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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-70085
PROSPECTUS
CONEXANT SYSTEMS, INC.
1998 STOCK OPTION PLAN
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COMMON STOCK, PAR VALUE $1 PER SHARE
(INCLUDING ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
The approximately 10,100,000 shares of common stock offered by this
prospectus may be acquired by you as a participant in the Conexant Systems, Inc.
1998 Stock Option Plan upon the exercise of options to purchase shares of
Conexant's common stock held by you in accordance with the terms of the Plan and
your option agreement. Any proceeds received by Conexant from the exercise of
the stock options covered by the Plan will be used for general corporate
purposes.
This prospectus may also be used by certain officers and directors of
Conexant, and their permitted transferees, who may be deemed to be "affiliates"
of Conexant under certain provisions of the Securities Act of 1933, to offer and
sell shares of common stock acquired upon the exercise of stock options under
the Plan. These selling shareowners may sell these shares from time to time at
various prices and through a number of methods, including through brokers or
dealers who may receive compensation in the form of commissions, discounts or
other concessions. Conexant will pay the expenses relating to this prospectus,
but will not receive any of the proceeds from sales by the selling shareowners.
The number of shares to be sold, the names of the selling shareowners and any
other relevant information concerning a particular offering will be included in
a supplement to this prospectus.
An associated preferred share purchase right is included with each share
of common stock issued under the Plan.
The common stock and associated preferred share purchase rights are
listed on The Nasdaq Stock Market, Inc. National Market System under the trading
symbol "CNXT".
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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January 29, 1999
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR
TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF THE DATE IT
WAS FILED. YOU SHOULD BE AWARE THAT SOME OF THIS INFORMATION MAY HAVE CHANGED BY
THE TIME THIS DOCUMENT IS DELIVERED TO YOU.
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TABLE OF CONTENTS
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PAGE
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Available Information....................................... 2
Documents Incorporated By Reference......................... 3
Summary..................................................... 4
Risk Factors................................................ 5
Use of Proceeds............................................. 23
Determination of Option Exercise Prices..................... 23
The Plan.................................................... 24
Tax Consequences............................................ 29
Selling Shareowners......................................... 32
Experts..................................................... 33
Legal Matters............................................... 33
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AVAILABLE INFORMATION
In accordance with the Securities Act of 1933, as amended (the
"Securities Act"), Conexant Systems, Inc. (the "Company" or "Conexant") filed a
registration statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), relating to its common
stock (including the associated preferred share purchase rights, collectively,
the "Company Common Stock"). This prospectus does not contain all of the
information included in the Registration Statement and its attached exhibits.
You may read and obtain copies of the Registration Statement and any amendments
to it, including its exhibits, as described below.
In accordance with the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company files reports, proxy and information statements and
other information with the Commission. You may read and copy these reports,
proxy and information statements and other information that the Company files,
including the Registration Statement and its attached exhibits, at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Commission also maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants (including the Company) that file
electronically with the Commission (http://www.sec.gov). The Company's Internet
site is http://www.conexant.com.
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You also may inspect reports, proxy statements and other information
about the Company at the offices of The Nasdaq Stock Market, Inc. National
Market System ("Nasdaq"), 1735 K Street, N.W., Washington, D.C. 20006-1500.
DOCUMENTS INCORPORATED BY REFERENCE
The Company has filed with the Commission a Registration Statement on
Form 10, as amended (File Number 000-24923), pursuant to Section 12(g) of the
Exchange Act (the "Form 10"), which is incorporated by reference into and made
part of this prospectus. For a description of the Company Common Stock, see
"Description of Company Capital Stock" at pages 78-88 of the Information
Statement contained in the Form 10. The Company's Current Reports on Form 8-K
dated January 12, 1999 and January 20, 1999 are also incorporated by reference
into and made a part of this prospectus.
All of the documents that we file in accordance with Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this prospectus and
before the termination of this offering of Company Common Stock will be deemed
to be incorporated by reference in this prospectus as of the date such documents
are filed. Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus will be deemed to be modified or
superseded for purposes of this prospectus and the Registration Statement to the
extent that a statement contained in this prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus modifies or supersedes that statement. Any such
statement so modified or superseded will not constitute a part of this
prospectus or the Registration Statement, except as so modified or superseded.
Upon written or oral request, the Company will provide you with a copy of
any of the incorporated documents without charge (not including exhibits to such
documents unless such exhibits are specifically incorporated by reference into
such documents). You may submit a request for this material to Dennis E.
O'Reilly, Esq., Senior Vice President, General Counsel and Secretary, Conexant
Systems, Inc., 4311 Jamboree Road, Newport Beach, California 92660-3095
(telephone number (949) 483-4600).
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SUMMARY
THE COMPANY
The Company is the world's largest company focused exclusively on
providing semiconductor products for communications electronics. With over 30
years of experience in developing analog modem technology, the Company utilizes
its expertise in mixed-signal processing and communications technology to
deliver semiconductor products for a broad range of communications applications.
In addition to its semiconductor integrated circuit products, the Company's
system-level solutions integrate signal processing algorithms, communication
protocols and applications software.
On December 31, 1998, the Company became an independent, publicly-held
company by means of the distribution (the "Distribution") of all the outstanding
shares of Company Common Stock to shareowners of Rockwell International
Corporation ("Rockwell") at the rate of one share of Company Common Stock for
every two shares of Rockwell common stock ("Rockwell Common Stock"). Prior to
the Distribution, the Company was a wholly-owned subsidiary of Rockwell and,
together with certain other subsidiaries of Rockwell, operated Rockwell's
Semiconductor Systems business.
The Company's principal executive offices are located at 4311 Jamboree
Road, Newport Beach, California 92660-3095 (telephone number (949)483-4600).
THE OFFERINGS
As a result of the Distribution, some or all of your options to purchase
shares of Rockwell Common Stock were adjusted so that you now hold options to
purchase shares of Company Common Stock ("Company Options"). The Company has
assumed Rockwell's obligations for the Company Options and has implemented the
Conexant Systems, Inc. 1998 Stock Option Plan (the "Plan") to govern the terms
of the Company Options.
As a Company Option holder you are entitled to purchase shares of Company
Common Stock, subject to the provisions of the Plan and your option agreement.
The exercise prices for the Company Options range from $6.1528 to $20.3280 per
share of Company Common Stock. A total of approximately 10,100,000 shares of
Company Common Stock, subject to adjustment, may be purchased upon the exercise
of Company Options covered by the Plan.
This prospectus also relates to offers and sales by certain officers and
directors of the Company, and their permitted transferees (collectively, the
"Selling Shareowners"), who may be deemed to be "affiliates" of Conexant, as
defined in Rule 405 under the Securities Act, of shares of Company Common Stock
they may acquire upon the exercise of Company Options.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION IN THIS
PROSPECTUS, INCLUDING THE RISK FACTORS LISTED BELOW. ANY OF THESE RISK FACTORS
COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, WHICH IN TURN COULD MATERIALLY AND
ADVERSELY AFFECT THE PRICE OF COMPANY COMMON STOCK.
In addition to historical information, this prospectus contains
statements relating to the Company's future results. These statements include
certain projections and business trends which are "forward looking" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from projected results as a result
of certain risks and uncertainties. These risks and uncertainties include,
without limitation, those set forth below and those detailed from time to time
in our filings with the Commission:
- global and market conditions, including, without limitation, the
cyclical nature of the semiconductor industry and the markets related
to the Company's and its customers' products;
- demand for and market acceptance of new and existing products;
- successful development of new products;
- timing of new product introductions;
- availability and extent of use of manufacturing capacity;
- pricing pressures and other competitive factors;
- changes in product mix;
- fluctuations in manufacturing yields;
- product obsolescence;
- the Company's 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;
- uncertainties of litigation; and
- other risks and uncertainties.
RECENT AND ANTICIPATED FUTURE LOSSES
The Company experienced rapid growth in sales and operating earnings
during the five fiscal years ended September 30, 1996. However, in fiscal 1997
sales declined $58 million, or four percent, to $1,412 million and operating
earnings declined $119 million, or 38 percent, to $197 million, before
acquisition-related charges in both fiscal 1996 and 1997. Moreover, for
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the fiscal year ended September 30, 1998 the Company had sales of $1,200 million
and incurred an operating loss of $444 million.
In September 1998, the Company announced a comprehensive plan to
restructure its business to position the Company for future profitability. This
plan resulted in fourth quarter fiscal 1998 special charges of approximately $90
million after tax and includes workforce reductions, facility closures and other
actions. The Company's fiscal 1998 full-year net loss after tax was $262
million, including (1) inventory write-offs of $66 million, (2) a charge for
intellectual property matters of $43 million and (3) the fourth quarter special
charges. On January 19, 1999, the Company reported a net loss of $57.1 million
for the first quarter of fiscal 1999. The Company cannot assure you whether or
when it will return to profitability or whether it will be able to sustain such
profitability, if achieved.
