<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
FILE NO. 000-24923
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 10/A
GENERAL FORM FOR
REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
CONEXANT SYSTEMS, INC.
(FORMERLY NAMED ROCKWELL SEMICONDUCTOR SYSTEMS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 25-1799439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4311 JAMBOREE ROAD
NEWPORT BEACH, CALIFORNIA 92660-3095
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 221-4600
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1 per share
(TITLE OF CLASS)
Preferred Share Purchase Rights
(TITLE OF CLASS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CONEXANT SYSTEMS, INC.
PART I
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------- ---------------------------------
<C> <S> <C>
1. Business............................. "Summary of Certain Information"; "Risk Factors"; "The
Semiconductor Systems Business"; "Management's
Discussion and Analysis of Financial Condition and
Results of Operations"; "The
Distribution -- Introduction"; and "The Distribution --
Background and Reasons for the Distribution".
2. Financial Information................ "Summary of Certain Information"; "Historical Selected
Financial Data"; "Unaudited Pro Forma Condensed
Financial Statements of the Company"; "Management's
Discussion and Analysis of Financial Condition and
Results of Operations"; "The Distribution"; and
"Semiconductor Systems Combined Financial Statements and
Schedule".
3. Properties........................... "The Semiconductor Systems Business -- Properties".
4. Security Ownership of Certain
Beneficial Owners and Management..... "The Distribution -- Trading Market" and "Management of
the Company -- Ownership of Company Common Stock".
5. Directors and Executive Officers..... "Arrangements Between Rockwell and the Company";
"Management of the Company"; and "Liability and
Indemnification of Directors and Officers".
6. Executive Compensation............... "Arrangements Between Rockwell and the Company" and
"Management of the Company".
7. Certain Relationships and Related
Transactions......................... "Summary of Certain Information" and "Arrangements
Between Rockwell and the Company".
8. Legal Proceedings.................... "The Semiconductor Systems Business -- Legal
Proceedings".
9. Market Price of and Dividends on the
Registrant's Common Equity and
Related Shareowner Matters........... "Summary of Certain Information"; "Risk Factors"; "The
Distribution -- Introduction"; and "The
Distribution -- Trading Market".
10. Recent Sales of Unregistered
Securities........................... Not Applicable.
11. Description of Registrant's
Securities to be Registered.......... "The Distribution -- Trading Market" and "Description of
Company Capital Stock".
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------- ---------------------------------
<C> <S> <C>
12. Indemnification of Directors and
Officers............................. "Liability and Indemnification of Directors and
Officers".
13. Financial Statements and
Supplementary Data................... "Summary of Certain Information"; "Historical Selected
Financial Data"; "Unaudited Pro Forma Condensed
Financial Statements of the Company"; "Management's
Discussion and Analysis of Financial Condition and
Results of Operations"; and "Semiconductor Systems
Combined Financial Statements and Schedule".
14. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. Not Applicable.
15. Financial Statements and Exhibits.... "Semiconductor Systems Combined Financial Statements and
Schedule".
</TABLE>
ii
<PAGE> 4
[ROCKWELL LOGO]
December [ ], 1998
Dear Shareowner:
Over the last few years, Rockwell International Corporation ("Rockwell")
has undergone a dramatic transformation to better position our leadership
businesses to achieve their full potential and deliver greater value to our
shareowners. These strategic actions allow us to leverage our financial strength
and enhance our ability to focus on our core Automation and Avionics &
Communications businesses.
On November 4, 1998, the Board of Directors of Rockwell approved the
distribution (the "Distribution") to our shareowners of all of the outstanding
shares of common stock of Conexant Systems, Inc. ("Conexant"), a wholly-owned
subsidiary of Rockwell, which after the Distribution will be a separately-traded
public company owning and operating Rockwell's semiconductor systems business.
The Distribution, which is expected to occur on December 31, 1998, will be at
the rate of one share of Conexant common stock for every two shares of Rockwell
common stock held as of the close of business on December 11, 1998. Rockwell has
received a favorable ruling from the Internal Revenue Service as to the tax-free
status of the Distribution. The enclosed Information Statement explains the
Distribution in detail and provides important financial and other information
regarding Conexant. Holders of Rockwell common stock are not required to take
any action to participate in the Distribution. A shareowner vote is not
required, and, accordingly, your proxy is not being sought.
Conexant, like many of its Silicon Valley-based counterparts, is a business
with a rich heritage of innovation and technology leadership. It also has
excellent people, facilities and resources and a broad and exciting array of
innovative products. The Distribution will separate Rockwell's Automation and
Avionics & Communications businesses from the semiconductor systems business and
will result in your ownership of shares of two separate and distinct
publicly-traded companies: Rockwell, which will focus on its Automation and
Avionics & Communications businesses, and Conexant, which will focus on the
semiconductor systems business. With this separation, investors will also be
able to focus on the specific growth, market and value creation characteristics
of each company.
As announced in September, Conexant is implementing several restructuring
actions to improve competitiveness and to position the business for future
profitability. Conexant will begin operations as a leading supplier of chipsets
and other products for the communications electronics market, with revenues in
its latest fiscal year of $1.2 billion. We are confident about the future of
Conexant as an independent public company.
Our continuing businesses of Automation and Avionics & Communications
achieved earnings per share of $2.33 (before special charges) in fiscal 1998.
Now we are focused on our commitment to deliver $100 million in pre-tax savings
in 1999 from the restructuring we announced in June. This will help us achieve
our fiscal 1999 earnings target of $2.90 to $3.00 per share.
Automation's 1998 financial performance is expected to be among the best in
the industry, as this business continues to be the largest industrial automation
supplier in North America and a global leader, generating strong returns and
cash flow. I am also encouraged that as the full impact of the restructuring
actions takes effect in fiscal 1999 and beyond, Automation's operating margins
should reach industry-leading levels.
The strong performance of the Rockwell Collins businesses in fiscal 1998
should be a precursor to an even stronger 1999. Our Government Systems segment
captured a record one billion dollars in new orders in 1998, while Air Transport
Systems grew 1998 revenues and profits by more than 20 percent, and the Business
and Regional Aircraft Systems segment yielded its sixth consecutive year of
record sales and profit. Passenger Systems, our In-Flight Entertainment
business, generated $460 million in new orders in fiscal 1998.
Our Electronic Commerce business also had an excellent fiscal 1998 relative
to capturing new business, driven by the introduction of new software-based call
center management products, and further penetration of
<PAGE> 5
international markets. Going forward, we anticipate that revenues and profits
for this business will continue to increase at double-digit rates.
The actions we have taken to position Conexant for profitability as an
independent company and to strengthen the continuing Rockwell underscore our
focus on developing and positioning each business to deliver value to our
shareowners. We are confident that these actions will be successful.
Sincerely,
/s/ Don H. Davis, Jr.
Don H. Davis, Jr.
Chairman and Chief Executive Officer
<PAGE> 6
[CONEXANT LOGO]
December [ ], 1998
Dear Future Shareowner:
The following pages contain a great deal of information about Conexant, of
which you will soon become a shareowner. In this letter, I would like to take
the opportunity to briefly summarize the history, strategy and business
performance of the semiconductor systems business ("Semiconductor Systems") as a
part of Rockwell and to outline some of the reasons we feel confident in the
prospects for success of Conexant as an independent organization.
Rockwell has a rich heritage in the communications market and Semiconductor
Systems has been involved in the development of analog modem technology for over
three decades. The first to apply semiconductor integration capabilities to
emerging facsimile markets of the 1970s, Semiconductor Systems achieved a better
than seventy percent market share position that continues to this day. In the
1980s, Semiconductor Systems again was first to introduce modem chipset products
for the nascent Personal Computer communications market. A continuous innovator,
Semiconductor Systems once more built a number one market share position, and
despite fierce competition, has held this top position for seven product
generations from 2400bps (V.22bis) to today's 56,000bps (V.90) modem products.
In the process, Semiconductor Systems profitably grew its modem revenue base
from approximately $200 million in the early 1990s to almost $1.2 billion in
sales and over $300 million in earnings from operations in 1996.
Even as the modem market was demonstrating strong growth, the Semiconductor
Systems management team foresaw the maturation and eventual decline of this
communications segment, and in 1995 launched an aggressive portfolio
diversification program. The strategy of this diversification was to build on
our existing core capabilities, what we call mixed-signal processing, and to
leverage these capabilities to address adjacent communications markets. The
execution focus of this program was both internal, through expanded product
development programs and investment in high performance mixed-signal and radio
frequency manufacturing capabilities, and external, through targeted technology
and market position acquisitions. The investment level driving these initiatives
was substantial; in fact, over the three-year period ending in 1997 total
expenditures for research and development, capital expenditures and acquisitions
exceeded $1.7 billion.
Early 1998 found us mid-course in our diversification strategy when we were
faced with twin challenges. First, the existing slowdown in the worldwide
semiconductor market turned into a recession driven by significant industry
over-capacity, the Asia-Pacific market turmoil and slowing PC sales. Second, and
more critical, the decline in our analog PC modem business was occurring sooner
and proceeding more rapidly than we had earlier anticipated. By 1998, the
significant successes of our expansion platforms were contributing almost $600
million in revenues; however, this was not sufficient to offset the precipitous
decline in analog PC modem margins, and significant operating losses resulted.
In September of this year, we announced and began implementation of a
comprehensive resizing program that is expected to reduce annualized operating
costs by over $200 million from recent levels and position us for future
profitability.
It is this challenging environment -- driving toward completion of a
strategic diversification during a period of semiconductor industry
retrenchment -- in which Conexant will begin to operate as an independent
entity. Despite these hurdles we are optimistic about the future and feel there
are several very solid reasons for our confidence. First, the communications
marketplace is generally considered one of the most outstanding long-term growth
segments in the semiconductor industry, and we will begin life as the largest
company in the
<PAGE> 7
world focused exclusively on providing semiconductor products for communication
applications. Second, when complete, our product portfolios in Wireless
Communications, Network Access, Digital Infotainment, Personal Imaging and
Personal Computing will provide a balanced revenue foundation for renewed
growth, with significant opportunities for technology re-use and the leverage of
intellectual property to achieve economies of scale in these converging markets.
Third, the cumulative investments of our diversification program in technology
research, intellectual property portfolio acquisition, and development of high
performance mixed-signal and radio frequency manufacturing capabilities are a
critical asset that will drive future product success. Fourth, and most
important, Conexant has a talented and motivated employee team with a proven
track record of product innovation, profitable business growth and the
demonstrated ability to compete and win. We look forward to your support as we
address our present challenge and as we seek to capitalize on our many
opportunities.
Sincerely,
/s/ Dwight W. Decker
Dwight W. Decker
Chairman and Chief Executive Officer
<PAGE> 8
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1998 -- FOR INFORMATION ONLY
INFORMATION STATEMENT
CONEXANT SYSTEMS, INC.
------------------------
COMMON STOCK, PAR VALUE $1 PER SHARE
(INCLUDING ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
This Information Statement is being furnished to shareowners of Rockwell
International Corporation ("Rockwell") in connection with the distribution (the
"Distribution") by Rockwell to its shareowners of all of the outstanding shares
of common stock of its wholly-owned subsidiary, Conexant Systems, Inc. (the
"Company"). Following the Distribution, the Company will own and operate
Rockwell's semiconductor systems business ("Semiconductor Systems").
The Distribution is expected to be made on December 31, 1998, to holders of
record of common stock, par value $1 per share, of Rockwell ("Rockwell Common
Stock") as of the close of business on December 11, 1998 (the "Record Date"), on
the basis of one share of common stock, par value $1 per share, of the Company
(the "Common Stock") for every two shares of Rockwell Common Stock. The Common
Stock and the associated preferred share purchase rights of the Company
(described below) are collectively referred to herein as the "Company Common
Stock". No consideration will be paid by shareowners of Rockwell for the shares
of Company Common Stock to be received by them in the Distribution, nor will
they be required to surrender or exchange shares of Rockwell Common Stock or
take any other action in order to receive Company Common Stock.
There is no current trading market for the Company Common Stock, although a
"when-issued" trading market is expected to develop prior to the Distribution
Date (as defined below). Application has been made for approval of trading and
quotation of the Company Common Stock on The Nasdaq Stock Market, Inc. National
Market System ("Nasdaq") under the proposed trading symbol "CNXT".
SHAREOWNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE SECTION
ENTITLED "RISK FACTORS" IN THIS INFORMATION STATEMENT.
NO VOTE OF SHAREOWNERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is , 1998.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 4
SUMMARY OF CERTAIN INFORMATION.............................. 5
RISK FACTORS................................................ 12
Recent and Anticipated Future Losses...................... 12
Declining Contribution of Analog PC Modem Business........ 12
Dependence on Timely Success of Expansion Platforms....... 13
Rapid Technological Change................................ 13
Dependence on New Product Development and Product Cost
Reductions............................................. 13
Future Capital Sources.................................... 14
Research and Development Expenses......................... 14
Capital Expenditures...................................... 14
Fluctuations in Operating Results......................... 14
Credit Facility and Restrictive Covenants................. 15
Intellectual Property Matters............................. 15
Competition............................................... 16
Manufacturing Risks....................................... 16
Order and Shipment Uncertainties.......................... 17
Cyclical Nature of the Semiconductor Industry............. 18
Dependence on Key Personnel............................... 18
Risks of International Sales and Operations............... 18
Investments, Alliances and Acquisitions................... 19
Demands on Management Resources........................... 19
Environmental Matters..................................... 20
Readiness for Year 2000................................... 20
Absence of History as an Independent Company.............. 20
No Prior Market For Company Common Stock; Volatility;
Possibility of Substantial Sales of Company Common
Stock.................................................. 20
Certain Anti-takeover Effects............................. 21
Certain Federal Income Tax Considerations................. 21
THE SEMICONDUCTOR SYSTEMS BUSINESS.......................... 23
Industry Background....................................... 24
Company Approach.......................................... 25
Company Strategy.......................................... 26
The Five Product Platforms................................ 27
Customers; Sales and Marketing............................ 33
Competition............................................... 34
Raw Materials and Supplies................................ 34
Research and Development.................................. 34
Intellectual Property..................................... 35
Employees................................................. 35
Cyclicality; Seasonality.................................. 36
Properties................................................ 36
Environmental Matters..................................... 37
Legal Proceedings......................................... 38
General................................................... 39
CREDIT FACILITY............................................. 40
HISTORICAL SELECTED FINANCIAL DATA.......................... 41
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF THE
COMPANY................................................... 42
Unaudited Pro Forma Condensed Combined Balance Sheet of
the Company............................................ 42
Unaudited Pro Forma Condensed Combined Statement of
Operations of the Company.............................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 44
Overview.................................................. 44
Results of Operations..................................... 46
Income Taxes.............................................. 48
Acquisitions.............................................. 48
Liquidity and Capital Resources........................... 49
Year 2000................................................. 50
Quantitative and Qualitative Disclosures About Market
Risk................................................... 51
Cautionary Statement...................................... 51
THE DISTRIBUTION............................................ 53
Introduction.............................................. 53
Background and Reasons for the Distribution............... 53
Manner of Effecting the Distribution...................... 53
Trading Market............................................ 54
Dividend Policy........................................... 55
Certain Federal Income Tax Consequences of the
Distribution........................................... 55
Conditions; Termination................................... 56
ARRANGEMENTS BETWEEN ROCKWELL AND THE COMPANY............... 57
Distribution Agreement.................................... 57
Employee Matters Agreement................................ 59
Tax Allocation Agreement.................................. 60
Transition Agreement...................................... 61
MANAGEMENT OF THE COMPANY................................... 62
Directors of the Company.................................. 62
Committees of the Board of Directors...................... 63
Compensation of Directors................................. 64
Executive Officers of the Company......................... 65
Historical Compensation of Executive Officers............. 67
Option Grants............................................. 69
Aggregated Option Exercises and Fiscal Year-End Values.... 70
Long-Term Incentive Plan Awards........................... 70
Retirement Benefits....................................... 70
Benefit Plans Following the Distribution.................. 71
Ownership of Company Common Stock......................... 78
DESCRIPTION OF COMPANY CAPITAL STOCK........................ 79
Company Common Stock...................................... 79
Company Preferred Stock................................... 79
Certain Provisions in the Company Certificate and Company
By-Laws................................................ 82
Company Rights Plan....................................... 86
Anti-takeover Legislation................................. 88
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS..... 89
GLOSSARY OF TECHNICAL TERMS................................. 90
INDEX TO SEMICONDUCTOR SYSTEMS COMBINED FINANCIAL STATEMENTS
AND SCHEDULE.............................................. F-1
</TABLE>
3
<PAGE> 11
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form 10 (the "Registration Statement")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the Company Common Stock. This Information Statement does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. The Registration Statement and any amendments thereto, including
exhibits filed as a part thereof, are available for reading and copying as set
forth below.
Upon effectiveness of the Registration Statement, the Company will be
subject to the Exchange Act and will file reports, proxy and information
statements and other information relating to itself with the Commission. The
public may read and copy such reports, proxy and information statements and
other information filed by the Company, including the Registration Statement and
exhibits thereto, at the Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission also maintains an Internet site that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the Commission (http://www.sec.gov).
The Company's Internet site is http://www.conexant.com.
If the Company Common Stock is traded and quoted on Nasdaq, reports, proxy
statements and other information concerning the Company can be inspected at the
offices of Nasdaq, 1735 K Street, N.W., Washington, D.C. 20006-1500.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS INFORMATION STATEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR ANY DISTRIBUTION OF
SHARES OF COMPANY COMMON STOCK MADE AS DESCRIBED HEREIN SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE> 12
SUMMARY OF CERTAIN INFORMATION
The following summary is not intended to be complete and is qualified by
reference to the more detailed information set forth elsewhere in this
Information Statement, which should be reviewed carefully in its entirety.
Unless the context otherwise indicates, as used in this Information Statement,
the term the "Company" means Semiconductor Systems for periods prior to the
Distribution and Conexant Systems, Inc. and its subsidiaries for periods
following the Distribution. For the convenience of the reader, a glossary of
technical terms used herein appears on page 90.
THE DISTRIBUTION
Distributing Company.......... Rockwell International Corporation, a Delaware
corporation.
Shares to be Distributed...... Approximately 95 million shares of Company
Common Stock, based on the number of shares of
Rockwell Common Stock outstanding as of October
31, 1998. No consideration will be paid by
shareowners of Rockwell for the shares of
Company Common Stock to be received by them in
the Distribution, nor will they be required to
surrender or exchange shares of Rockwell Common
Stock or take any other action in order to
receive Company Common Stock. See "The
Distribution -- Manner of Effecting the
Distribution".
Distribution Ratio............ One share of Company Common Stock for every two
shares of Rockwell Common Stock. See "The
Distribution -- Manner of Effecting the
Distribution".
Direct (Book-Entry)
Registration; Share
Certificates................ Company shareowners initially will have their
ownership of Company Common Stock registered
only in book-entry form. Book-entry
registration refers to a method of recording
stock ownership in the Company's records in
which no share certificates are issued. On the
Distribution Date, each holder of Rockwell
Common Stock as of the close of business on the
Record Date will be credited through book-entry
in the records of the Company with the number
of whole shares of Company Common Stock
received by the shareowner. Each such Rockwell
shareowner will receive an account statement
indicating the number of shares of Company
Common Stock that the shareowner owns.
Following the Distribution Date, any Company
shareowner whose ownership of Company Common
Stock is registered in book-entry form may
obtain at any time without charge a certificate
to represent the number of whole shares by
contacting the Transfer Agent (as defined
below). See "The Distribution -- Manner of
Effecting the Distribution".
Fractional Share Interests.... The distribution ratio for the number of shares
of Company Common Stock to be issued for each
share of Rockwell Common Stock outstanding on
the Record Date will be such that the
Distribution will give rise to fractional
shares of Company Common Stock. Fractional
shares of Company Common Stock will not be
distributed. Fractional shares will be
aggregated and sold in the public market by the
Distribution Agent (as defined below) and the
aggregate net proceeds will be distributed
ratably to
5
<PAGE> 13
those shareowners entitled to fractional
interests. The Distribution Agent is
independent from the Company. See "The
Distribution -- Manner of Effecting the
Distribution". Although the Distribution is
intended to be tax-free, shareowners will
recognize gain or loss for tax purposes in an
amount equal to the difference between the cash
received in respect of any fractional share and
the amount of such shareowner's tax basis
allocable to such fractional share. See "The
Distribution -- Certain Federal Income Tax
Consequences of the Distribution".
Record Date................... The Record Date is the close of business on
December 11, 1998.
Distribution Date............. The Distribution is expected to occur at the
close of business on December 31, 1998 (the
"Distribution Date"). On or about the
Distribution Date, the Distribution Agent will
commence mailing account statements reflecting
ownership of shares of Company Common Stock to
holders of Rockwell Common Stock as of the
close of business on the Record Date.
Distribution Agent............ ChaseMellon Shareholder Services, L.L.C.
("ChaseMellon") will serve as the distribution
agent (the "Distribution Agent") for the
Distribution. ChaseMellon will also serve as
transfer agent and registrar (the "Transfer
Agent") for the Company Common Stock.
ChaseMellon's address is P.O. Box 3315, South
Hackensack, New Jersey 07606-1915, and its
telephone number is (800) 204-7800.
Federal Income Tax
Consequences.................. Rockwell has received a ruling (the "Tax
Ruling") from the Internal Revenue Service (the
"IRS") to the effect that the Distribution will
qualify as a tax-free reorganization within the
meaning of Section 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the "Code").
See "The Distribution -- Certain Federal Income
Tax Consequences of the Distribution".
Trading Market and Symbol..... There is no current trading market for the
Company Common Stock, although a "when-issued"
trading market is expected to develop prior to
the Distribution Date. Application has been
made for approval of trading and quotation of
the Company Common Stock on Nasdaq under the
proposed trading symbol "CNXT". See "The
Distribution -- Trading Market".
Conditions to the
Distribution.................. The Distribution is subject to the satisfaction
or waiver of certain conditions, including: (i)
the Registration Statement becoming effective
under the Exchange Act; (ii) the Company Common
Stock being approved for trading and quotation
on Nasdaq; and (iii) a "no-action" letter from
the staff of the Commission being issued and in
full force and effect regarding the sale of
certain shares of Company Common Stock to be
received by the Rockwell Savings Plan (as
defined below) in the Distribution. Regardless
of whether the conditions are satisfied, the
Distribution Agreement may be terminated and
the Distribution abandoned by Rockwell's Board
of Directors, in its sole discretion, without
the approval of
6
<PAGE> 14
Rockwell shareowners, at any time prior to the
Distribution. See "The
Distribution -- Conditions; Termination".
Arrangements Between Rockwell
and the Company............... For the purpose of governing certain of the
relationships between Rockwell and the Company
relating to the Distribution, to provide for an
orderly transition and for other matters,
Rockwell and the Company will, prior to the
Distribution, enter into certain agreements,
including (i) the Distribution Agreement
providing for, among other things, the
principal corporate transactions required to
effect the separation of Semiconductor Systems
from the Automation Business and the Avionics &
Communications Business (each as defined below)
and the Distribution, and certain other
agreements governing the relationship between
Rockwell and the Company with respect to or in
consequence of the Distribution; (ii) the
Employee Matters Agreement (as defined below)
providing for, among other things, certain
matters relating to employees, employee benefit
plans and certain compensation arrangements for
current and former employees of Semiconductor
Systems and their beneficiaries; (iii) the Tax
Allocation Agreement (as defined below)
providing for, among other things, the
allocation between Rockwell and the Company of
federal, state, local and foreign tax
liabilities relating to Semiconductor Systems;
and (iv) the Transition Agreement (as defined
below) providing for, among other things, the
provision by Rockwell to the Company, for
specified periods after the Distribution Date
and on mutually agreed terms, of certain
services which prior to the Distribution Date
have been provided to the Company by Rockwell.
See "Arrangements Between Rockwell and the
Company".
Trading in Rockwell Common
Stock Prior to the
Distribution................ It is expected that the New York Stock Exchange
(the "NYSE") will determine that Rockwell
Common Stock traded on or after December 9,
1998, the second trading day prior to the
Record Date, may be traded either "ex
distribution, when issued" or "regular way
(with due bills attached)". Rockwell Common
Stock traded "ex distribution, when issued"
will entitle the buyer to receive only the
underlying shares of Rockwell Common Stock and
will entitle a seller who was the holder of
record of those shares on the Record Date to
receive shares of Company Common Stock in the
Distribution. Rockwell Common Stock traded
"regular way (with due bills attached)" will
entitle the buyer to receive and will require
the seller to deliver the shares of Company
Common Stock to be issued in the Distribution
as well as the underlying shares of Rockwell
Common Stock. Beginning on the first NYSE
trading day after the Distribution Date, it is
expected that trading of Rockwell Common Stock
"ex distribution, when issued" or "regular way
(with due bills attached)" will no longer be
permitted and Rockwell Common Stock will trade
"regular way" only, entitling the buyer to
receive only Rockwell Common Stock.
7
<PAGE> 15
THE COMPANY
The Company................... The Company, a Delaware corporation formerly
named Rockwell Semiconductor Systems, Inc., is
currently a wholly-owned subsidiary of Rockwell
which, together with certain other subsidiaries
of Rockwell, operates Semiconductor Systems.
Following consummation of the Distribution, the
Company will be a separately-traded public
company owning and operating Semiconductor
Systems. Prior to the Distribution, Rockwell
will transfer to the Company assets and
liabilities of Semiconductor Systems not
already owned by the Company, including the
stock of certain subsidiaries, and the Company
will transfer to Rockwell all assets and
liabilities not constituting part of
Semiconductor Systems, including all assets and
liabilities of Rockwell's electronic commerce
business.
The Semiconductor Systems
Business...................... Following the Distribution, Semiconductor
Systems will be the world's largest company
focused exclusively on providing semiconductor
products for communications electronics. With
over 30 years of experience in developing
analog modem technology, Semiconductor Systems
utilizes its expertise in mixed-signal
processing and communications technology to
deliver semiconductor products for a broad
range of communications applications. In
addition to its semiconductor integrated
circuit products, the Company's system-level
solutions integrate signal processing
algorithms, communication protocols and
applications software.
Semiconductor Systems' products facilitate
communications worldwide through wireline voice
and data communications networks, cordless and
cellular wireless telephony systems and
emerging cable and wireless broadband
communications networks. Semiconductor Systems
focuses its business in five key product
platforms: Personal Computing, Personal
Imaging, Wireless Communications, Digital
Infotainment and Network Access. Through these
strategic product platforms, Semiconductor
Systems believes it is well positioned to
supply semiconductor products for a broad range
of closely interrelated and converging markets.
See "The Semiconductor Systems Business" and
"Semiconductor Systems Combined Financial
Statements and Schedule".
Management.................... Most of the initial executive officers of the
Company are expected to be persons who
currently serve as officers or other employees
of Semiconductor Systems or Rockwell. All such
persons who are employees of Rockwell will
resign from their positions with Rockwell prior
to the Distribution, so that the Company and
Rockwell will have no executive officers in
common and none of the executive officers of
the Company will be employees of Rockwell. It
is expected that Donald R. Beall, former
Chairman and Chief Executive Officer of
Rockwell and currently Chairman of the
Executive Committee of the Board of Directors
of Rockwell, will serve as a non-executive
director of the Company. It is also expected
that Richard M. Bressler, who is currently a
director of Rockwell, will serve as a
non-employee director of the Company.
8
<PAGE> 16
Mr. Bressler will resign as a Rockwell director
at the time of the Distribution. See
"Management of the Company".
Credit Facility............... Prior to the Distribution, the Company expects
to enter into a three-year $350 million secured
revolving credit facility with a group of banks
led by Credit Suisse First Boston (the "Credit
Facility"), which will be used for working
capital and other general corporate purposes of
the Company and its subsidiaries following the
Distribution. See "Credit Facility".
Certain Anti-takeover
Effects....................... Certain provisions of the Company's Restated
Certificate of Incorporation (the "Company
Certificate") and the Company's Amended By-Laws
(the "Company By-Laws"), as each will be in
effect as of the Distribution Date, would have
the effect of making more difficult an
acquisition of control of the Company in a
transaction not approved by the Company's Board
of Directors. See "Description of Company
Capital Stock -- Certain Provisions in the
Company Certificate and Company By-Laws". The
Rights Agreement to be entered into between the
Company and ChaseMellon, as rights agent, also
would make more difficult an acquisition of
control of the Company in a transaction not
approved by the Board of Directors of the
Company. See "Description of Company Capital
Stock -- Company Rights Plan". Certain tax
consequences may also discourage an acquisition
of control of the Company for some period of
time. See "Risk Factors -- Certain Federal
Income Tax Considerations".
Post-Distribution Dividend
Policy........................ It is anticipated that following the
Distribution, the Company initially will not
pay dividends and Rockwell initially will
continue to pay quarterly cash dividends at the
same annual rate of $1.02 per share as
currently paid on Rockwell Common Stock.
However, the declaration and payment of
dividends by the Company and Rockwell will be
at the sole discretion of their respective
Boards of Directors. See "The
Distribution -- Dividend Policy".
Risk Factors.................. Shareowners should carefully consider the
matters discussed under the section entitled
"Risk Factors" in this Information Statement.
RECENT SEPARATION DECISIONS
In connection with the separation of Semiconductor Systems from Rockwell,
Rockwell and the Company decided in November 1998 that prior to the
Distribution, the Company will distribute its wafer fabrication facilities in
Colorado Springs, Colorado (and the related tax benefit) to Rockwell. See
"Arrangements Between Rockwell and the Company -- Distribution Agreement". The
Company had previously announced in September 1998 that it would close and
dispose of these facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview". Also in November
1998, Rockwell and the Company decided that prior to the Distribution, Rockwell
will contribute $65 million in cash to the Company, which will be placed in an
escrow account to be used to satisfy Semiconductor Systems' obligation with
respect to the judgment rendered against Semiconductor Systems in the
intellectual property litigation brought by Celeritas Technologies, Ltd. See
"The Semiconductor Systems Business -- Legal Proceedings" and "Arrangements
Between Rockwell and the Company -- Distribution Agreement". These transactions
are not reflected in the historical combined financial statements of the Company
but are set forth as adjustments in the pro forma condensed financial statements
of the Company included herein. See "Unaudited Pro Forma Condensed Financial
Statements of the Company".
9
<PAGE> 17
SUMMARY FINANCIAL DATA
The following summary financial data have been derived from the financial
statements of Semiconductor Systems. The data should be read in conjunction with
the financial statements of Semiconductor Systems and notes thereto included
elsewhere in this Information Statement. The statement of operations data for
the years ended September 30, 1998, 1997, 1996 and 1995 and the balance sheet
data as of September 30, 1998, 1997 and 1996 have been derived from the audited
financial statements of Semiconductor Systems. The statement of operations data
for the year ended September 30, 1994 and the balance sheet data as of September
30, 1995 and 1994 have been derived from unaudited financial information of
Semiconductor Systems.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................ $1,200 $1,412 $1,470 $ 784 $ 599
Cost of sales............................................ 909 744 849 483 347
------ ------ ------ ------ ------
Gross margin............................................. 291 668 621 301 252
Research and development................................. 337 280 155 91 74
Selling, general and administrative...................... 251 191 150 103 79
Purchased research and development(1).................... -- 30 121 -- --
Special charges(2)....................................... 147 -- -- -- --
------ ------ ------ ------ ------
Operating (loss) earnings ............................... (444) 167 195 107 99
Other income, net........................................ 14 13 3 4 1
------ ------ ------ ------ ------
(Loss) income before income taxes........................ (430) 180 198 111 100
(Benefit) provision for income taxes..................... (168) 54 114 35 33
------ ------ ------ ------ ------
Net (loss) income........................................ $ (262) $ 126 $ 84 $ 76 $ 67
====== ====== ====== ====== ======
COMBINED BALANCE SHEET DATA:
(at end of period)
Working capital.......................................... $ 256 $ 222 $ 229 $ 130 $ 95
Property, net............................................ 713 802 656 351 215
Total assets............................................. 1,418 1,486 1,383 671 448
Rockwell's net investment................................ 1,009 1,107 899 478 301
OTHER DATA:
Capital expenditures..................................... $ 270 $ 317 $ 380 $ 166 $ 148
Depreciation and amortization............................ 220 181 132 61 44
Cash provided by operating activities.................... 98 296 315 106 49
Cash used for investing activities....................... (270) (382) (634) (202) (147)
Cash provided by financing activities.................... 172 86 319 96 98
</TABLE>
- ---------------
(1) Purchased research and development relates to the acquisitions of the
Hi-Media broadband communication chipset business of ComStream Corporation
in May 1997 and Brooktree Corporation in September 1996.
(2) In September 1998, Semiconductor Systems recorded special charges of
approximately $147 million ($90 million after tax) related to its decision
to close and dispose of its wafer fabrication facilities in Colorado
Springs, Colorado, a worldwide workforce reduction and certain other
actions.
10
<PAGE> 18
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma cash, short-term
debt and capitalization of the Company as of September 30, 1998. This
information should be read in conjunction with the pro forma financial
information and the financial statements of Semiconductor Systems and notes
thereto appearing elsewhere herein. The pro forma information may not reflect
the cash, short-term debt and capitalization of the Company in the future or as
it would have been had the Company been a stand-alone company on September 30,
1998. Assumptions regarding the number of shares of Company Common Stock may not
reflect the actual number outstanding on the Distribution Date.
PRO FORMA CAPITALIZATION TABLE
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEMICONDUCTOR
SYSTEMS PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS(1) PRO FORMA
------------- -------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Cash................................................. $ 14 $ 65(2) $ 79
====== ======= ======
Short-term debt(3)................................... $ 14 $ -- $ 14
====== ======= ======
Shareowners' equity:
Rockwell's net investment.......................... $1,017 $(1,017)(4) $ --
Common Stock....................................... -- 95(4) 95
Additional paid-in capital......................... -- 922(4) 886
(78)(5)
42(2)
Retained earnings.................................. -- -- --
Currency translation............................... (8) -- (8)
------ ------- ------
Total shareowners' equity and
capitalization........................... $1,009 $ (36) $ 973
====== ======= ======
</TABLE>
- ---------------
(1) Rockwell will pay the costs related to the Distribution which are estimated
at $18 million and, accordingly, such costs are not reflected in the
historical financial statements or as a pro forma adjustment.
(2) Prior to the Distribution, Rockwell will contribute $65 million in cash to
the Company, which will be placed in an escrow account to be used to satisfy
Semiconductor Systems' obligation with respect to the Celeritas litigation.
The adjustment reflects the cash deposit and the realization by Rockwell of
the related tax benefit.
(3) The Company is in the process of arranging a three-year $350 million secured
revolving credit facility with a group of banks. The credit facility will be
used to support working capital requirements and for other general corporate
purposes when the Company becomes an independent company.
(4) To reflect the Distribution as the elimination of Rockwell's net investment
and the issuance of an estimated 95 million shares of Company Common Stock,
par value $1 per share. This is based on the number of shares of Rockwell
Common Stock outstanding on September 30, 1998 of approximately 190 million
shares and the distribution ratio of one share of Company Common Stock for
every two shares of Rockwell Common Stock outstanding.
(5) Prior to the Distribution, the Company will distribute its wafer fabrication
facilities in Colorado Springs, Colorado (and the related tax benefit) to
Rockwell. The adjustment reflects the elimination of the assets held for
disposal and the related tax benefit.
11
<PAGE> 19
RISK FACTORS
Shareowners should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors listed
below. Any one or more of such risk factors could materially and adversely
affect the Company's business, financial condition and results of operations,
which in turn could materially and adversely affect the price of the Company
Common Stock. In addition to the historical information included herein, this
Information Statement contains statements relating to future results of the
Company (including certain projections and business trends) that are
"forward-looking statements". Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to the factors listed below and those detailed from time to time in the
filings of the Company with the Commission. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statement".
RECENT AND ANTICIPATED FUTURE LOSSES
Although Semiconductor Systems experienced rapid growth in sales and
operating earnings during the five fiscal years ended September 30, 1996, in
fiscal 1997 sales declined $58 million, or four percent, to $1,412 million and
operating earnings declined $119 million, or 38 percent, to $197 million, before
acquisition related charges in both years. Moreover, for the fiscal year ended
September 30, 1998 Semiconductor Systems had sales of $1,200 million and
incurred an operating loss of $444 million. In September 1998, the Company
announced a comprehensive plan to restructure its business to position the
Company for future profitability. This plan resulted in fourth quarter fiscal
1998 special charges of approximately $90 million after tax and includes
workforce reductions, facility closures and other actions. Semiconductor
Systems' fiscal 1998 full-year net loss after tax was $262 million, including
inventory write-offs of $66 million, a charge for intellectual property matters
of $43 million and the fourth quarter special charges. The Company anticipates a
pre-tax loss of approximately $80 million in the first quarter of fiscal 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations". There can be no assurance as to whether or when the Company will
return to profitability or whether it will be able to sustain such
profitability, if achieved.
DECLINING CONTRIBUTION OF ANALOG PC MODEM BUSINESS
The Company is the world's leading supplier of analog PC modem chipsets for
personal computing applications. However, revenues and gross margin from sales
of these products, which make up most of the Company's Personal Computing
platform, have recently declined, most particularly in fiscal 1998, due to,
among other factors, intense competitive price pressures as modem chipset
suppliers aggressively compete for market share. Other material factors
contributing to the decline in gross margin from sales of analog PC modem
products include slower than planned implementation of cost reduction programs,
including the transition from .35 micron to .25 micron process technologies
(which would enable the Company to produce lower-cost products), and excess
capacity in the Company's wafer fabrication facilities. Revenues of the
Company's Personal Computing platform declined from $1,173 million
(approximately 80 percent of sales) in fiscal 1996 to $640 million
(approximately 53 percent of sales) in fiscal 1998. Revenues and margins from
sales of analog PC modem products are expected to decline even further as unit
growth in the markets for these products is not anticipated to offset continued
price erosion. In the past year, as a result of the significant price erosion
for PCs, driven to a significant extent by the market demand for sub-$1,000 PCs,
PC original equipment manufacturers ("OEMs") are demanding less expensive modem
devices, which has placed significant pricing pressure on the Company's
traditional hardware-based modem chipset products. The Company's inability to
offset further declines in the analog PC modem business with revenues and gross
margin from sales of other products would have a material adverse effect on the
Company's business, financial condition and results of operations.
12
<PAGE> 20
DEPENDENCE ON TIMELY SUCCESS OF EXPANSION PLATFORMS
In 1995, Semiconductor Systems began to diversify its business and expand
in selected related product platforms -- Personal Imaging, Wireless
Communications, Digital Infotainment and Network Access -- with higher growth
prospects than its analog PC modem business. The Company's future financial
performance and overall success, particularly in the long term, will depend in
large measure on the rate of sales growth and margin contribution of the
Company's expansion platforms and whether these platforms will increase their
contribution to the Company's financial performance sufficiently and soon enough
to offset the anticipated continued declining financial contribution of the
Company's analog PC modem chipset products.
There are numerous risks inherent in the Company's diversification and
expansion strategy, many of which are beyond the Company's control. In certain
of its expansion platforms, the Company currently has minimal market presence
relative to other more established competitors. Moreover, the Company's success
with its expansion platforms will depend, in part, on the ability of the
Company's customers to develop new and enhanced products and successfully
introduce and market such products to end users. There can be no assurance that
the Company will be successful in its diversification and expansion program, and
its failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are generally characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements, frequent new product introductions and enhancements and short
product life cycles with declining prices over the life cycle of the product. A
faster than anticipated change in one or more of the technologies related to its
products or in market demand for products based on a particular technology, in
particular due to the introduction of new technology which represents a
substantial advance over current technology, could result in faster than
anticipated obsolescence of the Company's products and could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, increased market demand for sub-$1,000 PCs is causing
PC OEMs to require less expensive modem devices, such as software modems, which
require fewer semiconductor components than the Company's traditional modem
chipsets and may render obsolete the traditional hardware upgrade path for the
Company's modem products. Currently accepted industry standards are also subject
to change, which may contribute to the obsolescence of the Company's products.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND PRODUCT COST REDUCTIONS
The Company's operating results will depend to a significant extent on its
ability to continue to introduce new and enhanced semiconductor products on a
timely basis. Successful product development and introduction depends on
numerous factors, including, among others, the Company's ability to anticipate
customer and market requirements and changes in technology and industry
standards, accurate new product definition, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Furthermore, the Company is required to continually evaluate planned
product development expenditures and choose among alternative technologies based
upon its expectations of future market growth. There can be no assurance that
the Company will be able to develop and introduce new or enhanced products in a
timely and cost-effective manner or that such products will satisfy customer
requirements, achieve market acceptance or anticipate new industry standards and
technological changes or that the Company will be able to respond to new product
announcements and introductions by competitors.
In addition, as prices of established products decline, sometimes
significantly, over time, the Company believes that in order to remain
competitive it must continue to reduce the cost of producing and delivering
existing products at the same time as it is developing and introducing new or
enhanced products. There can be no assurance that the Company will be able to
continue to reduce the cost of its products to remain competitive.
13
<PAGE> 21
FUTURE CAPITAL SOURCES
Over the past several years, Semiconductor Systems has obtained significant
investments from Rockwell to help satisfy its capital needs. Following the
Distribution, the Company will no longer be able to rely on investments from
Rockwell. Prior to the Distribution, the Company expects to enter into the
Credit Facility, which will be used for working capital and other general
corporate purposes of the Company and its subsidiaries following the
Distribution. Although the Company believes that anticipated improved cash flows
from operations resulting in part from the restructuring actions announced in
September 1998 (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview") and available borrowings under the
Credit Facility will be sufficient to satisfy its future research and
development, capital expenditure, working capital and other financing
requirements, there can be no assurance that this will be the case or that
alternative sources of liquidity will be available to the Company.
RESEARCH AND DEVELOPMENT EXPENSES
The semiconductor industry requires substantial investment in research and
development. In order to remain competitive, the Company must continue to make
substantial investments in research and development to develop new and enhanced
products. There can be no assurance that the Company will have sufficient
resources to develop new and enhanced technologies and competitive products. As
part of its plan to resize its business announced in September 1998, the Company
intends to reduce research and development expenditures in fiscal 1999 by
approximately 25 percent from fiscal 1998 levels. The Company's failure to make
sufficient investments in research and development programs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
CAPITAL EXPENDITURES
The semiconductor industry is capital intensive. Semiconductor
manufacturing requires a constant upgrading of process technology to remain
competitive, as new and enhanced semiconductor processes are developed which
permit smaller, more efficient and more powerful semiconductor devices. The
Company maintains its own manufacturing, assembly and test facilities which have
required and will continue to require significant investments in manufacturing
technology and equipment. After several years of significant capital investments
to improve manufacturing capabilities, the Company expects fiscal 1999 capital
expenditures to be approximately $110 million less than in fiscal 1998. There
can be no assurance that the Company will have sufficient capital resources to
make necessary investments in manufacturing technology and equipment.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results are subject to substantial quarterly and
annual fluctuations due to a number of factors, many of which are beyond the
Company's control. Such factors may include, among others, the effects of
competitive pricing pressures, decreases in average selling prices of the
Company's products, production capacity levels and fluctuations in manufacturing
yields, availability and cost of products from the Company's suppliers, the gain
or loss of significant customers, the Company's ability to develop, introduce
and market new products and technologies on a timely basis, new product and
technology introductions by the Company's competitors, changes in the mix of
products produced and sold, market acceptance of the Company's and its
customers' products, intellectual property disputes, seasonal customer demand,
the timing of significant orders and the timing and extent of product
development costs. Operating results also could be adversely affected by general
economic and other conditions causing a downturn in the market for semiconductor
products, or otherwise affecting the timing of customer orders or causing order
cancellations or rescheduling. The Company's customers may change delivery
schedules or cancel or reduce orders without significant penalty and generally
are not subject to minimum purchase requirements. The foregoing factors are
difficult to forecast, and these or other factors could materially adversely
affect the Company's quarterly or annual operating results. If the Company's
operating results fail to meet the expectations of analysts or investors, the
price of the Company Common Stock could be materially and adversely affected.
14
<PAGE> 22
CREDIT FACILITY AND RESTRICTIVE COVENANTS
The Company anticipates that it will enter into a three-year $350 million
secured revolving credit facility prior to the Distribution (see "Credit
Facility"). The Credit Facility is expected to include, among other things,
restrictions on capital expenditures, indebtedness, acquisitions, mergers, asset
sales and liens on assets and requirements that the Company meet certain
financial tests and maintain certain financial ratios. Although the Company
believes that it will be able to comply with these requirements, such compliance
may restrict the Company's operating and financial flexibility, and there can be
no assurance that the Company will in fact be able to satisfy all of the
requirements in the Credit Facility. The fact that substantially all of the
Company's and its subsidiaries' assets will be pledged as collateral under the
Credit Facility could also significantly limit the operating and financial
flexibility of the Company. The failure to maintain the financial ratios or
comply with the other covenants to be included in the Credit Facility could
result in a default that would entitle the lenders thereunder to declare all
amounts owed to them due and payable and to proceed against their collateral,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY MATTERS
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. Litigation has been necessary in the
past and is expected to be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of proprietary rights of others, including the
Company's customers. The Company has received, and may continue to receive in
the future, claims of infringement of intellectual property rights of others.
The Company is a party to certain pending proceedings involving such claims.
There can be no assurance that the Company will prevail in pending actions, or
that other actions alleging infringement by the Company of third-party patents
or invalidity of the patents held by the Company will not be asserted or
prosecuted against the Company, or that any assertions of infringement or
prosecutions seeking to establish the invalidity of Company-held patents will
not materially and adversely affect the Company's business, financial condition
and results of operations. Even if the Company is successful in such matters,
the attempted enforcement of intellectual property rights by or against the
Company could result in significant costs and diversion of the Company's
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. If claims or actions are asserted
or commenced against the Company, the Company in certain situations may seek to
obtain licenses under a third party's intellectual property rights to avert or
resolve a controversy. There can be no assurance that under such circumstances a
license would be available on commercially reasonable terms, if at all. See "The
Semiconductor Systems Business -- Intellectual Property" and "-- Legal
Proceedings".
The Company relies primarily on patent, copyright, trademark and trade
secret laws, as well as nondisclosure and confidentiality agreements and other
methods to protect its proprietary technologies and processes. In addition, the
Company often incorporates the intellectual property of its customers into its
designs, and the Company has certain obligations with respect to the non-use and
non-disclosure of such intellectual property. There can be no assurance that the
steps taken by the Company to prevent misappropriation or infringement of the
intellectual property of the Company or its customers will be successful; that
any existing or future patents will not be challenged, invalidated or
circumvented; or that any of the protective measures described above would
provide meaningful protection to the Company. The failure of any patents to
provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. Moreover, despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology without authorization, develop similar
technology independently or design around the Company's patents. In addition,
effective copyright, trademark and trade secret protection may be unavailable or
limited in certain countries.
The Company has historically indemnified its customers for certain of the
costs and damages of patent infringement in circumstances where the Company's
product is the factor creating the customer's infringement exposure (generally
excluding coverage where infringement arises out of the combination of the
15
<PAGE> 23
Company's products with products of others). This policy could have a material
adverse effect on the business, financial condition and results of operations of
the Company, particularly with respect to the Company's products designed for
use in devices manufactured by its customers that comply with international
standards. Such international standards are often covered by patent rights held
by competitors of the Company or its customers and the combined costs of
obtaining licenses from all holders of patent rights essential to such standards
could be high and could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The semiconductor industry in general and the markets in which the Company
competes in particular are intensely competitive. The Company currently faces
significant competition in its markets and expects that intense price and
product competition will continue. Such competition has resulted and is expected
to continue to result in declining average selling prices for the Company's
products. As a result of the trend toward global expansion by foreign and
domestic competitors, technological and public policy changes and relatively low
barriers to entry in certain segments of the industry, the Company anticipates
that additional competitors will enter its markets. Although the Company enjoys
substantial market shares in its analog data and facsimile ("fax") modem chipset
product lines, as the Company pursues its diversification strategy and develops
its expansion platforms it is and will be competing in certain new markets in
which it has little or no market share and where existing competitors have
dominant market positions. Moreover, certain of the Company's customers offer
products that compete with similar products offered by the Company.
Many of the Company's current and potential competitors have longer
operating histories and presence in key markets, greater name recognition,
access to larger customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than the
Company. As a result, such competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Current and potential competitors also have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties, which may affect
customers' purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully against current or potential competitors, or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "The Semiconductor Systems
Business -- Competition".
The high-growth nature of the communications electronics industry, coupled
with the "time-to-market" pressures on suppliers to decrease the time required
for product conception, research and development, sampling and production launch
before product reaches the market, has led to consolidation among participants
in the markets that the Company serves, including both competitors and customers
of the Company, and this trend is expected to continue. Investments, alliances
and acquisitions may enable semiconductor suppliers, including the Company and
its competitors, to augment technical capabilities or achieve faster
time-to-market for their products than internal development. Certain
participants in the markets served by the Company have been actively engaged in
merger and acquisition transactions. Consolidations by industry participants,
including, in some cases, acquisition of certain of the Company's customers by
competitors of the Company, are creating entities with increased market share,
customer base, technology and marketing expertise in markets in which the
Company competes. These developments may significantly and adversely affect the
Company's current markets, the markets the Company is seeking to serve and the
Company's ability to compete successfully in such markets.
MANUFACTURING RISKS
The fabrication of integrated circuits is an extremely complex and precise
process consisting of hundreds of separate steps and requiring production in a
highly controlled, clean environment. Minute impurities, errors
16
<PAGE> 24
in any step of the fabrication process, defects in the masks used to print
circuits on a wafer or a number of other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer to be
non-functional.
The Company maintains its own manufacturing, assembly and test facilities,
including three operating wafer fabrication facilities, a test and assembly
facility and a module assembly facility. The Company also has arrangements with
third parties, including entities outside the United States, for the production,
assembly and testing of certain of its semiconductor products. The Company's
assembly and test facility in Mexicali, Mexico and its international subcontract
manufacturing arrangements are subject to a number of risks of operating abroad.
The semiconductor industry is currently experiencing an excess of wafer
fabrication capacity. In this environment, the Company is at a relative
disadvantage when compared to some of its competitors who rely primarily on
outside foundries because the Company's wafer fabrication facilities require
substantial fixed costs and investment. In September 1998, the Company announced
that it would close and dispose of its Colorado Springs, Colorado wafer
fabrication facilities, which will be distributed to Rockwell prior to the
Distribution. See "Arrangements Between Rockwell and the Company -- Distribution
Agreement". The Company is also exploring wafer manufacturing alternatives,
including increased use of outside foundries, entering into joint ventures with
respect to wafer manufacturing or other actions in respect of its wafer
manufacturing facilities. There can be no assurance that the Company will
succeed in implementing any such alternatives.
Lengthy or recurring disruptions of operations at any of the Company's
production facilities or those of its subcontractors for any reason, including
labor strikes, work stoppages, fire, earthquake, flooding or other natural
disasters, could cause significant delays in shipments until the Company could
shift the products from an affected facility or subcontractor to another
facility or subcontractor. In such event, there can be no assurance that
required alternate capacity, particularly wafer production capacity, would be
available on a timely basis or at all, or that if available, it could be
obtained on favorable terms, thereby potentially resulting in a loss of
customers. Any inability of the Company to generate sufficient manufacturing
capacities to meet demand, either at its own facilities or through foundry or
similar arrangements with others, could have a material adverse effect on the
Company's business, financial condition and results of operations. Certain of
the Company's manufacturing facilities are located near major earthquake fault
lines, including the Company's Newport Beach, California and Mexicali, Mexico
facilities. The Company maintains only minimal earthquake insurance coverage
with respect to these facilities. See "The Semiconductor Systems
Business -- Properties".
Due to the highly specialized nature of the Gallium Arsenide ("GaAs")
semiconductor manufacturing process, in the event of a disruption at the
Company's Newbury Park, California wafer fabrication facility, alternate GaAs
production capacity would not be readily available from third party sources. In
addition, the Company is dependent on a single source supplier for epitaxial
wafers used in its GaAs manufacturing processes. The number of qualified
alternative suppliers for such wafers is limited and the process of qualifying a
new epitaxial wafer supplier could require a substantial leadtime. See "The
Semiconductor Systems Business -- Raw Materials and Supplies". Any disruption of
operations at the Company's Newbury Park, California wafer fabrication facility
or the interruption in the supply of epitaxial wafers used in its GaAs process
could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly with respect to the Company's
Wireless Communications products.
ORDER AND SHIPMENT UNCERTAINTIES
The Company's sales are typically made pursuant to individual purchase
orders and the Company generally does not have long-term supply arrangements
with its customers. The Company's customers may cancel orders until 30 days
prior to the shipping date. In addition, the Company sells a portion of its
products through distributors who have certain rights to return unsold products
to the Company. Moreover, semiconductor companies, including the Company,
routinely manufacture or purchase inventory based on estimates of customer
demand for their products, which is difficult to predict. 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 the Company holding excess or obsolete inventory which could have a
material
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<PAGE> 25
adverse effect on the Company's business, financial condition and results of
operations. For example, in the fourth quarter of fiscal 1998, the Company made
a provision for excess and obsolete inventories of $66 million due to lower
anticipated demand, price declines and the obsolescence of certain products.
