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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999*
COMMISSION FILE NUMBER: 000-24923
CONEXANT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 25-1799439
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
4311 JAMBOREE ROAD, NEWPORT BEACH, CALIFORNIA 92660-3095
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 483-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE PER SHARE
(INCLUDING ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant (based on the closing price as reported on the
NASDAQ National Market on October 29, 1999) was approximately $9.1 billion.
Shares of voting stock held by each officer and director and by each shareowner
affiliated with a director have been excluded from this calculation because such
persons may be deemed to be affiliates. This determination of officer or
affiliate status is not necessarily a conclusive determination for other
purposes. The number of outstanding shares of the Registrant's Common Stock as
of October 29, 1999 was 196,389,578.**
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareowners to be held on February 10, 2000, are incorporated by reference into
Part III of this Form 10-K.
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* For presentation purposes of this Form 10-K, references made to the September
30, 1999 period relate to the actual fiscal year ended October 1, 1999.
** Number of outstanding shares reflects a 2-for-1 stock split effected in the
form of a stock dividend on October 29, 1999.
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CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains statements relating to future
results of Conexant Systems, Inc. (including certain projections and business
trends) that are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe harbor" created
by those sections. Actual results may differ materially from those projected as
a result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to, global and market conditions, including, but
not limited to, the cyclical nature of the semiconductor industry and the
markets addressed by the Company's and its customers' products; demand for and
market acceptance of new and existing products; successful development of new
products; the timing of new product introductions; the availability and extent
of utilization of manufacturing capacity and raw materials; price erosion; other
competitive factors; changes in product mix; fluctuations in manufacturing
yields; product obsolescence; the ability to develop and implement new
technologies and to obtain protection of the related intellectual property;
successful management of potential product supply constraint issues; labor
relations of the Company, its customers and suppliers; competitive product and
pricing pressures; timely completion of the Year 2000 modifications by the
Company and its key suppliers and customers; failure to meet forecasted
expenditures; the Company's inability to obtain or generate sufficient capital
to fund its research and development expenses and other working capital needs;
and the uncertainties of litigation, as well as other risks and uncertainties,
including but not limited to those set forth herein and those detailed from time
to time in the filings of the Company with the Securities and Exchange
Commission. These forward-looking statements are made only as of the date
hereof, and the Company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
GENERAL
Conexant Systems, Inc. ("Conexant" or the "Company") is the world's largest
independent company focused exclusively on providing semiconductor products for
communications electronics. With more than 30 years of experience in developing
communications products, Conexant draws upon its expertise in mixed-signal
processing technology to deliver semiconductor integrated circuit products and
system-level solutions for a broad range of communications applications. These
products facilitate communications worldwide through wireline voice and data
communications networks, cordless and cellular wireless telephony systems and
emerging cable and wireless broadband communications networks. Conexant has
aligned its business into five platforms: Personal Computing, Network Access,
Wireless Communications, Digital Infotainment, and Personal Imaging. For a
discussion of the five platforms, see "Products."
On November 4, 1998, the Board of Directors of Rockwell International
Corporation ("Rockwell") approved the distribution (the "Distribution") to its
shareowners of all the outstanding shares of the common stock of its
wholly-owned subsidiary, Conexant, by means of a tax-free spin-off. Under the
terms of the Distribution, each Rockwell shareowner of record on December 11,
1998, received one share of the Company's common stock (including an associated
preferred share purchase right) for every two shares of Rockwell common stock
owned on December 11, 1998. The Distribution occurred at the close of business
on December 31, 1998. Prior to the Distribution, the Company, a Delaware
corporation formerly named Rockwell Semiconductor Systems, Inc., was a
wholly-owned subsidiary of Rockwell which, together with certain other
subsidiaries of Rockwell, operated Rockwell's semiconductor systems business
("Semiconductor Systems"). As part of the Distribution, Rockwell transferred to
the Company, assets and liabilities of Semiconductor Systems not already owned
by the Company, which included the stock of certain subsidiaries, and the
Company transferred to Rockwell all assets and liabilities not constituting part
of Semiconductor Systems, including all assets and liabilities of Rockwell's
electronic commerce business. Conexant was incorporated as Rockwell
Semiconductor Systems, Inc. in Delaware on September 16, 1996, and changed its
name to Conexant Systems, Inc., on October 14, 1998. All references to the
Company and its predecessors will now be known as Conexant.
The financial information contained herein for fiscal 1999 contains
information while Conexant was part of Rockwell during the first quarter of
fiscal 1999. Further, the Company was not a stand alone public company until the
beginning of the second quarter of fiscal 1999, thus, stock price information
will not be presented for the first quarter of fiscal 1999.
For a discussion of certain significant risk factors associated with the
Company's business, see "Certain Business Risks."
PRODUCTS
The Company focuses its business in five key product platforms:
- Personal Computing
- Network Access
- Wireless Communications
- Digital Infotainment
- Personal Imaging
The Personal Computing product platform provides telephony-based
communications products for personal computing terminals, including desktops,
notebooks and handheld personal computers ("PCs"). The Company is the world's
leading supplier of V.90 dial-up modem chipsets to modem subsystem manufacturers
who supply modems to PC original equipment manufacturers ("OEMs") and retail
modem markets.
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Conexant's V.90 dial-up modems are supplied in multiple and single chip
configurations, and include digital signal processors ("DSPs"),
analog-to-digital ("A/D") and digital-to-analog ("D/A") converters and, in most
cases, microcontrollers, together with optimized signal processing algorithms,
communication protocols and applications software. To provide a broader range of
modem products to its customers, particularly to address the low-cost,
sub-$1,000 PC market, Conexant is supplying mixed-signal intensive,
controllerless modem chipsets and software modem solutions which take advantage
of the increasing power of PC central processors and use software to perform
functions traditionally enabled by semiconductor components. In addition, the
Company has transitioned its V.90 dial-up modem technology to other end-user
products and is a leading supplier of Internet appliance modems for applications
such as next generation gaming machines.
Capitalizing on its core mixed-signal processing technologies and its
digital subscriber line ("DSL") technology alliances, Conexant has introduced
chipsets that provide full rate and G.Lite asymmetric digital subscriber line
("ADSL") modem capabilities permitting broadband digital transmission of data,
voice and video over existing standard telephone lines at speeds of up to 8
megabits per second ("Mbps").
The Network Access product platform provides network infrastructure OEMs
with semiconductor products for electronic equipment that resides at
communications access points between individual client users and wide area
networks ("WANs"). These products enable the transportation of voice, data and
video between and within networks. WAN access equipment provides connectivity
for PCs, fax machines, cellular telephones and local area networks ("LANs")
through the Public Switched Telephone Network, the Internet, intranets and other
high speed corporate data networks, cellular networks and cable networks. WAN
transport equipment provides network backbone point-to-point communications at
very high speeds. Conexant's product portfolio includes multi-service access
solutions operating at 56 kilobits per second ("Kbps"), broadband DSL solutions
facilitating transmission speeds up to 8 Mbps, and WAN transport product T1/E1
chipsets operating at 1.5 Mbps, including asynchronous transfer mode ("ATM")
devices supporting up to 622 Mbps, and SONET transceivers for next generation 10
gigabits per second ("Gbps") optical standards. Many of the Company's Network
Access products include DSPs, A/D and D/A converters and microcontrollers,
together with optimized signal processing algorithms, communication protocols
and applications software.
The Wireless Communications product platform provides components,
subsystems and system-level semiconductor products for wireless voice and data
communications. The Company supplies silicon and gallium arsenide ("GaAs")-based
components and systems for use in digital cordless telephones, digital cellular
handsets and base stations and global positioning system ("GPS") receivers. Many
of these products include DSPs, A/D and D/A converters, microcontrollers and
radio frequency integrated circuits ("RFICs"), together with optimized signal
processing algorithms, communication protocols and applications software.
Conexant is the worldwide leader in supplying complete
antenna-to-microphone system-level semiconductor products for the 900 megahertz
("Mhz") digital spread spectrum ("DSS") digital cordless telephone market. In
addition, Conexant is a leading supplier of GaAs power amplifiers for use in a
wide range of digital cellular handsets addressing global system for mobile
communications ("GSM"), code division multiple access ("CDMA") and time division
multiple access ("TDMA") air interface protocol standards. Conexant also
provides a family of RFIC chipset subsystems that integrate the functions of
mixers, oscillators and amplifiers and thereby reduce the number of radio
frequency ("RF") components, for use in digital cellular handsets. Conexant has
introduced semiconductor system solutions for GSM handsets that integrate the RF
front end, which receives and filters the RF signal, with the baseband backend,
which processes the voice signal, to provide digital cellular handset OEMs with
complete antenna-to-microphone system-level chipsets in smaller, less expensive
and less power consuming packages. Finally, Conexant designs and manufactures
GPS receiver components and supplies them to OEMs for incorporation into end
products for marine, automotive and personal computer applications.
The Digital Infotainment product platform provides semiconductor products
that perform communication and media processing functions within a variety of
electronics equipment for digital information and entertainment. The Company
offers broadband wireless communications and cable modem products and RF tuners,
which process high-speed data, voice and video transmissions from various
sources. Conexant is a leading supplier of RF tuner and demodulator products for
satellite set top box applications. In addition,
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Conexant has introduced its two-way cable modem for multimedia cable network
systems ("MCNS") and digital video broadcasting ("DVB") applications. For the PC
platform, Conexant offers a family of national television standards committee
("NTSC" -- North American television standard)/phase alternate line
("PAL" -- European television standard)/Systeme Electronique Couleur Avec
Memorie ("SECAM" -- French television standard) A/D video decoders which enable
use of the PC to receive radio and television broadcasts and create and edit
videos. Many of the Company's Digital Infotainment products include DSPs, A/D
and D/A converters and microcontrollers, together with optimized signal
processing algorithms, communication protocols and applications software.
The Personal Imaging product platform supplies semiconductor products that
enable image capture, processing and printing. These products are used in a wide
array of office automation products such as fax machines and multifunction
peripherals ("MFPs"), which combine printer, plain paper fax, copier, scanner
and telephone functionality into one system. The Company is the world's leading
supplier of fax modem chipsets to fax machine OEMs, supplying more than 70% of
the worldwide market. In addition, the Company is capitalizing on its leading
position in fax machine chipsets by offering complete system-level chipsets for
the growing market for high-performance MFPs. The Company's fax modem and MFP
products incorporate DSPs, A/D and D/A converters and microcontrollers
integrated within a single package, together with optimized signal processing
algorithms, communication protocols and application software.
Capitalizing on core imaging technologies originally developed by
Rockwell's Science Center, Conexant is developing a family of low cost, digital
image sensors and camera engines, including back-end processors, targeted at PC
teleconferencing, digital still and video cameras and other embedded imaging
applications.
COMPANY STRATEGY
The Company's mission is to become the worldwide leader in providing the
most complete and most synergistic portfolio of system-level semiconductor
solutions for the industry's highest growth communications applications. The
Company's strategic intent is to provide highly valued, differentiated products
for wireline voice and data communications, cordless and cellular wireless
telephony systems and emerging telephony, cable and wireless broadband
communications networks by leveraging competencies in signal conversion, signal
processing, communications algorithms and protocols and applications software.
Key elements of the Company's strategy include:
CORE TECHNOLOGY -- The Company believes that executing a core technology
strategy, which deploys technology building blocks, such as DSPs, RFICs,
mixed-signal processing cores and software, across multiple product platforms,
is fundamental to its growth objectives. This core technology strategy enables
creation of economies of scale in research and development and facilitates a
reduction in the time-to-market for its key products. Conexant intends to extend
its technology portfolio and, in parallel, seek alliances to gain access to
critical intellectual property, thereby ensuring continued agility and
flexibility to meet changing market and technology requirements.
MANUFACTURING EXCELLENCE -- The Company intends to maintain access to
leading edge, high volume semiconductor design and manufacturing resources
(complementary metal oxide semiconductor "CMOS", Bipolar, BiCMOS, RF CMOS, GaAs
and SiGe) that are the driving force behind today's smaller, more integrated,
lower power and lower cost devices. In addition, the Company will continue to
follow a balanced manufacturing strategy of internal wafer fabrication
production augmented by external foundries to optimize capacity availability
while seeking to reduce capital and operating infrastructure requirements.
TIME-TO-MARKET -- Through integrated engineering and manufacturing teams,
the Company pursues the rapid design and cost-effective production of
semiconductor system solutions for its targeted markets. The Company believes
that the combination of design expertise and wafer fabrication and assembly
capability allows the Company to develop prototypes in a shorter amount of time
relative to its competitors.
SYSTEM SOLUTION FOCUS -- The Company seeks to capitalize on its design
capabilities and communications systems knowledge by providing suppliers of
communications electronics products with complete semiconductor system
solutions. High levels of integration allow the Company to enhance the benefits
of its
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products by reducing production costs through fewer external components, reduced
board space and improved system assembly yields. By combining all of the
necessary communication functions for a complete system solution, the Company
can deliver additional semiconductor content, thereby offering its existing and
potential customers more compelling and cost-effective solutions.
PORTFOLIO LEVERAGE -- The increasing linkages between the Company's
business platforms and target markets offers opportunities for the Company to
propagate its core technology competencies quickly and cost-effectively across
multiple product initiatives. Portfolio leverage involves collaborative product
planning and development between at least two business units and includes common
product components, features, or interfaces that make each newly developed
product more valuable as a result of the existence of companion portfolio
products. Through this approach, the Company believes it can deliver products
that provide greater value to customers with shorter development times.
CUSTOMER INTIMACY -- The Company believes a business partnership approach
yields maximum value to the customer through multi-level organizational
engagement and product roadmap alignment. Further, the Company believes that the
strength of its relations with leading customers in each of its product
platforms is a competitive advantage that enables it to more effectively target
its research and development investments. Conexant has established relationships
with market leaders in each of its addressed markets and will seek to build upon
its existing leadership market positions and gain market share in new
high-growth markets by continuing to work closely with industry leading system
and service providers. This strategy provides Conexant with rapid feedback from
customers during the design process and increases the likelihood that products
will meet customers' cost and performance requirements for high volume
applications.
TALENT DEVELOPMENT -- The Company believes employees are its most valuable
assets and a commitment to the development and motivation of its employee base
is essential to attracting and retaining industry-leading talent. To support
this initiative, Conexant is encouraging state-of-the-art change management,
leadership development, and technical training programs in conjunction with
major universities. Talent development serves as the foundation upon which all
other business strategies are built and the Company is committed to aligning
employee goals with company performance and shareowner value.
RESEARCH AND DEVELOPMENT
Conexant has significant research, development, engineering and product
design capabilities. At September 30, 1999, Conexant employed approximately
1,500 engineers.
Ongoing research and development projects in each of Conexant's product
platforms include the following: In the Personal Computing platform, Conexant is
developing a next generation full rate ADSL/G.Lite/V.90 client solution for
broadband access to the home in conjunction with the Network Access platform
which is supplying ADSL functionality to network infrastructure OEMs. In
addition, it is developing a family of 10 Mbps and higher home networking
solutions. In the Network Access platform, Conexant is investing in broadband
access and WAN transport solutions, namely next generation SDSL, HDSL, ADSL,
T/E, ATM and SONET products. New product developments within the Network Access
platform seek to integrate functionality, reduce power requirements and increase
port density of network access and transport equipment. Further, it is working
on solutions to support a new low cost interface for interconnecting co-located
gigabit switch router ("GSR") networking equipment at 10 Gbps (OC-192) data
rates and developing dynamic packet transport ("DPT") technology, a
packet-optimized transport solution for the rapidly growing Internet
infrastructure. In the Wireless Communications platform, Conexant is developing
next generation components and RF subsystems for the CDMA and GSM frequency
bands as well as providing a higher level of integration for its existing GSM
antenna-to-microphone system solution. In the Digital Infotainment platform,
Conexant is focusing its development efforts on future cable modems and set-top
box solutions. Additionally, it is developing advanced television silicon and
software products for PC systems to receive and display high definition
television ("HDTV") signals from a variety of broadcast sources including analog
and emerging digital TV formats. In the Personal Imaging platform, Conexant is
developing next generation MFP chipsets that provide a complete suite of office
equipment in a single platform, with future development planned for combined
monochrome and color devices. Further, it is expanding its family
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of single-chip image sensors and camera engines that offers low-cost, high
quality alternatives to traditional charge coupled device solutions.
Conexant spent approximately $310.0 million, $342.3 million, and $279.8
million in fiscal 1999, 1998, and 1997, respectively, on research and
development activities. See "Certain Business Risks -- Substantial Research and
Development Expenses."
MANUFACTURING
The Company operates its own manufacturing, assembly and test facilities.
These facilities include two operating wafer fabrication facilities, an
integrated circuit ("IC") assembly and test facility and a module assembly and
test facility. The Company also has arrangements with third parties, including
entities outside the United States, for the production, assembly and testing of
certain semiconductor products. The Company's assembly and test facility in
Mexicali, Mexico and international subcontract manufacturing arrangements are
subject to a number of risks of operating abroad. In April 1999, the Company
ceased operations at its former Colorado Springs, Colorado wafer fabrication
facilities. Prior to the Distribution, Conexant distributed these facilities to
Rockwell. The Company is also exploring wafer manufacturing alternatives,
including increased use of outside foundries, entering into joint ventures with
respect to wafer manufacturing or other actions in respect of its wafer
manufacturing facilities. See "Certain Business Risks -- Manufacturing Risks,"
and Item 2 "Properties."
RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. Raw wafers and other raw materials used in the production of
the Company's CMOS products are available from several suppliers. The Company is
currently dependent on a single source supplier for epitaxial wafers used in the
GaAs semiconductor manufacturing processes at its Newbury Park, California
facility. See "Certain Business Risks -- Raw Materials and Supplies Risk."
CUSTOMERS, MARKETING AND SALES
The Company markets and sells its products to leading OEMs of
communications electronics products in each of its product platforms, including
the following selected customers:
PERSONAL COMPUTING (PC OEMs, systems integrators, retail modem manufacturers,
and modem subsystem manufacturers)
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Acer Incorporated Compaq Computer Corporation International Business
Apple Computer, Inc. Dell Computer Corporation Machines
Askey Computer Corporation Fujitsu Limited Corporation
Best Data Products, Inc. GVC Corporation NEC Corporation
Boca Research, Inc. Hewlett-Packard Company Sega Enterprises Ltd.
CIS Technologies Toshiba Corporation
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NETWORK ACCESS (Data communications and telecommunications network
infrastructure manufacturers)
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3Com Corporation ECI Telecommunications Northern Telecom Limited
Alcatel Data Networks, S.A. Ericsson, Inc. Orckit Communications
Cabletron Systems, Inc. Fujitsu Limited PairGain Technologies
CIENA Corporation Limited CIENA Corporation Tellabs, Inc.
Cisco Systems, Inc. Lucent Technologies, Inc.
Copper Mountain, Inc. Nokia Corporation
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WIRELESS COMMUNICATIONS (Wireless base station equipment, cellular and cordless
handset and navigation systems manufacturers)
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Casio PhoneMate Inc. L.G. International Sagem S.A.
CIDCO Inc. Corporation Samsung Electronics Co.,
DeLorme Mapping Motorola, Inc. Ltd.
Ericsson, Inc. NEC Corporation Sanyo Electric Company Ltd.
Hyundai Corporation Nokia Corporation Sony Corporation
QUALCOMM Incorporated Uniden Corporation
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DIGITAL INFOTAINMENT (PC OEMs, PC subsystem manufacturers, set-top box
manufacturers and satellite service providers)
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ATI Technologies, Inc. General Instruments, Inc. Sony Corporation
Compaq Computer Corporation Hewlett-Packard Company Thomson Corporation
EchoStar Communications Hughes Network Systems, Inc. Toshiba Corporation
Corporation Philips Electronics N.V. Web TV Networks, Inc.
Gateway 2000, Inc.
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PERSONAL IMAGING (Fax and multifunction peripherals manufacturers)
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Brother Industries, Ltd. Lexmark International Ricoh Company Ltd.
Canon Inc. Group, Inc. Sagem S.A.
Daewoo Telecom Ltd. Matsushita Electric Samsung Electronics Co.,
Fuji Xerox Co., Ltd. Industrial Ltd.
Hewlett-Packard Company Co. Ltd. Sanyo Electric Company Ltd.
Kinpo Electronics Inc. NEC Corporation Sharp Corporation
Olivetti S.p.A
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Conexant has a worldwide sales organization comprised of approximately 250
employees as of September 30, 1999, with 11 domestic and 15 international sales
offices. To complement its direct sales and customer support efforts, the
Company also sells its products through approximately 42 independent
manufacturers' representatives and approximately 46 distributors and dealers.
