<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999*
Commission file number 000-24923
Conexant Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 25-1799439
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4311 Jamboree Road, Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 483-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of April 23, 1999 was
96,599,978.
* For presentation purposes, references made to the March 31, 1999 period
relate to the actual second fiscal quarter end of April 2, 1999.
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CONEXANT SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Unaudited Consolidated Condensed Balance Sheets -
March 31, 1999 and September 30, 1998............................... 3
Unaudited Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended March 31, 1999 and 1998 .......... 4
Unaudited Consolidated Condensed Statements of Cash Flows -
Six Months Ended March 31, 1999 and 1998 ........................... 5
Notes to Unaudited Consolidated Condensed Financial Statements ..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 16
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 18
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONEXANT SYSTEMS, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 159,099 $ 14,000
Receivables (less allowance for doubtful accounts: March 31, 1999,
$7,869; September 30, 1998, $8,975) ............................... 145,961 166,386
Inventories, net (see Note 4) ........................................ 146,661 200,926
Deferred income taxes ................................................ 89,844 152,559
Assets held for disposal ............................................. -- 42,346
Other current assets ................................................. 11,679 10,735
---------- ----------
Total current assets ......................................... 553,244 586,952
PROPERTY, PLANT AND EQUIPMENT, NET ................................... 651,074 713,400
OTHER ASSETS ......................................................... 112,200 118,178
---------- ----------
TOTAL ASSETS ................................................. $1,316,518 $1,418,530
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ...................................................... $ 100,000 $ 14,000
Accounts payable ..................................................... 129,370 151,044
Accrued litigation - Celeritas (see Note 6) .......................... -- 65,000
Other current liabilities ............................................ 84,991 100,219
---------- ----------
Total current liabilities .................................... 314,361 330,263
Other liabilities and contingencies .................................. 90,833 78,892
SHAREHOLDERS' EQUITY:
Rockwell's net investment (September 30, 1998) ....................... -- 1,009,375
Preferred stock (25,000 shares authorized; no shares issued or
outstanding) ....................................................... -- --
Common stock (500,000 shares authorized; 96,279 issued and
outstanding)....................................................... 96,279 --
Additional paid-in capital ........................................... 804,920 --
Retained earnings .................................................... 7,617 --
Accumulated other comprehensive income ............................... 2,508 --
---------- ----------
Total shareholders' equity ................................... 911,324 1,009,375
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $1,316,518 $1,418,530
========== ==========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
3
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CONEXANT SYSTEMS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------ --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES ............................................... $ 316,932 $ 274,241 $ 611,610 $ 657,693
Cost of sales ........................................... 186,677 152,611 403,431 355,992
--------- --------- --------- ---------
GROSS MARGIN ............................................ 130,255 121,630 208,179 301,701
Research and development ................................ 68,802 80,652 139,911 164,245
Selling, general and administrative ..................... 48,893 68,819 112,909 128,361
Amortization of intangibles ............................. 2,063 2,771 4,127 5,650
Special charges - -Rockwell Retained Assets (see Note 2). -- -- 20,000 --
Special charges - Other (see Note 3) .................... -- -- 17,906 --
--------- --------- --------- ---------
OPERATING EARNINGS (LOSS) ............................... 10,497 (30,612) (86,674) 3,445
Other income, net ....................................... 383 1,926 240 5,660
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ....................... 10,880 (28,686) (86,434) 9,105
Provision (benefit) for income taxes .................... 3,263 (13,075) (36,928) 4,150
--------- --------- --------- ---------
NET INCOME (LOSS) ....................................... $ 7,617 $ (15,611) $ (49,506) $ 4,955
========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE
(see Notes 8 and 9) .................................. $ 0.08
=========
WEIGHTED AVERAGE SHARES:
BASIC ................................................... 94,979
=========
DILUTED ................................................. 97,732
=========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
4
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CONEXANT SYSTEMS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income..................................................... $ (49,506) $ 4,955
Adjustments to net (loss) income to arrive at cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 104,187 90,648
Deferred income taxes ............................................ 13,076 (14,542)
Amortization of deferred compensation - restricted stock ......... 2,346 --
Special charges - Rockwell Retained Assets (see Note 2) .......... 20,000 --
Special charges - Other (see Note 3) ............................. 17,906 --
Changes in assets and liabilities:
Receivables .................................................. 20,425 51,602
Inventories .................................................. 54,265 (86,662)
Accounts payable ............................................. (21,674) (49,423)
Other current liabilities .................................... (16,845) 36,812
Other ........................................................ (10,266) (41,653)
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........... 133,914 (8,263)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................................. (33,367) (122,492)
--------- ---------
CASH USED IN INVESTING ACTIVITIES ......................... (33,367) (122,492)
--------- ---------
FINANCING ACTIVITIES:
Increase in short-term borrowings .................................... 100,000 --
Payments of short-term debt .......................................... (14,075) (23)
Net transfers (to) from Rockwell ..................................... (44,670) 130,778
Issuance of common stock ............................................. 3,297 --
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES ..................... 44,552 130,755
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ................................ 145,099 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 14,000 14,000
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 159,099 $ 14,000
========= =========
</TABLE>
Non-cash activity: During the six months ended March 31, 1999, the Company
transferred its wafer fabrication facilities in Colorado Springs, Colorado, (and
the related tax benefit) with a book value of $58 million to Rockwell, as well
as certain other tax benefits of $23 million related to the Celeritas
litigation. In addition, Rockwell transferred $64 million of restricted cash to
Conexant to be used to satisfy the $65 million liability which Conexant recorded
in the year ended September 30, 1998, related to the Celeritas judgment. During
the second fiscal quarter of 1999, the restricted cash balance of $64 million
transferred from Rockwell was used to settle the Celeritas judgment, the
additional $1 million paid directly by Rockwell was recorded as additional
paid-in capital, and the corresponding $65 million liability was eliminated.
See notes to unaudited consolidated condensed financial statements.
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CONEXANT SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On December 31, 1998, Conexant Systems, Inc. (formerly named Rockwell
Semiconductor Systems, Inc.) (the Company or Conexant), became an independent,
separately traded, publicly-held company when Rockwell International Corporation
(Rockwell) spun off its semiconductor systems business (Semiconductor Systems)
by means of the distribution (the Distribution) of all the outstanding shares of
common stock of the Company to the shareholders of Rockwell in a tax-free
spin-off. In the Distribution, each Rockwell shareholder of record on December
11, 1998, received one share of the Company's common stock (including an
associated preferred share purchase right) for every two shares of Rockwell
common stock owned on December 11, 1998.
The unaudited consolidated condensed financial statements of Conexant have been
prepared in accordance with generally accepted accounting principles, which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates. In the opinion of the management of Conexant, the unaudited financial
statements contain all adjustments, consisting of adjustments of a normal
recurring nature, as well as the special charges recorded in the first quarter
of 1999 (see Notes 2 and 3), necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. Certain
reclassification entries have been made to prior periods for consistency
purposes. These statements should be read in conjunction with the Company's
Registration Statement on Form 10, as amended, as filed with the Securities and
Exchange Commission. The results of operations for the second fiscal quarter and
six months ended March 31, 1999, are not necessarily indicative of the results
that may be expected for the full year.
The accompanying unaudited consolidated condensed financial statements present
the historical financial position, results of operations, and cash flows of
Semiconductor Systems, as it was spun off, and exclude the assets, liabilities,
and results of operations of non-semiconductor businesses 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 Conexant been
an independent public company during all periods presented. Financial data
included in the accompanying unaudited consolidated condensed financial
statements, for periods subsequent to the Distribution, have been prepared on a
basis that reflects the historical assets, liabilities, and operations of the
business contributed to Conexant by Rockwell.
For presentation purposes, references made to the March 31, 1999, and March 31,
1998, periods relate to the second fiscal quarter-ends, which are actually April
2, 1999, and April 3, 1998, respectively. In addition, references made to the
December 31, 1998, period relate to the first fiscal quarter-end, which is
actually January 1, 1999, as previously reported.
Prior to the Distribution, Rockwell provided certain management services that
were allocated based on sales in proportion to total Rockwell sales. Rockwell
continues to provide certain services to the Company, including payroll and
employee benefits administration, data processing and telecommunications
services, and research and development activities under the terms of a
transition agreement. Costs for these services and programs are billed to
Conexant based on actual usage and are included in Conexant's Unaudited
Consolidated Condensed Statements of Operations. Management believes that the
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methods of billing these costs are reasonable and that the costs charged to
Conexant are approximately those which would have been incurred on a stand-alone
basis.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 is effective for Conexant's fiscal
year beginning October 1, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that the Company recognize all derivative instruments as either assets or
liabilities in the Unaudited Consolidated Condensed Balance Sheets and measure
those instruments at fair value. Management believes the impact of adopting this
standard will not be material to the financial position or results of operations
of the Company.