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often in connection with, or in anticipation of, maturing product cycles (of
both semiconductor companies' and their customers' products) and declines in
general economic conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high inventory levels and
accelerated erosion of average selling prices. The Company is currently
experiencing these conditions in its analog PC modem chipset business and may
experience such downturns in the future. In fiscal 1998, average selling prices
for the Company's Personal Computing products fell by approximately 50 percent,
the annual growth rate for such products fell to approximately 20 percent and in
the fourth quarter, the Company made a provision for excess and obsolete
inventories of $66 million due to lower anticipated demand, price declines and
the obsolescence of certain products. The current downturn in the Company's
analog modem chipset business, which has been exacerbated by the Asia-Pacific
region's current economic situation, has had, and any future downturns may have,
a material adverse effect on the Company's business, financial condition and
results of operations. The semiconductor industry also from time to time has
experienced periods of increased demand and production capacity constraints. The
Company thus may experience substantial changes in future operating results due
to general semiconductor industry conditions, general economic conditions and
other factors.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent upon the
continued service of its executive officers and other key management and
technical personnel and on its ability to continue to attract, retain and
motivate qualified personnel. The Company is dependent on key technical
personnel, who represent a significant asset of the Company as the source of its
technological and product innovations. The competition for such personnel is
intense in the semiconductor industry. There can be no assurance that the
Company will be able to continue to attract and retain qualified management and
other personnel necessary for the design, development, manufacture and sale of
its products. The ability of the Company to attract and retain key personnel may
be negatively impacted during periods of poor operating performance by the
Company. The loss of the services of one or more of the Company's key employees
or the Company's failure to attract, retain and motivate qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. In particular, the loss of the services of
Dwight W. Decker, Chairman and Chief Executive Officer of the Company, or
certain key design and technical personnel could materially and adversely affect
the Company.
RISKS OF INTERNATIONAL SALES AND OPERATIONS
For the fiscal year ended September 30, 1998, approximately 59 percent of
total sales of Semiconductor Systems were to customers located outside the
United States, primarily in Japan and other Asian-Pacific countries. In
addition, the Company has facilities and suppliers located outside the United
States, including its assembly and test facility in Mexicali, Mexico and
third-party foundries located in the Asia-Pacific region. The Company's
international sales and operations are subject to a number of risks inherent in
selling and operating abroad, including, but not limited to, risks with respect
to currency exchange rate fluctuations, local economic and political conditions,
disruptions of capital and trading markets, restrictive governmental actions
(such as restrictions on transfer of funds and trade protection measures,
including export duties and quotas and customs duties and tariffs), changes in
legal or regulatory requirements, import or export licensing requirements,
limitations on the repatriation of funds, difficulty in obtaining distribution
and support, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and
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<PAGE> 26
tax laws. Because most of the Company's international sales, other than sales to
Japan (which are denominated principally in Japanese yen), are currently
denominated in U.S. dollars, the Company's products could become less
competitive in international markets if the value of the U.S. dollar increases
relative to foreign currencies. Moreover, the Company may be competitively
disadvantaged relative to competitors of the Company located outside the United
States who may benefit from a devaluation of their local currency. There can be
no assurance that the factors described above will not have a material adverse
effect on the Company's ability to increase or maintain its foreign sales or on
its business, financial condition and results of operations.
The decline in the Company's operating performance has been exacerbated by
the current economic situation in the Asia-Pacific region. This economic
situation has increased the uncertainty with respect to the long-term viability
of certain of the Company's customers and suppliers in the region. Sales to
customers in Japan and other countries in the Asia-Pacific region, principally
Taiwan, South Korea and Hong Kong, represented approximately 47 percent of total
Semiconductor Systems sales in fiscal 1998.
The Company enters into foreign currency forward exchange contracts,
principally for the Japanese yen, to minimize risk of loss from currency
exchange rate fluctuations for foreign currency commitments entered into in the
ordinary course of business. The Company has not experienced nor does it
anticipate any material adverse effect on its results of operations or financial
condition related to these foreign currency forward exchange contracts. The
Company has not entered into foreign currency forward exchange contracts for
other purposes and the Company's financial condition and results of operations
could be affected (negatively or positively) by currency fluctuations.
INVESTMENTS, ALLIANCES AND ACQUISITIONS
Although the Company invests significant resources in research and
development activities, the complexity and rapidity of technological changes
make it impractical for the Company to pursue development of all technological
solutions on its own. As part of its goal to provide advanced semiconductor
products and systems, the Company expects to review on an ongoing basis
investment, alliance and acquisition prospects that would complement its
existing product offerings, augment its market coverage or enhance its
technological capabilities. However, there can be no assurance that the Company
will be able to identify and consummate suitable investment, alliance or
acquisition transactions in the future. Moreover, should the Company consummate
such transactions, they could result in the diversion of management resources,
as well as dilutive issuances of equity securities, large one-time write-offs,
the incurrence of debt and contingent liabilities, amortization of expenses
related to goodwill and other intangible assets and other acquisition related
costs, any of which could materially adversely affect the Company's business,
financial condition and results of operations and the price of the Company
Common Stock. The ultimate success of any such investments, alliances or
acquisitions in achieving the purposes for which they are undertaken will depend
on the ability of the Company to integrate successfully any acquired business
and to retain key personnel, as well as a variety of other factors.
DEMANDS ON MANAGEMENT RESOURCES
A combination of circumstances currently presents the Company's management
with a variety of challenges. In addition to implementing the Company's ongoing
diversification and expansion strategy, the Company will need to dedicate
significant managerial and other resources to implement the restructuring of
Semiconductor Systems announced in September 1998 and to establish the
infrastructure and systems necessary for the Company to operate as an
independent public company. While the Company believes that it has sufficient
management resources to execute each of these initiatives, there can be no
assurance that this will be the case or that the initiatives will be
successfully implemented. Failure to implement these initiatives successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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<PAGE> 27
ENVIRONMENTAL MATTERS
The Company uses a variety of chemicals in its manufacturing operations and
is subject to a wide range of environmental protection regulations in the United
States and Mexico. While the Company has not experienced any material adverse
effect on its operations as a result of such regulations, there can be no
assurance that current or future regulations would not have a material adverse
effect on the Company's business, financial condition and results of operations.
In the United States, environmental regulations often require parties to fund
remedial action regardless of fault. As a consequence, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. There can be no assurance that the amount of expense and capital
expenditures which might be required to complete remedial actions and to
continue to comply with applicable environmental laws will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "The Semiconductor Systems Business -- Environmental Matters".
READINESS FOR YEAR 2000
The Company is in the process of implementing plans to address issues
related to the impact of the Year 2000 on the Company's products, business
systems, infrastructure, manufacturing systems and suppliers. A five-step
process is applied to each of these areas to inventory all possibly affected
assets, assess non-compliance with Year 2000, formulate a remediation strategy,
upgrade the system and test compliance. The Company continues to evaluate the
estimated costs associated with these efforts based on actual experience. While
the Company believes, based on available information, that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business, financial condition and results of operations, there can be no
assurance that such will be the case. In addition, the Company and the economy
in general may be adversely affected by the failure of federal, state, local and
international governments to address Year 2000 issues affecting their systems.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000".
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
The Company does not have an operating history as an independent company.
Accordingly, the financial information included herein may not necessarily
reflect the results of operations, financial position and cash flows of
Semiconductor Systems had the Company been operated independently during the
periods presented. While Semiconductor Systems had been profitable as part of
Rockwell, Semiconductor Systems has experienced recent operating losses and
anticipates future operating losses at least in the short-term. There can be no
assurance that as a stand-alone company the Company will return to, or maintain
any particular level of, profitability. Semiconductor Systems has historically
relied on Rockwell for cash investments and various financial and administrative
services. After the Distribution, although Rockwell will provide to the Company
certain transitional services which prior to the Distribution have been provided
to Semiconductor Systems by Rockwell, the Company will maintain its own sources
of funding, banking relationships and administrative functions. See "Credit
Facility".
NO PRIOR MARKET FOR COMPANY COMMON STOCK; VOLATILITY; POSSIBILITY OF SUBSTANTIAL
SALES OF COMPANY COMMON STOCK
There is no current trading market for the Company Common Stock, and while
a "when-issued" trading market is expected to develop prior to the Distribution,
there can be no assurance as to the prices at which trading in the Company
Common Stock will occur after completion of the Distribution. Application has
been made for approval of trading and quotation of the Company Common Stock on
Nasdaq under the proposed trading symbol "CNXT". At least until the Company
Common Stock is fully distributed and an orderly market develops, and even
thereafter, the prices at which trading in such stock occurs may fluctuate
significantly. There can be no assurance that an active trading market in the
Company Common Stock will develop or be sustained in the future. The prices at
which shares of Company Common Stock trade will be
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<PAGE> 28
determined by the marketplace and may be influenced by many factors, including,
among other things, the Company's performance and prospects, the depth and
liquidity of the market for Company Common Stock, investor perception of the
Company and the industry in which it operates, changes in earnings estimates or
buy/sell recommendations by analysts, general financial and other market
conditions, and domestic and international economic conditions. In addition,
public stock markets have experienced extreme price and trading volume
volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company Common Stock. See "The
Distribution -- Trading Market".
Substantially all of the shares of Company Common Stock distributed in the
Distribution will be eligible for immediate resale in the public market. In
spin-off transactions similar to the Distribution, it is not unusual for a
significant redistribution of shares to occur during the first few weeks or even
months following completion of the spin-off. Neither Rockwell nor the Company is
able to predict whether substantial amounts of Company Common Stock will be sold
in the open market following the Distribution or what effect such sales may have
on prices at which shares of Company Common Stock may trade. Any sales of
substantial amounts of Company Common Stock in the public market during this
period, or the perception that any redistribution has not been completed, could
materially adversely affect the market price of Company Common Stock. For a
description of the treatment of shares of Company Common Stock to be held by the
Rockwell International Corporation Savings Plan (the "Rockwell Savings Plan"),
see "Arrangements Between Rockwell and the Company -- Employee Matters
Agreement".
CERTAIN ANTI-TAKEOVER EFFECTS
The Company Certificate, the Company By-Laws, the Company Rights Agreement
(as defined below) and the General Corporation Law of the State of Delaware (the
"DGCL") contain several provisions that would make more difficult the
acquisition of control of the Company in a transaction not approved by the
Company's Board of Directors. See "Description of Company Capital
Stock -- Certain Provisions in the Company Certificate and Company By-Laws",
"-- Company Rights Plan" and "-- Anti-takeover Legislation". Certain tax
consequences may also discourage an acquisition of control of the Company for
some period of time. See "-- Certain Federal Income Tax Considerations".
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Rockwell has received the Tax Ruling from the IRS to the effect that the
Distribution will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(D) of the Code. See "The Distribution -- Certain Federal
Income Tax Consequences of the Distribution". While the Tax Ruling generally is
binding on the IRS, the continuing validity of the Tax Ruling is subject to
certain factual representations and assumptions. Rockwell and the Company are
not aware of any facts or circumstances that would cause such representations
and assumptions to be untrue. The Tax Allocation Agreement provides that neither
Rockwell nor the Company is to take any action inconsistent with, nor fail to
take any action required by, the request for the Tax Ruling or the Tax Ruling
unless required to do so by law or the other party has given its prior written
consent or, in certain circumstances, a supplemental ruling permitting such
action is obtained. Rockwell and the Company will agree to indemnify each other
with respect to any tax liability resulting from their respective failures to
comply with such provisions. The Tax Allocation Agreement also provides that the
Company will be responsible for any taxes imposed on Rockwell, the Company or
Rockwell shareowners as a result of the failure of the Distribution to qualify
as a tax-free reorganization within the meaning of Section 368(a)(1)(D) of the
Code or the subsequent disqualification of the Distribution as a tax-free
transaction to Rockwell under Section 361(c)(2) of the Code if such failure or
disqualification is attributable to certain post-Distribution actions by or in
respect of the Company (including its subsidiaries) or its shareowners, such as
the acquisition of the Company by a third party at a time and in a manner that
would cause such a failure or disqualification. In addition, in connection with
Rockwell's spin-off of Meritor Automotive, Inc. on September 30, 1997, certain
tax-free intragroup spin-offs were effected by the Company. The Tax Allocation
Agreement provides
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that the Company will be responsible for any taxes imposed on Rockwell, the
Company or Rockwell shareowners in respect of those intragroup spin-offs if such
taxes are attributable to certain post-Distribution actions by or in respect of
the Company (including its subsidiaries) or its shareowners, such as the
acquisition of the Company by a third party at a time and in a manner that would
cause such taxes to be incurred. In the event that any of the taxes described
above were to become payable by the Company, such payment would have a material
adverse effect on the financial position, results of operations and cash flow of
the Company. See "Arrangements Between Rockwell and the Company -- Tax
Allocation Agreement".
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<PAGE> 30
THE SEMICONDUCTOR SYSTEMS BUSINESS
Following the Distribution, Semiconductor Systems will be the world's
largest company focused exclusively on providing semiconductor products for
communications electronics. With over 30 years of experience in developing
analog modem technology, Semiconductor Systems utilizes its expertise in mixed-
signal processing and communications technology to deliver semiconductor
products for a broad range of communications applications. In addition to its
semiconductor integrated circuit products, the Company's system-level solutions
integrate signal processing algorithms, communication protocols and applications
software.
The Company's core technological capability in mixed-signal processing
forms the foundation of its analog PC modem business as well as the building
blocks for the Company's expansion platforms, as illustrated below.
[DESCRIPTION OF ILLUSTRATION: MIXED-SIGNAL PROCESSING (SIGNAL CONVERSION,
SIGNAL PROCESSING ALGORITHMS AND COMMUNICATION PROTOCOLS) BRIDGING THE
ANALOG AND DIGITAL WORLDS.]
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INDUSTRY BACKGROUND
Initially developed in the 1950s, analog data modems have played a crucial
role in the history of data communications, revolutionizing computing by
allowing users to have distributed and remote-computing communications
capabilities. The word "modem" is a contraction of the device's primary
functions: modulation, where outgoing digital signals are converted into analog
tones that can be communicated over telephone lines, and demodulation, which
performs the reverse function for incoming signals. Early modem systems were
large, self-contained pieces of equipment housed in three- to four-foot tall
cabinets, operating at speeds below 150 bits per second ("bps"). These modems
were primarily used for early computer applications such as airline reservations
and financial services. In the 1980s, the modem industry's growth was driven by
the beginning of the PC revolution, the V.22bis international industry standard
and significant technology advancements in modem semiconductors. Advances in
integrated circuit design techniques and process technologies have enabled
improvements in modem product building blocks, such as digital signal processors
("DSPs"), microcontrollers, signal converters and embedded memory. These
advances have allowed manufacturers to improve performance and offer an
ever-increasing variety of features, while simultaneously reducing the number
and cost of components. While the first widely-available PC modems operated at
speeds of approximately 1200 bps, today's V.90 modems operate at speeds of up to
56 Kbps, representing a doubling of modem performance every two years since the
mid-1980s. In the mid-1990s, modems became the primary interface for the
Internet explosion, propelling the modem from a niche PC peripheral to a key PC
communications feature.
In the early 1980s, fax communications revolutionized business
communications by enabling the electronic transfer of documents in near
real-time. Modem technology also is the basis for communications in fax
equipment, which scans and modulates a digital image locally followed by
demodulation and printing the image remotely. Fax machines designed in the late
1970s were large, cumbersome pieces of equipment approximately the size of
today's commercial copy machine. Since then, streamlining the scanning and
printing mechanics has significantly reduced the size and cost of fax machines.
Since the late 1970s, fax modem electronic content has declined from over 200
components costing approximately $1,000 and covering more than 128 square inches
of circuit board space to one semiconductor package containing two die covering
less than one square inch of circuit board space. Concurrent with this decrease
in size, a decrease in cost to less than $20 per unit and an increase in speeds
to 33.6 Kbps (V.34), fax modem functionality has evolved to include digital
answering machine, speakerphone and caller ID features.
In addition to use in PCs and fax machines, analog modems are increasingly
employed in a wide range of embedded applications. These applications include
credit card verification machines, automated teller machines, game machines and
personal digital assistants.
Today, nearly every form of communication is being revolutionized by the
growing use of digital communications to move all types of data, voice and video
around the world. In addition to data and fax modem functionality, different
technologies, protocols and media have evolved which are uniquely suited to the
particular application required. Each of these technologies requires specific
transport and access hardware devices, including handsets and base stations for
wireless telephony, switches and routers for telecommunications and data
networking, set-top boxes for cable and satellite communications, and digital
cable and digital subscriber line ("xDSL") modems for Internet access.
The advent of the Internet as a communications medium has dramatically
increased business and consumer demand for high-speed access to multimedia and
entertainment content. As businesses and consumers increasingly rely on the
Internet and intranets, networks are under unprecedented stress. A bandwidth
constraint has emerged, particularly at the last mile of network
infrastructures, challenging users and industry participants in a number of
communications segments. In response to growing network demands,
telecommunications, data communications and cable network operators are making
significant investments to alleviate congestion and support emerging high
bandwidth, integrated data, voice and video services. Specific technologies
addressing this bandwidth problem include cable modems and xDSL, including
asymmetric digital subscriber line ("ADSL"), for residential applications, high
speed digital subscriber line ("HDSL") and T1/E1 for high speed network access
in commercial applications, and Asynchronous Transfer Mode
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<PAGE> 32
("ATM"), Synchronous Optical Network ("SONET") and Synchronous Digital Hierarchy
("SDH") for network backbone transmission.
For wireless communications, digital wireless services are rapidly
eclipsing analog wireless services for next generation voice and data
applications by providing superior voice quality, improved security, more
efficient use of bandwidth and the ability to provide enhanced features. In
emerging markets, where wireline infrastructure is inadequate or limited,
digital wireless networks are providing a viable and economic alternative that
can be rapidly deployed. Wireless systems also deliver digital entertainment via
direct broadcast satellite ("DBS"), multi-point, multi-channel distribution
system ("MMDS") and local multi-channel distribution system ("LMDS") networks.
The various forms of digital communications will continue to evolve and are
expected to grow. In all forms of digital communications products, the core
competencies required include the mixed-signal processing competencies employed
in traditional data and fax modem products. These signal conversion and
processing functions are best addressed by highly integrated mixed-signal
devices that combine analog and digital functions with high-performance digital
signal processing circuitry using cost-effective semiconductor technologies to
achieve faster, smaller, lower cost and more integrated product offerings.
In order to address the evolving needs of their increasingly diverse
customer base and to provide products for the broad array of communications
protocols and functionalities, providers of communications semiconductor
solutions are being continually challenged to enhance product performance
features. To be successful, they must have access to the core technologies of
communications semiconductors, including signal conversion, signal processing,
radio frequency techniques and applications software. To keep pace with changes
across various communications media, providers must also have access to the
breadth of manufacturing process technologies required to produce new and
innovative solutions.
COMPANY APPROACH
The Company is the worldwide leader in supplying analog PC and fax modem
chipsets. In addition, it is at the forefront of advances in digital
communications, providing semiconductor products for a broad range of wireline
and wireless communications applications. The Company's strong business
relationships with leading OEMs have enabled collaboration in successful new
product introductions and definition of product roadmaps. These relationships
also provide a foundation for expansion into new market areas.
Semiconductor Systems has had a continuous presence as a leader of the
modem industry, having led seven generations of modem chipset evolution, from
Semiconductor Systems' early heritage in driving the standard for V.22bis (2400
bps) data modems to its industry-leading position in V.90 (56 Kbps) data modems.
The Company has maintained its leadership position in modem technology by
integrating additional functionality in its data and fax modem portfolio,
including simultaneous voice and data, audio and full-featured telephony (caller
ID, speakerphone and digital answering machine). In building its market
leadership positions in analog modems, the Company has advanced its core
competencies in signal conversion, signal processing, communication algorithms
and protocols and applications software, and has evolved to become one of the
largest application-specific DSP providers in the world.
Semiconductor Systems has successfully leveraged its core technological
competencies to expand into related high growth communications markets,
developing leading positions in digital cellular handset power amplifiers, HDSL
devices, global positioning system ("GPS") components and video decoder/encoder
devices. Additionally, the Company has capitalized on its system-level design
and integration expertise to provide OEMs with higher value semiconductor
systems, such as its industry leading 900 MHz digital spread spectrum ("DSS")
cordless telephone chipsets.
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COMPANY STRATEGY
The Company's products facilitate communications worldwide through wireline
voice and data communication networks, cordless and cellular wireless telephony
systems and emerging cable and wireless broadband communications networks, as
illustrated below.
[DESCRIPTION OF ILLUSTRATION: LEVERAGING CORE COMPETENCIES IN
MIXED-SIGNAL PROCESSING FOR MULTIPLE COMMUNICATIONS
NETWORKS (PSTN, CABLE, CELLULAR/PCS AND SATELLITE).]
The Company's strategic intent is to drive to world leadership in providing
semiconductor products for communications electronics by leveraging its
competencies in signal conversion, signal processing, communication algorithms
and protocols and applications software. Key elements of the Company's strategy
include the following:
Diversification and Expansion. In view of the rapid expansion of
communications electronics markets in areas other than traditional analog
data and fax modem communication over telephone lines, the Company decided
to diversify its product offerings into new, higher growth markets. The
interrelationship and convergence within the Company's product platforms
offers opportunities for the Company to leverage its strength in
mixed-signal processing technology and to spread its core technological
competencies and intellectual property quickly and cost-effectively across
multiple product initiatives to develop communications products for each of
its targeted markets. The Company is building on its leadership position in
the modem chipset marketplace to expand into selected related product areas
that draw upon the same core competencies established with its modem
business.
Core Technology Strategy. The Company believes that executing a core
technology strategy that deploys technology building blocks, such as DSPs,
radio frequency integrated circuits ("RFIC"), mixed-signal cores and
software, across multiple product platforms is integral to its
diversification and expansion strategy. The Company believes this will
allow the continued creation of economies of scale in research
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and development and facilitate reducing the time-to-market for its key
products. The Company intends to continue to leverage its broad-based
talent pool of approximately 1,500 engineers to extend its technology
portfolio and, in parallel, seek to form alliances to gain access to
critical technology, thereby ensuring agility and flexibility to meet
rapidly changing market and technology requirements.
Integrated Solutions Focus. The Company seeks to capitalize on its
design capabilities and experience by providing suppliers of communications
electronics products with complete semiconductor system solutions. High
levels of integration allow the Company to enhance the benefits of its
products by reducing production costs through fewer external components,
reduced board space and improved yields, improvement of performance and
reliability and reduced time-to-market for end products. Through the
combination of all the necessary communication functions for a complete
system solution, the Company seeks to increase semiconductor value-added
content, thereby offering its existing and potential customers more
compelling and cost-effective products.
Process, Design and Manufacturing Capabilities. Semiconductor Systems
intends to maintain access to small geometry, high volume semiconductor
design and manufacturing resources (CMOS, Bipolar, BiCMOS, RFCMOS, GaAs and
SiGe) that are the driving force behind today's smaller, more integrated,
lower power, lower cost devices. These design and manufacturing resources
are supported by the Company's platform technologies organization, which
develops semiconductor manufacturing processes, advanced packaging
techniques and design automation tools/kits for re-use across multiple
product platforms. The Company will continue to use both internal wafer
fabrication production and external foundries to optimize capacity
availability and reduce time-to-market, while seeking to reduce capital and
operating infrastructure requirements.
Strategic Customer Relationships. The Company believes that the
strength of its relationships with leading customers in each of its product
platforms is a competitive advantage that enables it to target more
effectively its product development activities. Semiconductor Systems has
established relationships with leading OEMs in each of its addressed
markets. The Company will seek to enhance its existing leadership market
positions and gain market share in new high-growth segments by continuing
to offer innovative products to existing and new customers.
THE FIVE PRODUCT PLATFORMS
The Company focuses its business in five key product platforms:
<TABLE>
<S> <C>
- - Personal Computing - Wireless Communications
- - Digital Infotainment - Network Access
- Personal Imaging
</TABLE>
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<PAGE> 35
Through these strategic product platforms, the Company believes it is well
positioned to supply semiconductor products for a broad range of closely
interrelated and converging markets, as illustrated below.
[DESCRIPTION OF ILLUSTRATION: TERMINALS AND NETWORK INFRASTRUCTURE EQUIPMENT FOR
WHICH THE COMPANY'S FIVE PRODUCT PLATFORMS SUPPLY PRODUCTS.]
Semiconductor Systems sales by product platform for the three fiscal years
ended September 30, 1998 were as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Personal Computing.......................................... $ 640 $ 861 $1,173
Personal Imaging............................................ 102 131 113
Wireless Communications..................................... 170 115 45
Digital Infotainment........................................ 145 112 32
Network Access.............................................. 143 193 107
------ ------ ------
Total............................................. $1,200 $1,412 $1,470
====== ====== ======
</TABLE>
28
<PAGE> 36
PERSONAL COMPUTING
The Personal Computing product platform provides telephony-based
communications products for personal computing terminals, including desktops,
notebooks and handheld PCs. The Company is the world's leading supplier of
voiceband analog modem chipsets to modem subsystems manufacturers who supply
modems to PC OEMs and retail modem markets. In addition, the Company supplies
audio semiconductor system hardware and software which provide multimedia
functionality for PCs.
The Company offers a wide range of analog PC modem products for
communications over standard telephone wires, including high-speed data/fax
modems incorporating simultaneous voice and data, speakerphone and enhanced
audio capabilities. The Company supports a number of modem standards, including
the V.34 standard for data transmission at speeds of up to 33.6 Kbps and the
K56Flex(TM) and V.90 standards for data transmission at up to 56 Kbps. The
Company has been an active participant in the development of 56 Kbps modem
technology beginning with the introduction of its K56Flex(TM) modem product in
1997, jointly developed and promoted with Lucent Technologies, Inc. ("Lucent").
Following an extended period of intense competition in 1997 between the
Company's K56Flex(TM) modem products and modem products using x2(TM) technology,
an incompatible 56 Kbps solution developed by 3Com/U.S. Robotics Corporation,
the International Telecommunications Union (the "ITU") established the V.90
standard which permits inter-operability among competing 56 Kbps modem products
supplied by the Company and its competitors. In February 1998, the Company began
shipment of V.90 standard 56 Kbps modem chipsets. The V.90 standard was formally
ratified by the ITU in September 1998. Due to line quality and FCC limitations,
actual speeds are less than rated speeds.
The Company's modem products are supplied in multiple and single chip
configurations, and include DSPs, analog-to-digital ("A/D") and
digital-to-analog ("D/A") converters and, in most cases, microcontrollers
together with optimized signal processing algorithms, communication protocols
and applications software. Increasingly, modems are becoming a key
communications feature of PCs. To provide a broader range of modem products to
its customers, particularly to address the low-cost, sub-$1,000 PC segment, the
Company is developing mixed-signal intensive controllerless modem chipsets and
software modem solutions which take advantage of the increasing power of PC
central processors and use software to perform functions traditionally enabled
by semiconductor components.
The Company is also developing system solutions that merge the
communications functionality of modems with audio capabilities to enable PC
audio telephony while eliminating the need for separate dedicated audio and
modem chipsets. The Company's RipTide(TM) audio/communications device includes a
full complement of modem functions, mainstream audio capabilities and advanced
wavetable synthesis for next generation, audio-intensive communications
applications, such as 3-D multiplayer gaming and interactive music.
Capitalizing on its core mixed-signal processing technologies and its xDSL
technology alliances, the Company is developing chipsets that provide xDSL modem
capabilities permitting broadband digital transmission of data, voice and video
over existing standard telephone lines at speeds of up to 8 Mbps. The Company's
xDSL modem architecture is designed to support digital modem products based on
specifications being developed by the ITU and the Universal ADSL Working Group,
a consortium of leading computer and telecommunications suppliers. The Company
is also developing Home Networking communications solutions that are designed to
enable the interconnection of equipment, such as PCs, printers and multifunction
peripherals ("MFPs"), over existing home wiring.
The Company markets and sells PC modem chipsets worldwide to modem
subsystem manufacturers who, in turn, sell complete modem boards to PC OEMs and
to PC system integrators. The Company also markets its Personal Computing
products to leading PC OEMs directly, and indirectly through modem subsystem
manufacturers. The Company markets and sells its Personal Computing products
worldwide to retail modem manufacturers, who sell modems to consumers in the
retail aftermarket.
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<PAGE> 37
PERSONAL IMAGING
The Personal Imaging product platform supplies semiconductor products that
enable image capture, processing and printing. These products are used in a wide
array of office automation products such as fax machines and MFPs, which combine
printer, plain paper fax, copier, scanner and telephone functionality into one
system. The Company is the world's leading supplier of fax modem chipsets to fax
machine OEMs, supplying more than 70 percent of the worldwide market. In
addition, the Company is capitalizing on its leading position in fax machine
chipsets by offering complete system-level chipsets for the growing market for
high-performance MFPs. The Company's fax modem and MFP products incorporate
DSPs, A/D and D/A converters and microcontrollers integrated within a single
package, together with optimized signal processing algorithms, communication
protocols and application software.
The Company offers a wide range of standard fax modem products with speeds
ranging from 9600 bps to 33.6 Kbps (V.34). The Company is now shipping V.34 fax
modems to leading fax machine OEMs with whom Semiconductor Systems collaborated
on the standardization of V.34 protocols and interoperability for fax
applications. The Company's FAXENGINE(TM) family of complete system-level fax
chipsets consists of a fax controller, fax modem and system firmware to provide
all the standard facsimile functions. Optional features include digital
answering machine and full-duplex speakerphone functionality.
The Company is also integrating additional functionality with its core fax
modem to address the high-performance MFP market and offers the MFPEngine(TM)
family of products which combine the functions of traditional stand-alone
business machines, such as fax, copier, printer and scanner machines, into a
two-chip semiconductor chipset. In order to accelerate development time for its
MFP products, the Company has entered into strategic partnerships with market
leaders in key technology areas.
WIRELESS COMMUNICATIONS
The Wireless Communications product platform provides components,
subsystems and system-level semiconductor products for wireless voice and data
communications. The Company supplies silicon and GaAs-based components and
systems for use in digital cordless telephones, digital cellular handsets and
base stations and GPS receivers. Many of these products include DSPs, A/D and
D/A converters, microcontrollers and RFICs, together with optimized signal
processing algorithms, communication protocols and applications software.
The Company is the world leader in supplying complete antenna-to-microphone
system-level semiconductor products for the 900 MHz DSS digital cordless
telephone market. DSS technology offers extended range, improved voice quality
and increased security relative to traditional analog cordless phones and other
digital cordless products.
The Company is the worldwide leader in supplying GaAs power amplifiers for
use in digital cellular handsets. The Company's power amplifier micromodules
provide a smaller package, lower parts count and lower power consumption than
traditional multiple discrete component solutions. The Company supplies digital
cellular handset OEMs with power amplifier components for a wide range of
digital cellular standards, including the GSM (Global System for Mobile
Communications) standard, the CDMA (Code Division Multiple Access) standard and
the TDMA (Time Division Multiple Access) standard. The Company also supplies
GaAs single and dual band receivers for cellular base stations for the GSM and
CDMA digital cellular standards.
The Company is developing RFICs, chipset subsystems that integrate the
functions of mixers, oscillators and amplifiers and thereby reduce the number of
radio frequency ("RF") components, for use in digital cellular handsets. The
first RFICs to be offered by the Wireless Communications product platform are
for the CDMA standard.
The Company is developing semiconductor system solutions for GSM handsets
that will seek to integrate the RF front end, which receives and filters the RF
signal, with the baseband backend, which processes the voice signal, to provide
digital cellular handset OEMs with complete antenna-to-microphone system-level
30
<PAGE> 38
chipsets in smaller, less expensive and less power consuming packages. These
chipsets are designed to enable OEMs to provide a broad range of low- to
high-end products, while improving time-to-market performance.
The Company designs and manufactures GPS receiver components and supplies
them to OEMs for incorporation into end products for marine, automotive and
personal computer applications. GPS receivers use signals from a series of
satellites to provide precise location determination anywhere on earth. Building
on Rockwell's long heritage as an industry leader in GPS military receivers and
satellites, the Company offers the 12-channel Jupiter(TM) GPS receiver module on
a printed circuit board for lower-volume applications and the two-device
Zodiac(TM) chipset for high-volume applications.
The Company markets and sells its Wireless Communications products to a
wide variety of cellular and cordless telephony OEMs who require various levels
of integration for wireless components.
DIGITAL INFOTAINMENT
The Digital Infotainment product platform provides semiconductor products
that perform communication and media processing functions within a variety of
electronics equipment for digital information and entertainment. Digital
infotainment is the delivery of digitally encoded information or entertainment
content to the consumer from a storage device or via broadcast transmission over
the air or satellite or cable network, for display on a television set or on a
PC. As entertainment media transition to a digital format, a convergence of
functionality is taking place, wherein televisions become more interactive
devices through digital set-top boxes and PCs enable more home entertainment
applications. The Company offers broadband wireless communications and cable
modem products and RF tuners, which process high-speed data, voice and video
transmissions from various sources. The Company is also developing semiconductor
products and systems for digital infotainment applications by combining
communications technologies with video encoder and decoder technology, which
convert video signals for television to a format that can be displayed on a PC
monitor or PC images to a format that can be displayed on a television. Many of
the Company's Digital Infotainment products include DSPs, A/D and D/A converters
and microcontrollers, together with optimized signal processing algorithms,
communication protocols and application software.
The Company offers high-speed broadband wireless and cable communication
and demodulation tuner integrated circuits (ICs). These products process the
signals received from various broadband transmissions, such as satellites, cable
or MMDS microwave transmissions, and send high-speed and high-resolution digital
information and entertainment both to PCs and other consumer appliances. The
Company is currently a leading supplier of products for digital MMDS. The
Company has developed a tuner and demodulator product for receiving satellite
transmissions, in which the tuner section receives the RF input signal and
performs channel selection, filtering and RF to baseband conversion and the
demodulator section processes and decodes the video signal. The Company plans to
sell these products to manufacturers of set-top boxes, satellite service
providers and PC OEMs and add-in card manufacturers for use in PC receiver cards
and in products which provide interactive services.
The Company currently supplies analog modem chipsets for set-top boxes
which provide users with interactive capability over traditional telephone
lines. The Company is also developing a family of cable modem chipsets that will
enable data transmission at speeds up to 100 times the speed of the fastest
conventional analog modems. These system-level semiconductor chipsets are
designed to enable OEMs to develop client-side modems that support the
Multimedia Cable Network Systems Data Over Cable Services Interface
Specifications ("MCNS/DOCSIS") and to combine communications and media
processing technology. These cable modems can be used internally in a set-top
box or a PC or as a stand-alone appliance external to a PC.
For the PC platform, the Company also offers its Fusion(TM) family of
NTSC/PAL/SECAM analog-to-digital video decoders which enable use of the PC to
receive radio and television broadcasts and create and edit videos. The Company
markets and sells video encoder and decoder components, as well as integrated
decoder/tuner products, to PC subsystem manufacturers and also markets its
products to leading PC OEMs.
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<PAGE> 39
NETWORK ACCESS
The Network Access product platform provides network infrastructure OEMs
with semiconductor products for electronic equipment that resides at
communications access points between individual client users and wide area
networks ("WANs"). These products enable the transportation of voice, data and
video between and within networks. WAN access equipment provides connectivity
for PCs, fax machines, cellular telephones and local area networks ("LANs")
through the Public Switched Telephone Network, the Internet, intranets and other
high speed corporate data networks, cellular networks and cable networks. WAN
transport equipment provides network backbone point-to-point communications at
very high speeds. Many of the Company's Network Access products include DSPs,
A/D and D/A converters and microcontrollers, together with optimized signal
processing algorithms, communication protocols and applications software.
The Company is a leading supplier of analog modem chipsets for central site
equipment used by Internet service providers ("ISPs"). Utilizing the same core
56 Kbps analog modem technology used in client-side PC modems supplied by the
Personal Computing product platform, the Network Access product platform offers
network infrastructure OEMs complete system-level chipsets for high-density
remote access servers used by ISPs. These central site modems can support data,
fax and voice over IP (Internet Protocol). The Company is developing a complete
system-level solution for xDSL network modems which, together with the
client-side xDSL modem products offered by the Personal Computing product
platform, will enable high-speed digital Internet connectivity at speeds of up
to 8 Mbps over existing telephone lines.
The Company supplies network infrastructure OEMs with semiconductor
products that enable telecommunications and data communications companies to
deploy digital T1/E1 and T3/E3 communications over existing telephone lines. The
Network Access product platform offers line interface units, framers and
controllers for a variety of networking equipment. In addition, the Network
Access product platform offers xDSL products which simplify the deployment of
T1/E1 transmission lines by eliminating the need for repeaters and other line
conditioning equipment to achieve digital service at speeds up to 1.5 Mbps.
The Company also supplies chipsets to network infrastructure OEMs for ATM
packet-switched networking products, which subdivide digital information into
individual packets with unique identifiers to be sent by various routes through
the network and reassembled at their destination, for high speed voice, video
and data transmission. These segmentation and reassembly ("SAR") chipsets
implement the ATM specifications for subdividing and reassembling data, enabling
transmission speeds of 155 Mbps, and the Company is developing a family of 622
Mbps SAR devices. In addition, the Company has developed mixed-signal intensive
physical layer devices (PHYs), which enable transmission of ATM packets and,
together with its SAR products, allow the Company to provide network system OEMs
with a complete semiconductor system for ATM transmissions.
The Network Access product platform also offers a GaAs-based front-end
transceiver chipset for 2.5 Gbps transmission (OC-48) over fiber-optic lines
based on SONET and SDH communication standards. The Company is developing a
similar GaAs transceiver chipset for next generation 9.6 Gbps (OC-192) optical
standards.
The Company markets and sells WAN access products to network infrastructure
OEMs that provide high density remote access equipment, primarily for the ISP
market. The Company markets and sells WAN transport products to network
infrastructure OEMs that provide WAN hubs, routers, switches, analog and digital
multiplexors and other multi-service networking equipment.
32
<PAGE> 40
CUSTOMERS; SALES AND MARKETING
The Company markets and sells its products to leading OEMs of
communications electronics products in each of its product platforms, including
the following:
PERSONAL COMPUTING (PC OEMs, PC systems integrators, retail modem manufacturers
and modem subsystem manufacturers)
<TABLE>
<S> <C> <C>
Acer Incorporated Dell Computer Corporation International Business
Apple Computer, Inc. Diamond Multimedia Machines
Aztech Systems Ltd. Systems, Inc. Corporation
Best Data Products, Inc. Fujitsu Limited Packard Bell NEC, Inc.
Boca Research, Inc. GVC Corporation Psion Dacom plc
Compaq Computer Corporation Hewlett-Packard Company Toshiba Corporation
</TABLE>
PERSONAL IMAGING (Fax and multifunction peripherals manufacturers)
<TABLE>
<S> <C> <C>
Brother Industries, Ltd. Lexmark International Ricoh Company Ltd.
Canon Inc. Group, Inc. Sagem S.A.
Daewoo Telecom Ltd. Matsushita Electric Industrial Samsung Electronics Co., Ltd.
Fuji Xerox Co., Ltd. Co., Ltd. Sanyo Electric Company Ltd.
Hewlett-Packard Company NEC Corporation Sharp Corporation
Kinpo Electronics Inc. Olivetti S.p.A.
</TABLE>
WIRELESS COMMUNICATIONS (Wireless base station equipment, cellular and cordless
handset and navigation systems manufacturers)
<TABLE>
<S> <C> <C>
Casio PhoneMate Inc. NEC Corporation Samsung Electronics Co., Ltd.
Ericsson, Inc. Nokia Corporation Sanyo Electric Company Ltd.
Fujitsu Limited Northern Telecom Limited Sharp Corporation
Lowrance Electronics, Inc. QUALCOMM Incorporated Sony Corporation
Mitsubishi Wireless Sagem S.A. Uniden Corporation
Communications, Inc.
</TABLE>
DIGITAL INFOTAINMENT (PC OEMs, PC subsystem manufacturers, set-top box
manufacturers and satellite service providers)
<TABLE>
<S> <C> <C>
ATI Technologies, Inc. Hewlett-Packard Company Sony Corporation
Compaq Computer Corporation Hughes Network Systems, Inc. Sun Microsystems, Inc.
EchoStar Communications Intel Corporation Thomson Corporation
Corporation Matsushita Electric Industrial Toshiba Corporation
Gateway 2000, Inc. Co., Ltd. Web TV Networks, Inc.
General Instruments, Inc. Philips Electronics N.V.
</TABLE>
NETWORK ACCESS (Data communications and telecommunications network
infrastructure manufacturers)
<TABLE>
<S> <C> <C>
ADC Telecommunications, Inc. Cisco Systems, Inc. Lucent Technologies, Inc.
Alcatel Data Networks, S.A. Copper Mountain, Inc. Newbridge Networks Corporation
Ascend Communications, Inc. ECI Telecommunications Nokia Corporation
Cabletron Systems, Inc. Ericsson, Inc. Northern Telecom Limited
CIENA Corporation Fujitsu Limited Tellabs, Inc.
</TABLE>
Semiconductor Systems has a worldwide sales organization comprised of
approximately 215 employees as of September 30, 1998, with 10 domestic and 13
international sales offices. To complement its direct sales and customer support
efforts, the Company also sells its products through approximately 44
independent manufacturers' representatives and approximately 50 distributors.
The Company has a marketing staff that is
33
<PAGE> 41
organized around its five product platforms. In addition, the Company's design
and applications engineering staff is actively involved with customers during
all phases of design and production and provides customer support through the
Company's worldwide sales offices, which are generally in close proximity to
customers' facilities.
COMPETITION
The semiconductor industry in general and the markets in which the Company
competes in particular are intensively competitive. The Company competes
worldwide with a number of United States and international manufacturers that
are both larger and smaller than the Company in terms of resources and market
share. In addition, customers for certain of the Company's products offer other
products that compete with similar products offered by the Company. The Company
believes that the principal competitive factors for silicon providers to the
Company's addressed markets are product performance, level of integration,
quality, compliance with industry standards, price, time-to-market, system cost,
design and engineering capabilities, new product innovation and customer
support. The specific bases on which the Company competes vary by product
platform. See "Risk Factors -- Competition".
Within PC analog modem products, the Company competes primarily with Lucent
in the PC OEM market and with Cirrus Logic, Inc. and Lucent in the PC system
integrator market. For semiconductor sales to retail modem manufacturers, the
Company competes primarily with Texas Instruments Incorporated (which supplies
basic DSP chipsets without communications software to 3Com/U.S. Robotics
Corporation) and Lucent. The Company's competitors in the Personal Imaging
market include Hyundai Electronics Industries Co., Ltd., Matsushita Electric
Industrial Co., Ltd., Samsung Electronics Co., Ltd. and Toshiba Corporation. The
Company's competitors in the markets addressed by the Wireless Communications
platform include ANADIGICS, Inc., Analog Devices, Inc., Hitachi Ltd., Lucent,
Motorola, Inc., National Semiconductor Corporation, Philips Electronics N.V., RF
Micro Devices, Inc., Siemens Corporation, Texas Instruments Incorporated,
TriQuint Semiconductor, Inc. and VLSI Technology, Inc. In the Digital
Infotainment market, competitors of the Company include Broadcom, Inc., C-Cube
Microsystems, ITT Industries, Inc., Libit Signal Processing Ltd., LSI Logic
Corporation, Philips Electronics N.V., STMicroelectronics N.V. and VLSI
Technology, Inc. In the Network Access market, competitors of the Company
include Analog Devices, Inc., Applied Micro Circuits Corporation, Level One
Communications Incorporated, Lucent, MMC Networks, Inc., PMC-Sierra Inc.,
STMicroelectronics N.V., Siemens Corporation, Texas Instruments Incorporated and
Vitesse Semiconductor, Inc.
RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. Blank wafers and other raw materials used in the production of
the Company's CMOS products are available from several suppliers. However, the
Company is dependent on a single source supplier for epitaxial wafers used in
the GaAs semiconductor manufacturing processes at its Newbury Park, California
facility. The number of qualified alternative suppliers for such wafers is
limited and the process of qualifying a new epitaxial wafer supplier could
require a substantial leadtime. Although the Company historically has not
experienced any significant difficulties in obtaining an adequate supply of raw
materials and components necessary for its manufacturing operations, the loss of
a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Manufacturing Risks".
RESEARCH AND DEVELOPMENT
The Company has significant research, development, engineering and product
design capabilities. At September 30, 1998, the Company employed approximately
1,500 engineers.
Ongoing research and development projects in each of the Company's product
platforms include the following: In the Personal Computing platform, the Company
is developing a software modem that replaces
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<PAGE> 42
DSP and microcontroller functions traditionally enabled through hardware chip
devices with software to be processed by the host PC's processor. For its
Personal Imaging platform, the Company is developing MFP chipsets that provide a
complete suite of office equipment in a single platform, with future development
planned for combined monochrome and color devices. In the Wireless
Communications platform, the Company is developing complete
antenna-to-microphone system solutions for 900 MHz GSM cellular handsets, with
future developments in similar products for all three GSM frequency bands
planned. For the Digital Infotainment platform, the Company is focusing its
development efforts on next generation MCNS compliant cable modems with higher
levels of function, performance and integration and is working with major OEMs
and CableLabs to develop technical specifications for packet voice telephony. In
the Network Access platform, the Company is investing in WAN solutions,
particularly T1/E1, T3/E3 and SONET products, focusing on integrating
functionality, reducing power requirements and increasing the port density of
network access equipment.
The Company spent $337 million, $280 million and $155 million in fiscal
1998, 1997 and 1996, respectively, on research and development. The Company
expects to spend approximately $250 million on research and development in
fiscal 1999. See "Risk Factors -- Research and Development Expenses" and
"-- Future Capital Sources".
Rockwell's Science Center also provides assistance to the Company in the
development of various technological and product advancements and will continue
to provide assistance after the Distribution. See "Arrangements Between Rockwell
and the Company -- Transition Agreement".
INTELLECTUAL PROPERTY
Numerous United States and foreign patents and patent applications are
owned or licensed by the Company relating to its manufacturing operations and
other activities. The Company has filed federal and international trademark
applications seeking registered protection of the Conexant name and logo. In
addition, the Company owns a number of other trademarks applicable only to
certain of its products. Management believes that intellectual property,
including patents, patent applications and licenses, and trademarks are of
material importance to the Company. In addition to the protection of its
proprietary technologies and processes, the Company is seeking to strengthen its
intellectual property portfolio to enhance its ability to obtain cross-licenses
of intellectual property from others, whether to obtain access to intellectual
property the Company does not possess or to resolve potential intellectual
property claims against the Company, without the need to make financial
payments.
Various claims of patent infringement have been made against the Company.
Management believes that none of these claims will have a material adverse
effect on the consolidated financial statements of the Company. Pursuant to the
Distribution Agreement, the Company will assume all liabilities in respect of
intellectual property matters related to current and former operations of
Semiconductor Systems. See "-- Legal Proceedings" and "Risk
Factors -- Intellectual Property Matters". Prior to the Distribution, Rockwell
will contribute $65 million in cash to the Company, which will be placed in an
escrow account to be used to satisfy Semiconductor Systems' obligation with
respect to the Celeritas litigation matter. See "Arrangements Between Rockwell
and the Company -- Distribution Agreement".
EMPLOYEES
As of September 30, 1998, Semiconductor Systems had approximately 6,300
full-time employees, of whom approximately 1,500 were engineers. Approximately
500 Semiconductor Systems employees in the United States and 1,050 employees in
Mexico are covered by collective bargaining agreements. In July 1998, following
a 50-day strike by members of the International Brotherhood of Electrical
Workers (IBEW) Local 2295, Semiconductor Systems entered into a collective
bargaining agreement with that union covering approximately 500 employees at the
Company's Newport Beach, California facility. The agreement will expire in May
2003. No other significant work stoppages have occurred in the past five years.
In September 1998, in connection with its plan to restructure its business,
the Company announced a worldwide workforce reduction of approximately 10
percent and the closure and planned disposition of its
35
<PAGE> 43
Colorado Springs, Colorado wafer fabrication facilities (which will be
distributed to Rockwell prior to the Distribution). The plan included the offer
of voluntary early retirement packages to certain eligible employees,
approximately 185 of whom have accepted the early retirement program.
CYCLICALITY; SEASONALITY
The semiconductor industry is highly cyclical. Sales of the Company's
Personal Computing, Wireless Communications and Personal Imaging product
platforms are subject to seasonal fluctuation related to the increase in sales
of products which include the Company's products, such as PCs, cordless and
cellular telephones and fax machines, generally associated with the Christmas
season. The Company's sales for these product platforms generally increase
beginning in August and September and continue at a higher level through the end
of the calendar year. See "Risk Factors -- Cyclical Nature of the Semiconductor
Industry" and " -- Fluctuations in Operating Results".
PROPERTIES
At September 30, 1998, the Company operated four manufacturing facilities
in the United States and one facility in Mexico. It also had 13 design centers
and 23 sales offices. These facilities had an aggregate floor space of
approximately 3.0 million square feet, approximately 70 percent of which was
owned and approximately 30 percent of which was leased. Approximately 676,000
square feet of the Company's owned facilities is unused space at the Company's
Colorado Springs, Colorado facility. Another 72,000 square feet of leased office
space in San Diego, California is unoccupied and 19,200 square feet of leased
warehouse space in El Paso, Texas is vacant. As of September 30, 1998, there
were no major encumbrances (other than financing arrangements which in the
aggregate are not material) on any of the Company's property, plants or
equipment. In the opinion of management, the Company's properties have been well
maintained, are in sound operating condition and contain all the equipment and
facilities necessary to operate at present levels. A summary of floor space of
the Company's facilities at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
OWNED LEASED
TYPE OF FACILITY FACILITIES FACILITIES TOTAL
- ---------------- ---------- ---------- -----
(IN THOUSANDS OF SQUARE FEET)
<S> <C> <C> <C>
Manufacturing.................................... 1,719 152 1,871
General office space............................. 403 727 1,130
----- --- -----
Total.................................. 2,122 879 3,001
===== === =====
</TABLE>
The following table outlines the functions and capabilities of the
Company's major manufacturing facilities:
<TABLE>
<CAPTION>
FACILITY FUNCTION CAPACITY
-------- -------- --------
<S> <C> <C>
Newport Beach, California Wafer fabrication facility - 4500 8-inch wafer starts
- Class 1 and Class 10 per week
clean rooms
- 0.25-0.5 micron CMOS
- RF BiPolar
- Embedded flash, BiCMOS
in development
Newbury Park, California GaAs wafer fabrication - 500 4-inch wafer starts
facility per week
- 2.0 micron HBT
Fmax 50 GHz
- 0.7 micron MESFET
Mexicali, Mexico Assembly and test facility - 110 million assembly
- High volume/low cost starts per year
multichip modules
El Paso, Texas Module design and assembly - 400,000 modules and
facility systems per month
</TABLE>
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<PAGE> 44
The Company's headquarters and primary wafer fabrication facility are
located in Newport Beach, California, consisting of approximately 633,000 square
feet of owned and approximately 420,000 square feet of leased floor space;
approximately 80,000 square feet is subleased to several tenants. This location
includes a 130,000 square foot wafer fabrication facility. The Company
manufactures GaAs products at its wafer fabrication facility located in Newbury
Park, California. In September 1998, the Company announced that it will close
and dispose of its wafer fabrication facilities in Colorado Springs, Colorado.
Prior to the Distribution, the Company will distribute its wafer fabrication
facilities in Colorado Springs, Colorado to Rockwell.
The Company owns an approximately 198,000 square foot assembly and test
facility in Mexicali, Mexico, which has been in operation for over 25 years. The
Mexicali facility assembles semiconductor die from the Company's wafer
fabrication facilities and outside foundry sources into various types of chipset
packages and tests the packages using automatic test equipment with a full range
of analog, digital and radio frequency capability. This facility is ISO 9002
certified and focuses on high volume, industry standard plastic packaging but
has the capability to manufacture a wide variety of high- and low-volume and
specialized packages using conventional and proprietary assembly techniques.
The Company operates a fully integrated electronic module design and
assembly facility in El Paso, Texas, consisting of approximately 152,000 square
feet of leased manufacturing space. This facility provides full turnkey design
capabilities and the ability to manufacture and test standard and custom
products for each of the Company's product platforms, ranging from prototypes to
high volume production. At this facility, the Company integrates its
semiconductor chipset devices into electronic modules, such as internal cards
for PCs and digital infotainment equipment and standard PCMCIA interface cards,
as well as custom products and complete, market-ready systems. This facility has
been ISO 9002 certified since 1993.
The Company's design centers provide design engineering and product
application support as well as after-sales customer service. The design centers
are strategically located around the world to be in close proximity to the
Company's OEM customers and to take advantage of key technical and engineering
talent worldwide.