The Company has a marketing staff that is organized around its five product
platforms. In addition, the Company's design and applications engineering staff
is actively involved with customers during all phases of design and production
and provides customer support through the Company's worldwide sales offices,
which are generally in close proximity to customers' facilities.
The Company continues to seek close technical collaboration with its
customers during the design phase of new programs to facilitate integration of
the Company's products into such programs, to improve the Company's ability to
rapidly reach high manufacturing volumes, and to position the Company to be a
primary supplier for new programs.
BACKLOG
The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products, with such purchase orders officially acknowledged by
Conexant according to its own terms and conditions. Due to industry practice
with respect to cancellation of orders which allows customers to cancel orders
with limited advance notice to the Company prior to shipment, Conexant believes
that backlog as of any particular date is not a reliable indicator of future
revenue levels.
COMPETITION
The semiconductor industry in general and the markets in which the Company
competes in particular are intensively competitive. The Company competes
worldwide with a number of United States and international manufacturers that
are both larger and smaller than the Company in terms of resources and market
share. The Company currently faces significant competition in its markets and
expects that intense price and product competition will continue. As a result of
the trend toward global expansion by foreign and domestic competitors,
technological and public policy changes and relatively low barriers to entry in
certain markets of the industry, the Company anticipates that additional
competitors will enter its markets. The Company
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believes that the principal competitive factors for IC providers to the
Company's addressed markets are product performance, level of integration,
quality, compliance with industry standards, price, time-to-market, system cost,
design and engineering capabilities, new product innovation and customer
support. The specific bases on which the Company competes vary by product
platform. See "Certain Business Risks -- Intense Competition."
Within V.90 modem products, the Company competes primarily with Lucent
Technologies, Inc., Motorola, Inc., PC-Tel, Inc., and Texas Instruments
Incorporated. In the Network Access market, competitors of the Company include
Analog Devices, Inc., Applied Micro Circuits Corporation, Globespan
Technologies, Intel Corporation, Lucent Technologies, Inc., PMC-Sierra Inc.,
Siemens Corporation, and Vitesse Semiconductor, Inc. The Company's competitors
in markets addressed by the Wireless Communications platform include ANADIGICS,
Inc., Analog Devices, Inc., Hitachi Ltd., Lucent Technologies, Inc., Motorola,
Inc., Philips Electronics N.V., RF Micro Devices, Inc., Siemens Corporation, and
Texas Instruments Incorporated. In the Digital Infotainment market, competitors
of the Company include Broadcom, Inc., C-Cube Microsystems, LSI Logic
Corporation, Philips Electronics N.V., STMicroelectronics N.V., and Texas
Instruments Incorporated. The Company's competitors in the Personal Imaging
market include Samsung Electronics Co., Ltd. and Toshiba Corporation.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Numerous United States and foreign patents and patent applications are
owned or licensed by Conexant related to its manufacturing operations and other
activities. Conexant has filed federal and international trademark applications
seeking registered protections of the Conexant name and logo. In addition,
Conexant owns a number of other trademarks applicable only to certain of its
products. Management believes that intellectual property, including patents,
patent applications and licenses, and trademarks are of material importance to
Conexant. In addition to the protection of its proprietary technologies and
processes, Conexant is seeking to strengthen its intellectual property portfolio
to enhance its ability to obtain cross-licenses of intellectual property from
others, whether to obtain access to intellectual property Conexant does not
posses or to resolve potential intellectual property claims against Conexant,
without the need to make financial payments.
Various claims of patent infringement have been made against Conexant.
Management believes that none of these claims will have a material adverse
effect on the consolidated financial statements of Conexant. Pursuant to the
Distribution, Conexant assumed all liabilities in respect of intellectual
property matters related to current and former operations of Semiconductor
Systems. See Item 3 "Legal Proceedings."
ENVIRONMENTAL REGULATION
Federal, state, and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes, and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of Conexant. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on Conexant's liquidity and capital
resources, competitive position or financial statements.
Conexant has been designated as a potentially responsible party ("PRP") at
one Superfund site located at a former silicon wafer manufacturing facility and
steel fabrication plant in Parker Ford, Pennsylvania formerly occupied by the
Company. The site was also formerly occupied by Recticon Corporation and Allied
Steel Products Corporation, each also named as a PRP and each of which is
insolvent. The remediation plan for the site includes installation of a public
water supply line and a groundwater pump and treatment system, as well as
routine groundwater sampling. Management estimates the total costs for the
remediation of this Superfund site to be approximately $4 million and has
accrued for these costs as of September 30, 1999.
In addition, the Company is engaged in two other remediations of
groundwater contamination at its Newport Beach and Newbury Park, California
facilities. Management currently estimates the total costs for these
remediations to be approximately $4 million and has also accrued for these costs
as of September 30, 1999.
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Pursuant to the Distribution Agreement, the Company has assumed all
liabilities in respect of environmental matters related to current and former
operations of Conexant.
Management of the Company believes that Conexant's expenditures for
environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the Company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.
CYCLICALITY; SEASONALITY
The semiconductor industry is highly cyclical. Sales of Conexant's Personal
Computing, Wireless Communications and Personal Imaging product platforms are
subject to seasonal fluctuation related to the increase in sales of products
which include Conexant's products, such as PCs, cordless and cellular telephones
and fax machines, generally associated with the holiday season in December.
Conexant's sales for these product platforms generally increase beginning in
August and September and continue at a higher level through the end of the
calendar year. See "Certain Business Risks -- Cyclical Nature of the
Semiconductor Industry."
EMPLOYEES
As of September 30, 1999, Conexant had approximately 7,200 full-time
employees, of whom approximately 1,500 are engineers. Approximately 500 Conexant
employees in the United States and 1,900 employees in Mexico are covered by
collective bargaining agreements. In July 1998, following a 50-day strike by
members of the International Brotherhood of Electrical Workers (IBEW) Local
2295, Conexant entered into a collective bargaining agreement with that union
covering approximately 500 employees at the Company's Newport Beach, California
facility. The agreement will expire in May 2003. No other significant work
stoppages have occurred in the past five years.
In September 1998, in connection with its plan to restructure its business,
the Company announced a worldwide workforce reduction of approximately 10% and
the closure and planned disposition of its Colorado Springs, Colorado wafer
fabrication facilities (which were distributed to Rockwell prior to the
Distribution). The plan included the offer of voluntary early retirement
packages to certain eligible employees, 192 of whom accepted the early
retirement program.
Conexant believes its future success will depend in large part upon its
ability to continue to attract, retain, train and motivate highly skilled and
dedicated employees.
CERTAIN BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Recent Financial Performance
We experienced rapid growth in sales and operating earnings during the five
fiscal years ended September 30, 1996. However, in fiscal 1997, sales declined
approximately $58 million, or 4%, to approximately $1,412 million and operating
earnings declined approximately $117 million, or 37%, to approximately $199
million, before acquisition related charges in both fiscal 1997 and 1996.
Moreover, for the fiscal year ended September 30, 1998, we had sales of
approximately $1,200 million and incurred an operating loss of approximately
$440 million.
In September 1998, we announced a comprehensive plan to restructure our
business to position us for future profitability. This plan resulted in fourth
quarter fiscal 1998 special charges of approximately $147 million and included
workforce reductions, facility closures and other actions. Our fiscal 1998
full-year net loss was approximately $262 million, including inventory
write-offs of approximately $66 million, a charge
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for intellectual property matters of approximately $43 million and the fourth
quarter special charges. See Part II Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Although we returned
to profitability in fiscal 1999, but there can be no assurance that we will be
able to sustain such profitability.
Dependence on Timely Success of Expansion Platforms
We are dependent on the success of our plan, begun in 1995, to diversify
our business and expand into the following selected related product platforms:
- Network Access;
- Wireless Communications;
- Digital Infotainment; and
- Personal Imaging
These platforms offer higher growth prospects than our analog PC modem
business. Our 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 these
expansion platforms; and
- second, whether these platforms will increase their contribution to
financial performance.
There are numerous risks inherent in this diversification and expansion
strategy, many of which are beyond our control. In certain product lines within
these expansion platforms, we currently have minimal market presence relative to
other more established competitors. Moreover, success with these expansion
platforms will depend, in part, on our customers' ability to develop new and
enhanced products and to successfully market those products to end users. We
cannot assure you that our diversification and expansion program will be
successful. A failure of this program would have a material adverse effect on
our business, financial condition and results of operations.
Substantial Research and Development Expenses
To remain competitive, we must continue to make substantial investments in
research and development to develop new and enhanced products. The semiconductor
industry requires substantial investment in research and development. We cannot
assure you that we will have sufficient resources to develop new and enhanced
technologies and competitive products. Our failure to continue to make
sufficient investments in research and development programs could have a
material adverse effect on our business, financial condition and results of
operations.
Substantial Capital Expenditures and Working Capital Needs
To remain competitive, we need to make significant capital expenditures for
manufacturing technology and equipment. The semiconductor industry is highly
capital intensive. Semiconductor manufacturing requires a constant upgrading of
process technology to remain competitive, as new and enhanced semiconductor
processes are developed which permit smaller, more efficient and more powerful
semiconductor devices.
Our manufacturing, assembly and test facilities have required and will
continue to require significant investments in manufacturing technology and
equipment. There can be no assurance that we will have sufficient capital
resources to make necessary investments in manufacturing technology and
equipment.
We have made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for our
products. We made capital expenditures during fiscal 1999 of approximately $214
million, compared to approximately $270 million during fiscal 1998. We plan to
spend between approximately $275 million and approximately $325 million during
fiscal 2000. As of September 30, 1999, total commitments for construction or
purchase of capital equipment were approximately $52.3 million.
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There can be no assurance that our cash flows from operations will increase
sufficiently to absorb these additional costs.
Credit Facility and Restrictive Covenants
Our bank credit facility, which is guaranteed by each of our domestic
subsidiaries, includes covenants that may restrict our operating and financial
flexibility in the future. Substantially all of our assets and the assets of our
domestic subsidiaries and the stock of our subsidiaries, subject to certain
exceptions, have been pledged as collateral to secure repayment of this credit
facility. The credit facility includes restrictions on capital expenditures,
indebtedness, acquisitions, mergers, asset sales and liens on assets that apply
to us and our subsidiaries. We also must meet certain financial tests and
maintain certain financial ratios. Although we believe that we will be able to
comply with these requirements, compliance with these requirements may restrict
our operating and financial flexibility. We cannot assure you that we will in
fact be able to satisfy all of the requirements in the credit facility. If we do
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 our
business, financial condition and results of operations.
Fluctuations in Operating Results
Our operating results are subject to substantial quarterly and annual
fluctuations due to a number of factors, many of which are beyond our control.
Such factors may include:
- the effects of competitive pricing pressures;
- decreases in average selling prices of our products;
- production capacity levels and fluctuations in manufacturing yields;
- availability and cost of products from our suppliers;
- the gain or loss of significant customers;
- our ability to develop, introduce and market new products and
technologies on a timely basis;
- new product and technology introductions by competitors;
- changes in the mix of products produced and sold;
- market acceptance of our products and our customers' products;
- intellectual property disputes;
- 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 order
cancellations or rescheduling of orders, could also adversely affect our
operating results. Moreover, our customers may change delivery schedules or
cancel or reduce orders without significant penalty and generally are not
subject to minimum purchase requirements.
The foregoing factors are difficult to forecast, and these, as well as
other factors, could materially adversely affect our quarterly or annual
operating results. If our operating results fail to meet the expectations of
analysts or investors, it could materially and adversely affect the price of our
common stock.
Intellectual Property Litigation, Protection and Indemnification
Our business faces risks of intellectual property obsolescence,
infringement and litigation. The semiconductor industry is characterized by
vigorous protection and pursuit of intellectual property rights. In the past,
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we have found it necessary to engage in litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of proprietary rights of others, including our customers. We expect future
litigation on similar grounds.
We have received, and may receive in the future, claims of infringement of
intellectual property rights of others. There are pending proceedings involving
such claims. We cannot assure you (1) that we will prevail in pending actions,
(2) that other actions alleging infringement by us of third-party patents or
invalidity of our patents will not be asserted or presented against us, or (3)
that any assertions of infringement or actions seeking to establish the
invalidity of our patents will not materially and adversely affect our business,
financial condition and results of operations.
Even if we are successful in such matters, the attempted enforcement of
intellectual property rights by or against us could result in significant costs
and diversion of resources. It could also have a material adverse effect on our
business, financial condition and results of operations. If claims or actions
are asserted or commenced against us, we may seek to obtain licenses under a
third party's intellectual property rights to avert or resolve a controversy. We
cannot assure you that under such circumstances a license would be available on
commercially reasonable terms, if at all.
We rely primarily on patent, copyright, trademark and trade secret laws, as
well as nondisclosure and confidentiality agreements and other methods to
protect our proprietary technologies and processes. In addition, we often
incorporate the intellectual property of our customers into our designs, and
have certain obligations with respect to the non-use and non-disclosure of their
intellectual property. We cannot assure you (1) that the steps we take to
prevent misappropriation or infringement of our intellectual property or the
intellectual property of our customers will be successful; (2) that any existing
or future patents will not be challenged, invalidated or circumvented; or (3)
that any of the prospective measures described above would provide meaningful
protection. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our technology without authorization, develop
similar technology independently or design around our patents. If any of our
patents fails to protect our technology it would make it easier for our
competitors to offer similar products. In addition, effective copyright,
trademark and trade secret protection may be unavailable or limited in certain
countries.
We have historically indemnified customers for certain costs and damages of
patent infringement where our product is the factor creating the customer's
infringement exposure. This practice generally excludes circumstances where
infringement arises out of the combination of our products with products of
others. This indemnification practice could have a material adverse effect on
our business, financial condition and results of operations, particularly in
situations where our products are designed for use in devices manufactured by
our customers that comply with international standards. These international
standards are often covered by patent rights held by our competitors or our
customers. The combined costs of obtaining licenses from all holders of patent
rights essential to such standards could be high and could have material adverse
effect on our business, financial condition and results of operations.
Cyclical Nature of the Semiconductor Industry
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand.
The industry has experienced significant downturns, often in connection
with, or in anticipation of, maturing product cycles (of both semiconductor
companies' and their customers' products) and declines in general economic
conditions. These downturns have been characterized by diminished product
demand, production overcapacity, high inventory levels and accelerated erosion
of average selling prices.
We have recently experienced these conditions in our dial-up PC modem
chipset business and may experience such downturns in the future. For example,
in fiscal 1998, average selling prices for our Personal Computing products fell
by approximately 50%, the annual growth rate for such products fell to
approximately 20% and in the fourth quarter, we made a provision for excess and
obsolete inventories of approximately
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$66 million due to lower than anticipated demand, price declines and
obsolescence of certain products. Any future downturns of this nature could have
a material adverse effect on our business, financial condition and results of
operations.
Intense Competition
The semiconductor industry in general and the markets in which we compete
in particular are intensely competitive. We compete worldwide with a number of
United States and international manufacturers that are both larger and smaller
than us in terms of resources and market share. We currently face significant
competition in our markets and expect 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 our products. As a result of the
trend toward global expansion by foreign and domestic competitors, technological
and public policy changes and relatively low barriers to entry in certain
markets of the industry, we anticipate that additional competitors will enter
our markets. Although we currently enjoy substantial market share in our V.90
dial-up modem and facsimile ("fax") modem chipset product lines, as we continue
our diversification strategy and develop our expansion platforms, we are and
will be, competing in certain new markets in which we have little or no market
share and existing competitors have dominant market positions. Moreover,
customers for certain of our products offer other products that compete with
similar products offered by us. We believe that the principal competitive
factors for IC providers to our 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 we compete vary by product platform.
We compete with a number of U.S. and international manufacturers. Many of
our current and potential competitors have certain advantages, including:
- longer operating histories and presence in key markets;
- greater name recognition;
- access to larger customer bases; and
- significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we have.
As a result, these 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 Conexant.
These competitors also have established or may establish financial or
strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. These relationships may affect
customers' purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. We cannot assure you that we will be
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able to compete successfully against these competitors. We also cannot assure
you that competition will not have a material adverse effect on our business,
financial condition and results of operations.
Many of our competitors have combined with each other and consolidated
their businesses, including the consolidation of competitors with our customers.
This is attributable to a number of factors, including the high-growth nature of
the communications electronic industry and the time-to-market pressures on
suppliers to decrease the time required for product conception, research and
development, sampling and production launch before product reaches the market.
This consolidation trend is expected to continue, since investments, alliances
and acquisitions may enable semiconductor suppliers including Conexant and our
competitors, to augment technical capabilities or to achieve faster
time-to-market for their products than would be possible solely through internal
development.
Consolidations by industry participants are creating entities with
increased market share, customer base, technology and marketing expertise in
markets in which we compete. These developments may significantly and adversely
affect our current markets, the markets we want to serve and our ability to
compete successfully in those markets.
Rapid Technological Change
The demand for our products can change quickly and in ways we may not
anticipate because our markets 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 our products or in market demand for products based on a particular
technology, particularly due to the introduction of new technology that
represents a substantial advance over current technology, could result in a
faster than anticipated obsolescence of our products. Such an event could have a
material adverse effect on our business, financial condition and results of
operations. For example, increased market demand for sub-$1,000 PCs is causing
PC OEMs to require less expensive modem devices, such as software modems. These
software modems require fewer semiconductor components than our traditional
modem chipsets. As a result, these devices render obsolete the traditional
hardware upgrade path for our modem products.
Manufacturing Risks
Our manufacturing operations are complex and subject to disruption due to
causes beyond our control. The fabrication of ICs 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 numerous die on each wafer not to function.
We are exploring wafer manufacturing alternatives, including increased use
of outside foundries, entering into business relationships with respect to wafer
manufacturing or other actions related to our wafer manufacturing facilities. We
cannot assure you that we will succeed in implementing any such alternatives.
Our operating results are highly dependent upon our ability to produce
large volumes of integrated circuits at acceptable manufacturing yields. Lengthy
or recurring disruptions of operations at any of our production facilities or
those of our subcontractors for any reason, including labor strikes, work
stoppages, fire, earthquake, flooding or other natural disasters, could cause
significant delays in shipments until we could shift the products from an
affected facility or subcontractor to another facility or subcontractor. In such
event, we cannot assure you that the required alternate capacity, particularly
wafer production capacity, would be available on a timely basis or at all.
Moreover even if alternate wafer production capacity is available, we may not be
able to obtain it on favorable terms, which would result in a loss of customers.
Any inability to generate sufficient manufacturing capacities to meet demand,
either at our own facilities or through foundry or similar arrangements with
others, could have a material adverse effect on our business, financial
condition and results of operations. Certain of our manufacturing facilities are
located near major earthquake fault lines, including
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our California and Mexico facilities. We maintain only minimal earthquake
insurance coverage on these facilities.
Due to the highly specialized nature of the GaAs semiconductor
manufacturing process, in the event of a disruption at our Newbury Park,
California wafer fabrication facility, alternate GaAs production capacity would
not be readily available from third party sources. In addition, we are dependent
on a single source supplier for epitaxial wafers used in our GaAs manufacturing
processes. The number of qualified alternative suppliers for these wafers is
limited and the process of qualifying a new epitaxial wafer supplier could
require a substantial leadtime. See "Raw Materials and Supplies." Any disruption
of operations at our Newbury Park, California wafer fabrication facility or the
interruption in the supply of epitaxial wafers used in our GaAs process could
have a material adverse effect on our business, financial condition and results
of operations, particularly with respect to our Wireless Communications
products.
Complex Manufacturing Processes
Our manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing yields for new products
initially tend to be lower as we complete product development and commence
volume manufacturing, and will typically increase as we ramp to full production.
Our forward product pricing includes this assumption of improving manufacturing
yields and, as a result, material variances between projected and actual
manufacturing yields have a direct effect on our gross margin and profitability.
The difficulty of forecasting manufacturing yields accurately and maintaining
cost competitiveness through improving manufacturing yields will continue to be
magnified by ever increasing process complexity of manufacturing integrated
circuit products. Also by the compression of product life cycles which requires
us to bring new products on line faster and for shorter periods while
maintaining acceptable manufacturing yields and quality without, in many cases,
reaching the longer-term, high volume manufacturing conducive to higher
manufacturing yields and declining costs.
Raw Materials and Supplies Risk
We believe we have adequate sources for the supply of raw materials and
components for our manufacturing needs with suppliers located around the world.