DECLINING CONTRIBUTION OF ANALOG PC MODEM BUSINESS
The Company is the world's leading supplier of analog PC modem chipsets
for personal computing applications. However, revenues and gross margin from
sales of these products, which make up most of the Company's Personal Computing
platform, have recently declined, most particularly in fiscal 1998. This decline
is attributable to, among other factors, intense competitive price pressures as
modem chipset suppliers aggressively compete for market share. Other material
factors contributing to the decline in gross margin from sales of analog PC
modem products include slower than planned implementation of cost reduction
programs, including the transition from .35 micron to .25 micron process
technologies (which would enable the Company to produce lower-cost products) and
excess capacity in the Company's wafer fabrication facilities. Revenues of the
Company's Personal Computing platform declined from $1,173 million
(approximately 80 percent of sales) in fiscal 1996 to $640 million
(approximately 53 percent of sales) in fiscal 1998. Revenues and margins from
sales of analog PC modem products are expected to decline even further as unit
growth in the markets for these products is not anticipated to offset continued
price erosion.
In the past year, as a result of the significant price erosion for PCs,
driven to a significant extent by the market demand for sub-$1,000 PCs, PC
original equipment manufacturers ("OEMs") are demanding less expensive modem
devices, which has placed significant pricing pressure on the Company's
traditional hardware-based modem chipset products. The Company's inability to
offset further declines in the analog PC modem business with revenues and gross
margin from sales of other products would have a material adverse effect on the
Company's business, financial condition and results of operations.
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DEPENDENCE ON TIMELY SUCCESS OF EXPANSION PLATFORMS
In 1995, the Company began to diversify its business and expand into the
following selected related product platforms:
- Personal Imaging;
- Wireless Communications;
- Digital Infotainment; and
- Network Access.
These platforms offered higher growth prospects than the Company's analog
PC modem business. The Company's future financial performance and overall
success, particularly in the long term, will depend largely on two factors:
- first, the rate of sales growth and margin contribution of the
Company's expansion platforms; and
- second, whether these platforms will increase their financial
contribution to the Company's financial performance sufficiently and
soon enough to offset the anticipated continued declining financial
contribution of the Company's analog PC modem chipset products.
There are numerous risks inherent in the Company's diversification and
expansion strategy, many of which are beyond the Company's control. In certain
of its expansion platforms, the Company currently has minimal market presence
relative to other more established competitors. Moreover, the Company's success
with its expansion platforms will depend, in part, on the ability of the
Company's customers to develop new and enhanced products and to successfully
market such products to end users. The Company cannot assure you that it will
succeed in its diversification and expansion program. Its failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.
RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are generally characterized by (1)
rapid technological developments, (2) evolving industry standards, (3) changes
in customer requirements, (4) frequent new product introductions and
enhancements and (5) short product life cycles with declining prices over the
life cycle of the product. A faster than anticipated change in one or more of
the technologies related to its products or in market demand for products based
on a particular technology, particularly due to the introduction of new
technology that represents a substantial advance over current technology, could
result in a faster than anticipated obsolescence of the Company's products. Such
an event could have a material adverse effect on the Company's business,
financial condition and results of operations. Currently accepted industry
standards are also subject to change and may potentially contribute to the
obsolescence of the Company's products.
For example, increased market demand for sub-$1,000 PCs is causing PC
OEMs to require less expensive modem devices, such as software modems. These
software modems
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require fewer semiconductor components than the Company's traditional modem
chipsets. As a result, these devices may render obsolete the traditional
hardware upgrade path for the Company's modem products.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND PRODUCT COST REDUCTIONS
The Company's operating results will depend largely on its ability to
continue to introduce new and enhanced semiconductor products on a timely basis.
Successful product development and introduction depends on numerous factors,
including, among others, (1) the Company's ability to anticipate customer and
market requirements and changes in technology and industry standards, (2)
accurate new product definition, (3) timely completion and introduction, (4)
differentiation from offerings of the Company's competitors and (5) market
acceptance.
Furthermore, the Company is required to continually evaluate expenditures
for planned product development and to choose among alternative technologies
based upon its expectations of future market growth. The Company cannot assure
you that it will be able to develop and introduce new or enhanced products in a
timely and cost-effective manner. It cannot assure you that such products will
satisfy customer requirements, achieve market acceptance or anticipate new
industry standards and technological changes. It also cannot assure you that it
will be able to respond successfully to new product announcements and
introductions by competitors.
In addition, the prices of established products decline, sometimes
significantly, over time. The Company believes that to remain competitive it
must continue to reduce the cost of producing and delivering existing products
at the same time that it develops and introduces new or enhanced products. The
Company cannot assure you that it will be able to continue to reduce the cost of
its products to remain competitive.
FUTURE SOURCES OF CAPITAL
For several years, the Company obtained significant investments from
Rockwell to help satisfy its capital needs. The Company can no longer rely on
these investments from Rockwell. Prior to the Distribution, the Company entered
into a three-year $350 million secured revolving credit facility with Credit
Suisse First Boston, as administrative agent and collateral agent, and the
lenders named therein (the "Credit Facility"). The Credit Facility is available
for working capital and other general corporate purposes of the Company and its
subsidiaries.
The Company believes that anticipated improved cash flows from operations
resulting in part from the restructuring actions announced in September 1998 and
available borrowings under the Credit Facility will be sufficient to satisfy its
future research and development, capital expenditure, working capital and other
financing requirements. However, the Company cannot assure you that this will
occur or that the Company will have access to alternative sources of liquidity.
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RESEARCH AND DEVELOPMENT EXPENSES
The semiconductor industry requires substantial investment in research
and development. To remain competitive, the Company must continue to make
substantial investments in research and development to develop new and enhanced
products. The Company cannot assure you that it will have sufficient resources
to develop new and enhanced technologies and competitive products.
As part of the plan it announced in September 1998 to restructure its
business, the Company intends to reduce research and development expenditures in
fiscal 1999 by approximately 25 percent from fiscal 1998 levels. The Company's
failure to make sufficient investments in research and development programs
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CAPITAL EXPENDITURES
The semiconductor industry is capital intensive. Semiconductor
manufacturing requires a constant upgrading of process technology to remain
competitive. This upgrading is required particularly as new and enhanced
semiconductor processes are developed allowing for smaller, more efficient and
more powerful semiconductor devices.
The Company maintains its own manufacturing, assembly and test
facilities. These facilities have required and will continue to require
significant investments in manufacturing technology and equipment.
After several years of significant capital investments to improve
manufacturing capabilities, the Company expects capital expenditures in fiscal
1999 to be approximately $110 million less than in fiscal 1998. The Company
cannot assure you that it will have sufficient capital resources to make
necessary investments in manufacturing technology and equipment.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results are subject to substantial quarterly and
annual fluctuations due to a number of factors, many of which are beyond the
Company's control. Such factors may include, among others:
- the effects of competitive pricing pressures;
- decreases in average selling prices of the Company's products;
- production capacity levels and fluctuations in manufacturing yields;
- availability and cost of products from the Company's suppliers;
- the gain or loss of significant customers;
- the Company's ability to develop, introduce and market new products and
technologies on a timely basis;
- new product and technology introductions by the Company's competitors;
- changes in the mix of products produced and sold;
- market acceptance of the Company's and its customers' products;
- intellectual property disputes;
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- seasonal customer demand;
- the timing of significant orders; and
- the timing and extent of product development costs.
General economic or other conditions causing a downturn in the market for
semiconductor products, affecting the timing of customer orders or causing
cancellations or rescheduling of orders, could also adversely affect the
Company's operating results. The Company's customers may change delivery
schedules or cancel or reduce orders without significant penalty and generally
are not subject to minimum purchase requirements. These factors are difficult to
forecast and these, as well as other factors, could materially adversely affect
the Company's quarterly or annual operating results. If the Company's operating
results fail to meet the expectations of analysts or investors, it could
materially and adversely affect the price of the Company Common Stock.