Certain of the Company's facilities, including the Newport Beach,
California and Mexicali, Mexico facilities, are located near major earthquake
fault lines. The Company maintains only minimal earthquake insurance with
respect to these facilities. A portion of the Mexicali, Mexico facility is
seismically isolated and the Company is currently undertaking a $28 million
program to seismically isolate certain portions of its Newport Beach, California
facility. See "Risk Factors -- Manufacturing Risks".
ENVIRONMENTAL MATTERS
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes, and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of Semiconductor Systems. Thus far,
compliance with environmental requirements and resolution of environmental
claims have been accomplished without material effect on Semiconductor Systems'
liquidity and capital resources, competitive position or financial statements.
Semiconductor Systems has been designated as a potentially responsible
party ("PRP") at one Superfund site located at a former silicon wafer
manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by Semiconductor Systems. The site was also formerly occupied
by Recticon Corporation and Allied Steel Products Corporation, each also named
as a PRP and each of which is insolvent. The remediation plan for the site
includes installation of a public water supply line and a groundwater pump and
treat system, as well as routine groundwater sampling. Management estimates the
total reasonably possible costs the Company could incur for the remediation of
this Superfund site to be approximately $4 million and has accrued for these
costs as of September 30, 1998.
In addition, the Company is engaged in two other remediations of
groundwater contaminations at its Newport Beach and Newbury Park, California
facilities. Management estimates the total reasonably possible costs the Company
could incur for these remediations to be approximately $5 million and has
accrued for these costs as of September 30, 1998.
37
<PAGE> 45
Pursuant to the Distribution Agreement, the Company will assume all
liabilities in respect of environmental matters related to current and former
operations of Semiconductor Systems. See "Arrangements Between Rockwell and the
Company -- Distribution Agreement".
Management of the Company believes that Semiconductor Systems' expenditures
for environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the Company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements. See "Risk Factors -- Environmental Matters".
LEGAL PROCEEDINGS
On September 27, 1995, Celeritas Technologies, Ltd. filed a suit against
Rockwell in the U.S. District Court for the Central District of California for
patent infringement, misappropriation of trade secrets and breach of contract
relating to cellular telephone data transmission technology utilized in certain
modem products produced by the Company in 1995 and 1996. The court entered
judgment against Rockwell in January 1997 and, in ruling on post-trial motions
in July 1997, entered a revised judgment awarding damages of $57 million, plus
interest. On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit
reversed the holding of the trial court based on patent infringement and found
Celeritas's patent invalid but affirmed the trial court holding based on breach
of contract. The Company's petition for a rehearing (and rehearing en banc) and
a motion to certify the contract issue to the California Supreme Court were
denied in September 1998. The Company continues to believe that the judgment is
in error and intends to file a petition for certiorari with the United States
Supreme Court. At September 30, 1998, $65 million had been accrued for the
ultimate resolution of this matter. Prior to the Distribution, Rockwell will
contribute $65 million in cash to the Company, which will be placed in an escrow
account to be used to satisfy the Company's obligation with respect to the
Celeritas matter. See "Arrangements Between Rockwell and the
Company -- Distribution Agreement".
The Company was joined on April 7, 1998 as a defendant in a suit filed by
Harris Corporation against PairGain Technologies, Inc. in the Superior Court of
California for Orange County. Harris alleges that a "teaming agreement" between
it and PairGain to develop a complete ADSL solution constituted a joint venture
and that the Company's subsequent exclusive agreement with PairGain to develop
digital modem products using PairGain's ADSL technology constituted an
intentional interference with contractual relations, intentional interference
with prospective economic advantage, negligent interference with contractual
relations and an unfair trade practice in violation of the California Business &
Professions Code. The Company believes it has meritorious defenses to these
claims and will vigorously defend this action. Discovery is ongoing.
On October 14, 1997, Brent Townshend filed suit against Rockwell and the
Company in the Superior Court of California for San Mateo County seeking an
injunction to halt the sale of products containing the Company's K56Flex(TM)
chipsets and requesting unspecified damages, claiming that the Company had
engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information disclosed in
confidence by Mr. Townshend to accelerate its development of 56 Kbps modem
technology. The Company is vigorously defending its position that it
independently developed the 56 Kbps modem technology using entirely its own
skills and public domain information. Trial on this matter is expected to
commence in the spring of 1999.
On July 29, 1991, Shumpei Yamazaki filed suit against a Japanese subsidiary
of Rockwell in the Tokyo District Court, Twenty-ninth Civil Division for patent
infringement relating to the Company's facsimile modem chipsets seeking 685
million yen (approximately $5.89 million based on the exchange rate on October
30, 1998) and court costs. In October 1998, the District Court rendered its
decision dismissing the suit, from which decision Mr. Yamazaki has appealed. The
Company believes it has meritorious defenses to these claims and will vigorously
defend this action.
On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S.
District Court for the Northern District of California for patent infringement
relating to the Company's modem products utilizing the V.42bis
38
<PAGE> 46
standard for data compression. The Company believes that it has meritorious
defenses to these claims and will vigorously defend this action. The case is
expected to go to trial in the first half of 1999.
On May 6, 1998, Western Atlas, Inc. filed suit against Rockwell in the U.S.
District Court for the Southern District of Texas alleging infringement of
several patents acquired by Western Atlas covering certain aspects of GPS
technology. The complaint explicitly identifies the Company's Jupiter(TM) GPS
receiver as an allegedly infringing product. The Company believes that it has
meritorious defenses to these claims and will vigorously contest the
infringement claims and the validity of the asserted patents. No trial date has
been set in this matter.
On May 5, 1997, former shareowners of Brooktree Corporation ("Brooktree"),
now a subsidiary of the Company, commenced a class action in the Superior Court
of the State of California for the County of San Diego against Brooktree and
officers of Brooktree alleging fraud on the market by Brooktree and its officers
arising from allegedly false statements made during introduction of certain
Brooktree products in 1995 and 1996. Following dismissal of that action, a
similar action was filed in the United States District Court for the Southern
District of California. On March 10, 1998, the complaint was dismissed without
prejudice, and on August 14, 1998, plaintiffs filed an amended complaint in this
action. The Company believes that is has meritorious defenses to these claims
and will vigorously defend this action.
The Company conducts its business in market sectors where the Lemelson
Foundation broadly asserts certain intellectual property rights against all
participants. The Lemelson Foundation has made explicit demands that virtually
all semiconductor companies must be licensed under those intellectual property
rights and must pay the Foundation a royalty calculated as a percentage of
product sales. The Lemelson Foundation thereafter filed a patent infringement
suit in the U.S. District Court in Arizona against approximately twenty
defendants from the semiconductor industry. Although the Company has received
notice from the Lemelson Foundation, stating its desire to negotiate a license
under which the Company would operate, the Company has not been named or joined
in the pending Arizona litigation. If the Lemelson Foundation prevails in the
Arizona litigation, the Company would expect to negotiate a royalty no worse
than the industry-wide royalty established as a result of that lawsuit. It is
the Company's position that a portion of any such royalty the Company would be
obligated to pay should be indemnified by certain vendors to the Company. If the
Lemelson Foundation were to lose the Arizona litigation, the Company would
expect to benefit from that result and avoid the obligation to pay any royalty.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to Semiconductor Systems, including those pertaining to
product liability, intellectual property, environmental, safety and health, and
employment matters.
Pursuant to the Distribution Agreement, the Company will assume
responsibility for all current and future litigation (including environmental
and intellectual property proceedings) against Rockwell or its subsidiaries in
respect of Semiconductor Systems.
Although the outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, based on its evaluation of matters which are pending or asserted,
management of the Company believes the disposition of such matters will not have
a material adverse effect on the financial statements of Semiconductor Systems.
GENERAL
In connection with the sale of Rockwell's aerospace and defense businesses
to The Boeing Company in December 1996, Semiconductor Systems was reorganized as
a wholly-owned subsidiary of Rockwell in the form of the Company, a Delaware
corporation incorporated in September 1996. The Company's executive offices are
located at 4311 Jamboree Road, Newport Beach, California 92660-3095, and its
telephone number is (949) 221-4600.
39
<PAGE> 47
CREDIT FACILITY
The Company has obtained a commitment letter dated October 6, 1998 from
Credit Suisse First Boston to provide a senior secured revolving credit facility
for the Company. The Credit Facility will be used for working capital and other
general corporate purposes of the Company and its subsidiaries following the
Distribution. The Company expects to sign a definitive credit agreement
including terms substantially as described below prior to the Distribution Date.
The Credit Facility is expected to be a three-year $350 million revolving
loan facility. The Credit Facility will be guaranteed by each of the Company's
domestic subsidiaries. It will also be secured by (i) a first-priority security
interest in substantially all domestic assets of the Company and its domestic
subsidiaries and (ii) a pledge of the stock of the Company's domestic and
foreign subsidiaries, subject to certain exceptions to be agreed upon.
Loans obtained under the Credit Facility will bear interest at a rate per
annum equal, at the election of the Company, to either (i) a base rate ("ABR"),
which is the higher of Credit Suisse First Boston's prime rate and 0.50 percent
over the federal funds rate and (ii) the London interbank offered rate for
offshore dollar deposits ("LIBOR"), plus, in either case, a variable margin. For
the first six months following the Distribution Date, the margin will be fixed
at 75 basis points for ABR-based loans and 175 basis points for LIBOR-based
loans. After that, the margin will be based on the Company's total debt to total
capitalization ratio. The Company will pay a facility fee on the unused amount
of the Credit Facility at a per annum rate that will vary depending on the same
criteria used to determine the interest rate margin. The Company also will pay
other customary fees.
The Credit Facility is expected to contain, among other terms,
representations and warranties, conditions precedent, covenants, mandatory and
voluntary prepayment provisions and events of default customary for facilities
of this type. Covenants will include certain restrictions on capital
expenditures, consolidations and mergers, sales of assets, incurrence of
indebtedness and creation of liens and encumbrances. The Credit Facility is
expected to include various financial covenants, including a minimum net worth
requirement and required financial ratios in respect of (i) earnings before
interest, taxes, depreciation and amortization ("EBITDA") to interest expense,
(ii) debt to EBITDA and (iii) cash, cash equivalents and net accounts receivable
classified as current assets to current liabilities.
40
<PAGE> 48
HISTORICAL SELECTED
FINANCIAL DATA
The following selected financial data have been derived from the financial
statements and financial information of Semiconductor Systems. The data should
be read in conjunction with the financial statements of Semiconductor Systems
and notes thereto included elsewhere in this Information Statement. The
statement of operations data for the years ended September 30, 1998, 1997, 1996
and 1995 and the balance sheet data as of September 30, 1998, 1997 and 1996 have
been derived from the audited financial statements of Semiconductor Systems. The
statement of operations data for the year ended September 30, 1994 and the
balance sheet data as of September 30, 1995 and 1994 have been derived from
unaudited financial information of Semiconductor Systems.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................ $1,200 $1,412 $1,470 $ 784 $ 599
Cost of sales............................................ 909 744 849 483 347
------ ------ ------ ----- -----
Gross margin............................................. 291 668 621 301 252
Research and development................................. 337 280 155 91 74
Selling, general and administrative...................... 251 191 150 103 79
Purchased research and development(1).................... -- 30 121 -- --
Special charges(2)....................................... 147 -- -- -- --
------ ------ ------ ----- -----
Operating (loss) earnings................................ (444) 167 195 107 99
Other income, net........................................ 14 13 3 4 1
------ ------ ------ ----- -----
(Loss) income before taxes............................... (430) 180 198 111 100
(Benefit) provision for taxes............................ (168) 54 114 35 33
------ ------ ------ ----- -----
Net (loss) income........................................ $ (262) $ 126 $ 84 $ 76 $ 67
====== ====== ====== ===== =====
COMBINED BALANCE SHEET DATA:
(at end of period)
Working capital.......................................... $ 256 $ 222 $ 229 $ 130 $ 95
Property (at cost)....................................... 1,395 1,342 1,053 653 475
Accumulated depreciation................................. (682) (540) (397) (302) (260)
Property, net............................................ 713 802 656 351 215
Intangible assets, net................................... 53 87 36 14 9
Total assets............................................. 1,418 1,486 1,383 671 448
Short-term debt.......................................... 14 14 14 14 14
Rockwell's net investment................................ 1,009 1,107 899 478 301
OTHER DATA:
Capital expenditures..................................... $ 270 $ 317 $ 380 $ 166 $ 148
Depreciation and amortization............................ 220 181 132 61 44
Cash provided by operating activities.................... 98 296 315 106 49
Cash used for investing activities....................... (270) (382) (634) (202) (147)
Cash provided by financing activities.................... 172 86 319 96 98
</TABLE>
- ---------------
(1) Purchased research and development relates to the acquisitions of the
Hi-Media broadband communication chipset business of ComStream Corporation
in May 1997 and Brooktree Corporation in September 1996.
(2) In September 1998, Semiconductor Systems recorded special charges of
approximately $147 million ($90 million after tax) related to its decision
to close and dispose of its wafer fabrication facilities in Colorado
Springs, Colorado, a worldwide workforce reduction and certain other
actions.
41
<PAGE> 49
UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS OF THE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF THE COMPANY
The unaudited pro forma condensed combined balance sheet of the Company has
been derived from the historical balance sheet of Semiconductor Systems and has
been prepared assuming the Distribution occurred on September 30, 1998.
The unaudited pro forma condensed combined balance sheet should be read in
conjunction with the historical financial statements of Semiconductor Systems
and the notes thereto for the three years ended September 30, 1998 included
elsewhere herein. The unaudited pro forma condensed combined balance sheet is
not necessarily indicative of the financial position of the Company had the
Distribution occurred on September 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------
SEMICONDUCTOR
SYSTEMS PRO FORMA COMPANY PRO
HISTORICAL ADJUSTMENTS(1) FORMA
------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash........................................................ $ 14 $ 65(2) $ 79
Receivables................................................. 167 167
Inventories................................................. 201 201
Assets held for disposal.................................... 42 (42)(3) --
Deferred taxes and other current assets..................... 163 (36)(3) 104
(23)(2)
------ ------- ------
Total current assets.................................... 587 (36) 551
Property, net............................................... 713 713
Other assets................................................ 118 118
------ ------- ------
Total assets............................................ $1,418 $ (36) $1,382
====== ======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
Short-term debt............................................. $ 14 $ $ 14
Accounts payable and accrued liabilities.................... 317 317
------ ------- ------
Total current liabilities............................... 331 331
------ ------- ------
Other liabilities........................................... 78 78
Shareowners' equity:
Rockwell's net investment................................... 1,017 (1,017)(4) --
Common stock................................................ -- 95(4) 95
Additional paid-in capital.................................. -- 922(4) 886
(78)(3)
42(2)
Retained earnings........................................... -- --
Currency translation........................................ (8) (8)
------ ------- ------
Total shareowners' equity............................... 1,009 (36) 973
------ ------- ------
Total liabilities and shareowners' equity............... $1,418 $ (36) $1,382
====== ======= ======
</TABLE>
- ---------------
(1) Rockwell will pay the costs related to the Distribution which are estimated
at $18 million and accordingly, such costs are not reflected in the
historical financial statements or as a pro forma adjustment.
(2) Prior to the Distribution, Rockwell will contribute $65 million in cash to
the Company, which will be placed in an escrow account to be used to satisfy
Semiconductor Systems' obligation with respect to the Celeritas litigation.
The adjustment reflects the cash deposit and the realization by Rockwell of
the related tax benefit.
(3) Prior to the Distribution, the Company will distribute its wafer fabrication
facilities in Colorado Springs, Colorado (and the related tax benefit) to
Rockwell. The adjustment reflects the elimination of the assets held for
disposal and the related tax benefit.
(4) To reflect the Distribution as the elimination of Rockwell's net investment
and the issuance of an estimated 95 million shares of Company Common Stock,
par value $1 per share. This is based on the number of shares of Rockwell
Common Stock outstanding on September 30, 1998 of approximately 190 million
shares and the distribution ratio of one share of Company Common Stock for
every two shares of Rockwell Common Stock outstanding.
42
<PAGE> 50
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF THE COMPANY
The unaudited pro forma condensed combined statement of operations of the
Company has been derived from the historical statements of operations of
Semiconductor Systems and has been prepared assuming the Distribution occurred
on October 1, 1997.
The unaudited pro forma condensed combined statement of operations should
be read in conjunction with the historical financial statements of Semiconductor
Systems and notes thereto for the three years in the period ended September 30,
1998 included elsewhere herein. The unaudited pro forma condensed combined
statement of operations is not necessarily indicative of the financial results
of the Company had the Distribution occurred on October 1, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------
SEMICONDUCTOR
SYSTEMS PRO FORMA COMPANY PRO
HISTORICAL ADJUSTMENTS FORMA
------------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Sales................................................... $1,200 $ $1,200
Cost of sales........................................... 909 909
------ ------- ------
Gross margin....................................... 291 291
Research and development................................ 337 337
Selling, general and administrative..................... 251 251
Special charges......................................... 147 147
------ ------- ------
Operating loss..................................... (444) (444)
Other income, net....................................... 14 14
------ ------- ------
Loss before income taxes................................ (430) (430)
Income tax benefit...................................... (168) (168)
------ ------- ------
Net loss........................................... $ (262) $ -- $ (262)
====== ======= ======
Loss per share (basic and diluted)...................... $(2.65)(1)
------
Average outstanding shares.............................. 99.0(1)
======
</TABLE>
- ---------------
(1) Loss per share and average outstanding shares are based on the
post-Distribution capital structure of the Company. These amounts are based
on average outstanding shares of Rockwell Common Stock of 197.9 million for
the year ended September 30, 1998 and the distribution ratio of one share of
Company Common Stock for every two shares of Rockwell Common Stock
outstanding.
43
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Following the Distribution, the Company will be the world's largest company
focused exclusively on providing semiconductor products for communications
electronics. Semiconductor Systems continues to implement a strategic transition
from a narrow offering of primarily analog PC modem products to a more broadly
diversified product portfolio. The Company's product portfolio is now comprised
of its Personal Computing platform, which includes analog PC modems, and the
following expansion platforms: Personal Imaging, Digital Infotainment, Wireless
Communications and Network Access.
From 1991 through 1997, Semiconductor Systems grew rapidly, with average
annual revenue growth of nearly 30 percent, driven principally by the growth of
the Internet and a correspondingly robust demand for data modems for personal
computers. During this growth period, management recognized that Semiconductor
Systems' dependence on analog PC modem products would likely result in declining
revenue and profits over time due to the eventual reduced pace of technological
change and a market migration to lower cost software-based solutions. In view of
the rapid expansion of communications electronics markets in areas beyond
traditional analog data and fax modems, the Company decided to diversify its
product offerings into new, higher growth markets. Beginning in 1995, the
Company aggressively implemented its diversification strategy, more than
trebling its annual research and development investments to $337 million in
fiscal 1998 and making several strategic acquisitions. See "The Semiconductor
Systems Business -- Company Strategy" for a detailed discussion of the Company's
diversification strategy. Expansion platforms generated almost half of the
Company's total sales in fiscal 1998 and are expected to grow as a percentage of
total sales over the next several years. However, the increase in sales in 1998
from the expansion platforms was insufficient to offset the significant decline
in margins from the Company's analog PC data modems.
Following five years of double-digit revenue and profit growth, the
introduction of competing next generation 56 Kbps modem technologies in 1997
greatly intensified price competition in the markets for the Company's
K56Flex(TM) product and its older V.34 modems, resulting in lower operating
earnings. In fiscal 1998, average selling prices of Personal Computing products
fell by approximately 50 percent and the annual growth rate for such products
fell to approximately 20 percent. The greater than expected decline in prices
and lower than expected demand, combined with the Company's increasing
investments in its expansion product platforms and manufacturing process
technology, resulted in disappointing operating performance in fiscal 1998. This
decline in operating performance has been exacerbated by worldwide excess
capacity in the semiconductor industry and the weakening economic environment in
the Asia-Pacific region.
The Company's full-year fiscal 1998 pre-tax loss was $430 million ($262
million after tax). The fourth quarter pre-tax loss was $378 million ($234
million after tax) and includes $275 million associated with the following (in
millions):
<TABLE>
<S> <C>
Special charges............................................. $147(1)
Included in cost of sales:
Inventory write-offs...................................... 66(2)
Intellectual property matters............................. 43(3)
Manufacturing capacity underutilization................... 19(4)
----
Total............................................. $275
====
</TABLE>
- ---------------
(1) In September 1998, the Company implemented a comprehensive plan to
restructure its business to position the Company for future profitability. A
key element of this plan was the decision to close and dispose of its wafer
fabrication facilities in Colorado Springs, Colorado. In addition,
management decided to reduce its worldwide workforce by 10 percent and to
curtail certain market and product development activities. This plan
resulted in special charges of $147 million ($90 million after tax),
44
<PAGE> 52
including $103 million related to the write-down of the Colorado Springs
facilities to fair value, $15 million for employee severance costs and costs
associated with a voluntary early retirement program, $11 million for
intangible asset write-offs, and $18 million of other costs, principally
lease termination costs, contractual liabilities and other asset write-offs.
(2) In the first quarter of fiscal 1998, the Company experienced strong demand
for its modem products, particularly its older V.34 products. As a result of
this first quarter demand and forecasts of high demand throughout the
balance of fiscal 1998, the Company substantially increased production
levels, including the expanded use of external foundries. In the second half
of fiscal 1998, market acceptance of the V.90 standard for 56 Kbps modem
technology, coupled with the precipitous drop in V.90 modem prices due to
intensified competition, substantially reduced the demand for the Company's
V.34 modem inventory, much of which was produced in early 1998. Lower than
anticipated modem sales in the third and fourth quarters of fiscal 1998 and
downward revisions to forecasted demand for certain of its products over the
next six months, particularly for the V.34 modems, caused the Company to
record additional inventory reserves of $66 million in the fourth quarter of
fiscal 1998.
(3) On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed
a trial court's judgment of $57 million, plus interest, related to the
Company's dispute with Celeritas Technologies, Ltd. As a result, the Company
recorded a charge of $35 million to increase its reserve for this matter to
$65 million. The Company also recorded additional provisions of $8 million
in the fourth quarter related to other intellectual property matters.
(4) In July 1998, the Company reduced production at its manufacturing facilities
to levels significantly below capacity, in order to align inventory levels
with anticipated market demand. The Company estimates the cost of this
manufacturing capacity underutilization in the fourth quarter of fiscal 1998
to be approximately $19 million.
The Company anticipates an operating loss before tax of approximately $80
million ($50 million after tax) in the first quarter of fiscal 1999. The pre-tax
operating loss includes $20 million related to the voluntary early retirement
program offered by the Company in September 1998. The first quarter charge
relates to those employees who accepted the Company's offer after September 30,
1998. The estimated operating loss also includes higher advertising costs
related to the introduction of the Company's new identity and higher operating
costs related to the residual effects of lower manufacturing capacity
utilization over the last four months. The Company expects to increase
production to full capacity in the first quarter of fiscal 1999 and is expecting
inventories to be reduced to appropriate levels by the end of the quarter.
Management believes that, as a result of the comprehensive restructuring
plan, as well as other cost reduction initiatives, Semiconductor Systems will be
able to reduce operating costs by over $200 million on an annualized basis.
Assuming a modest increase in unit demand and a return to the historical pattern
of price erosion in the PC modem market, as well as the successful
implementation of the Company's diversification strategy and restructuring plan,
management expects to achieve a return to profitability by the end of fiscal
1999.
45
<PAGE> 53
RESULTS OF OPERATIONS
The following table sets forth the Company's sales by product platform (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Personal Computing.......................................... $ 640 $ 861 $1,173
Personal Imaging............................................ 102 131 113
Wireless Communications..................................... 170 115 45
Digital Infotainment........................................ 145 112 32
Network Access.............................................. 143 193 107
------ ------ ------
Total............................................. $1,200 $1,412 $1,470
====== ====== ======
</TABLE>
The following table sets forth certain Combined Statement of Operations
data of the Company:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................... $1,200 $1,412 $1,470
Cost of sales............................................... 909 744 849
------ ------ ------
Gross margin................................................ 291 668 621
Research and development.................................... 337 280 155
Selling, general and administrative......................... 251 191 150
Purchased research and development.......................... -- 30 121
Special charges............................................. 147 -- --
------ ------ ------
Operating (loss) earnings................................... (444) 167 195
Other income, net........................................... 14 13 3
------ ------ ------
(Loss) income before income taxes........................... (430) 180 198
(Benefit) provision for income taxes........................ (168) 54 114
------ ------ ------
Net (loss) income........................................... $ (262) $ 126 $ 84
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997 1996
------- ------- -------
(AS A PERCENTAGE OF NET SALES)
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 75.8 52.7 57.8
----- ----- -----
Gross margin................................................ 24.2 47.3 42.2
Research and development.................................... 28.1 19.9 10.5
Selling, general and administrative......................... 20.9 13.5 10.2
Purchased research and development.......................... -- 2.1 8.2
Special charges............................................. 12.2 -- --
----- ----- -----
Operating (loss) earnings................................... (37.0) 11.8 13.3
Other income, net........................................... 1.2 0.9 0.2
----- ----- -----
(Loss) income before income taxes........................... (35.8) 12.7 13.5
(Benefit) provision for income taxes........................ (14.0) 3.8 7.8
----- ----- -----
Net (loss) income........................................... (21.8)% 8.9% 5.7%
===== ===== =====
</TABLE>
46
<PAGE> 54
1998 COMPARED TO 1997
Net sales. Net sales decreased 15 percent to $1,200 million in fiscal 1998
from $1,412 million in fiscal 1997. This decrease was principally due to a
decline in sales of $221 million from PC modems in Personal Computing and $50
million from central site modems in Network Access. The decrease in modem sales
in 1998 was due to significant price declines of the Company's V.34 and 56 Kbps
products, partially offset by a 20 percent increase in modem unit volume.
Personal Imaging sales also declined 22 percent to $102 million, reflecting
lower product demand, principally as a result of the protracted Asia-Pacific
recession. These sales declines were partially offset by an increase in sales
from Wireless Communications and Digital Infotainment. Wireless Communications
sales grew 48 percent to $170 million, driven by increased volume of digital
cordless telephone chipsets and power amplifier components. Digital Infotainment
sales grew 30 percent to $145 million as a result of increased demand for video
encoders/decoders and broadband communications products.
Gross margin. Cost of sales consists predominantly of purchased materials,
labor and overhead (including depreciation) associated with product
manufacturing, royalty and other intellectual property costs, warranty and
sustaining engineering expenses pertaining to products sold. Gross margin
decreased 56 percent to $291 million in fiscal 1998 from $668 million in fiscal
1997. As a percentage of sales, gross margin declined to 24 percent in 1998 from
47 percent in fiscal 1997. This decline was due primarily to a 50 percent
reduction in average selling prices of PC modem products, slightly offset by
higher margins on Wireless Communications and Digital Infotainment products.
Gross margin was also adversely impacted by the fourth quarter 1998 inventory
write-off of $66 million (5.5 percent of sales), the $43 million charge (3.6
percent of sales) for intellectual property matters and $19 million (1.6 percent
of sales) related to the underutilization of manufacturing capacity. The 50-day
strike that ended in July 1998 had little or no effect on the full-year
operating results of the Company.
Research and development. Research and development expenses consist
primarily of salaries and selected costs of employees engaged in product/process
research, design and development activities, as well as related subcontracting
activities, prototype development, cost of design tools and technology license
agreement expenses. Investments in new product and process development increased
20 percent to $337 million in fiscal 1998 from $280 million in fiscal 1997. This
increase was due primarily to investments in expansion platform products,
including the expanded use of technology licensing agreements with external
partners. Significant product investments were made in audio/telephony modem
products, higher density central site modems, ATM, T1/E1 and SONET portfolio
expansion, GSM and CDMA RFICs, GSM systems, broadband communication products,
including cable modems, and MFP products. The Company also continued investments
in specialty process development activities, including Bipolar, BiCMOS and GaAs
processes.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses consist mainly of employee expenses not related
to product manufacturing or research and development, commissions to sales
representatives, advertising, marketing expenses, legal costs and provisions for
doubtful accounts. SG&A expenses increased 31 percent to $251 million in fiscal
1998 from $191 million in fiscal 1997. This increase was primarily due to higher
costs of cooperative advertising programs associated with various channel and
brand development campaigns of approximately $26 million and $11 million related
to the growth of the worldwide sales organization to support the Company's
expanding product portfolio, offset by a reduction in the allowance for doubtful
accounts in fiscal 1997, due to favorable resolution of accounts which were
previously reserved.
Operating (loss) earnings. The Company incurred an operating loss of $444
million (including special charges of $147 million) in fiscal 1998, compared to
operating earnings of $167 million (including a $30 million charge for purchased
research and development) in fiscal 1997.
Other income, net. Other income consists of royalty income from technology
license agreements, gains and losses on sales of property and investments and
other non-operating income and expense.
Net (loss) income. The net loss for fiscal 1998 was $262 million, compared
to fiscal 1997's net income of $126 million.
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1997 COMPARED TO 1996
Net sales. Net sales decreased 3.9 percent to $1,412 million in fiscal
1997 from $1,470 million in fiscal 1996 despite the addition of sales resulting
from the acquisition of Brooktree at the end of fiscal 1996. Analog PC modem
sales decreased $312 million due to severe price declines in all the Company's
PC modem products, primarily in connection with the introduction of the
Company's K56Flex(TM) product. Average selling prices for PC modem products
declined by 35 percent compared to fiscal 1996, partially offset by a modem unit
volume increase of 25 percent. This sales decrease was partially offset by sales
increases in the Company's expansion platforms. The Company's Personal Imaging
platform grew 16 percent to $131 million, led by a strong demand for fax modem
chipsets. Network Access sales grew 80 percent to $193 million, related to sales
of remote access concentrators. Digital Infotainment sales grew 250 percent to
$112 million, driven by video encoder/decoder product rollouts and the
introduction of RF tuner products. Sales in Wireless Communications increased
$70 million (or 156 percent) over the prior year primarily due to growth in
sales of the Company's digital cordless telephone products and power amplifier
components.
Gross margin. Gross margin increased 7.6 percent to $668 million in fiscal
1997 from $621 million in fiscal 1996. As a percentage of sales, gross margin
increased to 47 percent from 42 percent. This increase was due to $107 million
of lower costs of intellectual property matters in fiscal 1997 compared to
fiscal 1996, partially offset by the impact of approximately 25 percent lower
average selling prices for modem products.
Research and development. Investments in new product and process
development increased 81 percent to $280 million in fiscal 1997 from $155
million in fiscal 1996. This increase was due primarily to an increase in
investments in mixed signal and manufacturing process technologies and the
inclusion of research and development expenditures from Brooktree, the Hi-Media
broadband communication chipset business acquired from ComStream Corporation
("Hi-Media") and the Company's other acquisitions.
Selling, general and administrative. SG&A expenses increased 27 percent to
$191 million in fiscal 1997 from $150 million in fiscal 1996. The increase was
due to the inclusion of SG&A costs from Brooktree, costs of $6 million related
to the growth in the Company's worldwide sales organization and a $7 million
increase in advertising costs for the K56Flex(TM) campaign. The increase was
partially offset by a decrease in bad debt expense of $26 million associated
with receipt of payments for accounts which were previously reserved.
Operating earnings. Operating earnings (including a $30 million charge for
purchased research and development in connection with the acquisition of
Hi-Media) were $167 million in fiscal 1997, a decrease of $28 million from
operating earnings (including a $121 million charge for purchased research and
development in connection with the Brooktree acquisition) of $195 million in
fiscal 1996.
Other income, net. Other income increased $10 million from 1996 to 1997,
principally resulting from $7 million of income related to the favorable
settlement of a technology license dispute in 1997.
Net income (loss). Net income in 1997 was $126 million, compared with net
income of $84 million in 1996.
INCOME TAXES
The effective income tax rates for Semiconductor Systems were determined on
a stand-alone basis and were 39.1 percent in 1998, 30.0 percent in 1997 and 57.6
percent in 1996. The effective tax rates are generally lower than the statutory
rate due to tax benefits utilized by Semiconductor Systems related to export
sales and research credits. The effective tax rate was higher in fiscal 1996 due
to the non-deductible charge recorded in connection with the Brooktree
acquisition.
ACQUISITIONS
In September 1996, the Company acquired Brooktree, a designer and supplier
of mixed-signal integrated circuits for high-speed digital communications and
media processing applications, for $254 million, net of cash acquired. The
excess of the purchase price over the fair value of tangible net assets of $178
million was allocated to intangible assets, including $50 million for developed
technology, $7 million for assembled
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workforce and $121 million for purchased research and development. Developed
technology and assembled workforce are being amortized on a straight-line basis
over eight and ten years, respectively.
Purchased research and development, which represented the value assigned to
projects in process at Brooktree at the date of acquisition which had not yet
reached technological feasibility and had no alternative future use, was charged
immediately to expense. The research and development projects related to three
categories of products in process: Communications, which includes products for
the telecommunications industry and high-speed T1/E1 applications, as well as
WAN and ATM products; Graphics and Imaging, which includes integrated circuits
that enable PC vendors to offer cost-effective graphic and video processing; and
Multimedia, which includes products that enable PCs to simultaneously control
graphics, text, animation, sound and video through use of "packeted data".
At the date of the acquisition, Brooktree had several projects in process
at various stages of completion. The efforts to complete these projects included
finalization of design, device layout, fabrication, testing and systems
integration. At the date of the acquisition, the estimated amount and timing of
effort to complete these projects varied by product platform and averaged
approximately $40 million annually for the first five years after the
acquisition, declining steadily thereafter.
In May 1997, the Company acquired Hi-Media for $42 million in cash. The
purchase price allocation included $30 million ($19 million after-tax) for
purchased research and development. The projects in process at Hi-Media at the
date of acquisition which had not yet reached technological feasibility and had
no alternative future use related to integrated circuits for the direct
broadcast satellite (DBS), wireless (MMDS) and cable modem markets. The efforts
to complete these projects included finalization of design, device layout,
fabrication, testing and systems integration. At the date of the acquisition,
the estimated amount and timing of effort to complete these projects varied by
product platform and averaged approximately $11 million annually for the first
five years after the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor Systems has obtained significant investments from Rockwell as
the business pursued its strategies of product diversification and development
of world-class manufacturing capabilities. Net transfers of cash from Rockwell
to Semiconductor Systems totaled $172 million in fiscal 1998, $86 million in
fiscal 1997 and $341 million in fiscal 1996.
Cash provided by operating activities was $98 million in fiscal 1998, $296
million in fiscal 1997 and $315 million in fiscal 1996. The Company's fiscal
1998 operating activities generated almost $100 million in cash despite the
significant net loss, due in part to improvement in accounts receivable
collections and the non-cash special and other charges included in 1998's net
loss. Fiscal 1997's operating cash flow was due to the Company's strong
profitability, offset somewhat by the settlement of certain intellectual
property matters. Fiscal 1996's operating cash flow was driven by explosive
revenue growth principally for the Company's V.34 PC modem products, partially
offset by increases in receivables and inventories of $205 million, related to
this strong market demand.
Cash provided by operating activities as well as transfers from Rockwell
have funded significant investments in product and process technology, including
capital expenditures of $270 million in fiscal 1998, $317 million in fiscal 1997
and $380 million in fiscal 1996. The capital expenditures included capacity
expansion at the Company's main fabrication facility in Newport Beach,
California and investments in manufacturing process technology to reduce
manufacturing costs. The Company also made several strategic acquisitions to
broaden its product portfolio and market positions. These acquisitions included
Brooktree, for approximately $254 million (net of cash acquired) in fiscal 1996
and Hi-Media for approximately $42 million in fiscal 1997. Investing activities
from fiscal 1996 through fiscal 1998 also included approximately $128 million of
cash used for the Company's wafer fabrication facilities in Colorado Springs,
Colorado.
Management expects that cash requirements during the next two or three
years will be reduced by several factors. As the Company's expansion platforms
mature, research and development expenditures should decline from $337 million
in fiscal 1998 to approximately $250 million in fiscal 1999. After several years
of
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significant capital investments to improve manufacturing capabilities, the
Company expects fiscal 1999 capital expenditures to decline to approximately
$160 million from $270 million in fiscal 1998. In addition, the Company is
exploring wafer manufacturing alternatives, including the increased use of
foundries, joint ventures or other actions. These manufacturing alternatives are
expected to keep capital expenditures over the next two to three years below
$200 million per year.
In September 1998, Semiconductor Systems began to take initial steps to
obtain financing on a stand-alone basis, in order to operate as an independent
company. Prior to the Distribution, the Company expects to enter into a
three-year $350 million secured revolving credit facility with a group of banks.
See "Credit Facility". Management believes that the credit facility, coupled
with improved operating cash flow resulting in part from the actions initiated
in the fourth quarter of fiscal 1998, will be sufficient to fund future capital
requirements.
Prior to the Distribution, the Company will distribute its wafer
fabrication facilities in Colorado Springs, Colorado (and the related tax
benefit) to Rockwell. In addition, Rockwell will contribute $65 million in cash
to the Company, which will be placed in an escrow account to be used to satisfy
the Company's obligation with respect to the Celeritas litigation.
YEAR 2000
Semiconductor Systems has developed plans to address issues related to the
impact of the Year 2000 on each of five major areas: the Company's products,
business systems (computer systems that handle business processes),
infrastructure (servers, desktop computers, networks, telecom systems and
software), manufacturing systems (computer systems used in the manufacturing
process) and suppliers (critical materials suppliers to the business). Each of
the five areas will undergo the following process to ensure readiness for the
Year 2000. First, in the inventory phase, all Semiconductor Systems assets are
inventoried to identify those that have any type of software or hardware Year
2000-related issues. Second, in the assessment phase, all inventoried items are
assessed to confirm that a Year 2000-related issue is present and the extent of
remediation required. Third, in the strategy phase, a remediation strategy is
created to ensure that all critical systems are upgraded to be Year 2000 ready
by December 31, 1999. Fourth, in the conversion/upgrade phase, upgrades are
performed on all items identified in the assessment and strategy phases.
Finally, in the certification phase, all upgraded items receive final
certification testing to verify Year 2000 readiness. Semiconductor Systems has
completed the inventory phase for all five areas. In addition, it has completed
the assessment and strategy phases and is currently in the conversion and
certification phases for the products, business systems and manufacturing
systems areas. Semiconductor Systems is currently in the assessment and strategy
phases for the infrastructure and supplier areas. Semiconductor Systems is
integrating its testing efforts with SEMATECH, a consortium of semiconductor
manufacturing companies, to ensure best practice testing. The manufacturing
systems, hardware systems and software applications areas are being tested under
the SEMATECH guidelines.
The Company's greatest area of uncertainty centers primarily in the
supplier and manufacturing areas, due to the number of equipment and materials
suppliers involved and their various stages of readiness for Year 2000. In
particular, the Company is dependent on semiconductor equipment manufacturers to
supply the upgrades required to remediate Year 2000 issues in the manufacturing
systems area and suppliers to upgrade their systems to ensure an uninterrupted
supply of materials. A Year 2000-related failure by a significant equipment or
materials supplier could result in the temporary slowdown of production by the
Company, the duration of which the Company reasonably estimates would be not
more than a few days. As a result, the Company's contingency planning centers
heavily on the supplier and manufacturing systems areas. For the top 5 to 10
percent of its critical materials and manufacturing suppliers, the Company is
planning on-site audits and intends to monitor specific Year 2000-based
milestones to ensure compliance. In the event a supplier does not meet the
Company's milestones for Year 2000 compliance, the Company is in the process of
identifying specific target dates (beginning as early as April 1999) for all
critical materials suppliers by which the Company will implement a contingency
plan that includes alternate sourcing and stockpiling of materials.
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Part of the Company's initial assessment phase included a detailed Year
2000 questionnaire sent to all critical materials and manufacturing suppliers.
This questionnaire included questions on products, services, internal operating
systems and the supplier's own supply chain. To date, the Company has received
responses from approximately 80 percent of those questioned. The Company is
following up the questionnaires, where necessary, with on-site audits to ensure
Year 2000 compliance. The Company has also contacted its major customers with
respect to their Year 2000 compliance efforts and does not believe that
customers will have any Year 2000 compliance problems that would have a material
adverse effect on the Company's business.
Semiconductor Systems, utilizing both internal and external resources to
address the Year 2000 issue, expects to be substantially complete with this
project by the middle of calendar year 1999. The current estimate of total
project cost is approximately $6 million, which includes the cost of purchasing
certain hardware and software. Approximately $5 million of this amount is for
capital investments, with the remainder being expenses (primarily salary costs).
At September 30, 1998, approximately $500,000 had been spent, with the majority
of the remaining amount to be spent within the next year. Semiconductor Systems
continues to evaluate the estimated costs associated with these efforts based on
actual experience. Management believes, based on available information, that the
Company will be able to remediate Year 2000-related issues in the products,
business systems and infrastructure areas without any material adverse effect on
its business operations, products or financial condition. However, the Company
could be adversely impacted by the Year 2000 issues faced by major suppliers,
distributors, customers, vendors and financial services organizations with which
the Company interacts. Any disruption in the Company's operations as a result of
the failure of any of these third parties to be Year 2000 compliant could have a
material adverse effect on Semiconductor Systems' business operations, products
and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash, short-term debt and
foreign currency forward exchange contracts. At September 30, 1998, the carrying
values of the Company's financial instruments approximated their fair values
based on current market prices and rates.
It is the policy of the Company not to enter into derivative financial
instruments for speculative purposes. The Company enters into foreign currency
forward exchange contracts to protect itself from adverse currency rate
fluctuations on foreign currency commitments entered into in the ordinary course
of business. These commitments are generally for terms of less than one year.
The foreign currency forward exchange contracts are executed with creditworthy
banks and are denominated in currencies of major industrial countries. The
notional amount of all the Company's outstanding foreign currency forward
exchange contracts aggregated $17 million at September 30, 1998 and $28 million
at September 30, 1997. The gains and losses relating to these foreign currency
forward exchange contracts are deferred and included in the measurement of the
foreign currency transaction subject to the hedge. The Company believes that any
gain or loss incurred on foreign currency forward exchange contracts is offset
by the effects of currency movements on the respective underlying hedged
transactions.
Based on the Company's overall currency rate exposure at September 30,
1998, a 10 percent change in currency rates would not have had a material effect
on the financial position, results of operations or cash flows of the Company.
CAUTIONARY STATEMENT
This Information Statement contains statements relating to future results
of the Company (including certain projections and business trends) that are
"forward-looking statements". Actual results may differ materially from those
projected as a result of certain risks and uncertainties. These risks and
uncertainties include, but are not limited to, global and market conditions,
including, but not limited to, the cyclical nature of the semiconductor industry
and the markets addressed by the Company's and its customers' products; demand
for and market acceptance of new and existing products; successful development
of new products; the timing of new product introductions; the availability and
extent of utilization of manufacturing capacity; price erosion; other
competitive factors; changes in product mix; fluctuations in manufacturing
yields; product
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obsolescence; the ability to develop and implement new technologies and to
obtain protection of the related intellectual property; a modest increase in
unit demand and a return to the historical pattern of price erosion in the PC
modem market, as well as the successful implementation of the Company's
diversification strategy and restructuring plan; labor relations of the Company,
its customers and suppliers; competitive product and pricing pressures; timely
completion of the Year 2000 modifications by the Company and its key suppliers
and customers; and the uncertainties of litigation, as well as other risks and
uncertainties, including but not limited to those set forth under "Risk Factors"
and those detailed from time to time in the filings of the Company with the
Commission.
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THE DISTRIBUTION
INTRODUCTION
On November 4, 1998, the Board of Directors of Rockwell approved the
Distribution, which will result in the separation of Rockwell into two companies
by means of a tax-free spin-off of Semiconductor Systems. The Distribution is
expected to occur at the close of business on December 31, 1998 (subject to the
satisfaction or waiver of certain conditions set forth in the Distribution
Agreement). At the time of the Distribution, the Company will own, directly or
through subsidiaries, substantially all of the assets, liabilities (including
liabilities relating to former operations) and operations which prior to the
Distribution Date comprise Semiconductor Systems. See "The Semiconductor Systems
Business".
Shareowners of Rockwell with inquiries relating to the Distribution should
contact the Distribution Agent, telephone number (800) 204-7800, or Rockwell
Shareowner Services, telephone number (714) 424-4550. After the Distribution
Date, shareowners of the Company with inquiries relating to the Distribution or
their investment in the Company should contact the Company at 4311 Jamboree
Road, Newport Beach, California 92660-3095, telephone number (949) 221-4600 or
ChaseMellon, the Company's Transfer Agent, at P.O. Box 3315, South Hackensack,
New Jersey 07606-1915, telephone number (888) 470-5829.
BACKGROUND AND REASONS FOR THE DISTRIBUTION
Rockwell's Board of Directors believes that the Distribution will
accomplish a number of important business objectives and, by enabling Rockwell
and the Company to develop their respective businesses separately, should better
position the two companies to produce greater total shareowner value over the
long term. The Distribution will separate Semiconductor Systems from Rockwell's
remaining automation (the "Automation Business") and avionics and communications
(the "Avionics & Communications Business") businesses, each with distinct
financial, investment and operating characteristics, so that each can adopt
strategies and pursue objectives appropriate to its specific business. The
Distribution will permit the management of each company to prioritize the
allocation of its respective management and financial resources for achievement
of its own corporate objectives. In particular, Rockwell believes that the
Distribution will permit each business to maximize its strengths and provide
greater flexibility to pursue business opportunities, including acquisitions,
joint ventures and other business alliances and combinations. In addition, the
establishment of Company Common Stock as a separate, publicly-traded equity
security will increase the Company's ability to participate in the ongoing
process of consolidation in its industry by facilitating the Company's ability
to effect acquisitions using Company Common Stock as consideration. Further, the
Distribution is expected to allow each of Rockwell and the Company to attract,
motivate and retain key personnel by enabling Rockwell and the Company to
provide more effective incentive compensation programs that are based on the
performance of the respective business in which such individuals are employed
without being influenced by the results of the business in which they have no
involvement. The Distribution also will enable shareowners and potential
investors to evaluate better the financial performance of each business and its
strategies, enhancing the likelihood that each will achieve appropriate market
recognition for its own performance.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution is expected to be made on the Distribution Date to
shareowners of record of Rockwell Common Stock as of the close of business on
the Record Date. On the Distribution Date, Rockwell will effect the Distribution
by delivering all of the outstanding shares of Company Common Stock to the
Distribution Agent for allocation to the holders of record of Rockwell Common
Stock as of the close of business on the Record Date. In the Distribution, each
Rockwell shareowner will receive one share of Company Common Stock for every two
shares of Rockwell Common Stock held as of the close of business on the Record
Date. The delivery of a share of Company Common Stock in connection with the
Distribution also will constitute the delivery of the Company Right (as defined
below) associated with such share. Based on the number of
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shares of Rockwell Common Stock outstanding as of October 31, 1998,
approximately 95 million shares of Company Common Stock will be distributed in
the Distribution.
Company shareowners will have their ownership of Company Common Stock
registered only in book-entry form. Book-entry registration refers to a method
of recording stock ownership in the Company's records in which no share
certificates are issued. On the Distribution Date, each owner of Rockwell Common
Stock as of the close of business on the Record Date will be credited through
book-entry in the records of the Company with the number of whole shares of
Company Common Stock received by the shareowner. Commencing on or about the
Distribution Date, the Distribution Agent will begin mailing account statements
to such Rockwell shareowners indicating the number of shares of Company Common
Stock that each such shareowner owns. Following the Distribution Date, any
Company shareowner whose ownership of Company Common Stock is registered in
book-entry form may obtain at any time without charge, physical certificates to
represent the number of whole shares owned by such shareowner by contacting the
Transfer Agent. All shares of Company Common Stock distributed in the
Distribution will be fully paid and nonassessable and holders thereof will not
be entitled to preemptive rights. See "Description of Company Capital
Stock -- Company Common Stock".
Fractional shares of Company Common Stock will not be distributed.
Fractional shares will be aggregated and sold in the public market by the
Distribution Agent and the aggregate net proceeds will be distributed ratably to
those shareowners entitled to fractional interests. See "-- Certain Federal
Income Tax Consequences of the Distribution".
Participants in the Rockwell Investor Services Program will be credited
with the number of whole shares of Company Common Stock distributed in the
Distribution in respect of the Rockwell Common Stock held in their accounts.
Shares of Company Common Stock credited as a result of the Distribution to
participants in the Rockwell Investor Services Program in respect of the
Rockwell Common Stock held by such participants in their accounts will be
aggregated with shares of Company Common Stock distributed in the Distribution
in respect of Rockwell Common Stock held outside such accounts (except shares
held in the Rockwell Savings Plan) and will be credited to such shareowner
through book-entry in the records of the Company. After such aggregation any
fractional shares will be sold and the net proceeds distributed in the same
manner as described above.
Participants in the Rockwell Savings Plan will have their Rockwell Common
Stock accounts credited with the number of shares (including fractional shares)
of Company Common Stock distributed in the Distribution in respect of the
Rockwell Common Stock held in their Rockwell Savings Plan accounts. Individual
Rockwell Savings Plan participants, rather than the Rockwell Savings Plan, will
have authority to determine if and when shares of Company Common Stock held in
their Rockwell Savings Plan accounts will be sold. See "Arrangements Between
Rockwell and the Company -- Employee Matters Agreement".
NO CONSIDERATION WILL BE PAID BY SHAREOWNERS OF ROCKWELL FOR THE SHARES OF
COMPANY COMMON STOCK TO BE RECEIVED BY THEM IN THE DISTRIBUTION, NOR WILL THEY
BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF ROCKWELL COMMON STOCK OR TAKE ANY
OTHER ACTION IN ORDER TO RECEIVE COMPANY COMMON STOCK.
The Distribution will not affect the number of outstanding shares of
Rockwell Common Stock or the rights attendant thereto. Certificates representing
outstanding shares of Rockwell Common Stock will continue also to represent
rights to purchase shares of Series A Junior Participating Preferred Stock,
without par value, of Rockwell ("Rockwell Junior Preferred Stock") pursuant to
the Rights Agreement, dated as of November 30, 1996, between Rockwell and
ChaseMellon, as rights agent.
TRADING MARKET
There is no current trading market for the Company Common Stock, and while
a "when-issued" trading market is expected to develop prior to the Distribution,
there can be no assurance as to the prices at which trading in the Company
Common Stock will occur after completion of the Distribution. See "Risk
Factors --
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No Prior Market For Company Common Stock; Volatility; Possibility of Substantial
Sales of Company Common Stock".
Application has been made for approval of trading and quotation of the
Company Common Stock on Nasdaq under the proposed trading symbol "CNXT". The
Company initially will have approximately 59,000 shareowners of record, based on
the number of record holders of Rockwell Common Stock as of October 31, 1998.
For certain information regarding options to purchase Company Common Stock that
will be or may become outstanding after the Distribution, see "Arrangements
Between Rockwell and the Company -- Employee Matters Agreement", "Management of
the Company -- Historical Compensation of Executive Officers" and "-- Benefit
Plans Following the Distribution".
Shares of Company Common Stock distributed to Rockwell shareowners in the
Distribution will be freely transferable, except for shares received by persons
who may be deemed to be "affiliates" of the Company under the Securities Act of
1933, as amended (the "Securities Act"), and the rules promulgated thereunder.
Persons who may be deemed to be affiliates of the Company after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with the Company, and may include certain officers and
directors of the Company as well as principal shareowners of the Company, if
any. Persons who are affiliates of the Company will be permitted to sell their
shares of Company Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144
under the Securities Act.
DIVIDEND POLICY
It is anticipated that following the Distribution, the Company initially
will not pay cash dividends and Rockwell initially will continue to pay
quarterly cash dividends at the same annual rate of $1.02 per share as currently
paid on Rockwell Common Stock. However, the declaration and payment of dividends
by the Company and Rockwell will be at the sole discretion of their respective
Boards of Directors.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Rockwell has received the Tax Ruling from the IRS to the effect that the
Distribution will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(D) of the Code. So long as the Distribution qualifies as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Code
and is not disqualified as a tax-free transaction to Rockwell under Section
361(c)(2) of the Code because of a post-Distribution acquisition of Rockwell or
the Company by a third party, the material United States federal income tax
consequences of the Distribution will be as follows:
(i) no gain or loss will be recognized by or be includable in the
income of a holder of Rockwell Common Stock solely as a result of the
receipt of Company Common Stock in the Distribution, except, as described
below, in connection with cash received in lieu of fractional shares of
Company Common Stock;
(ii) no gain or loss will be recognized by Rockwell upon the
Distribution;
(iii) assuming that a holder of Rockwell Common Stock holds such
Rockwell Common Stock as a capital asset, such holder's holding period for
Company Common Stock received in the Distribution will include the period
during which such Rockwell Common Stock was held;
(iv) a Rockwell shareowner who receives cash as a result of the sale
of a fractional share of Company Common Stock by the Distribution Agent on
behalf of such shareowner will be treated as having received such
fractional share in the Distribution and then having sold such fractional
share. Accordingly, such shareowner will recognize gain or loss equal to
the difference between the cash received and the amount of tax basis
allocable (as described below) to such fractional share. Such gain or loss
will be capital gain or loss if such fractional share would have been held
by such shareowner as a capital asset; and
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(v) the tax basis of Rockwell Common Stock held by a Rockwell
shareowner immediately prior to the Distribution will be apportioned (based
upon relative fair market values at the time of the Distribution) between
such Rockwell Common Stock and Company Common Stock received (including any
fractional share of Company Common Stock deemed received) by such
shareowner in the Distribution.