2. SPECIAL CHARGES - ROCKWELL RETAINED ASSETS
Prior to the Distribution, the Company distributed its wafer fabrication
facilities in Colorado Springs, Colorado, (and the related tax benefit) to
Rockwell. The transition agreement with Rockwell provides for the lease of the
Colorado Springs facilities by Conexant through April 30, 1999, pursuant to a
triple-net lease under which Conexant will pay all costs of the facilities.
In the first fiscal quarter of 1999, Conexant recorded a special charge for an
additional asset impairment of $20 million for the Colorado Springs wafer
fabrication facilities as a result of Rockwell's decision to further write-down
the facilities, which were retained by Rockwell as part of the spin-off. This
non-cash charge was required to be reported in the Company's last fiscal quarter
as a subsidiary of Rockwell.
3. SPECIAL CHARGES - OTHER
In the fourth fiscal quarter of 1998, Conexant restructured its business and
recorded special charges of $147 million. In the first fiscal quarter of 1999,
Conexant recorded additional special charges of $18 million. At March 31, 1999,
$28.7 million of accruals remained for these special charges relating primarily
to contract cancellations, facility lease termination costs and equipment
decommissioning. The restructuring actions are expected to be substantially
completed by the end of fiscal year 1999.
4. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Finished goods, net .................... $ 44,410 $ 71,328
Work-in-process, net ................... 86,339 107,002
Raw materials, parts, and supplies, net. 15,912 22,596
-------- --------
Inventories, net ....................... $146,661 $200,926
======== ========
</TABLE>
5. REPORTING COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income." This statement
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requires the Company to report in the financial statements, in addition to net
income (loss), comprehensive income (loss) and its components. Comprehensive
income (loss) for the three- and six-month periods ended March 31, 1999, was
$10.1 million and $(47.0) million, respectively. Accumulated other comprehensive
income includes $0.6 million in translation gain and $1.9 million of unrealized
gains on investments at March 31, 1999. Translation gains and losses for periods
prior to the Distribution were reflected as part of Rockwell's net investment
and were not considered material.
6. CONTINGENT LIABILITIES
Claims have been asserted against Conexant for utilizing the intellectual
property rights of others in certain of the Company's products. The resolution
of these matters may entail the negotiation of a license agreement, a
settlement, or the resolution of such claims through arbitration or litigation.
In September 1995, Celeritas Technologies, Ltd., filed suit against Rockwell, in
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 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. As of September 30, 1998, $65 million was reserved for this
matter. During the first fiscal quarter of 1999, Rockwell contributed $64
million into an escrow account related to this judgment which was subsequently
paid to Celeritas on February 11, 1999, in final settlement of the judgment.
The remaining $1 million of this liability was paid directly by Rockwell and
recorded as additional paid in capital, and the corresponding $65 million
liability was eliminated.
On October 14, 1997, Brent Townshend filed suit against Rockwell and Conexant in
the Superior Court of California for San Mateo County seeking an injunction to
halt the sale of products containing Conexant's K56Flex(TM) chipsets and
requesting unspecified damages, claiming that Conexant had engaged in unfair
competition, misappropriation of trade secrets, breach of contract and breach of
confidence by using technical information allegedly disclosed in confidence by
Mr. Townshend to accelerate its development of 56 Kbps modem technology. In
January 1999, Townshend dismissed his State Court action and re-filed the same
claims and three new claims for patent infringement in the U.S. District Court
for the Northern District of California. In the Federal action, Townshend
alleges that each of his patents (the "Townshend Patents") covers certain
aspects of the V.90 standard and are infringed by Conexant's 56 Kbps products.
In the Federal action, Townshend seeks injunctive relief, compensatory damages,
restitution and exemplary and punitive damages. Townshend and 3Com Corporation
have publicly announced that 3Com is the exclusive licensee for the Townshend
Patents and acts as Townshend's agent in sublicensing the Townshend Patents to
third parties. Conexant is vigorously defending its position that it
independently developed the 56 Kbps modem technology using entirely its own
skills and public domain information and will vigorously contest the
infringement claims and the validity of the asserted patents.
Various other lawsuits, claims and proceedings have been or may be instituted or
asserted against Rockwell or Conexant or their respective subsidiaries,
including those pertaining to product liability, intellectual property,
environmental, safety and health, and employment matters.
In connection with the Distribution, Conexant assumed responsibility for all
contingent liabilities and current and future litigation (including
environmental and intellectual property proceedings) against Rockwell or its
subsidiaries in respect of Semiconductor Systems.
The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to Conexant. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
Conexant. Based on its evaluation of matters which are pending or asserted and
taking into account Conexant's reserves for such matters, management of Conexant
believes the disposition of such matters will not have a material adverse effect
on the financial condition or results of operations of Conexant.
7. FINANCING AGREEMENT
On December 21, 1998, Conexant entered into a three-year secured revolving loan
facility (the Credit Facility) with a group of banks. Loans under the Credit
Facility are to be used for working capital needs and other general corporate
purposes. The Credit Facility is guaranteed by substantially all of the
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Company's domestic subsidiaries. It is also 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. On January 4, 1999, the
Company borrowed $100 million under the Credit Facility, which amount remained
outstanding during the remainder of the second fiscal quarter.
Loans obtained under the Credit Facility 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 or (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, the margin is 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 capitalization ratio. The
Company pays 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 pays other customary fees.
The Credit Facility contains, among other terms, representations and warranties,
conditions precedent, covenants, mandatory and voluntary prepayment provisions
and events of default customary for facilities of this type. Borrowings under
the Credit Facility are limited to $250 million prior to receipt of Conexant's
1999 second fiscal quarter financial results, at which point the entire $350
million Credit Facility will be available.
8. PRO-FORMA EARNINGS (LOSS) PER SHARE
The number of pro-forma weighted average outstanding shares and common share
equivalents used in the pro-forma earnings (loss) per share calculation set
forth below was based upon the weighted average number of Rockwell shares and
share equivalents outstanding for the applicable periods, adjusted for the
distribution ratio in the Distribution of one share of the Company's common
stock for every two shares of Rockwell common stock. For the six months ended
March 31, 1999, the weighted average common shares was determined based upon the
weighted average of (i) the Rockwell method for the first fiscal quarter, as
previously described, and (ii) the actual Conexant share activity for the second
fiscal quarter, as described further in Note 9.
The pro-forma effect of common share equivalents outstanding for the three
months ended March 31, 1998, and for the six months ended March 31, 1999, were
not included in the computation of diluted loss per share for those periods
because the Company incurred a loss and, therefore, the impact was antidilutive.
Pro-forma basic and diluted earnings (loss) per share (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- -------------------------------
1998 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) .................. $ (15,611) $ (49,506) $ 4,955
Pro-forma basic and diluted (loss)
earnings per share .............. $ (0.16) $ (0.52) $ 0.05
Pro-forma basic and diluted weighted
average common shares ........... 100,100 94,957 101,300
</TABLE>
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These pro-forma results are not indicative of future amounts.
9. STOCK OPTIONS AND EARNINGS PER SHARE
The number of weighted average shares and common share equivalents outstanding
used in the earnings per share calculation for the second quarter of fiscal 1999
was based upon the weighted average number of Conexant shares outstanding and
Conexant common share equivalents for the second quarter of fiscal 1999, which
includes the Distribution of one share of the Company's common stock for every
two shares of Rockwell common stock. The common share equivalent calculation
assumes the dilutive effect of stock options to purchase 1.7 million shares of
common stock and 1.0 million shares of restricted stock which are subject to
vesting requirements.
The total stock options outstanding were 17.4 million as of March 31, 1999,
which include 9.6 million options issued in connection with the Distribution, as
well as 7.8 million options for Conexant common stock issued under the Company's
1999 Long-Term Incentives Plan (the 1999 LTIP). In connection with the
Distribution, outstanding options to purchase Rockwell common stock held by
Conexant employees, as well as certain options held by others, were converted
into options to purchase approximately 10.1 million shares of Conexant common
stock based on formulas designed to preserve the intrinsic value of the options.
The options issued in connection with the Distribution have the same terms and
vesting schedule as the original Rockwell options, and the options issued under
the 1999 LTIP generally vest over four years and expire after ten years.
At March 31, 1999, approximately 0.6 million stock options were excluded from
the calculation of diluted earnings per share, because their exercise price was
greater than the average market price of the common shares during the quarterly
period, and the effect of such inclusion would be antidilutive.
