economic and other market conditions; |
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proposed acquisitions by us or our competitors; |
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the hiring or departure of key personnel; and |
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adverse judgments or settlements obligating us to pay damages. |
In addition, public stock markets have experienced, and may in the future experience,
extreme price and trading volume volatility, particularly in the technology sectors of the
market. This volatility has significantly affected the market prices of securities of many
technology companies for reasons frequently unrelated to or disproportionately impacted by
the operating performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock.
40
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ITEM 5. |
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OTHER INFORMATION |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is a tabulation of the votes on
proposals considered at our Annual Meeting of Stockholders held on February 18, 2010 via the Internet:
1. To elect three members of the Board of Directors of the Company with terms expiring at the 2013
Annual Meeting of Stockholders.
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For |
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Withheld |
William E. Bendush |
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22,399,455 |
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1,859,057 |
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Balakrishnan S. Iyer |
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21,078,162 |
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3,180,350 |
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Jerre L. Stead |
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13,489,297 |
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10,769,215 |
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Broker non-vote |
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26,805,428 |
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2. To approve the Amendment to the Companys Restated Certificate of Incorporation to increase
the number of authorized common shares.
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Shares (#) |
For |
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33,496,208 |
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Against |
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17,305,860 |
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Abstain |
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261,869 |
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Broker non-vote |
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N/A |
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3. To approve the 2010 Equity Incentive Plan.
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Shares (#) |
For |
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19,640,255 |
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Against |
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4,254,362 |
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Abstain |
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363,892 |
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Broker non-vote |
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26,805,428 |
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4. To ratify the appointment by the Audit Committee of the Board of Directors of the accounting
firm of Deloitte & Touche LLP as independent auditors for the Company for the current fiscal year.
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Shares (#) |
For |
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49,643,613 |
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Against |
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1,027,476 |
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Abstain |
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392,848 |
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Broker non-vote |
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N/A |
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Exhibit |
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No. |
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Description |
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1.1
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Underwriting Agreement, dated March 4, 2010, between Conexant Systems,
Inc. and Goldman, Sachs & Co. (incorporated by reference to Exhibit
1.1 of the Companys Current Report on Form 8-K filed on March 5,
2010). |
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3.1
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Certificate of Amendment of Restated Certificate of Incorporation of
Conexant Systems, Inc., as filed with the Secretary of State of the
State of Delaware on February 19, 2010 (incorporated by reference to
Exhibit 3.1 of the Companys Current Report on Form 8-K filed on
February 24, 2010). |
41
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Exhibit |
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No. |
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Description |
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3.2 |
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Bylaws of Conexant Systems, Inc., as of December 18, 2009
(incorporated by reference to Exhibit 3.2 of the Companys Current
Report on Form 8-K filed on December 24, 2009). |
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4.1 |
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Indenture, dated March 10, 2010, among Conexant Systems, Inc., the
subsidiary guarantors party thereto, and The Bank of New York Mellon
Trust Company, N.A., as Trustee and Collateral Trustee (incorporated
by reference to Exhibit 4.1 of the Companys Current Report on Form
8-K filed on March 11, 2010). |
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4.2 |
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Blanket Lien Pledge and Security Agreement, dated March 10, 2010,
among Conexant Systems, Inc., the grantors party thereto, and The Bank
of New York Mellon Trust Company, N.A., as Collateral Trustee
(incorporated by reference to Exhibit 4.2 of the Companys Current
Report on Form 8-K filed on March 11, 2010). |
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10.1* |
|
Conexant Systems, Inc. 2010 Equity Incentive Plan (incorporated by
reference to Exhibit 99.1 of the Companys Current Report on Form 8-K
filed on February 22, 2010). |
|
10.1.1* |
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock
Unit Award Agreement under the Conexant Systems, Inc. 2010 Equity
Incentive Plan. |
|
|
|
10.1.2* |
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock
Unit Award Agreement (for Directors) under the Conexant Systems, Inc.
2010 Equity Incentive Plan. |
|
|
|
10.1.3* |
|
Form of Stock Option Award Grant Notice and Stock Option Agreement
under the Conexant Systems, Inc. 2010 Equity Incentive Plan. |
|
|
|
10.2* |
|
Conexant Systems, Inc. 2004 New-Hire Equity Incentive Plan, as amended. |
|
|
|
10.3* |
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock
Unit Award Agreement under the Conexant Systems, Inc. 2000
Non-Qualified Stock Plan. |
|
|
|
10.3.1* |
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock
Unit Award Agreement (for Directors) under the Conexant Systems, Inc.