While the Tax Ruling relating to the qualification of the Distribution as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Code
generally is binding on the IRS, the continuing validity of the Tax Ruling is
subject to certain factual representations and assumptions. Rockwell and the
Company are not aware of any facts or circumstances which would cause such
representations and assumptions to be untrue. If the Distribution were not to
qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(D)
of the Code, Rockwell would recognize taxable gain equal to the excess of the
fair market value of the Company Common Stock distributed to Rockwell's
shareowners over Rockwell's tax basis in such Company Common Stock. In addition,
each Rockwell shareowner who receives Company Common Stock in the Distribution
would generally be treated as receiving a taxable distribution in an amount
equal to the fair market value of the Company Common Stock. If the Distribution
qualified under Section 368(a)(1)(D) of the Code but was disqualified as
tax-free to Rockwell under Section 361(c)(2) of the Code because of a post-
Distribution acquisition of Rockwell or the Company, Rockwell would recognize
taxable gain as described in the second preceding sentence above but the
Distribution would generally be tax-free to each Rockwell shareowner as
described in the preceding paragraph. See "Risk Factors -- Certain Federal
Income Tax Considerations".
Promptly following the Distribution, information with respect to the
allocation of tax basis between Rockwell Common Stock and Company Common Stock
will be made available to the holders of Rockwell Common Stock.
THE FOREGOING IS ONLY A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED
FOR GENERAL INFORMATION ONLY. EACH ROCKWELL SHAREOWNER SHOULD CONSULT HIS OR HER
TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
SHAREOWNER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND
AS TO POSSIBLE CHANGES IN TAX LAW THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED
ABOVE.
The Tax Allocation Agreement provides that neither Rockwell nor the Company
is to take any action inconsistent with, nor fail to take any action required
by, the request for the Tax Ruling or the Tax Ruling unless required to do so by
law or the other party has given its prior written consent or, in certain
circumstances, a supplemental ruling permitting such action is obtained. See
"Arrangements Between Rockwell and the Company -- Tax Allocation Agreement".
CONDITIONS; TERMINATION
The Distribution is subject to the satisfaction or waiver of certain
conditions as set forth in the Distribution Agreement. Regardless of whether the
conditions are satisfied, Rockwell's Board of Directors, in its sole discretion,
without approval of Rockwell's shareowners, may terminate the Distribution
Agreement and abandon the Distribution at any time prior to the effective time
of the Distribution. See "Arrangements Between Rockwell and the
Company -- Distribution Agreement".
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ARRANGEMENTS BETWEEN ROCKWELL AND THE COMPANY
For the purpose of governing certain of the relationships between Rockwell
and the Company relating to the Distribution, to provide for an orderly
transition and for other matters, Rockwell and the Company will, prior to the
Distribution, enter into the agreements described below, forms of which (other
than the Transition Agreement) have been filed as exhibits to the Registration
Statement of which this Information Statement is a part. The following summaries
of the material terms of these agreements are qualified by reference to the
agreements as so filed.
DISTRIBUTION AGREEMENT
Rockwell and the Company will enter into a distribution agreement (the
"Distribution Agreement") providing for, among other things, the principal
corporate transactions required to effect the separation of Semiconductor
Systems from the Automation and Avionics & Communications Businesses and the
Distribution, and certain other agreements governing the relationship between
Rockwell and the Company with respect to or in consequence of the Distribution.
The Distribution Agreement provides for the Distribution to be effective as of
the close of business on the Distribution Date.
The Distribution Agreement further provides that prior to the Distribution,
Rockwell will transfer to the Company certain assets and liabilities of
Semiconductor Systems (including liabilities relating to former operations) not
already owned by the Company, including the stock of certain subsidiaries, and
the Company will transfer to Rockwell all assets and liabilities not
constituting part of Semiconductor Systems, including all assets and liabilities
of Rockwell's electronic commerce business. Rockwell will retain all cash and
cash equivalents of the Company and its wholly-owned subsidiaries at the time of
the Distribution, except for an amount equal to certain outstanding indebtedness
of the Company that will be retained by the Company (expected to be
approximately $14 million) and $65 million to be contributed to the Company in
respect of the Celeritas litigation, as described in the second following
paragraph. The Distribution Agreement generally provides for the elimination of
intercompany indebtedness between Rockwell and the Company in existence at the
time of the Distribution.
The Distribution Agreement provides that prior to the Distribution, the
Company will distribute its wafer fabrication facilities in Colorado Springs,
Colorado (and the related tax benefit) to Rockwell. The Company will continue to
occupy the facilities after the Distribution until April 30, 1999 pursuant to a
lease from Rockwell. See "-- Transition Agreement".
The Distribution Agreement also provides that prior to the Distribution,
Rockwell will contribute $65 million in cash to the Company, which will be
placed in an escrow account to be used to satisfy Semiconductor Systems'
obligation with respect to the Celeritas litigation. Pursuant to the
Distribution Agreement, the Company will be obligated to reimburse Rockwell for
any portion of the amount escrowed that is not used to satisfy the obligation
and is returned to the Company.
Rockwell will retain all intellectual property owned by Rockwell or any of
its subsidiaries other than intellectual property used primarily in or related
primarily to Semiconductor Systems, which will be transferred to the Company
prior to the Distribution. The Distribution Agreement also includes cross
licenses by each of Rockwell and the Company to the other of rights to use,
subsequent to the Distribution, intellectual property of the licensor to the
extent the same is used by the licensee at the time of the Distribution. In
addition, for a period of five years following the Distribution Date, in certain
circumstances the Distribution Agreement authorizes each of Rockwell and the
Company to grant licenses of intellectual property owned by the other to
third-parties in connection with the resolution of intellectual property
disputes or the formation of alliances.
The Distribution Agreement provides that after the Distribution, Rockwell
will have all rights in and to the names "Rockwell" and "Rockwell International"
and all derivatives thereof, except for certain limited rights of use granted to
the Company. The Company will change the names of its subsidiaries to eliminate
therefrom the names "Rockwell", "Rockwell International" and all derivatives
thereof.
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In addition, pursuant to the Distribution Agreement, the Company will
assume all liabilities in respect of environmental matters to the extent
relating to current and former operations of Semiconductor Systems and
responsibility for all current and future litigation (including environmental
and intellectual property proceedings) against Rockwell or its subsidiaries to
the extent relating to Semiconductor Systems.
Subject to certain exceptions, the Distribution Agreement provides for
cross-indemnities principally designed to place financial responsibility for the
liabilities of Semiconductor Systems (including liabilities relating to former
operations) with the Company and financial responsibility for the liabilities of
the Automation and Avionics & Communications Businesses (including liabilities
relating to former operations) with Rockwell. In addition, the Distribution
Agreement provides that each of Rockwell and the Company will indemnify the
other in the event of certain liabilities arising under the Exchange Act.
The Distribution Agreement provides that prior to the Distribution the
Board of Directors of the Company will approve the Company Certificate and the
Company By-Laws and that the Company and Rockwell will take all actions which
may be required to elect or otherwise appoint as directors of the Company, at or
prior to the time of the Distribution, the persons named herein to constitute
the Company's Board of Directors at the time of the Distribution. See
"Management of the Company -- Directors of the Company".
The Distribution Agreement provides generally that all costs and expenses
incurred prior to the Distribution in connection with the Distribution, the
preparation, execution and delivery of the Distribution Agreement, the Employee
Matters Agreement, the Tax Allocation Agreement and the Transition Agreement and
the consummation of the transactions contemplated thereby will be charged to and
paid by Rockwell, other than the costs and expenses of the Credit Facility and
other costs and expenses to the extent relating to operations of Semiconductor
Systems subsequent to the Distribution, which will be charged to and paid or
reimbursed by the Company. Except as otherwise expressly provided, all costs and
expenses incurred following the Distribution in connection with the
implementation thereof will be charged to and paid by the party for whose
benefit the expenses are incurred, with any expenses which cannot be allocated
on such basis to be split equally between Rockwell and the Company.
The Distribution Agreement provides that the Distribution will not be made
until all of the following conditions are satisfied or waived by Rockwell's
Board of Directors in its sole discretion:(i) receipt of the Tax Ruling; (ii)
final approval by Rockwell's Board of Directors of the Distribution; (iii)
receipt of all material consents required to effect the Distribution; (iv) the
Registration Statement of which this Information Statement is a part becoming
effective under the Exchange Act; (v) the Company Certificate, the Company
By-Laws and the Company Rights Agreement being adopted and in full force and
effect; (vi) the Company Common Stock being approved for trading and quotation
on Nasdaq; (vii) the transactions contemplated by the Distribution Agreement in
connection with separating Semiconductor Systems and the Automation and Avionics
& Communications Businesses being consummated in all material respects; (viii)
Rockwell and the Company having entered into each of the agreements,
instruments, understandings, assignments and other arrangements to be entered
into in connection with the transactions contemplated by the Distribution
Agreement, including, without limitation, any conveyance documents, the Employee
Matters Agreement, the Tax Allocation Agreement and the Transition Agreement,
and each such agreement being in full force and effect; (ix) a "no-action"
letter from the staff of the Commission being issued and in full force and
effect regarding the sale of Company Common Stock to be received by the Rockwell
Savings Plans in the Distribution by or on behalf of non-affiliate plan
participants without compliance with Rule 144 under the Securities Act; (x) no
order, injunction or decree having been issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing consummation of
the Distribution being in effect; and (xi) no suit, action or proceeding by or
before any court of competent jurisdiction or other governmental entity having
been commenced and pending to restrain or challenge the Distribution, and no
inquiry having been received that in the reasonable judgment of the Board of
Directors of Rockwell may lead to such a suit, action or proceeding. Rockwell
has received the Tax Ruling and on November 4, 1998 Rockwell's Board of
Directors approved the Distribution subject to satisfaction or waiver of the
other conditions described above. Even if all the conditions have been
satisfied, the Distribution Agreement may be terminated and the Distribution
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<PAGE> 66
abandoned by Rockwell's Board of Directors, in its sole discretion, without the
approval of Rockwell shareowners, at any time prior to the Distribution.
EMPLOYEE MATTERS AGREEMENT
Rockwell and the Company will enter into an employee matters agreement (the
"Employee Matters Agreement") providing for certain matters relating to
employees, employee benefit plans and compensation arrangements for current and
former employees of Semiconductor Systems and their beneficiaries (collectively,
the "Company Participants").
The Employee Matters Agreement provides that, except as expressly set forth
therein, effective as of the time of the Distribution, the Company will or will
cause one or more of its subsidiaries to assume or retain, as the case may be,
all liabilities of Rockwell and its subsidiaries with respect to Company
Participants relating to employment by Rockwell or its subsidiaries, including
liabilities under medical, retiree health and life insurance, short and
long-term disability, workers compensation and other employee benefit plans,
policies and agreements.
Pursuant to the Employee Matters Agreement and subject to the terms and
conditions thereof, Rockwell will retain liabilities for all vested benefits of
Company Participants accrued to the time of the Distribution under Rockwell's
U.S. and certain foreign pension plans and all related assets. Rockwell will
cause each employee participating in Rockwell's U.S. and such foreign pension
plans who will be employed by the Company at the time of the Distribution to
have a fully nonforfeitable right to such employee's benefit payable at normal
retirement age under Rockwell's U.S. and such foreign pension plans accrued as
of the time of the Distribution. Notwithstanding the foregoing, Rockwell shall
not grant to Company Participants credit for any purpose under Rockwell's U.S.
and such foreign pension plans for service with the Company after the
Distribution Date, including without limitation, credit for purposes of
determining eligibility for any early retirement or disability pension. The
Company will establish a defined benefit pension plan covering employees of
Semiconductor Systems who are members of Local 2295 of the International
Brotherhood of Electrical Workers and will establish a defined benefit pension
plan covering certain salaried employees accepting early retirement from the
Company as part of a voluntary early retirement program. The Company does not
expect to establish defined benefit pension plans for its remaining hourly and
salaried U.S. employees.
The Employee Matters Agreement also provides for adjustment of outstanding
options to purchase Rockwell Common Stock ("Rockwell Options") granted under the
Rockwell International Corporation 1995 Long-Term Incentives Plan (the "Rockwell
1995 LTIP"), the Rockwell International Corporation 1988 Long-Term Incentives
Plan (the "Rockwell 1988 LTIP") and the Rockwell International Corporation
Directors Stock Plan (the "Rockwell Directors Plan", and, together with the
Rockwell 1995 LTIP and the Rockwell 1998 LTIP, the "Rockwell Option Plans").
Pursuant to the Employee Matters Agreement, Rockwell Options held by employees
of Semiconductor Systems at the time of the Distribution will be replaced with
options to purchase shares of Company Common Stock ("Company Options"), with the
number of shares covered thereby and the exercise price per share to be
determined pursuant to a formula designed to cause (i) the economic value of
such Company Options (i.e., the difference between the aggregate fair market
value of the shares of Company Common Stock subject to such options and the
aggregate per share exercise price thereof) immediately after the Distribution
to be the same as the economic value immediately prior to the Distribution of
the Rockwell Options being replaced, and (ii) the ratio of the exercise price to
the fair market value of the underlying stock to remain the same immediately
before and immediately after the Distribution. See "Management of the
Company -- Benefit Plans Following the Distribution -- 1998 Stock Option Plan".
Rockwell Options held by persons other than employees of Semiconductor
Systems at the time of the Distribution, other than those granted prior to
January 1, 1990 or after August 31, 1998, will be adjusted so that following the
Distribution, each such holder will hold options to purchase shares of Rockwell
Common Stock and Company Common Stock. The number of shares subject to, and the
exercise price of, such options will be adjusted to take into account the
Distribution and to ensure that the aggregate economic value (i.e., the
difference between the aggregate fair market value of the shares subject to such
options and the aggregate
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<PAGE> 67
per share exercise price thereof) of the resulting Rockwell and Company options
immediately after the Distribution is equal to the aggregate economic value of
the Rockwell Options immediately prior to the Distribution.
Rockwell Options held by persons other than employees of Semiconductor
Systems at the time of the Distribution that were granted prior to January 1,
1990 or after August 31, 1998 will remain Rockwell Options, but the number of
shares covered thereby and the exercise price per share will be adjusted
pursuant to a formula designed to cause (i) the economic value of such Rockwell
Options (i.e., the difference between the aggregate fair market value of the
shares of Rockwell Common Stock subject to such options and the aggregate per
share exercise price thereof) to remain the same immediately before and
immediately after the Distribution, after giving effect to any change in the
fair market value of Rockwell Common Stock resulting from the Distribution, and
(ii) the ratio of the exercise price to the fair market value of the underlying
Rockwell Common Stock to remain the same immediately before and immediately
after the Distribution.
Pursuant to the Employee Matters Agreement, following the Distribution,
Rockwell will retain sponsorship of the Rockwell Savings Plan and the trust
related thereto. Rockwell will cause each employee who will be employed by the
Company or one of its subsidiaries on the Distribution Date to have a fully
nonforfeitable right to such employee's account balances, if any, under the
Rockwell Savings Plan. The account balances of each such employee will be
maintained under the Rockwell Savings Plan; provided, however, that such
employees will not be entitled to make additional contributions into the
Rockwell Savings Plan and matching contributions will no longer be made by
either Rockwell or the Company on behalf of such employees. For purposes of
distribution of account balances under the Rockwell Savings Plan, continued
employment with the Company or any of its subsidiaries will be deemed to be
continued employment with Rockwell or one of its subsidiaries and such account
balances will not be distributed to such employees until termination of
employment with the Company or one of its subsidiaries, except as may otherwise
be permitted in accordance with the terms of the Rockwell Savings Plan and
applicable law.
Based upon the Rockwell Savings Plan's ownership of Rockwell Common Stock
on October 31, 1998, the Rockwell Savings Plan is expected to hold approximately
17.8 million shares of Company Common Stock or approximately 19% of the Company
Common Stock outstanding immediately following the Distribution. The Rockwell
Savings Plan will provide Rockwell Savings Plan participants a high degree of
flexibility with respect to continued investment in Company Common Stock in
their Rockwell Savings Plan accounts, so that individual participants, rather
than the Rockwell Savings Plan, will have authority to determine if and when
shares of Company Common Stock held in participant accounts will be sold and
reinvested in accordance with the provisions of the Rockwell Savings Plan.
Participants in the Rockwell Savings Plan will be entitled to elect at any time,
but not more frequently than twice during each calendar month, to have all or a
portion of the Company Common Stock in their accounts under the Rockwell Savings
Plan sold, with the net proceeds reinvested as provided for in the Rockwell
Savings Plan. Under the Rockwell Savings Plan, dispositions of Company Common
Stock will be effected only at the direction and on behalf of individual
participants.
TAX ALLOCATION AGREEMENT
Through the Distribution Date, the results of the operations of
Semiconductor Systems have been and will be included in Rockwell's consolidated
United States federal income tax returns. As part of the Distribution, Rockwell
and the Company will enter into a tax allocation agreement (the "Tax Allocation
Agreement") which provides, among other things, for the allocation between
Rockwell and the Company of federal, state, local and foreign tax liabilities
relating to Semiconductor Systems.
The Tax Allocation Agreement also allocates between Rockwell and the
Company liability for any taxes which may arise in connection with separating
Semiconductor Systems and the Automation and Avionics & Communications
Businesses. The Tax Allocation Agreement provides, in general, that Rockwell
will be responsible for any such taxes. The Tax Allocation Agreement also
provides that neither Rockwell nor the Company is to take any action
inconsistent with, nor fail to take any action required by, the request for the
Tax Ruling or the Tax Ruling unless required to do so by law or the other party
has given its prior written consent or, in certain circumstances, a supplemental
ruling permitting such action is obtained. Rockwell and the
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Company will agree to indemnify each other with respect to any tax liability
resulting from their respective failures to comply with such provisions. In
addition, the Company will be responsible for any taxes imposed on Rockwell, the
Company or Rockwell shareowners as a result of the failure of the Distribution
to qualify as a tax-free reorganization within the meaning of Section
368(a)(1)(D) of the Code or the subsequent disqualification of the Distribution
as tax-free to Rockwell under Section 361(c)(2) of the Code if such failure or
disqualification is attributable to certain post-Distribution actions by or in
respect of the Company (including its subsidiaries) or its shareowners, such as
the acquisition of the Company by a third party at a time and in a manner that
would cause such a failure or disqualification. In addition, in connection with
Rockwell's spin-off of Meritor Automotive, Inc. on September 30, 1997, certain
tax-free intragroup spin-offs were effected by the Company. The Tax Allocation
Agreement provides that the Company will be responsible for any taxes imposed on
Rockwell, the Company or Rockwell shareowners in respect of those intragroup
spin-offs if such taxes are attributable to certain post-Distribution actions by
or in respect of the Company (including its subsidiaries) or its shareowners,
such as the acquisition of the Company by a third party at a time and in a
manner that would cause such taxes to be incurred. In the event that any of the
taxes described above were to become payable by the Company, such payment would
have a material adverse effect on the financial position, results of operations
and cash flow of the Company.
Though valid as between the parties thereto, the Tax Allocation Agreement
is not binding on the IRS and does not affect the liability of each of the
Company, Rockwell and their respective subsidiaries to the IRS for all federal
taxes of the consolidated group relating to periods through the Distribution
Date.
TRANSITION AGREEMENT
Rockwell and the Company will enter into a transition services agreement
(the "Transition Agreement") prior to the Distribution. Pursuant to the
Transition Agreement, Rockwell will provide to the Company, for specified
periods after the Distribution Date and on mutually agreed terms, certain
services which prior to the Distribution have been provided to Semiconductor
Systems by Rockwell, including payroll and human resource services, health and
welfare benefit administration services, computing and telecommunications
services and research and development support services of the Rockwell Science
Center. Such services generally will be provided for periods of one to three
years. In addition, the Transition Agreement will provide for the continuation
of certain supply arrangements between the Company and Rockwell or certain
Rockwell subsidiaries. The Transition Agreement also will provide for continued
occupancy by the Company through April 30, 1999 of the Colorado Springs,
Colorado wafer fabrication facilities to be distributed to Rockwell prior to the
Distribution, pursuant to an operating lease under which the Company will pay
all costs of the facilities.
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MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
Immediately after the Distribution, the Board of Directors of the Company
is expected to consist of the individuals named below. The Company Certificate
provides that the Company will have three classes of directors, the initial
terms of office of which will expire, respectively, at the annual meetings of
shareowners in 2000, 2001 and 2002. The Company expects to hold its first annual
meeting of shareowners in February 2000. Successors to any directors whose terms
are expiring are elected to three-year terms and hold office until their
successors are elected and qualified. Also set forth below with respect to each
director is the class of which such director will be a member. Unless otherwise
indicated, (i) the business address for each person listed below is Conexant
Systems, Inc., 4311 Jamboree Road, Newport Beach, California 92660-3095 and (ii)
each individual listed below is a citizen of the United States. See "Description
of Company Capital Stock -- Certain Provisions in the Company Certificate and
Company By-Laws".
CLASS I DIRECTORS
Class I Directors will serve until the 2000 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
DWIGHT W. DECKER -- Mr. Decker, age 48, will serve as Chairman of the Board
and Chief Executive Officer of the Company. Mr. Decker joined Rockwell in 1989
as director of data modem products engineering and, after serving in a number of
increasingly responsible management positions, served as Vice President/ General
Manager, Digital Communications Division of Rockwell's Telecommunications
Division from January 1993 to June 1995. He served as President,
Telecommunications of Rockwell from June 1995 to October 1995, President,
Rockwell Semiconductor Systems from October 1995 to March 1997, Senior Vice
President of Rockwell and President, Rockwell Semiconductor Systems and
Electronic Commerce from March 1997 to July 1998 and Senior Vice President of
Rockwell and President, Rockwell Semiconductor Systems since July 1998.
F. CRAIG FARRILL -- Mr. Farrill, age 45, has been corporate Vice President,
Strategic Technology of AirTouch Communications, Inc. (wireless communications)
since June 1996. Prior thereto, he served as Vice President of Technology,
Planning and Development of AirTouch Communications, Inc. He is also a member of
the Board of Directors and a corporate officer of the CDMA Development Group, a
digital cellular technology consortium, which he founded in 1993.
CLASS II DIRECTORS
Class II Directors will serve until the 2001 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
DONALD R. BEALL -- Mr. Beall, age 59, is former Chairman of the Board and
Chief Executive Officer of Rockwell and has been a director of Rockwell since
1978. He served as Chairman of the Board and Chief Executive Officer of Rockwell
from February 1988 to February 1998 after serving nine years as President and
Chief Operating Officer. Mr. Beall joined Rockwell in 1968 and served in a
number of senior management positions prior to becoming Executive Vice President
in September 1977 and President in February 1979. Mr. Beall is also Chairman of
the Executive Committee of the Board of Directors of Rockwell. Mr. Beall is a
director of Amoco Corporation, Meritor Automotive, Inc., The Procter & Gamble
Company and The Times Mirror Company. He is a trustee of the California
Institute of Technology and a member of the Board of Overseers of the Hoover
Institution and the University of California -- Irvine Foundation Board, as well
as a member of The Business Council and the Council on Competitiveness. He is
also a director, trustee or member of a number of other professional, civic and
entrepreneurial organizations.
JERRE L. STEAD -- Mr. Stead, age 55, has been Chairman of the Board and
Chief Executive Officer of Ingram Micro Inc. (computer technology products and
services) since August 1996. Mr. Stead served as Chief Executive Officer and
Chairman of the Board of LEGENT Corporation (software development) from
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January 1995 to August 1995. Prior thereto, Mr. Stead was Executive Vice
President, American Telephone and Telegraph Company and Chief Executive Officer
of AT&T Global Information Solutions (NCR Corporation) from May 1993 to December
1994 and President of AT&T Global Business Communications Systems from September
1991 to April 1993. He is a director of Armstrong World Industries, Inc.,
American Precision Industries, Inc. and TJ International, Inc. Mr. Stead is
Chairman of the Board of the Center of Ethics and Values at Garrett Seminary on
the Northwestern University campus.
CLASS III DIRECTORS
Class III Directors will serve until the 2002 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
RICHARD M. BRESSLER -- Mr. Bressler, age 68, served as Chief Executive
Officer of Burlington Northern Inc. (rail transportation) from 1980 through
1988. Mr. Bressler retired in October 1990 as Chairman of both Burlington
Northern Inc. and Burlington Resources Inc. (natural resources operations),
positions he had held since 1982 and 1989, respectively. He served as Chairman
of the Plum Creek Management Company (timber operations) from April 1989 to
January 1993. He was Chairman of the El Paso Natural Gas Company from October
1990 through December 1993. Mr. Bressler, who has been a director of Rockwell
since 1986, will resign as a Rockwell director at the time of the Distribution.
Mr. Bressler is a director of H.F. Ahmanson and Company and General Mills, Inc.
and is active in a number of business and civic organizations.
[Additional director(s) to be provided.]
COMMITTEES OF THE BOARD OF DIRECTORS
The standing committees of the Board of Directors of the Company will
include an Audit Committee, a Compensation and Management Development Committee,
a Board Composition Committee and a Technology, Environmental and Social
Responsibility Committee, each of which will be comprised of non-employee
directors. The functions of each of these four committees are described below.
The Audit Committee will review the scope and effectiveness of audits of
the Company by the Company's independent public accountants and internal
auditors; select and recommend to the Board of Directors the employment of
independent public accountants for the Company, subject to approval of the
shareowners; review the audit plans of the Company's independent public
accountants and internal auditors; review and approve the fees charged by the
independent public accountants; review the Company's annual financial statements
before their release; review the adequacy of the Company's system of internal
controls and recommendations of the independent public accountants with respect
thereto; review and act on comments and suggestions by the independent public
accountants and by the internal auditors with respect to their audit activities;
and monitor compliance by the employees of the Company with the Company's
standards of business conduct policies.
The principal functions of the Compensation and Management Development
Committee (the "Compensation Committee") will be to evaluate the performance of
the Company's senior executives and plans for management succession and
development, to consider the design and competitiveness of the Company's
compensation plans, to review and approve senior executive compensation and to
administer the Company's incentive, deferred compensation, stock option and
long-term incentives plans pursuant to the terms of the respective plans. The
members of the Compensation Committee will be ineligible to participate in any
of the plans or programs which are administered by the Committee except the
Directors Plan (as defined below).
The principal functions of the Board Composition Committee will be to
consider and recommend to the Board qualified candidates for election as
directors of the Company and periodically to prepare and submit to the Board for
adoption the Committee's selection criteria for director nominees. The Committee
will also periodically assess the performance of the Board of Directors and
report thereon to the Board. Shareowners of the Company may recommend candidates
for consideration by the Committee by writing to the Secretary of the Company
within certain specified time periods, giving the candidate's name, biographical
data and qualifications. See "Description of Company Capital Stock -- Certain
Provisions in the Company Certificate
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and Company By-Laws". Any such recommendation should be accompanied by a written
statement from the individual of his or her consent to be named as a candidate
and, if nominated and elected, to serve as a director.
The Technology, Environmental and Social Responsibility Committee will
review and monitor science and technological activities of the Company and will
review and assess the Company's policies and practices in the following areas:
employee relations, with emphasis on equal employment opportunity and
advancement; the protection and enhancement of the environment and energy
resources; product integrity and safety; employee health and safety; and
community and civic relations including programs for and contributions to
health, educational, cultural and other social institutions.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company will receive a retainer at the rate
of $30,000 per year for Board service, payable to initial non-employee directors
effective concurrently with the first grant of options under the 1999 LTIP (as
defined below). Pursuant to the Directors Plan, each non-employee director will
be granted an option to purchase 40,000 shares of Company Common Stock effective
upon election as a director (or, for the initial non-employee directors,
effective concurrently with the first grant of options under the 1999 LTIP).
Following completion of one year of service on the Board, each non-employee
director will thereafter be granted an option for 15,000 shares of Company
Common Stock immediately after each Annual Meeting of Shareowners of the
Company. Under the terms of the Company's directors' deferred compensation plan,
a director may elect to defer all or part of the cash payment of retainer fees
until such time as shall be specified, with interest on deferred amounts
accruing quarterly at 120% of the Federal long-term rate set each month by the
Secretary of the Treasury. Each director shall also have the option each year to
determine whether to defer all or any portion of the cash retainers by electing
to receive restricted shares valued at the closing price of the Company Common
Stock on Nasdaq on the date each retainer payment would otherwise be made in
cash. See "-- Benefit Plans Following the Distribution -- Directors Stock Plan".
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EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the name, age, position and office to be held with the
Company, principal occupations and employment during the past five years, and
education of those individuals who are expected to serve as executive officers
of the Company immediately following the Distribution. Those individuals named
below who are currently officers or employees of Rockwell will resign from all
such positions prior to the Distribution. Executive officers of the Company will
be elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, PRINCIPAL OCCUPATIONS AND EMPLOYMENT, AND EDUCATION AGE
- ------------------------------------------------------------------------------ -----
<S> <C>
DWIGHT W. DECKER -- Chairman of the Board and Chief Executive Officer. Senior
Vice President of Rockwell and President, Rockwell Semiconductor Systems
since July 1998; Senior Vice President of Rockwell and President, Rockwell
Semiconductor Systems and Electronic Commerce from March 1997 to July 1998;
President, Rockwell Semiconductor Systems from October 1995 to March 1997;
President, Telecommunications of Rockwell from June 1995 to October 1995;
Vice President/General Manager, Digital Communications Division of
Rockwell's Telecommunications Division prior thereto. Mr. Decker received a
Ph.D. in applied mathematics from the California Institute of Technology and
a B.Sc. in mathematics and physics from McGill University.......... 48
MOIZ M. BEGUWALA -- Senior Vice President and General Manager -- Wireless
Communications. Vice President and General Manager -- Wireless
Communications Division of Rockwell Semiconductor Systems since October
1998; Vice President and General Manager -- Personal Computing Division of
Rockwell Semiconductor Systems from January 1998 to October 1998; Vice
President, Worldwide Sales of Rockwell Semiconductor Systems from October
1995 to January 1998; Vice President, Worldwide Sales of Rockwell's
Telecommunications Division from September 1995 to October 1995; Division
Director, Worldwide Sales, Digital Communications Division of Rockwell's
Telecommunications Division prior thereto. Mr. Beguwala received an M.B.A.
and a B.S. in engineering from the University of California -- Los Angeles
and an M.S. and a Ph.D. in electrical engineering from the University of
Southern California ............................................... 52
ANTHONY C. D'AUGUSTINE -- Senior Vice President and General Manager -- Digital
Infotainment. Vice President and General Manager -- Digital Infotainment
Division of Rockwell Semiconductor Systems since April 1997; Vice
President -- Graphic/Imaging Sub-Business Unit of Rockwell Semiconductor
Systems' Brooktree subsidiary from October 1996 to April 1997; Vice
President -- Graphic/Imaging Sub-Business Unit of Brooktree Corporation
(graphics and multimedia semiconductor supplier) prior thereto. Mr.
D'Augustine received an M.B.A. from Rutgers University and a B.S.E.E. in
electrical engineering from Drexel University ..................... 54
RAOUF Y. HALIM -- Senior Vice President and General Manager -- Network Access.
Vice President and General Manager -- Network Access Division of Rockwell
Semiconductor Systems since February 1997; Vice President -- VLSI
Engineering of Rockwell Semiconductor Systems from October 1995 to February
1997; Vice President -- VLSI Engineering of Rockwell's Telecommunications
Division from September 1995 to October 1995; Division Director, VLSI
Engineering, Digital Communications Division of Rockwell's
Telecommunications Division prior thereto. Mr. Halim received an M.S.E.E. in
electrical engineering from the Georgia Institute of Technology and a B.Sc.
in electrical engineering from Alexandria University .............. 38
</TABLE>
65
<PAGE> 73
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, PRINCIPAL OCCUPATIONS AND EMPLOYMENT, AND EDUCATION AGE
- ------------------------------------------------------------------------------ -----
<S> <C>
BALAKRISHNAN S. IYER -- Senior Vice President, Chief Financial Officer and
Secretary. Senior Vice President and Chief Financial Officer of Rockwell
Semiconductor Systems since October 1998; Senior Vice President and Chief
Financial Officer of VLSI Technology, Inc. (semiconductors) from January
1997 to October 1998; Vice President and Corporate Controller of VLSI
Technology, Inc. (semiconductors) from April 1993 to December 1996;
Corporate Controller of Cypress Semiconductor Corporation (semiconductors)
prior thereto. Mr. Iyer received an M.B.A. from The Wharton School of the
University of Pennsylvania, an M.S. in industrial engineering from the
University of California, Berkeley and a B.S. in mechanical engineering from
the Indian Institute of Technology ................................ 42
KERRY K. PETRY -- Vice President and Treasurer. Vice President and Treasurer
of Rockwell Semiconductor Systems since October 1998; Assistant
Treasurer -- Domestic of Rockwell prior thereto. Mr. Petry received an
M.B.A. from Virginia Polytechnic Institute & State University and a B.S. in
accounting from West Virginia University .......................... 49
F. MATTHEW RHODES -- Senior Vice President and General Manager -- Personal
Computing. Vice President and General Manager -- Personal Computing Division
of Rockwell Semiconductor Systems since October 1998; Director, Marketing
Software Products of Rockwell Semiconductor Systems from January 1997 to
October 1998; Director, VLSI and Technology of Pacific Communications
Services, Inc. prior thereto. Mr. Rhodes received an M.B.A. from the
Anderson Graduate School of Management of the University of California, Los
Angeles, an M.S. in electrical engineering from Lehigh University and a B.S.
in physics from The Pennsylvania State University ................. 41
KEVIN V. STRONG -- Senior Vice President and General Manager -- Personal
Imaging. Vice President and General Manager -- Personal Imaging Division of
Rockwell Semiconductor Systems since September 1998; Division Director,
Digital Communications Products, Personal Computing Division of Rockwell
Semiconductor Systems from June 1998 to September 1998; Division Director,
Technology Planning, Personal Computing Division of Rockwell Semiconductor
Systems from June 1997 to June 1998; Business Director, Personal Computing
Products, Multimedia Communications Division of Rockwell Semiconductor
Systems from August 1996 to June 1997; Director Technology Planning -- Media
Processing, Multimedia Communications Division of Rockwell Semiconductor
Systems from January 1996 to August 1996; Manager -- Business Development,
Multimedia Communications Division of Rockwell Semiconductor Systems prior
thereto. Mr. Strong received a B.S. in electronic engineering from
Southampton University ............................................ 38
STEVEN M. THOMSON -- Vice President and Controller. Vice President and
Controller of Rockwell Semiconductor Systems since October 1998;
Director -- Financial Planning and Control of Rockwell Semiconductor Systems
from October 1995 to October 1998; Director, Financial Planning and Control
of Rockwell's Telecommunications Division prior thereto. Mr. Thomson
received an M.S. in financial management from West Coast University and a
B.A. in accounting from California State University, Fullerton..... 42
</TABLE>
66
<PAGE> 74
HISTORICAL COMPENSATION OF EXECUTIVE OFFICERS
There is shown below information concerning the annual and long-term
compensation for services rendered in all capacities to Rockwell and its
subsidiaries for the fiscal years ended September 30, 1996, 1997 and 1998 of the
individual who will serve as chief executive officer of the Company and for the
fiscal year ended September 30, 1998 for the other four most highly compensated
individuals who will serve as executive officers of the Company, in each case,
based on their employment by Rockwell or an affiliate of Rockwell at September
30, 1998 (the "Named Executive Officers"). The compensation described in this
table was paid by Rockwell or an affiliate of Rockwell. References to "stock
options" relate to awards of options under the Rockwell 1995 Long-Term
Incentives Plan. The services rendered to Rockwell were, in some cases, in
capacities not equivalent to those to be provided to the Company and this table
does not reflect the compensation to be paid to executive officers of the
Company in the future.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION(4)
---------------------------------- ---------------------- ---------------
AWARDS PAYOUTS
-------- ----------
OTHER STOCK LONG-TERM
NAME AND ANNUAL OPTIONS INCENTIVE
PRINCIPAL POSITION(2) YEAR SALARY BONUS COMPENSATION (SHARES) PAYOUTS
- --------------------- ---- -------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dwight W. Decker............ 1998 $357,405 $ -- $16,839 30,000 $ -- $ --
Chairman of the Board and 1997 305,039 300,000 17,278 85,568(3) 1,041,013(5) 39,558
Chief Executive Officer 1996 247,116 350,000 9,752 127,577(3) 600,000 18,504
Moiz M. Beguwala............ 1998 216,058 24,998 5,772 20,000 -- 12,963
Senior Vice President and
General
Manager -- Wireless
Communications
Anthony C. D'Augustine...... 1998 216,346 -- 21,050 -- -- 12,981
Senior Vice President and
General Manager -- Digital
Infotainment
Raouf Y. Halim.............. 1998 227,324 -- 13,407 -- -- 13,640
Senior Vice President and
General Manager -- Network
Access
F. Matthew Rhodes........... 1998 145,439 -- 159 -- -- 8,726
Senior Vice President and
General
Manager -- Personal
Computing
</TABLE>
- ---------------
(1) In accordance with the executive compensation disclosure rules adopted by
the Commission, the compensation of the Named Executive Officers, other than
Mr. Decker, is not shown for fiscal 1996 and 1997 because the Company was
not a reporting company under the Exchange Act for such years and such
compensation information has not been provided in a prior filing with the
Commission.
(2) The positions reflected in the table are the positions to be held by the
Named Executive Officers with the Company at the time of the Distribution
and were not the positions held by the Named Executive Officers with
Rockwell during the period or periods covered by the table.
(3) Shares reflect anti-dilution adjustments made December 6, 1996 and September
30, 1997 to preserve the intrinsic value of options following the
reorganization of Rockwell in connection with the divestiture of its
Aerospace and Defense businesses and the pro-rata distribution of shares of
Meritor Automotive, Inc., respectively.
(4) Amounts contributed or accrued for the Named Executive Officers under the
Rockwell Savings Plan and the related supplemental savings plan.
(5) Long-term incentive payments to Mr. Decker for the three-year performance
period ended September 30, 1997 were paid in part by delivery of 8,205
shares of restricted Rockwell Common Stock, valued at the closing price on
the New York Stock Exchange -- Composite Transactions on November 28, 1997,
the date specified for that purpose in the Rockwell 1995 LTIP ($48.75).
67
<PAGE> 75
Effective January 1, 1999, the annual salaries of Messrs. Decker, Iyer,
Beguwala, D'Augustine, Halim and Rhodes are expected to be $308,000, $300,000,
$216,000, $202,500, $216,000 and $193,500, respectively. Mr. Decker's 1999
annual salary will reflect a reduction of approximately 20 percent from his 1998
annual salary and the 1999 annual salaries of the other Named Executive Officers
will reflect reductions of approximately 10 percent from their 1998 annual
salaries. These salary reductions will remain in effect until the Company earns
a profit in two consecutive quarters. At such time, the salary reductions will
be rescinded and it is intended that the annual salaries for Messrs. Decker,
Iyer, Beguwala, D'Augustine, Halim and Rhodes will be set at levels the Company
determines are competitive with those of its peer companies.
It is anticipated that options for shares of Company Common Stock will be
granted to employees of the Company, including Messrs. Decker, Iyer, Beguwala,
D'Augustine, Halim and Rhodes, in the second quarter of fiscal 1999. The
purchase price of the shares subject to such options will be the closing price
of the Company Common Stock on the date of grant.
Prior to the Distribution, the Company will enter into change of control
employment agreements ("Employment Agreements") with each of Messrs. Decker,
Beguwala, D'Augustine, Halim and Rhodes and certain other key executives. Each
such Employment Agreement becomes effective upon a "change of control" of the
Company (as defined in the Employment Agreement). Each Employment Agreement
provides for the continuing employment of the executive after the change of
control on terms and conditions no less favorable than those in effect before
the change of control. If the executive's employment is terminated by the
Company without "cause" or if the executive terminates his or her own employment
for "good reason" (each as defined in the Employment Agreement), the executive
is entitled to severance benefits equal to a multiple of his or her annual
compensation (including bonus) and continuation of certain benefits for a number
of years equal to the multiple. The multiple is three for Mr. Decker and two for
the other executives (or, in either case, the shorter number of years until the
executive's normal retirement date). The executives are entitled to an
additional payment, if necessary, to make them whole as a result of any excise
tax imposed by the Code on certain change of control payments (unless the safe
harbor below which the excise tax is imposed is not exceeded by more than 10%,
in which event the payments will be reduced to avoid the excise tax).
68
<PAGE> 76
OPTION GRANTS
Shown below is further information on grants to the Named Executive
Officers of stock options pursuant to the Rockwell 1995 LTIP during the fiscal
year ended September 30, 1998, which are reflected in the Summary Compensation
Table above.
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
- ------------------------------------------------------------------------------------------------ ----------------
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING ROCKWELL EXERCISE OR GRANT DATE
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME (SHARES)(1) FISCAL 1998 (PER SHARE) DATE VALUE(2)
- ---- --------------- ------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Dwight W. Decker.......... 30,000 .99% $48.125 12/3/2007 $418,500
Moiz M. Beguwala.......... 20,000 .66 55.8125 4/23/2008 380,800
Anthony C. D'Augustine.... -- -- -- -- --
Raouf Y. Halim............ -- -- -- -- --
F. Matthew Rhodes......... -- -- -- -- --
</TABLE>
- ---------------
(1) All options granted to Mr. Decker were granted on December 3, 1997 and the
first of three substantially equal installments will become exercisable
December 3, 1998. All options granted to Mr. Beguwala were granted on April
23, 1998 and will become exercisable April 23, 2001.
(2) These values are based on the Black-Scholes option pricing model which
produces a per option share value of $13.95 for the December 3, 1997 grant
and $19.04 for the April 23, 1998 grant, using the following assumptions and
inputs: options exercised after 7 1/2 years, eleven-month volatility of
0.2908 (calculated after the Meritor Automotive, Inc. spin-off in September
1997), dividend yield of 2.26% (for the December 3, 1997 grant) and 2.17%
(for the April 23, 1998 grant) and an interest rate of 5.89% (for the
December 3, 1997 grant) and 5.78% (for the April 23, 1998 grant), which was
the zero coupon 7 1/2-year Treasury bond rate at date of grant. The actual
value, if any, the executive officer may realize from these options will
depend solely on the gain in stock value over the exercise price when the
options are exercised.
As set forth in the Employee Matters Agreement, Rockwell Options held by
employees of Semiconductor Systems at the time of the Distribution will be
converted into Company Options, having the same terms and vesting schedule as
the original Rockwell Options, but with adjustments in order to provide
equivalent value to each optionholder. Rockwell Options held by other than
employees of Semiconductor Systems at the time of the Distribution, other than
those granted prior to January 1, 1990 or after August 31, 1998, will be
adjusted so that following the Distribution, each holder will hold options to
purchase shares of Rockwell Common Stock and Company Common Stock with
adjustments in order to provide equivalent value to each optionholder after
giving effect to the Distribution. Rockwell Options held by persons other than
those who will be employed by Semiconductor Systems at the time of the
Distribution that were granted prior to January 1, 1990 or after August 31, 1998
will continue as Rockwell Options with adjustments in order to provide
equivalent value to each optionholder after giving effect to the Distribution.
See "Arrangements Between Rockwell and the Company -- Employee Matters
Agreement".
69
<PAGE> 77
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to (i) exercises by the Named
Executive Officers during fiscal 1998 of options to purchase Rockwell Common
Stock granted under the Rockwell Option Plans and (ii) the unexercised options
to purchase Rockwell Common Stock granted to the Named Executive Officers in
fiscal 1998 and prior years under the Rockwell Option Plans and held by them at
September 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES SEPTEMBER 30, 1998 SEPTEMBER 30, 1998(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dwight W. Decker........ -- -- 41,905 213,389 $141,688 --
Moiz M. Beguwala........ -- -- 2,672 44,300 31,162 --
Anthony C.
D'Augustine........... -- -- -- 22,818 -- --
Raouf Y. Halim.......... -- -- 1,576 47,118 21,596 --
F. Matthew Rhodes....... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Based on the closing price of Rockwell Common Stock on the NYSE Composite
Transactions reporting system on September 30, 1998, the last trading day in
that month ($36.25).
LONG-TERM INCENTIVE PLAN AWARDS
All Rockwell long-term incentive plan awards granted to Semiconductor
Systems employees as of the time of the Distribution will have been paid or
terminated on or prior to the Distribution Date. Such long-term incentive plan
awards are based in part on achieving goals measured by sales growth, return on
sales and return on assets of Semiconductor Systems, and performance of Rockwell
Common Stock, for 3-year performance cycles ending on each of September 30,
1998, September 30, 1999 and September 30, 2000. No payments will be made in
respect of grants made for the 3-year performance cycle ending September 30,
1998 based on performance for the fiscal years ended September 30, 1996, 1997
and 1998. Grants made in respect of the 3-year performance cycles ending
September 30, 1999 and September 30, 2000 (including all grants made to each
Named Executive Officer during fiscal 1998) will be terminated without payment
as of the Distribution Date.
RETIREMENT BENEFITS
All of the Named Executive Officers participate in Rockwell's defined
benefit pension plan which qualifies under Section 401(a) of the Code. Pursuant
to the Employee Matters Agreement, the Named Executive Officers will have a
fully non-forfeitable right in their benefits under the pension plan accrued as
of the time of the Distribution. See "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement". The Company does not expect to adopt a
defined benefit pension plan.
The following table shows the estimated aggregate annual retirement
benefits payable on a straight life annuity basis to participating employees in
the earnings and years of service classifications indicated, under the Rockwell
retirement plans which cover most officers and other salaried employees of the
Company on a noncontributory basis. Such benefits reflect termination of benefit
accrual on December 31, 1998 and a reduction to recognize in part the cost of
Social Security benefits related to service for Rockwell. The plans also provide
for the payment of benefits to an employee's surviving spouse or other
beneficiary.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS FOR
AVERAGE YEARS OF SERVICE INDICATED
ANNUAL ------------------------------------------
EARNINGS 5 YEARS 10 YEARS 25 YEARS
- -------- ---------- ----------- -----------
<S> <C> <C> <C>
$100,000.................................................. $12,620 $ 25,254 $ 42,096
300,000.................................................. 39,280 78,594 132,096
500,000.................................................. 65,940 131,934 222,096
700,000.................................................. 92,600 185,274 312,096
</TABLE>
70
<PAGE> 78
Covered compensation includes salary and annual bonus. The calculation of
retirement benefits under the plans generally is based upon average earnings for
the highest five consecutive years of the ten years preceding retirement.
The credited years of service of Messrs. Decker, Beguwala, D'Augustine,
Halim and Rhodes are 10, 25, 5, 7 and 4 years, respectively.
Sections 401(a)(17) and 415 of the Code limit the annual benefits which may
be paid from a tax-qualified retirement plan. As permitted by the Employee
Retirement Income Security Act of 1974, Rockwell has established supplemental
plans which authorize the payment out of its general funds of any benefits
calculated under provisions of the applicable retirement plan which may be above
the limits under these sections. Pursuant to the Employee Matters Agreement,
Rockwell will retain liabilities accrued as of the Distribution Date with
respect to Company Participants under such supplemental plans of Rockwell.
BENEFIT PLANS FOLLOWING THE DISTRIBUTION
The following are descriptions of certain benefit plans that are expected
to provide benefits to employees and directors of the Company after the
Distribution.
1999 LONG-TERM INCENTIVES PLAN
The Company's 1999 Long-Term Incentives Plan (the "1999 LTIP") has been
adopted by the Company's Board of Directors and approved by Rockwell as the
Company's sole shareowner. The 1999 LTIP permits grants to be made from time to
time as nonqualified stock options, incentive stock options and restricted
stock.
Administration. The 1999 LTIP will be administered by the Compensation
Committee, consisting of two or more members of the Company's Board of Directors
who are not eligible to participate in the 1999 LTIP. In order to meet the
requirements of Section 162(m) of the Code and the rules under Section 16 of the
Exchange Act, all grants under the 1999 LTIP will be made by those members of
the Compensation Committee who are both "outside directors" as defined for
purposes of Section 162(m) of the Code and regulations thereunder and
"nonemployee directors" as defined for purposes of Section 16 of the Exchange
Act.
Participation. The persons to whom grants are made under the 1999 LTIP
("1999 LTIP Participants") will be selected from time to time by the
Compensation Committee in its sole discretion from among employees of the
Company and its subsidiaries who hold positions of significant responsibility
with the Company or a subsidiary of the Company or whose performance or
potential contribution, in the judgment of the Compensation Committee, will
benefit the future success of the Company and its subsidiaries.
Shares Subject to 1999 LTIP. The 1999 LTIP authorizes the issuance or
transfer of an aggregate of 10,185,000 shares of Company Common Stock, provided
that no more than 3,000,000 shares will be available for grants of restricted
stock. Shares of Company Common Stock subject to the unexercised or
undistributed portion of any terminated of forfeited grant under the 1999 LTIP
will be available for further awards.
Stock Options and Restricted Stock. The 1999 LTIP authorizes grants to
1999 LTIP Participants of stock options, which may be either incentive stock
options eligible for special tax treatment or nonqualified stock options, and
restricted stock. Under the 1999 LTIP, no single 1999 LTIP Participant will
receive, in any one calendar year, grants which over any three-year period
exceed an annual average of (i) 500,000 stock options, whether nonqualified
stock options or incentive stock options, and (ii) 100,000 shares of restricted
stock.
Under the provisions of the 1999 LTIP authorizing the grant of stock
options, (a) the option price may not be less than the fair market value of the
shares of Company Common Stock at the date of grant, (b) the aggregate fair
market value (determined as of the date the option is granted) of the shares of
Company Common Stock for which any employee may be granted incentive stock
options which are exercisable for the first time in any calendar year may not
exceed $100,000, (c) stock options generally may not be exercised
71
<PAGE> 79
prior to one year nor after ten years from the date of grant and (d) at the time
of exercise of a stock option the option price must be paid in full in cash or
in shares of Company Common Stock or in a combination of cash and shares of
Company Common Stock.
Under the 1999 LTIP, the Compensation Committee may also grant to 1999 LTIP
Participants shares of Company Common Stock subject to restrictions on transfer
and such other restrictions on incidents of ownership as the Compensation
Committee may determine ("restricted stock"). During the restricted period,
shares of restricted stock have all the attributes of outstanding shares of
Company Common Stock, except that the Compensation Committee may provide at the
time of the grant that any dividends or other distributions paid on such
restricted stock while subject to such restrictions will be accumulated or
reinvested in Company Common Stock and held subject to the same restrictions as
the restricted stock and such other terms and conditions as the Compensation
Committee may determine.
All grants made under the 1999 LTIP will be evidenced by an agreement
between the Company and the 1999 LTIP Participant (the "Award Agreement")
setting forth the terms and conditions applicable to the grants, as determined
by the Compensation Committee consistent with the terms of the 1999 LTIP. Award
Agreements will include, among other things, a provision describing the
treatment of grants in the event of the retirement, disability, death or other
termination of a 1999 LTIP Participant's employment with the Company or any of
the Company's subsidiaries, including terms relating to the vesting, time for
exercise, forfeiture or cancellation of a grant under such circumstances. Award
Agreements will also include a provision stating that in the event the 1999 LTIP
Participant's employment is terminated for cause, all grants made to such
participant will immediately terminate and be forfeited.
The Compensation Committee may condition, or provide for the acceleration
of, the exercisability or vesting of any grant made under the 1999 LTIP upon
such prerequisites as the Compensation Committee, in its sole discretion, deems
appropriate, including achievement of specific performance objectives, with
respect to one or more measures of the performance of the Company or its
subsidiaries, including earnings per share, revenue, net income, stock price and
total shareowner return.
Under the 1999 LTIP, stock options and restricted stock may not be granted
after December 31, 2008.
Initial Grants. It is anticipated that options to purchase approximately
7,700,000 shares of Company Common Stock will be granted under the 1999 LTIP to
employees of the Company (including options for approximately 875,000 shares to
be granted to the Named Executive Officers) in the second quarter of fiscal
1999. See "Arrangements Between Rockwell and the Company -- Employee Matters
Agreement".