Restricted stock grants under the 1999 LTIP consist of time vesting and
performance accelerated grants. Approximately 1.0 million restricted shares are
outstanding as of March 31, 1999 under the 1999 LTIP. The time vesting
restricted stock generally will be restricted for a two-year period and will
fully vest on the second anniversary of the grant date. For the performance
accelerated restricted stock, 50 percent will vest upon the completion of twenty
consecutive trading days during which the fair market value of the stock on each
such trading day is at least 50 percent higher than the value of the stock on
the grant date, and the remaining 50 percent will vest upon the completion of
twenty consecutive trading days during which the fair market value of the stock
on each such trading day is at least 100 percent higher than the value of the
stock on the grant date, provided that no performance accelerated restricted
stock will vest prior to one year after the date of grant. In any event, the
performance accelerated restricted stock will fully vest on the eighth
anniversary of the grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," allows companies to record compensation cost for stock-based
employee compensation plans at fair value or to show the effects in a footnote.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost of stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the option exercise price, and is charged to operations over the vesting
period. Income tax benefits attributable to stock options exercised will be
credited to capital in excess of par value at the end of the fiscal year. As of
March 31, 1999, all stock options granted to employees were granted at an
exercise price equal to the closing market price of the stock on the date of
grant; therefore, no expense to the Company has been incurred. No compensation
expense has been
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recognized for any other stock-based incentive compensation plans, other than
$2.3 million related to the restricted stock awards. The Company expects to
grant additional stock-based compensation awards in future years.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This information should be read in conjunction with the unaudited consolidated
condensed financial statements and the notes thereto included in Part I, Item 1
of this Quarterly Report, and the audited combined financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Registration Statement on
Form 10.
The results of operations for the periods prior to January 1, 1999 reflect the
Company's operations as a subsidiary of Rockwell. The results of operations
subsequent to December 31, 1998 reflect the Company's operations as a
stand-alone entity subsequent to the spin-off from Rockwell. The results of
operations while the Company was a subsidiary of Rockwell may not be indicative
of the results of operations of the Company if it had been a stand-alone entity
for the time periods shown herein.
RESULTS OF OPERATIONS
The following table summarizes the net sales of the Company's five product
platforms for the periods presented (dollars are in thousands and percentages
are expressed as a percentage of total net sales):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------------------------------- -----------------------------------------------
1999 1998 1999 1998
----------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal Computing ... $149,557 47.2% 149,225 54.4% 301,833 49.4% 381,921 58.1%
Personal Imaging ..... 20,611 6.5% 26,797 9.8% 36,627 6.0% 59,278 9.0%
Network Access ....... 47,021 14.8% 28,483 10.4% 88,749 14.5% 62,510 9.5%
Digital Infotainment . 42,644 13.5% 36,384 13.3% 82,088 13.4% 77,485 11.8%
Wireless Communication 57,099 18.0% 33,352 12.1% 102,313 16.7% 76,499 11.6%
-------- ------- -------- ------- -------- ------- -------- -------
Total ................ $316,932 100.0% $274,241 100.0% $611,610 100.0% $657,693 100.0%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
NET SALES: Net sales of $316.9 million in the second fiscal quarter (Q2) of 1999
were $42.7 million, or 16%, higher than Q2 of 1998 on a 68% increase in unit
shipments. This increase was primarily due to revenue growth in three of the
Company's operating platforms. Net sales for Wireless Communications increased
71% with record shipments of power amplifiers for cellular phones and strong
demand for other products, including cellular base station receivers, wireless
data, and global positioning systems (GPS). Code Division Multiple Access (CDMA)
power amplifier net sales increased 171% from the prior year, generating more
than 63% of Q2 1999 Wireless Communications revenue. Net sales for Network
Access increased 65%, primarily associated with an inventory correction at one
customer in Q2 1998 for K56 central site modems. Network Access had record
sales of all high-speed digital-networking products that include synchronous
optical network (SONET), T1/E1, digital subscriber line (DSL) solutions, and
asynchronous transfer mode (ATM). Net sales for Digital Infotainment increased
17%. This performance was driven by solid growth in both the consumer and
computer market segments, including satellite set-top box tuners and
demodulators, video encoders, and peripheral computer interconnect (PCI)
decoders for PC-TV applications. Net sales were adversely affected by a decline
in average selling prices, which partially offset the increase in unit shipments
for the three expansion platforms just discussed. Personal
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<PAGE> 12
Computing revenues declined as a percentage of total sales from 54% in Q2 1998
to 47% in Q2 1999 but remained essentially flat in terms of revenue dollars as
pricing returned to historical patterns. Personal Imaging sales decreased 23%
primarily due to a reduction in facsimile modem shipments to the Asian market.
For the six months ended March 31, 1999, net sales of $611.6 million were 7%
less than net sales of $657.7 million for the six months ended March 31, 1998,
on a 34% increase in unit shipments. Net sales declined in two of the five
product platforms during the six months ended March 31, 1999 compared to the
same period in fiscal 1998. Net sales for Personal Computing decreased 21%.
Personal Computing sales comprised 49% of the Company's net sales compared to
58% for the same period in the previous year. Net sales declined due to a shift
towards lower priced products such as the Host Controllerless (HCF) product line
and a decline in average selling prices. Net sales for Personal Imaging declined
38%. This decrease was primarily related to a reduction in facsimile modem
shipments to the Asian market. The decline in net sales from Personal Computing
and Personal Imaging compared to the first six months of fiscal 1998 were
partially offset by unit shipment and revenue growth in the other three product
platforms. Net sales for Wireless Communications increased from $76.5 million to
$102.3 million, or 34%. This growth was due primarily to the CDMA power
amplifier product line. Net sales for Network Access increased from $62.5
million to $88.7 million, or 42%. Net sales for Digital Infotainment increased
from $77.5 million to $82.1 million, or 6%, and was driven by increased
shipments of encoder/decoder products and set-top box tuners.
GROSS MARGIN: Gross margin increased 7% to $130.3 million in Q2 1999 from $121.6
million in Q2 1998. As a percentage of net sales, gross margin decreased to 41%
from 44% in Q2 1998 due to lower prices for Personal Computing products, which
eroded faster than associated unit production costs. For the six months ended
March 31, 1999, gross margin decreased 31% to $208.2 million, from $301.7
million for the six months ended March 31, 1998. As a percentage of net sales,
gross margin decreased to 34% from 46% in the same period of the prior year,
primarily due to pricing pressure in Personal Computing and unusually high
inventory costs associated with lower manufacturing capacity utilization in the
first fiscal quarter of 1999.
RESEARCH AND DEVELOPMENT: Research and development (R&D) expenses in Q2 1999 of
$68.8 million were $11.8 million, or 14.7%, lower than in Q2 1998. R&D expenses
for the six months ended March 31, 1999 were $ 139.9 million, 14.8% lower than
the $164.2 million in the six months ended March 31, 1998. The decrease in R&D
for the fiscal 1999 periods was driven principally by cost reduction actions
initiated in the fourth quarter of fiscal 1998 to reduce the Company's overall
cost structure. These actions included headcount reductions, design center
closures and project cancellations.
SELLING, GENERAL, AND ADMINISTRATIVE: Selling, general, and administrative
(SG&A) expenses in Q2 1999 of $48.9 million were $19.9 million, or 29%, lower
than in Q2 1998. SG&A expenses for the six months ended March 31, 1999 were
$112.9 million, 12% lower than the $128.4 million for the same period of the
prior year. The decline for both periods was due to reductions in headcount,
advertising and consulting expenses.
AMORTIZATION OF INTANGIBLES: Amortization of intangibles in Q2 1999 of $2.1
million was $0.7 million, or 25.5%, lower than in Q2 1998. Amortization of
intangibles for the six months ended March 31, 1999 was $4.1 million, 27%
lower than the $5.6 million for the same period of the prior year. The decline
for both periods was due to a write-off of goodwill related to the acquisition
of certain technologies that were abandoned in Q4 1998 in conjunction with the
restructuring activities.
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<PAGE> 13
SPECIAL CHARGES - ROCKWELL RETAINED ASSETS: In the first fiscal quarter of 1999,
Conexant recorded a special charge for an additional asset impairment of $20
million for the Colorado Springs wafer fabrication facilities as a result of
Rockwell's decision to further write-down the facilities, which were retained by
Rockwell as part of the spin-off. This non-cash charge was required to be
reported in the Company's last fiscal quarter as a subsidiary of Rockwell.
SPECIAL CHARGES - OTHER: Other special charges for the first quarter of fiscal
1999 and the six months ended March 31, 1999 were $17.9 million. These special
charges included approximately $17 million related to a voluntary early
retirement program and $1 million related to equipment decommission and contract
cancellation at the Colorado Springs wafer fabrication facility.
OTHER INCOME, NET: Other income decreased to $0.4 million in Q2 1999 from $1.9
million in Q2 1998 primarily due to $1.7 million of interest on the Company's
$100 million of short-term debt in Q2 1999. Other income for the six month
period ended March 31, 1999 of $0.2 million decreased from $5.7 million in the
first six months of fiscal 1998 primarily due to a $3.3 million cash payment
that was received in the first fiscal quarter (Q1) 1998 in connection with a
contract cancellation as well as the interest expense of $1.7 million recorded
in the six months ended March 31, 1999.