CREDIT FACILITY AND RESTRICTIVE COVENANTS
The Company and certain of its subsidiaries have entered into the Credit
Facility providing for a three-year $350 million secured revolving line of
credit. Substantially all of the assets of the Company and its domestic
subsidiaries and the stock of the Company's domestic and foreign subsidiaries,
subject to certain exceptions, have been pledged as collateral to secure
repayment of the Credit Facility. The Credit Facility includes, among other
things, restrictions on capital expenditures, indebtedness, acquisitions,
mergers, asset sales and liens on assets that apply to the Company and its
subsidiaries. The Company also must meet certain financial tests and maintain
certain financial ratios. Although the Company believes that it will be able to
comply with these requirements, compliance with these requirements may restrict
the Company's operating and financial flexibility. The Company cannot assure you
that it will in fact be able to satisfy all of the requirements in the Credit
Facility. If the Company does not satisfy the financial ratios or comply with
the other covenants included in the Credit Facility, the lenders under the
Credit Facility could declare all amounts owed to them due and payable and
proceed against their collateral. Such a foreclosure on the collateral would
have a material adverse effect on the Company's business, financial condition
and results of operations.
INTELLECTUAL PROPERTY MATTERS
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. In the past, the Company has found it
necessary to engage in litigation to enforce its intellectual property rights,
protect the Company's trade secrets or determine the validity and scope of
proprietary rights of others, including the Company's customers. The Company
expects that it will be required to engage in future litigation on similar
grounds.
The Company has received, and may continue to receive in the future,
claims of infringement of intellectual property rights of others. The Company is
a party to certain pending proceedings involving such claims. The Company cannot
assure you (1) that it will
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prevail in pending actions, (2) that other actions alleging the infringement by
the Company of third-party patents or the invalidity of the patents held by the
Company will not be asserted or prosecuted against the Company or (3) that any
assertions of infringement or actions seeking to establish the invalidity of
Company-held patents will not materially and adversely affect the Company's
business, financial condition and results of operations.
Even if the Company is successful in such matters, the attempted
enforcement of intellectual property rights by or against the Company could
result in significant costs and diversion of the Company's resources. It could
also have a material adverse effect on the Company's business, financial
condition and results of operations. If claims or actions are asserted or
commenced against the Company, the Company in certain situations may seek to
obtain licenses under a third party's intellectual property rights to avert or
resolve a controversy. The Company cannot assure you that under such
circumstances a license would be available on commercially reasonable terms, if
at all.
The Company relies primarily on patent, copyright, trademark and trade
secret laws, as well as nondisclosure and confidentiality agreements and other
methods, to protect its proprietary technologies and processes. In addition, the
Company often incorporates the intellectual property of its customers into its
designs and has certain obligations with respect to the non-use and
non-disclosure of such intellectual property. The Company cannot assure you (1)
that the steps that it takes to prevent misappropriation or infringement of the
intellectual property of the Company or its customers will be successful, (2)
that any existing or future patents will not be challenged, invalidated or
circumvented or (3) that any of the protective measures described above would
provide meaningful protection to the Company. The failure of any patents to
protect the Company's technology would make it easier for the Company's
competitors to offer similar products. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
technology without authorization, develop similar technology independently or
design around the Company's patents. In addition, effective copyright, trademark
and trade secret protection may be unavailable or limited in certain countries.
The Company has historically indemnified its customers for certain of the
costs and damages of patent infringement where the Company's product is the
factor creating the customer's infringement exposure. This policy generally
excludes circumstances where infringement arises out of the combination of the
Company's products with products of others. This indemnification policy could
have a material adverse effect on the business, financial condition and results
of operations of the Company, particularly in situations where the Company's
products are designed for use in devices manufactured by its customers that
comply with international standards. These international standards are often
covered by patent rights held by competitors of the Company or its customers.
The combined costs of obtaining licenses from all holders of patent rights
essential to such standards could be high and could have a material adverse
effect on the Company's business, financial condition and results of operations.
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COMPETITION
The semiconductor industry in general and the markets in which the
Company competes in particular are intensely competitive. The Company currently
faces significant competition in its markets and expects that intense price and
product competition will continue. This competition has resulted and is expected
to continue to result in declining average selling prices for the Company's
products. The Company also anticipates that additional competitors will enter
its markets as a result of growth opportunities in communications electronics,
the trend toward global expansion by foreign and domestic competitors,
technological and public policy changes and relatively low barriers to entry in
certain segments of the industry.
The Company currently enjoys substantial market shares in its analog data
and fax modem chipset product lines. However, as the Company pursues its
diversification strategy and develops its expansion platforms, it is and will be
competing in certain new markets in which it has little or no market share and
where existing competitors have dominant market positions. Moreover, certain of
the Company's customers offer products that compete with similar products
offered by the Company.
The Company believes that the principal competitive factors for
semiconductor providers to the Company's addressed markets are:
- product performance;
- level of integration;
- quality;
- compliance with industry standards;
- price;
- time-to-market;
- system cost;
- design and engineering capabilities;
- new product innovation; and
- customer support.
The specific bases on which the Company competes vary by product platform.
The Company competes with a number of U.S. and international
manufacturers. Many of the Company's current and potential competitors have
certain advantages, including (1) longer operating histories and presence in key
markets, (2) greater name recognition, (3) access to larger customer bases and
(4) significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than the Company. As a result, such
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. These competitors may be able to devote
greater resources to the development, promotion and sale of their products than
the Company.
These competitors also have established or may establish financial or
strategic relationships among themselves or with existing or potential customers
of the Company, resellers or other third parties. These relationships may affect
customers' purchasing decisions.
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Accordingly, it is possible that new competitors or alliances among competitors
could emerge and rapidly acquire significant market share. The Company cannot
assure you that it will be able to compete successfully against these
competitors. It also cannot assure you that competition will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Due to the high-growth nature of the communications electronics industry
and the "time-to-market" pressures on suppliers to decrease the time required
for product conception, research and development, sampling and production launch
prior to the product reaching the market, many of the Company's competitors have
combined with each other and consolidated their businesses, including the
consolidation of competitors with customers of the Company. This consolidation
trend is expected to continue, since investments, alliances and acquisitions may
enable semiconductor suppliers, including the Company and its competitors, to
augment technical capabilities or to achieve faster time-to-market for their
products than internal development.
Consolidations by industry participants are creating entities with
increased market share, customer base, technology and marketing expertise in
markets in which the Company competes. These developments may significantly and
adversely affect the Company's current markets, the markets the Company is
seeking to serve and the Company's ability to compete successfully in such
markets.
MANUFACTURING RISKS
The fabrication of integrated circuits is an extremely complex and
precise process consisting of hundreds of separate steps. It requires production
in a highly controlled, clean environment. Minute impurities, errors in any step
of the fabrication process, defects in the masks used to print circuits on a
wafer or a number of other factors can cause a substantial percentage of wafers
to be rejected or number of die on each wafer not to function.
The Company operates its own manufacturing, assembly and test facilities.
Its facilities include three operating wafer fabrication facilities, a test and
assembly facility and a module assembly facility. The Company also has
arrangements with third parties, including entities outside the United States,
for the production, assembly and testing of certain of its semiconductor
products. The Company's assembly and test facility in Mexicali, Mexico and its
international subcontract manufacturing arrangements are subject to a number of
risks of operating abroad.
The semiconductor industry is currently experiencing an excess of wafer
fabrication capacity. In this environment, the Company is at a relative
disadvantage when compared to some of its competitors who rely primarily on
outside foundries because the Company's wafer fabrication facilities require
substantial fixed costs and investment. In September 1998, the Company announced
that it would close and dispose of its Colorado Springs, Colorado wafer
fabrication facilities, which were distributed to Rockwell prior to the
Distribution. The Company will continue to occupy the facility until April 30,
1999 pursuant to a lease from Rockwell under which the Company pays all costs of
the facilities.
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The Company is also exploring wafer manufacturing alternatives, including
(1) increased use of outside foundries, (2) entering into joint ventures with
respect to wafer manufacturing or (3) other actions in respect of its wafer
manufacturing facilities. The Company cannot assure you that it will succeed in
implementing any such alternatives.
The Company's operations may be affected by lengthy or recurring
disruptions at any of its production facilities or those of its subcontractors.
These disruptions may include, without limitation, labor strikes, work
stoppages, fire, earthquake, flooding or other natural disasters. These
disruptions could cause significant delays in shipments until the Company is
able to shift the products from an affected facility or subcontractor to another
facility or subcontractor.
In the event of such delays, the Company cannot assure you that that
required alternate capacity, particularly wafer production capacity, would be
available on a timely basis or at all. Even if such capacity is available, the
Company cannot assure you that it could be obtained on favorable terms. The
inability to obtain alternate capacity on favorable terms could result in a
potential loss of customers. Any inability of the Company to obtain sufficient
manufacturing capacities to meet demand, either at its own facilities or through
foundry or similar arrangements with others, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain of the Company's manufacturing facilities are located near major
earthquake fault lines, including the Company's Newport Beach, California wafer
fabrication facility and its Mexicali, Mexico assembly and test facility. The
Company maintains only minimal earthquake insurance coverage with respect to
these facilities.