Tax Matters. The following is a brief summary of the material Federal
income tax consequences of benefits under the 1999 LTIP under present law and
regulations:
(a) Incentive Stock Options. The grant of an incentive stock option
will not result in any immediate tax consequences to the Company or the
optionee. An optionee will not realize taxable income, and the Company will
not be entitled to any deduction, upon the timely exercise of an incentive
stock option, but the excess of the fair market value of the shares of
Company Common Stock acquired over the option exercise price will be
includable in the optionee's "alternative minimum taxable income" for
purposes of the alternative minimum tax. If the optionee does not dispose
of the shares of Company Common Stock acquired within one year after their
receipt (and within two years after the option was granted), gain or loss
realized on the subsequent disposition of the shares of Company Common
Stock will be treated as long-term capital gain or loss. Capital losses of
individuals are deductible only against capital gains and a limited amount
of ordinary income. In the event of an earlier disposition, the optionee
will realize ordinary income in an amount equal to the lesser of (i) the
excess of the fair market value of the shares of Company Common Stock on
the date of exercise over the option exercise price or (ii) if the
disposition is a taxable sale or exchange, the amount of any gain realized.
Upon such a disqualifying disposition, the Company will be entitled to a
deduction in the same amount and at the same time as the optionee realizes
such ordinary income.
(b) Nonqualified Stock Options. The grant of a nonqualified stock
option will not result in any immediate tax consequences to the Company or
the optionee. Upon the exercise of a nonqualified stock
72
<PAGE> 80
option, the optionee will realize ordinary income, and the Company will be
entitled to a deduction, equal to the difference between the option
exercise price and the fair market value of the shares of Company Common
Stock acquired at the time of exercise.
(c) Restricted Stock. An employee normally will not realize taxable
income in connection with an award of restricted stock, and the Company
will not be entitled to a deduction, until the termination of the
restrictions. Upon such termination, the employee will realize ordinary
income in an amount equal to the fair market value of the shares of Company
Common Stock at that time, plus the amount of the dividends and interest
thereon to which the employee then becomes entitled. However, an employee
may elect to realize taxable ordinary income in the year the restricted
stock is awarded in an amount equal to its fair market value at that time,
determined without regard to the restrictions. The Company will be entitled
to a deduction in the same amount and at the same time as the employee
realizes income.
Change of Control Benefits. In order to maintain the rights of 1999 LTIP
Participants in the event of a change of control of the Company, the 1999 LTIP
provides that upon the occurrence of such a change, all outstanding stock
options shall become fully exercisable whether or not otherwise then
exercisable, and the restrictions on all shares of Company Common Stock granted
as restricted stock would lapse. A change of control is deemed to occur if any
of the following occur: (a)the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock") or (ii)
the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for purposes
of this clause (a), the following acquisitions shall not constitute a Change of
Control: (w) any acquisition directly from the Company, (x) any acquisition by
the Company, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or Rockwell or by any corporation
controlled by the Company or Rockwell or (z) any acquisition pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of clause (c) of
this definition; or (b) individuals who, as of the date of the Distribution,
constitute the Board of Directors (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors; provided, however,
that any individual becoming a director subsequent to that date whose election,
or nomination for election by the Company's shareowners, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or (c) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another entity (a
"Corporate Transaction"), in each case, unless, following such Corporate
Transaction, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Corporate Transaction beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (ii)
no Person (excluding any employee benefit plan (or related trust) of the
Company, of Rockwell or of such corporation resulting from such Corporate
Transaction) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Corporate Transaction or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Corporate Transaction and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Corporate Transaction were
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<PAGE> 81
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors, providing for such
Corporate Transaction; or (d) approval by the Company's shareowners of a
complete liquidation or dissolution of the Company.
Amendment, Suspension or Termination of 1999 LTIP. The Board of Directors
of the Company may at any time amend, suspend or discontinue the 1999 LTIP and
the Compensation Committee may at any time alter or amend Award Agreements made
thereunder to the extent permitted by law, provided that no such alteration or
amendment will impair the rights of any recipient of grants without such
recipient's consent. In the event of any change in the outstanding shares of
Company Common Stock by reason of a stock dividend, stock split,
recapitalization, merger, consolidation, reorganization or similar corporate
change or an extraordinary dividend, the number of shares of Company Common
Stock then remaining subject to the 1999 LTIP and the maximum number of shares
that may be issued to a 1999 LTIP Participant, including those that are covered
by outstanding grants, will (i) in the event of an increase in the number of
outstanding shares of Company Common Stock, be proportionately increased and the
price for each share then covered by an outstanding grant will be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares of Company Common Stock, be proportionately reduced and the
price for each share then covered by an outstanding grant will be
proportionately increased. The Compensation Committee may make any further
adjustments as it deems necessary to ensure equitable treatment of any holder of
a grant under the 1999 LTIP as the result of any transaction affecting the
securities subject to the 1999 LTIP.
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") has been adopted by
the Company's Board of Directors and approved by Rockwell as the Company's sole
shareowner. The 1998 Plan covers nonqualified stock options and incentive stock
options to purchase shares of Company Common Stock resulting from the
adjustments to Rockwell Options (i) held by employees of Semiconductor Systems
at the time of the Distribution and (ii) held by persons other than employees of
Semiconductor Systems at the time of the Distribution that were granted between
January 1, 1990 and August 31, 1998. See "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement".
Administration. The 1998 Plan will be administered by the Compensation
Committee, consisting of two or more members of the Company's Board of Directors
who are not eligible to participate in the 1998 Plan. In addition, the Company's
Board of Directors has authority to perform all functions of the Compensation
Committee under the 1998 Plan.
Participation. The persons to whom grants are made under the 1998 Plan
("1998 Plan Participants") are (i) holders of Rockwell Options who are employees
of Semiconductor Systems at the time of the Distribution or (ii) holders of
Rockwell Options, other than employees of Semiconductor Systems at the time of
the Distribution, that were granted between January 1, 1990 and August 31, 1998.
Shares Subject to 1998 Plan. The 1998 Plan authorizes the issuance of the
aggregate number of shares of Company Common Stock (currently estimated to be 15
million) necessary to provide for the exercise of all Company Options
outstanding on the Distribution Date as a result of adjustments to Rockwell
Options, as may be adjusted under the 1998 Plan.
Stock Options. The 1998 Plan authorizes the issuance to 1998 Plan
Participants of Company Options, which may be either incentive stock options
eligible for special tax treatment or nonqualified stock options. Under the
provisions of the 1998 Plan authorizing the issuance of stock options, the
exercise price and the number of shares of Company Common Stock issuable upon
exercise of such options will be determined pursuant to the adjustments to the
Rockwell Options set forth under "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement", and each stock option will otherwise
have substantially the same terms and conditions as the corresponding Rockwell
Option which was adjusted, except that references to Rockwell will be changed to
refer to the Company. Such terms and conditions include that (a) stock options
generally may not be exercised prior to one year nor after ten years from the
date of original grant under the Rockwell Plans and generally become exercisable
in three approximately equal installments on the first, second and third
anniversaries of the original date of grant under the Rockwell Plans and (b) at
the time
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<PAGE> 82
of exercise of a stock option the option price must be paid in full in cash or
in shares of Company Common Stock or in a combination of cash and shares of
Company Common Stock. If a 1998 Plan Participant who holds an outstanding stock
option dies, the 1998 Plan permits the exercise thereof within three years of
the date of death (or the expiration date specified in the option if earlier)
even if it were not exercisable at such date. If a 1998 Plan Participant holding
an outstanding grant of options retires under a retirement plan specified in the
1998 Plan at any time after a portion of the options subject to a particular
grant has become exercisable, the options subject to that grant may be exercised
from and after the date upon which they are first exercisable under that grant
for five years after the date of retirement (or the expiration date specified in
the grant if earlier), even if any of them was not exercisable at the date of
retirement. Except as the Compensation Committee may otherwise determine
(subject to certain limitations), if a 1998 Plan Participant's employment
terminates for any other reason at any time after a portion of the options
subject to a particular grant has become exercisable, the options subject to
that grant may be exercised within 90 days after the date of termination of
employment (or the expiration date specified in the grant if earlier), only to
the extent the 1998 Plan Participant was entitled to exercise the options at the
time of termination of employment.
No stock options may be granted under the 1998 Plan after the Distribution
Date.
Total Grants. It is anticipated that options to purchase approximately
5,450,000 shares of Company Common Stock will be issued to holders of Rockwell
Options, other than employees of Semiconductor Systems at the time of the
Distribution, that were granted between January 1, 1990 and August 31, 1998, in
connection with the adjustment of certain Rockwell Options held by such persons
on the Distribution Date. It is also anticipated that options to purchase
Company Common Stock will be issued to employees of the Company, including the
Named Executive Officers, in replacement of approximately 1,700,000 Rockwell
Options, including approximately 374,000 Rockwell Options held by the Named
Executive Officers, expected to be held by such employees on the Distribution
Date; the number of shares of Company Common Stock that are subject to such
options will depend on the ratio between the respective market values of Company
Common Stock and Rockwell Common Stock at the time of the Distribution. See
"Arrangements Between Rockwell and the Company -- Employee Matters Agreement".
Tax Matters. The material Federal income tax consequences of receipt of
incentive stock options and non-qualified stock options under the 1998 Plan
under present law and regulations are as described for incentive stock options
and non-qualified stock options under the 1999 LTIP. See "-- 1999 Long-Term
Incentives Plan -- Tax Matters".
Change of Control Benefits. In order to maintain the rights of 1998 Plan
Participants in the event of a change of control of the Company, the 1998 Plan
provides that all stock options then outstanding shall become fully exercisable
whether or not otherwise then exercisable. A change of control is deemed to
occur under the same circumstances as provided in Article III, Section 13(I) of
the Company By-Laws. See "-- 1999 Long-Term Incentives Plan".
Amendment, Suspension or Termination of 1998 Plan. The Compensation
Committee may at any time amend, suspend or terminate the 1998 Plan or Company
Options subject thereto. In the event any change in or affecting shares of
Company Common Stock occurs, the Company's Board of Directors may make
appropriate amendments to or adjustments in the 1998 Plan or Company Options
subject thereto, including changes in the number of shares of Company Common
Stock which may be issued under the 1998 Plan and the number of shares of
Company Common Stock and price per share of Company Common Stock subject to
Company Options. The Company's Board of Directors and the Compensation Committee
may not, however (except in making amendments and adjustments in the event of
changes in or affecting shares of Company Common Stock) (i) without the consent
of the person affected, cancel or reduce an outstanding Company Option other
than as provided for or contemplated in the agreement evidencing the option or
(ii) without the approval of shareowners, increase the number of shares of
Company Common Stock that may be issued under the 1998 Plan or reduce the option
exercise price of any Company Option.
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<PAGE> 83
DIRECTORS STOCK PLAN
The Company's Directors Stock Plan (the "Directors Plan") has been adopted
by the Company's Board of Directors and approved by Rockwell as the Company's
sole shareowner. An aggregate of 315,000 shares of Company Common Stock may be
issued under the Directors Plan, subject to appropriate adjustment in the event
of any change in or affecting shares of Company Common Stock, including but not
limited to stock dividends, stock splits and recapitalizations.
Participation. Participation in the Directors Plan will be limited to
directors who are not employees of the Company or any of its subsidiaries.
Restricted Shares. Directors may elect to receive their cash retainer for
Board service in the form of restricted shares of Company Common Stock.
Restricted shares, if elected, would be held by the Company until ten days after
the recipient retires from the Company's Board of Directors after reaching age
72 and having served at least three years as a director or ceases to be a
director by reason of the antitrust laws, compliance with the Company's conflict
of interest policies, death, disability or other circumstances the Company's
Board of Directors determines not to be adverse to the best interests of the
Company. Restricted shares would have all the attributes of outstanding shares
including the right to vote and to receive dividends thereon.
Stock Options. Under the Directors Plan grants of options to purchase
40,000 shares of Company Common Stock will be made to each non-employee director
effective upon election as a director (or, for the initial non-employee
directors, effective concurrently with the first options granted under the 1999
LTIP). Following completion of one year of service on the Board by a
non-employee director, grants of options to purchase 15,000 shares of Company
Common Stock will thereafter be made annually to such non-employee director
immediately following each Annual Meeting of Shareowners. The purchase price of
the shares subject to the option will be one hundred percent (100%) of the fair
market value of Company Common Stock on the date an option is granted. Upon
exercise of an option, the option price must be paid in full in cash, shares of
Company Common Stock valued at their fair market value on the date of exercise,
or a combination of both.
Options granted under the Directors Plan may not be exercised prior to one
year nor after ten years from the date of grant and become exercisable in four
approximately equal installments on the first, second, third and fourth
anniversaries of the date of grant. If an optionee who holds an outstanding
stock option dies, the Directors Plan permits the exercise of such option within
three years of the date of death (or until the expiration date specified in the
option, if earlier), even if it were not exercisable at such date. If an
optionee who holds an outstanding stock option retires from the Company's Board
of Directors after reaching age 72 or having served at least ten years as a
director, all options then held will be exercisable even if they were not
exercisable at such retirement date, provided that such options shall expire at
the earlier of five years from the date of retirement or the expiration date
specified in the options. The Directors Plan permits the Compensation Committee
to make determinations as to exercisability upon other termination of an
optionee's membership on the Company's Board of Directors.
Administration and Amendment. The Directors Plan will be administered by
the Compensation Committee. The Company's Board of Directors may amend the
Directors Plan in any respect, provided that no amendment may be made without
shareowner approval that would materially (i) increase the maximum number of
shares of Company Common Stock available for delivery under the Directors Plan
(other than adjustments to reflect changes in or affecting shares of Company
Common Stock), (ii) increase the benefits accruing to participants under the
Directors Plan, or (iii) modify the requirements as to eligibility for
participation in the Directors Plan. The Company's Board of Directors also has
authority to terminate the Directors Plan at any time.
Change of Control Benefits. In order to maintain the rights of
participants in the Directors Plan in the event of a change of control of the
Company, the Directors Plan provides that upon the occurrence of such a change,
all outstanding stock options shall become fully exercisable whether or not then
exercisable and the restrictions on all restricted shares shall lapse. See
"-- 1999 Long-Term Incentives Plan".
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<PAGE> 84
Tax Matters. The material Federal income tax consequences of the issuance
or transfer of restricted shares awarded in lieu of cash retainers is that the
value thereof is not taxable to the recipient, and the Company will not be
entitled to its deduction, until the restriction lapses (at the value of the
shares on the date the restriction lapses).
The material Federal income tax consequences of the grant of options under
the Directors Plan are that upon the exercise of an option, the optionee
realizes ordinary income, and the Company is entitled to a deduction, equal to
the difference between the option exercise price and the fair market value of
the shares acquired at the time of exercise.
EMPLOYEE STOCK PURCHASE PLAN
Prior to the Distribution the Company will adopt (and Rockwell will approve
as the Company's sole shareowner) an employee stock purchase plan to be
qualified under Section 423 of the Code (the "Stock Purchase Plan") for
anticipated implementation during fiscal 1999. Participation in the Stock
Purchase Plan is expected to be available to all full-time employees of the
Company (including represented hourly employees) in the United States and all
salaried employees at the Company's international locations (to the extent
permitted by local law). Participants may elect to have up to 10 percent of
their total compensation withheld for quarterly purchases of Company Common
Stock at a price equal to 85 percent of the lesser of the fair market value
thereof at the beginning or end of each quarter. It is anticipated that an
aggregate of 1,500,000 shares of Company Common Stock will initially be
authorized for issuance pursuant to the Stock Purchase Plan.
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<PAGE> 85
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth the number of shares of Company Common Stock
expected to be beneficially owned following the Distribution, directly or
indirectly, by each director, each Named Executive Officer and such persons and
other executive officers, as a group, based upon the beneficial ownership of
such persons of Rockwell Common Stock reported to Rockwell as of October 31,
1998, including shares as to which a right to acquire ownership exists (for
example, through the exercise of stock options, conversions of securities or
through various trust arrangements) within the meaning of Rule 13d-3(d)(1) under
the Exchange Act.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
NAME SHARES(1) PERCENT OF CLASS (2)
- ---- --------- --------------------
<S> <C> <C>
Donald R. Beall......................................... 891,883(3)(4) 0.9%
Richard M. Bressler..................................... 5,826(5)(6) --
Dwight W. Decker........................................ 42,789(3)(5)(7) --
F. Craig Farrill........................................ -- --
Jerre L. Stead.......................................... -- --
Moiz M. Beguwala........................................ 6,293(3)(5) --
Anthony C. D'Augustine.................................. 207(3) --
Raouf Y. Halim.......................................... 1,669(3)(5) --
F. Matthew Rhodes....................................... 433(3)(5) --
All of the above and other
executive officers as a group (13 persons)............ 970,010(3)(5) 1.0
</TABLE>
- ---------------
(1) Each person has sole voting and investment power with respect to the shares
listed unless otherwise indicated.
(2) The shares owned by each person, and by the group, and the shares included
in the number of shares outstanding have been adjusted, and the percentage
of shares owned (where such percentage exceeds 0.1%) has been computed, in
accordance with Rule 13d-3(d)(1) under the Exchange Act.
(3) Includes shares expected to be beneficially owned in respect of shares of
Rockwell Common Stock held under Rockwell's savings plans as of October 31,
1998.
(4) Includes shares, as to which beneficial ownership is disclaimed, as follows:
125,506 shares expected to be held for the benefit of family members and
5,000 shares expected to be owned by the Beall Family Foundation, of which
Mr. Beall is President and a director. Does not include 144,104 shares in
respect of shares of Rockwell Common Stock that may be acquired upon
exercise of stock options assigned to family members who are the beneficial
owners thereof.
(5) Includes shares in respect of shares of Rockwell Common Stock that may be
acquired upon the exercise of outstanding stock options within 60 days as
follows: 703,474; 3,834; 35,768; 1,336; 788; 250; and 762,493 for Messrs.
Beall, Bressler, Decker, Beguwala, Halim, Rhodes and the group,
respectively.
(6) Includes 892 shares in respect of shares of Rockwell Common Stock granted to
Mr. Bressler as restricted stock under the Rockwell Directors Plan.
(7) Includes 4,102 shares in respect of shares of Rockwell Common Stock granted
to Mr. Decker as restricted stock in partial payment of long-term incentive
payments earned for three-year performance periods ended September 30, 1997.
With the exception of Wells Fargo Bank, N.A., as trustee under the Rockwell
Savings Plan, which held approximately 19% (of which approximately 6% was for
active Rockwell employees and the remainder for former Rockwell employees) of
the outstanding shares of Rockwell Common Stock as of October 31, 1998, there
are no persons known to Rockwell who are expected to be "beneficial owners" (as
that term is defined in the rules of the Commission) of more than 5% of any
class of the Company's voting securities outstanding as of the Distribution
Date.
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<PAGE> 86
DESCRIPTION OF COMPANY CAPITAL STOCK
Immediately prior to the Distribution, the Company will be authorized to
issue (i) 500,000,000 shares of Company Common Stock, of which (based on the
number of shares of Rockwell Common Stock outstanding as of October 31, 1998)
approximately 95 million shares of Company Common Stock will be issued to
shareowners of Rockwell in the Distribution, and (ii) 25,000,000 shares of
Preferred Stock, without par value ("Company Preferred Stock"), of which
1,500,000 shares will be designated as Series A Junior Participating Preferred
Stock ("Company Junior Preferred Stock") for issuance in connection with the
exercise of the Company Rights. See "-- Company Rights Plan".
The discussion of the material terms of the Company's capital stock
contained herein is qualified by reference to the Company Certificate, which
will be in effect immediately prior to the Distribution, a copy of which has
been filed as an exhibit to the Registration Statement of which this Information
Statement is a part.
COMPANY COMMON STOCK
The Company Certificate (except as to the numbers of authorized shares of
capital stock) and the Company By-Laws will be substantially similar to the
Restated Certificate of Incorporation of Rockwell (the "Rockwell Certificate")
and the By-Laws of Rockwell (the "Rockwell By-Laws"), including provisions
establishing a classified Board of Directors, requiring shareowners to provide
advance notice of any shareowner nominations of directors or any proposal of new
business to be considered at any meeting of shareowners, requiring a
supermajority vote to remove a director or to amend or repeal certain provisions
of the Company Certificate or the Company By-Laws and precluding shareowners
from calling a special meeting of shareowners. See "-- Certain Provisions in the
Company Certificate and Company By-Laws".
Holders of Company Common Stock will be entitled to such dividends as may
be declared by the Board of Directors of the Company out of any funds of the
Company legally available therefor. Dividends may not be paid on Company Common
Stock unless all accrued dividends on Company Preferred Stock, if any, have been
paid or set aside. In the event of any liquidation, dissolution or winding up of
the Company, the holders of Company Common Stock will be entitled to share pro
rata in the assets remaining after payment to creditors and after payment of the
liquidation preference plus any unpaid dividends to holders of any outstanding
Company Preferred Stock. Each holder of Company Common Stock will be entitled to
one vote for each such share outstanding in such holder's name. No holder of
Company Common Stock will be entitled to cumulate such holder's votes in voting
for directors. The Company Certificate provides that, unless otherwise
determined by the Board of Directors of the Company, no holder of Company Common
Stock will, as such holder, have any right to purchase or subscribe for any
stock of any class which the Company may issue or sell.
Except as described below under "-- Certain Provisions in the Company
Certificate and Company By-Laws", the rights, privileges and preferences of
Company Common Stock will otherwise be substantially similar to the rights,
privileges and preferences of Rockwell Common Stock.
COMPANY PREFERRED STOCK
General
The Company Certificate authorizes the Board of Directors of the Company to
establish one or more series of Company Preferred Stock (of up to an aggregate
of 25,000,000 shares) and to determine, with respect to any series of Company
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Board of Directors of the Company may thereafter (except where otherwise
provided in the applicable certificate of designation) increase or decrease (but
not below the number of shares thereof then outstanding), (iii) whether
dividends, if any, will be cumulative or noncumulative, and, in the case of
shares of any series having cumulative dividend rights, the date or dates or
method of determining the date or dates from which dividends on the shares of
such series shall be cumulative, (iv) the rate of any dividends (or method of
determining such dividends) payable to the holders of the shares of such series,
any conditions upon which such dividends will be paid and the date or dates or
the method for determining the date or dates upon which such dividends will be
payable, (v) the
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redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series and
(xi) any other relative rights, preferences and limitations of such series.
The Board of Directors of the Company believes that the ability of the
Board to issue one or more series of Company Preferred Stock will provide the
Company with flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs which might arise. The
authorized shares of Company Preferred Stock, as well as Company Common Stock,
will be available for issuance without further action by the Company's
shareowners, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. If the approval of the Company's shareowners
is not so required, the Board of Directors of the Company may determine not to
seek shareowner approval.
Although the Board of Directors of the Company has no intention at the
present time of doing so (other than as described below with respect to the
Company Junior Preferred Stock), it could issue a series of Company Preferred
Stock that could, depending on the terms of such series, impede the completion
of a merger, tender offer or other takeover attempt. The Board of Directors of
the Company will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its shareowners. The Board
of Directors of the Company, in so acting, could issue Company Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Board of Directors of the
Company, including a tender offer or other transaction that some, or a majority,
of the Company's shareowners might believe to be in their best interests or in
which shareowners might receive a premium for their stock over the then current
market price of such stock.
Company Junior Preferred Stock
The summary of the material terms of the Company Junior Preferred Stock
contained herein is qualified by reference to the provisions of the Company
Certificate, a copy of which has been filed as an exhibit to the Registration
Statement of which this Information Statement is a part.
Prior to the Distribution, the Board of Directors of the Company will
authorize the issuance of up to 1,500,000 shares of Company Junior Preferred
Stock. The terms of the Company Junior Preferred Stock will be set forth in the
Company Certificate. The Company Junior Preferred Stock, when issued upon
exercise of the Company Rights, will be fully paid and nonassessable. See
"-- Company Rights Plan".
Ranking and Redemption. The Company Junior Preferred Stock will rank
junior to all series of any other class of Company Preferred Stock with respect
to payments of dividends and distribution of assets and will be non-redeemable.
Dividend Rights. Holders of Company Junior Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company out of funds legally available therefor, quarterly dividends equal to
the greater of (i) $1 or (ii) 100 times the amount of cash dividends and 100
times the amount (payable in kind) of non-cash dividends or other distributions
(other than stock dividends of Company Common Stock) declared per share of the
Company Common Stock. If the Company at any time declares or pays a stock
dividend payable in Company Common Stock, or effects a subdivision or
combination or consolidation of Company Common Stock, then the amount to which
holders of Company Junior Preferred Stock will be entitled under clause (ii) of
the previous sentence will be adjusted in accordance with the antidilution
provisions contained in the Company Certificate.
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<PAGE> 88
Dividends and distributions on the Company Junior Preferred Stock will be
declared immediately after the declaration of the dividend or distribution on
the Company Common Stock and will be payable quarterly on the second Monday of
March, June, September and December in each year (a "Dividend Payment Date"). In
the event that no dividend or distribution is declared on Company Common Stock,
then a dividend of $1 per share of Company Junior Preferred Stock will
nevertheless be payable on the next Dividend Payment Date. The Board of
Directors of the Company may fix a record date for the determination of the
holders of Company Junior Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date may not be more
than 60 days prior to the payment date. Dividends on the Company Junior
Preferred Stock will accrue and be cumulative. Accrued and unpaid dividends will
not bear interest.
If quarterly dividends or other dividends or distributions payable on the
Company Junior Preferred Stock are in arrears, until all accrued and unpaid
dividends and distributions on the Company Junior Preferred Stock are paid in
full, the Company may not (i) declare or pay any dividend or distribution with
respect to any stock ranking junior to the Company Junior Preferred Stock; (ii)
declare or pay any dividend or distribution with respect to any stock ranking on
a parity with the Company Junior Preferred Stock, other than pro rata
distributions made on the Company Junior Preferred Stock and all such parity
stock; (iii) redeem or purchase or otherwise acquire shares of Company Junior
Preferred Stock or any stock ranking junior to the Company Junior Preferred
Stock (provided that the Company may redeem or purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock ranking
junior to the Company Junior Preferred Stock); and (iv) redeem or purchase or
otherwise acquire shares of any stock ranking on a parity with the Company
Junior Preferred Stock, except in accordance with a purchase offer made in
writing or publication to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, no distributions will be made with respect to (i) any
shares of stock ranking junior to the Company Junior Preferred Stock, unless
holders of shares of Company Junior Preferred Stock have received an amount per
share equal to $100 plus an amount per share equal to any dividends accrued but
unpaid thereon, without interest, provided that such holders will be entitled to
receive an amount per share equal to 100 times the amount to be distributed per
share to holders of Company Common Stock or (ii) any shares of stock ranking on
a parity with the Company Junior Preferred Stock, except for pro rata
distributions made on the Company Junior Preferred Stock and all such parity
stock. If the Company at any time declares or pays a stock dividend payable in
Company Common Stock, or effects a subdivision or combination or consolidation
of Company Common Stock, then the amount to which holders of Company Junior
Preferred Stock will be entitled will be adjusted in accordance with the
antidilution provisions contained in the Company Certificate.
Voting Rights. Each share of Company Junior Preferred Stock will be
entitled to 100 votes per share. If the Company at any time declares or pays a
stock dividend payable in Company Common Stock, or effects a subdivision or
combination or consolidation of Company Common Stock, then the number of votes
to which holders of Company Junior Preferred Stock will be entitled will be
adjusted in accordance with the antidilution provisions contained in the Company
Certificate. The Company Junior Preferred Stock shall vote together with the
Company Common Stock and any other capital stock of the Company having general
voting rights as one class on all matters submitted to a vote of shareowners of
the Company, except as otherwise provided in a certificate of designation for
any other class of Company Preferred Stock filed with the Secretary of State of
the State of Delaware or by law. Except as otherwise provided by law, the
Company Junior Preferred Stock will have no special voting rights, and except to
the extent the Company Junior Preferred Stock is entitled to vote with the
Company Common Stock, the consent of the Company Junior Preferred Stock will not
be required for taking any corporate action.
Rights Upon Consolidation, Merger or Combination. If the Company enters
into any consolidation, merger, combination or other transaction in which shares
of Company Common Stock are exchanged for or changed into other stock or
securities, cash and/or other property, then each share of Company Junior
Preferred Stock will at the same time be similarly exchanged or changed into an
amount per share equal to 100 times the aggregate amount of stock, securities,
cash and/or other property (payable in kind) into which
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or for which each share of Company Common Stock is changed or exchanged. If the
Company at any time declares or pays a stock dividend payable in Company Common
Stock, or effects a subdivision or combination or consolidation of Company
Common Stock, then the amount to which holders of Company Junior Preferred Stock
will be entitled with respect to such exchange or change will be adjusted in
accordance with the antidilution provisions contained in the Company
Certificate.
CERTAIN PROVISIONS IN THE COMPANY CERTIFICATE AND COMPANY BY-LAWS
Except as described below, the Company Certificate and the Company By-Laws
will be substantially similar to the Rockwell Certificate and the Rockwell
By-Laws. Accordingly, the Company Certificate and the Company By-Laws will
contain various provisions intended to (i) promote stability of the Company's
shareowner base and (ii) render more difficult certain unsolicited or hostile
attempts to take over the Company which could disrupt the Company, divert the
attention of the Company's directors, officers and employees and adversely
affect the independence and integrity of the Company's business. A summary of
the material terms of these provisions of the Company Certificate and the
Company By-Laws is set forth below.
Classified Board of Directors and Removal of Directors
Pursuant to the Company Certificate, the number of directors of the Company
will be fixed by the Board of Directors of the Company. The directors (other
than those elected by the holders of any series of Company Preferred Stock or
any other series or class of stock, other than Company Common Stock) will be
divided into three classes, each class to consist as nearly as possible of
one-third of the directors. Directors elected by shareowners at an Annual
Meeting of Shareowners will be elected by a plurality of all votes cast at such
annual meeting. Initially, the terms of office of the three classes of directors
will expire, respectively, at the Annual Meetings of Shareowners in 2000, 2001
and 2002. The term of the successors of each such class of directors expires
three years from the year of election.
The Company Certificate provides that except as otherwise provided for or
fixed by or pursuant to a certificate of designations setting forth the rights
of the holders of any class or series of Company Preferred Stock and unless the
Board of Directors of the Company otherwise determines, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors of the Company resulting from death,
resignation, disqualification, removal or other cause will be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors of the Company, and not by
the shareowners. Any director elected in accordance with the preceding sentence
will hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting the Board of Directors of the Company will
shorten the term of any incumbent director. Subject to the rights of holders of
any Company Preferred Stock, any director may be removed from office only for
cause by the affirmative vote of the holders of at least 80 percent of the
voting power of all the outstanding capital stock of the Company entitled to
vote generally in the election of directors (the "Voting Power"), voting
together as a single class.
These provisions of the Company Certificate would preclude a third party
from removing incumbent directors and simultaneously gaining control of the
Board of Directors of the Company by filling the vacancies created by removal
with its own nominees. Under the classified board provisions described above, it
would take at least two elections of directors for any individual or group to
gain control of the Board of Directors of the Company. Accordingly, these
provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
Fair Price Provision
The Company Certificate contains a provision (the "Fair Price Provision")
pursuant to which a Business Combination (as defined below) between the Company
or a subsidiary of the Company and an Interested Shareowner (as defined below)
requires approval by the affirmative vote of the holders of not less than 80
percent of the Voting Power, unless the Business Combination is approved by at
least two-thirds of the
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Continuing Directors (as defined below) or certain fair price criteria and
procedural requirements specified in the Fair Price Provision and described
below are met. If either the requisite Board of Directors approval or the fair
price and procedural requirements were met, the Business Combination would be
subject to the voting requirements otherwise applicable under the DGCL and
Nasdaq, which for most types of Business Combinations currently would be the
affirmative vote of the holders of a majority of the outstanding shares of stock
of the Company entitled to vote thereon.
The general purpose of the Fair Price Provision is to protect shareowners
against so-called front-end loaded or two-tier tender offers which may afford
some shareowners a disproportionately higher price for their shares than
shareowners receive generally. The Fair Price Provision is intended to help
assure the Company's shareowners fair and equitable treatment in the event a
third party were to seek to acquire the Company.
A "Business Combination" is defined as: (i) a merger or consolidation of
the Company or any subsidiary with an Interested Shareowner; (ii) the sale,
lease, exchange, mortgage, pledge, transfer or other disposition by the Company
or a subsidiary of assets or securities having a value of $25 million or more if
an Interested Shareowner is a party to the transaction; (iii) the adoption of
any plan or proposal for the liquidation or dissolution of the Company proposed
by or on behalf of an Interested Shareowner; (iv) any reclassification of
securities, recapitalization, merger with a subsidiary or other transaction
which has the effect, directly or indirectly, of increasing an Interested
Shareowner's proportionate share of the outstanding capital stock of the Company
or a subsidiary; or (v) any agreement or contract providing for any of the
foregoing.
An "Interested Shareowner" is defined as any person who is the beneficial
owner of 10 percent or more of the Voting Power other than the Company, certain
of its subsidiaries, or the employee benefit plans of the Company, any
subsidiary or Rockwell and the trustees of such plans. A person is the
"beneficial owner" of stock that such person, directly or indirectly, owns or
has the right to acquire or vote. The Company is not aware of any person or
group who would have been within the definition of an "Interested Shareowner" if
the Distribution had occurred on October 31, 1998.
"Fair Price" Criteria. Under the Fair Price Provision, the fair price
criteria that must be satisfied to avoid the 80 percent shareowner voting
requirement include the requirements that the consideration paid to the
Company's shareowners in a Business Combination must be (i) either cash or the
same form of consideration used by the Interested Shareowner in acquiring its
beneficial ownership of the largest number of shares of the relevant class or
series of the Company's capital stock acquired by the Interested Shareowner and
(ii) at least equal to the highest of (A) the highest per share price paid by or
on behalf of the Interested Shareowner in the two-year period immediately
preceding the date of the first public announcement of the proposal of the
Business Combination or in the transaction in which it became an Interested
Shareowner, whichever is higher, (B) the fair market value per share of the
relevant class or series of the Company's capital stock on the date the
Interested Shareowner became an Interested Shareowner or the date of the first
public announcement of the proposal of the Business Combination, whichever is
higher, or (C) the liquidation preference of the relevant class or series of the
Company's capital stock (other than Company Common Stock). The Interested
Shareowner would be required to meet the fair price criteria with respect to
each class of the Company's capital stock, whether or not the Interested
Shareowner beneficially owned shares of that class prior to proposing the
Business Combination. If the Business Combination does not involve any cash or
other property being received by any of the other shareowners, such as a sale of
assets or an issuance of the Company's securities to an Interested Shareowner,
then the fair price criteria discussed above would not apply, and approval by
the holders of 80 percent of the Voting Power would be required unless the
transaction were approved by at least two-thirds of the Continuing Directors.
Procedural Requirements. Under the Fair Price Provision, even if the
foregoing fair price criteria are met, the following procedural requirements
must be met if the Business Combination is not to require approval by at least
two-thirds of the Continuing Directors or approval by the holders of 80 percent
of the Voting Power: (i) the Company, after the Interested Shareowner became an
Interested Shareowner, must not have failed to pay full quarterly dividends on
the Company Preferred Stock, if any, or reduced the rate of dividends paid on
the Company Common Stock, unless such failure or reduction was approved by at
least two-thirds of the Continuing Directors; (ii) the Interested Shareowner
must not have acquired at any time after
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becoming an Interested Shareowner any additional shares of the Company's capital
stock in any transaction unless after giving effect to such acquisition there
would be no increase in the Interested Shareowner's percentage beneficial
ownership of any class of the Company's capital stock; (iii) the Interested
Shareowner must not have received (other than proportionately as a shareowner)
at any time after becoming an Interested Shareowner, whether in connection with
the proposed Business Combination or otherwise, the benefit of any loans or
other financial assistance or any tax advantages provided by the Company; (iv) a
proxy or information statement describing the proposed Business Combination and
complying with the requirements of the Exchange Act must have been mailed to all
shareowners of the Company at least 30 days prior to the consummation of the
Business Combination; and (v) the Interested Shareowner must not have made any
material change in the Company's business or equity capital structure without
the approval of at least two-thirds of the Continuing Directors.
Continuing Director Approval. If the Business Combination with an
Interested Shareowner is approved by at least two-thirds of the Continuing
Directors, neither the fair price criteria and other procedural requirements nor
the 80 percent shareowner vote requirement would be applicable. A "Continuing
Director" is any member of the Board of Directors of the Company who is not
affiliated or associated with or a representative of the Interested Shareowner
and who was a director of the Company prior to the time the Interested
Shareowner became an Interested Shareowner, and any successor to such Continuing
Director who is not affiliated or associated with or a representative of an
Interested Shareowner and who was recommended or elected by at least two-thirds
of the Continuing Directors.
80 Percent Shareowner Vote. If the fair price criteria and procedural
requirements are not satisfied and the Business Combination is not approved by
at least two-thirds of the Continuing Directors, the Fair Price Provision
requires the approval of the holders of 80 percent of the Voting Power, voting
as a single class, in addition to any vote required by law or otherwise. If the
fair price criteria and other procedural requirements were met or at least
two-thirds of the Continuing Directors approved a particular Business
Combination, the normal voting requirements of the DGCL and Nasdaq would apply.
Under current provisions of the DGCL, certain mergers, consolidations,
reclassifications of securities, sales of substantially all assets and plans of
dissolution would have to be approved by the holders of a majority of the
outstanding shares of stock of the Company entitled to vote thereon. Under the
current rules of Nasdaq, on which shares of Company Common Stock are expected to
be approved for trading and quotation, the issuance of additional shares of
Company Common Stock aggregating 20 percent of the outstanding shares could,
under certain circumstances, require approval by a majority of the votes cast by
the holders of the shares of the stock of the Company entitled to vote thereon.
Certain other transactions, such as sales of less than substantially all assets,
mergers involving a 90%-owned subsidiary and recapitalizations not involving any
amendments to the Company Certificate, would not require shareowner approval
under the DGCL or Nasdaq rules, although such transactions may constitute
Business Combinations subject to the Fair Price Provision.
Amendment of the Fair Price Provision. Any amendment or repeal of the Fair
Price Provision, or the adoption of provisions inconsistent therewith, must be
approved by the affirmative vote of the holders of not less than 80 percent of
the Voting Power, voting together as a single class, unless such amendment,
repeal or adoption were approved by at least two-thirds of the Continuing
Directors, in which case the provisions of the DGCL would require the
affirmative vote of the holders of a majority of the outstanding shares of the
Company's stock entitled to vote thereon.
Special Shareowners' Meetings and Right to Act By Written Consent
The Company Certificate and the Company By-Laws provide that a special
meeting of shareowners may be called only by a resolution adopted by a majority
of the entire Board of Directors of the Company. Shareowners are not permitted
to call, or to require that the Board of Directors call, a special meeting of
shareowners. Moreover, the business permitted to be conducted at any special
meeting of shareowners is limited to the business brought before the meeting
pursuant to the notice of the meeting given by the Company. In addition, the
Company Certificate provides that any action taken by the shareowners of the
Company must be effected at an annual or special meeting of shareowners and may
not be taken by written consent in lieu of a meeting.
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The provisions of the Company Certificate and the Company By-Laws
prohibiting shareowner action by written consent may have the effect of delaying
consideration of a shareowner proposal until the next annual meeting. These
provisions would also prevent the holders of a majority of the Voting Power from
unilaterally using the written consent procedure to take shareowner action.
Moreover, a shareowner could not force shareowner consideration of a proposal
over the opposition of the Board of Directors of the Company by calling a
special meeting of shareowners prior to the time the Board believes such
consideration to be appropriate.
Procedures for Shareowner Nominations and Proposals
The Company By-Laws establish an advance notice procedure for shareowners
to nominate candidates for election as directors or to bring other business
before meetings of shareowners of the Company (the "Shareowner Notice
Procedure").
Only those shareowner nominees who are nominated in accordance with the
Shareowner Notice Procedure will be eligible for election as directors of the
Company. Under the Shareowner Notice Procedure, notice of shareowner nominations
to be made at an annual meeting (or of any other business to be brought before
such meeting) must be received by the Company not less than 90 days nor more
than 120 days prior to the first anniversary of the previous year's annual
meeting (or, in the case of the 2000 Annual Meeting of Shareowners or if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, not earlier than the 120th day prior to such
meeting and not later than the later of (i) the 90th day prior to such meeting
or (ii) the 10th day after public announcement of the date of such meeting is
first made). Notwithstanding the foregoing, in the event that the number of
directors to be elected is increased and there is no public announcement naming
all of the nominees for director or specifying the size of the increased Board
of Directors made by the Company at least 100 days prior to the first
anniversary of the preceding year's annual meeting, a shareowner's notice will
be timely, but only with respect to nominees for any new positions created by
such increase, if it is received by the Company not later than the 10th day
after such public announcement is first made by the Company.
The Company By-Laws provide that only such business may be conducted at a
special meeting as is specified in the notice of meeting. Nominations for
election to the Company's Board of Directors may be made at a special meeting at
which directors are to be elected only by or at the Company's Board of Directors
direction or by a shareowner who has given timely notice of nomination. Under
the Shareowner Notice Procedure, such notice must be received by the Company not
earlier than the 120th day before such meeting and not later than the later of
(i) the 90th day prior to such meeting or (ii) the 10th day after public
announcement of the date of such meeting is first made. Shareowners will not be
able to bring other business before special meetings of shareowners.
The Shareowner Notice Procedure provides that at an annual meeting only
such business may be conducted as has been brought before the meeting by or at
the direction of the Company's Board of Directors or by a shareowner who has
given timely written notice (as set forth above with respect to shareowner's
nominations for election of directors at annual meetings) to the Company of such
shareowner's intention to bring such business before such meeting.
Under the Shareowner Notice Procedure, a shareowner's notice to the Company
proposing to nominate an individual for election as a director must contain
certain information, including, without limitation, the identity and address of
the nominating shareowner, the class and number of shares of stock of the
Company owned by such shareowner, and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee. Under the Shareowner Notice Procedure, a
shareowner's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing shareowner, including, without limitation, a brief
description of the business the shareowner proposes to bring before the meeting,
the reasons for conducting such business at such meeting, the name and address
of such shareowner, the class and number of shares of stock of the Company
beneficially owned by such shareowner, and any material interest of such
shareowner in the business so proposed. If the Chairman or other officer
presiding at a meeting determines that an individual was not nominated, or other
business was not brought before the meeting, in accordance
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with the Shareowner Notice Procedure, such individual will not be eligible for
election as a director, or such business will not be conducted at such meeting,
as the case may be.
By requiring advance notice of nominations by shareowners, the Shareowner
Notice Procedure will afford the Company's Board of Directors an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Company's Board of Directors, to inform
shareowners about such qualifications. By requiring advance notice of other
proposed business, the Shareowner Notice Procedure will provide a more orderly
procedure for conducting annual meetings of shareowners and, to the extent
deemed necessary or desirable by the Company's Board of Directors, will provide
the Company's Board of Directors with an opportunity to inform shareowners,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with the Company's Board of Directors' position regarding
action to be taken with respect to such business, so that shareowners can better
decide whether to attend such a meeting or to grant a proxy regarding the
disposition of any such business.
Although the Company By-Laws do not give the Company's Board of Directors
any power to approve or disapprove shareowner nominations for the election of
directors or proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of shareowner
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareowners.
Amendment of the Company Certificate and Company By-Laws
The Company Certificate provides that the affirmative vote of at least 80
percent of the Voting Power, voting together as a single class, would be
required to (i) amend or repeal the provisions of the Company Certificate with
respect to (A) the election of directors, (B) the right to call a special
shareowners' meeting and (C) the right to act by written consent, (ii) adopt any
provision inconsistent with such provisions and (iii) amend or repeal the
provisions of the Company Certificate with respect to amendments to the Company
Certificate or the Company By-Laws. In addition, the Company Certificate
provides that the Board of Directors of the Company may make, alter, amend and
repeal the by-laws of the Company and that the amendment or repeal by
shareowners of any by-laws of the Company would require the affirmative vote of
at least 80 percent of the Voting Power, voting together as a single class.
COMPANY RIGHTS PLAN
The Company's Board of Directors will declare a dividend of one preferred
share purchase right ("Company Right") to be paid in respect of each share of
Company Common Stock to be issued in the Distribution. Each Company Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of Company Junior Preferred Stock, at a price to be established by the
Board of Directors of the Company at the time the Company Rights Agreement is
entered into (the "Purchase Price"), subject to adjustment. The description and
terms of the Company Rights will be set forth in a Rights Agreement (the
"Company Rights Agreement") to be entered into between the Company and
ChaseMellon, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
Company Common Stock or (ii) 10 business days (or such later date as may be
determined by the Company's Board of Directors prior to such time as any person
or group becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding Company Common Stock (the earlier of
such dates being called the "Rights Distribution Date"), the Company Rights will
be attached to Company Common Stock and the Company Rights will be owned by the
registered owners of Company Common Stock.
The Company Rights Agreement will provide that, until the Rights
Distribution Date (or until the earlier redemption or expiration of the Company
Rights), (i) the Company Rights will be transferred with and only with the
Company Common Stock, (ii) certificates representing Company Common Stock and
statements in
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respect of shares of Company Common Stock registered in book-entry or
uncertificated form will contain a notation incorporating the terms of the
Company Rights by reference and (iii) the transfer of any shares of Company
Common Stock will also constitute the transfer of the Company Rights associated
therewith. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Company Rights ("Rights Certificates") will
be mailed to holders of record of the Company Common Stock as of the close of
business on the Rights Distribution Date and such separate Rights Certificates
alone will evidence the Company Rights.
The Company Rights will not be exercisable until the Rights Distribution
Date. The Company Rights will expire on the tenth anniversary of the
Distribution (the "Final Expiration Date"), unless the Final Expiration Date is
extended or unless the Company Rights are earlier redeemed by the Company, in
each case, as described below.
The Purchase Price payable, and the number of shares of Company Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Company Rights will be subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, Company Junior Preferred Stock, (ii) upon the grant to
holders of shares of Company Junior Preferred Stock of certain rights or
warrants to subscribe for or purchase shares of Company Junior Preferred Stock
at a price, or securities convertible into shares of Company Junior Preferred
Stock with a conversion price, less than the then current market price of the
shares of Company Junior Preferred Stock or (iii) upon the distribution to
holders of shares of Company Junior Preferred Stock of evidences of indebtedness
or assets (excluding regular periodic cash dividends or dividends payable in
shares of Company Junior Preferred Stock) or of subscription rights or warrants
(other than those referred to above).
The number of outstanding Company Rights and the number of one
one-hundredths of a share of Company Junior Preferred Stock issuable upon
exercise of each Company Right will also be subject to adjustment in the event
of a stock split of the Company Common Stock or a stock dividend on the Company
Common Stock payable in Company Common Stock or subdivisions, consolidations or
combinations of the Company Common Stock occurring, in any such case, prior to
the Rights Distribution Date.
Shares of Company Junior Preferred Stock purchasable upon exercise of the
Company Rights will not be redeemable. Each share of Company Junior Preferred
Stock will be entitled to a minimum preferential quarterly dividend payment of
$1 per share but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of Company Common Stock whenever such dividend is
declared. In the event of liquidation, the holders of Company Junior Preferred
Stock will be entitled to a minimum preferential liquidation payment of $100 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of Company Common Stock. Each share of Company Junior Preferred Stock
will have 100 votes, voting together with the Company Common Stock. In the event
of any merger, consolidation or other transaction in which shares of Company
Common Stock are exchanged, each share of Company Junior Preferred Stock will be
entitled to receive 100 times the amount received per share of Company Common
Stock. These rights will be protected by customary antidilution provisions.
Because of the nature of the Company Junior Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Company Junior Preferred Stock purchasable upon exercise of each
Company Right should approximate the value of one share of Company Common Stock.
In the event that, at any time after a person has become an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power is sold,
proper provision will be made so that each holder of a Company Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Company Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Company Right. In the event
that any person becomes an Acquiring Person, proper provision shall be made so
that each holder of a Company Right, other than Company Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise, in lieu of shares of Company Junior
Preferred Stock, that number of shares of Company Common Stock having a market
value of two times the exercise price of the Company Right.
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At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of Company Common Stock, the
Company's Board of Directors may exchange the Company Rights (other than Company
Rights owned by such person or group, which will have become void after such
person became an Acquiring Person) for Company Common Stock or Company Junior
Preferred Stock, in whole or in part, at an exchange ratio of one share of
Company Common Stock, or one hundredth of a share of Company Junior Preferred
Stock (or of a share of another series of Company Preferred Stock having
equivalent rights, preferences and privileges), per Company Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Company Junior Preferred Stock will
be issued (other than fractions which are integral multiples of one
one-hundredth of a share of Company Junior Preferred Stock, which may, at the
election of the Company, be evidenced by depository receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Company Junior Preferred Stock on the last trading day prior to the date of
exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of Company Common Stock, the Board of Directors of the Company may redeem
the Company Rights in whole, but not in part, at a price of $.01 per Company
Right (the "Redemption Price"). The redemption of the Company Rights may be made
effective at such time, on such basis and with such conditions as the Company's
Board of Directors may determine, in its sole discretion. Immediately upon any
redemption of the Company Rights, the right to exercise the Company Rights will
terminate and the only right of the holders of Company Rights will be to receive
the Redemption Price.
The terms of the Company Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Company Rights, including
an amendment to decrease the threshold at which a person becomes an Acquiring
Person from 20% to not less than 10%, except that from and after such time as
any person becomes an Acquiring Person no such amendment may adversely affect
the interests of the holders of the Company Rights.
Until a Company Right is exercised, the holder thereof, as such, will have
no rights as a shareowner of the Company, including, without limitation, the
right to vote or to receive dividends.
The Company Rights will have certain anti-takeover effects. The Company
Rights will cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Company's Board of Directors,
except pursuant to an offer conditioned on a substantial number of the Company
Rights being acquired. The Company Rights should not interfere with any merger
or business combination approved by the Company's Board of Directors, since the
Company Rights may be redeemed by the Company at the Redemption Price prior to
the time that a person or group has become an Acquiring Person.
The foregoing summary of the material terms of the Company Rights is
qualified by reference to the form of the Company Rights Agreement, which has
been filed as an exhibit to the Registration Statement of which this Information
Statement is a part.
ANTI-TAKEOVER LEGISLATION
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested shareowner for a three-year period following the time that
such shareowner becomes an interested shareowner unless (i) prior to such time,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareowner becoming an
interested shareowner; (ii) upon consummation of the transaction which resulted
in the shareowner becoming an interested shareowner, the interested shareowner
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares); or (iii) at or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested shareowner.
Except as specified in Section 203 of the DGCL, an "interested shareowner" is
defined to include (x) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the
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outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates of
any such person.
Under certain circumstances, Section 203 of the DGCL makes it more
difficult for a person who would be an interested shareowner to effect various
business combinations with a corporation for a three-year period, although the
shareowners may elect to exclude a corporation from the restrictions imposed
thereunder. The Company Certificate does not exclude the Company from the
restrictions imposed under Section 203 of the DGCL. It is anticipated that the
provisions of Section 203 of the DGCL may encourage companies interested in
acquiring the Company to negotiate in advance with the Company's Board of
Directors, since the shareowner approval requirement would be avoided if a
majority of the directors then in office approved either the business
combination or the transaction which resulted in the shareowner becoming an
interested shareowner.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits Delaware corporations to eliminate or limit the monetary
liability of directors for breach of their fiduciary duty of care, subject to
certain limitations. The Company Certificate provides that Company directors are
not liable to the Company or its shareowners for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its shareowners, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for willful or negligent violation of the laws governing
the payment of dividends or the purchase or redemption of stock or (iv) for any
transaction from which a director derived an improper personal benefit.
The DGCL provides for indemnification of directors, officers, employees and
agents subject to certain limitations. The Company By-Laws and the appendix
thereto provide for the indemnification of directors, officers, employees and
agents of the Company to the extent permitted by Delaware law. It is expected
that the Company's directors and officers will be insured against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act.
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GLOSSARY OF TECHNICAL TERMS
<TABLE>
<S> <C>
A/D Analog-to-Digital.
ADSL Asymmetric Digital Subscriber Line.
ATM Asynchronous Transfer Mode.
BiCMOS Bipolar Complementary Metal-Oxide Semiconductor.
bps Bits per second.
CDMA Code Division Multiple Access.
CMOS Complementary Metal Oxide Semiconductor.
D/A Digital-to-Analog.
DBS Direct Broadcast Satellite.
DSL Digital Subscriber Line.
DSP Digital Signal Processor.
DSS Digital Spread Spectrum.
E1 European standard for digital transmission for speeds up to
2.048 Mbps.
E3 European standard for digital transmission for speeds up to
34.368 Mbps.
GaAs Gallium Arsenide.
Gbps Gigabits per second, a billion bits per second.
GHz Gigahertz.
GPS Global Positioning System.
GSM Global System for Mobile Communications.
HBT Heterojunction Bipolar Transistor.
HDSL High-speed Digital Subscriber Line.
IC Integrated Circuit.
IP Internet Protocol.
ISO International Standards Organization.
ISP Internet Service Provider.
ITU International Telecommunications Union.
Kbps Kilobits per second, a thousand bits per second.
LAN Local Area Network.
LMDS Local Multi-channel Distribution Service.
Mbps Megabits per second, a million bits per second.