PROVISION (BENEFIT) FOR INCOME TAXES: The income tax provision in the second
quarter of fiscal 1999 was $3.2 million, or 30% of income before income taxes.
In the second fiscal quarter of fiscal 1998, an income tax benefit of $13
million was recorded due to a loss from operations. The income tax provision for
the six months ended March 31, 1999 was a benefit of $36.9 million, or 43% of
loss before income taxes. For the six months ended March 31, 1998, an income tax
provision of $4.1 million, or 46% of income before income taxes, was provided.
The effective tax rate for the remainder of the fiscal year is expected to
remain at 30%, down from earlier quarters, primarily due to the positive impact
of various tax credits available to the Company. The effective tax rate includes
state tax credits and federal research and experimentation tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $133.9 million for the six months
ended March 31, 1999, compared to $8.3 million of cash used by operating
activities in the same period of fiscal 1998. Net operating cash flows were
favorably impacted due to a net decrease in inventories of $54.3 million in the
first six months of fiscal 1999, as compared to a net increase of $86.7 million
in the prior year, reflecting the results of the Company's efforts to reduce
inventory quantities and unit costs. In addition, net receivables were reduced
by $20.4 million during the six months ended March 31, 1999, driven by an
improved rate of collections. Net income in the first six months of fiscal 1999
was reduced by non-cash special charges of $37.9 million and non-cash charges
for depreciation and amortization of $104.2 million. These items were partially
offset by a $21.7 million decrease in trade payables and a $16.8 million
decrease in other current liabilities from September 30, 1998.
Investing activities used $33.4 million in cash during the six months ended
March 31, 1999, compared to $122.5 million in the same period of 1998. Lower
current period investments relate to the timing of capital expenditures for
additional capacity and new process technologies. Capital expenditures for the
entire 1999 fiscal year are expected to be approximately $160 million.
The Company's financing activities provided cash of $44.6 million during the six
months ended March 31, 1999, compared to $130.8 million during the same period
of fiscal 1998. Financing sources of cash for the first six months of fiscal
1999 were $100 million of short-term borrowings under a three-year $350 million
senior secured revolving loan facility (the Credit Facility). These items were
partially offset by the repayment of a loan
13
<PAGE> 14
at the Company's Japanese subsidiary and net transfers to Rockwell. In fiscal
1998, the financing sources of cash were predominantly transfers of cash from
Rockwell.
In December 1998, the Company and three of its subsidiaries entered into the
Credit Facility with a group of banks. The Credit Facility includes facilities
for revolving loans and swingline loans in multiple currencies and letters of
credit. The Credit Facility is guaranteed by substantially all of the Company's
domestic subsidiaries. It is also 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. See Note 7 of the notes to
unaudited consolidated condensed financial statements for further details on the
Credit Facility.
The Credit Facility contains, 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 include
certain restrictions on capital expenditures, consolidations and mergers, sales
of assets, incurrence of indebtedness and creation of liens and encumbrances.
The Credit Facility includes 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.
On January 4, 1999, the Company borrowed $100 million under the Credit Facility.
The Company invests its excess cash balances in short-term interest bearing
accounts.
The Company believes that its existing sources of liquidity and cash expected to
be generated from future operations are sufficient to fund operations, capital
expenditures and research and development efforts for the foreseeable future.
YEAR 2000 READINESS DISCLOSURE
Conexant is addressing 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 is undergoing the following process to ensure
readiness for the Year 2000. First, in the inventory phase, all Conexant assets
are inventoried to identify those that have any type of software or hardware
with 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. Conexant 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, infrastructure, and manufacturing systems
areas. The Company has completed the assessment and strategy phase and is now
in the remediation and certification phases for the suppliers area. The Company
has begun auditing those suppliers who did not perform up to standards during
the assessment phase. Conexant 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.
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<PAGE> 15
The Company's greatest area of uncertainty centers primarily in the supplier
area, 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 suppliers to upgrade their systems to ensure an uninterrupted
supply of materials. Approximately 85 percent of our manufacturing tools have
achieved certification. A Year 2000-related failure by a significant 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 plan centers heavily on the
supplier area. For the top five to ten percent of its critical materials and
manufacturing suppliers, the Company is performing on-site audits and intends to
monitor specific Year 2000-based milestones to ensure readiness. The Company has
completed its assessment of all Tier 1 critical suppliers and has begun its
audit process. In the event a supplier does not meet the Company's milestones
for Year 2000 readiness, the Company is identifying specific target dates
(beginning as early as April 1999) for all critical materials suppliers and has
begun implementing a contingency plan that includes alternate sourcing and
stockpiling of materials, which the Company expects will be complete by June 30,
1999.
Part of the Company's initial assessment phase included a detailed Year 2000
questionnaire which was 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 all of those questioned. The Company is following up on
the questionnaires, where necessary, with on-site audits to ensure Year 2000
readiness. The Company has also contacted its major customers with respect to
their Year 2000 readiness efforts and does not believe that customers will have
any Year 2000 readiness problems that would have a material adverse effect on
the Company's business.
In connection with the Company's receipt of transition services pursuant to the
transition agreement with Rockwell, the Company is relying on certain of
Rockwell's computer systems, including its payroll and benefits administration
systems, for a period of up to two years after the Distribution. The Company
believes that the Rockwell systems on which it relies for transition services
will be Year 2000 ready, such that its reliance thereon will not have a material
adverse effect on the Company's financial position or results of operations.
Overall, utilizing both internal and external resources to address the Year 2000
issue, Conexant has achieved a certification level of 80 percent as of March 31,
1999 and plans to be 100 percent complete by June 30, 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). As of March 31, 1999, approximately $2.3 million had been spent,
with the majority of the remaining amount to be spent by the end of this fiscal
year. Conexant 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 ready could have a material adverse effect on Conexant's business
operations, products, and financial condition.
15
<PAGE> 16
The Company has begun initial preparation of a Year 2000 contingency plan for
the entire Company, with an expectation to complete this plan by September 1999.
CAUTIONARY STATEMENT
This Quarterly Report contains statements relating to future results of the
Company (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. 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 and raw materials; pricing pressures
and other competitive factors; changes in product mix; fluctuations in
manufacturing yields; product obsolescence; the ability to develop and implement
new technologies and to obtain protection of the related intellectual property;
the successful implementation of the Company's diversification strategy and
restructuring plan; labor relations of the Company, its customers and suppliers;
timely completion of 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 discussed in the
Company's Registration Statement on Form 10 or detailed from time to time in the
Company's Securities and Exchange Commission filings. Reference is made to the
Risk Factors section on pages 12 to 21 of the Information Statement included in
the Company's Registration Statement on Form 10. These forward-looking
statements are made only as of the date hereof, and the Company undertakes no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and short-term debt. At March
31, 1999, 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 $14.3 million at March 31, 1999, and $17 million
at September 30, 1998. 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 March 31, 1999, 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. 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 Conexant 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.
Conexant'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. Conexant's petition for certiorari with the United States
Supreme Court filed on November 23, 1998 was denied in January 1999. Conexant
has received a satisfaction of judgment from the court for the $65 million,
previously accrued for the ultimate resolution of this matter, used to satisfy
Conexant's obligation with respect to this matter.
Conexant 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 Conexant'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. As of November 3, 1998, Conexant settled its portion of the
lawsuit.
On October 14, 1997, Brent Townshend filed suit against Rockwell and Conexant in
the Superior Court of California for San Mateo County seeking an injunction to
halt the sale of products containing Conexant's K56Flex(TM) chipsets and
requesting unspecified damages, claiming that Conexant had engaged in unfair
competition, misappropriation of trade secrets, breach of contract and breach of
confidence by using technical information allegedly disclosed in confidence by
Mr. Townshend to accelerate its development of 56 Kbps modem technology. In
January 1999, Townshend dismissed his State Court action and re-filed the same
claims and three new claims for patent infringement in the U.S. District Court
for the Northern District of California. In the Federal action, Townshend
alleges that each of his patents (the "Townshend Patents") covers certain
aspects of the V.90 standard and are infringed by Conexant's 56 Kbps products.
In the Federal action, Townshend seeks injunctive relief, compensatory damages,
restitution and exemplary and punitive damages. Townshend and 3Com Corporation
have publicly announced that 3Com is the exclusive licensee for the Townshend
Patents and acts as Townshend's agent in sublicensing the Townshend Patents to
third parties. Conexant is vigorously defending its position that it
independently developed the 56 Kbps modem technology using entirely its own
skills and public domain information and will vigorously contest the
infringement claims and the validity of the asserted patents.