Raw wafers and other raw materials used in the production of our CMOS products
are available from several suppliers. We are currently dependent on a single
source supplier for epitaxial wafers used in the GaAs semiconductor
manufacturing processes at our Newbury Park, California facility. However, we
are in the process of arranging alternative suppliers. 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 we
historically have not experienced any significant difficulties in obtaining an
adequate supply of raw materials and components necessary for our 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 our business, financial condition and results of
operations.
Risks of International Sales and Operations
For the fiscal year ended September 30, 1999, approximately 61% of our
total sales were to customers located outside the United States, primarily in
the Asian-Pacific and European countries. In addition, we have facilities and
suppliers located outside the United States, including our assembly and test
facility in Mexicali, Mexico and third-party foundries located in the
Asia-Pacific region. Our international sales and operations are subject to a
number of risks inherent in selling and operating abroad. These include risks
regarding:
- currency exchange rate fluctuations;
- local economic and political conditions;
- disruptions of capital and trading markets;
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- 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.
Because most of our international sales, other than sales to Japan (which
are denominated principally in Japanese yen), are currently denominated in U.S.
dollars, our products could become less competitive in international markets if
the value of the U.S. dollar increases relative to foreign currencies.
Moreover, we may be competitively disadvantaged relative to our competitors
located outside the United States who may benefit from a devaluation of their
local currency. The above factors may have a material adverse effect on our
ability to increase or maintain our foreign sales or on our business, financial
condition and results of operations.
Our operating performance has been impacted by the current economic
situation in the Asia-Pacific region. This economic situation has increased the
uncertainty with respect to the long-term viability of certain of our 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 52% of total revenues in fiscal 1999.
We use 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. We have not experienced nor do we anticipate any material adverse
effect on our results of operations or financial condition related to these
foreign currency forward exchange contracts. We have not entered into foreign
currency forward exchange contracts for other purposes and our financial
condition and results of operations could be affected (negatively or positively)
by currency fluctuations.
Investments, Alliances and Acquisitions
We face risks associated with investments, alliances and acquisitions.
Although we invest significant resources in research and development activities,
the complexity and rapidity of technological changes make it impractical for us
to pursue development of all technological solutions on our own. Accordingly, we
will review on an ongoing basis investment, alliance and acquisition prospects
that would complement our existing product offerings, augment our market
coverage or enhance our technological capabilities. However, we cannot assure
you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future.
Moreover, if we consummate such transactions, they could result in (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 our business, financial condition and results
of operations and the price of our common stock.
The ultimate success of any such investments, alliances or acquisitions in
achieving the purposes for which they are undertaken will depend on our ability
to integrate successfully any acquired business and to retain key personnel, as
well as a variety of other factors.
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Dependence on Key Personnel
Our future success depends largely upon the continued service of our
executive officers and other key management and technical personnel. Our success
also depends on our ability to continue to attract, retain and motivate
qualified personnel. We are dependent on key technical personnel. They represent
a significant asset, as the source of its technological and product innovations.
The competition for such personnel is intense in the semiconductor industry. We
cannot assure you that we will be able to continue to attract and retain
qualified management and other personnel necessary for the design, development,
manufacture and sale of our products.
We may have difficulty attracting and retaining key personnel during
periods of poor operating performance. The loss of one or more of our key
employees or our inability to attract, retain and motivate qualified personnel
could have a material adverse effect on our business, financial condition and
results of operations. In particular, the loss of the services of Dwight W.
Decker, our Chairman and Chief Executive Officer, or certain key design and
technical personnel could materially and adversely affect us.
Demands on Management Resources
Our management currently faces a variety of challenges. These include
implementing our ongoing diversification and expansion strategy and expanding
the infrastructure and systems necessary for us to operate as an independent
public company. While we believe that it has sufficient management resources to
execute each of these initiatives, we cannot assure you that we 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
our business, financial condition and results of operations.
Limited History as an Independent Company
We have a limited operating history as an independent company. Accordingly,
the financial information presented herein for periods prior to January 1, 1999
may not necessarily reflect the results of the operations, financial position
and cash flows we would have had if we had operated independently during the
periods presented.
We cannot assure you that we will be profitable on an ongoing basis as a
stand-alone company. We have historically relied on Rockwell for cash
investments and various financial and administrative services.
Volatility of Stock Price
The trading price of our common stock fluctuates significantly. Since our
common stock began trading publicly, the reported closing price of our common
stock on the NASDAQ National Market has been as high as $41 17/32 and as low as
$7 3/16 per share. This price may be influenced by many factors, including (1)
our performance and prospects, (2) the depth and liquidity of the market for our
common stock, (3) investor perception of Conexant 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 our common stock.
Certain Anti-Takeover Effects
We have established certain anti-takeover measures that may affect the
common stock and the $350 million 4 1/4% convertible subordinated notes issued
in May 1999. Our Restated Certificate of Incorporation (the "Conexant
Certificate"), Conexant's By-Laws (the "Conexant By-Laws"), the Rights Agreement
(as defined below) and the General Corporation of Law of the State of Delaware
(the "DGCL") contain
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several provisions that would make more difficult an acquisition of control of
Conexant in a transaction not approved by our Board of Directors. The Conexant
Certificate and Conexant By-Laws include provisions such as:
- the ability of our Board of Directors to issue shares of Conexant
preferred stock in one or more series without further authorization of
our 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 Conexant
Certificate or Conexant By-Laws;
- elimination of the right of shareowners to call a special meeting of
shareowners; and
- the division of our Board of Directors into three classes to be elected
on a staggered basis, one class each year.
We also have a rights agreement with ChaseMellon Shareholder Services,
L.L.C., as rights agent, dated as of November 30, 1998 (the "Rights Agreement"),
which gives our shareowners certain rights that would substantially increase the
cost of acquiring Conexant in a transaction not approved by our Board of
Directors.
In addition to the Rights Agreement and the provisions in the Conexant
Certificate and Conexant 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 the three-year period. The
provisions of Section 203 of the DGCL provide that the shareowner approval
requirement may be avoided if a majority 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 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. We 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 Conexant and Rockwell provides, among other
things, that neither Rockwell nor Conexant 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 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 Conexant have
indemnified each other any tax liability resulting from each entity's failure to
comply with such provisions.
The Tax Allocation Agreement also provides that we will be responsible for
any taxes imposed on Rockwell, Conexant 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 Conexant
(including its subsidiaries) or its shareowners, such as the acquisition of
Conexant by a third-party at a time and in a manner that would cause such taxes
to be incurred.
19
<PAGE> 20
In addition, we effected certain tax-free intragroup spin-offs as a result
of Rockwell's spin-off of Meritor Automotive, Inc. on September 30, 1997. The
Tax Allocation Agreement provides that we will be responsible for any taxes
imposed on Rockwell, Conexant 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 Conexant (including its subsidiaries) or its
shareowners, such as the acquisition of us by a third-party at a time and in a
manner that would cause such taxes to be incurred.
If we were to pay any of the taxes described above, such payment would have
a material adverse effect on our financial position, results of the operations
and cash flow.
EXECUTIVE OFFICERS
The Company's executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dwight W. Decker........... 49 Chairman of the Board of Directors and Chief Executive Officer
Moiz M. Beguwala........... 53 Senior Vice President and General Manager -- Wireless
Communications
Lewis C. Brewster.......... 35 Senior Vice President, Worldwide Sales
Anthony C. D'Augustine..... 55 Senior Vice President and General Manager -- Digital
Infotainment
Terry L. Ellis............. 54 Senior Vice President, Operations
Raouf Y. Halim............. 39 Senior Vice President and General Manager -- Network Access
Balakrishnan S. Iyer....... 43 Senior Vice President and Chief Financial Officer
Dennis E. O'Reilly......... 55 Senior Vice President, General Counsel and Secretary
Kerry K. Petry............. 50 Vice President and Treasurer
Ashwin Rangan.............. 40 Senior Vice President and Chief Information Officer
F. Matthew Rhodes.......... 42 Senior Vice President and General Manager -- Personal
Computing
James P. Spoto............. 49 Senior Vice President, Platform Technologies
Thomas A. Stites........... 44 Senior Vice President, Communications
Kevin V. Strong............ 39 Senior Vice President and General Manager -- Personal Imaging
Steven M. Thomson.......... 43 Vice President and Controller
William C. Tipton.......... 55 Senior Vice President, Human Resources
</TABLE>
There are no family relationships among directors or executive officers of
the Company. Set forth below are the name, office and position held with the
Company and principal occupations and employment during the past 5 years of each
of the executive officers of the Company.
Dwight W. Decker -- Chairman of the Board and Chief Executive Officer.
Senior Vice President of Rockwell and President, Rockwell Semiconductor Systems
from July 1998 to December 1998; Senior Vice President of Rockwell and
President, Rockwell Semiconductor Systems and Electronic Commerce from March
1997 to July 1998; President, Rockwell Semiconductor Systems from October 1995
to March 1997; President, Telecommunications of Rockwell from June 1995 to
October 1995; Vice President/General Manager, Digital Communications Division of
Rockwell's Telecommunications Division prior thereto. Mr. Decker received a
Ph.D. in applied mathematics from the California Institute of Technology and a
B.Sc. in mathematics and physics from McGill University.
Moiz M. Beguwala -- Senior Vice President and General Manager -- Wireless
Communications. Vice President and General Manager -- Wireless Communications
Division of Rockwell Semiconductor Systems from October 1998 to December 1998;
Vice President and General Manager -- Personal Computing Division of Rockwell
Semiconductor Systems from January 1998 to October 1998; Vice President,
Worldwide Sales of Rockwell Semiconductor Systems from October 1995 to January
1998; Vice President Worldwide Sales of Rockwell's Telecommunications Division
from September 1995 to October 1995; Division Director, Worldwide Sales, Digital
Communications Division of Rockwell's Telecommunications Division prior thereto.
20
<PAGE> 21
Mr. Beguwala received an M.B.A. and a B.S. in engineering from the University of
California -- Los Angeles and an M.S. and a Ph.D. in electrical engineering from
the University of Southern California.
Lewis C. Brewster -- Senior Vice President, Worldwide Sales. Vice
President, Worldwide Sales of Rockwell Semiconductor Systems from January 1998
to December 1998; Executive Director, America Sales of Rockwell Semiconductor
Systems from June 1997 to January 1998; Director, Strategic Sales and Operations
of Rockwell Semiconductor Systems from October 1995 to June 1996; and Director,
Strategic Sales and Operations, Digital Communications Division of Rockwell's
Telecommunications Division prior thereto. Mr. Brewster received an M.B.A. from
Stanford University and a B.S. in electrical engineering and biomedical
engineering from Duke University.
Anthony C. D'Augustine -- Senior Vice President and General
Manager -- Digital Infotainment. Vice President and General Manager -- Digital
Infotainment Division of Rockwell Semiconductor Systems from April 1997 to
December 1998; Vice President -- Graphic/Imaging Sub-Business Unit of Rockwell
Semiconductor Systems' Brooktree subsidiary from October 1996 to April 1997;
Vice President -- Graphic/Imaging Sub-Business Unit of Brooktree Corporation
(graphics and multimedia semiconductor supplier) prior thereto. Mr. D'Augustine
received an M.B.A. from Rutgers University and a B.S. in electrical engineering
from Drexel University.
Terry L. Ellis -- Senior Vice President, Operations. Vice
President -- Operations of Rockwell Semiconductor Systems from September 1998 to
December 1998; Executive Director, Semiconductor Manufacturing of Rockwell
Semiconductor Systems from August 1997 to August 1998; Director, Die
Manufacturing of Rockwell Semiconductor Systems from October 1995 to August
1997; Director, Die Manufacturing of Rockwell's Telecommunications Division from
September 1995 to October 1995; and Plant Manager, Die Manufacturing Division of
Rockwell's Telecommunications Division prior thereto. Mr. Ellis received a B.S.
in electrical engineering from the University of Texas.
Raouf Y. Halim -- Senior Vice President and General Manger -- Network
Access. Vice President and General Manager -- Network Access Division of
Rockwell Semiconductor Systems from February 1997 to December 1998; Vice
President -- VLSI Engineering of Rockwell Semiconductor Systems from October
1995 to February 1997; Vice President -- VLSI Engineering of Rockwell's
Telecommunications Division from September 1995 to October 1995; Division
Director, VLSI Engineering, Digital Communications Division of Rockwell's
Telecommunications Division prior thereto. Mr. Halim received an M.S. in
electrical engineering from the Georgia Institute of Technology and a B.Sc. in
electrical engineering from Alexandria University.
Balakrishnan S. Iyer -- Senior Vice President and Chief Financial Officer.
Senior Vice President and Chief Financial Officer of Rockwell Semiconductor
Systems from October 1998 to December 1998; Senior Vice President and Chief
Financial Officer of VLSI Technology, Inc. (semiconductors) from January 1997 to
October 1998; Vice President and Corporate Controller of VLSI Technology, Inc.
(semiconductors) from April 1993 to December 1996; Corporate Controller of
Cypress Semiconductor Corporation (semiconductors) prior thereto. Mr. Iyer
received an M.B.A. from The Wharton School of the University of Pennsylvania, an
M.S. in industrial engineering from the University of California, Berkeley and a
B.S. in mechanical engineering from the Indian Institute of Technology.
Dennis E. O'Reilly -- Senior Vice President, General Counsel and Secretary.
Director -- Business Development of Intel Corporation's Mobile and Handheld
Products Group (semiconductors) from September 1997 to December 1998; Group
Counsel of Intel Corporation prior thereto. Mr. O'Reilly received a J.D. from
Boston University School of Law and a B.A. from the State University of New York
at Binghamton.
Kerry K. Petry -- Vice President and Treasurer. Vice President and
Treasurer of Rockwell Semiconductor Systems from October 1998 to December 1998;
Assistant Treasurer -- Domestic of Rockwell prior thereto. Mr. Petry received an
M.B.A. from Virginia Polytechnic Institute & State University and a B.S. in
accounting from West Virginia University.
Ashwin Rangan -- Senior Vice President and Chief Information
Officer. Senior Vice President and Chief Information Officer of Rockwell
Semiconductor Systems from October 1998 to December 1998;
21
<PAGE> 22
Executive Director, Business Process Re-engineering and Information Technology
of Rockwell Semiconductor Systems from December 1996 to October 1998; Director,
Business Process Re-engineering and Information Technology of Rockwell
Semiconductor Systems from February 1995 to December 1996; and Senior Manager,
Demand Management Systems of AST Computer prior thereto. Mr. Rangan received an
M.S.I.E. and M.B.A. in Operations Management and Information Systems from the
National Institute of Industrial Engineering in Bombay, India, a B. Engr. in
mechanical engineering and an A.A. from Bangalore University.
F. Matthew Rhodes -- Senior Vice President and General Manager -- Personal
Computing. Vice President and General Manager -- Personal Computing Division of
Rockwell Semiconductor Systems from October 1998 to December 1998; Director,
Marketing Software Products of Rockwell Semiconductor Systems from January 1997
to October 1998; Director, VLSI and Technology of Pacific Communications
Services Inc. prior thereto. Mr. Rhodes received an M.B.A. from the Anderson
Graduate School of Management of the University of California, Los Angeles, an
M.S. in electrical engineering from Lehigh University and a B.S. in physics from
The Pennsylvania State University.
James P. Spoto -- Senior Vice President, Platform Technologies. Vice
President, Platform Technologies of Rockwell Semiconductor Systems from October
1997 to December 1998; Vice President, Business Development of Cadence Design
Systems, Inc. from March 1996 to July 1997; and Vice President, Engineering and
Mixed-Signal and Physical Design of Cadence Design Systems, Inc. prior thereto.
Mr. Spoto received an M.S. and a B.S. in electrical engineering from the
University of Florida.
Thomas A. Stites -- Senior Vice President, Communications. Vice President,
Communications of Advanced Micro Devices from 1992 to December 1998. Mr. Stites
received a B.A. in journalism from the University of Colorado.
Kevin V. Strong -- Senior Vice President and General Manager -- Personal
Imaging. Vice President and General Manager -- Personal Imaging Division of
Rockwell Semiconductor Systems from September 1998 to December 1998; Division
Director, Digital Communications Products, Personal Computing Division of
Rockwell Semiconductor Systems from June 1998 to September 1998; Division
Director, Technology Planning, Personal Computing Division of Rockwell
Semiconductor Systems from June 1997 to June 1998; Business Director, Personal
Computing Products, Multimedia Communications Division of Rockwell Semiconductor
Systems from August 1996 to June 1997; Director Technology Planning -- Media
Processing, Multimedia Communications Division of Rockwell Semiconductor Systems
from January 1996 to August 1996; Manager -- Business Development, Multimedia
Communications division of Rockwell Semiconductor Systems prior thereto. Mr.
Strong received a B.S. in electronic engineering from Southampton University.
Steven M. Thomson -- Vice President and Controller. Vice President and
Controller of Rockwell Semiconductor Systems from October 1998 to December 1998;
Director -- Financial Planning and Control of Rockwell Semiconductor Systems
from October 1995 to October 1998; Director, Financial Planning and Control of
Rockwell's Telecommunications Division prior thereto. Mr. Thomson received an
M.S. in financial management from West Coast University and a B.A. in accounting
from California State University, Fullerton.
William C. Tipton -- Senior Vice President, Human Resources. Vice
President, Human Resources of Rockwell Semiconductor Systems from October 1995
to December 1998; Vice President, Human Resources of Rockwell's
Telecommunications Division prior thereto. Mr. Tipton received an M.B.A. and a
B.S. in management and labor from the University of Arkansas.
ITEM 2. PROPERTIES
At September 30, 1999, the Company operated 3 manufacturing facilities in
the United States and one facility in Mexico. It also had 11 design centers and
26 sales offices. These facilities had an aggregate floor space of approximately
2.1 million square feet, approximately 54% of which were owned and approximately
46% of which were leased. Approximately 72,000 square feet of leased office
space in San Diego, California is unoccupied. As of September 30, 1999,
substantially all of the domestic assets of Conexant and its domestic
subsidiaries, including property, plant and equipment, have been pledged as
collateral to secure repayment of
22
<PAGE> 23
Conexant's credit facility. In the opinion of management, the Company's
properties have been well maintained, are in sound operating condition and
contain all the equipment and facilities necessary to operate at present levels.
A summary of floor space of the Company's facilities at September 30, 1999 is as
follows (in thousands of square feet):
<TABLE>
<CAPTION>
OWNED LEASED
TYPE OF FACILITY FACILITIES FACILITIES TOTAL
---------------- ---------- ---------- -----
<S> <C> <C> <C>
Manufacturing.................................... 701 199 900
General office space............................. 408 744 1,152
----- --- -----
Total.................................. 1,109 943 2,052
===== === =====
</TABLE>
The following table outlines the functions and capabilities of the
Company's major manufacturing facilities:
<TABLE>
<CAPTION>
FACILITY FUNCTION CAPACITY
-------- -------- --------
<S> <C> <C>
Newport Beach, California Wafer fabrication facility 4,500 8-inch wafer starts per
- Class 1 and Class 10 clean week
rooms
- 0.18 - 0.5 micron CMOS
- RF BiPolar
- BiCMOS
- SiGe (in development)
Newbury Park, California GaAs wafer fabrication 800 4-inch wafer starts per
facility week
- 2.0 micron HBT Fmax 50 Ghz
- 0.7 micron MESFET
Mexicali, Mexico Assembly and test facility 150 million assembly starts
- High volume/low cost per year
multichip modules
El Paso, Texas Module design and assembly 400,000 modules and systems
facility per month
</TABLE>
The Company's headquarters and primary wafer fabrication facility are
located in Newport Beach, California, consisting of approximately 633,000 square
feet of owned and approximately 420,000 square feet of leased floor space;
approximately 58,000 square feet is subleased to several tenants. This location
includes an approximately 130,000 square foot wafer fabrication facility. The
Company manufactures GaAs products at its wafer fabrication facility located in
Newbury Park, California. In April 1999, the Company closed and disposed of its
wafer fabrication facilities in Colorado Springs, Colorado. Prior to the
Distribution, the Company distributed its wafer fabrication facilities in
Colorado Springs, Colorado to Rockwell.
The Company owns an approximately 198,000 square foot assembly and test
facility in Mexicali, Mexico, which has been in operation for over 25 years. The
Mexicali facility assembles semiconductor die from the Company's wafer
fabrication facilities and outside foundry sources into various types of chipset
packages and tests the packages using automatic test equipment with a full range
of analog, digital and radio frequency capability. This facility is ISO 9002
certified and focuses on high volume, industry standard plastic packaging but
has the capability to manufacture a wide variety of high- and low-volume and
specialized packages using conventional and proprietary assembly techniques.