MCNS/DOCSIS Multimedia Cable Network Systems Data Over Cable Services
Interface Specifications.
MESFET Metal Semiconductor Field-Effect Transistor.
MFP Multifunction peripheral.
MHz Megahertz.
MMDS Multi-point Multi-channel Distribution System.
NTSC National Television Standards Committee (North American
television standard).
OEM Original Equipment Manufacturer.
PAL Phase Alternate Line (European television standard).
PCMCIA Personal Computer Memory Card International Association.
PHY Physical layer device.
RF Radio Frequency.
RFCMOS Radio Frequency Complementary Metal Oxide Semiconductor.
RFIC Radio Frequency Integrated Circuit.
</TABLE>
90
<PAGE> 98
<TABLE>
<S> <C>
SAR Segmentation And Reassembly device.
SDH Synchronous Digital Hierarchy.
SECAM Systeme Electronique Couleur Avec Memorie (French television
standard).
SiGe Silicon Germanium.
SONET Synchronous Optical Network.
T1 North American standard for digital transmission for speeds
up to 1.544 Mbps.
T3 North American standard for digital transmission for speeds
up to 45 Mbps.
TDMA Time Division Multiple Access.
WAN Wide Area Network.
xDSL Generic term for digital subscriber line, including ADSL and
HDSL.
</TABLE>
91
<PAGE> 99
INDEX TO SEMICONDUCTOR SYSTEMS COMBINED
FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Combined Balance Sheet as of September 30, 1998 and 1997.... F-3
Combined Statement of Operations for the years ended
September 30, 1998, 1997 and 1996......................... F-4
Combined Statement of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... F-5
Notes to Combined Financial Statements...................... F-6
Schedule II -- Valuation and Qualifying Accounts............ F-20
</TABLE>
F-1
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners of
Rockwell International Corporation:
We have audited the accompanying combined balance sheet of the
semiconductor systems business (Semiconductor Systems) of Rockwell International
Corporation (Rockwell), as described in Note 1 to the financial statements, as
of September 30, 1998 and 1997, and the related combined statements of
operations and cash flows for each of the three years in the period ended
September 30, 1998. Our audits also included the financial statement schedule
listed in the Index to Semiconductor Systems Combined Financial Statements and
Schedule at page F-1. These financial statements and the financial statement
schedule are the responsibility of Rockwell's management. Our responsibility is
to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Semiconductor Systems as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
combined financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
November 4, 1998
F-2
<PAGE> 101
SEMICONDUCTOR SYSTEMS
COMBINED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 14 $ 14
Receivables (less allowance for doubtful accounts: 1998, $9;
1997, $10)................................................ 167 223
Inventories, net............................................ 201 223
Deferred income taxes....................................... 153 50
Assets held for disposal (see Note 3)....................... 42 --
Other current assets........................................ 10 11
------ ------
Total current assets.............................. 587 521
PROPERTY, NET............................................... 713 802
INTANGIBLE ASSETS, NET...................................... 53 87
OTHER ASSETS................................................ 65 76
------ ------
TOTAL ASSETS...................................... $1,418 $1,486
====== ======
LIABILITIES AND ROCKWELL'S NET INVESTMENT
CURRENT LIABILITIES:
Short-term debt............................................. $ 14 $ 14
Accounts payable............................................ 151 189
Accrued compensation and benefits........................... 37 49
Other current liabilities................................... 129 47
------ ------
Total current liabilities......................... 331 299
OTHER LIABILITIES AND CONTINGENCIES......................... 78 80
ROCKWELL'S NET INVESTMENT................................... 1,009 1,107
------ ------
TOTAL LIABILITIES AND ROCKWELL'S NET INVESTMENT... $1,418 $1,486
====== ======
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 102
SEMICONDUCTOR SYSTEMS
COMBINED STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... $1,200 $1,412 $1,470
Cost of sales............................................... 909 744 849
------ ------ ------
GROSS MARGIN................................................ 291 668 621
Research and development.................................... 337 280 155
Selling, general and administrative......................... 251 191 150
Purchased research and development.......................... -- 30 121
Special charges (see Note 3)................................ 147 -- --
------ ------ ------
OPERATING (LOSS) EARNINGS................................... (444) 167 195
Other income, net........................................... 14 13 3
------ ------ ------
(LOSS) INCOME BEFORE INCOME TAXES........................... (430) 180 198
(Benefit) provision for income taxes........................ (168) 54 114
------ ------ ------
NET (LOSS) INCOME................................. $ (262) $ 126 $ 84
====== ====== ======
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 103
SEMICONDUCTOR SYSTEMS
COMBINED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................................... $(262) $ 126 $ 84
Adjustments to net (loss) income to arrive at cash provided
by operating activities:
Depreciation and amortization............................. 220 181 132
Deferred income taxes..................................... (109) 32 (89)
Special charges (see Note 3).............................. 147 -- --
Purchased research and development........................ -- 30 121
Changes in assets and liabilities, excluding effects of
acquisitions:
Receivables............................................ 52 (27) (54)
Inventories............................................ 21 66 (151)
Accounts payable....................................... (42) 11 95
Other current liabilities.............................. 171 (125) 146
Other.................................................. (100) 2 31
----- ----- -----
CASH PROVIDED BY OPERATING ACTIVITIES............. 98 296 315
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures........................................ (270) (317) (380)
Acquisitions of businesses, net of cash acquired............ -- (65) (254)
----- ----- -----
CASH USED FOR INVESTING ACTIVITIES................ (270) (382) (634)
----- ----- -----
FINANCING ACTIVITIES
Decrease in short-term borrowings........................... -- -- (11)
Payments of long-term debt.................................. -- -- (11)
Net transfers from Rockwell................................. 172 86 341
----- ----- -----
CASH PROVIDED BY FINANCING ACTIVITIES............. 172 86 319
----- ----- -----
CHANGE IN CASH.............................................. -- -- --
CASH AT BEGINNING OF PERIOD................................. 14 14 14
----- ----- -----
CASH AT END OF PERIOD....................................... $ 14 $ 14 $ 14
===== ===== =====
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 104
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On November 4, 1998, the Board of Directors of Rockwell International
Corporation (Rockwell) approved the distribution (the Distribution) to Rockwell
shareowners of all of the outstanding shares of common stock of Conexant
Systems, Inc. (formerly named Rockwell Semiconductor Systems, Inc.) (the
Company), a wholly-owned subsidiary of Rockwell, which after the Distribution
will own Rockwell's semiconductor systems business (Semiconductor Systems). The
shares of the Company will be distributed on a pro rata basis to the shareowners
of Rockwell in a tax-free spin-off, with each Rockwell shareowner receiving one
share of Company Common Stock (including an associated preferred share purchase
right) for every two shares of Rockwell Common Stock owned on the record date
for the Distribution. The Company will become a separately traded, publicly-held
company. Prior to the Distribution, Rockwell will transfer to the Company those
assets and liabilities of Semiconductor Systems not already owned by the
Company, including the stock of certain subsidiaries, and the Company will
transfer to Rockwell those assets and liabilities not constituting part of
Semiconductor Systems, including all assets and liabilities of Rockwell's
Electronic Commerce business. The Distribution, which is subject to satisfaction
or waiver of several conditions, is expected to be completed on December 31,
1998. Rockwell has received a ruling from the Internal Revenue Service that the
Distribution will be tax-free to its shareowners.
Prior to the Distribution, the Company will distribute its wafer
fabrication facilities in Colorado Springs, Colorado (and the related tax
benefit) to Rockwell. In addition, prior to the Distribution, Rockwell will
contribute $65 million in cash to the Company, which will be placed in an escrow
account to be used to satisfy Semiconductor Systems' obligation with respect to
the intellectual property litigation brought by Celeritas Technologies, Ltd. See
Note 17.
The accompanying combined financial statements present the historical
financial position, results of operations, and cash flows of Semiconductor
Systems, as it had been operated by Rockwell for the periods presented
(including the assets and liabilities related to the Colorado Springs, Colorado
wafer fabrication facilities). The combined financial statements do not include
the assets, liabilities, and results of operations of businesses to be retained
by Rockwell. These financial statements are not necessarily indicative of what
the financial position, results of operations, or cash flows would have been had
Semiconductor Systems been an independent public company during the periods
presented.
The combined financial statements of Semiconductor Systems have been
prepared in accordance with generally accepted accounting principles that
require management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates.
Rockwell provides certain services to Semiconductor Systems' United States
(U.S.) operations, including payroll and employee benefits administration, data
processing and telecommunications services, and research and development
activities. Rockwell also administers certain programs in which Semiconductor
Systems' U.S. operations participate, including active medical and insurance
programs. Costs for these services and programs are billed to Semiconductor
Systems based on actual usage and are included in Semiconductor Systems'
Combined Statement of Operations. These costs totaled $23 million, $19 million
and $15 million in fiscal 1998, 1997, and 1996, respectively. Management
believes that the methods of billing these costs are reasonable and that the
costs charged to Semiconductor Systems are approximately those which would have
been incurred on a stand-alone basis. The nature and term of services to be
provided to the Company by Rockwell after the Distribution are subject to
finalization of a transition agreement and are expected to include payroll and
employee benefits administration, data processing, and certain research
development activities. The cost of services to be billed by Rockwell will be
approximately equal to the amounts billed in the historical financial
statements. The transition agreement also will provide for continued occupancy
by the Company through April 30, 1999 of the Colorado Springs, Colorado wafer
fabrication
F-6
<PAGE> 105
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
facilities to be distributed to Rockwell prior to the Distribution, pursuant to
an operating lease under which the Company will pay all costs of the facilities.
Rockwell also provides management services to Semiconductor Systems,
including corporate oversight, financial, legal, tax, corporate communications,
and human resources. The costs of providing these services have been allocated
to Semiconductor Systems based on sales in proportion to total Rockwell sales
and are included in selling, general and administrative expense in the Combined
Statement of Operations. These costs totaled $12 million, $11 million and $12
million in fiscal 1998, 1997 and 1996, respectively. Management believes that
the method of allocating these costs to Semiconductor Systems is reasonable and
the amount is approximately equal to the cost of providing these services on a
stand-alone basis.
Semiconductor Systems' U.S. and certain of its non-U.S. operations
participate in Rockwell's centralized cash management systems which manage all
of Semiconductor Systems' cash receipt and disbursement activities. Accordingly,
the combined financial statements exclude debt and interest income and expense
in countries with centralized cash management systems. Accounts payable includes
$20 million and $14 million as of September 30, 1998 and 1997, respectively,
related to outstanding checks drawn on U.S. centralized disbursement accounts.
Semiconductor Systems has no financing or debt arrangements with Rockwell.
In connection with the Distribution, Rockwell will transfer to the Company
cash balances and an equal amount of short-term debt, expected to be
approximately $14 million.
2. ACCOUNTING POLICIES
Basis of Combination
The combined financial statements include all subsidiaries and businesses
of Rockwell which relate to Semiconductor Systems. All significant accounts and
transactions among Semiconductor Systems' locations have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
Intercompany accounts receivable and payable between Semiconductor Systems
and Rockwell or its subsidiaries as of the date of the Distribution will be
canceled or otherwise eliminated and, accordingly, have been reflected in
Rockwell's net investment on the combined balance sheet.
Inventories
Inventories are stated at the lower of cost (using the average cost method)
or market (determined on the basis of estimated realizable values). Management
evaluates the need for lower of cost or market impairment reserves by comparing
the total cost of inventories to total market value. Management determines
excess and obsolete inventory reserves based on current inventory levels and
projected usage for the following six month period.
Property
Property is stated at cost. Depreciation is based on estimated useful lives
(50 years for buildings and 10 to 30 years for building improvements; 5 years
for machinery and equipment; and the shorter of the remaining terms of the
leases or the estimated economic useful lives of the improvements for land and
leasehold improvements) using straight-line and double-declining methods.
Significant renewals and betterments are capitalized and replaced units are
written off. Maintenance and repairs, as well as renewals of a minor amount, are
charged to expense.
Intangible Assets
Goodwill and other intangible assets generally result from business
acquisitions. Semiconductor Systems accounts for business acquisitions by
assigning the purchase price to tangible and intangible assets and
F-7
<PAGE> 106
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities, including research and development projects which have not yet
reached technological feasibility and have no alternative future use (purchased
research and development). Assets acquired and liabilities assumed are recorded
at their fair values; the appraised value of purchased research and development
is immediately charged to expense, and the excess of the purchase price over the
amounts assigned is recorded as goodwill.
Goodwill, patents, developed technology, and other intangibles are
amortized on a straight-line basis over their estimated useful lives, ranging
from 5 to 10 years.
Impairment of Long-Lived Assets
Semiconductor Systems reviews all long-lived assets for impairment when
events or circumstances indicate that the carrying amount of a long-lived asset
may not be recoverable, and for all assets to be disposed of. Long-lived assets
held for use are reviewed for impairment by comparing undiscounted cash flows
over remaining useful lives to net book value. When impairment is indicated for
a long-lived asset, the amount of impairment loss is the excess of net book
value over fair value.
Revenue Recognition
Generally, revenue is recognized when title to the product transfers.
Certain of Semiconductor Systems' domestic distributors have the right to return
all of Semiconductor Systems' products under certain circumstances. Revenue
associated with shipments to those distributors is deferred and is recognized
when the product is shipped to the ultimate customer. Gross revenue is reduced
by accruals for estimated pricing and other return activity on product shipments
based on historical experience.
Environmental Matters
Semiconductor Systems records accruals for environmental matters in the
accounting period in which its responsibility is established and the cost to
remediate can be reasonably estimated. At environmental sites in which more than
one potentially responsible party has been identified, Semiconductor Systems
records a liability for its allocable share of costs related to its involvement
with the site as well as an allocable share of costs related to insolvent
parties or unidentified shares. At environmental sites in which Semiconductor
Systems is the only responsible party, Semiconductor Systems records a liability
for the total estimated costs of remediation. Costs of future expenditures for
environmental remediation obligations are recorded on an undiscounted basis. If
recovery from insurers or other third parties is determined to be probable,
Semiconductor Systems records a receivable for the estimated recovery.
In 1998, Semiconductor Systems adopted American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 96-1, "Environmental
Remediation Liabilities." The effect of adoption of this SOP on the combined
financial statements was not material.
New Accounting Standards
Effective October 1, 1997, Semiconductor Systems adopted AICPA SOP No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires the cost of purchased software and
certain costs incurred in developing computer software for internal use to be
capitalized and amortized over future periods. During fiscal 1998, Semiconductor
Systems capitalized $4 million of such costs that would have been charged to
expense under its previous accounting policy.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which is effective for fiscal 2000. SFAS 133
will require Semiconductor Systems to record all derivatives on the balance
sheet at fair value. For derivatives that are hedges, changes in the fair value
of derivatives will be offset
F-8
<PAGE> 107
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
by the change in fair value of the hedged assets, liabilities, or firm
commitments. Management believes the impact of adopting this standard will not
be material to the financial position or results of operations of Semiconductor
Systems.
3. SPECIAL CHARGES
In the fourth quarter of 1998, Semiconductor Systems restructured its
business and recorded special charges of $147 million ($90 million after tax).
The special charges include an asset impairment of $103 million related to the
closure and planned disposal of its wafer fabrication facilities in Colorado
Springs, Colorado, $15 million for employee severance and voluntary early
retirement program costs associated with an approximate 10 percent worldwide
workforce reduction, $11 million related to intangible asset write-offs and $18
million for other actions including lease termination costs, contractual
liabilities and other asset write-offs. These actions are expected to be
substantially completed by the end of 1999 with cash expenditures of $15
million.
The effect of the special charges on the combined balance sheet at
September 30, 1998 is as follows (in millions):
<TABLE>
<S> <C>
Property, net............................................... $103
Intangible assets, net...................................... 11
Other assets................................................ 4
Accrued compensation and benefits........................... 9
Other current liabilities................................... 14
Other liabilities and contingencies......................... 6
----
Total....................................................... $147
====
</TABLE>
In connection with the restructuring, management decided to close and
dispose of its wafer fabrication facilities in Colorado Springs, Colorado. The
$103 million charge represents the excess of the carrying value of the
long-lived assets of these facilities over their estimated fair value as
determined by independent appraisal. These facilities will be distributed to
Rockwell prior to the Distribution.
4. ACQUISITIONS OF BUSINESSES
In September 1996, Semiconductor Systems acquired Brooktree Corporation
(Brooktree), a designer and supplier of mixed-signal integrated circuits for
high-speed digital communications and media processing applications, for $254
million, net of cash acquired. The acquisition was accounted for as a purchase
as of September 30, 1996 and the price allocation included $121 million (before
and after tax) for purchased research and development which was immediately
expensed, and $57 million for purchased intangibles, primarily developed
technology, which is being amortized over 9 years.
Semiconductor Systems acquired the Hi-Media broadband communications
chipset business of ComStream Corporation (Hi-Media) for $42 million in cash.
The acquisition was accounted for as a purchase as of May 31, 1997, and the
price allocation included $30 million ($19 million after tax) for purchased
research and development which was immediately expensed, and $18.5 million for
intangible assets, including goodwill, which are being amortized on a
straight-line basis over 10 years. Semiconductor Systems also acquired two other
businesses in fiscal 1997 at a net cost of $22 million.
The following unaudited pro forma schedule presents combined information
for Semiconductor Systems, Brooktree and Hi-Media for the years ended September
30, 1997 and 1996 as if each of the acquisitions had
F-9
<PAGE> 108
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
taken place at the beginning of each period presented (the effects of the
purchased research and development charges for Brooktree and Hi-Media are
included in pro forma net income in the year of acquisition only):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Net sales............................................ $1,447 $1,642
Net income........................................... 123 77
</TABLE>
5. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Finished goods.............................................. $109 $ 69
Die bank.................................................... 74 85
Work-in-process............................................. 88 105
Raw materials, parts, and supplies.......................... 36 30
---- ----
Inventories, gross.......................................... 307 289
Reserves.................................................... (106) (66)
---- ----
Inventories, net............................................ $201 $223
==== ====
</TABLE>
Die bank is work-in-process inventory that has completed all die processing
operations and is stored in wafer form. Die bank inventory needs to be cut,
packaged, assembled and tested to become finished goods.
Reserves are primarily for excess and obsolete finished goods and die bank
inventory. In the fourth quarter of 1998, Semiconductor Systems recorded a
charge of $66 million, principally related to the write-off of certain PC modem
inventory.
6. PROPERTY
Property is summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------ ------
<S> <C> <C>
Property at cost:
Land.................................................... $ 16 $ 16
Land and leasehold improvements......................... 6 10
Buildings............................................... 305 261
Machinery and equipment................................. 954 727
Construction in progress................................ 114 328
------ ------
Total..................................................... 1,395 1,342
Less accumulated depreciation............................. (682) (540)
------ ------
Property, net............................................. $ 713 $ 802
====== ======
</TABLE>
In September 1998, management decided to close and dispose of its wafer
fabrication facilities in Colorado Springs, Colorado (see Note 3). The net book
value of these facilities, which will be distributed to Rockwell prior to the
Distribution, is set forth on the combined balance sheet as assets held for
disposal as of
F-10
<PAGE> 109
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1998. The September 30, 1997 property balance includes $144
million related to these facilities.
7. INTANGIBLE ASSETS
Intangible assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Developed technology and other.............................. $46 $ 49
Goodwill.................................................... 18 36
Patents..................................................... 6 21
--- ----
Total....................................................... 70 106
Less accumulated amortization............................... (17) (19)
--- ----
Intangible assets, net...................................... $53 $ 87
=== ====
</TABLE>
8. OTHER ASSETS
Other assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Deferred income taxes (see Note 14)......................... $48 $42
Investments................................................. 17 16
Other....................................................... -- 18
--- ---
Other assets................................................ $65 $76
=== ===
</TABLE>
9. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Accrued litigation -- Celeritas (see Note 17)............. $ 65 $--
Accrued restructuring..................................... 15 --
Accrued royalties and licenses............................ 11 23
Accrued taxes other than income taxes..................... 8 10
Other..................................................... 30 14
---- ---
Other current liabilities................................. $129 $47
==== ===
</TABLE>
F-11
<PAGE> 110
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER LIABILITIES AND CONTINGENCIES
Other liabilities and contingencies are summarized as follows (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Accrued retirement benefits................................. $36 $29
Environmental remediation costs............................. 9 4
Accrued litigation -- Celeritas (see Note 17)............... -- 30
Other....................................................... 33 17
--- ---
$78 $80
=== ===
</TABLE>
11. FINANCIAL INSTRUMENTS
Semiconductor Systems' financial instruments include cash, short-term debt
and foreign currency forward exchange contracts. As of September 30, 1998 and
1997, the carrying values of Semiconductor Systems' financial instruments
approximated their fair values based on prevailing market prices and rates.
It is the policy of Semiconductor Systems not to enter into derivative
financial instruments for speculative purposes. Semiconductor Systems does enter
into foreign currency forward exchange contracts to minimize risk of loss from
currency rate fluctuations on foreign currency commitments entered into in the
ordinary course of business. These commitments are generally for terms of less
than one year. The foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. The notional amount of outstanding foreign currency forward exchange
contracts by country is as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Japan (Yen)................................................. $14 $--
United States (Dollars)..................................... 3 19
The Netherlands (Guilders).................................. -- 9
--- ---
$17 $28
=== ===
</TABLE>
Semiconductor Systems does not anticipate any material adverse effect on
its financial position relating to these foreign currency forward exchange
contracts.
12. RETIREMENT MEDICAL PLANS
Semiconductor Systems has retirement medical plans which cover most of its
U.S. and certain non-U.S. employees and provide for medical payments to eligible
employees and dependents upon retirement.
Retirement medical expense included in the combined statement of
operations, consisting principally of interest accrued on the accumulated
retirement medical obligation, was $3 million in 1998 and $2 million in each of
1997 and 1996.
F-12
<PAGE> 111
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The retirement medical obligation at September 30, 1998 and 1997 is
comprised of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
----- ----
<S> <C> <C>
Accumulated retirement medical obligation:
Retirees.................................................. $ 14 $ 17
Employees eligible to retire.............................. 2 4
Employees not eligible to retire.......................... 5 9
----- ----
Total............................................. 21 30
Unamortized amounts:
Plan amendments........................................... 18 3
Actuarial losses.......................................... (8) (3)
----- ----
Recorded liability.......................................... $ 31 $ 30
===== ====
Assumptions used (June 30 measurement date):
Discount rate............................................. 6.75% 7.5%
Health care cost trend rate (decreasing to 5.5% after
2015).................................................. 7.0% 8.0%
</TABLE>
In 1998, Semiconductor Systems announced to its current and former U.S.
employees that it will be changing its active and retiree medical plans. The
changes included one common plan for all active employees and retirees and
increased employee and retiree cost sharing. Semiconductor Systems also
announced that it will discontinue offering retiree medical coverage to all
active salaried employees as of December 31, 1998. Unamortized amounts related
to these and other plan amendments at September 30, 1998 reflect the accumulated
cost reduction of the retirement benefit obligation.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated retirement medical obligation at September 30, 1998 by
approximately $1 million and would not significantly increase retirement medical
expense.
13. RETIREMENT PENSION PLANS
Semiconductor Systems participates in a Rockwell pension plan (the Rockwell
Pension Plan), which provides for monthly pension payments to eligible U.S.
employees upon retirement. Pension benefits for U.S. salaried employees are
based on years of credited service and compensation. Pension benefits for U.S.
hourly employees are based on years of service and specified benefit amounts.
In connection with the Distribution, Rockwell will retain the obligation
for vested benefits earned by Semiconductor Systems participants in the Rockwell
Pension Plan and all related assets. For U.S. employees that are members of
Local 2295 of the International Brotherhood of Electrical Workers Union ("U.S.
Hourly Employees"), Semiconductor Systems will establish a pension plan with
substantially similar benefits and which credits these employees for service
earned with Rockwell. The benefits payable under this Semiconductor Systems'
plan will be equal to the difference between the total benefit earned with both
companies and the vested benefit obligation retained by Rockwell. Accordingly,
the balance sheet includes a liability for the pension obligations related to
U.S. Hourly Employees equal to the excess of the projected benefit obligation
over the vested benefit obligation retained by Rockwell. Semiconductor Systems
will not establish a pension plan for U.S. salaried and certain hourly employees
and, accordingly, no pension liability related to these employees has been
included in the combined balance sheet.
In connection with the restructuring plan announced in September 1998,
Semiconductor Systems offered a voluntary early retirement program (VERP) to
certain salaried employees. Pension benefits under the VERP will be paid from a
newly established pension plan (the VERP Plan) of Semiconductor Systems.
Benefits payable under the VERP Plan will be equal to the excess of the total
early retirement pension benefit
F-13
<PAGE> 112
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
over the vested benefit obligation retained by Rockwell. Eligible employees
could accept the VERP through November 2, 1998. Special charges include $6
million for costs associated with employees who accepted the VERP on or before
September 30, 1998, and Semiconductor Systems anticipates an additional charge
in the first quarter of fiscal 1999 for costs associated with the employees who
accept the VERP after September 30, 1998.
Non-U.S. pension plans which relate solely to employees and retirees of
Semiconductor Systems will be assumed by Semiconductor Systems.
Net pension expense included in the combined statement of operations,
consisting principally of service cost for benefits earned during the year and
the cost of benefits related to the VERP in 1998, was $14 million in 1998 and $6
million in both 1997 and 1996. At each of September 30, 1998 and 1997, the
projected benefit obligation and the accrued liability included in the combined
balance sheet related to the pension obligations to be assumed by Semiconductor
Systems totaled $7 million and $1 million, respectively. There were no plan
assets at September 30, 1998 and 1997.
Assumptions (using a June 30 measurement date) include a 7.75% discount
rate and a 4.5% compensation increase rate for both periods presented.
Semiconductor Systems also participates in certain Rockwell defined
contribution savings plans for eligible employees. Expense related to these
plans was $7 million for 1998 and $4 million in both 1997 and 1996.
14. INCOME TAXES
Most of Semiconductor Systems' operations are included in the consolidated
or combined income tax returns of Rockwell. Rockwell intends to indemnify
Semiconductor Systems for all income tax liabilities and retain rights to all
tax refunds relating to operations included in consolidated or combined tax
returns for periods through the date of the Distribution. Accordingly, the
combined balance sheet does not include current or prior period income tax
receivables or payables related to wholly-owned subsidiaries which file on a
consolidated or combined basis with Rockwell. The income tax provisions included
in the combined statement of operations have been determined as if Semiconductor
Systems were a separate taxpayer.
The components of the (benefit) provision for income taxes are summarized
as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Current tax (benefit) provision:
United States...................................... $ (66) $12 $162
Foreign............................................ 5 7 9
State and local.................................... 2 3 32
----- --- ----
Total current tax (benefit) provision...... (59) 22 203
----- --- ----
Deferred tax (benefit) provision:
United States...................................... (94) 25 (76)
State and local.................................... (15) 7 (13)
----- --- ----
Total deferred tax (benefit) provision..... (109) 32 (89)
----- --- ----
(Benefit) provision for income taxes................. $(168) $54 $114
===== === ====
</TABLE>
F-14
<PAGE> 113
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Current deferred income tax benefits included in the combined balance sheet
at September 30, 1998 and 1997 consist of the tax effects of temporary
differences related to the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Accrued compensation and benefits........................... $ 11 $ 6
Inventories................................................. 48 31
Assets held for disposal.................................... 36 --
Allowance for doubtful accounts............................. 3 4
Accrued royalties and licenses.............................. 26 2
Other, net.................................................. 29 7
---- ---
Current deferred income taxes............................... $153 $50
==== ===
</TABLE>
Deferred income tax benefits included in Other Assets in the combined
balance sheet at September 30, 1998 and 1997 consist of the tax effects of
temporary differences related to the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Property.................................................... $ 24 $ 21
Retirement benefits......................................... 11 12
Accrued royalties and licenses.............................. 9 16
Intangible assets........................................... (4) (11)
Other, net.................................................. 8 4
---- ----
Long-term deferred income taxes (see Note 8)................ $ 48 $ 42
==== ====
</TABLE>
Management believes it is more likely than not that current and long-term
deferred tax benefits will reduce future income tax payments. Significant
factors considered by management in its determination of the probability of the
realization of the deferred tax benefits included: (a) the historical operating
results of Semiconductor Systems, (b) expectations of future earnings, and (c)
available tax planning strategies.
Semiconductor Systems' effective tax rate was different from the U.S.
statutory rate for the reasons set forth below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate................................... 35.0% 35.0% 35.0%
State and local income taxes......................... 1.8 3.4 3.8
Foreign income taxes................................. 0.2 0.8 1.0
Foreign sales corporation............................ 0.2 (7.8) (6.1)
Research and experimentation credits................. 2.2 (1.7) --
Purchased research and development................... -- -- 23.8
Other................................................ (0.3) 0.3 0.1
---- ---- ----
Effective tax rate................................... 39.1% 30.0% 57.6%
==== ==== ====
</TABLE>
F-15
<PAGE> 114
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax (benefit) provision was calculated based upon the following
components of (loss) income before income taxes (in millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
United States (loss) income...................... $(444) $162 $179
Foreign income................................... 14 18 19
----- ---- ----
Total............................................ $(430) $180 $198
===== ==== ====
</TABLE>
No provision has been made for U.S., state, or additional foreign income
taxes related to approximately $12 million of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested.
15. ROCKWELL'S NET INVESTMENT
Changes in Rockwell's net investment are summarized as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Beginning balance.................................. $1,107 $ 899 $478
Net (loss) income.................................. (262) 126 84
Net transfers from Rockwell........................ 172 86 341
Currency translation loss.......................... (8) (4) (4)
------ ------ ----
Ending balance..................................... $1,009 $1,107 $899
====== ====== ====
</TABLE>
The cumulative deferred currency translation (loss) gain was $(11) million,
$(3) million, and $1 million as of September 30, 1998, 1997, and 1996,
respectively.
16. SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Statement of operations data:
Depreciation expense................................ $206 $167 $126
Maintenance and repairs............................. 63 74 64
Rental expense...................................... 17 12 6
Statement of cash flows data:
Income tax payments................................. 3 10 6
</TABLE>
Minimum future rental commitments under operating leases having
non-cancelable lease terms in excess of one year aggregated $40 million as of
September 30, 1998 and are payable as follows (in millions): 1999, $9; 2000, $7;
2001, $6; 2002, $5; 2003, $5; and thereafter, $8.
17. CONTINGENT LIABILITIES
Compliance with federal, state and local environmental requirements and
resolution of environmental claims have been accomplished without material
effect on Semiconductor Systems' liquidity and capital resources, competitive
position, or financial statements.
F-16
<PAGE> 115
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on its assessment, management believes that Semiconductor Systems'
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on Semiconductor Systems' liquidity and capital resources,
competitive position, or financial statements. Management cannot assess the
possible effect of compliance with future requirements.
Semiconductor Systems has been designated as a potentially responsible
party (PRP) at one Superfund site located at a former silicon wafer
manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by Semiconductor Systems. The site was also formerly occupied
by Recticon Corporation and Allied Steel Products Corporation, each also named
as a PRP and each of which is insolvent. The remediation plan for the site
includes installation of a public water supply line and a groundwater pump and
treat system, as well as routine groundwater sampling. The Company has accrued
$4 million as of September 30, 1998 related to this matter. In addition, the
Company is engaged in two other remediations of groundwater contaminations at
its Newport Beach and Newbury Park, California facilities. The Company has
accrued $5 million as of September 30, 1998 related to these matters.
Claims have been asserted against Semiconductor Systems for utilizing the
intellectual property rights of others in certain of Semiconductor Systems'
products. The resolution of these matters may result in the negotiation of a
license agreement, a settlement or the resolution of such claims through
arbitration or litigation. Semiconductor Systems accrues the estimated cost of
the ultimate resolution of these matters.
In September 1995, Celeritas Technologies, Ltd. filed suit against Rockwell
for patent infringement, misappropriation of trade secrets, and breach of
contract relating to cellular telephone data transmission technology utilized in
certain modem products produced by Semiconductor Systems. In July 1997, the
court entered a judgment awarding damages of $57 million, plus interest. On July
20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed the trial
court's judgment based on breach of contract. The Company continues to believe
the judgment is in error and intends to file a petition for certiorari with the
U.S. Supreme Court. Semiconductor Systems recorded an additional charge of $35
million in the fourth quarter of fiscal 1998 related to this matter to increase
its reserve at September 30, 1998 to approximately $65 million. Prior to the
Distribution, Rockwell will contribute $65 million in cash to the Company, which
will be placed in an escrow account to be used to satisfy Semiconductor Systems'
obligation with respect to this matter.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Semiconductor Systems relating to the conduct of
its business, including those pertaining to product liability, safety and health
and employment matters. Although the outcome of litigation cannot be predicted
with certainty and some lawsuits, claims, or proceedings may be disposed of
unfavorably to Semiconductor Systems, management believes the disposition of
matters which are pending or asserted will not have a material adverse effect on
Semiconductor Systems' financial statements.
The Company will assume all contingent liabilities (including those in
respect of intellectual property and environmental matters) related to current
and former operations of Semiconductor Systems.
18. GEOGRAPHIC SEGMENT INFORMATION
Semiconductor Systems operates in one industry segment which is engaged in
research, development, and manufacture of semiconductor products and systems for
communications electronics markets such as personal computers, personal imaging
devices, wireless communications products, network access devices, and digital
information and entertainment products.
F-17
<PAGE> 116
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Sales by Geographic Area of Origin
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
United States.................................... $1,178 $1,359 $1,443
Europe........................................... 148 131 145
Asia-Pacific..................................... 100 168 138
Other............................................ 38 28 28
Eliminations..................................... (264) (274) (284)
------ ------ ------
Total Sales................................. $1,200 $1,412 $1,470
====== ====== ======
</TABLE>
United States sales include export sales to unaffiliated customers of $530
million, $517 million, and $434 million in fiscal 1998, 1997, and 1996,
respectively. Substantially all export sales are to the Asia-Pacific region.
(Loss) Earnings by Geographic Area
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
United States....................................... $(310) $151 $ 178
Europe.............................................. 6 3 6
Asia-Pacific........................................ 5 11 9
Other............................................... 2 2 2
Special charges..................................... (147) -- --
----- ---- -----
Operating (loss) earnings........................... (444) 167 195
Other income, net................................... 14 13 3
(Benefit) provision for income taxes................ (168) 54 114
----- ---- -----
Net (loss) income.............................. $(262) $126 $ 84
===== ==== =====
</TABLE>
In 1998, the special charges relate to the geographic areas as follows:
United States, $142 million; Europe, $3 million; Asia-Pacific, $2 million.
Included within United States earnings are pre-tax charges for the write-off of
purchased research and development in connection with the fiscal 1997 Hi-Media
acquisition and the fiscal 1996 Brooktree acquisition of $30 million and $121
million, respectively.
Identifiable Assets by Geographic Area
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
United States.................................... $1,331 $1,375 $1,251
Europe........................................... 25 32 25
Asia-Pacific..................................... 40 63 93
Other............................................ 22 16 14
------ ------ ------
Total....................................... $1,418 $1,486 $1,383
====== ====== ======
</TABLE>
F-18
<PAGE> 117
SEMICONDUCTOR SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (IN MILLIONS)
<TABLE>
<CAPTION>
1998 FISCAL QUARTERS
----------------------------------
FIRST SECOND THIRD FOURTH 1998
----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Sales.............................................. $383 $275 $278 $264 $1,200
Cost of sales...................................... 208 158 190 353 909
Special charges (see Note 3)....................... -- -- -- 147 147
Net income (loss).................................. 21 (16) (33) (234) (262)
</TABLE>
<TABLE>
<CAPTION>
1997 FISCAL QUARTERS
----------------------------------
FIRST SECOND THIRD FOURTH 1997
----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Sales.............................................. $388 $334 $321 $369 $1,412
Cost of sales...................................... 199 169 173 203 744
Net income......................................... 56 50 4 16 126
</TABLE>
Third quarter fiscal 1997 net income includes a $30 million charge ($19
million after tax) for the write-off of purchased research and development in
connection with the acquisition of Hi-Media.
F-19
<PAGE> 118
SCHEDULE II
SEMICONDUCTOR SYSTEMS
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT NET CHARGE (CREDIT) BALANCE AT
BEGINNING TO COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
- ----------- ---------- ------------------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 1996
Allowance for doubtful accounts........ $12 $15 $ 2(a) $ 25
Inventory reserves..................... 28 75 15(b) 88
Year ended September 30, 1997
Allowance for doubtful accounts........ 25 (9) 6(a) 10
Inventory reserves..................... 88 (2) 20(b) 66
Year ended September 30, 1998
Allowance for doubtful accounts........ 10 3 4(a) 9
Inventory reserves..................... 66 67 27(b) 106
</TABLE>
- ---------------
(a) Primarily uncollectible accounts written off during the year.
(b) Inventory disposed of during the year.
F-20
<PAGE> 119
[CONEXANT LOGO]
<PAGE> 120
PART II
INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*2 Form of Distribution Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 By-Laws of the Company
*4.1 Form of Restated Certificate of Incorporation of the Company
*4.2 Form of Amended By-Laws of the Company
4.3 Specimen certificate for Company Common Stock, par value $1
per share
*4.4 Form of Rights Agreement by and between the Company and the
rights agent named therein
10.1 Form of Conexant Systems, Inc. 1999 Long-Term Incentives
Plan
10.2 Form of Conexant Systems, Inc. Directors Stock Plan
*10.3 Form of Employee Matters Agreement
10.4 Form of Tax Allocation Agreement
**10.5 Form of Credit Agreement
10.6 Form of Conexant Systems, Inc. 1998 Stock Option Plan
10.7 Form of Employment Agreement to be entered into between the
Company and certain executives of the Company
*21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
II-1
<PAGE> 121
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
ROCKWELL SEMICONDUCTOR SYSTEMS, INC.
By: /s/ DWIGHT W. DECKER
------------------------------------
Name: Dwight W. Decker
Title: President and Chief
Executive Officer
Date: November 17, 1998
II-2
<PAGE> 122
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
*2 Form of Distribution Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 By-Laws of the Company
*4.1 Form of Restated Certificate of Incorporation of the Company
*4.2 Form of Amended By-Laws of the Company
4.3 Specimen certificate for Company Common Stock, par value $1
per share
*4.4 Form of Rights Agreement by and between the Company and the
rights agent named therein
10.1 Form of Conexant Systems, Inc. 1999 Long-Term Incentives
Plan
10.2 Form of Conexant Systems, Inc. Directors Stock Plan
*10.3 Form of Employee Matters Agreement
10.4 Form of Tax Allocation Agreement
**10.5 Form of Credit Agreement
10.6 Form of Conexant Systems, Inc. 1998 Stock Option Plan
10.7 Form of Employment Agreement to be entered into between the
Company and certain executives of the Company
*21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
<PAGE> 1
Exhibit 4.3
[FACE OF CERTIFICATE OF STOCK]
NUMBER SHARES
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NY
COMMON STOCK AND RIDGEFIELD PARK, NJ
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 207142 10 0
CONEXANT SYSTEMS, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Conexant Systems, Inc. (hereinafter called the "Corporation") transferable on
the books of the Corporation in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
[the words "CERTIFICATE OF STOCK" are superimposed over the foregoing text]
Dated:
TREASURER CHAIRMAN OF THE BOARD
[CORPORATE SEAL OF CONEXANT SYSTEMS, INC. - 1996 - DELAWARE]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY AUTHORIZED SIGNATURE
<PAGE> 2
[REVERSE OF CERTIFICATE OF STOCK]
CONEXANT SYSTEMS, INC.
The Corporation will furnish without charge to each shareowner who so
requests, a copy of the provisions setting forth the voting powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof which the Corporation
is authorized to issue, and the qualifications, limitations or restrictions of
such preferences and/or rights. Any such request may be addressed to the
Secretary of the Corporation or to the Transfer Agent named on the face hereof.
This Certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between the Corporation and
ChaseMellon Shareholder Services, L.L.C., dated as of November 30, 1998 (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
the Corporation. Under certain circumstances, as set forth in the Rights
Agreement, such rights will be evidenced by separate certificates and will no
longer be evidenced by this Certificate. The Corporation will mail to the holder
of this Certificate a copy of the Rights Agreement without charge after receipt
of a written request therefor. Under certain circumstances, as set forth in the
Rights Agreement, Rights issued to any person who becomes an Acquiring Person
(as defined in the Rights Agreement) may become null and void.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
UNF GIFT MIN ACT --_____________________ Custodian _____________________
(Cust) (Minor)
Under Uniform Gifts to Minors
Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ______________________
____________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed:
____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
Exhibit 10.1
Conexant Systems, Inc.
1999 Long-Term Incentives Plan
Section 1: Purpose
The purpose of the Plan is to provide incentive compensation to officers,
executives and other employees of the Corporation and its Subsidiaries; to
attract and retain individuals of outstanding ability; and to align the
interests of such officers, executives and other employees with the interests of
the Corporation's shareowners.
Section 2: Definitions
The following terms, as used herein, shall have the meaning specified:
"Award" means an award granted pursuant to Section 4.
"Award Agreement" means an agreement described in Section 6 entered into
between the Corporation and a Participant, setting forth the terms and
conditions applicable to the Award granted to the Participant.
"Board of Directors" means the Board of Directors of the Corporation as it
may be comprised from time to time.
"Cause" means (i) a felony conviction of a Participant; (ii) the
commission by a Participant of an act of fraud or embezzlement against the
Corporation and/or a Subsidiary; (iii) willful misconduct or gross
negligence materially detrimental to the Corporation and/or a Subsidiary;
(iv) the Participant's continued failure to implement reasonable requests
or directions received in the course of his employment; (v) the
Participant's wrongful dissemination or use of confidential or proprietary
information; or (vi) the intentional and habitual neglect by the
Participant of his duties to the Corporation and/or a Subsidiary.
"Change of Control" means Change of Control as defined in
Section 10.
<PAGE> 2
"Code" means the Internal Revenue Code of 1986, and any successor statute,
as it or they may be amended from time to time.
"Committee" means the Compensation and Management Development Committee of
the Board of Directors as it may be comprised from time to time or such
other Committee of the Board of Directors designated by the Board of
Directors to administer the Plan.
"Corporation" means Conexant Systems, Inc., a Delaware
corporation, and any successor corporation.
"Disability" means permanent and total disability within the meaning of
the Corporation's long-term disability plan, as it may be amended from
time to time, or, if there is no such plan, as determined by the
Committee.
"Employee" means officers, executives and other employees of the
Corporation or a Subsidiary, but excludes directors who are not also
officers or employees of the Corporation.
"Exchange Act" means the Securities Exchange Act of 1934, and any
successor statute, as it may be amended from time to time.
"Fair Market Value" means the closing price of the Stock as reported in
the NASDAQ reporting system on the relevant date, or if no sale of the
Stock is reported for such date, the next preceding day for which there is
a reported sale.
"Incentive Stock Option" means an option to purchase Stock that is granted
pursuant to Section 4(b) or pursuant to any other Plan of the Corporation
or its Subsidiaries that complies with Code section 422.
"Participant" means any Employee who has been granted an Award
pursuant to this Plan.
"Retirement" means retirement at or after age 62 or, with the advance
consent of the Committee, before age 62 but at or after age 55.
"Stock" means shares of common stock of the Corporation, or any security
of the Corporation issued in substitution, exchange or lieu thereof.
-2-
<PAGE> 3
"Subsidiary" means any corporation in which the Corporation, directly or
indirectly, controls 50% or more of the total combined voting power of all
classes of such corporation's stock.
"Ten-percent Shareowner" means any person who owns, directly or
indirectly, on the relevant date securities having ten percent (10%) or
more of the combined voting power of all classes of the Corporation's
securities or of its parent or subsidiaries. For purposes of applying the
foregoing ten percent (10%) limitation, the rules of Code section 425(d)
shall apply.
Section 3: Eligibility
Persons eligible for Awards shall consist of Employees who hold positions
of significant responsibility with the Corporation and/or a Subsidiary or
whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Corporation and/or a
Subsidiary.
Section 4: Awards
The Committee may grant any of the following types of Awards, either singly, in
tandem or in combination with other types of Awards, as the Committee may in its
sole discretion determine:
a. Non-qualified Stock Options. A Non-qualified Stock Option is an
option to purchase a specific number of shares of Stock
exercisable at such time or times, and during such specified time
not to exceed ten (10) years, as the Committee may determine, at a
price not less than 100% of the Fair Market Value of the Stock on
the date the option is granted.
i) The purchase price of the Stock subject to the option may
be paid in cash. At the discretion of the Committee, the
purchase price may also be paid by the tender of Stock (the
value of such Stock shall be its Fair Market Value on the
date of exercise), or through a combination of Stock and
cash, or through such other means as the Committee
determines are consistent with the Plan's purpose and
applicable law. No fractional shares of Stock will be
issued or accepted.
ii) Without limiting the foregoing, the Committee may permit
Participants, either on a selective or aggregate basis, to
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simultaneously exercise options and sell the shares of
Stock thereby acquired, pursuant to a brokerage or similar
arrangement approved in advance by the Committee, and use
the proceeds from such sale as payment of the purchase
price of such Stock and any applicable withholding taxes.
b. Incentive Stock Options. An Incentive Stock Option is an Award in
the form of an option to purchase a specified number of shares of
Stock that complies with the requirements of Code Section 422,
which option shall, subject to the following provisions, be
exercisable at such time or times, and during such specified time,
as the Committee may determine.
(i) The aggregate Fair Market Value (determined at the time of
the grant of the Award) of the shares of Stock subject to
Incentive Stock Options which are exercisable by one person
for the first time during a particular calendar year shall
not exceed $100,000.
(ii) No Incentive Stock Option may be granted under this Plan on
or after the tenth anniversary of the date this Plan is
adopted, or the date this Plan is approved by shareowners,
whichever is earlier.
(iii) No Incentive Stock Option may be exercisable more than:
a) in the case of an Employee who is not a Ten-Percent
Shareowner on the date that the option is granted, ten
(10) years after the date the option is granted, and
b) in the case of an Employee who is a Ten-Percent
Shareowner on the date the option is granted, five (5)
years after the date the option is granted.
(iv) The exercise price of any Incentive Stock Option shall not
be less than:
a) in the case of an Employee who is not a Ten-Percent
Shareowner on the date that the option is granted, the
Fair Market Value of the Stock subject to the option on
such date; and
b) in the case of an Employee who is a Ten-Percent
Shareowner on the date that the option is granted, 110%
of the Fair Market Value of the Stock subject
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to the option on such date.
(v) The Committee may provide that the exercise price of an Incentive
Stock Option may be paid by one or more of the methods available
for paying the exercise price of a Non-qualified Stock Option.
c. Restricted Stock. Restricted Stock is Stock that is issued to a
Participant subject to restrictions on transfer and such other
restrictions on incidents of ownership as the Committee may
determine. Subject to such restrictions, the Participant as owner
of such shares of Restricted Stock shall have the rights of the
holder thereof, except that the Committee may provide at the time
of the Award that any dividends or other distributions paid on
such Stock while subject to such restrictions shall be accumulated
or reinvested in Stock and held subject to the same restrictions
as the Restricted Stock and such other terms and conditions as the
Committee shall determine. A certificate for the shares of
Restricted Stock, which certificate shall be registered in the
name of the Participant, shall bear an appropriate restrictive
legend and shall be subject to appropriate stop-transfer orders;
provided, however, that the certificates representing shares of
Restricted Stock shall be held in custody by the Corporation until
the restrictions relating thereto otherwise lapse, and the
Participant shall deliver to the Corporation a stock power
endorsed in blank relating to the Restricted Stock.
Section 5: Shares of Stock Available Under Plan
a. Subject to the adjustment provisions of Section 9, the number of
shares of Stock with respect to which Awards may be granted under
the Plan shall not exceed 10,185,000 shares of Stock; provided
that no more than 3,000,000 of the shares of Stock available for
Awards shall be available for Awards in the form of Restricted
Stock. No single Participant shall receive, in any one calendar
year, Awards which, over any three-year period exceed a per-year
average of (i) 500,000 stock options, whether Non-qualified Stock
Options or Incentive Stock Options and (ii) 100,000 shares of
Restricted Stock.
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<PAGE> 6
b. Shares of Stock with respect to the unexercised or undistributed
portion of any terminated or forfeited Award shall be available
for further Awards in addition to those shares of Stock available
under Section 5(a). Additional rules for determining the number of
shares of Stock granted under the Plan may be adopted by the
Committee, as it deems necessary and appropriate.
c. The Stock that may be issued pursuant to an Award under the Plan
may be treasury or authorized but unissued Stock, or Stock may be
acquired, subsequently or in anticipation of the transaction, in
the open market to satisfy the requirements of the Plan.
Section 6: Award Agreements
Each Award under the Plan shall be evidenced by an Award Agreement. Each Award
Agreement shall set forth the number of shares of Stock subject to the Award and
shall include the terms set forth below and such other terms and conditions
applicable to the Award, as determined by the Committee, not inconsistent with
the terms of the Plan. In the event of any conflict between an Award Agreement
and this Plan, the terms of the Plan shall govern.
a. Assignability. A provision setting forth the conditions pursuant
to which an Award may be assigned or transferred.
b. Termination of Employment.
(i) A provision describing the treatment of an Award in the
event of the Retirement, Disability, death or other
termination of a Participant's employment with the
Corporation or a Subsidiary, including but not limited to
terms relating to the vesting, time for exercise,
forfeiture or cancellation of an Award in such
circumstances. Participants who terminate employment due to
Retirement, Disability, or death prior to the satisfaction
of applicable conditions and restrictions associated with
their Award(s) may be entitled to a prorated Awards(s) as
and to the extent determined by the Committee.
(ii) A provision that for purposes of the Plan, (i) a transfer
of an Employee from the Corporation to a Subsidiary or
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affiliate of the Corporation, whether or not incorporated,
or vice versa, or from one Subsidiary or affiliate of the
Corporation to another, and (ii) a leave of absence, duly
authorized in writing by the Corporation, shall not be
deemed a termination of employment.
(iii) A provision stating that in the event the Participant's
employment is terminated for Cause, anything else in the
Plan or the Award Agreement to the contrary
notwithstanding, all Awards granted to such Participant
shall immediately terminate and be forfeited.
c. Rights as a Shareowner. A provision stating that a Participant
shall have no rights as a shareowner with respect to any Stock
covered by an Award until the date the Participant becomes the
holder of record thereof. Except as provided in Section 9, no
adjustment shall be made for dividends or other rights, unless the
Award Agreement specifically requires such adjustment.
d. Withholding. A provision requiring the withholding of applicable
taxes required by law from all amounts paid in satisfaction of an
Award. A Participant may satisfy the withholding obligation by
paying the amount of any taxes in cash or, with the approval of
the Committee, shares of Stock may be deducted from the payment
or, in accordance with Section 4(a)(ii), sold to satisfy the
obligation in full or in part.
e. Treatment of Options. Each Award of an option shall state whether
it will or will not be treated as an Incentive Stock Option.
f. Performance Conditions. The Committee may condition, or provide
for the acceleration of, the exercisability or vesting of any
Award upon such prerequisites as it, in its sole discretion, deems
appropriate, including, but not limited to, achievement of
specific objectives, whether absolute or relative to a peer group
or index designated by the Committee, with respect to one or more
measures of the performance of the Corporation and/or one or more
Subsidiaries, including earnings per share, revenue, net income
(whether before or after extraordinary items), net operating
income, earnings before interest, taxes,
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depreciation and amortization (EBIDTA), stock price and total
shareholder return. Such performance objectives shall be
determined in accordance with the Corporation's audited financial
statements, to the extent applicable, and so that a third party
having knowledge of the relevant facts could determine whether
such performance objective is met.
Section 7: Amendment and Termination
The Board of Directors may at any time amend, suspend or discontinue the Plan,
in whole or in part, and the Committee may at any time alter or amend any or all
Award Agreements under the Plan to the extent permitted by law, but no such
alteration or amendment shall impair the rights of any holder of an Award
without the holder's consent. Notwithstanding the foregoing, no such action may,
without approval of the shareowners of the Corporation, increase the number of
shares of Stock with respect to which Awards may be granted or reduce the
exercise price of any Option below Fair Market Value on the date of grant.
Section 8: Administration
a. The Committee shall have full and complete authority, in its sole
and absolute discretion, (i) to exercise all of the powers granted
to it under the Plan, (ii) to construe, interpret and implement
the Plan and any related document, (iii) to prescribe, amend and
rescind rules relating to the Plan, (iv) to make all
determinations necessary or advisable in administering the Plan,
and (v) to correct any defect, supply any omission and reconcile
any inconsistency in the Plan. The actions and determinations of
the Committee on all matters relating to the Plan and any Awards
will be final and conclusive. The Committee's determinations under
the Plan need not be uniform and may be made by it selectively
among Employees who receive, or who are eligible to receive,
Awards under the Plan, whether or not such persons are similarly
situated.
b. The Committee and others to whom the Committee has delegated such
duties shall keep a record of all their proceedings and actions
and shall maintain all such books of account, records and other
data as shall be necessary for the proper administration of the
Plan.