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 Conexant's facsimile modem chipsets seeking 685 million
yen (approximately $5.74 million based on the exchange rate on April 28, 1999)
and court costs. In October 1998, the District Court rendered its decision
dismissing the suit, from which decision Mr. Yamazaki appealed. On April 12,
1999, Mr. Yamazaki presented his position at the first portion of the appellate
hearing. Conexant will present its position to the appellate court on June 16,
1999. Conexant 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 Conexant's modem products utilizing the
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<PAGE> 18
V.42bis standard for data compression. On September 30, 1998, the Court barred
any alleged damages arising before May 30, 1997. On December 17, 1998, the Court
issued an order construing the claims of the patent. Conexant filed a motion for
Summary Judgment of Non-Infringement on February 22, 1999, and expects a hearing
thereon in June 1999. Conexant believes it has meritorious defenses to these
claims and will vigorously defend this action.
Conexant 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 filed a patent infringement suit in the
U.S. District Court in Arizona against approximately 88 defendants from the
semiconductor industry, including Rockwell and Conexant. Rockwell and Conexant
are in the process of negotiating a license under the Lemelson patent portfolio.
It is Conexant's position that a portion of any royalty Conexant would be
obligated to pay under such license should be indemnified by certain vendors to
Conexant.
Various other lawsuits, claims and proceedings have been or may be instituted or
asserted against Rockwell or Conexant or their respective subsidiaries,
including those pertaining to product liability, intellectual property,
environmental, safety and health, and employment matters.
In connection with the Distribution, Conexant assumed responsibility for all
current and future litigation (including environmental and intellectual property
proceedings) against Rockwell or its subsidiaries in respect of Semiconductor
Systems.
The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to Conexant Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
Conexant. Based on its evaluation of matters which are pending or asserted and
taking into account Conexant's reserves for such matters, management of Conexant
believes the disposition of such matters will not have a material adverse effect
on the financial condition or results of operations of Conexant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.b.1 Amendment, adopted January 4, 1999, to the By-Laws of the
Company, filed as Exhibit 99.2 to the Company's Current Report
on Form 8-K dated January 12, 1999, is incorporated herein by
reference.
3.b.2 Amended By-Laws of the Company, filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated January 12, 1999,
are incorporated herein by reference.
10.1* Form of Stock Option Agreement under the Company's 1999
Long-Term Incentives Plan.
10.2* Form of Restricted Stock Agreement (Performance Vesting) under
the Company's 1999 Long-Term Incentives Plan.
10.3* Form of Restricted Stock Agreement (Time Vesting) under the
Company's 1999 Long-Term Incentives Plan.
18
<PAGE> 19
11 Computation of Per Share Data.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January 12, 1999,
in respect of the completion on December 31, 1998, of the spin-off of
Rockwell's Semiconductor Systems business to holders of shares of
Common Stock, par value $1 per share, of Rockwell by means of the
distribution to such holders of all outstanding shares of Common Stock,
par value $1 per share (including the associated preferred share
purchase rights), of the Company (Items 5 and 7(c)).
The Company filed a Current Report on Form 8-K dated January 20,1999,
in respect of the Company's press release reporting earnings for the
three months ended January 1, 1999, (Items 5 and 7(c)).
- --------------------
* Management contract or compensatory plan or arrangement.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONEXANT SYSTEMS, INC.
(Registrant)
Date: April 30, 1999 By /s/ BALAKRISHNAN S. IYER
--------------------------
Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Date: April 30, 1999 By /s/ STEVEN M. THOMSON
--------------------------
Steven M. Thomson
Vice President and Controller
(principal accounting officer)
Date: April 30, 1999 By /s/ DENNIS E. O'REILLY
--------------------------
Dennis E. O'Reilly
Senior Vice President,
General Counsel and Secretary
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
3.b.1 Amendment, adopted January 4, 1999, to the By-Laws of the
Company, filed as Exhibit 99.2 to the Company's Current Report on Form
8-K dated January 12, 1999, is incorporated herein by reference.
3.b.2 Amended By-Laws of the Company, filed as Exhibit 99.3 to the Company's
Current Report on Form 8-K dated January 12, 1999, are incorporated
herein by reference.
10.1* Form of Stock Option Agreement under the Company's 1999 Long-Term
Incentives Plan.
10.2* Form of Restricted Stock Agreement (Performance Vesting) under the
Company's 1999 Long-Term Incentives Plan.
10.3* Form of Restricted Stock Agreement (Time Vesting) under the Company's
1999 Long-Term Incentives Plan.
11 Computation of Per Share Data.
27 Financial Data Schedule.
</TABLE>
- ----------------
* Management contract or compensatory plan or arrangement.
21
<PAGE> 1
EXHIBIT 10.1
January 4, 1999
NAME
ADDRESS_1
ADDRESS_2
Social Security/Account Number: SSN
Dear Optionee:
We are pleased to notify you that the Board of Directors has granted to you
today the following stock option(s) under the 1999 Long-Term Incentives Plan
(the Plan):
Date of Grant Type of Grant Number of Shares Option Price
------------- ------------- ---------------- ------------
GRANT DATE NON-QUALIFIED OPTIONS GRANTED GRANT
These stock option(s) have been granted, and may be exercised only upon the
terms and conditions of this Stock Option Agreement, subject in all respects to
the provisions of the Plan, as it may be amended. The attached Stock Option
Terms and Conditions are incorporated in and are part of this Stock Option
Agreement.
This stock option grant is also subject to the condition that you sign and
return one copy of the Mutual Agreement to Arbitrate Claims to:
Conexant Systems, Inc.
Office of the Secretary
4311 Jamboree Road
Newport Beach, California 92660-3095
These stock option(s) will be of no effect if the copy of the Mutual Agreement
to Arbitrate Claims properly signed by you, is not received by the Office of the
Secretary of Conexant on or before May 31, 1999, unless Conexant (in its sole
discretion) elects in writing to extend that date.
A Stock Options Participant Booklet, including copies of the Plan and the
Prospectus is enclosed. Please carefully read the enclosed documents and retain
them for future reference.
By: /s/ DENNIS E. O'REILLY
--------------------------------
Dennis E. O'Reilly
Senior Vice President
General Counsel and Secretary
<PAGE> 2
CONEXANT SYSTEMS, INC.
1999 LONG-TERM INCENTIVES PLAN
STOCK OPTION AGREEMENT
STOCK OPTION TERMS AND CONDITIONS
1. Definitions
Capitalized terms used and not defined herein shall have the prespective
meanings assigned to such terms in the Plan. As used in these Stock Option
Terms and Conditions, the following words and phrases shall have the
respective meanings ascribed to them below unless the context in which any
of them is used clearly indicates a contrary meaning:
(a) CHASEMELLON: ChaseMellon Shareholder Services, the Stock Option
Administrator whom Conexant has engaged to administer and process all
stock option exercises.
(b) CONEXANT: Conexant Systems, Inc., a Delaware corporation.
(c) IVR: Integrated Voice Response system that is used to facilitate all
stock option transactions.
(d) OPTIONS: The stock option or stock options listed in the first paragraph
of the letter dated [Date] to which these Stock Option Terms and
Conditions are attached and which together with these Stock Option Terms
and Conditions constitutes the Stock Option Agreement.
(e) OPTION SHARES: The shares of Conexant Common Stock issuable or
transferable on exercise of the Options.
(f) PLAN: Conexant's 1999 Long-Term Incentives Plan, as such Plan may be
amended and in effect at the relevant time.
(g) SHARES: Shares of Conexant Common Stock.
(h) STOCK OPTION AGREEMENT: These Stock Option Terms and Conditions together
with the letter dated [Date] to which they are attached.
2. When Options May be Exercised
The Options may be exercised, in whole or in part (but only for a whole
number of shares) and at one time or from time to time, as follows:
<TABLE>
<CAPTION>
Beginning Ending
--------- ------
<S> <C> <C>
25% of the Option Shares [Date] [Date]
25% of the Option Shares [Date] [Date]
25% of the Option Shares [Date] [Date]
25% of the Option Shares [Date] [Date]
</TABLE>
<PAGE> 3
All vesting increments are rounded to the nearest whole number of Option
Shares and vest only during the period indicated above, provided that:
(a) if you die while an employee of the Corporation, your estate, or any
person who acquires the Options by bequest or inheritance, may exercise
all the Options not theretofore exercised within (and only within) the
period beginning on your date of death (even if you die before you have
become entitled to exercise all or any part of the Options) and ending
three years thereafter;
(b) if your employment by the Corporation terminates other than by death,
then:
(i) if your employment by the Corporation is terminated for Cause, the
Options shall expire forthwith upon your termination and may not be
exercised thereafter;
(ii) if your employment by the Corporation terminates for any reason
(including Retirement or Disability) not specified in subparagraph
(a) or in clause (i) of this subparagraph (b), you (or if you die
after your termination date, your estate or any person who acquires
the Options by bequest or inheritance) may thereafter exercise the
Options within (and only within) the period ending three months
after your termination date but only to the extent they were
exercisable on your termination date it being understood that
neither (i) your transfer from Conexant to a Subsidiary or
affiliate of Conexant, whether or not incorporated, or vice versa,
or from one Subsidiary or affiliate of the Corporation to another,
nor (ii) a leave of absence duly authorized in writing by Conexant,
shall be deemed a termination of employment); and
(c) in the event a Change of Control shall occur, then all the Options shall
forthwith become fully exercisable whether or not otherwise then
exercisable.