The Company operates a fully integrated electronic module design and
assembly facility in El Paso, Texas, consisting of approximately 133,000 square
feet of leased manufacturing space. This facility provides full turnkey design
capabilities and the ability to manufacture and test standard and custom
products for each of the Company's product platforms, ranging from prototypes to
high volume production. At this facility, the Company integrates its
semiconductor chipset devices into electronic modules, such as internal cards
for PCs and digital infotainment equipment and standard PCMCIA interface cards,
as well as custom products and complete, market-ready systems. This facility has
been ISO 9002 certified since 1993.
The Company's design centers provide design engineering and product
application support as well as after-sales customer service. The design centers
are strategically located around the world to be in close
23
<PAGE> 24
proximity to the Company's OEM customers and to take advantage of key technical
and engineering talent worldwide.
Certain of the Company's facilities, including the California and Mexico
facilities are located near major earthquake fault lines. The Company maintains
only minimal earthquake insurance with respect to these facilities. A portion of
the Mexico facility is seismically isolated and the Company is currently
undertaking a $34 million program to seismically isolate certain portions of its
California facilities. See Part I, Item 1 "Manufacturing."
ITEM 3. LEGAL PROCEEDINGS
On October 14, 1997, Brent Townshend ("Townshend") filed suit against
Rockwell and Conexant in the Superior Court of California for San Mateo County
seeking an injunction to halt the sale of products containing Conexant's
K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant
had engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information allegedly
disclosed in confidence by Mr. Townshend to accelerate its development of 56
Kbps modem technology. In January 1999, Townshend dismissed his State Court
action and re-filed the same claims and three new claims for patent infringement
in the U.S. District Court for the Northern District of California. In the
Federal action, Townshend alleges that each of his patents (the "Townshend
Patents") covers certain aspects of the V.90 standard and are infringed by
Conexant's 56 Kbps products. In the Federal action, Townshend seeks injunctive
relief, compensatory damages, restitution and exemplary and punitive damages.
Townshend and 3Com Corporation had publicly announced that 3Com was the
exclusive licensee for the Townshend Patents and acted as Townshend's agent in
sublicensing the Townshend Patents to third parties. More recently, Townshend
and 3Com publicly announced that Townshend has reacquired exclusive control over
the licensing and enforcement of the patents as well as other ownership rights,
while 3Com retained a non-exclusive license to practice the Townshend
inventions. Conexant has filed its answer to Townshend and counterclaims against
Townshend and claims against 3Com. Conexant is vigorously defending its position
that it independently developed the 56 Kbps modem technology using entirely its
own skills and public domain information and will vigorously contest the
infringement claims and the validity of the asserted patents.
On July 29, 1991, Shumpei Yamazaki filed suit against a Japanese subsidiary
of Rockwell in the Tokyo District Court, Twenty-ninth Civil Division for patent
infringement relating to Conexant's facsimile modem chipsets seeking 685 million
yen (approximately $6.6 million based on the exchange rate on October 29, 1999)
and court costs. In October 1998, the District Court rendered its decision
dismissing the suit, from which decision Mr. Yamazaki appealed. On April 12,
1999, Mr. Yamazaki presented his position at the first portion of the appellate
hearing. Conexant presented its position to the appellate court on June 16,
1999. Mr. Yamazaki also attempted to enter a new cause of action at the
appellate level. Conexant has also presented its position to the appellate court
on the procedural aspects of including such a new cause of action at the
appellate level. The Court is scheduling a special hearing to understand the
procedural aspects of entering such a new cause of action. Conexant believes it
has meritorious defenses to these claims and is vigorously defending this
action.
On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S.
District Court for the Northern District of California for patent infringement
relating to Conexant's modem products utilizing the V.42bis standard for data
compression. On September 30, 1998, the Court barred any alleged damages arising
before May 30, 1997. On December 17, 1998, the Court issued an order construing
the claims of the patent. Conexant filed a motion for Summary Judgment of
Non-Infringement on February 22, 1999. A hearing was held thereon on June 14,
1999. On October 25, 1999, the Company was notified that the Court found in
favor of the Company and the case was dismissed.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or Conexant or their respective
subsidiaries, including those pertaining to product liability,
24
<PAGE> 25
intellectual property, environmental, safety and health, and employment matters.
See Item I "Environmental Regulation."
In connection with the Distribution, Conexant assumed responsibility for
all current and future litigation (including environmental and intellectual
property proceedings) against Rockwell or its subsidiaries in respect of
Semiconductor Systems.
The outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to Conexant. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
Conexant. Based on its evaluation of matters which are pending or asserted and
taking into account Conexant's reserves for such matters, management of Conexant
believes the disposition of such matters will not have a material adverse effect
on the financial condition or results of operations of Conexant.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "CNXT" since January 4, 1999. The following table sets forth
for the periods indicated the high and low closing sale prices for the Company's
common stock. These closing sales prices reflect the 2-for-1 stock split
effected in the form of a stock dividend announced on September 13, 1999 for
shareowners of record on September 24, 1999 and effected on October 29, 1999.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ending September 30, 1999
Second Quarter.............................................. $13 27/32 $ 7 3/16
Third Quarter............................................. 31 15/16 13 3/16
Fourth Quarter............................................ 41 17/32 27 5/8
</TABLE>
At October 29, 1999, there were approximately 54,659 holders of record of
the Company's common stock.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. See Part II Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
25
<PAGE> 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
1999(1) 1998(2) 1997(3) 1996(3) 1995
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues.................. $1,444,114 $1,200,231 $1,412,325 $1,470,455 $783,677
Gross margin.................. 580,862 312,380 678,477 621,461 300,348
Operating (loss) income....... (3,179) (440,158) 168,789 194,101 106,527
Net income (loss)............. 12,929 (262,216) 125,824 83,528 75,917
Proforma basic net income
(loss) per share(4)......... 0.07 (1.32) 0.59 0.38 0.35
Proforma diluted net income
(loss) per share(4)......... 0.06 (1.32) 0.59 0.38 0.35
Total assets........ $1,841,950 $1,418,530 $1,485,759 $1,383,055 $671,083
Long-term obligations......... 432,076 78,892 79,890 97,488 36,108
</TABLE>
- ---------------
(1) In fiscal 1999, the Company recorded special charges of approximately $20.0
million related to the further write-down of the Company's wafer fabrication
facilities in Colorado Springs, Colorado, and approximately $17.9 million
related to other restructuring actions initiated in the fourth quarter of
fiscal 1998.
(2) In September 1998, the Company recorded special charges of approximately
$147.3 million related to its decision to close and dispose of the wafer
fabrication facilities in Colorado Springs, Colorado, a worldwide workforce
reduction and certain other actions.
(3) In fiscal 1997 and 1996, the Company incurred charges of approximately $29.9
million and approximately $121.0 million for purchased research and
development related to the acquisitions of the Hi-Media broadband
communication chipset business of ComStream Corporation and Brooktree
Corporation, respectively.
(4) Proforma net income (loss) per share reflects the 2-for-1 stock split
effected in the form of a stock dividend for shareowners of record on
September 24, 1999 and effected on October 29, 1999.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the Company as a
percentage of net revenues for the three fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 59.8 74.0 52.0
----- ----- -----
Gross margin................................................ 40.2 26.0 48.0
Operating expenses:
Research and development.................................. 21.5 28.5 19.8
Selling, general and administrative....................... 15.8 21.0 13.5
Amortization of intangibles............................... 0.6 0.9 0.6
Purchased research and development........................ 0.0 0.0 2.1
Special charges -- Rockwell retained assets............... 1.4 8.0 0.0
Special charges -- Other.................................. 1.2 4.3 0.0
----- ----- -----
Total operating expenses.......................... 40.5 62.7 36.0
----- ----- -----
Operating (loss) income..................................... (0.3) (36.7) 12.0
Other income, net........................................... 0.4 0.8 0.8
----- ----- -----
Income (loss) before (benefit) provision for income taxes... 0.1 (35.9) 12.8
----- ----- -----
(Benefit) provision for income taxes........................ (0.7) (14.0) 3.8
----- ----- -----
Net income (loss)........................................... 0.8% (21.9)% 9.0%
===== ===== =====
</TABLE>
NET REVENUES
The following table summarizes the net revenues of the Company's five
product platforms for the three years ended September 30, 1999 (dollars are in
thousands and percentages are expressed as a percentage of total net revenues):
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Personal Computing....................... $ 626,534 43% $ 639,925 53% $ 861,242 61%
Network Access........................... 277,613 19% 143,270 12% 192,836 14%
Wireless Communications.................. 266,553 19% 170,381 14% 115,599 8%
Digital Infotainment..................... 183,522 13% 144,600 12% 111,795 8%
Personal Imaging......................... 89,892 6% 102,055 9% 130,853 9%
---------- --- ---------- --- ---------- ---
Total net revenues............. $1,444,114 100% $1,200,231 100% $1,412,325 100%
========== === ========== === ========== ===
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net revenues were approximately $1,444.1 million in fiscal 1999, an
increase of 20% from net revenues of approximately $1,200.2 million during
fiscal 1998. The net increase in the Company's net revenues for fiscal 1999 as
compared to fiscal 1998 was mainly due to aggregate net revenue growth of the
expansion platform products offset by the slight decrease in Personal Computing
revenues. The expansion platform products are comprised of all products
excluding the Personal Computing products. Net revenues for Network Access
increased 94% during fiscal 1999 compared to fiscal 1998 mainly fueled by the
upgrade and build-out of both public and private communications infrastructures
to support increased Internet traffic and the convergence of voice and data
services. Net revenues for Wireless Communications increased 56% during fiscal
1999 compared to fiscal 1998 mainly due to the strong demand for digital
cellular handsets worldwide. Net revenues for Digital Infotainment increased 27%
during fiscal 1999 compared to fiscal 1998 mainly due to solid demand for tuners
and demodulators, video encoders and back channel telephony solutions,
principally for satellite digital set-top box OEMs. Net revenues for Personal
Imaging decreased 12% during fiscal 1999
27
<PAGE> 28
compared to fiscal 1998 mainly due to the Asia-Pacific recession which
negatively impacted the first half of fiscal 1999. Net revenues for Personal
Computing decreased 2% during fiscal 1999 compared to fiscal 1998 mainly due to
a shift towards lower priced products.
Fiscal 1998 Compared to Fiscal 1997
Net revenues were approximately $1,200.2 million in fiscal 1998, a decrease
of 15% from net revenues of approximately $1,412.3 million in fiscal 1997. This
decrease was principally due to a decline in revenues of approximately $221
million from PC modems in Personal Computing and approximately $50 million from
central site modems in Network Access. The decrease in modem revenues in 1998
was mainly due to significant price declines of the Company's V.34 and 56 Kbps
products, partially offset by a 20% increase in modem unit volume. Personal
Imaging revenues also declined 22% to approximately $102 million, reflecting
lower product demand, principally as a result of the protracted Asia-Pacific
recession. These net revenue declines were partially offset by an increase in
net revenues from Wireless Communications and Digital Infotainment. Wireless
Communications net revenues grew 47% to approximately $170 million, driven by
increased volume of digital cordless telephone chipsets and power amplifier
components. Digital Infotainment sales grew 29% to approximately $145 million as
a result of increased demand for video encoders/decoders and broadband
communications products.
GROSS MARGIN
Fiscal 1999 Compared to Fiscal 1998
Cost of goods sold consists predominantly of purchased materials, labor and
overhead (including depreciation) associated with product manufacturing, royalty
and other intellectual property costs, warranty and sustaining engineering
expenses pertaining to products sold. Gross margin as a percentage of net
revenues was 40% during fiscal 1999 compared to gross margin as a percentage of
net revenues of 26% during fiscal 1998. The significant increase in gross margin
as a percentage of net revenues during fiscal 1999 was mainly due to the
increase in volume shipped which allowed fixed costs to be allocated over a
higher number of die produced, a continued transition to a richer product mix,
the favorable market environment for purchasing processed wafers, and the
implementation of cost reduction initiatives in the fourth quarter of fiscal
1998 that included headcount reduction combined with several items that
adversely impacted fiscal 1998 including an inventory write-off of $66 million
in the fourth quarter of fiscal 1998, $43 million charge for intellectual
property matters, and $19 million related to the under utilization of
manufacturing capacity. Average selling price ("ASP") erosion also had an impact
on gross margin during fiscal 1999 and will continue in fiscal 2000. Further,
the favorable market environment for purchasing processed wafers is not expected
to continue in fiscal 2000.
Fiscal 1998 Compared to Fiscal 1997
Gross margin as a percentage of net revenues decreased to 26% in fiscal
1998 compared to gross margin as a percentage of revenues of 48% in fiscal 1997.
The decline was due primarily to an approximate 50% reduction in ASPs of PC
modem products, slightly offset by higher margins on Wireless Communications and
Digital Infotainment products. Gross margin was also adversely impacted by the
fourth quarter 1998 inventory write-off of $66 million (6% of net revenues), the
$43 million charge (4% of net revenues) for intellectual property matters and
$19 million (2% of net revenues) related to the under-utilization of
manufacturing capacity. The 50-day strike that ended in July 1998 had little or
no effect on the full-year operating results of the Company.
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 1999 Compared to Fiscal 1998
Research and development ("R&D") expenses were approximately $310.0 million
during fiscal 1999, a 9% decrease from R&D expenses of approximately $342.3
million during fiscal 1998. The decrease in
28
<PAGE> 29
R&D expenses during fiscal 1999 compared to fiscal 1998 was mainly due to cost
reduction actions initiated in the fourth quarter of fiscal 1998 to reduce the
Company's overall cost structure. These actions included headcount reductions,
design center closures, and project cancellations. However, the Company intends
to increase its R&D expenditures, in absolute dollars, in future periods.
Fiscal 1998 Compared to Fiscal 1997
Research and development expenses were approximately $342.3 million during
fiscal 1998, a 22% increase from R&D expenses of approximately $279.8 million
during fiscal 1997. The increase in R&D expenses during fiscal 1998 compared to
fiscal 1997 was due primarily to investments in expansion platform products,
including the expanded use of technology licensing agreements with external
partners. Significant product investments were made in audio/telephony modem
products, higher density central site modems, ATM, T1/ E1 and SONET portfolio
expansion, GSM and CDMA RFICs, GSM systems, broadband communication products,
including cable modems, and MFP products. The Company also continued investments
in specialty process development activities, including Bipolar, BiCMOS and GaAs
processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1999 Compared to Fiscal 1998
Selling, general & administrative ("SG&A") expenses were approximately
$227.7 million during fiscal 1999, a 10% decrease from SG&A expenses of $251.9
million during fiscal 1998. The decrease in SG&A costs in fiscal 1999 compared
to fiscal 1998 was mainly due to reductions in headcount as a result of the
Company's plan to restructure its business during the fourth quarter of fiscal
1998 and lower advertising and consulting expenses. However, the Company intends
to increase its SG&A costs, in absolute dollars, during fiscal 2000.
Fiscal 1998 Compared to Fiscal 1997
Selling, general and administrative expenses were approximately $251.9
million during fiscal 1998, an increase of 32% from $190.9 million in fiscal
1997. The increase was primarily due to higher costs of cooperative advertising
programs associated with various channel and brand development campaigns of
approximately $26 million and $11 million related to the growth of the worldwide
sales organization to support the Company's expanding product portfolio, offset
by a reduction in the allowance for doubtful accounts in fiscal 1997, due to
favorable resolution of accounts which were previously reserved.
SPECIAL CHARGES
In the fourth quarter of 1998, Conexant restructured its business and
recorded special charges of approximately $147 million. The special charges
include an asset impairment of approximately $103 million related to the closure
and planned disposal of its wafer fabrication facilities in Colorado Springs,
Colorado, approximately $15 million for employee severance and Voluntary Early
Retirement Program ("VERP") costs associated with an approximate 10% worldwide
workforce reduction, approximately $11 million related to intangible asset
write-offs and approximately $18 million for other actions including lease
termination costs, contractual liabilities and other asset write-offs. In
connection with the restructuring, management decided to close and dispose of
its wafer fabrication facilities in Colorado Springs, Colorado. The $103 million
charge represents the excess of the carrying value of the long-lived assets of
these facilities over their estimated fair value as determined by independent
appraisal. These facilities were distributed to Rockwell prior to the
Distribution.
In the first fiscal quarter of 1999, Conexant recorded special charges of
approximately $38 million. The additional charges include approximately $20.0
million related to the further write down of the Company's wafer fabrication
facilities in Colorado Springs, Colorado, approximately $17.0 million relating
to the VERP, and approximately $0.9 million to decommission equipment,
activities at foreign subsidiaries and contract cancellations at the Colorado
Springs wafer fabrication facilities.
29
<PAGE> 30
The Company monitors the adequacy of the liability for restructuring
charges by reviewing it from time to time to ensure it is sufficient. As of
September 30, 1999, all of the employees identified as part of the approximate
10% workforce reduction had been terminated and cash payments totaling
approximately $46.8 million had been made for employee severance and other
expenses associated with the restructuring plans and closing of the Colorado
Springs, Colorado facilities. The Company expects to make additional cash
payments of approximately $7.3 million for employee severance and benefits and
other expenses associated with the restructuring plans and closing of the
Colorado Springs, Colorado facilities. The Company anticipates these
restructuring plans and closing of the Colorado Springs, Colorado facilities to
be substantially complete by the end of December 31, 1999.
The following table summarizes the Company's restructuring activity for the
year ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
FACILITIES SEVERANCE
AND AND OTHER
EQUIPMENT BENEFITS EXPENSES TOTAL
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Restructuring Balances at September 30, 1998..... $ 20,051 $ 6,739 $11,456 $ 38,246
Non-Cash Charges................................. (1,154) -- (893) (2,047)
Cash Charges..................................... (17,504) (24,141) (5,204) (46,849)
Additional charge and change in reserve
estimate....................................... 609 17,680 (383) 17,906
-------- -------- ------- --------
Restructuring Balances at September 30, 1999..... $ 2,002 $ 278 $ 4,976 $ 7,256
======== ======== ======= ========
</TABLE>
OTHER INCOME, NET
Fiscal 1999 Compared to Fiscal 1998
Other income, net was $5.9 million during fiscal 1999, compared to $9.8
million during fiscal 1998. The decrease in other income, net during fiscal 1999
was mainly due to amortization of costs associated with the Company's spin-off
and issuance of the $350 million convertible subordinated notes, higher interest
expense related to the $350 million convertible subordinated notes, costs
associated with the $350 million credit facility, and receipt of a contract
cancellation fee in fiscal 1998, partially offset by higher interest income and
other non-operating income. Interest expense is expected to be higher in fiscal
2000.
Fiscal 1998 Compared to Fiscal 1997
Other income, net was $9.8 million during fiscal 1998, compared to $11.0
million during fiscal 1997. The decrease in other income, net during fiscal 1998
was mainly due to the favorable settlement of a technology license dispute in
fiscal 1997 partially offset by receipt of a contract cancellation fee and gain
on sales of equity securities.
PROVISION FOR INCOME TAXES
The results of Conexant's operations for the quarter ended December 31,
1998 and prior periods are being included in the federal, state and local, and
foreign income tax returns of Rockwell International Corporation. The effective
tax rate for the period in which Conexant was an independent company was 30%,
which is lower than the federal statutory tax rate primarily due to the benefits
of research and development credits.
Fiscal 1999 Compared to Fiscal 1998
The Company's effective tax rate in fiscal 1999 was a benefit of 369.2%
compared to a benefit of 39.1% in fiscal 1998. The 1999 tax rate benefit results
primarily from the significant research and development credits generated in
comparison to pre-tax net income. The Company's 1998 tax benefit of 39.1% also
results primarily from the statutory tax rates plus the benefit of research and
development credits. The change in the effective rate is due to the change in
pre-tax net income in comparison to the tax credits generated.
30
<PAGE> 31
Fiscal 1998 Compared to Fiscal 1997
The Company's effective income tax rate in fiscal 1998 was a benefit of
39.1% compared to 30.0% in fiscal 1997. The Company's 1998 tax benefit of 39.1%
of pre-tax loss reflects the statutory rates plus the benefits of research and
development credits. The lower tax rate in 1997 reflects the statutory tax rates
less the benefits associated with export sales and research and development tax
credits. The difference in the effective tax rate results from the fact that tax
benefits increase the effective tax rate in the loss year of fiscal 1998 and
decrease the effective tax rate in the income year of fiscal 1997.