The Gallium Arsenide ("GaAs") semiconductor manufacturing process used at
the Company's Newbury Park, California wafer fabrication facility is highly
specialized in nature. In the event of a disruption, alternate GaAs production
capacity would not be readily available from third party sources. In addition,
the Company is currently dependent on a single source supplier for epitaxial
wafers used in its GaAs manufacturing processes. The number of qualified
alternative suppliers for such wafers is limited and the process of qualifying a
new epitaxial wafer supplier could require a substantial leadtime. Although the
Company historically has not experienced any significant difficulties in
obtaining an adequate supply of raw materials and components necessary for its
manufacturing operations, the loss of a significant supplier or the inability of
a supplier to meet performance and quality specifications or delivery schedules
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Any disruption of operations at the Company's Newbury Park, California
wafer fabrication facility or the interruption in the supply of epitaxial wafers
used in its GaAs process could have a material adverse effect on the Company's
business, financial condition and results of operations, particularly with
respect to the Company's Wireless Communications products.
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ORDER AND SHIPMENT UNCERTAINTIES
The Company typically makes its sales through individual purchase orders.
The Company generally does not have long-term supply arrangements with its
customers. The Company's customers may cancel orders until 30 days before the
shipping date. In addition, the Company sells a portion of its products through
distributors who have certain rights to return unsold products to the Company.
Moreover, semiconductor companies, including the Company, routinely
manufacture or purchase inventory based on estimates of customer demand for
their products. However, customer demand is often difficult to predict. The
Company could hold excess or obsolete inventory resulting from the cancellation
or deferral of product orders, the return of previously sold products or
overproduction due to the failure of anticipated orders to materialize. This
excess or obsolete inventory could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
in the fourth quarter of fiscal 1998, the Company made a provision for excess
and obsolete inventories of $66 million due to lower anticipated demand, price
declines and the obsolescence of certain products.
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand.
The industry has experienced significant downturns, often connected with,
or in anticipation of, maturing product cycles (of both semiconductor companies'
and their customers' products) and declines in general economic conditions.
These downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices.
The Company has recently experienced these conditions in its analog PC
modem chipset business and may experience such downturns in the future. In
fiscal 1998, average selling prices for the Company's Personal Computing
products fell by approximately 50 percent, the annual growth rate for such
products fell to approximately 20 percent and as discussed above under "-- Order
and Shipment Uncertainties", in the fourth quarter, the Company made a provision
for excess and obsolete inventories of $66 million. The current economic crisis
in the Asia-Pacific region has exacerbated this current downturn in the
Company's analog modem chipset business. This downturn has had, and any future
downturns may have, a material adverse effect on the Company's business,
financial condition and results of operations.
The semiconductor industry also from time to time has experienced periods
of increased demand and production capacity constraints. The Company thus may
experience substantial changes in future operating results due to general
semiconductor industry conditions, general economic conditions and other
factors.
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DEPENDENCE ON KEY PERSONNEL
The Company's future success depends largely upon the continued service
of its executive officers and other key management and technical personnel. Its
success also depends on its ability to continue to attract, retain and motivate
qualified personnel. The Company is dependent on key technical personnel, who
represent a significant asset of the Company as the source of its technological
and product innovations. The competition for such personnel is intense in the
semiconductor industry. The Company cannot assure you that it will be able to
attract and retain qualified management and other personnel necessary for the
design, development, manufacture and sale of its products.
The Company may have difficulty attracting and retaining key personnel
during periods of poor operating performance. The loss of the services of one or
more of the Company's key employees or the Company's failure to attract, retain
and motivate qualified personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the loss of the services of Dwight W. Decker, Chairman and Chief
Executive Officer of the Company, or certain key design and technical personnel,
could materially and adversely affect the Company.
RISKS OF INTERNATIONAL SALES AND OPERATIONS
For the fiscal year ended September 30, 1998, the Company made
approximately 59 percent of total sales to customers located outside the United
States, primarily in Japan and other Asian-Pacific countries. In addition, the
Company has facilities and suppliers located outside the United States. These
include its assembly and test facility in Mexicali, Mexico and third-party
foundries located in the Asia-Pacific region.
The Company's international sales and operations are subject to a number
of risks inherent in selling and operating abroad. These include, without
limitation, risks regarding:
- currency exchange rate fluctuations;
- local economic and political conditions;
- disruptions of capital and trading markets;
- restrictive governmental actions (such as restrictions on transfer of
funds and trade protection measures, including export duties and quotas
and customs duties and tariffs);
- changes in legal or regulatory requirements;
- import or export licensing requirements;
- limitations on the repatriation of funds;
- difficulty in obtaining distribution and support;
- nationalization;
- the laws and policies of the United States affecting trade, foreign
investment and loans; and
- tax laws.
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Most of the Company's international sales are currently denominated in
U.S. dollars. As a result, the Company's products could become less competitive
in international markets if the value of the U.S. dollar increases relative to
foreign currencies. Sales to Japan, which are denominated principally in
Japanese yen, are not affected to the same extent.
Moreover, the Company may be competitively disadvantaged relative to
competitors of the Company located outside the United States (including Japan)
who may benefit from a devaluation of their local currency. The Company cannot
assure you that it will be able to prevent the above factors from having a
material adverse effect on the Company's ability to increase or maintain its
foreign sales or on its business, financial condition and results of operations.
The current economic situation in the Asia-Pacific region has exacerbated
the decline in the Company's operating performance. This economic situation has
increased the uncertainty with respect to the long-term viability of certain of
the Company's customers and suppliers in the region. Sales to customers in Japan
and other countries in the Asia-Pacific region, principally Taiwan, South Korea
and Hong Kong, represented approximately 47 percent of total Company sales in
fiscal 1998.
The Company enters into foreign currency forward exchange contracts,
principally for the Japanese yen, to minimize risk of loss from currency
exchange rate fluctuations for foreign currency commitments entered into in the
ordinary course of business. The Company has not experienced nor does it
anticipate any material adverse effect on its results of operations or financial
condition related to these foreign currency forward exchange contracts. The
Company has not entered into foreign currency forward exchange contracts for
other purposes. In addition, the Company's financial condition and results of
operations could be affected (negatively or positively) by currency
fluctuations.
INVESTMENTS, ALLIANCES AND ACQUISITIONS
Although the Company invests significant resources in research and
development activities, the complexity and rapidity of technological changes
make it impractical for the Company to pursue development of all technological
solutions on its own. As part of its goal to provide advanced semiconductor
products and systems, the Company expects to review on an ongoing basis
investment, alliance and acquisition prospects that would complement its
existing product offerings, augment its market coverage or enhance its
technological capabilities. However, the Company cannot assure you that it will
be able to identify and consummate suitable investment, alliance or acquisition
transactions in the future.
Moreover, should the Company consummate such transactions, they could
result in (1) the diversion of management resources, (2) dilutive issuances of
equity securities, (3) large one-time write-offs, (4) the incurrence of debt and
contingent liabilities, (5) amortization of expenses related to goodwill and
other intangible assets and (6) other acquisition related costs. Any of these
events could materially adversely affect the Company's
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business, financial condition and results of operations and the price of the
Company Common Stock.
The ultimate success of any such investments, alliances or acquisitions
in achieving the purposes for which they are undertaken will depend on the
ability of the Company to integrate successfully any acquired business and to
retain key personnel, as well as a variety of other factors.
DEMANDS ON MANAGEMENT RESOURCES
A combination of circumstances currently presents the Company's
management with a variety of challenges. In addition to implementing the
Company's ongoing diversification and expansion strategy, the Company is
dedicating significant managerial and other resources to implement the
restructuring of the Company announced in September 1998. It is also in the
process of establishing the infrastructure and systems necessary for the Company
to operate as an independent public company.
While the Company believes that it has sufficient management resources to
execute each of these initiatives, it cannot assure you that it will have these
resources or that such initiatives will be successfully implemented. Failure to
implement these initiatives successfully could have a material adverse effect on
the Company's business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
The Company uses a variety of chemicals in its manufacturing operations.
It is subject to a wide range of environmental protection regulations in the
United States and Mexico. While the Company has not experienced any material
adverse effect on its operations as a result of such regulations, it cannot
assure you that current or future regulations would not have a material adverse
effect on the Company's business, financial condition and results of operations.