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<PAGE> 9
c. The Corporation shall pay all reasonable expenses of administering
the Plan, including, but not limited to, the payment of
professional fees.
d. The Committee may appoint such accountants, counsel, and other
experts as it deems necessary or desirable in connection with the
administration of the Plan. The Committee may delegate to the
officers or employees of the Corporation and its Subsidiaries the
authority to execute and deliver such instruments and documents,
to do all such acts and things, and to take all such other steps
deemed necessary, advisable or convenient for the effective
administration of the Plan in accordance with its terms and
purpose, except that the Committee may not delegate any
discretionary authority with respect to substantive decisions or
functions regarding the Plan or Awards thereunder as these relate
to executive officers (within the meaning of Rule 3b-7 under the
Exchange Act, or any successor provision) of the Corporation.
Section 9: Adjustment Provisions
a. In the event of any change in the outstanding shares of Stock by
reason of a stock dividend or split, recapitalization, merger or
consolidation (whether or not the Corporation is a surviving
corporation), reorganization, combination or exchange of shares or
other similar corporate changes or an extraordinary dividend
payback in cash or property, the number of shares of Stock (or
other securities) then remaining subject to this Plan, and the
maximum number of shares that may be issued to any single
Participant pursuant to this Plan, including those that are then
covered by outstanding Awards, shall (i) in the event of an
increase in the number of outstanding shares, be proportionately
increased and the price for each share then covered by an
outstanding Award shall be proportionately reduced, and (ii) in
the event of a reduction in the number of outstanding shares, be
proportionately reduced and the price for each share then covered
by an outstanding Award shall be proportionately increased.
b. The Committee shall make any further adjustments as it deems
necessary to ensure equitable treatment of any holder of an Award
as the result of any transaction affecting the
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<PAGE> 10
securities subject to the Plan not described in (a), or as is
required or authorized under the terms of any applicable Award
Agreement.
c. The existence of the Plan and the Awards granted hereunder shall
not affect or restrict in any way the right or power of the Board
of Directors or the shareholders of the Corporation to make or
authorize any adjustment, recapitalization, reorganization or
other capital structure of its business, any merger or
consolidation of the Corporation, any issue of bonds, debentures,
preferred or prior preference stock ahead of or affecting the
Stock or the rights thereof, the dissolution or liquidation of the
Corporation or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding.
Section 10: Change of Control
a. In the event a Change of Control shall occur, then, (i) all
Awards granted as Non-qualified Stock Options or Incentive Stock
Options then outstanding pursuant to the Plan shall forthwith
become fully exercisable whether or not otherwise then exercisable
and (ii) the restrictions on all Stock granted as Restricted Stock
under the Plan shall forthwith lapse.
b. Change of Control means:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Person)
of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then outstanding
shares of Common Stock of Conexant (the Outstanding Conexant Common
Stock) or (B) the combined voting power of the then outstanding voting
securities of Conexant entitled to vote generally in the election of
directors (the Outstanding Conexant Voting Securities); provided,
however, that for purposes of this subparagraph (i), the following
acquisitions shall not constitute a Change of Control: (w) any
acquisition directly from Conexant, (x) any acquisition by Conexant, (y)
any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by Conexant, Rockwell International Corporation (Rockwell)
or any corporation controlled by Conexant or Rockwell or (z) any
acquisition pursuant to a transaction which complies with clauses (A),
(B) and (C) of
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subsection (iii) of this Section 10.b.; or
(ii) Individuals who, as of the date of the pro rata distribution
of all the outstanding Stock by Rockwell to its shareowners (Conexant
Distribution Date), constitute the Board of Directors (the Incumbent
Board) cease for any reason to constitute at least a majority of the
Board of Directors; provided, however, that any individual becoming a
director subsequent to that date whose election, or nomination for
election by Conexant's shareowners, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
Conexant or the acquisition of assets of another entity (a Corporate
Transaction), in each case, unless, following such Corporate Transaction,
(A) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Conexant Common Stock
and Outstanding Conexant Voting Securities immediately prior to such
Corporate Transaction beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction (including,
without limitation, a corporation which as a result of such transaction
owns the Corporation or all or substantially all of the Corporation's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior
to such Corporate Transaction of the Outstanding Conexant Common Stock
and Outstanding Conexant Voting Securities, as the case may be, (B) no
Person (excluding any employee benefit plan (or related trust) of the
Corporation or such corporation resulting from such Corporate
Transaction) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Corporate Transaction and (C) at least a majority of the members of the
board
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<PAGE> 12
of directors of the corporation resulting from such Corporate Transaction
were members of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board of Directors, providing
for such Corporate Transaction; or
(iv) Approval by Conexant's shareowners of a complete liquidation
or dissolution of Conexant.
Section 11: Miscellaneous
a. Other Payments or Awards. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Corporation or a
Subsidiary from making any award or payment to any person under
any other plan, arrangement or understanding, whether now existing
or hereafter in effect.
b. Payments to Other Persons. If payments are legally required to be
made to any person other than the person to whom any amount is
made available under the Plan, payments shall be made accordingly.
Any such payment shall be a complete discharge of the liability
hereunder.
c. Unfunded Plan. The Plan shall be unfunded. No provision of the
Plan or any Award Agreement shall require the Corporation or a
Subsidiary, for the purpose of satisfying any obligations under
the Plan, to purchase assets or place any assets in a trust or
other entity to which contributions are made or otherwise to
segregate any assets, nor shall the Corporation or a Subsidiary
maintain separate bank accounts, books, records or other evidence
of the existence of a segregated or separately maintained or
administered fund for such purposes. Participants shall have no
rights under the Plan other than as unsecured general creditors of
the Corporation or a Subsidiary, except that insofar as they may
have become entitled to payment of additional compensation by
performance of services, they shall have the same rights as other
employees under generally applicable law.
d. Limits of Liability. Any liability of the Corporation or a
Subsidiary to any Participant with respect to an Award shall be
based solely upon contractual obligations created by the Plan and
the Award Agreement. Neither the Corporation or its
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<PAGE> 13
Subsidiaries, nor any member of the Board of Directors or of the
Committee, nor any other person participating in any determination
of any question under the Plan, or in the interpretation,
administration or application of the Plan, shall have any
liability to any party for any action taken, or not taken, in good
faith under the Plan.
e. Rights of Employees. Status as an eligible Employee shall not be
construed as a commitment that any Award shall be made under this
Plan to such eligible Employee or to eligible Employees generally.
Nothing contained in this Plan or in any Award Agreement shall
confer upon any Employee or Participant any right to continue in
the employ or other service of the Corporation or a Subsidiary or
constitute any contract or limit in any way the right of the
Corporation or a Subsidiary to change such person's compensation
or other benefits or to terminate the employment or other service
of such person with or without Cause.
f. Section Headings. The section headings contained herein are for
the purpose of convenience only, and in the event of any conflict,
the text of the Plan, rather than the section headings, shall
control.
g. Gender, Etc. In interpreting the Plan, the masculine gender shall
include the feminine, the neuter gender shall include the
masculine or feminine, and the singular shall include the plural
unless the context clearly indicates otherwise.
h. Invalidity. If any term or provision contained herein or in any
Award Agreement shall to any extent be invalid or unenforceable,
such term or provision will be reformed so that it is valid, and
such invalidity or unenforceability shall not affect any other
provision or part thereof.
i. Applicable Law. The Plan, the Award Agreements and all actions
taken hereunder or thereunder shall be governed by, and construed
in accordance with, the laws of the State of California without
regard to the conflict of law principles thereof.
j. Compliance with Laws. Notwithstanding anything contained
herein or in any Award Agreement to the contrary, the
Corporation shall not be required
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<PAGE> 14
to sell or issue shares of Stock hereunder or thereunder if
the issuance thereof would constitute a violation by the
Participant or the Corporation of any provisions of any law
or regulation of any governmental authority or any national
securities exchange; and as a condition of any sale or
issuance the Corporation may require such agreements or
undertakings, if any, as the Corporation may deem necessary
or advisable to assure compliance with any such law or
regulation.
j. Non-Assignability. Except as otherwise determined by
the Committee in an Award Agreement, no Award shall be
assignable or transferable except by will or by the laws of
descent and distribution, and, during the lifetime of a
Participant, an Award shall be exercised only by such
Participant or by his or her guardian or legal
representative.
l. Effective Date and Term. The Plan was adopted by the Board of
Directors and shall be submitted to the sole shareowner of the
Corporation, and if approved, shall be effective as of Conexant
Distribution Date. The Committee may grant Awards prior to
shareowner approval, provided, however, that Awards granted prior
to such shareowner approval are automatically canceled if
shareowner approval is not obtained at or prior to the period
ending twelve months after the date the Plan is effective and
provided further that no Award may be exercisable prior to the
date shareowner approval is obtained. The Plan shall remain in
effect until all Awards under the Plan have been exercised or
terminated under the terms of the Plan and applicable Award
Agreements, provided that Awards under the Plan may only be
granted within ten (10) years from the effective date of the Plan.
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Exhibit 10.2
Conexant Systems, Inc.
Directors Stock Plan
1. PURPOSE OF THE PLAN.
The purpose of the Directors Stock Plan (the Plan) is to link the
compensation of non-employee directors of Conexant Systems, Inc.
(Conexant) directly with the interests of the shareowners.
2. PARTICIPANTS.
Participants in the Plan shall consist of directors of Conexant who are
not employees of Conexant or any of its subsidiaries (Non-Employee
Director). The term "subsidiary" as used in the Plan means a corporation
more than 50% of the voting stock of which, or an unincorporated business
entity more than 50% of the equity interest in which, shall at the time be
owned directly or indirectly by Conexant.
<PAGE> 2
3. SHARES RESERVED UNDER THE PLAN.
Subject to the provisions of Section 9 of the Plan, there shall be
reserved for delivery under the Plan 315,000 shares of Common Stock of
Conexant (Shares). Shares to be delivered under the Plan may be authorized
and unissued Shares, Shares held in treasury or any combination thereof.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Compensation and Management
Development Committee (the Committee) of the Board of Directors of
Conexant (the Board), subject to the right of the Board, in its sole
discretion, to exercise or authorize another committee or person to
exercise some of or all the responsibilities, powers and authority vested
in the Committee under the Plan. The Committee (or the Board or any other
committee or person authorized by the Board) shall have authority to
interpret the Plan, and to prescribe, amend and rescind rules and
regulations relating to the administration of the Plan, and all such
interpretations, rules and regulations shall be conclusive and binding on
all persons.
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<PAGE> 3
5. EFFECTIVE DATE OF THE PLAN.
The Plan has been approved by the Board and shall be submitted to the sole
shareowner of Conexant, and, if approved, shall become effective on the
date on which Rockwell International Corporation (Rockwell) completes the
pro rata distribution of all the outstanding Shares to Rockwell's
shareowners.
6. STOCK OPTIONS.
Each Non-Employee Director in office on January 2, 1999 shall be granted,
on or prior to March 31, 1999, an option to purchase 40,000 Shares. Each
other Non-Employee Director shall be granted an option to purchase 40,000
Shares at the meeting of the Board at which, or immediately following the
Annual Meeting of Shareowners at which, the Non-Employee Director is first
elected a director of Conexant. Immediately following the Annual Meeting
of Shareowners held in the year 2000 and each Annual Meeting of
Shareowners thereafter, each Non-Employee Director who has served as a
Non-Employee Director for at least one year and is elected a director at,
or who was previously elected and continues as a director after, that
Annual Meeting shall be granted an option to purchase 15,000 Shares.
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The exercise price per share for each option so granted shall be the
closing price per share (the Fair Market Value) of Shares on the date of
grant as reported in the NASDAQ reporting system (or on the next preceding
day such stock was traded if it was not traded on the date of grant). The
purchase price of the Shares with respect to which an option or portion
thereof is exercised shall be payable in full in cash, Shares valued at
their Fair Market Value on the date of exercise, or a combination thereof.
Each option may be exercised in whole or in part at any time after it
becomes exercisable; and each option shall become exercisable in
approximately four equal installments on each of the first, second, third
and fourth anniversaries of the date the option is granted. No option
shall be exercisable prior to one year nor after ten years from the date
of the grant thereof; provided, however, that if the holder of an option
dies, the option may be exercised from and after the date of the
optionee's death for a period of three years (or until the expiration date
specified in the option if earlier) even if it was not exercisable at the
date of death. Moreover, if an optionee retires after attaining age 72 or
completing at least ten years service as a director, all options then held
by such optionee shall be exercisable even if they were not exercisable at
such retirement date; provided, however, that each such option shall
expire at the earlier of five years from the date of the optionee's
retirement or the expiration date
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specified in the option.
Options granted under the Plan are not transferable other than (i) by will
or by the laws of descent and distribution; or (ii) by gift to the
grantee's spouse or natural, adopted or step -children or grandchildren
(Immediate Family Members) or to a trust for the benefit of one or more of
the grantee's Immediate Family Members or to a family charitable trust
established by the grantee or a member of the grantee's family. If an
optionee ceases to be a director while holding unexercised options, such
options are then void, except in the case of (i) death, (ii) disability,
(iii) retirement after attaining age 72 or completing ten years service as
a director, or (iv) resignation from the Board for reasons of the
antitrust laws, compliance with Conexant's conflict of interest policies
or other circumstances that the Committee may determine as serving the
best interests of Conexant.
7. SHARES IN LIEU OF CASH COMPENSATION.
Each Non-Employee Director may elect each year, not later than December 31
of the year preceding the year as to which an election is to be
applicable, to receive all or any portion of the cash retainer to be paid
for board, committee or other service in the following calendar year
through
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the issuance or transfer of Shares, valued at the closing price as
reported in the NASDAQ reporting system on the date when each payment of
such retainer amount would otherwise be made in cash. Each Non-Employee
Director making such an election may also elect at the same time to
receive those Shares in the form of restricted stock (Restricted Shares).
Upon receipt of Shares, the recipient shall have all the rights of a
shareowner. Upon receipt of Restricted Shares, the recipient shall have
the right to vote the Shares and to receive dividends thereon, and the
Shares shall have all the attributes of outstanding Shares except that the
registered owner shall have no right to direct the transfer thereof.
Restricted Shares shall be held in book-entry accounts subject to the
direction of Conexant (or if Conexant elects, certificates therefor may be
issued in the recipient's name but delivered to and held by Conexant)
until ten days after (i) the recipient retires from the Board after
attaining age 72 or completing at least ten years service as a director or
(ii) the recipient resigns from the Board or ceases to be a director by
reason of the antitrust laws, compliance with Conexant's conflict of
interest policies, death, disability or other circumstances the Board
determines not to be adverse to the best interests of Conexant, when the
restrictions on such book-entry accounts shall be released (or any
certificates issued shall be delivered to the director), and such Shares
shall cease to be Restricted Shares.
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8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If there shall be any change in or affecting Shares on account of any
merger, consolidation, reorganization, recapitalization, reclassification,
stock dividend, stock split or combination, or other distribution to
holders of Shares (other than a cash dividend), there shall be made or
taken such amendments to the Plan and such adjustments and actions
thereunder as the Board may deem appropriate under the circumstances.
9. GOVERNMENT AND OTHER REGULATIONS.
The obligations of Conexant to deliver Shares upon exercise of options
granted under Section 6 of the Plan or pursuant to an election made under
Section 7 of the Plan shall be subject to (i) all applicable laws, rules
and regulations and such approvals by any governmental agencies as may be
required, including, without limitation, compliance with the Securities
Act of 1933, as amended, and (ii) the condition that such Shares shall
have been duly listed approved for quotation and trading in the NASDAQ
reporting system.
10. AMENDMENT AND TERMINATION OF THE PLAN.
The Plan may be amended by the Board in any respect, provided that,
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without shareowner approval, no amendment shall (i) materially increase
the maximum number of Shares available for delivery under the Plan (other
than adjustments pursuant to Section 8 hereof), (ii) materially increase
the benefits accruing to participants under the Plan, or (iii) materially
modify the requirements as to eligibility for participation in the Plan.
The Plan may also be terminated at any time by the Board.
12. MISCELLANEOUS.
(a) If a Change of Control as defined in Article III, Section 13(I)(1)
of Conexant's By-Laws shall occur, all options then outstanding
pursuant to the Plan shall forthwith become fully exercisable
whether or not then exercisable and the restrictions on all Shares
granted as Restricted Stock under the Plan shall forthwith lapse.
(b) Nothing contained in the Plan shall be deemed to confer upon any
person any right to continue as a director of or to be associated in
any other way with Conexant.
(c) To the extent that Federal laws do not otherwise control, the Plan
and all determinations made and actions taken pursuant hereto shall
be governed by the law of the State of Delaware.
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<PAGE> 1
Exhibit 10.4
- --------------------------------------------------------------------------------
TAX ALLOCATION AGREEMENT
by and between
ROCKWELL INTERNATIONAL CORPORATION
and
CONEXANT SYSTEMS, INC.
- --------------------------------------------------------------------------------
December [31], 1998
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS ................................................. 2
1.01 General ................................................... 2
1.02 Schedules, etc. ........................................... 8
ARTICLE II FILING OF TAX RETURNS; PAYMENT OF TAXES; REFUNDS ............ 9
2.01 Preparation of Tax Returns ................................ 9
2.02 Payment of Taxes .......................................... 12
2.03 Tax Refunds and Carrybacks ................................ 15
2.04 Allocation of Straddle Period Taxes ....................... 17
2.05 Schedule of Foreign Income Tax Returns and Payments ....... 17
ARTICLE III TAX INDEMNIFICATION; TAX CONTESTS ........................... 18
3.01 Indemnification ........................................... 18
3.02 Conexant Tax Acts ......................................... 20
3.03 Notice of Indemnity ....................................... 21
3.04 Payments .................................................. 21
3.05 Tax Contests .............................................. 24
ARTICLE IV COMPENSATION PAYMENTS; OPTIONS; INVENTORY WRITEDOWN; CELERITAS
LITIGATION; CALIFORNIA MANUFACTURER'S INVESTMENT CREDIT 25
4.01 Compensation Payments ..................................... 25
4.02 Stock Options ............................................. 26
4.03 Inventory Writedown ....................................... 28
4.04 Celeritas Litigation ...................................... 29
4.05 Tax Benefit Attributable to California Manufacturers
Investment Credit Carryforward ......................... 29
4.06 Change in Law ............................................. 29
ARTICLE V COOPERATION AND EXCHANGE OF INFORMATION ..................... 30
5.01 Inconsistent Actions ...................................... 30
5.02 Ruling Request ............................................ 30
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5.03 IRS Gain Recognition Agreement; Notification of Certain
Dispositions ........................................... 30
5.04 Cooperation and Exchange of Information ................... 31
5.05 Tax Records ............................................... 32
ARTICLE VI MISCELLANEOUS ............................................... 33
6.01 Entire Agreement; Construction ............................ 33
6.02 Effectiveness ............................................. 33
6.03 Survival of Agreements .................................... 33
6.04 Governing Law ............................................. 33
6.05 Notices ................................................... 33
6.06 Consent to Jurisdiction ................................... 35
6.07 Amendments ................................................ 35
6.08 Successors and Assigns .................................... 36
6.09 Captions; Currency ........................................ 36
6.10 Severability .............................................. 36
6.11 No Third Party Beneficiaries .............................. 36
6.12 Schedules ................................................. 37
6.13 Termination ............................................... 37
6.14 Waivers; Remedies ......................................... 37
6.15 Counterparts .............................................. 37
6.16 Performance ............................................... 37
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<PAGE> 4
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT (this "AGREEMENT") is made and entered
into as of December [31], 1998, by and between ROCKWELL INTERNATIONAL
CORPORATION, a Delaware corporation ("ROCKWELL"), and CONEXANT SYSTEMS, INC., a
Delaware corporation and, as of the date hereof, a wholly-owned subsidiary of
Rockwell ("CONEXANT").
W I T N E S S E T H :
WHEREAS, the Rockwell Board (as hereinafter defined) has determined
that it is appropriate and desirable to distribute all outstanding shares of
Conexant Common Stock (as hereinafter defined) on a pro rata basis to the
holders of Rockwell Common Stock (as hereinafter defined);
WHEREAS, the Rockwell Board has determined that it is appropriate
and desirable to effectuate the Distribution (as hereinafter defined) in a
transaction that will qualify under Section 368(a)(1)(D) of the Code (as
hereinafter defined) as a tax-free reorganization; and
WHEREAS, Rockwell and Conexant wish to provide for and agree upon
the allocation between the Rockwell Tax Group (as hereinafter defined) and the
Conexant Tax Group (as hereinafter defined) of all responsibilities, liabilities
and benefits relating to or affecting Taxes (as hereinafter defined) paid or
payable by either of them for all taxable periods, whether beginning before, on
or after the Distribution Date (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and of the
respective agreements contained in this Agreement, the parties hereto hereby
agree as follows:
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ARTICLE I
DEFINITIONS
1.01 GENERAL. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"ACTUALLY REALIZED" shall mean, for purposes of determining the
timing of any Taxes (or related Tax cost or benefit) relating to any payment,
transaction, occurrence or event, the time at which the amount of Taxes payable
by any person is increased above or reduced below, as the case may be, the
amount of Taxes that such person would be required to pay but for the payment,
transaction, occurrence or event.
"AUTOMOTIVE DISTRIBUTION" shall mean the distribution of the Meritor
Automotive, Inc. common stock on a pro rata basis to holders of Rockwell Common
Stock on September 30, 1997 pursuant to the Distribution Agreement by and
between Rockwell and Meritor Automotive, Inc. dated September 30, 1997.
"AUTOMOTIVE RULING REQUEST" shall mean the private letter ruling
request dated March 17, 1997 filed by Rockwell with the IRS (as modified or
supplemented by any materials submitted to the IRS), seeking rulings that, inter
alia, the Automotive Distribution qualified for U.S. federal Income Tax purposes
as a tax-free reorganization under Section 368(a)(1)(D) of the Code.
"AUTOMOTIVE TRANSACTION AGREEMENTS" shall have the meaning ascribed
thereto in the Distribution Agreement by and between Rockwell and Meritor
Automotive, Inc. dated September 30, 1997.
"BOEING" shall mean The Boeing Company, a Delaware corporation.
"BOEING TAX GROUP" shall mean Boeing and its affiliates.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, or
any successor legislation.
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"COMPENSATION PAYMENTS" shall mean all non-qualified employee
benefit plan and welfare benefit plan payments made by any member of the
Conexant Tax Group under Sections ___________________ of the Employee Matters
Agreement dated as of December [31], 1998 by and between Rockwell and Conexant.
"CONEXANT" shall have the meaning ascribed thereto in the preamble.
"CONEXANT COMMON STOCK" shall mean, collectively, the Common Stock,
par value $1 per share, of Conexant and the related Rights.
"CONEXANT COMMON STOCK OPTIONS" shall mean options to acquire
Conexant Common Stock.
"CONEXANT GROUP EMPLOYEES AND FORMER EMPLOYEES" shall mean
individuals (i) who are employees of any member of the Conexant Tax Group on the
date of the event giving rise to a deduction in respect of any Compensation
Payments made to such individuals or Stock Options held by such individuals,
(ii) who were employees of any member of the Conexant Tax Group and were not
thereafter employees of any member of the Rockwell Tax Group, or (iii) who were
employees of Old Rockwell and its affiliates who were engaged in the Conexant
business and who retired on or before December 6, 1996 and were not thereafter
employees of any member of the Rockwell Tax Group.
"CONEXANT TAX ACT" shall have the meaning set forth in Section
3.02(a).
"CONEXANT TAX GROUP" shall mean (i) Conexant, (ii) any corporation
or other legal entity which Conexant directly or indirectly owns immediately
following the Distribution, (iii) California Solution Networks Corporation, (iv)
Brooktree Technologies Ltd., (v) Brooktree International Ltd., and (vi)
Brooktree Ltd.
"CONEXANT TAX REPRESENTATION LETTER" shall mean the letter delivered
by Conexant to Rockwell on the Distribution Date, substantially in the form set
forth in Schedule 3.02(b) attached hereto.
"DISTRIBUTION" shall mean the distribution of the Conexant Common
Stock on a pro rata basis to holders
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<PAGE> 7
of Rockwell Common Stock on the Distribution Date pursuant to the Distribution
Agreement.
"DISTRIBUTION AGREEMENT" shall mean the Distribution Agreement dated
as of December [31], 1998 by and between Rockwell and Conexant.
"DISTRIBUTION DATE" shall mean the date on which the Distribution
occurs (or, if different, the date on which the Distribution is deemed to occur
for U.S. federal Income Tax purposes). For purposes of this Agreement, the
Distribution shall be deemed effective as of the end of the day on the
Distribution Date.
"DISTRIBUTION TRANSACTION" shall mean any transaction undertaken in
connection with the Distribution and described in the Ruling Request except for
those transactions specified on Schedule 1.01 that are being carried out for
business reasons unrelated to the Distribution.
"FOREIGN INCOME TAX" shall mean any Income Tax other than a U.S.
federal, state or local Income Tax.
"FOREIGN INCOME TAX RETURNS" shall mean any Income Tax Return which
is not a U.S. federal, state or local Income Tax Return.
"INCOME TAX" shall mean (a) any Tax based upon, measured by, or
calculated with respect to (i) net income or profits (including, but not limited
to, any capital gains, minimum Tax and any Tax on items of Tax preference, but
not including sales, use, real or personal property, gross or net receipts,
transfer or similar Taxes) or (ii) multiple bases (including, but not limited
to, corporate franchise, doing business or occupation Taxes) if one or more of
the bases upon which such Tax may be based, measured by, or calculated with
respect to, is described in clause (i) above, or (b) any U.S.
state or local franchise Tax.
"INCOME TAX BENEFIT" shall mean for any taxable period the excess of
(i) the hypothetical Income Tax liability of the taxpayer for the taxable period
calculated as if the Timing Difference or Reverse Timing Difference, as the case
may be, had not occurred but with all other facts unchanged, over (ii) the
actual Income Tax liability of the taxpayer for the taxable period,
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<PAGE> 8
calculated taking into account the Timing Difference or Reverse Timing
Difference, as the case may be (treating an Income Tax refund or credit as a
negative Income Tax liability for purposes of such calculation).
"INCOME TAX DETRIMENT" shall mean for any taxable period the excess
of (i) the actual Income Tax liability of the taxpayer for the taxable period,
calculated taking into account the Timing Difference or Reverse Timing
Difference, as the case may be, over (ii) the hypothetical Income Tax liability
of the taxpayer for the taxable period, calculated as if the Timing Difference
or Reverse Timing Difference, as the case may be, had not occurred but with all
other facts unchanged (treating an Income Tax refund or credit as a negative
Income Tax liability for purposes of such calculation).
"INCOME TAX RETURN" shall mean any Tax Return that relates to Income
Taxes.
"INDEMNITEE" shall have the meaning set forth in Section 3.03.
"INDEMNITOR" shall have the meaning set forth in Section 3.03.
"INDEMNITY ISSUE" shall have the meaning set forth in Section 3.03.
"INVENTORY WRITEDOWN" shall mean the planned 1998 writedown of
inventory by Conexant.
"IRS" shall mean the Internal Revenue Service.
"IRS GAIN RECOGNITION AGREEMENT" shall mean any gain recognition
agreement entered into between the IRS and any member of the Rockwell Tax Group
or the Conexant Tax Group pursuant to Section 367 of the Code and the
regulations thereunder or the Ruling, and any revised or successor agreement
thereto.
"OLD ROCKWELL" shall mean the corporation, formerly named Rockwell
International Corporation, which owned all of the Rockwell Common Stock prior to
the distribution of the Rockwell Common Stock to the shareholders of such
corporation on December 6, 1996.
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<PAGE> 9
"PRE-DISTRIBUTION TAXABLE PERIOD" shall mean a taxable period ending
on or before the Distribution Date.
"POST-DISTRIBUTION TAX ACT" shall have the meaning set forth in
Section 3.01(a).
"POST-DISTRIBUTION TAXABLE PERIOD" shall mean a taxable period
beginning after the Distribution Date.
"POST-TAX INDEMNIFICATION PERIOD" shall mean any Post-Distribution
Taxable Period and that portion of any Straddle Period that begins on the day
after the Distribution Date.
"REVERSE TIMING DIFFERENCE" shall mean an increase in income, gain
or recapture, or a decrease in deduction, loss or credit, as calculated for
Income Tax purposes, of the taxpayer for the Tax Indemnification Period coupled
with an increase in deduction, loss or credit, or a decrease in income, gain or
recapture, of the taxpayer for any Post-Tax Indemnification Period.
"RIGHTS" shall have the meaning ascribed thereto in the Distribution
Agreement.
"ROCKWELL" shall have the meaning ascribed thereto in the preamble.
"ROCKWELL BOARD" shall mean the Board of Directors of Rockwell or a
duly authorized committee thereof.
"ROCKWELL COMMON STOCK" shall mean the Common Stock, par value $1.00
per share, of Rockwell.
"ROCKWELL COMMON STOCK OPTIONS" shall mean options to acquire
Rockwell Common Stock.
"ROCKWELL TAX GROUP" shall mean (i) Rockwell, (ii) any corporation
or other legal entity which Rockwell directly or indirectly owns immediately
following the Distribution, (iii) any other corporation or other legal entity
which Rockwell or Old Rockwell directly or indirectly owned at any time prior to
the Distribution (but only with respect to the period such corporation or other
entity was so owned by Rockwell or Old Rockwell) other than a member of the
Conexant Tax Group, and (iv) solely for purposes of this Agreement and not for
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<PAGE> 10
purposes of any other Transaction Agreement, for any taxable period up to or
including December 6, 1996, Old Rockwell and any other corporation or legal
entity owned by Old Rockwell other than a member of the Conexant Tax Group.
"RULING" shall mean the private letter ruling issued by the IRS in
reply to the Ruling Request including any amendment or supplement thereto.
"RULING REQUEST" shall mean the private letter ruling request dated
June 29, 1998 filed by Rockwell with the IRS (as modified or supplemented by any
materials submitted to the IRS), seeking rulings that, inter alia, the
Distribution will qualify for U.S. federal Income Tax purposes as a tax-free
reorganization under Section 368(a)(1)(D) of the Code.
"STOCK OPTIONS" shall mean Conexant Common Stock Options or Rockwell
Common Stock Options.
"STRADDLE PERIOD" shall mean a taxable period that includes but does
not end on the Distribution Date.
"TAX" and "TAXES" shall mean all forms of taxation, whenever created
or imposed, and whether of the United States or elsewhere, and whether imposed
by a federal, state, municipal, governmental, territorial, local, foreign or
other body, and without limiting the generality of the foregoing, shall include
net income, gross income, gross receipts, sales, use, value added, ad valorem,
transfer, recording, franchise, profits, license, lease, service, service use,
payroll, wage, withholding, employment, unemployment insurance, workers
compensation, social security, excise, severance, stamp, business license,
business organization, occupation, premium, property, environmental, windfall
profits, customs, duties, alternative minimum, estimated or other taxes, fees,
premiums, assessments or charges of any kind whatever imposed or collected by
any governmental entity or political subdivision thereof, together with any
related interest and any penalties, additions to such tax or additional amounts
imposed with respect thereto by any Tax Authority.
"TAX AUTHORITY" shall mean, with respect to any Tax, any
governmental entity, quasi-governmental body or political subdivision thereof
that imposes such Tax and
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<PAGE> 11
the agency (if any) charged with the determination or collection of such Tax for
such entity, body or subdivision.
"TAX GROUP" shall mean the Rockwell Tax Group or the Conexant Tax
Group, as the case may be.
"TAX INDEMNIFICATION PERIOD" shall mean any Pre-Distribution Taxable
Period and that portion of any Straddle Period that ends on the Distribution
Date.
"TAX RETURN" shall mean any return, filing, questionnaire,
information return, election or other document required or permitted to be
filed, including requests for extensions of time, filings made with respect to
estimated tax payments, claims for refund and amended returns that may be filed,
for any period with any Tax Authority (whether domestic or foreign) in
connection with any Tax (whether or not a payment is required to be made with
respect to such filing).
"TIMING DIFFERENCE" means an increase in income, gain or recapture,
or a decrease in deduction, loss or credit, as calculated for Income Tax
purposes, of the taxpayer for any Post-Tax Indemnification Period coupled with
an increase in deduction, loss or credit, or a decrease in income, gain or
recapture, of the taxpayer for the Tax Indemnification Period.
"TRANSACTION AGREEMENTS" shall have the meaning ascribed thereto in
the Distribution Agreement.
Any capitalized term not otherwise defined in this Agreement shall
have the meaning ascribed to it in the Distribution Agreement.
1.02 SCHEDULES, ETC. References to a "SCHEDULE" are, unless
otherwise specified, to the Schedule attached to this Agreement; references to
"SECTION" or "Article" are, unless otherwise specified, to one of the Sections
or Articles of this Agreement; references to "SUB-SECTION" are, unless the
context otherwise requires, references to the section in which the reference
appears; and references to this Agreement include the Schedules.
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ARTICLE II
FILING OF TAX RETURNS; PAYMENT OF TAXES; REFUNDS
2.01 PREPARATION OF TAX RETURNS.
(a) UNITED STATES FEDERAL INCOME TAX RETURNS. Rockwell shall prepare
and file or cause to be prepared and filed all U.S. federal Income Tax Returns
(including amendments thereto) which include a member of the Rockwell Tax Group
or a member of the Conexant Tax Group which are required to be filed for any
Pre-Distribution Taxable Period. Conexant hereby irrevocably designates, and
agrees to cause each of its affiliates to so designate, Rockwell as its agent to
take any and all actions necessary or incidental to the preparation and filing
of such U.S. federal Income Tax Returns.
(b) UNITED STATES STATE AND LOCAL INCOME TAX RETURNS. (i) Rockwell
shall prepare and file or cause to be prepared and filed all U.S. state and
local Income Tax Returns (including amendments thereto) (A) which are required
to be filed for any Pre-Distribution Taxable Period which include a member of
the Rockwell Tax Group or a member of the Conexant Tax Group and (B) which are
required to be filed for any Straddle Period which (I) relate to a member or
members of the Rockwell Tax Group or their respective businesses, assets or
activities, (II) relate to members of each of the Rockwell Tax Group (other than
Rockwell Science Center, LLC, Rockwell Electronic Commerce Corporation and
Rockwell Collins Filter Products Corporation) and the Conexant Tax Group or
their respective businesses, assets or activities, or (III) relate to a member
of the Conexant Tax Group for a period in which such member conducts or has
conducted both a Conexant business and a non-Conexant business (other than a
business being conducted by Rockwell Science Center, LLC, Rockwell Electronic
Commerce Corporation and Rockwell Collins Filter Products Corporation). Conexant
hereby irrevocably designates, and agrees to cause each of its affiliates to so
designate, Rockwell as its agent to take any and all actions necessary or
incidental to the preparation and filing of such U.S. state and local Income Tax
Returns.
(ii) All U.S. state and local Income Tax Returns (including
amendments thereto) which relate to a member of the Conexant Tax Group or their
respective
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businesses, assets or activities for all Straddle Periods which are not the
responsibility of the Rockwell Tax Group shall be the responsibility of the
Conexant Tax Group.
(c) FOREIGN INCOME TAX RETURNS. (i) Conexant shall prepare and file
or cause to be prepared and filed all Foreign Income Tax Returns which are
required to be filed for any Pre-Distribution Taxable Period or any Straddle
Period which relate to the entities set forth on Schedule 2.01(c) attached
hereto. Rockwell hereby irrevocably designates, and agrees to cause each of its
affiliates to so designate, Conexant as its agent to take any and all actions
necessary or incidental to the preparation and filing of such Foreign Income Tax
Returns.
(ii) Rockwell shall prepare and file or cause to be prepared and
filed all Foreign Income Tax Returns (including amendments thereto) which
include a member of the Conexant Tax Group which are required to be filed for
any Pre-Distribution Taxable Period or any Straddle Period which relate to the
entities set forth on Schedule 2.01(c) attached hereto. Conexant hereby
irrevocably designates, and agrees to cause each of its affiliates to so
designate, Rockwell as its agent to take any and all actions necessary or
incidental to the preparation and filing of such Foreign Income Tax Returns.
(d) NON-INCOME TAX RETURNS. (i) All Tax Returns (including
amendments thereto) which are not Income Tax Returns for all Pre-Distribution
Taxable Periods and all Straddle Periods shall be the responsibility of the
Rockwell Tax Group if such Tax Returns (A) relate to a member or members of the
Rockwell Tax Group or their respective businesses, assets or activities, (B)
relate to members of each of the Rockwell Tax Group and the Conexant Tax Group
or their respective businesses, assets or activities, or (C) relate to a member
of the Conexant Tax Group for a period in which such member conducts or has
conducted both a Conexant business and a non-Conexant business. Conexant hereby
irrevocably designates, and agrees to cause each of its affiliates to so
designate, Rockwell as its agent to take any and all actions necessary or
incidental to the preparation and filing of such Tax Returns.
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(ii) All Tax Returns (including amendments thereto) which are not
Income Tax Returns which relate to a member of the Conexant Tax Group or their
respective businesses, assets or activities for all Pre-Distribution Taxable
Periods and Straddle Periods which are not the responsibility of the Rockwell
Tax Group shall be the responsibility of the Conexant Tax Group.
(e) POST-DISTRIBUTION DATE TAX RETURNS. All Tax Returns (including
amendments thereto) for all Post-Distribution Taxable Periods shall be the
responsibility of the Rockwell Tax Group if such Tax Returns relate to a member
or members of the Rockwell Tax Group or their respective businesses, assets or
activities, and shall be the responsibility of the Conexant Tax Group if such
Tax Returns relate to a member or members of the Conexant Tax Group or their
respective businesses, assets or activities.
(f) CONSISTENT WITH PAST PRACTICE; REVIEW BY NON-RESPONSIBLE PARTY.
Unless Rockwell and Conexant otherwise agree in writing, all Tax Returns
(including amendments thereto) described in this Section 2.01 filed after the
date of this Agreement, in the absence of a controlling change in law or
circumstances, shall be prepared on a basis consistent with the elections,
accounting methods, conventions and principles of taxation used for the most
recent taxable periods for which Tax Returns involving similar matters have been
filed. Upon the request of the non-responsible party, the party responsible
under this Section 2.01 for preparation of a particular Tax Return shall make
available a draft of such Tax Return (or relevant portions thereof) for review
and comment by such non-responsible party. Subject to the provisions of this
Agreement, all decisions relating to the preparation of Tax Returns shall be
made in the sole discretion of the party responsible under this Agreement for
such preparation.
(g) RESPONSIBILITY FOR FILING. Although, pursuant to this Agreement,
Rockwell or Conexant may be responsible for filing a particular Tax Return,
Rockwell and Conexant have agreed that the actual preparation and filing of
certain Tax Returns will be done by the non-responsible party. Schedule 2.01(g)
attached hereto sets forth a schedule specifying such Tax Returns. Rockwell
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<PAGE> 15
and Conexant may agree from time to time to additions or deletions from Schedule
2.01(g).
2.02 PAYMENT OF TAXES.
(a) UNITED STATES FEDERAL INCOME TAXES. Except as otherwise provided
in this Agreement, Rockwell shall pay or cause to be paid, on a timely basis,
all Taxes due with respect to the consolidated U.S. federal Income Tax liability
for all Pre-Distribution Taxable Periods of all members of the Rockwell Tax
Group or the Conexant Tax Group.
(b) UNITED STATES STATE AND LOCAL INCOME TAXES. Except as otherwise
provided in this Agreement:
(i) Rockwell shall pay or cause to be paid, on a timely basis, all
Taxes due with respect to the U.S. state and local Income Tax liability (A) for
all Pre-Distribution Taxable Periods of all members of the Rockwell Tax Group or
the Conexant Tax Group and (B) for all Straddle Periods which relate to (I) a
member or members of the Rockwell Tax Group or their respective businesses,
assets or activities, (II) members of each of the Rockwell Tax Group (other than
Rockwell Science Center, LLC, Rockwell Electronic Commerce Corporation and
Rockwell Collins Filter Products Corporation) and the Conexant Tax Group or
their respective businesses, assets or activities, or (III) a member of the
Conexant Tax Group for a period in which such member conducts or has conducted
both a Conexant business and a non-Conexant business (other than a business
being conducted by Rockwell Science Center, LLC, Rockwell Electronic Commerce
Corporation and Rockwell Collins Filter Products Corporation), provided,
however, that Conexant, on behalf of the Conexant Tax Group, hereby assumes and
agrees to pay directly to or at the direction of Rockwell, at least two days
prior to the date payment (including estimated payment) thereof is due, the
portion of such U.S. state and local Income Taxes for that portion of any
Straddle Period which begins on the day after the Distribution Date which
relates to a member of the Conexant Tax Group or its business, assets or
activities.
(ii) Conexant shall pay or cause to be paid, on a timely basis, all
U.S. state and local Income Taxes for all Straddle Periods which relate to a
member of the Conexant Tax Group, its business, assets or activities
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which are not the responsibility of the Rockwell Tax Group other than any U.S.
state and local Income Taxes imposed in connection with the transactions
contemplated by the Transaction Agreements or any other agreement entered into
for the purpose of implementing the Distribution, provided, however, that
Rockwell, on behalf of the Rockwell Tax Group, hereby assumes and agrees to pay
directly to or at the direction of Conexant, at least two days prior to the date
payment (including estimated payment) thereof is due, the portion of such U.S.
state and local Income Taxes actually due which relates to Rockwell Science
Center, LLC, Rockwell Electronic Commerce Corporation, and Rockwell Collins
Filter Products Corporation or their business, assets or activities.
(c) FOREIGN INCOME TAXES. Except as otherwise provided in this
Agreement:
(i) Conexant shall pay or cause to be paid, on a timely basis, all
Foreign Income Taxes due with respect to Foreign Income Tax liability for all
Pre-Distribution Taxable Periods and all Straddle Periods which relate to the
entities set forth on Schedule 2.01(c) attached hereto, provided, however,
Rockwell, on behalf of the Rockwell Tax Group, hereby assumes and agrees to pay
directly to or at the direction of Conexant, at least two days prior to the date
payment (including estimated payment) thereof is due such Foreign Income Tax
liability resulting from any Distribution Transaction; and
(ii) Except as provided in Section 2.02(c)(i) above, Rockwell shall
pay or cause to be paid, on a timely basis, all Foreign Income Taxes due with
respect to the Income Tax liability of all members of the Conexant Tax Group or
Rockwell Tax Group for all Pre-Distribution Taxable Periods and Straddle
Periods, provided, however, that Conexant, on behalf of the Conexant Tax Group,
hereby assumes and agrees to pay directly to or at the direction of Rockwell, at
least two days prior to the date payment (including estimated payment) thereof
is due (A) the portion of such Foreign Income Taxes for that portion of any
Straddle Period which begins on the day after the Distribution Date which
relates to a member of the Conexant Tax Group or its business, assets or
activities and (B) any such Foreign Income Taxes which may be due as a result of
any transaction specified on Schedule 1.01.
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(d) NON-INCOME TAXES. Except as otherwise provided in this
Agreement:
(i) Rockwell shall pay or cause to be paid, on a timely basis, all
Taxes due with respect to the non-Income Tax liability for all Pre-Distribution
Taxable Periods and Straddle Periods which relate to (A) a member or members of
the Rockwell Tax Group or their respective businesses, assets or activities, (B)
members of each of the Rockwell Tax Group and the Conexant Tax Group or their
respective businesses, assets or activities, or (C) a member of the Conexant Tax
Group for a period in which such member conducts or has conducted both a
Conexant business and a non-Conexant business, provided, however, that Conexant,
on behalf of the Conexant Tax Group, hereby assumes and agrees to pay directly
to or at the direction of Rockwell, at least two days prior to the date payment
(including estimated payment) thereof is due the portion of such non-Income
Taxes which relates to a member of the Conexant Tax Group (other than such
non-Income Taxes which relate to the Science Center, ECD or the filter products
business) or the Conexant business, assets or activities for such
Pre-Distribution Taxable Periods and Straddle Periods other than any such
non-Income Taxes resulting from any Distribution Transaction; and
(ii) Conexant shall pay or cause to be paid, on a timely basis, all
non-Income Taxes for all Pre-Distribution Taxable Periods and Straddle Periods
which relate to the Conexant Tax Group business, assets or activities which are
not the responsibility of the Rockwell Tax Group other than any non-Income Taxes
imposed in connection with the transactions contemplated by the Transaction
Agreements or any other agreement entered into for the purpose of implementing
the Distribution.
(e) POST-DISTRIBUTION DATE TAXES. Except as otherwise provided in
this Agreement, all Taxes for all Post-Distribution Taxable Periods shall be
paid or caused to be paid by the party responsible under this Agreement for
filing the Tax Return pursuant to which such Taxes are due or, if no such Tax
Returns are due, by the party liable for such Taxes.
(f) CREDIT FOR PRIOR TAX PAYMENTS. To the extent any member of a Tax
Group has made a payment of
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Taxes (including estimated Taxes) on or before the Distribution Date, the party
liable for paying such Taxes under this Agreement shall be entitled to treat the
payment as having been paid or caused to have been paid by such party, and such
party shall not be required to reimburse the party which actually paid such
Taxes.
(g) RESPONSIBILITY FOR PAYMENT; NOTICE OF PAYMENT DUE. Although
Rockwell or Conexant may be responsible for paying a particular Tax liability,
Rockwell and Conexant may agree that the actual payment to a Taxing Authority of
certain Tax liabilities will be made by the non-responsible party. Rockwell and
Conexant may agree to prepare a schedule setting forth such Tax liabilities and
may agree from time to time to additions or deletions from such schedule. In
each case where Rockwell or Conexant, as the case may be, is required to make
payment of Taxes to the other party, Rockwell or Conexant, as the case may be
shall notify the other party as to the amount of Taxes due from the other party
at least five days prior to the date payment (including estimated payment) is
due.
2.03 TAX REFUNDS AND CARRYBACKS.
(a) RETENTION AND PAYMENT OF TAX REFUNDS. Except as otherwise
provided in this Agreement, Rockwell shall be entitled to retain, and to receive
within ten days after Actually Realized by the Conexant Tax Group, the portion
of all refunds or credits of Taxes for which the Rockwell Tax Group is liable
pursuant to Section 2.02 or Section 3.01(a) or is treated as having paid or
caused to have been paid pursuant to Section 2.02(f), and Conexant shall be
entitled to retain, and to receive within ten days after Actually Realized by
the Rockwell Tax Group, the portion of all refunds or credits of Taxes for which
the Conexant Tax Group is liable pursuant to Section 2.02 or Section 3.01(b)
(including all non-Income Taxes for which Conexant would have been liable
pursuant to Section 2.02(d) had such non-Income Taxes been due and not paid) or
is treated as having paid or caused to have been paid pursuant to Section
2.02(f). The amount of any refund or credit of Taxes to which Rockwell or
Conexant is entitled to retain or receive pursuant to the foregoing sentence
shall be reduced to take account of any Taxes incurred by the Conexant Tax
Group, in the case of a refund or credit to which Rockwell is entitled, or the
Rockwell Tax Group, in the case of a refund or credit
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to which Conexant is entitled, upon the receipt of such refund or credit.
(b) CARRYBACKS. Unless the parties otherwise agree in writing,
Conexant shall elect and shall cause each member of the Conexant Tax Group to
elect, where permitted by law, to carry forward any net operating loss, net
capital loss, charitable contribution or other item arising after the
Distribution Date that could, in the absence of such election, be carried back
to a Pre-Distribution Taxable Period. Except as otherwise provided in this
Agreement, notwithstanding the provisions of Section 2.03(a), (i) any refund or
credit of Taxes resulting from the carryback of any item of Taxes attributable
to the Conexant Tax Group arising in a Post-Tax Indemnification Period to a Tax
Indemnification Period shall be for the account and benefit of the Conexant Tax
Group, and (ii) any refund or credit of Taxes resulting from the carryback of
any item of Taxes attributable to the Rockwell Tax Group arising in a Post-Tax
Indemnification Period to a Tax Indemnification Period shall be for the account
and benefit of the Rockwell Tax Group.
(c) REFUND CLAIMS. Rockwell shall be permitted to file at Rockwell's
sole expense, and Conexant shall reasonably cooperate with Rockwell in
connection with, any claims for refund of Taxes to which Rockwell is entitled
pursuant to this Section 2.03 or any other provision of this Agreement. Rockwell
shall reimburse Conexant for any reasonable out-of-pocket costs and expenses
incurred by any member of the Conexant Tax Group in connection with such
cooperation. Conexant shall be permitted to file at Conexant's sole expense, and
Rockwell shall reasonably cooperate with Conexant in connection with, any claims
for refunds of Taxes to which Conexant is entitled pursuant to this Section 2.03
or any other provision of this Agreement. Conexant shall reimburse Rockwell for
any reasonable out-of-pocket costs and expenses incurred by any member of the
Rockwell Tax Group in connection with such cooperation.
2.04 ALLOCATION OF STRADDLE PERIOD TAXES. In the case of any
Straddle Period:
(a) the Taxes of a member of the Rockwell Tax Group or the Conexant
Tax Group or its business, assets or activities for that portion of any Straddle
Period
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beginning after the Distribution Date (other than Taxes described in 2.04(a)
above) shall be computed on a "closing-of-the-books" basis as if such taxable
period began on the day after the Distribution Date, and, in the case of any
Taxes of a member of the Rockwell Tax Group or the Conexant Tax Group or its
business with respect to any equity interest in any partnership or other
"flowthrough" entity, as if a taxable period of such partnership or other
"flowthrough" entity began as of the day after the Distribution Date; and
(b) the Taxes of the Rockwell Tax Group and the Conexant Tax Group
with respect to any Tax Return for a Straddle Period which includes a member of
each of the Rockwell Tax Group and the Conexant Tax Group or their respective
businesses, assets or activities shall be allocated between the Rockwell Tax
Group, on the one hand, and the Conexant Tax Group, on the other hand,
determined in a manner analogous to that set forth in Treasury Regulation
Section 1.1552-1(a)(2).
2.05 SCHEDULE OF FOREIGN INCOME TAX RETURNS AND PAYMENTS. Following
the Distribution Date, Rockwell and Conexant agree to use their best efforts to
jointly prepare a schedule showing (a) each Foreign Income Tax Return required
to be filed by a member of the Rockwell Tax Group and each Foreign Income Tax
Return required to be filed by a member of the Conexant Tax Group for taxable
periods ending after [September 30, 1998] and (b) the party responsible for
filing such Foreign Income Tax Returns.
ARTICLE III
TAX INDEMNIFICATION; TAX CONTESTS
3.01 INDEMNIFICATION.
(a) ROCKWELL INDEMNIFICATION. Subject to Section 3.01(b) and Section
3.02, Rockwell shall indemnify, defend and hold harmless each member of the
Conexant Tax Group and each of their respective shareowners, directors,
officers, employees and agents and each of the heirs, executors, successors and
assigns of any of the foregoing from and against:
(i) all Taxes of the Rockwell Tax Group;
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(ii) all Taxes of the Conexant Tax Group for all Pre-Distribution
Taxable Periods and all Straddle Periods for which Rockwell is liable pursuant
to Section 2.02;
(iii) all liability as a result of Treasury Regulation Section
1.1502-6(a) (which imposes several liability on members of an affiliated group
that file a U.S. federal consolidated Income Tax return) or comparable U.S.
state or local provision for Income Taxes of any person which is or has ever
been affiliated with any member of the Rockwell Tax Group or with which any
member of the Rockwell Tax Group joins or has ever joined (or is or has ever
been required to join) in filing any consolidated, combined or unitary Income
Tax Return for any Tax period ending on or before or including the Distribution
Date;
(iv) all Taxes for any Tax period (whether beginning before, on or
after the Distribution Date) that would not have been payable but for the breach
by any member of the Rockwell Tax Group of any representation, warranty,
covenant or obligation under this Agreement;
(v) all liability for a breach by any member of the Rockwell Tax
Group of any representation, warranty, covenant or obligation under this
Agreement;
(vi) all Income Taxes and non-Income Taxes imposed in connection
with the transactions contemplated by the Transaction Agreements or any other
agreement entered into for the purpose of implementing the Distribution [other
than any transaction specified on Schedule 1.01];
(vii) all Taxes for which Rockwell is liable pursuant to Section
3.02; and
(viii) all liability for any reasonable legal, accounting,
appraisal, consulting or similar fees and expenses relating to the foregoing.
Notwithstanding the foregoing and subject to Section 3.01(b) and Section 3.02,
Rockwell shall not indemnify, defend or hold harmless any member of the Conexant
Tax Group from any liability for Taxes (other than Taxes resulting from (I) the
failure of the Distribution to qualify as a reorganization described in
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Section 368(a)(1)(D) of the Code, (II) the failure of the Distribution to
qualify as tax-free to Rockwell under Section 361(c) of the Code or (III) the
failure of any pre-Distribution transaction specified in Schedule 3.01 to be
non-taxable) attributable to any action (including the making of an election
under Section 338 of the Code) taken by any member of the Conexant Tax Group
after the Distribution (other than any such action expressly required or
otherwise expressly contemplated by the Transaction Agreements or any other
agreement entered into for the purpose of implementing the Distribution or taken
in the ordinary course of business) (a "POST-DISTRIBUTION TAX ACT").