ACQUISITIONS AND INVESTMENTS
In fiscal 1999, the Company made equity investments in several early stage
companies in the communications industry, and acquired an early stage company
for its Personal Imaging platform, for an aggregate of approximately $18.4
million.
Subsequent to the end of fiscal 1999, the Company entered into a $150
million strategic agreement with Taiwan Semiconductor Manufacturing Company
("TSMC") under which Conexant will receive foundry capacity to support its
future growth. The Company will advance $150 million to TSMC over time.
In May 1997, the Company acquired Hi-Media for approximately $42 million in
cash. The purchase price allocation included approximately $30 million
(approximately $19 million after-tax) for purchased research and development.
The projects in process at Hi-Media at the date of acquisition which had not yet
reached technological feasibility and had no alternative future use related to
integrated circuits for the direct broadcast satellite (DBS), wireless (MMDS)
and cable modem markets. The efforts to complete these projects included
finalization of design, device layout, fabrication, testing and systems
integration. At the date of the acquisition, the estimated amount and timing of
effort to complete these projects varied by product platform and averaged
approximately $11 million annually for the first five years after the
acquisition.
YEAR 2000 READINESS DISCLOSURE
Conexant is addressing the impact of the Year 2000 on each of five major
areas: the Company's products, business systems (computer systems that handle
business processes), infrastructure (servers, desktop computers, networks,
telecom systems and software), manufacturing systems (computer systems used in
the manufacturing process) and suppliers (critical materials suppliers to the
business). Each of the five areas is undergoing the following process to ensure
readiness for the Year 2000. First, in the inventory phase, all Conexant assets
are inventoried to identify those that have any type of software or hardware
with Year 2000-related issues. Second, in the assessment phase, all inventoried
items are assessed to confirm if a Year 2000-related issue is present and the
extent of remediation required. Third, in the strategy phase, a remediation
strategy is created to ensure that all critical systems are upgraded to be Year
2000 ready by September 30, 1999. Fourth, in the conversion/upgrade phase,
upgrades are performed on all items identified in the assessment and strategy
phases. Finally, in the certification phase, all upgraded items receive final
certification testing to verify Year 2000 readiness. Conexant has completed the
inventory phase for all five areas. In addition, it has completed the assessment
and strategy phases and is currently in the conversion and certification phases
for the business systems, infrastructure and manufacturing systems areas. All
five phases for the Company's products have been completed. The Company has
completed the assessment and strategy phase and is now in the remediation and
certification phases for the suppliers' area. The Company has begun auditing
those suppliers who did not perform up to standards during the assessment phase.
Conexant is integrating its testing efforts with SEMATECH, a consortium of
semiconductor manufacturing companies, to ensure best practice testing. The
manufacturing systems, hardware systems and software applications areas are
being tested under the SEMATECH guidelines.
The Company's greatest area of uncertainty centers primarily in the
supplier area, due to the number of equipment and materials suppliers involved
and their various stages of readiness for Year 2000. In particular, the Company
is dependent on suppliers to upgrade their systems to ensure an uninterrupted
supply of materials. All of the Company's manufacturing tools have achieved
certification. A Year 2000-related failure by a significant materials supplier
could result in the temporary slowdown of production by the Company, the
31
<PAGE> 32
duration of which the Company reasonably estimates would be not more than a few
days. As a result, the Company's contingency plan centers heavily on the
supplier area. For the top five to ten percent of its critical materials and
manufacturing suppliers, the Company is performing on-site audits and intends to
monitor specific Year 2000-based milestones to ensure readiness. The Company has
completed its assessment of all Tier 1 critical suppliers and has begun its
audit process. In the event a supplier does not meet the Company's milestones
for Year 2000 readiness, the Company has identified all critical materials
suppliers and has completed a critical supplier contingency plan that includes
alternate sourcing and stockpiling of materials as of September 30, 1999.
Part of the Company's initial assessment phase included a detailed Year
2000 questionnaire which was sent to all critical materials and manufacturing
suppliers. This questionnaire included questions on products, services, internal
operating systems, and the supplier's own supply chain. To date, the Company has
received responses from all of those questioned. The Company is following up on
the questionnaires, where necessary, with on-site audits to ensure Year 2000
readiness. The Company has also contacted its major customers with respect to
their Year 2000 readiness efforts and does not believe that customers will have
any Year 2000 readiness problems that would have a material adverse effect on
the Company's business.
In connection with the Company's receipt of transition services pursuant to
the transition agreement with Rockwell, the Company is relying on certain of
Rockwell's computer systems, including its payroll and benefits administration
systems, for a period of up to two years after the Distribution. The Company
believes that the Rockwell systems on which it relies for transition services
will be Year 2000 ready, such that its reliance thereon will not have a material
adverse effect on the Company's financial position or results of operations.
Overall, utilizing both internal and external resources to address the Year
2000 issue, Conexant has achieved a 100% certification level. The current
estimate of total project cost is approximately $6 million, which includes the
cost of purchasing certain hardware and software. Approximately $5 million of
this amount is for capital investments, with the remainder being expenses
(primarily salary costs). As of September 30, 1999, approximately $5.8 million
had been spent, with the majority of the remaining amount to be spent by the end
of this calendar year. Conexant continues to evaluate the estimated costs
associated with these efforts based on actual experience. Management believes,
based on available information, that the Company will be able to remediate Year
2000-related issues in the products, business systems, and infrastructure areas
without any material adverse effect on its business operations, products, or
financial condition. However, the Company could be adversely impacted by the
Year 2000 issues faced by major suppliers, distributors, customers, vendors, and
financial services organizations with which the Company interacts. Any
disruption in the Company's operations as a result of the failure of any of
these third parties to be Year 2000 ready could have a material adverse effect
on Conexant's business operations, products, and financial condition.
Although the Company has not experienced material disruptions in its
business associated with preparing its internal systems for the year 2000, there
can be no assurances that the Company will not experience serious unanticipated
negative consequences caused by undetected year 2000 defects in its internal
systems, including third party software and hardware products. The most
reasonably likely worst case scenarios could include: (i) corruption of data
contained in the Company's internal information systems, and (ii) failure of
hardware, software, or other information technology systems, causing an
interruption or failure of normal business operations. Such a scenario could
have a material adverse impact on the Company. In addition, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences caused by the failure of services provided by third parties, such
as electrical power, telecommunications services, and shipping services. Due to
the impossibility of knowing what failures generally will result from the year
2000 date change (particularly outside of countries such as the United States
where year 2000 remediation has progressed the furthest), and what effects such
failures could have on third party vendors, the Company is unable to assess the
likelihood of a material adverse impact on its results of operations, liquidity,
or financial position due to such year 2000 failures.
The Company has completed a Year 2000 contingency plan for the entire
Company.
32
<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was approximately $302.6 million
during fiscal 1999 compared to $98.3 million during fiscal 1998. Net operating
cash flows for fiscal 1999 was favorably impacted by an increase in accounts
payable of $114.1 million mainly due to significant capital expenditures being
incurred in the fourth quarter of fiscal 1999, stock related transactions, and
special charges related to the spin-off, partially offset by an increase in
receivables resulting from the increased net revenues during the fourth quarter
of fiscal 1999.
Investing activities used $232.2 million of cash during fiscal 1999
compared to $269.7 million of cash during fiscal 1998. The decrease in
investments was mainly due to the slowdown in capital expenditures that was part
of the comprehensive plan to restructure the Company during the fourth quarter
of fiscal 1998, offset partially by investments in various companies. However,
the Company intends to increase its capital expenditures, in absolute dollars,
in fiscal 2000. In addition, the Company intends to continue to explore
investment opportunities into various companies in fiscal 2000.
The Company's financing activities provided cash of $314.1 million during
fiscal 1999 compared to $171.4 million during fiscal 1998. Financing sources of
cash for fiscal 1999 were mainly due to the issuance of $350 million of
convertible subordinated notes during the third quarter of fiscal 1999, net of
related offering costs, and the sale of capital stock in the form of options
exercised and the employee stock purchase plan.
At September 30, 1999 the Company's primary sources of liquidity consisted
of cash and cash equivalents, mainly resulting from the issuance of the $350
million convertible subordinated notes, and a $350 million credit facility with
a group of banks (the "Credit Facility"), which was available subject to
compliance with certain covenants.
In May 1999, Conexant issued $350 million of its 4 1/4% convertible
subordinated notes due May 1, 2006 (the "Notes") in a private placement. Holders
of the Notes may convert the Notes into shares of the Company's common stock at
any time prior to redemption or maturity at a conversion price of $23.098 per
share, subject to adjustment. The Company has the option to redeem the Notes at
any time on or after May 6, 2002, at a declining premium to par. The Notes are
subordinated to all existing and future senior indebtedness of the Company.
The Company used $100 million of the net proceeds from the issuance of the
Notes to repay all amounts outstanding under the Credit Facility. The remaining
net proceeds will be used to acquire additional manufacturing equipment, to make
strategic investments to secure long-term access to advanced silicon wafer
fabrication capacity from third parties and for general corporate purposes.
In December 1998, the Company and three of its subsidiaries entered into a
three-year $350 million senior secured revolving loan facility with a group of
banks. As of September 30, 1999, no amount was outstanding on the Credit
Facility. The Credit Facility includes facilities for revolving loans and
swingline loans in multiple currencies and letters of credit. The Credit
Facility is guaranteed by substantially all of the Company's domestic
subsidiaries. It is also secured by (i) a first-priority security interest in
substantially all domestic assets of the Company and its domestic subsidiaries
and (ii) a pledge of the stock of the Company's subsidiaries, subject to certain
exceptions. For further details on the Credit Facility, see Part II Item 8 Note
4.
The Credit Facility contains, among other terms, representations and
warranties, conditions precedent, covenants, mandatory and voluntary prepayment
provisions and events of default customary for facilities of this type.
Covenants include certain restrictions on capital expenditures, consolidations
and mergers, sales of assets, incurrence of indebtedness and creation of liens
and encumbrances. The Credit Facility includes various financial covenants,
including a minimum net worth requirement and required financial ratios in
respect of (i) earnings before interest, taxes, depreciation and amortization
(EBITDA) to interest expense, (ii) debt to EBITDA and (iii) minimum cash
balance. The Company was in compliance with all covenants under the Credit
Facility during fiscal 1999. However, if the Company experiences a significant
decrease in revenues or a significant increase in expenses, the Company could,
under the terms of the Credit Facility, be deemed in default and may need to
seek waivers for any such default, or amendments to maintain compliance
33
<PAGE> 34
with the covenants of the Credit Facility. There can be no assurance the Company
will be successful in obtaining such waivers or amendments, if required.
The Company believes that its current level of liquid assets, credit
facilities, and cash expected to be generated from operations will be sufficient
to fund its operations during fiscal 2000. However, if industry conditions
become unfavorable, the Company does not consistently achieve timely customer
qualifications on new product programs, or the Company is unsuccessful at
ramping up volume production on new products at acceptable yields, the Company's
working capital and other capital needs will increase. Conversely, if industry
demand increases significantly such that the Company's capital requirements
exceed management's current estimates, the Company may again need to raise
additional capital. The Company may seek such capital through additional bank
facilities, debt or equity offerings, or other sources. Further, the Company may
elect from time to time to seek additional financing to the extent available.
There can be no assurance, however, that any such required financing will be
available when needed on terms and conditions acceptable or favorable to the
Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and Credit Facility. The Company
does not use derivative financial instruments in its investment portfolio. The
Company's main investment objectives are the preservation of investment capital,
which is accomplished by investing with only high-credit-quality issuers and
limiting the amount of credit exposure to any one issuer and the maximization of
after-tax return on its investment portfolio.
The Company generally invests in two types of securities, marketable
securities and equity investments. The Company mitigates default risk on
marketable securities by investing in high-credit quality securities and by
monitoring the credit rating of investment issuers. Marketable securities have
original maturities of 3 months or less at the date of purchase in order to meet
the liquidity needs of the Company. The equity securities are generally
investments in companies in the high-technology industry sector which are
entered into for the promotion of business and strategic objectives. Most are
privately held companies. The Company is exposed to equity price risks on these
equity investments. A 20% adverse change in equity prices would result in an
approximate $6 million decrease in the fair value of the Company's
available-for-sale securities as of the end of fiscal 1999.
The Company has relatively low cash flow exposure due to rate changes for
cash equivalents as all these instruments are at fixed interest rates. The
Company's Credit Facility is at a variable interest rate. Long-term debt is at a
fixed interest rate. The Company primarily enters into debt obligations to
support general corporate purposes including capital expenditures and working
capital needs.
The table below presents principal and interest amounts and related
weighted average interest rates by year of maturity for the Company's investment
portfolio and debt obligations as of September 30, (in millions):
<TABLE>
<CAPTION>
FAIR VALUE
SEPTEMBER 30,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
------ ----- ----- ----- ----- ---------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents............... $398.5 -- -- -- -- -- $398.5 $398.5
Average interest rate........ 5.63% -- -- -- -- -- 5.63%
LONG-TERM DEBT
Fixed rate..................... $ 14.9 $14.9 $14.9 $14.9 $14.9 $373.6 $448.1 $602.0
Average interest rate........ 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
</TABLE>
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<PAGE> 35
Foreign Currency Risk
The Company transacts business in various foreign countries. Its primary
foreign currency cash flows are in Japan. During fiscal 1999, the Company
employed a foreign currency hedging program utilizing foreign currency forward
exchange contracts to hedge certain foreign currency commitments in Japan and
the Netherlands. Under this program, increases or decreases in certain local
currency commitments as translated into U.S. dollars, are partially offset by
realized gains and losses on the hedging instruments. The goal of this hedging
program is to economically guarantee or lock in the exchange rates on the
Company's foreign currency cash outflows and to minimize the impact to the
Company of currency exchange rate fluctuations. The Company does not use foreign
currency forward exchange contracts for speculative or trading purposes.
The table below provides information as of September 30, 1999 about the
Company's derivative financial instruments, which are comprised of foreign
currency forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts, as presented in the Company's financial statements. The
table presents the notional amounts (at the contract exchange rates) and the
contract foreign currency exchange rates.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
NOTIONAL ESTIMATED
AMOUNT CONTRACT RATE FAIR VALUE
------------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Japanese Yen........................................... $12,070 100.51 $(478)
Dutch Guilder.......................................... $ 6,111 2.00 $(150)
</TABLE>
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 398,516 $ 14,000
Receivables, net of allowance of $9,658 in 1999 and $8,975
in 1998................................................ 238,940 166,386
Inventories, net.......................................... 224,477 200,926
Deferred income taxes..................................... 81,860 152,559
Assets held for disposal.................................. -- 42,346
Other current assets...................................... 35,381 10,735
---------- ----------
Total current assets.............................. 979,174 586,952
Property, plant and equipment, net.......................... 723,013 713,400
Intangible assets, net...................................... 47,824 52,552
Other assets................................................ 91,939 65,626
---------- ----------
Total assets...................................... $1,841,950 $1,418,530
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ -- $ 14,000
Accounts payable.......................................... 265,151 151,044
Accrued liability -- Celeritas............................ -- 65,000
Deferred revenue on shipments to distributors............. 21,027 16,650
Accrued compensation and benefits......................... 48,530 37,111
Other current liabilities................................. 40,013 46,458
---------- ----------
Total current liabilities......................... 374,721 330,263
Convertible subordinated notes.............................. 350,000 --
Other long-term liabilities................................. 82,076 78,892
---------- ----------
Total liabilities................................. 806,797 409,155
---------- ----------
Commitments and contingencies............................... -- --
Shareholders' equity:
Rockwell's net investment................................. -- 1,009,375
Preferred and junior preferred stock (No par value, 25,000
shares authorized, no shares issued or outstanding)
Common stock ($1.00 par value, 500,000 shares authorized;
196,387 issued and outstanding)........................ 196,387 --
Additional paid-in-capital................................ 769,563 --
Unearned compensation..................................... (998) --
Retained earnings......................................... 70,052 --
Accumulated other comprehensive income.................... 149 --
---------- ----------
Total shareholders' equity........................ 1,035,153 1,009,375
---------- ----------
Total liabilities and shareholders' equity........ $1,841,950 $1,418,530
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 37
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................................... $1,444,114 $1,200,231 $1,412,325
Cost of goods sold......................................... 863,252 887,851 733,848
---------- ---------- ----------
Gross margin............................................... 580,862 312,380 678,477
Operating expenses:
Research and development................................. 310,042 342,349 279,752
Selling, general and administrative...................... 227,729 251,863 190,858
Amortization of intangibles.............................. 8,364 11,020 9,178
Purchased research and development....................... -- -- 29,900
Special charges -- Rockwell retained assets.............. 20,000 95,500 --
Special charges -- Other................................. 17,906 51,806 --
---------- ---------- ----------
Total operating expenses......................... 584,041 752,538 509,688
---------- ---------- ----------
Operating (loss) income.................................... (3,179) (440,158) 168,789
Other income, net.......................................... 5,935 9,830 10,973
---------- ---------- ----------
Income (loss) before (benefit) provision for income
taxes.................................................... 2,756 (430,328) 179,762
(Benefit) provision for income taxes....................... (10,173) (168,112) 53,938
---------- ---------- ----------
Net income (loss).......................................... $ 12,929 $ (262,216) $ 125,824
========== ========== ==========
Proforma basic net income (loss) per share................. $ 0.07 $ (1.32) $ 0.59
========== ========== ==========
Proforma diluted net income (loss) per share............... $ 0.06 $ (1.32) $ 0.59
========== ========== ==========
Number of shares used in proforma per share computation:
Basic.................................................... 192,551 197,900 213,800
========== ========== ==========
Diluted.................................................. 203,484 197,900 213,800
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 12,929 $(262,216) $ 125,824
Adjustments required to reconcile net income (loss) to net
cash provided by operations:
Depreciation and amortization............................. 212,876 219,644 181,000
Deferred income taxes..................................... 9,940 (108,807) 32,128
Amortization of deferred compensation -- restricted
stock.................................................. 19,570 -- --
Special charges -- Rockwell retained assets............... 20,000 95,500 --
Special charges -- Other.................................. 17,906 51,806 --
Purchased research and development........................ -- -- 29,900
Changes in assets and liabilities:
Receivables............................................ (72,554) 51,612 (27,380)
Inventories............................................ (23,551) 21,354 66,066
Accounts payable....................................... 114,107 (42,116) 11,629
Accrued expenses and other current liabilities......... 27,317 171,106 (124,671)
Other.................................................. (35,981) (99,578) 1,877
--------- --------- ---------
Net cash provided by operating activities................. 302,559 98,305 296,373
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (213,756) (269,686) (316,893)
Investments and acquisitions of businesses.................. (18,400) -- (65,000)
--------- --------- ---------
Net cash used in investing activities..................... (232,156) (269,686) (381,893)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt................................. (14,075) -- --
Proceeds from issuance of convertible subordinated notes,
net of issuance costs..................................... 339,574 -- --
Net transfers (to) from Rockwell............................ (39,909) 171,381 85,520
Proceeds from exercise of stock options..................... 23,408 -- --
Proceeds from issuance of common stock under stock purchase
plan...................................................... 5,115 -- --
--------- --------- ---------
Net cash provided by financing activities................. 314,113 171,381 85,520
--------- --------- ---------
Net increase in cash and cash equivalents................... 384,516 -- --
Cash and cash equivalents at beginning of period............ 14,000 14,000 14,000
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 398,516 $ 14,000 $ 14,000
========= ========= =========
</TABLE>
Non-cash activity: During the fiscal year ended September 30, 1999, the
Company transferred its wafer fabrication facilities in Colorado Springs,
Colorado (and the related tax benefit) with a book value of approximately $59
million to Rockwell, as well as certain other tax benefits of approximately $25
million related to the Celeritas litigation. In addition, Rockwell transferred
$64 million of restricted cash to Conexant to be used to satisfy the $65 million
liability which Conexant recorded in the year ended September 30, 1998, related
to the Celeritas judgment. During the second fiscal quarter of 1999, the
restricted cash balance of $64 million transferred from Rockwell was used to
settle the Celeritas judgment. During the fourth fiscal quarter of 1999 the
Company recorded a non-cash income tax benefit of approximately $20.6 million
relating to employee stock transactions.
Interest paid during the fiscal year ended September 30, 1999 was
approximately $2.6 million. There was no interest paid during fiscal 1998 or
fiscal 1997. There were no income taxes paid subsequent to the Distribution.
Prior to the Distribution, all income tax payments were made by Rockwell.
See accompanying notes to the consolidated financial statements.