In the United States, environmental regulations often require parties to
fund remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. The Company cannot assure you that the amount of expense and
capital expenditures that might be required to complete remedial actions and to
continue to comply with applicable environmental laws will not have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has been designated as a potentially responsible party
("PRP"), together with two additional PRPs who are insolvent, at one site in
Parker Ford, Pennsylvania for which the Company had accrued approximately $4
million for the costs of remediation at September 30, 1998 for groundwater
remediation. In addition, the Company is engaged in two other remediations of
groundwater contaminations at its Newport Beach and Newbury Park, California
facilities for which it had accrued approximately $5 million for the costs of
remediation at September 30, 1998.
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YEAR 2000 READINESS DISCLOSURE
The Company is in the process of implementing plans to address issues
related to the impact of the Year 2000 on the Company's products, business
systems, infrastructure, manufacturing systems and suppliers. A five-step
process is applied to each of these areas to (1) inventory all possibly affected
assets, (2) assess non-compliance with Year 2000, (3) formulate a remediation
strategy, (4) upgrade the system and (5) test compliance. The Company continues
to evaluate the estimated costs associated with these efforts based on actual
experience.
The Company's greatest area of uncertainty centers primarily in the
supplier and manufacturing areas, due to the number of equipment and materials
suppliers involved and their various stages of readiness for Year 2000. In
particular, the Company is dependent on semiconductor equipment manufacturers to
supply the upgrades required to remediate Year 2000 issues in the manufacturing
systems area and suppliers to upgrade their systems to ensure an uninterrupted
supply of materials. A Year 2000-related failure by a significant equipment or
materials supplier could result in the temporary slowdown of production by the
Company, the duration of which the Company reasonably estimates would be not
more than a few days.
The Company believes, based on available information, that it will be
able to manage its total Year 2000 transition without any material adverse
effect on its business, financial condition and results of operations. 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. In addition, the Company and the economy in
general may be adversely affected by the failure of federal, state, local and
international governments to address Year 2000 issues affecting their systems.
LACK OF HISTORY AS AN INDEPENDENT COMPANY
The Company lacks an operating history as an independent company.
Accordingly, the financial information incorporated into the prospectus may not
necessarily reflect the results of operations, financial position and cash flows
of the Company had the Company been operated independently during the periods
presented. While the Company had been profitable as part of Rockwell, the
Company has experienced recent operating losses and anticipates future operating
losses at least in the short-term.
The Company cannot assure you that it will return to or maintain any
particular level of profitability as a stand-alone company. The Company has
historically relied on Rockwell for cash investments and various financial and
administrative services. After the Distribution, Rockwell will provide the
Company with certain transitional services which, before the Distribution, had
been provided to the Company by Rockwell. However, the Company will maintain its
own sources of funding, banking relationships and administrative functions. The
Company has obtained the Credit Facility providing for a three-year $350 million
revolving loan facility guaranteed by each of the Company's domestic
subsidiaries and secured by (1) substantially all domestic assets of the Company
and its domestic subsidiaries and (2) a
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pledge of the stock of the Company's domestic and foreign subsidiaries, subject
to certain exceptions.
NO PRIOR MARKET FOR COMPANY COMMON STOCK; VOLATILITY; POSSIBILITY OF SUBSTANTIAL
SALES OF COMPANY COMMON STOCK
Prior to December 9, 1998, when the Company Common Stock began trading on
a "when-issued" basis, there was no trading market for the Company Common Stock.
Beginning January 4, 1999, the Company Common Stock has been traded on a
"regular way" basis on Nasdaq under the trading symbol "CNXT". As of December
31, 1998, the Company had approximately 56,000 shareowners of record.
The trading prices of Company Common Stock may fluctuate significantly,
at least until and perhaps after such stock is fully distributed and an orderly
market develops. The Company cannot assure you that an active trading market in
the Company Common Stock will develop or be sustained in the future.
The marketplace will determine the prices at which shares of Company
Common Stock will trade. This price may be influenced by many factors,
including, among other things, (1) the Company's performance and prospects, (2)
the depth and liquidity of the market for Company Common Stock, (3) investor
perception of the Company and the industry in which it operates, (4) changes in
earnings estimates or buy/sell recommendations by analysts, (5) general
financial and other market conditions and (6) domestic and international
economic conditions.
In addition, public stock markets have experienced extreme price and
trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company Common Stock.
Substantially all of the shares of Company Common Stock distributed in
the Distribution are eligible for immediate resale in the public market. In
spin-off transactions similar to the Distribution, it is not unusual for a
significant redistribution of shares to occur during the first few weeks or even
months following completion of the spin-off.
Neither Rockwell nor the Company is able to predict whether substantial
amounts of Company Common Stock will be sold in the open market following the
Distribution or what effect such sales may have on prices at which shares of
Company Common Stock may trade. Any sales of substantial amounts of Company
Common Stock in the public market during this period, or the perception that any
redistribution has not been completed, could materially adversely affect the
market price of Company Common Stock. The Rockwell International Corporation
Savings Plan (the "Rockwell Savings Plan"), which as of December 31, 1998 held
approximately 19.5 percent of the outstanding shares of Company Common Stock,
provides plan participants (including employees of the Company who maintain
account balances in the Rockwell Savings Plan) with the authority to determine
if and when shares of
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Company Common Stock held in participant accounts will be sold and reinvested in
accordance with the provisions of the Rockwell Savings Plan. Under the Rockwell
Savings Plan, subject to certain limitations, dispositions of Company Common
Stock will be effected only at the direction and on behalf of individual
participants.
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Restated Certificate of Incorporation, as amended (the
"Company Certificate"), the Company's amended By-Laws (the "Company By-Laws"),
the Rights Agreement (as defined below) and the General Corporation Law of the
State of Delaware (the "DGCL") contain several provisions that would make more
difficult an acquisition of control of the Company in a transaction not approved
by the Company's Board of Directors. The Company Certificate and Company By-Laws
include provisions such as:
- the ability of the Company's Board of Directors to issue shares of
preferred stock in one or more series without further authorization of
the Company's shareowners;
- a fair price provision;
- a prohibition on shareowner action by written consent;
- a requirement that shareowners provide advance notice of any shareowner
nominations of directors or any proposal of new business to be
considered at any meeting of shareowners;
- a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of the
Company Certificate or the Company By-Laws;
- elimination of the right of shareowners to call a special meeting of
shareowners; and
- the division of the Company's Board of Directors into three classes to
be elected on a staggered basis, one class each year.
The Company has also entered into a rights agreement with ChaseMellon, as
rights agent, dated as of November 30, 1998 (the "Rights Agreement"), which
provides shareowners of the Company with certain rights that would substantially
increase the cost of acquiring the Company in a transaction not approved by the
Company's Board of Directors.
In addition to the Rights Agreement and the provisions in the Company
Certificate and Company By-Laws, Section 203 of the DGCL provides that, subject
to certain exceptions, a corporation shall not engage in any business
combination with any interested shareowner during the three-year period
following the time that such shareowner becomes an interested shareowner. The
restrictions of Section 203 of the DGCL, in certain circumstances, make it more
difficult for a person who would be an interested shareowner to effect various
business combinations with a corporation during that three-year period. The
provisions of Section 203 of the DGCL provide that the shareowner approval
requirement may be avoided if a majority
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of the directors then in office approved either the business combination or the
transaction that resulted in the shareowner becoming an interested shareowner.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE DISTRIBUTION
In connection with the Distribution, Rockwell received a tax ruling (the
"Tax Ruling") from the Internal Revenue Service (the "IRS") stating that the
Distribution would qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the
"Code"). While the Tax Ruling generally is binding on the IRS, the continuing
validity of the Tax Ruling is subject to certain factual representations and
assumptions. Rockwell and the Company are not aware of any facts or
circumstances that would cause such representations and assumptions to be
untrue.
The Tax Allocation Agreement dated as of December 31, 1998 (the "Tax
Allocation Agreement") between the Company and Rockwell provides, among other
things, that neither Rockwell nor the Company is to take any action inconsistent
with, nor fail to take any action required by, the request for the Tax Ruling or
the Tax Ruling unless (1) required to do so by law, or (2) the other party has
given its prior written consent or, in certain circumstances, (3) a supplemental
ruling permitting such action is obtained. Rockwell and the Company will
indemnify each other for any tax liability resulting from each entity's failure
to comply with such provisions.
The Tax Allocation Agreement also provides that the Company will be
responsible for any taxes imposed on Rockwell, the Company or Rockwell
shareowners as a result of (1) the failure of the Distribution to qualify as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Code
or (2) the subsequent disqualification of the Distribution as a tax-free
transaction to Rockwell under Section 361(c)(2) of the Code, if such failure or
disqualification is attributable to certain post-Distribution actions by or in
respect of the Company (including its subsidiaries) or its shareowners, such as
the acquisition of the Company by a third party at a time and in a manner that
would cause such a failure or disqualification.