The Committee may, in its discretion, extend the period during which Options
may be exercised beyond the period set forth in subparagraphs (a) and
(b)(ii) above, but in no event shall the provisions of the foregoing
subparagraphs (a) through (c) extend to a date after [ten years after Grant
Date] the period during which the Options may be exercised.
3. Exercise Procedure
(a) To exercise all or any part of the Options, you (or after your death,
your estate or any person who has acquired the Options by bequest or
inheritance) must contact the administrator, ChaseMellon, by using the
IVR system as follows:
(i) contact ChaseMellon using a touch-tone phone and follow the
instructions provided (or contact ChaseMellon using a rotary phone
and speak to a Customer Service Representative);
-2-
<PAGE> 4
(ii) confirm the Option transaction through the IVR system by receiving
a confirmation number;
(iii) at any time you may speak to a Customer Service Representative for
assistance;
(iv) full payment of the exercise price for the Option Shares to be
purchased on exercise of the Options may be made by:
o check; or
o in Shares; or
o in a combination of check and Shares; and
(v) in the case of an exercise of the Options by any person other than
you seeking to exercise the Options, such documents as ChaseMellon
or the Secretary of Conexant shall require to establish to their
satisfaction that the person seeking to exercise the Options is
entitled to do so.
(b) An exercise of the whole or any part of the Options shall be effective:
(i) if you elect (or after your death, the person entitled to exercise
the Options elects) to pay the exercise price for the Option Shares
entirely by check, (i) upon confirmation of your transaction by
using the IVR system and full payment of the exercise price and
withholding taxes (if applicable) are received by ChaseMellon
within five business days following the confirmation; and (ii)
receipt of any documents required pursuant to Section 3(a)(v); and
(ii) if you elect (or after your death, the person entitled to exercise
the Options elects) to pay the exercise price of the Option Shares
in Shares or in a combination of Shares and check, (i) upon
confirmation of your transaction by using the IVR system and full
payment of the exercise price (as defined in Section 3(d)(i)) and
withholding taxes (if applicable) are received by ChaseMellon
within five business days following the confirmation; and (ii)
receipt of any documents required pursuant to Section 3(a)(v).
-3-
<PAGE> 5
(c) If you choose (or after your death, the person entitled to exercise the
Options chooses) to pay the exercise price for the Option Shares to be
purchased on exercise of any of the Options entirely by check, payment
must be made by:
o delivering to ChaseMellon a check in the full amount of the
exercise price for those Option Shares; or
o arranging with a stockbroker, bank or other financial institution
to deliver to ChaseMellon full payment, by check or (if prior
arrangements are made with ChaseMellon) by wire transfer, of the
exercise price of those Option Shares.
In either event, in accordance with Section 3(e), full payment of the
exercise price for the Option Shares purchased must be made within five
business days after the exercise has been conducted and confirmed
through the IVR system.
(d) (i) If you choose (or after your death, the person entitled to
exercise the Options chooses) to use already-owned Shares to pay
all or part of the exercise price for the Option Shares to be
purchased on exercise of any of the Options, you (or after your
death, the person entitled to exercise the Options) must deliver to
ChaseMellon one or more certificates (and executed stock powers),
or authorize the book-entry transfer to Conexant of shares,
representing:
o at least the number of Shares whose value, based on the closing
price of Common Stock of Conexant on the NASDAQ reporting system
on the day you have exercised your Options through the IVR
system, equals the exercise price for those Option Shares; or
o any lesser number of Shares you desire (or after your death, the
person entitled to exercise the Options desires) to use to pay
the exercise price for those Option Shares and a check in the
amount of such exercise price less the value of the Shares
delivered, based on the closing price of Common Stock of
Conexant on the NASDAQ reporting system on the day you have
exercised your Options through the IVR system.
(ii) ChaseMellon will advise you (or any other person who, being
entitled to do so, exercises the Options) of the exact number of
Shares, valued in accordance with Section 4 of the Plan at the
closing price on the NASDAQ reporting system on the effective date
of exercise under Section 3(b)(ii), and any funds required to pay
in full the exercise price for the Option Shares purchased. In
accordance with Section 3(e), you (or such other person) must pay,
by check, in Shares or in a combination of check and Shares, any
balance required to pay in full the exercise price of the Option
Shares purchased within five business days following the effective
date of such exercise of the Options under Section 3(b)(ii).
-4-
<PAGE> 6
(iii) Notwithstanding any other provision of this Stock Option
Agreement, the Secretary of Conexant may limit the number,
frequency or volume of successive exercises of any of the Options
in which payment is made, in whole or in part, by delivery of
Shares pursuant to this subparagraph (d) to prevent unreasonable
pyramiding of such exercises.
(e) An exercise conducted and confirmed through the IVR system, whether or
not full payment of the exercise price for the Option Shares is received
by ChaseMellon, shall constitute a binding contractual obligation by you
(or the other person entitled to exercise the Options) to proceed with
and complete that exercise of the Options (but only so long as you
continue, or the other person entitled to exercise the Options
continues, to be entitled to exercise the Options on that date). By your
acceptance of this Stock Option Agreement, you agree (for yourself and
on behalf of any other person who becomes entitled to exercise the
Options) to deliver or cause to be delivered to ChaseMellon any balance
of the exercise price for the Option Shares to be purchased upon the
exercise pursuant to the transaction conducted through the IVR system
required to pay in full the exercise price for those Option Shares, that
payment being by check, wire transfer, in Shares or in a combination of
check and Shares, on or before the later of the fifth business day after
the date on which you confirm the transaction through the IVR system. If
such payment is not made, you (for yourself and on behalf of any other
person who becomes entitled to exercise the Options) authorize the
Corporation, in its discretion, to set off against salary payments or
other amounts due or which may become due you (or the other person
entitled to exercise the Options) any balance of the exercise price for
those Option Shares remaining unpaid thereafter.
(f) A book-entry statement representing the number of Option Shares
purchased will be issued as soon as practicable (i) after ChaseMellon
has received full payment therefor or (ii) at Conexant's or
ChaseMellon's election in their sole discretion, after Conexant or
ChaseMellon has received (x) full payment of the exercise price of those
Option Shares and (y) any reimbursement in respect of withholding taxes
due pursuant to Section 5.
4. Transferability
The Options are not transferable by you otherwise than by will or by the
laws of descent and distribution. During your lifetime, only you are
entitled to exercise the Options.
5. Withholding
Conexant or ChaseMellon shall have the right, in connection with the
exercise of the Options in whole or in part, to deduct from any payment to
be made by Conexant or ChaseMellon under the Plan an amount equal to the
taxes required to be withheld by law with respect to such exercise or to
require you (or any other person entitled to exercise the Options) to pay to
it an amount sufficient to provide for any such taxes so required to be
withheld. By your acceptance of this Stock Option Agreement, you agree (for
yourself and on behalf of any other person who becomes entitled to exercise
the Options) that if
-5-
<PAGE> 7
Conexant or ChaseMellon elects to require you (or such other person) to
remit an amount sufficient to pay such withholding taxes, you (or such other
person) must remit that amount within five business days after the
confirmation of the Option exercise (Section 3(a)(ii)). If such payment is
not made, Conexant, in its discretion, shall have the same right of set-off
with respect to payment of the withholding taxes in connection with the
exercise of the Option as provided under Section 3(e) with respect to
payment of the exercise price.
6. Rights as Shareowner
You will not have any rights as a shareowner with respect to any Option
Shares unless and until you become the holder of such Option Shares on the
books and records of Conexant.
7. Headings
The section headings contained in these Stock Option Terms and Conditions
are solely for the purpose of reference, are not part of the agreement of
the parties and shall in no way affect the meaning or interpretation of this
Stock Option Agreement.
8. References
All references in these Stock Option Terms and Conditions to Sections,
paragraphs, subparagraphs or clauses shall be deemed to be references to
Sections, paragraphs, subparagraphs and clauses of these Stock Option Terms
and Conditions unless otherwise specifically provided.
9. Entire Agreement
This Stock Option Agreement and the Plan embody the entire agreement and
understanding between Conexant and you with respect to the Options, and
there are no representations, promises, covenants, agreements or
understandings with respect to the Options other than those expressly set
forth in this Stock Option Agreement and the Plan.
10. Applicable Laws and Regulations
This Stock Option Agreement and Conexant's obligation to issue Option Shares
hereunder are governed by the laws of California and the Federal law of the
United States.
-6-
<PAGE> 1
EXHIBIT 10.2
CONEXANT SYSTEMS, INC.