(b) CONEXANT INDEMNIFICATION. Conexant shall be liable for, and
shall indemnify, defend and hold harmless each member of the Rockwell Tax Group
and each of the respective shareowners, directors, officers, employees and
agents and each of the heirs, executors, successors and assigns of any of the
foregoing from and against:
(i) all Taxes of any member of the Conexant Tax Group (other than
Taxes for which Rockwell provides indemnification pursuant to Section 3.01(a));
(ii) all Taxes for any Tax period (whether beginning before, on or
after the Distribution Date) that would not have been payable but for the breach
by any member of the Conexant Tax Group of any representation, warranty,
covenant or obligation under this Agreement;
(iii) all liability for a breach by any member of the Conexant Tax
Group of any representation, warranty, covenant or obligation under this
Agreement;
(iv) all Taxes for which Conexant is liable pursuant to Section
3.02;
(v) all Taxes arising under any IRS Gain Recognition Agreement
specified in Schedule 5.03 or any revised or successor agreement thereto;
(vi) all Taxes attributable to a Post-Distribution Tax Act; and
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(vii) all liability for any reasonable legal, accounting, appraisal,
consulting or similar fees and expenses relating to the foregoing.
3.02 CONEXANT TAX ACTS.
(a) Notwithstanding Section 3.01, Conexant agrees to indemnify,
defend and hold harmless each member of the Rockwell Tax Group and each of the
respective shareowners, directors, officers, employees and agents and each of
the heirs, executors, successors and assigns of any of the foregoing from and
against any Taxes resulting from any Conexant Tax Act which causes (i) the
Distribution to fail to qualify as a reorganization described in Section
368(a)(1)(D) of the Code, (ii) the Distribution to fail to qualify as tax-free
to Rockwell under Section 361(c) of the Code, or (iii) any pre-Distribution
transaction specified in Schedule 3.01 undertaken in connection with the
Distribution or the Automotive Distribution to become taxable. A Conexant Tax
Act shall mean any action specified on Schedule 3.02(a) attached hereto.
(b) Conexant shall, and shall cause each member of the Conexant Tax
Group to, comply with and take no action inconsistent with the Conexant Tax
Representation Letter, unless, pursuant to a favorable ruling letter obtained
from the IRS which is satisfactory to Rockwell or the advice of Chadbourne &
Parke LLP or other nationally recognized tax counsel to Rockwell, which advice
shall be satisfactory to Rockwell, such act or omission would not adversely
affect the U.S. federal Income Tax consequences of the Distribution to Rockwell
or the shareowners of Rockwell. Notwithstanding Sections 3.01(b)(iii),
3.01(b)(iv) and 3.01(b)(vi), the parties intend that the sole remedy for breach
of the covenants contained in this Section 3.02(b) shall be as set forth in
Section 3.02(a).
(c) Notwithstanding the foregoing, a Conexant Tax Act shall not
include any transaction or action specifically disclosed or specifically
described in any of the Transaction Agreements or, except as specifically set
forth in Schedule 3.01 occurring on or prior to the Distribution Date, any
action taken on or prior to the Distribution Date. A Conexant Tax Act shall not
include any action on the part of any member of the Rockwell Tax Group. Rockwell
agrees to indemnify and hold each member
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of the Conexant Tax Group harmless from and against any Taxes resulting from the
failure of the Distribution to qualify (i) as a reorganization described in
Section 368(a)(1)(D) of the Code or (ii) as tax-free to Rockwell under Section
361(c) of the Code, except where such failure is attributable to a Conexant Tax
Act.
3.03 NOTICE OF INDEMNITY. Whenever a party hereto (hereinafter an
"INDEMNITEE") becomes aware of the existence of an issue raised by any Tax
Authority which could reasonably be expected to result in a determination that
would increase the liability for any Tax of the other party hereto or any member
of its Tax Group for any Tax period or require a payment hereunder by the other
party (hereinafter an "INDEMNITY ISSUE"), the Indemnitee shall in good faith
promptly give notice to such other party (hereinafter the "INDEMNITOR") of such
Indemnity Issue. The failure of the Indemnitee to give such notice shall not
relieve the Indemnitor of its obligations under this Agreement, except to the
extent such Indemnitor or a member of its Tax Group is actually prejudiced by
such failure to give notice.
3.04 PAYMENTS.
(a) TIMING ADJUSTMENTS. (i) Timing Differences. If a Tax audit
proceeding or an amendment of a Tax Return results in a Timing Difference, and
such Timing Difference results in a decrease in an indemnity obligation Rockwell
has or would otherwise have under Section 3.01(a) and/or an increase in the
amount of a Tax refund or credit to which Rockwell is entitled under Section
2.03, then in each Post-Tax Indemnification Period in which the Conexant Tax
Group Actually Realizes an Income Tax Detriment, Rockwell shall pay to Conexant
an amount equal to such Income Tax Detriment; provided, however, that the
aggregate payments which Rockwell shall be required to make under this Section
3.04(a)(i) with respect to any Timing Difference shall not exceed the aggregate
amount of the Income Tax Benefits realized by the Rockwell Tax Group for all
taxable periods and the Conexant Tax Group for all Tax Indemnification Periods
as a result of such Timing Difference. Rockwell shall make all such payments
within ten days after Conexant notifies Rockwell that the relevant Income Tax
Detriment has been Actually Realized.
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(ii) Reverse Timing Differences. If a Tax audit proceeding or an
amendment to a Tax Return results in a Reverse Timing Difference, and such
Reverse Timing Difference results in an increase in an indemnity payment
obligation of Rockwell under Section 3.01 and/or a decrease in the amount of a
Tax refund or credit to which Rockwell is or would otherwise be entitled under
Section 2.03, then in each Post-Tax Indemnification Period in which the Conexant
Tax Group Actually Realizes an Income Tax Benefit, Conexant shall pay to
Rockwell within ten days after Conexant has Actually Realized such Income Tax
Benefit an amount equal to such Income Tax Benefit, provided, however, that the
aggregate payments which Conexant shall be required to make under this Section
3.04(a)(ii) with respect to Reverse Timing Differences shall not exceed the
aggregate amount of the Income Tax Detriments realized by the Conexant Tax Group
and the Rockwell Tax Group for all Tax Indemnification Periods as a result of
such Reverse Timing Difference.
(b) TIME FOR PAYMENT. Except as otherwise provided in this Section
3.04(b), any indemnity payment required to be made pursuant to this Agreement
shall be paid within thirty days after the indemnified party makes written
demand upon the indemnifying party, provided that in no event shall such payment
be required to be made earlier than five business days prior to the date on
which the relevant Taxes (including estimated Taxes) are required to be paid (or
would be required to be paid if no such Taxes are due) to the relevant Tax
Authority. Notwithstanding any other provision in this Agreement, to simplify
the administration of this Agreement, the payment of any amount less than
$100,000 required to be made pursuant to this Agreement by one party hereto to
another party hereto need not be made to such other party prior to thirty days
following the later of (i) the close of the calendar quarter during which such
payment obligation arose and (ii) the day during such calendar quarter when the
aggregate amount of all such less than $100,000 payment obligations arising
during such calendar quarter exceeds $500,000. Unless otherwise specified by the
recipient for items exceeding $250,000, any such payment may be made on a net
Tax basis (i.e., reduced to take account of any net Tax benefit to be realized
by the recipient (computed at the effective Tax rate set forth in Section
3.04(c)) to the extent such recipient is entitled to a corresponding deduction.
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(c) PAYMENTS NET OF TAXES AND TAX BENEFITS. The amount of any
payment under this Agreement shall be (i) reduced to take into account any net
Tax benefit realized by the recipient's Tax Group arising from the incurrence or
payment by such recipient's Tax Group of any amount in respect of which such
payment is made and (ii) increased to take into account any net Tax cost
incurred by the recipient's Tax Group as a result of the receipt or accrual of
payments hereunder (grossed-up for such increase), in each case determined by
treating the recipient as recognizing all other items of income, gain, loss,
deduction or credit before recognizing any item arising from the receipt of
accrual of any payment hereunder. In determining the amount of any such Tax
benefit or Tax cost, the recipient's Tax Group shall be deemed to be subject to
(A) U.S. federal Income Taxes and foreign Income Taxes at the maximum statutory
rate then in effect and (B) U.S. state and local Income Taxes at an assumed rate
of [FIVE] percent net of U.S. federal Income Tax benefits. Except as otherwise
provided in this Agreement or unless the parties otherwise agree to an
alternative method for determining the present value of any such anticipated Tax
benefit or Tax cost, any payment hereunder shall initially be made without
regard to this section and shall be increased or reduced to reflect any such net
Tax cost (including gross-up) or net Tax benefit only after the recipient's Tax
Group has Actually Realized such Tax cost or Tax benefit.
(d) RIGHT TO OFFSET. Any party making a payment under this Agreement
shall have the right to reduce any such payment by any undisputed amounts owed
to it by the other party to this Agreement.
(e) CHARACTERIZATION OF PAYMENTS. It is the intention of the parties
to this Agreement that payments made pursuant to this Agreement are to be
treated as relating back to the Distribution as an adjustment to the assets and
liabilities transferred thereunder, and the parties shall not take any position
inconsistent with such intention before any Tax Authority, except to the extent
that a final determination (as defined in Section 1313 of the Code) with respect
to the recipient party causes any such payment not to be so treated.
3.05 TAX CONTESTS. The Indemnitor and its representatives, at the
Indemnitor's expense, shall be entitled to participate (a) in all conferences,
meetings
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and proceedings with any Tax Authority, the subject matter of which is or
includes an Indemnity Issue and (b) in all appearances before any court, the
subject matter of which is or includes an Indemnity Issue. The party who has
responsibility for filing the Tax Return under this Agreement (the "RESPONSIBLE
PARTY") with respect to which there could be an increase in liability for any
Tax or with respect to which a payment could be required hereunder shall have
the right to decide as between the parties hereto how such matter is to be dealt
with and finally resolved with the appropriate Tax Authority and shall control
all audits and similar proceedings. If no Tax Return is or was required to be
filed in respect of an Indemnity Issue, the Indemnitor shall be treated as the
Responsible Party with respect thereto. The Responsible Party agrees to
cooperate in the settlement of any Indemnity Issue with the other party and to
take such other party's interests into account. Notwithstanding any other
provision of this Agreement, if Rockwell has materially satisfied its
obligations under this Agreement and if Conexant fails to permit Rockwell to
control any audit or proceeding regarding any Indemnity Issue relating to (i)
the qualification of the Distribution as a "reorganization" within the meaning
of Section 368(a)(1)(D) of the Code or as tax-free to Rockwell under Section
361(c) of the Code, (ii) the qualification of any transactions undertaken
pursuant to the Transaction Agreements or described in the Ruling Request as
transactions described in Section 355 of the Code, "reorganizations" within the
meaning of Section 368(a)(1)(D) of the Code or as otherwise tax-free
transactions or (iii) the qualification of any transactions undertaken pursuant
to the Automotive Transaction Agreements or described in the Automotive Ruling
Request as transactions described in Section 355 of the Code, "reorganizations"
within the meaning of Section 368(a)(1)(D) of the Code or as otherwise tax-free
transactions, then Rockwell shall not be liable for and shall not indemnify the
Conexant Tax Group for any Tax deficiency resulting from an adverse
determination of such Indemnity Issue.
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ARTICLE IV
COMPENSATION PAYMENTS; OPTIONS; INVENTORY WRITEDOWN; CELERITAS LITIGATION;
CALIFORNIA MANUFACTURER'S INVESTMENT CREDIT
4.01 COMPENSATION PAYMENTS.
(a) TAX DEDUCTIONS. Notwithstanding anything to the contrary in this
Agreement, unless Rockwell and Conexant otherwise agree in writing, (i) the
Boeing Tax Group (and not the Conexant Tax Group) shall claim the
post-Distribution Date Tax deductions in respect of Compensation Payments paid
to Conexant Group Employees and Former Employees who ceased employment on or
before December 6, 1996 and Rockwell shall pay to Conexant the amount received
from Boeing as a result of any Tax benefit realized arising in respect of such
Tax deductions within ten days after such amount is received by Rockwell, (ii)
the Conexant Tax Group (and not the Rockwell Tax Group) shall claim the
post-Distribution Date Tax deductions in respect of Compensation Payments paid
by the Conexant Tax Group to all other Conexant Group Employees and Former
Employees, and (iii) the Rockwell Tax Group (and not the Conexant Tax Group)
shall claim the post-Distribution Date Tax deductions in respect of Compensation
Payments paid by the Rockwell Tax Group to all other Conexant Group Employees
and Former Employees.
(b) NOTICES, WITHHOLDING, REPORTING. The party responsible for
making the Compensation Payments pursuant to the Employee Matters Agreement
shall withhold applicable Taxes and satisfy applicable Tax reporting obligations
in connection with the Compensation Payments made to all Conexant Group
Employees and Former Employees.
(c) TAX AUDIT ADJUSTMENTS. Notwithstanding the provisions of Section
4.01(a), in the event a Tax audit proceeding shall determine (by settlement or
otherwise), or the parties otherwise determine pursuant to Section 4.06, that
all or a portion of the Tax deductions in respect of Compensation Payments paid
to Conexant Group Employees or Former Employees was not available to the party
claiming the Tax deduction, then the appropriate party shall claim such Tax
deductions (by an amended Tax Return or otherwise) and shall pay to the
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party which had previously claimed such Tax deduction, within ten days after
such Tax deduction has been Actually Realized by the such appropriate party, the
amount of the resulting Tax benefit to such appropriate party.
4.02 STOCK OPTIONS.
(a) STOCK OPTION ADJUSTMENTS. Pursuant to the terms of the Employee
Matters Agreement, Rockwell Common Stock Options outstanding at the time of the
Distribution will be adjusted as follows:
(i) Rockwell Common Stock Options held by employees of the Conexant
Tax Group at the time of the Distribution will be replaced with Conexant Common
Stock Options;
(ii) except as provided in (iii) below, Rockwell Common Stock
Options held by persons other than employees of the Conexant Tax Group at the
time of the Distribution will be adjusted so that following the Distribution
each such holder will hold Rockwell Common Stock Options and Conexant Common
Stock Options; and
(iii) Rockwell Common Stock Options granted prior to January 1, 1990
or after August 31, 1998 held by persons other than employees of the Conexant
Tax Group at the time of the Distribution will remain Rockwell Common Stock
Options.
(b) TAX DEDUCTIONS. Notwithstanding anything to the contrary in this
Agreement, unless the IRS issues a contrary private letter ruling to Rockwell or
Conexant, or Rockwell and Conexant otherwise agree in writing, (i) the Rockwell
Tax Group or the Boeing Tax Group (and not the Conexant Tax Group) shall claim
the post-Distribution Date Tax deductions in respect of Rockwell Common Stock
Options and (ii) the Conexant Tax Group (and not the Rockwell Tax Group or the
Boeing Tax Group) shall claim any post-Distribution Date Tax deductions in
respect of Conexant Common Stock Options.
(c) NOTICES, WITHHOLDING, REPORTING. (i) Rockwell shall promptly
notify Conexant of any post-Distribution Date event giving rise to income to any
Conexant Group Employees and Former Employees in connection with the Rockwell
Common Stock Options and, if
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required by law, Conexant shall withhold applicable Taxes and satisfy applicable
Tax reporting obligations in connection therewith. Rockwell shall within ten
days of demand thereof reimburse Conexant for all reasonable out-of-pocket
expenses incurred in connection with the Rockwell Common Stock Options,
including with respect to incremental Tax reporting obligations and any
incremental employment Tax obligations; provided that Conexant shall use
reasonable efforts to collect any such amounts required to be paid by Conexant
Group Employees and Former Employees from such Conexant Group Employees and
Former Employees.
(ii) Conexant shall promptly notify Rockwell of any
post-Distribution Date event giving rise to income to any non-Conexant Group
Employees and Former Employees in connection with the Conexant Common Stock
Options and, if required by law, Rockwell shall withhold applicable Taxes and
satisfy applicable Tax reporting obligations in connection therewith. Conexant
shall within ten days of demand thereof reimburse Rockwell for all reasonable
out-of-pocket expenses incurred in connection with the Conexant Common Stock
Options, including with respect to incremental Tax reporting obligations and any
incremental employment Tax obligations; provided that Rockwell shall use
reasonable efforts to collect any such amounts required to be paid by
non-Conexant Group Employees and Former Employees from such non-Conexant Group
Employees and Former Employees.
(d) TAX AUDIT ADJUSTMENTS. Notwithstanding the provisions of Section
4.02(b), in the event a Tax audit proceeding shall determine (by settlement or
otherwise), or the parties otherwise determine pursuant to Section 4.06, that
all or a portion of the Tax deductions in respect of Rockwell Common Stock
Options or Conexant Common Stock Options should have been claimed by the
Conexant Tax Group or the Rockwell Tax Group, respectively, the Conexant Tax
Group or the Rockwell Tax Group, respectively, shall claim such Tax deductions
(by an amended Tax Return or otherwise) and shall pay to Rockwell or Conexant,
as the case may be, the amount of any Tax refund or credit arising in respect of
such Tax deduction within ten days after such Tax refund or credit is Actually
Realized by the Conexant Tax Group or the Rockwell Tax Group, as the case may
be.
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4.03 INVENTORY WRITEDOWN.
(a) TAX DEDUCTIONS. Notwithstanding anything to the contrary in this
Agreement, unless Rockwell and Conexant otherwise agree in writing, the Rockwell
Tax Group (and not the Conexant Tax Group) shall claim the Tax deductions in
respect of the Inventory Writedown as set forth in Schedule 4.03 attached
hereto.
(b) TAX AUDIT ADJUSTMENTS. Notwithstanding the provisions of Section
4.03(a), in the event a Tax audit proceeding shall determine (by settlement or
otherwise), or the parties otherwise determine pursuant to Section 4.06 or
otherwise, that all or a portion of the Tax deductions in respect of the
Inventory Writedown should be or should have been claimed by the Conexant Tax
Group, the Conexant Tax Group shall claim such Tax deductions (by an amended Tax
Return or otherwise) and shall pay to Rockwell the amount of any Tax refund or
credit arising in respect of such Tax deduction within ten days after such Tax
refund or credit is Actually Realized by the Conexant Tax Group.
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4.04 CELERITAS LITIGATION.
(a) TAX DEDUCTIONS. Notwithstanding anything to the contrary in this
Agreement, unless the IRS issues a contrary private letter ruling to Rockwell or
Conexant, or Rockwell and Conexant otherwise agree in writing, (i) the Rockwell
Tax Group (and not the Conexant Tax Group) shall claim the tax deduction in
respect of amounts paid on or before December 31, 1998 in connection with the
Celeritas Technologies, Ltd. litigation as more fully described in Schedule 4.05
attached hereto.
(b) TAX AUDIT ADJUSTMENTS. Notwithstanding the provisions of Section
4.05(a), in the event a Tax audit proceeding shall determine (by settlement or
otherwise), or the parties otherwise determine pursuant to Section 4.06 or
otherwise, that all or a portion of the Tax deductions in respect of the
Celeritas Technologies, Ltd. litigation should be or should have been claimed by
the Conexant Tax Group, the Conexant Tax Group shall claim such Tax deductions
(by an amended Tax Return or otherwise) and shall pay to Rockwell the amount of
any Tax refund or credit arising in respect of such Tax deduction within ten
days after such Tax refund or credit is Actually Realized by the Conexant Tax
Group.
4.05 TAX BENEFIT ATTRIBUTABLE TO CALIFORNIA MANUFACTURERS INVESTMENT
CREDIT CARRYFORWARD. Notwithstanding anything in this Agreement to the contrary,
the Conexant Tax Group shall pay to the Rockwell Tax Group the amount of any
savings in Taxes attributable to California manufacturer's investment credit
carryforwards as set forth in Schedule 4.06 hereto.
4.06 CHANGE IN LAW. Notwithstanding the agreement with respect to
reporting of Tax items and the claiming of the deductions set forth in Article 4
of this Agreement, neither the Conexant Tax Group nor the Rockwell Tax Group
shall have any obligation to report any such Tax items or claim such deductions
as set forth in such Article in the event that either such party determines,
based on an opinion of nationally recognized tax counsel, which opinion shall be
satisfactory to the other party, that there is no substantial authority to
support reporting such Tax items or claiming such deductions on a Tax Return
filed by such party as a result of a change in or amendment to any law or
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regulation, or any change in the official interpretation thereof, effective or
occurring after the date of this Agreement, and such Tax Group provides prompt
notice to the other Tax Group of any such determination.
ARTICLE V
COOPERATION AND EXCHANGE OF INFORMATION
5.01 INCONSISTENT ACTIONS. Each party to this Agreement agrees (i)
to, and to cause each of the relevant members of its Tax Group to, report the
Distribution as a transaction described in Section 368(a)(1)(D) of the Code on
all Tax Returns and other filings, (ii) to use its best efforts to ensure that
the Distribution receives such treatment for U.S. federal Tax purposes and (iii)
that, unless it has obtained the prior written consent of the other party, it
(and the members of its Tax Group) shall not take any action inconsistent with,
or fail to take any action required by, the Transaction Agreements.
5.02 RULING REQUEST. Each party hereto represents that neither it
(nor any of the members of its Tax Group) will take or has any plan or intention
to take any action which is inconsistent with any factual statements,
representations or other similar conditions contained in the Ruling Request or
in the Ruling.
5.03 IRS GAIN RECOGNITION AGREEMENT; NOTIFICATION OF CERTAIN
DISPOSITIONS. Conexant shall give Rockwell at least sixty days prior written
notice in the event that at any time prior to the date which is ten years after
the Distribution Date, Conexant directly or indirectly disposes of all or any
portion of the ownership interest in, or all or a substantial portion of the
assets of, any entity identified on Schedule 5.03. Such notice shall describe
any such disposition in sufficient detail to enable Rockwell (i) to comply with
the requirements of Section 367 of the Code, applicable regulations thereunder
and any IRS Gain Recognition Agreement, and (ii) if applicable, to enter into a
revised IRS Gain Recognition Agreement under Section 367 of the Code and the
applicable regulations thereunder. At the time of the delivery of such notice,
Conexant
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shall provide to Rockwell security reasonably satisfactory to Rockwell
for the performance of all obligations of Conexant under Section 3.01(b) hereof
and this Section 5.03 in respect of the disposition referred to in such notice.
5.04 COOPERATION AND EXCHANGE OF INFORMATION. Each party hereto
agrees to provide, and to cause each member of its Tax Group to provide, such
cooperation and information as such other party shall request, on a timely
basis, in connection with the preparation or filing of any Tax Return or claim
for Tax refund not inconsistent with this Agreement or in conducting any Tax
audit, Tax dispute, or otherwise in respect of Taxes or to carry out the
provisions of this Agreement. To the extent necessary to carry out the purposes
of this Agreement and subject to the other provisions of this Agreement, such
cooperation and information shall include without limitation the non-exclusive
designation of an officer of Rockwell as an officer of Conexant and each of its
affiliates for the purpose of signing Tax Returns, cashing refund checks,
pursuing refund claims, dealing with Tax Authorities and defending audits as
well as promptly forwarding copies of appropriate notices and forms or other
communications received from or sent to any Tax Authority which relate to the
Conexant Tax Group for the Tax Indemnification Period and providing copies of
all relevant Tax Returns for the Tax Indemnification Period, together with
accompanying schedules and related workpapers, documents relating to rulings or
other determinations by Tax Authorities, including without limitation, foreign
Tax Authorities, and records concerning the ownership and Tax basis of property,
which either party may possess. Subject to the rights of the Conexant Tax Group
under the other provisions of this Agreement, such officer shall have the
authority to execute powers of attorney (including Form 2848) on behalf of each
member of the Conexant Tax Group with respect to Tax Returns for the Tax
Indemnification Period. Each party to this Agreement shall make, or shall cause
its affiliates to make, its employees and facilities available on a mutually
convenient basis to provide an explanation of any documents or information
provided hereunder.
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5.05 TAX RECORDS.
(a) Rockwell and Conexant agree to (and to cause each member of
their respective Tax Group to) (i) retain all Tax Returns, related schedules and
workpapers, and all material records and other documents as required under
Section 6001 of the Code and the regulations promulgated thereunder relating
thereto existing on the date hereof or created through the Distribution Date,
for a period of at least ten years following the Distribution Date and (ii)
allow the party to this Agreement, at times and dates reasonably acceptable to
the retaining party, to inspect, review and make copies of such records, as
Rockwell and Conexant may reasonably deem necessary or appropriate from time to
time. In addition, after the expiration of such ten-year period, such Tax
Returns, related schedules and workpapers, and material records shall not be
destroyed or otherwise disposed of at any time, unless, prior to such
destruction or disposal, (A) the party proposing to destroy or otherwise dispose
of such records shall provide no less than 30 days' prior written notice to the
other party, specifying in reasonable detail the records proposed to be
destroyed or disposed of and (B) if a recipient of such notice shall request in
writing prior to the scheduled date for such destruction or disposal that any of
the records proposed to be destroyed or disposed of be delivered to such
requesting party, the party proposing the destruction or disposal shall promptly
arrange for the delivery of such requested records at the expense of the party
requesting such records.
(b) Notwithstanding anything in this Agreement to the contrary, if
any party fails to comply with the requirements of Section 5.05(a) hereof, the
party failing so to comply shall be liable for, and shall hold the other party,
harmless from, any Taxes (including without limitation, penalties for failure to
comply with the record retention requirements of the Code) and other costs
resulting from such party's failure to comply.
ARTICLE VI
MISCELLANEOUS
6.01 ENTIRE AGREEMENT; CONSTRUCTION. This Agreement, the
Distribution Agreement, all other
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Transaction Agreements, including any annexes, schedules and exhibits hereto or
thereto, and other agreements and documents referred to herein and therein, will
together constitute the entire agreement between the parties with respect to the
subject matter hereof and thereof and shall supersede all prior negotiations,
agreements and understandings of the parties of any nature, whether oral or
written, with respect to such subject matter. Notwithstanding any other
provisions in this Agreement to the contrary, in the event and to the extent
that there shall be a conflict relating to Taxes between the provisions of this
Agreement and the provisions of the Distribution Agreement or any other
Transaction Agreement, the provisions of this Agreement shall control.
6.02 EFFECTIVENESS. All covenants and agreements of the parties
contained in this Agreement shall be subject to and conditioned upon the
Distribution becoming effective.
6.03 SURVIVAL OF AGREEMENTS. Except as otherwise contemplated by
this Agreement, all covenants and agreements of the parties contained in this
Agreement shall remain in full force and effect and shall survive the Time of
Distribution.
6.04 GOVERNING LAW. This Agreement will be governed by and construed
in accordance with the internal laws of the State of New York applicable to
contracts made and to be performed entirely within such State, without regard to
the conflicts of law principles of such State.
6.05 NOTICES. All notices, requests, claims, demands and other
communications required or permitted to be given hereunder will be in writing
and will be delivered by hand or telecopied or sent, postage prepaid, by
registered, certified or express mail or reputable overnight courier service and
will be deemed given when so delivered by hand or telecopied, or three business
days after being so mailed (one business day in the case of express mail or
overnight courier service). All such notices, requests, claims, demands and
other communications will be addressed as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive such
notice:
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(a) If to Rockwell:
Rockwell International Corporation
600 Anton Boulevard, Suite 700
Costa Mesa, California 92626
Attention: Mr. W. Michael Barnes
Senior Vice President,
Finance and Planning and
Chief Financial Officer
Telecopy: (714) 424-4218
with a copy to:
Rockwell International Corporation
600 Anton Boulevard, Suite 700
Costa Mesa, California 92626
Attention: William J. Calise, Jr., Esq.
Senior Vice President,
General Counsel and
Secretary
Telecopy: (714) 424-4265
(b) If to Conexant:
Conexant Systems, Inc.
4311 Jamboree Road
Newport Beach, California 92658-8102
Attention: Mr. Dwight W. Decker
President
Telecopy: (949) 221-4318
with a copy to:
Conexant Systems, Inc.
4311 Jamboree Road
Newport Beach, California 92658-8102
Attention: [ ].
[ ]
Telecopy: (949) 221-[ ]
34
<PAGE> 38
6.06 CONSENT TO JURISDICTION. Each of the parties hereto irrevocably
submits to the exclusive jurisdiction of (a) the Court of Chancery in and for
the State of Delaware and the Superior Court in and for the State of Delaware
and (b) the U.S. District Court for the District of Delaware, for the purposes
of any suit, action or other proceeding arising out of this Agreement or any
transaction contemplated hereby (and agrees not to commence any action, suit or
proceeding relating thereto except in such courts). Each of the parties further
agrees that service of any process, summons, notice or document hand delivered
or sent by U.S. registered mail to such party's respective address set forth in
Section 6.05 will be effective service of process for any action, suit or
proceeding in Delaware with respect to any matters to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence. Each of the
parties irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Court of Chancery in and for the
State of Delaware and the Superior Court in and for the State of Delaware or
(ii) the U.S. District Court for the District of Delaware, and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum.
6.07 AMENDMENTS. This Agreement may not be amended, modified or
supplemented except by a written agreement executed by Rockwell and Conexant.
6.08 SUCCESSORS AND ASSIGNS. The rights and benefits under this
Agreement may not be assigned and the duties and obligations may not be
delegated by any party in whole or in part without the prior written consent of
the other party, which consent shall not be unreasonably withheld or delayed.
This Agreement and all of the provisions hereof shall be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns.
6.09 CAPTIONS; CURRENCY. The article, section and paragraph captions
herein and the table of contents hereto are for convenience of reference only,
do not constitute part of this Agreement and will not be deemed to limit or
otherwise affect any of the provisions
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hereof. Unless otherwise specified, all references herein to numbered articles
or sections are to articles and sections of this Agreement and all references
herein to schedules are to schedules to this Agreement. Unless otherwise
specified, all references contained in this Agreement or in any schedule
referred to herein to dollars or "$" shall mean U.S. dollars.
6.10 SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, will remain in full force and effect and will in no way be
affected, impaired or invalidated thereby. If the economic or legal substance of
the transactions contemplated hereby is affected in any manner adverse to the
party as a result thereof, the parties will negotiate in good faith in an effort
to agree upon a suitable and equitable substitute provision to effect the
original intent of the parties.
6.11 NO THIRD PARTY BENEFICIARIES. Except for the provisions of
Article III relating to Tax Indemnification, this Agreement is solely for the
benefit of the parties hereto and the respective members of their Tax Group and
should not be deemed to confer upon third parties (including any employee of
Rockwell or Conexant or of any Rockwell or Conexant subsidiary) any remedy,
claim, reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
6.12 SCHEDULES. All schedules attached hereto are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein. Capitalized terms used in the schedules hereto but not otherwise defined
therein will have the respective meanings assigned to such terms in this
Agreement.
6.13 TERMINATION. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Time of Distribution by and in
the sole discretion of the Rockwell Board without the approval of Conexant or of
Rockwell's shareowners. In the event of
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<PAGE> 40
such termination, no party will have any liability of any kind to any other
party on account of such termination.
6.14 WAIVERS; REMEDIES. No failure or delay by any party hereto in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of any party hereto of any right, power
or privilege hereunder operate as a waiver of any other right, power or
privilege hereunder, nor will any single or partial exercise of any right, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder. The rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies which the parties may otherwise have at law or equity.
6.15 COUNTERPARTS. This Agreement may be executed in separate
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts will together constitute the same agreement.
6.16 PERFORMANCE. Each party hereto will cause to be performed, and
hereby guarantees the performance of all actions, agreements and obligations set
forth herein to be performed by any subsidiary or any member of such party's Tax
Group.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties as of the date first
hereinabove written.
ROCKWELL INTERNATIONAL CORPORATION
By:
Name: William J. Calise, Jr.
Title: Senior Vice President,
General Counsel and
Secretary
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CONEXANT SYSTEMS, INC.
By:
Name: [ ]
Title: [ ]
38
<PAGE> 1
EXHIBIT 10.6
CONEXANT SYSTEMS, INC.
1998 STOCK OPTION PLAN
1. Purpose
In connection with the Conexant Distribution, certain stock options
granted pursuant to Rockwell's Option Plans will be adjusted so that following
the Conexant Distribution those options will entitle the respective grantees to
purchase Conexant Shares in addition to or instead of Rockwell Shares, and
Conexant will assume Rockwell's obligations with respect to those adjusted stock
options for Conexant Shares. The purpose of the 1998 Stock Option Plan is to
provide a means for Conexant to perform its obligations with respect to those
adjusted stock options for Conexant Shares and to foster creation of and enhance
Conexant shareowner value by linking the compensation of officers and other key
employees of Conexant, all of whose stock options granted pursuant to Rockwell's
Option Plans will be converted into stock options for Conexant Shares, to
increases in the price of Conexant stock, thus providing means by which persons
of outstanding abilities can be motivated and retained.
2. Definitions
For the purpose of the Plan, the following terms shall have the meanings
set forth below:
a. Boeing. The Boeing Company, a Delaware corporation.
Boeing North American. Boeing North American, Inc. (formerly Rockwell
International Corporation), a Delaware corporation incorporated in 1928 that is
the surviving corporation in a merger with Boeing NA, Inc., a wholly-owned
subsidiary of Boeing.
Board of Directors. The Board of Directors of Conexant.
Change of Control. Any of the following:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
Person) of beneficial ownership (within the
<PAGE> 2
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more
of either (A) the then outstanding shares of Common Stock of Conexant (the
Outstanding Conexant Common Stock) or (B) the combined voting power of the
then outstanding voting securities of Conexant entitled to vote generally
in the election of directors (the Outstanding Conexant Voting Securities);
provided, however, that for purposes of this subparagraph (i), the
following acquisitions shall not constitute a Change of Control: (w) any
acquisition directly from Conexant, (x) any acquisition by Conexant, (y)
any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by Conexant, Rockwell or any corporation controlled by
Conexant or Rockwell or (z) any acquisition pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (iii) of this
Section 2(d); or
(ii) Individuals who, as of the Conexant Distribution Date, constitute
the Board of Directors (the Incumbent Board) cease for any reason to
constitute at least a majority of the Board of Directors; provided,
however, that any individual becoming a director subsequent to that date
whose election, or nomination for election by Conexant's shareowners, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board of Directors;
or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
Conexant or the acquisition of assets of another entity (a Corporate
Transaction), in each case, unless, following such Corporate Transaction,
(A) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Conexant Common Stock
and Outstanding Conexant Voting Securities immediately prior to such
Corporate Transaction beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined
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voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns the
Corporation or all or substantially all of the Corporation's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction of the Outstanding Conexant Common Stock and Outstanding
Conexant Voting Securities, as the case may be, (B) no Person (excluding
any employee benefit plan (or related trust) of the Corporation or such
corporation resulting from such Corporate Transaction) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership
existed prior to the Corporate Transaction and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such Corporate Transaction were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board
of Directors, providing for such Corporate Transaction; or
(iv) Approval by Conexant's shareowners of a complete liquidation or
dissolution of Conexant.
b. Committee. The Compensation and Management Development Committee
designated by the Board of Directors from among its members excluding any
members thereof who hold an Option governed by the Plan.
Conexant. Conexant Systems, Inc., a Delaware corporation.
Conexant Distribution. The pro rata distribution of shares of Conexant Common
Stock to Rockwell's shareowners.
Conexant Distribution Date. The Distribution Date as defined in the Distribution
Agreement between Rockwell and Conexant relating, among other things, to the
distribution of Conexant shares to Rockwell's shareowners.
Conexant Option. An option to purchase Conexant Shares derived from
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<PAGE> 4
adjustment of a Rockwell Option in connection with the Conexant Distribution.
Conexant Shares. Shares of Common Stock of Conexant.
Corporation. Rockwell and those of its subsidiary corporations or affiliates
designated by the Committee to participate in any of Rockwell's Option Plans and
after consummation of the Conexant Distribution, Conexant and its direct or
indirect subsidiary corporations.
Employees. Officers and other key employees of the Corporation, but not
directors who are not also employees of the Corporation.
Fair Market Value. The closing price of the Common Stock of Conexant as reported
in the NASDAQ reporting system on the date of a determination (or on the next
preceding day such stock was traded if it was not traded on the date of a
determination).
Merger Closing Date. The Closing Date as defined in the Agreement and Plan of
Merger dated as of July 31, 1996 among Rockwell International Corporation, a
Delaware corporation incorporated in 1928, Boeing and Boeing NA, Inc.
Meritor. Meritor Automotive, Inc., a Delaware corporation.
c. Meritor Distribution Date. The Distribution Date as defined in the
Distribution Agreement between Rockwell and Meritor relating, among other
things, to the distribution of shares of Meritor Common Stock to Rockwell's
shareowners.
Non-Employee Director. A present or former Non-Employee Director of Rockwell.
Participant. (i) Any Employee (a Continuing USA Participant) as of the close of
business on May 31, 1996 who then held one or more outstanding Rockwell Options
and who on or before the close of business on the Merger Closing Date became an
employee of United Space Alliance, LLC (USA) immediately upon termination of
employment (by retirement or otherwise) by Rockwell or a subsidiary corporation
of Rockwell, but only for purposes of determining such an Employee's rights with
respect to his or her outstanding Conexant Options and only so long as such
Employee shall remain an employee of USA and Boeing North American, Boeing or
any of their respective subsidiaries shall continue to own at least 50% of the
total ownership interests in USA; (ii) any Employee (a Continuing
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<PAGE> 5
Boeing Participant) as of the opening of business on the Merger Closing Date who
then held one or more outstanding Rockwell Options and who as of the close of
business on that date remained or became an employee of Boeing North American,
Boeing or any of their respective subsidiaries, but only for purposes of
determining such an Employee's rights with respect to his or her outstanding
Conexant Options and only so long as such Employee shall remain an employee of
Boeing North American, Boeing, or any of their respective subsidiaries; (iii)
any Employee (a Continuing Meritor Participant) as of the opening of business on
the Meritor Distribution Date who then held one or more outstanding Rockwell
Options and who as of the close of business on that date remained or became an
employee of Meritor or any of its subsidiaries, but only for purposes of
determining such an Employee's rights with respect to his or her outstanding
Conexant Options and only so long as such an Employee shall remain an employee
of Meritor or any of its subsidiaries; (iv) any Employee (a Continuing Conexant
Participant) as of the opening of business on the Conexant Distribution Date who
then held one or more outstanding Rockwell Options and who as of the close of
business on that date remains or becomes an employee of Conexant or any of its
subsidiaries, but only for purposes of determining such an Employee's rights
with respect to his or her outstanding Conexant Options and only so long as such
an Employee shall remain an employee of Conexant or any of its subsidiaries; and
(v) any other person (a Continuing Rockwell Participant) who on the Conexant
Distribution Date held one or more outstanding Rockwell Options, but only for
purposes of determining the rights of such a person with respect to his or her
outstanding Conexant Options and only so long as such person (or his or her
legatees, heirs or permitted assigns) shall remain entitled to exercise the
Rockwell Options from which his or her Conexant Options are derived.
Plan. This 1998 Stock Option Plan.
Rockwell. Rockwell International Corporation, a Delaware corporation.
d. Rockwell Option. An option to purchase Rockwell Shares granted pursuant
to any of Rockwell's Option Plans.
Rockwell's Option Plans. As the context requires, any or all of Rockwell's 1988
Long-Term Incentives Plan, as amended, Rockwell's 1995 Long-Term Incentives
Plan, as amended, and Rockwell's Directors Stock Plan, as amended.
Rockwell Shares. Shares of Common Stock of Rockwell.
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<PAGE> 6
3. Plan Administration
a. The Committee shall exercise all responsibilities, powers and authority
relating to the administration of the Plan not reserved to the Board of
Directors.
The Board of Directors reserves the right, in its sole discretion, to exercise
or authorize another committee or person to exercise some of or all the
responsibilities, powers and authority vested in the Committee under the Plan.
3. Conexant Options
The outstanding Conexant Options entitle the respective holders thereof to
purchase such number of Conexant Shares at such exercise price as shall be
determined pursuant to resolutions to be adopted by Rockwell's Board of
Directors before the Conexant Distribution Date and otherwise have the same
terms and conditions as the Rockwell Options from which they are derived;
provided, however, that the purchase price of the Conexant Shares with respect
to which a Conexant Option or portion thereof is exercised cannot be paid by
delivery of Rockwell Shares but shall be payable in full in cash or in Conexant
Shares or in a combination of cash and Conexant Shares. The value of any
Conexant Share delivered in payment of the purchase price shall be its Fair
Market Value on the date the Conexant Option is exercised.
4. Effect of Death or Termination of Employment
a. If the employment by Rockwell or any of its subsidiaries of a
Continuing Rockwell Participant, the service as a director of Rockwell of any
Non-Employee Director, the employment by USA of a Continuing USA Participant,
the employment by Boeing North American, Boeing or any of their respective
subsidiaries of a Continuing Boeing Participant, the employment by Meritor or
any of its subsidiaries of a Continuing Meritor Participant or the employment by
Conexant or any of it subsidiaries of a Continuing Conexant Participant who (or
whose permitted transferee)
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<PAGE> 7
holds any outstanding Conexant Options terminates by reason of the death of the
Participant, the Conexant Options not theretofore exercised may be exercised
from and after the date of the death of the Participant for a period of three
years (or until the expiration date specified in the Rockwell Option from which
the Conexant Option is derived, if earlier) even if any of them was not
exercisable at the date of death.
If a Continuing USA Participant, a Continuing Boeing Participant, a Continuing
Meritor Participant or a Continuing Conexant Participant who (or whose permitted
transferee) holds outstanding Conexant Options retires under a retirement plan
of USA, Boeing North American, Boeing, Meritor, Conexant or any of their
respective subsidiaries, at any time after a portion of those Conexant Options
has become exercisable, the Conexant Options not theretofore exercised may be
exercised from and after the date upon which they are first exercisable under
the terms thereof for a period of five years from the date of retirement (or
until the expiration date specified in the Rockwell Option from which the
Conexant Option is derived if earlier) even if any of them was not exercisable
at the date of retirement.
a. If a Continuing Rockwell Participant who (or whose permitted
transferee) holds outstanding Conexant Options retires or has retired under a
retirement plan of Rockwell or any of its subsidiaries at any time after a
portion of those Conexant Options has become exercisable, or if a Non-Employee
Director who holds outstanding Conexant Options retires as a director of
Rockwell after attaining age 72 or completing ten years service as a director of
Rockwell whether or not any portion of those Conexant Options was exercisable at
the date of retirement, the Conexant Options not theretofore exercised may be
exercised from and after the date upon which they are first exercisable under
the terms thereof for a period of five years from the date of retirement (or
until the expiration date specified in the Rockwell Option from which the
Conexant Option is derived if earlier) even if any of them was not exercisable
at the date of retirement.
If the employment by Rockwell or any of its subsidiaries of a Continuing
Rockwell Participant who was an Employee prior to the Conexant Distribution
Date, the employment by USA of a Continuing USA Participant, the employment by
Boeing North American, Boeing or any of their respective subsidiaries of a
Continuing Boeing Participant, the employment by Meritor or its subsidiaries of
a Continuing Meritor Participant or the employment by Conexant or its
subsidiaries of a Continuing Conexant Participant who (or whose permitted
transferee)
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<PAGE> 8
holds any outstanding Conexant Options is terminated or has heretofore
terminated for any reason other than death or retirement under a retirement plan
of Rockwell, USA, Boeing North American, Boeing, Meritor, Conexant or any of
their respective subsidiaries, the Conexant Options not theretofore exercised
may be exercised only within 90 days after the termination of such employment
(or until the expiration date specified in the Rockwell Option from which the
Conexant Option is derived if earlier) and only to the extent the grantee
thereof (or a permitted transferee) was entitled to exercise the Options at the
time of termination of such employment, unless and except to the extent the
Committee may otherwise determine; provided, however, that the Committee shall
not in any event permit a longer period of exercise than would have been
applicable had the provisions of paragraph b. or c. above been applicable.
Shares Available
The total number of Conexant Shares which may be delivered upon exercise
of Conexant Options shall not exceed the number (presently estimated to be 15
million) necessary to provide for exercise of all Conexant Options outstanding
on the Conexant Distribution Date, as adjusted from time to time as herein
provided. Conexant Shares which may be delivered upon exercise of Conexant
Options may consist in whole or in part of unissued or reacquired Shares.
Adjustments
If there shall be any change in or affecting Conexant Shares on account of
any merger, consolidation, reorganization, recapitalization, reclassification,
stock dividend, stock split or combination, or other distribution to holders of
Conexant Shares (other than a cash dividend), there shall be made or taken such
amendments to the Plan and such adjustments and actions thereunder as the Board
of Directors may deem appropriate under the circumstances. Such amendments,
adjustments and actions may include, without limitation, changes in the number
of Conexant Shares which may be issued or transferred pursuant to the Plan, the
number of Conexant Shares subject to outstanding Conexant Options and the
related price per share. Without limiting the generality of the foregoing, (i)
if any such change in or affecting Conexant Shares shall result in an increase
in the number of outstanding Conexant Shares, the number of Conexant Shares
remaining subject to the Plan shall be proportionately increased and the price
for each Conexant Share then covered by an outstanding Conexant Option shall be
proportionately reduced, and (ii) if any such change in or affecting Conexant
Shares shall result in a decrease in the number of outstanding Conexant Shares,
the number of Conexant Shares remaining subject to the Plan shall be
proportionately decreased and the price for each Conexant Share then covered by
an outstanding Conexant Option shall be proportionately increased.
5. Amendment and Termination
The Committee shall have the power in its discretion to amend, suspend or
terminate the Plan or Conexant Options subject thereto at any time except that,
subject to the provisions of Section 6, (a) without the consent of the person
affected, no such action shall cancel or reduce an outstanding Conexant Option
other than as provided for or contemplated in the agreement evidencing the
Rockwell Option from which the Conexant Option is derived and (b) without the
approval of the shareowners of
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<PAGE> 9
Conexant, the Committee may not (i) increase the number of Shares provided in
Section 5 or (ii) reduce the exercise price of any Conexant Option.
6. Miscellaneous
a. No employee of Conexant shall have any right as a Participant to
continue in the employ of Conexant for any period of time or to a continuation
of any particular rate of compensation, and Conexant expressly reserves the
right to discharge or change the assignment of any of its employees who are
Participants at any time. There is no obligation for uniformity of treatment of
Participants under the Plan.
No Conexant Option may be assigned, pledged or transferred except (i) by will or
by the laws of descent and distribution; or (ii) by gift to any member of the
Participant's immediate family or to a trust for the benefit of one or more
members of the Participant's immediate family, if permitted in the applicable
agreement governing the Rockwell Option from which that Conexant Option is
derived; or (iii) as otherwise determined by the Committee. Each Conexant Option
shall be exercisable during the lifetime of the Participant to whom the Rockwell
Option from which it is derived was granted only by or to such Participant
unless the Conexant Option has been transferred in accordance with the
provisions of the applicable agreement governing the Rockwell Option from which
that Conexant Option is derived, to a member of the Employee's immediate family
or a trust for the benefit of one or more members of the Participant's immediate
family, in which case it shall be exercisable only by such transferee (or by the
legal representative of the estate or by the heirs or legatees of such
transferee). For purposes of this provision, a Participant's "immediate family"
shall mean the Participant's spouse and natural, adopted or step- children and
grandchildren.
b. No person shall have the rights or privileges of a shareowner with
respect to Conexant Shares subject to a Conexant Option until exercise of such
Conexant Option.
No fractional Conexant Shares shall be issued or transferred pursuant to the
Plan. If any Conexant Option shall be exercisable for a fractional Conexant
Share, the person entitled thereto shall be paid an amount equal to the excess
of the Fair Market Value as of the date of exercise over the exercise price for
any fractional Conexant Share deliverable in respect of exercise of that
Conexant Option.
c. Notwithstanding any other provision of the Plan, if a Change of
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<PAGE> 10
Control shall occur, then all Conexant Options then outstanding pursuant to the
Plan shall forthwith become fully exercisable whether or not otherwise then
exercisable.
Conexant shall have the right in connection with the delivery of any Conexant
Shares upon exercise of a Conexant Option to require as a condition of such
delivery that the recipient represent that such Conexant Shares are being
acquired for investment and not with a view to the distribution thereof.
c. Conexant shall have the right in connection with any exercise of a
Conexant Option, to deduct from any amount otherwise payable by Conexant, an
amount equal to any taxes required by law to be withheld with respect to
exercise of that Conexant Option or to require the Employee or other person
effecting such exercise, as a condition of and prior to delivery of Conexant
Shares upon such exercise, to pay to Conexant an amount sufficient to provide
for any such taxes so required to be withheld.
Unless otherwise determined by the Committee or provided in an agreement between
any Participant and his or her employer, for purposes of the Plan a Participant
on authorized leave of absence will be considered as being in the employ of
Rockwell, USA, Boeing North American, Boeing, Meritor, Conexant or any of their
respective subsidiaries, as the case may be.
Conexant shall bear all expenses and costs in connection with the operation of
the Plan, including costs related to the purchase, issue or transfer of Conexant
Shares, but excluding taxes imposed on any person receiving a payment or
delivery of Shares under the Plan.
9. Interpretations and Determinations
The Committee shall have the power from time to time to interpret the
Plan, to adopt, amend and rescind rules, regulations and procedures relating to
the Plan, to make, amend and rescind determinations under the Plan and to take
all other actions that the Committee shall deem necessary or appropriate for the
implementation and administration of the Plan. All interpretations,
determinations and other actions by the Committee not revoked or modified by the
Board of Directors shall be final, conclusive and binding upon all parties.
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<PAGE> 11
10. Effective Date
Upon approval by the sole shareowner of Conexant, the Plan shall become
effective as of the Conexant Distribution Date.
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<PAGE> 1
Exhibit 10.7
EMPLOYMENT AGREEMENT
AGREEMENT by and between Conexant Systems, Inc., a Delaware corporation
(the "Company") and _________ _________ (the "Executive"), dated as of the ___
day of _______, 199_.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first
date during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
<PAGE> 2
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company, Rockwell International Corporation or any corporation
controlled by the Company or Rockwell International Corporation or (iv) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company or
the acquisition of assets of another entity (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any employee benefit plan (or related trust) of
the Company, of Rockwell International Corporation or of such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed
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<PAGE> 3
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement.
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<PAGE> 4
Annual Base Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to Annual Base
Salary as so increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by, controlling or under common
control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's annual incentive plans for the last three full fiscal
years prior to the Effective Date (annualized in the event that the Executive
was not employed by the Company for the whole of such fiscal year) (the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of
the third month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the receipt
of such Annual Bonus.
(iii) Incentive and Savings Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive and savings plans,
practices, policies and programs applicable generally to other peer executives
of the Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with incentive
opportunities (measured with respect to both regular and special incentive
opportunities, to the extent, if any, that such distinction is applicable) and
savings opportunities, in each case, less favorable, in the aggregate, than the
most favorable of those provided by the Company and its affiliated companies for
the Executive under such plans, practices, policies and programs as in effect at
any time during the 120-day period immediately preceding the Effective Date or
if more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preced-
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<PAGE> 5
ing the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
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<PAGE> 6
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the Executive's
duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;
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<PAGE> 7
(iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 11(c) of
this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof
which has been
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<PAGE> 8
earned but deferred (and annualized for any fiscal year consisting of
less than twelve full months or during which the Executive was
employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such
higher amount being referred to as the "Highest Annual Bonus") and (y)
a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the
denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) [three] [two] and
(2) the sum of (x) the Executive's Annual Base Salary and (y) the
Highest Annual Bonus;
(ii) for [three] [two] years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement if the Executive's
employment had not been terminated or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies and their families, provided, however,
that if the Executive becomes reemployed with another employer and is eligible
to receive medical or other welfare benefits under another employer provided
plan, the medical and other welfare benefits described herein shall be secondary
to those provided under such other plan during such applicable period of
eligibility. For purposes of determining eligibility (but not the time of
commencement of benefits) of the Executive for retiree
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<PAGE> 9
benefits pursuant to such plans, practices, programs and policies, the Executive
shall be considered to have remained employed until [three] [two] years after
the Date of Termination and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 CONSOLIDATED BALANCE SHEET, CONSOLIDATED INCOME STATEMENT FOR
THE YEAR ENDED SEPTEMBER 30, 1998 AND NOTES TO THE FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH COMBINED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 167
<ALLOWANCES> 28
<INVENTORY> 201
<CURRENT-ASSETS> 587
<PP&E> 713
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,418
<CURRENT-LIABILITIES> 331
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,009
<TOTAL-LIABILITY-AND-EQUITY> 1,418
<SALES> 1,200
<TOTAL-REVENUES> 1,200
<CGS> 909
<TOTAL-COSTS> 1,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (430)
<INCOME-TAX> (168)
<INCOME-CONTINUING> (262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (262)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