38
<PAGE> 39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER ROCKWELL'S
------------------ PAID-IN UNEARNED RETAINED COMPREHENSIVE NET
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EARNINGS INVESTMENT
------- -------- ---------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996........ -- $ -- $ -- $ -- $ -- $ -- $ 899,216
Foreign currency translation
adjustment........................ -- -- -- -- -- -- (4,002)
Net transfers from Rockwell....... -- -- -- -- -- -- 85,520
Net income........................ -- -- -- -- -- -- 125,824
------- -------- -------- -------- ------- ------- ----------
Balance at September 30, 1997..... -- -- -- -- -- -- 1,106,558
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (6,348)
Net transfers from Rockwell....... -- -- -- -- -- -- 171,381
Net loss.......................... -- -- -- -- -- -- (262,216)
------- -------- -------- -------- ------- ------- ----------
Balance at September 30, 1998..... -- -- -- -- -- -- 1,009,375
Foreign currency translation
adjustment...................... -- -- -- -- -- 149 (3,845)
Net transfers (to) from
Rockwell........................ -- -- (796) -- -- 3,589 (51,335)
Issuance of common stock in
connection with the
Distribution.................... 189,763 189,763 707,309 -- -- -- (897,072)
Net loss prior to the
Distribution.................... -- -- -- -- -- -- (57,123)
Issuance of Conexant common stock
upon exercise of stock options
under Rockwell 1998 plan........ 4,026 4,026 19,382 -- -- -- --
Tax benefits from stock plans..... -- -- 20,583 -- -- -- --
Issuance of restricted stock under
Conexant 1999 plan.............. 2,162 2,162 18,406 (20,568) -- -- --
Issuance of Conexant common stock
under employee stock purchase
plan............................ 436 436 4,679 -- -- -- --
Realization of unrealized gain on
available-for-sale
investments..................... -- -- -- -- -- (3,589) --
Compensation expense related to
vesting of restricted stock..... -- -- -- 19,570 -- -- --
Net income subsequent to the
Distribution.................... -- -- -- -- 70,052 -- --
------- -------- -------- -------- ------- ------- ----------
Balance at September 30, 1999..... 196,387 $196,387 $769,563 $ (998) $70,052 $ 149 $ --
======= ======== ======== ======== ======= ======= ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at October 1, 1996........ $ 899,216
Foreign currency translation
adjustment........................ (4,002)
Net transfers from Rockwell....... 85,520
Net income........................ 125,824
----------
Balance at September 30, 1997..... 1,106,558
Foreign currency translation
adjustment...................... (6,348)
Net transfers from Rockwell....... 171,381
Net loss.......................... (262,216)
----------
Balance at September 30, 1998..... 1,009,375
Foreign currency translation
adjustment...................... (3,696)
Net transfers (to) from
Rockwell........................ (48,542)
Issuance of common stock in
connection with the
Distribution.................... --
Net loss prior to the
Distribution.................... (57,123)
Issuance of Conexant common stock
upon exercise of stock options
under Rockwell 1998 plan........ 23,408
Tax benefits from stock plans..... 20,583
Issuance of restricted stock under
Conexant 1999 plan.............. --
Issuance of Conexant common stock
under employee stock purchase
plan............................ 5,115
Realization of unrealized gain on
available-for-sale
investments..................... (3,589)
Compensation expense related to
vesting of restricted stock..... 19,570
Net income subsequent to the
Distribution.................... 70,052
----------
Balance at September 30, 1999..... $1,035,153
==========
</TABLE>
See accompanying notes to the consolidated financial statements.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Conexant is the world's largest independent company focused exclusively on
providing semiconductor products for communications electronics. With more than
30 years of experience in developing dial-up modem technology, Conexant draws
upon its expertise in mixed-signal processing and communications technology to
deliver semiconductor integrated circuit products and system-level solutions for
a broad range of communications applications. These products facilitate
communications worldwide through wireline voice and data communications
networks, cordless and cellular wireless telephony systems and emerging cable
and wireless broadband communications networks. Conexant has aligned its
business into five platforms: Personal Computing, Network Access, Wireless
Communications, Digital Infotainment, and Personal Imaging.
On November 4, 1998, the Board of Directors of Rockwell International
Corporation ("Rockwell") approved the distribution (the "Distribution") to its
shareowners of all the outstanding shares of the common stock of its
wholly-owned subsidiary, Conexant, by means of a tax-free spin-off. Under the
terms of the Distribution, each Rockwell shareowner of record on December 11,
1998, received one share of the Company's common stock (including an associated
preferred share purchase right) for every two shares of Rockwell common stock
owned on December 11, 1998. The Distribution occurred at the close of business
on December 31, 1998. Prior to the Distribution, the Company, a Delaware
corporation formerly named Rockwell Semiconductor Systems, Inc., was a
wholly-owned subsidiary of Rockwell which, together with certain other
subsidiaries of Rockwell, operated Rockwell's semiconductor systems business
("Semiconductor Systems"). As part of the Distribution, Rockwell transferred to
the Company, assets and liabilities of Semiconductor Systems not already owned
by the Company, which included the stock of certain subsidiaries, and the
Company transferred to Rockwell all assets and liabilities not constituting part
of Semiconductor Systems, including all assets and liabilities of Rockwell's
electronic commerce business. Conexant was incorporated as Rockwell
Semiconductor Systems, Inc. in Delaware on September 16, 1996, and changed its
name to Conexant Systems, Inc., on October 14, 1998. All references to the
Company and its predecessors will now be known as Conexant. Certain adjustments
were made to reflect the balance sheet of the Company on a stand alone basis and
to provide for the adjustment of certain balances with Rockwell in accordance
with the Distribution Agreement.
During fiscal 1999, the Company had net cash transfers of approximately
$39.9 million to Rockwell, and transferred its Colorado Springs, Colorado
facilities (and the related tax benefit) totaling approximately $59.0 million to
Rockwell in accordance with the Distribution Agreement. In addition, Rockwell
transferred $64.0 million in restricted cash (and the related tax benefit) to
Conexant to satisfy the $65.0 million liability related to the Celeritas
judgment, and other non-cash items totaling approximately $8.5 million.
Basis of Presentation
The consolidated financial statements include all subsidiaries and
businesses of Conexant. All significant accounts and transactions among
Conexant's entities have been eliminated in consolidation.
The fiscal 1999 financial statements include the operating results of
Conexant while it was part of Rockwell prior to the Distribution. Financial data
included in the accompanying consolidated financial statements, for periods
subsequent to the Distribution, have been prepared on a basis that reflects the
historical assets, liabilities, and operations of the business contributed to
Conexant by Rockwell. Financial statements prior to the Distribution are not
necessarily indicative of what the financial position, results of operations, or
cash flows would have been had Conexant been an independent public company
during the periods presented.
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Year
The Company maintains a fifty-two/fifty-three week fiscal year cycle ending
on the Friday closest to September 30. To conform the Company's fiscal year
ends, a fifty-third week must be added every sixth or seventh fiscal year.
Fiscal years 1999, 1998 and 1997 comprised 52 weeks, 53 weeks, 52 weeks, and
ended on October 1, October 2, September 26, respectively. For convenience, the
accompanying financial statements have been shown as ending on the last day of
the calendar month.
Stock Split
All shares, earnings per share, and related information give retroactive
effect to the 2-for-1 stock split effected in the form of a stock dividend
announced on September 13, 1999 for shareowners of record as of September 24,
1999, and effected on October 29, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition
Generally, revenue is recognized when title to the product transfers.
Certain of Conexant's domestic distributors have the right to return all of
Conexant's products under certain circumstances. Revenue associated with
shipments to those distributors is deferred and is recognized when the product
is shipped to the ultimate customer. Gross revenue is reduced by accruals for
estimated pricing and other return activity on product shipments based on
historical experience.
Proforma Net Income (Loss) Per Share
Net income (loss) per share has not been presented for the periods
presented as the Company was not an independent company during each of the full
periods. Proforma net income (loss) per share has been presented as if the
Distribution had occurred as of October 1, 1996. Subsequent to the Distribution,
proforma net income (loss) per share is based on Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires dual presentation of basic earnings per share ("EPS") and diluted EPS.
Proforma basic income (loss) per share is based on the weighted average number
of shares of common stock outstanding during the period. Proforma diluted income
(loss) per share also includes the effect of stock options outstanding during
the period and assumes the conversion of the Company's convertible subordinated
notes for the period of time such notes were outstanding, if such stock options
and convertible notes are dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with insignificant
interest rate risk and original maturities of three months or less from the date
of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed
using the average cost method on a currently adjusted standard basis (which
approximates actual cost); market is based upon estimated net realizable value.
The valuation of inventory at the lower of cost or market requires the use of
estimates as to the amounts of current inventory that will be sold. These
estimates are dependent on the Company's assessment of current and expected
orders from its customers, given that orders are subject to cancellation
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with limited advance notice prior to shipment. It is reasonably possible that
the recoverability of the Company's investment in inventory will change in the
near term.
Property, Plant and Equipment
Property is stated at cost. Depreciation is based on estimated useful lives
(50 years for buildings and 10 to 30 years for building improvements; 5 years
for machinery and equipment; and the shorter of the remaining terms of the
leases or the estimated economic useful lives of the improvements for land and
leasehold improvements). Significant renewals and betterments are capitalized
and replaced units are written off. Maintenance and repairs, as well as renewals
of a minor amount, are charged to expense.
The Company changed its depreciation method beginning October 1, 1998 from
the double declining method to the straight-line method for all prospective
purchases. The change resulted in lower depreciation expense for fiscal 1999 of
approximately $ 8.5 million or $0.03 per share for both proforma basic and
proforma diluted net income per share.
Intangible and Other Assets
Goodwill and other intangible assets generally result from business
acquisitions. Conexant accounts for business acquisitions by assigning the
purchase price to tangible and intangible assets and liabilities, including
research and development projects which have not yet reached technological
feasibility and have no alternative future use (purchased research and
development). Assets acquired and liabilities assumed are recorded at their fair
values; the appraised value of purchased research and development is immediately
charged to expense, and the excess of the purchase price over the amounts
assigned is recorded as goodwill.
Goodwill, patents, developed technology, and other intangibles are
amortized on a straight-line basis over their estimated useful lives, ranging
from 5 to 10 years.
The Company classifies its entire equity investment portfolio as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported as other comprehensive
income within shareholders' equity. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale securities are
included in other income, net.
Impairment of Long-Lived Assets
The Company reviews all long-lived assets for impairment when events or
circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable, and for all assets to be disposed of. Long-lived assets held for
use are reviewed for impairment by comparing undiscounted cash flows over
remaining useful lives to net book value. When impairment is indicated for a
long-lived asset, the amount of impairment loss is the excess of net book value
over fair value.
Foreign Currency Translation and Remeasurement
The functional currency of the majority of the Company's larger foreign
subsidiaries is the U.S. dollar. Results from foreign operations are subject to
exchange rate fluctuations and foreign currency transaction costs. In accordance
with the provisions of SFAS No. 52, "Foreign Currency Translation," the assets
and liabilities of subsidiaries located outside the United States are translated
into U.S. dollars at the rates of exchange in effect at the balance sheet dates.
Income and expense items are translated at the average exchange rates prevailing
during the period. Gains and losses resulting from foreign currency transactions
are recognized currently in income, and those resulting from translation of
foreign subsidiary financial statements are accumulated as a separate component
of shareholders' equity.
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative Financial Instruments
The Company enters into foreign currency forward exchange contracts to
manage exposure related to certain foreign currency commitments. The Company
does not enter into derivative financial instruments for speculative or trading
purposes.
The forward contracts qualify as hedges for financial reporting purposes.
The forward contracts at September 30, 1999 relate to hedging certain currency
commitments and consist of contracts to buy or sell approximately $17.5 million
in foreign currency. These contracts mature through September 2000 and are with
major financial institutions.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations. In
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
proforma net income and net income per share amounts have been disclosed in Note
8, Stock and Benefit Plans.
Income Taxes
The provision (benefit) for income taxes is determined in accordance with
SFAS No. 109, "Accounting For Income Taxes." Deferred tax assets and liabilities
are determined based on the temporary differences between the financial
reporting and tax bases of assets and liabilities, applying enacted statutory
tax rates in effect for the year in which the differences are expected to
reverse. Future tax benefits are recognized only to the extent that the
realization of such benefits is considered to be more likely than not.
Concentrations
Financial instruments that potentially subject Conexant to concentration of
credit risk consist principally of cash equivalents and trade receivables.
Conexant invests cash through high-credit quality financial institutions. The
Company's trade receivables primarily are derived from sales to manufacturers of
communications products, consumer products and PCs. Management believes that any
risk of an accounting loss is reduced due to the diversity of its products, end
customers and geographic sales areas. Conexant performs ongoing credit
evaluations of its customers' financial condition and requires collateral, such
as letters of credit and bank guarantees, whenever deemed necessary.
While Conexant operates and maintains its own wafer manufacturing and
assembly and test facilities, the Company relies on outside foundries to
supplement its wafer manufacturing capacity. Allocations by these suppliers of
wafer manufacturing capacity to the Company depend on the Company's needs and
capacity availability during periods of capacity shortages. A significant
reduction in allocation from these suppliers could adversely affect the
Company's results of operations.
The Company is currently dependent on a single source supplier for
epitaxial wafers used in the gallium arsenide ("GaAs") semiconductor
manufacturing processes at its Newbury Park, California facility.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The standard will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of
derivatives will either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or be recognized in
other comprehensive income until the hedged item is recognized in earnings. The
change in a derivative's fair value related to the ineffective portion of a
hedge, if any, will generally be immediately recognized in
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
earnings. The standard is required to be adopted by the Company as of the
beginning of fiscal year 2001. The effect of adopting the standard is currently
being evaluated, but is not expected to have a material effect on the Company's
financial position or results of operations.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
NOTE 2. FAIR VALUE DISCLOSURES
The following estimated fair values have been determined by the Company
using available market information.
Cash, and cash equivalents -- The carrying amounts of these items are their
fair values.
Long-term debt -- The carrying amount of this item is recorded at
historical cost. The estimated fair value is based on quoted market prices
obtained from dealers.
Foreign currency contract commitments -- The estimated fair value of
foreign currency contracts is based on quoted market prices obtained from
dealers.
Energy contract liability -- The estimated fair value of the energy
contract liability is based on the Company's estimated costs of long-term
borrowings.
The carrying/commitment amount and fair value of the Company's financial
instruments at September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING/
COMMITMENT FAIR
AMOUNT VALUE
---------- --------
<S> <C> <C>
SEPTEMBER 30, 1999
Cash and cash equivalents............................ $398,516 $398,516
Long-term debt....................................... $350,000 $602,000
Foreign currency contract commitments................ $ 18,181 $ 17,553
Energy contract...................................... $ 3,337 $ 2,927
SEPTEMBER 30, 1998
Cash and cash equivalents............................ $ 14,000 $ 14,000
</TABLE>
The fair value estimates presented are based on pertinent information
available to management as of September 30, 1999 and 1998. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since such dates, and current estimates of fair
value may differ significantly from the amounts presented.
NOTE 3. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Inventories, net consisted of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw material........................................... $ 29,998 $ 22,596
Work-in-process........................................ 160,781 107,002
Finished goods......................................... 33,698 71,328
-------- --------
Total inventories, net....................... $224,477 $200,926
======== ========
</TABLE>
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total inventories, net have been presented above inclusive of a valuation
allowance of approximately $64.6 million and approximately $105.7 million as of
September 30, 1999 and 1998, respectively.
Property, plant and equipment, net consisted of the following at September
30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Land................................................. $ 12,087 $ 12,087
Land and leasehold improvements...................... 12,636 10,475
Buildings............................................ 318,725 304,828
Machinery and equipment.............................. 1,090,175 954,054
Construction in progress............................. 166,399 114,043
---------- --------
Property, plant and equipment...................... 1,600,022 1,395,487
Less accumulated depreciation and amortization....... (877,009) (682,087)
---------- --------
Total property, plant and equipment, net... $ 723,013 $713,400
========== ========
</TABLE>
Intangible assets, net consisted of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Developed technology and other......................... $ 45,864 $ 45,864
Goodwill............................................... 20,316 18,354
Patents................................................ 7,085 5,415
-------- --------
Total........................................ 73,265 69,633
Less accumulated amortization.......................... (25,441) (17,081)
-------- --------
Total intangible assets, net................. $ 47,824 $ 52,552
======== ========
</TABLE>
NOTE 4. LONG-TERM DEBT
Convertible Subordinated Notes
In May 1999, Conexant issued $350 million of its 4 1/4% convertible
subordinated notes due May 1, 2006 (the "Notes"). Holders of the Notes may
convert the Notes into shares of the Company's common stock at any time prior to
redemption or maturity at a conversion price of $23.098 per share, subject to
certain adjustments. The Company has the option to redeem the Notes at any time
on or after May 6, 2002, at a declining premium to par. The Notes are
subordinated to all existing and future senior indebtedness of the Company.
Secured Credit Facility
In December 1998, the Company and three of its subsidiaries entered into a
three-year $350 million senior secured revolving loan facility (the "Credit
Facility") with a group of banks. Loans under the Credit Facility are to be used
for working capital needs and other general corporate purposes. The Credit
Facility is guaranteed by the common stock of the Company's subsidiaries and
substantially all assets of the Company's subsidiaries. It is also secured by
(i) a first-priority security interest in substantially all domestic assets of
the Company and its subsidiaries and (ii) a pledge of the stock of the Company's
subsidiaries, subject to certain exceptions. At September 30, 1999, there were
no amounts outstanding under the Credit Facility.
Loans obtained under the Credit Facility bear interest at a rate per annum
equal, at the election of the Company, to either (i) a base rate (ABR), which is
the higher of Credit Suisse First Boston's prime rate and 0.50 percent over the
federal funds rate or (ii) the London interbank offered rate for offshore dollar
deposits (LIBOR); plus, in either case, a variable margin. For the first six
months following the Distribution, the margin was fixed at 75 basis points for
ABR-based loans and 175 basis points for LIBOR-based loans. Thereafter, the
margin is based on the Company's total debt to capitalization ratio. The Company
pays a
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
facility fee on the unused amount of the Credit Facility at a per annum rate
that will vary depending on the same criteria used to determine the interest
rate margin. The Company also pays other customary fees.
The Credit Facility contains, among other terms, representations and
warranties, conditions precedent, covenants, mandatory and voluntary prepayment
provisions and events of default customary for facilities of this type. The
Company was in compliance with all covenants under the Credit Facility for
fiscal 1999.
At September 30, 1999, the future minimum principal payments under
long-term debt obligations were $350 million, all due after fiscal 2004.
NOTE 5. COMMITMENTS
Purchase Commitments
Purchase commitments for construction or purchase of plant and equipment
for the Company totaled approximately $52.3 million at September 30, 1999.
Operating Leases
The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2003
and contain various provisions for rental adjustments including, in certain
cases, a provision based on increases in the Consumer Price Index. Rental
expense under operating leases was approximately $13.5 million, $17.4 million,
and $12.0 million during fiscal years 1999, 1998 and 1997, respectively.
Energy Contract
The Company assumed an energy contract for natural gas and electricity
entered into prior to the Distribution at its Colorado Springs, Colorado
facilities that were distributed to Rockwell prior to the Distribution.
At September 30, 1999, the future minimum payments under operating leases
and the energy contract are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING ENERGY
FISCAL YEAR LEASES CONTRACT TOTAL
----------- --------- -------- -------
<S> <C> <C> <C>
2000.................................................. $ 6,871 $ 874 $ 7,745
2001.................................................. 5,698 405 6,103
2002.................................................. 4,664 405 5,069
2003.................................................. 4,162 405 4,567
2004.................................................. 3,823 405 4,228
After 2004............................................ 3,113 843 3,956
------- ------ -------
Total future minimum payments......................... $28,331 $3,337 $31,668
======= ====== =======
</TABLE>
NOTE 6. INCOME TAXES
(Benefit) Provision For Income Taxes
The results of Conexant's operations for the quarter ended December 31,
1998 and prior periods are being included in the federal, state, local and
foreign income tax returns of Rockwell International Corporation. The remaining
results of operations for Conexant will be included in separate Conexant income
tax returns. Rockwell has agreed to indemnify Conexant for income tax
liabilities and retained the rights to tax refunds relating to any operations
included in Rockwell's income tax returns. Accordingly, the balance sheet does
not include current or prior period income tax receivables or payables related
to Conexant operations which are
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
included in the consolidated or combined Rockwell income tax returns. The income
tax provisions included in the Statements of Operations for periods prior to the
Distribution have been determined based on the "separate return" method.