In addition, the Company effected certain tax-free intragroup spin-offs
as a result of Rockwell's spin-off of Meritor Automotive, Inc. ("Meritor") on
September 30, 1997. The Tax Allocation Agreement provides that the Company will
be responsible for any taxes imposed on Rockwell, the Company or Rockwell
shareowners in respect of those intragroup spin-offs if such taxes are
attributable to certain post-Distribution actions by or in respect of the
Company (including its subsidiaries) or its shareowners, such as the acquisition
of the Company by a third party at a time and in a manner that would cause such
taxes to be incurred.
If the Company were required to pay any of the taxes described above,
such payment would have a material adverse effect on the financial position,
results of operations and cash flow of the Company.
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USE OF PROCEEDS
Any proceeds received by the Company from the exercise of the Company
Options covered by the Plan will be used for general corporate purposes. Such
proceeds represent the exercise prices for the Company Options. The Company will
not receive any proceeds from sales by Selling Shareowners of their Company
Common Stock acquired upon exercise of their Company Options.
DETERMINATION OF OPTION EXERCISE PRICES
In connection with the Distribution, Rockwell and the Company entered
into an Amended and Restated Employee Matters Agreement, dated as of December
31, 1998 (the "Employee Matters Agreement"), which provides for the adjustment
of outstanding options to purchase Rockwell Common Stock ("Rockwell Options")
granted under the Rockwell International Corporation 1995 Long-Term Incentives
Plan (the "Rockwell 1995 LTIP"), the Rockwell International Corporation 1988
Long-Term Incentives Plan (the "Rockwell 1988 LTIP") and the Rockwell
International Corporation Directors Stock Plan (the "Rockwell Directors Plan"
and, together with the Rockwell 1995 LTIP and the Rockwell 1988 LTIP, the
"Rockwell Option Plans").
Pursuant to the Employee Matters Agreement, Rockwell Options held by
employees of the Company or its subsidiaries (or by any director of the Company
who is not also a director of Rockwell) at the time of the Distribution were
replaced with Company Options to purchase shares of Company Common Stock, with
the number of shares covered thereby and the exercise price per share determined
pursuant to a formula designed to cause (1) the economic value of such Company
Options (i.e., the difference between the aggregate fair market value of the
shares of Company Common Stock subject to such options and the aggregate per
share exercise price thereof) immediately after the Distribution to be the same
as the economic value immediately before the Distribution of the Rockwell
Options being replaced and (2) the ratio of the exercise price to the fair
market value of the underlying stock to remain the same immediately before and
immediately after the Distribution.
Rockwell Options held by persons other than employees of Conexant or its
subsidiaries (or by any director of the Company who is not also a director of
Rockwell) at the time of the Distribution, other than those granted before
January 1, 1990 or after August 31, 1998, were adjusted so that following the
Distribution, each such holder holds options to purchase shares of Rockwell
Common Stock and Company Common Stock. The number of shares subject to, and the
exercise prices of, such options were adjusted to take into account the
Distribution and to ensure that the aggregate economic value (i.e., the
difference between the aggregate fair market value of the shares subject to such
options and the aggregate per share exercise price thereof) of the resulting
Rockwell Options and Company Options immediately after the Distribution was
equal to the aggregate economic value of the Rockwell Options immediately before
the Distribution.
The Company Options resulting from these adjustments will otherwise have
the same terms and conditions under the Plan as under the Rockwell Option Plans.
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THE PLAN
The shares of Company Common Stock offered hereby may be acquired by
participants in the Plan upon the exercise of Company Options in accordance with
the terms of the Plan and the option agreements assumed by the Company.
The following statements include summaries of certain provisions of the
Plan. These statements do not purport to be complete and are qualified by
reference to the provisions of the Plan, which are incorporated by reference
into this prospectus.
The Plan was adopted by the Company's Board of Directors and approved by
Rockwell, as the Company's sole shareowner, on November 4, 1998 and became
effective as of December 31, 1998. In connection with the Distribution, Rockwell
Options granted pursuant to the Rockwell Option Plans were adjusted as described
above. The Company has assumed Rockwell's obligations with respect to the
resulting Company Options. The purpose of the Plan is to provide a means for the
Company to perform its obligations with respect to those Company Options and, in
part, to foster creation of and enhance Company shareowner value by linking the
compensation of certain officers and other key employees of the Company to
increases in the price of Company Common Stock, providing a means by which
persons of outstanding abilities can be motivated and retained. The Plan
authorizes the issuance of an aggregate number of shares of Company Common Stock
necessary to provide for the exercise of all Company Options outstanding on
December 31, 1998 as a result of adjustments to Rockwell Options, as may be
adjusted from time to time under the Plan. No further grants will be made under
the Plan.
Administration. The Company's Compensation and Management Development
Committee (the "Committee") may exercise all responsibilities, powers and
authority relating to the administration of the Plan not reserved to the
Company's Board of Directors. The Committee is designated by the Board of
Directors from among its members, excluding any members who hold a Company
Option governed by the Plan. The Board of Directors, however, reserves the
right, in its sole discretion, to exercise or authorize another committee or
person to exercise some of or all the responsibilities, powers and authority
vested in the Committee under the Plan.
Participation. Participants under the Plan (the "Participants") include
the following persons:
(1) Any employee of Rockwell or its subsidiaries as of the close of
business on May 31, 1996 who then held one or more outstanding Rockwell
Options and who on or before the close of business on the closing date as
defined in the Agreement and Plan of Merger dated as of July 31, 1996 among
Rockwell, The Boeing Company ("Boeing"), and Boeing North American, Inc.
("Boeing NA") (the "Merger Closing Date") became an employee of United
Space Alliance, LLC ("USA") immediately upon termination of employment (by
retirement or otherwise) by Rockwell or a subsidiary corporation of
Rockwell (a "Continuing USA Participant"), but only for purposes of
determining such an employee's rights with respect to his or her
outstanding Company Options and only so
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long as such employee shall remain an employee of USA and Boeing NA, Boeing
or any of their respective subsidiaries shall continue to own at least 50
percent of the total ownership interests in USA;
(2) any employee as of the opening of business on the Merger Closing
Date who then held one or more outstanding Rockwell Options and who as of
the close of business on that date remained or became an employee of Boeing
NA, Boeing or any of their respective subsidiaries (a "Continuing Boeing
Participant"), but only for purposes of determining such an employee's
rights with respect to his or her outstanding Company Options and only so
long as such employee shall remain an employee of Boeing NA, Boeing or any
of their respective subsidiaries;
(3) any employee as of the opening of business on September 30, 1997
(the "Meritor Distribution Date") who then held one or more outstanding
Rockwell Options and who as of the close of business on that date remained
or became an employee of Meritor or any of its subsidiaries (a "Continuing
Meritor Participant"), but only for purposes of determining such an
employee's rights with respect to his or her outstanding Company Options
and only so long as such an employee shall remain an employee of Meritor or
any of its subsidiaries;
(4) any employee as of the opening of business on December 31, 1998
who then held one or more outstanding Rockwell Options and who as of the
close of business on that date remained or became an employee of the
Company or any of its subsidiaries (a "Continuing Company Participant"),
but only for purposes of determining such an employee's rights with respect
to his or her outstanding Company Options and only so long as such an
employee shall remain an employee of the Company or any of its
subsidiaries; and
(5) any other person as of the close of business on December 31, 1998
who then held one or more outstanding Rockwell Options (a "Continuing
Rockwell Participant"), but only for purposes of determining the rights of
such person with respect to his or her outstanding Company Options and only
so long as such person (or his or her legatees, heirs or permitted assigns)
shall remain entitled to exercise the Company Options.
Stock Options. The outstanding Company Options entitle the respective
holders thereof to purchase such number of shares of Company Common Stock at
such exercise price as has been determined pursuant to the adjustment provisions
of the Employee Matters Agreement described under "Determination of Option
Exercise Prices". The Company Options otherwise have the same terms and
conditions as the Rockwell Options from which they are derived, except that the
purchase price of the Company Common Stock with respect to which a Company
Option or portion thereof is exercised cannot be paid by delivery of shares of
Rockwell Common Stock but may be payable in full in cash or in shares of Company
Common Stock or in a combination of cash and Company Common Stock (based on its
fair market value on the date the Company Option is exercised).