RESTRICTED STOCK AGREEMENT
To: [NAME] [GRANT DATE]
In accordance with a determination of the Board of Directors of Conexant
Systems, Inc. (the Corporation) on _______________, 1999 (the Grant Date),
[ ] shares (the Restricted Shares) of Common Stock of the Corporation have
been granted to you as Restricted Stock pursuant to the Corporation's 1999
Long-Term Incentives Plan (the Plan). Capitalized terms used herein but not
otherwise defined shall have the meanings assigned to such terms in the Plan.
The Restricted Shares have been granted to you today upon the following
terms and conditions:
1. Earning of Restricted Shares
You shall be deemed to have earned the Restricted Shares subject
to this Agreement on the earlier of:
(a) the eighth anniversary of the Grant Date;
(b) with respect to 50% of the Restricted Shares, when the Fair
Market Value of the Stock is equal to or greater than 150% of the Fair
Market Value of the Stock on the Grant Date for at least 20 consecutive
trading days and with respect to 100% of the Restricted Shares when the
Fair Market Value of the Stock is equal to or greater than 200% of the
Fair Market Value of the Stock on the Grant Date for at least 20
consecutive trading days; provided, however, that no Restricted Shares
shall be deemed to have been earned pursuant to this paragraph 1(b)
prior to the first anniversary of the Grant Date.
(c) your death or Disability; or
(d) a Change of Control.
For purposes of the foregoing, a "trading day" shall include any
day for which sales generally are reported in the Nasdaq reporting
system, regardless of whether a sale of Stock is reported for such date.
2. Retention of Certificates for Restricted Shares and Dividends
Certificates for the Restricted Shares and any dividends or
distributions thereon or in respect thereof (Dividends), whether in cash
or otherwise (including but not limited to additional shares of Stock,
other securities of the Corporation or securities of another entity, any
such shares or other securities being collectively referred to herein as
Stock Dividends) shall be delivered to and held by the Corporation, or
shall be held in book-entry form subject to the Corporation's
instructions, until you shall have earned the Restricted Shares in
accordance with the provisions of paragraph 1, [Alternative provision:
provided that unless you shall have earlier earned the Restricted
Shares, the Restricted Shares will not be issued, and no dividends will
be paid or distributions made thereon, prior to June 30, 1999]. To
facilitate implementation of the provisions of this
<PAGE> 2
agreement, you undertake to sign and deposit with the Corporation's
Office of the Secretary (i) a Stock Transfer Power in the form of
ATTACHMENT 1 hereto with respect to the Restricted Shares and any Stock
Dividends thereon; (ii) a Dividend Order in the form of ATTACHMENT 2
hereto with respect to Dividends (whether payable in cash or as Stock
Dividends) on the Restricted Shares; and (iii) such other documents
appropriate to effectuate the purpose and intent of this agreement as
the Corporation may reasonably request from time to time.
3. Voting Rights
Notwithstanding the retention by the Corporation of certificates (or the
right to give instructions with respect to shares held in book-entry
form) for the Restricted Shares and any Stock Dividends, you shall be
entitled to vote the Restricted Shares and any Stock Dividends held by
the Corporation in accordance with paragraph 2 from and after the time
of issuance thereof, unless and until such shares have been forfeited in
accordance with paragraph 5.
4. Delivery of Earned Restricted Shares
As promptly as practicable after you shall have been deemed to have
earned the Restricted Shares in accordance with paragraph 1, the
Corporation shall deliver to you (or in the event of your death, to your
estate or any person who acquires your interest in the Restricted Shares
by bequest or inheritance) the Restricted Shares, together with any
Dividends then held by the Corporation (or subject to its instructions).
5. Forfeiture of Unearned Restricted Shares and Dividends
Notwithstanding any other provision of this agreement, (a) if at any
time it shall become impossible for you to earn any of the Restricted
Shares in accordance with this agreement, or (b) unless determined
otherwise by the Committee, in the event of a Termination of Employment,
all unearned Restricted Shares, together with any Dividends thereon,
shall be forfeited, and you shall have no further rights of any kind or
nature with respect thereto. Upon any such forfeiture, the unearned
Restricted Shares theretofore issued, together with any Dividends
thereon, shall be transferred to the Corporation. For purposes of this
paragraph, "Termination of Employment" shall mean your termination of
your employment as an employee of the Corporation for any reason, or the
Corporation terminating your employment for Cause, provided that (i)
death, (ii) Disability, (iii) a transfer from the Corporation to a
Subsidiary or affiliate of the Corporation, whether or not incorporated,
or vice versa, or from one Subsidiary or affiliate of the Corporation to
another and (iv) a leave of absence, duly authorized in writing by the
Corporation, shall not be deemed a Termination of Employment.
6. Transferability
This grant is not transferable by you otherwise than by will or by the
laws of descent and distribution, and the Restricted Shares and any
Dividends shall be deliverable, during your lifetime, only to you.
-2-
<PAGE> 3
7. Withholding
The Corporation shall have the right, in connection with the delivery of
the Restricted Shares and any Dividends subject to this agreement, (i)
to deduct from any payment otherwise due by the Corporation to you or
any other person receiving delivery of the Restricted Shares and any
Dividends an amount equal to the taxes required to be withheld by law
with respect to such delivery, (ii) to require you or any other person
receiving such delivery to pay to it an amount sufficient to provide for
any such taxes so required to be withheld or (iii) to sell such number
of the Restricted Shares and any Stock Dividends as may be necessary so
that the net proceeds of such sale shall be an amount sufficient to
provide for any such taxes so required to be withheld.
8. Applicable Law
This agreement and the Corporation's obligation to deliver Restricted
Shares and any Dividends hereunder shall be governed by and construed
and enforced in accordance with the laws of California and the Federal
law of the United States.
CONEXANT SYSTEMS, INC.
By: /s/ DENNIS E. O'REILLY
---------------------------
Dennis E. O'Reilly
Senior Vice President
General Counsel and Secretary
Accepted and agreed as of the date set forth above.
- ---------------------------------------------
(Signature)
[NAME]
Address:
----------------------------------
----------------------------------
----------------------------------
Social Security No.:
-------------------------
Attachment 1 - Stock Transfer Power
Attachment 2 - Dividend Order
-3-
<PAGE> 4
ATTACHMENT 1
STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, [______________________], hereby sell, assign and
transfer unto Conexant Systems, Inc. (i) the [_______] shares (the Shares) of
the Common Stock of Conexant Systems, Inc. (Conexant) standing in my name on the
books of Conexant represented in book-entry form or by Certificate No. ________
herewith, granted to me on [____________________, 199__], as Restricted Stock
under Conexant's 1999 Long-Term Incentives Plan, and (ii) any additional shares
of Conexant's Common Stock, other securities issued by Conexant or securities of
another entity (Stock Dividends) distributed, paid or payable on or in respect
of the Shares and Stock Dividends during the period the Shares and Stock
Dividends are held by Conexant pursuant to a certain Restricted Stock Agreement
dated [___________________, 199__,] with respect to the Shares; and I do hereby
irrevocably constitute and appoint __________________________, attorney with
full power of substitution in the premises to transfer the Shares on the books
of Conexant.
Dated: _________________, 199__
------------------------
(Signature)
<PAGE> 5
ATTACHMENT 2
Send To:
---------------------------------------------------------
---------------------------------------------------------
D I V I D E N D O R D E R
Date:
------------------
Until this order shall be revoked in writing by the undersigned with the written
consent of the Secretary or an Assistant Secretary of Conexant Systems, Inc.,
please comply with the following instructions with respect to the payment of all
dividends or other distributions on all shares of Common Stock of Conexant
Systems, Inc.:
REGISTERED AS FOLLOWS: [Name]
[Address]
[City, State Zip]
Tax Identification No.: [SSN]
Account Key:
DIVIDEND CHECKS and all rights, stock dividends, notices and other
communications (other than proxy statements and proxies) pertaining to the above
account are to be payable to and mailed as follows:
Conexant Systems, Inc.
Office of the Secretary
4311 Jamboree Road
Newport Beach, CA 92660
All proxy statements, proxies and related materials pertaining to the above
account are to be mailed to the undersigned at the following address:
[Name]
[Address]
THIS ORDER MUST BE SIGNED BY ALL REGISTERED OWNERS:
- ------------------------------
(Signature)
<PAGE> 1
EXHIBIT 10.3
CONEXANT SYSTEMS, INC.
RESTRICTED STOCK AGREEMENT
To: [NAME] [GRANT DATE]
In accordance with a determination of the Board of Directors of Conexant
Systems, Inc. (the Corporation) on _______________, 1999 (the Grant Date),
[ ] shares (the Restricted Shares) of Common Stock of the Corporation have
been granted to you as Restricted Stock pursuant to the Corporation's 1999
Long-Term Incentives Plan (the Plan). Capitalized terms used herein but not
otherwise defined shall have the meanings assigned to such terms in the Plan.