2000 Non-Qualified Stock Plan. |
|
|
|
10.4* |
|
Conexant Systems, Inc. 2001 Employee Stock Purchase Plan, as amended
and restated (incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement on Form S-8 filed on March 1, 2010). |
|
|
|
10.5 |
|
Amendment No. 1 to Loan and Security Agreement, dated March 3, 2010,
by and between Conexant CF, LLC and Silicon Valley Bank (incorporated
by reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on March 5, 2010). |
|
|
|
10.6 |
|
Purchase and Sale Agreement and Joint Escrow Instructions, dated
January 12, 2010, by and between Conexant Systems, Inc. and City
Ventures, LLC. |
|
|
|
10.6.1 |
|
Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated February 1, 2010, by and between Conexant Systems,
Inc. and City Ventures, LLC. |
|
|
|
10.6.2 |
|
Second Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated February 19, 2010, by and between Conexant
Systems, Inc. and City Ventures, LLC. |
|
|
|
10.6.3 |
|
Third Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated February 26, 2010, by and between Conexant
Systems, Inc. and City Ventures, LLC. |
|
|
|
10.6.4 |
|
Fourth Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated March 12, 2010, by and between Conexant Systems,
Inc. and City Ventures, LLC. |
|
|
|
10.6.5 |
|
Letter, dated March 24, 2010, concerning termination of Purchase and
Sale Agreement and Joint Escrow Instructions from City Ventures, LLC
to Conexant Systems, Inc. |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-15(a) or 15d-15(a). |
|
|
|
31.2 |
|
Certification of the Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-15(a) or 15d-15(a). |
|
|
|
32 |
|
Certification by Chief Executive Officer and Chief Financial Officer
of Periodic Report Pursuant to 18 U.S.C. Section 1350. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
42
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.
|
|
|
|
|
|
CONEXANT SYSTEMS, INC.
(Registrant)
|
|
Date: May 7, 2010 |
By |
/s/ JEAN HU
|
|
|
|
Jean Hu |
|
|
|
Chief Financial Officer, Treasurer and
Senior Vice President, Business Development
(principal financial officer) |
|
|
43
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
1.1
|
|
Underwriting Agreement, dated March 4, 2010, between Conexant Systems, Inc. and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 1.1 of the Companys Current Report on Form 8-K filed on March 5, 2010). |
|
|
|
3.1
|
|
Certificate of Amendment of Restated Certificate of Incorporation of Conexant Systems, Inc., as filed with the Secretary
of State of the State of Delaware on February 19, 2010 (incorporated by reference to Exhibit 3.1 of the Companys Current
Report on Form 8-K filed on February 24, 2010). |
|
|
|
3.2
|
|
Bylaws of Conexant Systems, Inc., as of December 18, 2009 (incorporated by reference to Exhibit 3.2 of the Companys
Current Report on Form 8-K filed on December 24, 2009). |
|
|
|
4.1
|
|
Indenture, dated March 10, 2010, among Conexant Systems, Inc., the subsidiary guarantors party thereto, and The Bank of
New York Mellon Trust Company, N.A., as Trustee and Collateral Trustee (incorporated by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K filed on March 11, 2010). |
|
|
|
4.2
|
|
Blanket Lien Pledge and Security Agreement, dated March 10, 2010, among Conexant Systems, Inc., the grantors party
thereto, and The Bank of New York Mellon Trust Company, N.A., as Collateral Trustee (incorporated by reference to Exhibit
4.2 of the Companys Current Report on Form 8-K filed on March 11, 2010). |
|
|
|
10.1*
|
|
Conexant Systems, Inc. 2010 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Companys Current
Report on Form 8-K filed on February 22, 2010). |
|
|
|
10.1.1*
|
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the Conexant Systems,
Inc. 2010 Equity Incentive Plan. |
|
|
|
10.1.2*
|
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement (for Directors) under the
Conexant Systems, Inc. 2010 Equity Incentive Plan. |
|
|
|
10.1.3*
|
|
Form of Stock Option Award Grant Notice and Stock Option Agreement under the Conexant Systems, Inc. 2010 Equity Incentive
Plan. |
|
|
|
10.2*
|
|
Conexant Systems, Inc. 2004 New-Hire Equity Incentive Plan, as amended. |
|
|
|
10.3*
|
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the Conexant Systems,
Inc. 2000 Non-Qualified Stock Plan. |
|
|
|
10.3.1*
|
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement (for Directors) under the
Conexant Systems, Inc. 2000 Non-Qualified Stock Plan. |
|
|
|
10.4*
|
|
Conexant Systems, Inc. 2001 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit
4.1 of the Companys Registration Statement on Form S-8 filed on March 1, 2010). |
|
|
|
10.5
|
|
Amendment No. 1 to Loan and Security Agreement, dated March 3, 2010, by and between Conexant CF, LLC and Silicon Valley
Bank (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on March 5, 2010). |
|
|
|
10.6
|
|
Purchase and Sale Agreement and Joint Escrow Instructions, dated January 12, 2010, by and between Conexant Systems, Inc.
and City Ventures, LLC. |
|
|
|
10.6.1
|
|
Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated February 1, 2010, by and between Conexant
Systems, Inc. and City Ventures, LLC. |
|
|
|
10.6.2
|
|
Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated February 19, 2010, by and between
Conexant Systems, Inc. and City Ventures, LLC. |
|
|
|
10.6.3
|
|
Third Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated February 26, 2010, by and between
Conexant Systems, Inc. and City Ventures, LLC. |
44
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.6.4
|
|
Fourth Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated March 12, 2010, by and between
Conexant Systems, Inc. and City Ventures, LLC. |
|
|
|
10.6.5
|
|
Letter, dated March 24, 2010, concerning termination of Purchase and Sale Agreement and Joint Escrow Instructions from
City Ventures, LLC to Conexant Systems, Inc. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(a) or 15d-15(a). |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(a) or 15d-15(a). |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. |
|
|
|
*
|
|
Management contract or compensatory plan or arrangement. |
45