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Effect of Death or Termination of Employment. If the employment by
Rockwell or any of its subsidiaries of a Continuing Rockwell Participant, the
service as a director of Rockwell of any non-employee director of Rockwell, the
employment by USA of a Continuing USA Participant, the employment by Boeing NA,
Boeing or any of their respective subsidiaries of a Continuing Boeing
Participant, the employment by Meritor or any of its subsidiaries of a
Continuing Meritor Participant or the employment by the Company or any of its
subsidiaries of a Continuing Company Participant who (or whose permitted
transferee) holds any outstanding Company Options terminates by reason of the
death of such participant, the Company Options not theretofore exercised may be
exercised from and after the date of the death of such participant for a period
of three years (or until the expiration date of the Company Option, if earlier)
even if any of them was not exercisable at the date of death.
If a Continuing USA Participant, a Continuing Boeing Participant, a
Continuing Meritor Participant or a Continuing Company Participant who (or whose
permitted transferee) holds outstanding Company Options retires under a
retirement plan of USA, Boeing NA, Boeing, Meritor, the Company or any of their
respective subsidiaries, at any time after a portion of those Company Options
has become exercisable, the Company Options not yet exercised may be exercised
from and after the date upon which they are first exercisable under the terms
thereof for a period of five years from the date of retirement (or until the
expiration date of the Company Option, if earlier) even if any of them was not
exercisable at the date of retirement.
If a Continuing Rockwell Participant who (or whose permitted transferee)
holds outstanding Company Options retires or has retired under a retirement plan
of Rockwell or any of its subsidiaries at any time after a portion of those
Company Options has become exercisable, or if a non-employee director of
Rockwell who holds outstanding Company Options retires as a director of Rockwell
after attaining age 72 or completing ten years of service as a director of
Rockwell whether or not any portion of those Company Options was exercisable at
the date of retirement, the Company Options not theretofore exercised may be
exercised from and after the date upon which they are first exercisable under
the terms thereof for a period of five years from the date of retirement (or
until the expiration date of the Company Option, if earlier) even if any of them
was not exercisable at the date of retirement.
If the employment by Rockwell or any of its subsidiaries of a Continuing
Rockwell Participant who was an employee prior to the close of business on
December 31, 1998, the employment by USA of a Continuing USA Participant, the
employment by Boeing NA, Boeing or any of their respective subsidiaries of a
Continuing Boeing Participant, the employment by Meritor or its subsidiaries of
a Continuing Meritor Participant or the employment by the Company or its
subsidiaries of a Continuing Company Participant who (or whose permitted
transferee) holds any outstanding Company Options is terminated for any reason
other than death or retirement under a retirement plan of Rockwell, USA, Boeing
NA, Boeing, Meritor, the Company or any of their respective subsidiaries, the
Company Options not theretofore exercised may be exercised only within 90 days
after the termination of such employment (or until the expiration date of the
Company Option, if earlier) and only to the
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extent the grantee thereof (or a permitted transferee) was entitled to exercise
the Company Options at the time of termination of such employment, unless and
except to the extent the Committee may otherwise determine.
Shares Deliverable. Shares of Company Common Stock which may be
delivered may consist in whole or in part of unissued or reacquired shares. The
Company shall bear all expenses and costs in connection with the operation of
the Plan, including costs related to the purchase, issue or transfer of shares
of Company Common Stock, but excluding taxes imposed on any person receiving a
payment or delivery of shares under the Plan.
Adjustments. The Board of Directors of the Company may make such
amendments or adjustments or take such other actions as it may deem appropriate
under the circumstances in the event of any change in or affecting the Company
Common Stock on account of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split or combination,
or other distribution to holders of Company Common Stock (other than a cash
dividend). These amendments, adjustments and actions may include, without
limitation, changes in the number of shares of Company Common Stock which may be
issued or transferred pursuant to the Plan, the number of shares of Company
Common Stock subject to outstanding Company Options and the related price per
share. Without limiting the generality of the foregoing, (1) if any such change
in or affecting the Company Common Stock results in an increase in the number of
outstanding Company shares, the number of shares of Company Common Stock
remaining subject to the Plan will be proportionately increased and the price
for each share of Company Common Stock then covered by an outstanding Company
Option will be proportionately reduced, and (2) if any such change in or
affecting the Company Common Stock results in a decrease in the number of
outstanding shares of Company Common Stock, the number of shares of Company
Common Stock remaining subject to the Plan will be proportionately decreased and
the price for each share then covered by an outstanding Company Option will be
proportionately increased.
Amendment and Termination. The Committee has the power in its discretion
to amend, suspend or terminate the Plan or Company Options subject thereto at
any time except that, subject to the adjustment provisions discussed above, (1)
without the consent of the person affected, no such action may cancel or reduce
an outstanding Company Option other than as provided for or contemplated in the
agreement evidencing the Company Option and (2) without the approval of the
Company shareowners, the Committee may not (A) increase the total number of
shares that may be issued or transferred pursuant to the Plan or (B) reduce the
exercise price of any Company Option.
Limited Assignability; Fractional Shares; No Rights as Shareholder. No
Company Option may be assigned, pledged or transferred except (1) by will or by
the laws of descent and distribution, (2) by gift to any member of the
Participant's immediate family or to a trust for the benefit of one or more
members of the Participant's immediate family, if permitted in the applicable
agreement governing the Company Option or (3) as otherwise determined by the
Committee. Each Company Option shall be exercisable during the lifetime of the
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Participant to whom the Company Option was granted only by such Participant
unless the Company Option has been transferred in accordance with the provisions
of the applicable agreement governing that Company Option, to a member of the
Participant's immediate family or a trust for the benefit of one or more members
of the Participant's immediate family, in which case it shall be exercisable
only by such transferee (or the legal representative of the estate or the heirs
or legatees of such transferee). For purposes of this provision, the
Participant's "immediate family" means the Participant's spouse and natural,
adopted or step-children and grandchildren.
No fractional shares of Company Common Stock may be issued or transferred
pursuant to the Plan. If any Company Option is exercisable for a fractional
share of Company Common Stock, the person entitled thereto will be paid an
amount equal to the excess of the fair market value as of the date of exercise
over the exercise price for any fractional share of Company Common Stock
deliverable in respect of the exercise of that Company Option.
No option holder will have the rights or privileges of a shareowner with
respect to Company Common Stock subject to a Company Option until exercise of
such Company Option.
Change of Control Benefits. Notwithstanding any other provision of the
Plan, if a change of control (a "Change of Control") occurs, then all Company
Options then outstanding pursuant to the Plan will immediately become fully
exercisable whether or not otherwise then exercisable. The following situations
qualify as a Change of Control:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20 percent or more of either (A) the then outstanding
shares of Company Common Stock (the "Outstanding Company Common Stock") or
(B) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for
purposes of this paragraph (1), the following acquisitions shall not
constitute a Change of Control: (w) any acquisition directly from the
Company, (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company, Rockwell or any corporation controlled by the Company or Rockwell
or (z) any acquisition pursuant to a transaction which complies with
clauses (A), (B) and (C) of paragraph (3) below; or
(2) Individuals who, as of December 31, 1998, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board of Directors; provided, however, that any
individual becoming a director subsequent to that date whose election, or
nomination for election by the Company's shareowners, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial
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assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board of Directors; or
(3) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the
Company or the acquisition of assets of another entity (a "Corporate
Transaction"), in each case, unless, following such Corporate Transaction,
(A) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such
Corporate Transaction beneficially own, directly or indirectly, more than
60 percent of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Corporate Transaction
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any employee benefit plan (or related trust) of the Company,
Rockwell or their respective subsidiaries or such corporation resulting
from such Corporate Transaction) beneficially owns, directly or indirectly,
20 percent or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Corporate Transaction and (C) at least a majority of the members of the
board of directors of the corporation resulting from such Corporate
Transaction were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board of
Directors, providing for such Corporate Transaction; or
(4) Approval by the Company's shareowners of a complete liquidation or
dissolution of the Company.
TAX CONSEQUENCES
The Company has been advised by Chadbourne & Parke LLP, counsel for the
Company, that under the present provisions of the Code, the principal federal
income tax consequences under the Plan relating to stock options and stock
"swaps" are as follows:
Company Options granted under the Plan are, at the time of grant,
intended to qualify as either "incentive stock options" under the Code or
non-qualified stock options.