The Restricted Shares have been granted to you today upon the following
terms and conditions:
1. Earning of Restricted Shares
You shall be deemed to have earned the Restricted Shares subject
to this Agreement on the earlier of:
(a) the second anniversary of the Grant Date;
[Alternative special vesting provisions:
X shares on the first anniversary of the Grant Date;
X shares on the second anniversary of the Grant Date;
X shares on the third anniversary of the Grant Date;
X shares on the fourth anniversary of the Grant Date.]
(b) your death or Disability; or
(c) a Change of Control.
2. Retention of Certificates for Restricted Shares and Dividends
Certificates for the Restricted Shares and any dividends or
distributions thereon or in respect thereof (Dividends), whether in cash
or otherwise (including but not limited to additional shares of Stock,
other securities of the Corporation or securities of another entity, any
such shares or other securities being collectively referred to herein as
Stock Dividends) shall be delivered to and held by the Corporation, or
shall be held in book-entry form subject to the Corporation's
instructions, until you shall have earned the Restricted Shares in
accordance with the provisions of paragraph 1 [Alternative provision:
provided that unless you shall have earlier earned the Restricted
Shares, the Restricted Shares will not be issued, and no dividends will
be paid or distributions made thereon prior to June 30, 1999]. To
facilitate implementation of the provisions of this agreement, you
undertake to sign and deposit with the Corporation's Office of the
Secretary (i) a Stock Transfer Power in the form of ATTACHMENT 1 hereto
with respect to the Restricted Shares and any Stock Dividends thereon;
(ii) a Dividend Order in the form of ATTACHMENT 2 hereto with respect to
Dividends (whether payable in cash or as Stock Dividends) on the
Restricted Shares; and (iii) such other documents appropriate to
effectuate the purpose and intent of this agreement as the Corporation
may reasonably request from time to time.
<PAGE> 2
3. Voting Rights
Notwithstanding the retention by the Corporation of certificates (or the
right to give instructions with respect to shares held in book-entry
form) for the Restricted Shares and any Stock Dividends, you shall be
entitled to vote the Restricted Shares and any Stock Dividends held by
the Corporation in accordance with paragraph 2 from and after the time
of issuance thereof, unless and until such shares have been forfeited in
accordance with paragraph 5.
4. Delivery of Earned Restricted Shares
As promptly as practicable after you shall have been deemed to have
earned the Restricted Shares in accordance with paragraph 1, the
Corporation shall deliver to you (or in the event of your death, to your
estate or any person who acquires your interest in the Restricted Shares
by bequest or inheritance) the Restricted Shares, together with any
Dividends then held by the Corporation (or subject to its instructions).
5. Forfeiture of Unearned Restricted Shares and Dividends
Notwithstanding any other provision of this agreement, (a) if at any
time it shall become impossible for you to earn any of the Restricted
Shares in accordance with this agreement, or (b) unless determined
otherwise by the Committee, in the event of a Termination of Employment,
all unearned Restricted Shares, together with any Dividends thereon,
shall be forfeited, and you shall have no further rights of any kind or
nature with respect thereto. Upon any such forfeiture, the unearned
Restricted Shares theretofore issued, together with any Dividends
thereon, shall be transferred to the Corporation. For purposes of this
paragraph, "Termination of Employment" shall mean your termination of
your employment as an employee of the Corporation for any reason, or the
Corporation terminating your employment for Cause, provided that (i)
death, (ii) Disability, (iii) a transfer from the Corporation to a
Subsidiary or affiliate of the Corporation, whether or not incorporated,
or vice versa, or from one Subsidiary or affiliate of the Corporation to
another and (iv) a leave of absence, duly authorized in writing by the
Corporation, shall not be deemed a Termination of Employment.
6. Transferability
This grant is not transferable by you otherwise than by will or by the
laws of descent and distribution, and the Restricted Shares and any
Dividends shall be deliverable, during your lifetime, only to you.
7. Withholding
The Corporation shall have the right, in connection with the delivery of
the Restricted Shares and any Dividends subject to this agreement, (i)
to deduct from any payment otherwise due by the Corporation to you or
any other person receiving delivery of the Restricted Shares and any
Dividends an amount equal to the taxes required to be withheld by law
with respect to such delivery, (ii) to require you or any other person
receiving such delivery to pay to it an amount sufficient to provide for
any such taxes so required to be withheld or (iii) to sell such number
of the Restricted Shares and any Stock Dividends as may be necessary so
that the net proceeds of such sale shall be an amount sufficient to
provide for any such taxes so required to be withheld.
-2-
<PAGE> 3
8. Applicable Law
This agreement and the Corporation's obligation to deliver Restricted
Shares and any Dividends hereunder shall be governed by and construed
and enforced in accordance with the laws of California and the Federal
law of the United States.
CONEXANT SYSTEMS, INC.
By: /s/ DENNIS E. O'REILLY
---------------------------
Dennis E. O'Reilly
Senior Vice President
General Counsel and Secretary
Accepted and agreed as of the date set forth above.
- ---------------------------------------------
(Signature)
[NAME]
Address:
----------------------------------
----------------------------------
----------------------------------
Social Security No.:
-------------------------
Attachment 1 - Stock Transfer Power
Attachment 2 - Dividend Order
-3-
<PAGE> 4
ATTACHMENT 1
STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, [______________________], hereby sell, assign and
transfer unto Conexant Systems, Inc. (i) the [_______] shares (the Shares) of
the Common Stock of Conexant Systems, Inc. (Conexant) standing in my name on the
books of Conexant represented in book-entry form or by Certificate No. ________
herewith, granted to me on [____________________, 199__], as Restricted Stock
under Conexant's 1999 Long-Term Incentives Plan, and (ii) any additional shares
of Conexant's Common Stock, other securities issued by Conexant or securities of
another entity (Stock Dividends) distributed, paid or payable on or in respect
of the Shares and Stock Dividends during the period the Shares and Stock
Dividends are held by Conexant pursuant to a certain Restricted Stock Agreement
dated [___________________, 199__,] with respect to the Shares; and I do hereby
irrevocably constitute and appoint __________________________, attorney with
full power of substitution in the premises to transfer the Shares on the books
of Conexant.
Dated: _________________, 199__
------------------------
(Signature)
<PAGE> 5
ATTACHMENT 2
Send To:
---------------------------------------------------------
---------------------------------------------------------
D I V I D E N D O R D E R
Date:
------------------
Until this order shall be revoked in writing by the undersigned with the written
consent of the Secretary or an Assistant Secretary of Conexant Systems, Inc.,
please comply with the following instructions with respect to the payment of all
dividends or other distributions on all shares of Common Stock of Conexant
Systems, Inc.:
REGISTERED AS FOLLOWS: [Name]
[Address]
[City, State Zip]
Tax Identification No.: [SSN]
Account Key:
DIVIDEND CHECKS and all rights, stock dividends, notices and other
communications (other than proxy statements and proxies) pertaining to the above
account are to be payable to and mailed as follows:
Conexant Systems, Inc.
Office of the Secretary
4311 Jamboree Road
Newport Beach, CA 92660
All proxy statements, proxies and related materials pertaining to the above
account are to be mailed to the undersigned at the following address:
[Name]
[Address]
THIS ORDER MUST BE SIGNED BY ALL REGISTERED OWNERS:
- ------------------------------
(Signature)
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE DATA:
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
------------------
BASIC NET INCOME PER SHARE:
<S> <C>
Net Income ............................................................................... $ 7,617
Weighted average number of common shares outstanding ..................................... 94,979
-------
Basic Net Income Per Share ............................................................... $ 0.08
=======
DILUTED NET INCOME PER SHARE:
Net Income ............................................................................... $ 7,617
Weighted average number of common and common equivalent shares assuming
issuance of all outstanding dilutive stock options and restricted stock:
Common stock ....................................................................... 94,979
Dilutive stock options ............................................................. 1,736
Restricted stock ................................................................... 1,017
-------
Total ......................................................................... 97,732
-------
Diluted Net Income Per Share ............................................................. $ 0.08
=======
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS AND UNAUDITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31,
1999 AND NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 159,099
<SECURITIES> 0
<RECEIVABLES> 153,830
<ALLOWANCES> 7,869
<INVENTORY> 146,661
<CURRENT-ASSETS> 553,244
<PP&E> 1,448,412
<DEPRECIATION> 797,338
<TOTAL-ASSETS> 1,316,518
<CURRENT-LIABILITIES> 314,361
<BONDS> 0
0
0
<COMMON> 96,279
<OTHER-SE> 815,045
<TOTAL-LIABILITY-AND-EQUITY> 1,316,518
<SALES> 611,610
<TOTAL-REVENUES> 611,610
<CGS> 403,431
<TOTAL-COSTS> 403,431
<OTHER-EXPENSES> 294,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,683
<INCOME-PRETAX> (86,434)
<INCOME-TAX> (36,928)
<INCOME-CONTINUING> (49,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,506)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