The components of the (benefit) provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- -------
<S> <C> <C> <C>
Current:
United States...................................... $(22,604) $ (66,286) $11,771
Foreign.......................................... 6,047 4,621 7,379
State and local.................................. (3,556) 2,360 2,660
-------- --------- -------
Total current............................ (20,113) (59,305) 21,810
-------- --------- -------
Deferred :
United States.................................... 14,254 (94,116) 25,191
Foreign.......................................... 478 (591) 254
State and local.................................. (4,792) (14,100) 6,683
-------- --------- -------
Total deferred........................... 9,940 (108,807) 32,128
-------- --------- -------
(Benefit) provision for income taxes............... $(10,173) $(168,112) $53,938
======== ========= =======
</TABLE>
Deferred Income Taxes
Current deferred income tax benefits included in the balance sheet at
September 30, 1999 and 1998 consist of the tax effects of temporary differences
related to the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Accrued compensation and benefits........................... $ 9,486 $ 11,167
Assets held for disposal.................................... -- 36,666
Inventories................................................. 36,372 48,032
Accrued royalties and licenses.............................. 545 24,901
Product returns and allowances.............................. 12,735 14,017
Deferred U.S. distributor revenues.......................... 7,128 --
Research and development credits............................ 12,609 --
Other -- net................................................ 2,985 17,776
------- --------
Current deferred income taxes............................... $81,860 $152,559
======= ========
</TABLE>
Net long-term deferred income taxes included in the balance sheet at
September 30, 1999 and 1998 consist of the tax effects of temporary differences
related to the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Retirement benefits and deferred compensation............... $24,759 $13,063
Property, plant and equipment............................... 7,832 17,078
Accrued royalties........................................... 11,448 9,666
Other -- net................................................ 2,691 8,204
------- -------
Long-term deferred income taxes............................. $46,730 $48,011
======= =======
</TABLE>
Management believes it is more likely than not that current and long-term
tax assets will be realized through the reduction of future income tax payments.
Significant factors considered by management in its determination of the
probability of the realization of the deferred tax assets included: (a) the
historical operating results of the Company, (b) expectations of future
earnings, and (c) available tax planning strategies.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For U.S. and state income tax purposes, at September 30, 1999, Conexant has
tax credit carryforwards of approximately $6.5 million and $21.4 million,
respectively. The U.S. credits may be carried forward for 20 years. California
Manufacturers' Investment Credits of approximately $15.3 million expire from
2005 through 2007, while the remaining state credits of approximately $6.1
million have no expiration date. Approximately $11.2 million of the California
Manufacturers' Investment Credit carryforward was earned while the Company was
part of Rockwell. Under the terms of the Tax Allocation Agreement with Rockwell,
Conexant must pay Rockwell approximately $11.2 million when the benefits from
such portion of the California Manufacturers' Investment Credit carryforwards
are realized.
Shareholders' equity at September 30, 1999 reflects tax benefits related to
the exercise of stock options of approximately $20.6 million during fiscal 1999.
Reconciliation of (Benefit) Provision for Income Taxes
The (benefit) provision for income taxes differs from the United States
federal statutory tax expense for the three years ended September 30, 1999 as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
U.S. federal statutory tax at 35%................. $ 965 $(150,615) $ 62,917
State taxes, net of federal effects............... (5,426) (7,631) 6,073
Foreign income taxes in excess of (less than)
U.S............................................. 1,145 (911) 1,395
Research and development credits.................. (6,941) (9,321) (3,000)
Foreign Sales Corporation......................... (250) (831) (13,944)
Other............................................. 334 1,197 497
-------- --------- --------
(Benefit) provision for income taxes.............. $(10,173) $(168,112) $ 53,938
======== ========= ========
</TABLE>
The (benefit) income tax provision was calculated based upon the following
components (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
United States (loss) income....................... $(12,617) $(444,446) $161,940
Foreign income.................................... 15,373 14,118 17,822
-------- --------- --------
Total income (loss) before (benefit) provision for
income taxes.................................... $ 2,756 $(430,328) $179,762
======== ========= ========
</TABLE>
No provision has been made for United States, state, or additional foreign
income taxes which would be due upon the actual or deemed distribution of
approximately $15 million of undistributed earnings of foreign subsidiaries as
of September 30, 1999 which have been or are intended to be permanently
reinvested.
NOTE 7. PROFORMA NET INCOME (LOSS) PER SHARE
The number of proforma weighted average outstanding shares and common share
equivalents used in the proforma net income (loss) per share calculation set
forth below was based upon the weighted average number of Rockwell shares and
share equivalents outstanding for the applicable periods, adjusted for the
distribution ratio in the Distribution of one share of the Company's common
stock for every two shares of Rockwell common stock. For the year ended
September 30, 1999, the proforma weighted average common shares was determined
based upon the weighted average of (i) the Rockwell method for the first fiscal
quarter, as previously described, and (ii) the actual Conexant share activity
for the second through fourth quarters, as described further in this note. For
the years ended September 30, 1998 and September 30, 1997, the proforma weighted
average common shares was determined based upon the weighted average of the
Rockwell method for the entire periods, as previously described. These proforma
results are not indicative of future amounts.
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of proforma basic and
diluted net income (loss) per share for the years ended September 30 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Proforma basic net income (loss) per share
Numerator:
Net income (loss)....................................... $ 12,929 $(262,216) $125,824
-------- --------- --------
Denominator:
Weighted average number of common shares outstanding
during the period.................................... 192,551 197,900 213,800
-------- --------- --------
Proforma basic net income (loss) per share................ $ 0.07 $ (1.32) $ 0.59
======== ========= ========
Proforma diluted net income (loss) per share
Numerator:
Net income (loss)....................................... $ 12,929 $(262,216) $125,824
-------- --------- --------
Denominator:
Weighted average number of common shares outstanding
during the period before restricted shares and common
stock equivalents.................................... 192,551 197,900 213,800
Weighted average number of restricted shares............ 103 -- --
Incremental common shares issuable under stock option
plans after applying treasury stock method, net of
tax benefit.......................................... 10,830 -- --
-------- --------- --------
Weighted average number of common shares outstanding
during the period including restricted shares and
common stock equivalents............................. 203,484 197,900 213,800
-------- --------- --------
Proforma diluted net income (loss) per share.............. $ 0.06 $ (1.32) $ 0.59
======== ========= ========
</TABLE>
For the year ended September 30, 1999, incremental common shares
attributable to the assumed conversion of the Company's convertible subordinated
notes of approximately 15.2 million shares were not included in the diluted net
income per share computation as the effect would be antidilutive. For fiscal
1998 and 1997, the proforma diluted net income (loss) per share does not include
common stock equivalents as their effect was antidilutive during fiscal 1998 and
none were outstanding during fiscal 1997.
NOTE 8. STOCK AND BENEFIT PLANS
Stock Purchase Rights
The Company is authorized to issue 500,000,000 shares of common stock, par
value $1.00 per share, and 25,000,000 shares of preferred stock, without par
value, of which 1,500,000 shares are designated as series A junior participating
preferred stock (the "Junior Preferred Stock"). Under the Rights Agreement dated
as of November 30, 1998 between the Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, a preferred share purchase right (a "Right")
is attached to each share of common stock pursuant to which the holder may, in
certain takeover-related circumstances, become entitled to purchase from the
Company 1/200th of a share of Junior Preferred Stock at a price of $300, subject
to adjustment. Also, in certain takeover-related circumstances, each Right
(other than those held by an acquiring person) will generally be exercisable for
shares of common stock or stock of the acquiring person having a market value of
twice the exercise price. In certain events, each Right may be exchanged by the
Company for one share of common stock or 1/200th of a share of Junior Preferred
Stock. The Rights will expire on December 31, 2008, unless earlier exchanged or
redeemed at a redemption price of $0.01 per Right, subject to adjustment. Until
a Right is exercised, the holder, as such, will have no voting, dividend or
other rights as a shareowner of the Company.
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
The Company's 1998 Stock Option Plan (the "1998 Plan") covers certain
options to purchase shares of the Company's common stock resulting from the
adjustment or conversion of options to purchase Rockwell's common stock. These
Company options have the same vesting schedule, and other terms as the original
Rockwell options, generally vesting in three equal annual installments and
expiring ten years after the original date of grant by Rockwell. No further
options may be granted under the 1998 Plan. As of September 30, 1999, options to
purchase an aggregate of approximately 15,326,000 shares of the Company's common
stock were reserved for issuance under the 1998 Plan.
The Company's 1999 Long-Term Incentives Plan (the "1999 LTIP") provides for
the grant of incentive and non-qualified stock options, restricted stock and
other stock-based incentive awards for officers and other employees and certain
non-employees of the Company. Under the 1999 LTIP, these grants are generally
granted at a price not less than fair market value at the date of grant. Options
to purchase shares of the Company's common stock granted under the 1999 LTIP
generally vest in four equal annual installments and expire ten years after the
date of grant. Restricted stock awards under the 1999 LTIP are subject to
restrictions as to sale or other disposition and to restrictions which require
continued employment with the Company. The restrictions generally expire, and
the awards become fully vested, within four years from the date of grant. As of
September 30, 1999, the Company had granted approximately 2,341,000 shares of
restricted stock under the 1999 LTIP. The weighted average grant price of the
restricted stock was $11.70 in fiscal 1999. An aggregate of 20,370,000 shares of
the Company's common stock have been authorized for issuance under the 1999
LTIP.
Under the terms of the Company's Directors Stock Plan (the "Directors
Plan"), each non-employee director receives an initial grant of options to
purchase 80,000 shares of the Company's common stock upon election to the Board
of Directors and, following one year of service on the Board, will receive an
additional grant of options to purchase 30,000 shares of Company common stock
immediately following each Annual Meeting of Shareowners. As of September 30,
1999, options covering an aggregate of 320,000 shares of the Company's common
stock were outstanding under the Directors Plan. Under the Directors Plan, each
non-employee director may elect to receive all or a portion of the cash retainer
to which the director is entitled through the issuance of Company common stock
either in the form of restricted stock or non-forfeitable stock. As of September
30, 1999, 12,760 shares of Company common stock have been issued under the
Directors Plan, 6,380 shares issued as restricted stock and 6,380 shares issued
as non-forfeitable stock. An aggregate of 630,000 shares of the Company's common
stock have been authorized for issuance under the Directors Plan.
Stock option activity under the 1998 Plan, the 1999 LTIP, and the Directors Plan
were as follows (in thousands, except option price data):
<TABLE>
<CAPTION>
FY 1999
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, October 1, 1998............................. -- $ --
Options issued with the Distribution(a).................. 20,113 6.99
Options granted during period............................ 18,727 11.91
Options exercised........................................ (4,026) 5.81
Options cancelled........................................ (1,464) 9.21
------ ------
Outstanding, end of year................................. 33,350 $ 9.80
====== ======
Exercisable, end of year................................. 9,910 $ 6.54
====== ======
</TABLE>
- ---------------
(a) Reflects options issued in connection with the Distribution as a result of
adjustments to certain options to purchase Rockwell's common stock.
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock options outstanding at September 30,
1999 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
EXERCISE PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
- ------------------------------ -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
1998 Plan:
$ 3.09 - $ 4.93 4,171 3.63 $ 4.31 4,171 $4.31
$ 5.21 - $ 8.45 4,252 7.07 7.69 3,065 7.62
$ 8.45 - $10.16 6,903 7.96 8.72 2,674 8.78
1999 LTIP and Directors Plans:
$ 8.56 - $ 9.41 14,974 9.26 9.40 -- --
$11.38 - $39.59 3,050 9.70 24.67 -- --
------ ---- ------ ----- -----
$ 3.09 - $39.59 33,350 8.05 $ 9.80 9,910 $6.54
====== ==== ====== ===== =====
</TABLE>
No compensation expense has been recognized for stock-based incentive
compensation activity other than for the majority of the 1999 restricted stock
awards. Had compensation expense for the Company's stock options been recognized
based upon the fair value of awards granted, the Company's net income would have
been reduced by approximately $32.9 million, resulting in a net loss of
approximately $20.0 million for fiscal 1999 or $(0.10) per share for both
proforma basic and proforma diluted net income (loss) per share for fiscal 1999.
These proforma effects are not indicative of future amounts. The fair value of
each option granted during fiscal 1999 is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected life of 5 years for 1999, expected volatility of 60%, risk-free
interest rate of 5.93%, and no dividend yield during fiscal 1999. The Company
expects to grant additional awards in future years.
Grants of restricted stock are charged to unearned compensation in
shareholders' equity at their intrinsic value and recognized as expense over the
vesting period. Compensation expense recognized under the 1999 LTIP was
approximately $19.6 million in fiscal 1999, primarily due to the accelerated
vesting of most of the fiscal 1999 restricted stock grants as of October 1,
1999, based upon certain performance factors determined by the Board of
Directors and measured for the third and fourth quarters of fiscal 1999.
Restricted stock activity under the 1999 LTIP was as follows (in thousands,
except weighted average price data):
<TABLE>
<CAPTION>
FY 1999
---------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, October 1, 1998............................. -- $ --
Restricted stock granted during period................... 2,353 11.70
Restricted stock cancelled............................... (192) 10.07
Restricted stock vested.................................. (1,857) 11.20
------ ------
Restricted stock unvested, end of year................... 304 $15.79
====== ======
</TABLE>
Employee Stock Purchase Plan
The Company has adopted employee stock purchase plans for all eligible
employees to purchase shares of the Company's common stock at 85% of the lower
of the fair market value on the first or the last day of each six-month offering
period. Under the employee stock purchase plans, employees may authorize the
Company to withhold up to 10% of their compensation during any offering period,
subject to certain limitations. Participation under the 1999 Employee Stock
Purchase Plan, which is qualified under Section 423 of the Internal Revenue Code
and was implemented on April 1, 1999, is available to eligible employees of the
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company (including represented hourly employees) in the United States.
Participation under the 1999 Non-Qualified Employee Stock Purchase Plan, which
was implemented on July 1, 1999, is available to eligible employees of the
Company outside the United States to the extent permitted by local law. Offering
periods generally each have a six-month duration (shorter duration for the
initial periods), commencing on March 1 and September 1 of each year. The Board
of Directors initially authorized an aggregate of 3,400,000 shares of the
Company's common stock for issuance under the employee stock purchase plans. At
September 30, 1999, approximately 2,963,000 shares of Company common stock were
available for future purchases under the plans.
401(k) Retirement Savings Plan
The Company sponsors a 401(k) retirement savings plan (the "401(k) Plan")
under which eligible U.S. employees may contribute, on a pre-tax basis or after
tax basis, between 1% and 15% (between 1% and 17% subsequent to fiscal 1999) of
their total annual wages from the Company, excluding bonuses and subject to a
maximum aggregate annual contribution imposed by the Internal Revenue Code. The
Company sponsors a "stock match" program pursuant to which the Company
contributes shares of the Company's common stock through Fidelity's Conexant
Stock Fund to the 401(k) Plan. Each participating employee receives a fixed
matching contribution dollar for dollar for the first 1% through 6% (first 1%
through 4% subsequent to fiscal 1999). In addition, a variable matching
contribution that can range from 0% to 100% of the first 6% (first 4% subsequent
to fiscal 1999) of salary an employee contributes to the plan may be provided at
the fiscal year-end, based on Conexant's performance. All shares of the
Company's common stock, which are accumulated by employees' contributions or by
the Company's stock match program, vest immediately. The Board of Directors has
reserved 3,000,000 shares under the 401(k) Plan and, at September 30, 1999, all
of these shares were available for issuance.
Retirement Medical Plans
Conexant has retirement medical plans which cover most of its U.S. and
certain non-U.S. employees and provide for medical payments to eligible
employees and dependents upon retirement.
Retirement medical expense included in the Consolidated Statements of
Operations, consisting principally of interest accrued on the accumulated
retirement medical obligation, was approximately $1.6 million in fiscal 1999,
approximately $2.7 million in fiscal 1998, and approximately $2.0 million in
fiscal 1997.
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The retirement medical obligation is comprised of the following at
September 30 (in millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.................... $ 28.9 $ 30.6
Service cost............................................... 0.2 0.8
Interest cost.............................................. 1.9 2.2
Plan participants' contributions........................... 0.2 0.1
Amendments................................................. -- (15.3)
Curtailment................................................ -- 5.3
Special termination benefits............................... -- 2.7
Actuarial (gain) loss...................................... (1.4) 4.4
Benefits paid.............................................. (2.5) (1.9)
------ ------
Benefit obligation at end of year.......................... 27.3 28.9
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............. -- --
Actual return on plan assets............................... -- --
Employer contribution...................................... 2.3 1.8
Plan participants' contributions........................... 0.2 0.1
Benefits paid.............................................. (2.5) (1.9)
------ ------
Fair value of plan assets at end of year................... -- --
------ ------
Funded status.............................................. (27.3) (28.9)
Unrecognized net actuarial loss (gain)..................... 5.8 7.5
Unrecognized prior service cost............................ (9.0) (9.8)
------ ------
Prepaid (benefit) cost..................................... $(30.5) $(31.2)
====== ======
</TABLE>
In 1998, Conexant announced to its current and former U.S. employees that
it will be changing its active and retiree medical plans. The changes included
one common plan for all active employees and retirees and increased employee and
retiree cost sharing. Conexant also announced that it will discontinue offering
retiree medical coverage to all active salaried employees as of December 31,
1998. Unamortized amounts related to these and other plan amendments at
September 30, 1998 reflect the accumulated cost reduction of the retirement
benefit obligation.
Increasing the health care cost trend rate by 1% would increase the
accumulated retirement medical obligation at September 30, 1999 by approximately
$1.3 million and would not significantly increase retirement medical expense.
Retirement Pension Plans
Prior to the Distribution, Conexant employees participated in a Rockwell
pension plan (the "Rockwell Pension Plan"), which provides for monthly pension
payments to eligible U.S. employees upon retirement. Pension benefits for U.S.
salaried employees are based on years of credited service and compensation.
Pension benefits for U.S. hourly employees are based on years of service and
specified benefit amounts.
In connection with the Distribution, Rockwell retained the obligation for
vested benefits earned by Conexant participants in the Rockwell Pension Plan and
all related assets. For U.S. employees that are members of Local 2295 of the
International Brotherhood of Electrical Workers Union ("U.S. Hourly Employees"),
Conexant established a pension plan with substantially similar benefits and
which credits these employees for service earned with Rockwell. The benefits
payable under this plan are equal to the difference between the total benefits
earned with both companies and the vested benefit obligation retained by
Rockwell.
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Conexant does not have a pension plan for U.S. salaried and certain hourly
employees and, accordingly, no pension liability related to these employees has
been included in the combined balance sheet.
In connection with the restructuring plan announced in September 1998,
Conexant offered a voluntary early retirement program ("VERP") to certain
salaried employees. Pension benefits under the VERP are paid from a newly
established pension plan (the "VERP Plan") of Conexant. Benefits payable under
the VERP Plan are equal to the excess of the total early retirement pension
benefit over the vested benefit obligation retained by Rockwell under the
Rockwell pension plan. Special charges include approximately $6.0 million for
costs associated with employees who accepted the VERP on or before September 30,
1998, and an additional charge of approximately $17.0 million was recorded in
the first quarter of fiscal 1999 for costs associated with the employees who
accept the VERP after September 30, 1998.
Non-U.S. pension plans in effect prior to the Distribution, which relate
solely to employees and retirees of Conexant, were assumed by Conexant.
Net pension expense included in the consolidated statement of operations,
consisting principally of service costs for benefits earned during the year and
the cost of benefits related to the VERP in fiscal 1999 was approximately $17.9
million, approximately $14 million in fiscal 1998, and approximately $6 million
in fiscal 1997. At each of September 30, 1999 and 1998, the projected benefit
obligation and the accrued liability included in the consolidated balance sheet
related to the pension obligations assumed by Conexant was approximately $11.8
million and $7 million, respectively.
Assumptions (using a June 30 measurement date) include a 7.25% discount
rate and a 4.5% compensation increase rate for both periods presented.
Prior to the Distribution, Conexant employees also participated in certain
Rockwell defined contribution savings plans for eligible employees. Expense
related to these plans was approximately $1.3 million for fiscal 1999,
approximately $7 million for fiscal 1998, and approximately $4 million for
fiscal 1997.
NOTE 9. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," ("SFAS
130") in fiscal 1999. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components, however, it has no impact on
the Company's net income or total shareholders' equity.
The components of comprehensive income (loss) were mainly made up of
foreign currency translation adjustments totaling approximately $241,000 pre-tax
and approximately $149,000 net-of-tax for fiscal 1999. There were no foreign
currency translation adjustments for fiscal 1998 or fiscal 1997.