Incentive Stock Options. The grant of an incentive stock option does not
result in any immediate tax consequences to the Company or the optionee. An
optionee will not realize taxable income, and the Company will not be entitled
to any deduction, upon the exercise of
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an incentive stock option if the optionee was an employee of the Company (or its
parent, subsidiary or successor corporation) at all times from the date the
option was granted to the day three months (or, in the case of an employee who
is disabled within the meaning of Section 22(e)(3) of the Code, one year) before
the date of such exercise. If an employee exercises an incentive stock option
and does not dispose of the shares of stock transferred upon such exercise
within the later of (1) two years after the date the option was granted and (2)
one year after the issue or transfer of the shares to such employee, gain or
loss realized upon disposition thereafter of such shares by the employee will be
treated as long-term capital gain or loss. The excess of the fair market value
of the shares at the time of exercise of the option (or, in the case of an
employee subject to Section 16(b) of the Exchange Act, at the time described
under Non-qualified Stock Options below) over the option price will, however, be
includable in the employee's "alternative minimum taxable income" for purposes
of the "alternative minimum tax" imposed on such income at the maximum rate of
28 percent by Section 55 of the Code. If the shares of stock are disposed of
before the expiration of the later of the foregoing two- or one-year holding
periods, the employee will realize ordinary income in the year of such
disposition in an amount equal to (1) the excess of the fair market value of the
shares at the time of exercise of the option (or, under applicable regulations,
in the case of an employee subject to Section 16(b) of the Exchange Act, upon
the expiration of the period described under Non-qualified Stock Options below)
over the option price or (2) if the disposition is a taxable sale or exchange,
the amount of gain realized if such amount is less than the amount determined in
clause (1) above. Any gain recognized on the disposition in excess of the amount
thus taxable as ordinary income will be treated as capital gain, long-term or
short-term depending on whether the stock has been held for more than one year.
Upon such a disposition, the Company will generally be entitled to a deduction
in an amount equal to the ordinary income realized by the employee.
If an employee was not an employee of the Company (or its parent,
subsidiary or successor corporation) at all times from the date the option was
granted to the day three months (or, in the case of a disabled employee, one
year) before the date on which an incentive stock option is exercised, such
employee will realize ordinary income in an amount equal to the excess of the
fair market value of the shares at the time of exercise over the option price,
and the Company will be entitled to a deduction in the same amount. In the case
of any such employee who is subject to Section 16(b) of the Exchange Act, the
special rule described below in connection with non-qualified stock options will
be applicable to the receipt of shares upon such exercise. Any difference
between the market value used to determine the amount of includable ordinary
income and the price at which the employee may subsequently sell his shares will
be treated as capital gain or loss, long-term or short-term depending on the
length of time the shares have been held.
Under the present provisions of the Code, long-term capital gains are
taxable at a maximum rate of 20 percent and capital losses of individual
taxpayers are deductible only against capital gains and a limited amount of
ordinary income.
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Non-qualified Stock Options. The grant of a non-qualified stock option
has no immediate tax consequences to the Company or the employee. If an employee
exercises a non-qualified stock option, such employee will, except as noted
below, realize ordinary income measured by the difference between the option
price and the fair market value of the shares on the date of exercise, and the
Company will be entitled to a deduction in the same amount. In the case of an
employee subject to Section 16(b) of the Exchange Act, such ordinary income will
not be realized until the expiration of the period, if any, during which a sale
of the shares could subject the employee to suit under Section 16(b), and will
be measured by the fair market value of the shares at that time, unless such
employee elects under Section 83(b) of the Code to realize ordinary income at
the time of exercise, measured by the fair market value of the shares at that
time. Any difference between such fair market value and the price at which the
employee may subsequently sell such shares will be treated as capital gain or
loss, long-term or short-term depending on the length of time the shares have
been held. The precise application of the foregoing deferral of income
realization rule under applicable rules adopted by the Commission under Section
16 of the Exchange Act is not entirely clear. It appears likely, however, that
realization of income will no longer be deferred, at least unless the employee
has other matching purchases of shares during the six-month period before
exercise of the option, and perhaps not even then.
Stock "Swaps". The tax consequences of the surrender of Company Common
Stock in payment of the option price will vary depending upon whether the option
is a non-qualified stock option or an incentive stock option, and in the latter
case whether the stock surrendered was acquired upon exercise of a qualified or
incentive stock option. A published ruling issued by the IRS before enactment of
legislation that provided for incentive stock options (the "1981 Act"), held
that if upon exercise of a non-qualified option the option price is paid in
shares of stock, rather than cash, no gain or loss would be recognized upon the
transfer of such shares in payment of the option price to the extent that the
number of shares received was equal to the number of shares surrendered. In such
case, the basis and holding period of a corresponding number of the shares
received would be the same as the basis and holding period of the shares
surrendered. If the shares surrendered were received upon exercise of a
qualified stock option, the surrender would not constitute a disposition of such
shares so as to result in realization of taxable ordinary income for failure to
satisfy the holding period requirements applicable to qualified stock options.
To the extent that the number of shares received upon the exercise exceeded the
number of shares surrendered, the employee would realize ordinary income in an
amount equal to the fair market value of such excess number of shares, and the
employee's basis for such shares would be equal to such amount. Proposed
regulations issued under the 1981 Act, which would be applicable to incentive
stock options, would apply comparable rules if shares received upon exercise of
an incentive stock option are surrendered in payment of the option price upon
exercise of a non-qualified option.
Under the proposed regulations, if upon exercise of an incentive stock
option the option price is paid in shares of stock (other than shares acquired
upon exercise of a qualified or incentive stock option as described below), no
gain or loss will be recognized on the surrender
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of such shares and the basis and (except as stated below) the holding period of
a corresponding number of the shares received will be the same as the basis and
holding period of the shares surrendered. The basis of any additional shares
received in exchange for the shares surrendered would be zero, and the holding
period of such additional shares would commence at the time issued or
transferred to the employee upon the exercise. The proposed regulations further
provide that the disposition of any of the shares received upon exercise of the
incentive stock option before the expiration of the two- or one-year holding
periods described under Incentive Stock Options above will constitute a
"disqualifying disposition" of such shares resulting in realization of taxable
ordinary income (and capital gain) as described under Incentive Stock Options
above. If only a portion of the shares received upon exercise are disposed of,
the shares disposed of will be deemed to be those with the lowest tax basis. The
foregoing rules contained in the proposed regulations were modified by the
Technical Corrections Act of 1982, under which the surrender, in payment of the
exercise price of an incentive stock option, of shares of stock acquired upon
exercise of a qualified or incentive stock option before the expiration of the
required holding periods applicable to such options will constitute a
"disqualifying disposition" of such shares, resulting in realization of taxable
ordinary income (and capital gain) as described under Incentive Stock Options
above. Such recognition of income in respect of the shares surrendered will not
otherwise affect the tax treatment of the incentive stock option and stock
received upon exercise thereof, as described under Incentive Stock Options
above.
Since the foregoing does not purport to be a complete description of the
federal income tax aspects of the benefits under the Plan, holders should
consult their tax advisors on any questions they may have.
SELLING SHAREOWNERS
Information regarding the Selling Shareowners, the shares of Company
Common Stock beneficially owned by them, the shares of Company Common Stock
offered by them through this prospectus and the shares of Company Common Stock
to be beneficially owned by them after completion of the offering will be set
forth in a supplement to this prospectus.
The distribution of the shares by the Selling Shareowners is not subject
to any underwriting agreement. The Selling Shareowners may sell the shares
offered through this prospectus from time to time in transactions over one or
more stock exchanges, in the over-the-counter market, in negotiated
transactions, or a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, at prices
relating to prevailing market prices or at negotiated prices. The Selling
Shareowners may effect such transactions by selling the shares to or through
brokers or dealers, and such brokers or dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Shareowners or
the purchasers of the shares for whom such brokers or dealers may act as agents
or to whom they sell as principals, or both (which compensation as to a
particular broker or dealer might be in excess of the customary commissions).
The Selling Shareowners and any brokers or dealers that participate with the
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Selling Shareowners in the distribution of the shares may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act and any
commissions received by them and any profit on the resale of the shares may be
deemed to be underwriting commissions or discounts under the Securities Act. In
addition, any shares of Company Common Stock covered by this prospectus that
also qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under that rule rather than pursuant to this prospectus.
The Selling Shareowners will pay any transaction costs associated with
effecting any sales that occur other than the fees and expenses incident to the
registration of the shares of Company Common Stock covered by this prospectus,
which will be paid by the Company.
The Selling Shareowners are not restricted as to the price or prices at
which they may sell their shares of Company Common Stock. Such shares may have
an adverse effect on the market price of the Company Common Stock. Moreover, the
Selling Shareowners are not restricted as to the number of shares that may be
sold at any time, and it is possible that a significant number of shares could
be sold at the same time, which may have an adverse effect on the market price
of the Company Common Stock.
EXPERTS
The combined financial statements and related financial statement
schedule of the semiconductor systems business of Rockwell incorporated by
reference in this prospectus from the Form 10 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
their report given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Company Common Stock offered hereby will be passed
upon by Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York 10112,
counsel to the Company.
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