NOTE 10. SPECIAL CHARGES
In the fourth quarter of 1998, Conexant restructured its business and
recorded special charges of approximately $147 million. The special charges
include an asset impairment of approximately $103 million related to the closure
and planned disposal of its wafer fabrication facilities in Colorado Springs,
Colorado, approximately $15 million for employee severance and VERP costs
associated with an approximate 10% worldwide workforce reduction, approximately
$11 million related to intangible asset write-offs and approximately $18 million
for other actions including lease termination costs, contractual liabilities and
other asset write-offs. In connection with the restructuring, management decided
to close and dispose of the Company's wafer fabrication facilities in Colorado
Springs, Colorado. The $103 million charge represents the excess of the carrying
value of the long-lived assets of these facilities over their estimated fair
value as determined by independent appraisal. These facilities were distributed
to Rockwell prior to the Distribution.
In the first fiscal quarter of 1999, Conexant recorded special charges of
approximately $38 million. The additional charges include approximately $20.0
million related to the further writedown of the Company's wafer fabrication
facilities in Colorado Springs, Colorado, approximately $17.0 million relating
to the VERP,
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and approximately $0.9 million to decommission equipment, activities at foreign
subsidiaries and contract cancellations at the Colorado Springs wafer
fabrication facilities.
The Company monitors the adequacy of the liability for restructuring
charges by reviewing it from time to time to ensure it is sufficient. As of
September 30, 1999, all of the employees identified as part of the approximate
10% workforce reduction had been terminated and cash payments totaling
approximately $46.8 million had been made for employee severance and other
expenses associated with the restructuring plans and closing of the Colorado
Springs, Colorado facilities. The Company expects to make additional cash
payments of approximately $7.3 million for employee severance and benefits and
other expenses associated with the restructuring plans and closing of the
Colorado Springs, Colorado facilities. The Company anticipates these
restructuring plans to be substantially complete by the end of December 31,
1999.
The following table summarizes the Company's restructuring activity for the
year ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
FACILITIES SEVERANCE
AND AND OTHER
EQUIPMENT BENEFITS EXPENSES TOTAL
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Restructuring balances at September 30, 1998..... $ 20,051 $ 6,739 $11,456 $ 38,246
Non-cash charges................................. (1,154) -- (893) (2,047)
Cash charges..................................... (17,504) (24,141) (5,204) (46,849)
Additional charge and change in reserve
estimate....................................... 609 17,680 (383) 17,906
-------- -------- ------- --------
Restructuring balances at September 30, 1999..... $ 2,002 $ 278 $ 4,976 $ 7,256
======== ======== ======= ========
</TABLE>
NOTE 11. ACQUISITIONS OF BUSINESSES
In fiscal 1999, the Company made equity investments in several early stage
companies in the communications industry, and acquired an early stage company
for its Personal Imaging platform, for an aggregate of approximately $18.4
million.
Subsequent to the end of fiscal 1999, the Company entered into a $150
million strategic agreement with Taiwan Semiconductor Manufacturing Company
("TSMC") under which Conexant will receive foundry capacity to support its
future growth. The Company will advance $150 million to TSMC over time.
In fiscal 1997, Conexant acquired the Hi-Media broadband communications
chipset business of ComStream Corporation (Hi-Media) for approximately $42
million in cash. The acquisition was accounted for as a purchase as of May 31,
1997, and the price allocation included approximately $30 million (approximately
$19 million after tax) for purchased research and development which was
immediately expensed, and approximately $18.5 million for intangible assets,
including goodwill, which are being amortized on a straight-line basis over 10
years. The Company also acquired two other businesses in fiscal 1997 at a net
cost of approximately $22 million.
NOTE 12. CONTINGENCIES
Litigation
Claims have been asserted against Conexant for utilizing the intellectual
property rights of others in certain of the Company's products. The resolution
of these matters may entail the negotiation of a license agreement, a
settlement, or the resolution of such claims through arbitration or litigation.
In September 1995, Celeritas Technologies, Ltd., filed suit against
Rockwell, in the U.S. District Court for the Central District of California, for
patent infringement, misappropriation of trade secrets, and breach of contract
relating to cellular telephone data transmission technology utilized in certain
modem products produced by the Company. In July 1997, the Court entered a
judgment awarding damages of $57 million, plus interest. On July 20, 1998, the
U.S. Court of Appeals for the Federal Circuit affirmed the trial court's
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
judgment based on breach of contract. As of September 30, 1998, $65 million was
reserved for this matter. During the first fiscal quarter of 1999, Rockwell
contributed $64 million into an escrow account related to this judgment which
was subsequently paid to Celeritas on February 11, 1999, in final settlement of
the judgment. The remaining $1 million of this liability was paid directly by
Rockwell and recorded as additional-paid-in-capital, and the corresponding $65
million liability was eliminated.
On October 14, 1997, Brent Townshend ("Townshend") filed suit against
Rockwell and Conexant in the Superior Court of California for San Mateo County
seeking an injunction to halt the sale of products containing Conexant's
K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant
had engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information allegedly
disclosed in confidence by Mr. Townshend to accelerate its development of 56
Kbps modem technology. In January 1999, Townshend dismissed his State Court
action and re-filed the same claims and three new claims for patent infringement
in the U.S. District Court for the Northern District of California. In the
Federal action, Townshend alleges that each of his patents (the "Townshend
Patents") covers certain aspects of the V.90 standard and are infringed by
Conexant's 56 Kbps products. In the Federal action, Townshend seeks injunctive
relief, compensatory damages, restitution and exemplary and punitive damages.
Townshend and 3Com Corporation had publicly announced that 3Com was the
exclusive licensee for the Townshend Patents and acted as Townshend's agent in
sublicensing the Townshend Patents to third parties. More recently, Townshend
and 3Com publicly announced that Townshend has reacquired exclusive control over
the licensing and enforcement of the patents as well as other ownership rights,
while 3Com retained a non-exclusive license to practice the Townshend
inventions. Conexant has filed its answer to Townshend and counterclaims against
Townshend and claims against 3Com. Conexant is vigorously defending its position
that it independently developed the 56 Kbps modem technology using entirely its
own skills and public domain information and will vigorously contest the
infringement claims and the validity of the asserted patents. Various other
lawsuits, claims and proceedings have been or may be instituted or asserted
against Rockwell or Conexant or their respective subsidiaries, including those
pertaining to product liability, intellectual property, environmental, safety
and health, and employment matters.
In connection with the Distribution, Conexant assumed responsibility for
all contingent liabilities and current and future litigation (including
environmental and intellectual property proceedings) against Rockwell or its
subsidiaries in respect of Semiconductor Systems.
The outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to Conexant. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
Conexant. Based on its evaluation of matters which are pending or asserted and
taking into account Conexant's reserves for such matters, management of Conexant
believes the disposition of such matters will not have a material adverse effect
on the financial condition or results of operations of Conexant.
Environmental Matters
Conexant has been designated as a potentially responsible party ("PRP") at
one Superfund site located at a former silicon wafer manufacturing facility and
steel fabrication plant in Parker Ford, Pennsylvania formerly occupied by the
Company. The site was also formerly occupied by Recticon Corporation and Allied
Steel Products Corporation, each also named as a PRP and each of which is
insolvent. The remediation plan for the site includes installation of a public
water supply line and a groundwater pump and treatment system, as well as
routine groundwater sampling. Management estimates the total costs for the
remediation of this Superfund site to be approximately $4 million and has
accrued for these costs as of September 30, 1999.
In addition, the Company is engaged in two other remediations of
groundwater contamination at its Newport Beach and Newbury Park, California
facilities. Management currently estimates the total costs for
56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these remediations to be approximately $4 million and has also accrued for these
costs as of September 30, 1999.
NOTE 13. RELATED PARTY TRANSACTIONS
Prior to the Distribution, Rockwell provided certain management services
that were allocated based on sales in proportion to total Rockwell sales.
Subsequent to the Distribution, Rockwell provided certain services to the
Company, including payroll and employee benefits administration, data processing
and telecommunications services, and research and development activities under
the terms of a transition agreement. Costs for these services and programs are
billed to Conexant based on actual usage and are included in Conexant's
Consolidated Statements of Operations. Management believes that the methods of
billing these costs are reasonable. These costs totaled approximately $10
million, $23 million and $19 million in fiscal 1999, 1998, and 1997,
respectively.
Prior to the Distribution, Rockwell also provided management services to
Conexant, including corporate oversight, financial, legal, tax, corporate
communications, and human resources. The costs of providing these services have
been allocated to Conexant based on sales in proportion to total Rockwell sales
and are included in selling, general and administrative expense in the
Consolidated Statements of Operations. These costs totaled approximately $2
million, $12 million, and $11 million in fiscal 1999, 1998, and 1997,
respectively.
Prior to the Distribution, Conexant's U.S. and certain of its non-U.S.
operations participated in Rockwell's centralized cash management systems which
managed all of Conexant's cash receipt and disbursement activities. Accordingly,
the consolidated financial statements exclude debt and interest income and
expense in countries with centralized cash management systems. Accounts payable
include approximately $20 million as of September 30, 1998 related to
outstanding checks drawn on U.S. centralized disbursement accounts.
NOTE 14. SEGMENT AND OTHER INFORMATION
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1999. The new standard revises the way operating segments
are reported. The Company operates and tracks its results in one operating
segment. The Company is engaged in research, development, and manufacture of
semiconductor products and systems for communications electronics markets such
as personal computers, network access devices, wireless communications products,
digital information and entertainment products and personal imaging devices. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS 131.
Enterprise-wide information is provided in accordance with SFAS 131.
Geographical revenue information is based on the origin of the sales. Long-lived
assets consist of property, plant and equipment. Property, plant and equipment
information is based on the physical location of the assets at the end of each
fiscal year.
NET REVENUES BY GEOGRAPHIC AREA OF ORIGIN
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.................................. $1,173,259 $ 952,374 $1,118,348
Asia-Pacific................................... 141,369 99,702 162,771
Europe......................................... 129,486 148,155 131,206
---------- ---------- ----------
Total net revenues................... $1,444,114 $1,200,231 $1,412,325
========== ========== ==========
</TABLE>
57
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
United States sales include export sales to unaffiliated customers of
approximately $606 million, $457 million, and $456 million in fiscal 1999, 1998,
and 1997, respectively. Substantially all export sales are to the Asia-Pacific
region.
NET LONG-LIVED ASSETS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
United States............................................... $693,962 $683,989
Asia-Pacific................................................ 2,453 2,516
Europe...................................................... 2,290 2,693
Other....................................................... 24,308 24,202
-------- --------
Total net long-lived assets....................... $723,013 $713,400
======== ========
</TABLE>
Other Information
NET REVENUES BY PLATFORM
The following table summarizes the net revenues of the Company's five
product platforms for the three years ended September 30, 1999 (dollars are in
thousands and percentages are expressed as a percentage of total net revenues):
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Personal Computing...................... $ 626,534 43% $ 639,925 53% $ 861,242 61%
Network Access.......................... 277,613 19% 143,270 12% 192,836 14%
Wireless Communications................. 266,553 19% 170,381 14% 115,599 8%
Digital Infotainment.................... 183,522 13% 144,600 12% 111,795 8%
Personal Imaging........................ 89,892 6% 102,055 9% 130,853 9%
---------- --- ---------- --- ---------- ---
Total net revenues............ $1,444,114 100% $1,200,231 100% $1,412,325 100%
========== === ========== === ========== ===
</TABLE>
58
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for the years ended September 30 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FISCAL 1999
Net revenues................................... $452,174 $380,330 $316,932 $294,678
Cost of goods sold............................. 243,707 216,114 186,677 216,754
Special charges................................ -- -- -- 37,906
Net income (loss).............................. 38,045 24,390 7,617 (57,123)
Basic net income per share..................... 0.19 0.13 0.04 --
Diluted net income per share................... 0.18(1) 0.12 0.04 --
Proforma basic net loss per share.............. -- -- -- (0.30)
Proforma diluted net loss per share............ -- -- -- (0.30)
FISCAL 1998
Net revenues................................... 264,731 277,807 274,241 383,452
Cost of goods sold............................. 348,362 183,497 152,611 203,381
Special charges................................ 147,306 -- -- --
Net (loss) income.............................. (233,753) (33,418) (15,611) 20,566
Proforma basic net (loss) income per share..... (1.23) (0.17) (0.08) 0.10
Proforma diluted net (loss) income per share... (1.23) (0.17) (0.08) 0.10
</TABLE>
Certain reclassification entries have been made to provide consistency.
- ---------------
(1) Diluted net income per share for the fourth quarter of fiscal 1999 includes
the effect of the convertible subordinated notes of approximately 15.2
million shares as its effect is dilutive.
59
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareowners of
Conexant Systems, Inc.
We have audited the accompanying consolidated balance sheets of Conexant
Systems, Inc. and subsidiaries and its predecessor, Semiconductor Systems, Inc.,
representing the semiconductor business of Rockwell International Corporation
and subsidiaries (the "Company") as of September 30, 1999 and 1998, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries at September 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
October 29, 1999
60
<PAGE> 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file its definitive Proxy Statement for the Annual
Meeting of Shareowners to be held on February 10, 2000 pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Directors' Compensation"
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Distribution, Rockwell and the Company entered into
several agreements, including agreements relating to services to be provided by
Rockwell to the Company following the Distribution, the allocation of
liabilities and obligations with respect to taxes, employee benefit plans and
compensation arrangements, and other matters. At the time these agreements were
negotiated and executed, certain of the Company's directors and executive
officers also served as directors or executive officers of Rockwell. The Company
believes the terms of these agreements to be reasonable.
Additional information required by this Item is incorporated by reference
to the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company for the
fiscal year ended September 30, 1999 are included herewith:
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, Consolidated Statements of
Shareholders' Equity, Notes to Consolidated Financial Statements, and
Report of Deloitte & Touche LLP, Independent Auditors
(2) SUPPLEMENTAL SCHEDULES
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements or
notes thereto.
(3) EXHIBITS
(a):
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
3-a-1 Restated Certificate of Incorporation of the Company, filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (Registration No. 333-68755), is incorporated
herein by reference.
3-a-2 Amended By-Laws of the Company, filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated January 12, 1999,
is incorporated herein by reference.
4-a-1 Rights Agreement, dated as of November 30, 1998, by and
between the Company and ChaseMellon Shareholder Services,
L.L.C., as rights agent, filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-68755), is incorporated herein by reference.
4-b-1 Indenture, dated as of May 1, 1999, between the Company and
The First National Bank of Chicago, as trustee, including
the form of the Company's 4 1/4% Convertible Subordinated
Notes Due May 1, 2006 attached as Exhibit A thereto, filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-3 (Registration No. 333-82399), is incorporated
herein by reference.
4-c-1 Registration Rights Agreement, dated as of May 12, 1999, by
and among the Company and Morgan Stanley & Co. Incorporated,
Credit Suisse First Boston Corporation and Lehman Brothers,
Inc., filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-82399), is
incorporated herein by reference.
10-a-1 Credit Agreement dated as of December 21, 1998 among the
Company, the Lenders named therein and Credit Suisse First
Boston, as Administrative Agent and Collateral Agent, filed
as Exhibit 2.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998, is
incorporated herein by reference.
10-a-2 First Amendment to Loan Documents dated as of June 11, 1999
among the Company, certain of its subsidiaries, the Lenders
and the Issuing Banks thereunder, and Credit Suisse First
Boston, as administrative agent, filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, is incorporated herein by reference.
10-a-3 Second Amendment to Loan Documents dated as of September 17,
1999 among the Company, certain of its subsidiaries, the
Lenders and the Issuing Banks thereunder, and Credit Suisse
First Boston, as administrative agent.
</TABLE>
62
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
10-a-4 Third Amendment to Loan Documents dated as of October 20,
1999 among the Company, certain of its subsidiaries, the
Lenders and the Issuing Banks thereunder, and Credit Suisse
First Boston, as administrative agent.
*10-b-1 Conexant Systems, Inc. 1998 Stock Option Plan, filed as
Exhibit 10.6 to the Company's Registration Statement on Form
10 (File No. 000-24923), is incorporated herein by
reference.
*10-b-2 Copy of resolution of the Board of Directors of the Company,
adopted March 1, 1999, amending the Company's 1998 Stock
Option Plan.
*10-b-3 Forms of Stock Option Agreements under Rockwell's 1988
Long-Term O Incentives Plan for options granted prior to May
1, 1992, filed as Exhibit 10-d-2 to Rockwell's Annual Report
on Form 10-K for the year ended September 30, 1988 (File No.
1-1035), are incorporated herein by reference.
*10-b-4 Forms of Stock Option and Stock Appreciation Rights
Agreements under Rockwell's 1988 Long-Term Incentives Plan
for options and stock appreciation rights granted prior to
May 1, 1992, filed as Exhibit 10-d-3 to Rockwell's Annual
Report on Form 10-K for the year ended September 30, 1988
(File No. 1-1035), are incorporated herein by reference.
*10-b-5 Form of Stock Option Agreement under Rockwell's 1988
Long-Term Incentives Plan for options granted after May 1,
1992 and prior to March 1, 1993, filed as Exhibit 28-a-1 to
Rockwell's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 1-1035), is incorporated
herein by reference.
*10-b-6 Forms of Stock Option Agreements under Rockwell's 1988
Long-Term Incentives Plan for options granted after March 1,
1993 and prior to November 1, 1993, filed as Exhibit 28-a to
Rockwell's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993 (File No. 1-1035), are incorporated
herein by reference.
*10-b-7 Forms of Stock Option Agreements under Rockwell's 1988
Long-Term Incentives Plan for options granted after November
1, 1993 and prior to December 1, 1994, filed as Exhibit
10-d-6 to Rockwell's Annual Report on Form 10-K for the year
ended September 30, 1993 (File No. 1-1035), are incorporated
herein by reference.
*10-b-8 Forms of Stock Option Agreements under Rockwell's 1988
Long-Term Incentives Plan for options granted after December
1, 1994, filed as Exhibit 10-d-7 to Rockwell's Annual Report
on Form 10-K for the year ended September 30, 1994 (File No.
1-1035), are incorporated herein by reference.
*10-b-9 Forms of Stock Option Agreements under Rockwell's 1995
Long-Term Incentives Plan for options granted prior to
December 3, 1997, filed as Exhibit 10-e-2 to Rockwell's
Annual Report on Form 10-K for the year ended September 30,
1994 (File No. 1-1035), are incorporated herein by
reference.
*10-b-10 Forms of Stock Option Agreements under Rockwell's 1995
Long-Term Incentives Plan for options granted between
December 3, 1997 and August 31, 1998, filed as Exhibit
10-b-3 to Rockwell's Annual Report on Form 10-K for the year
ended September 30, 1998 (File No. 1-12383), are
incorporated herein by reference.
*10-b-11 Form of Stock Option Agreement under Rockwell's 1995
Long-Term Incentives Plan for options granted on April 23,
1998, filed as Exhibit 10-b-4 to Rockwell's Annual Report on
Form 10-K for the year ended September 30, 1998 (File No.
1-12383), is incorporated herein by reference.
*10-b-12 Form of Stock Option Agreement under Rockwell's 1995
Long-Term Incentives Plan for options granted on August 31,
1998, filed as Exhibit 10-b-5 to Rockwell's Annual Report on
Form 10-K for the year ended September 30, 1998 (File No.
1-12383), is incorporated herein by reference.
*10-b-13 Form of Stock Option Agreement under Rockwell's Directors
Stock Plan, filed as Exhibit 10-d to Rockwell's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996
(File No. 1-1035), is incorporated herein by reference.
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
*10-b-14 Copy of resolution of the Board of Directors of Rockwell,
adopted November 6, 1996, adjusting outstanding awards under
Rockwell's (i) 1988 Long-Term Incentives Plan, (ii) 1995
Long-Term Incentives Plan and (iii) Directors Stock Plan,
filed as Exhibit 4-g-2 to Rockwell's Registration Statement
on Form S-8 (Registration No. 333-17055), is incorporated
herein by reference.
*10-b-15 Copy of resolution of the Board of Directors of Rockwell,
adopted September 3, 1997, adjusting outstanding awards
under Rockwell's (i) 1988 Long-Term Incentives Plan, (ii)
1995 Long-Term Incentives Plan and (iii) Directors Stock
Plan, filed as Exhibit 10-e-3 to Rockwell's Annual Report on
Form 10-K for the year ended September 30, 1997 (File No.
1-12383), is incorporated herein by reference.
*10-b-16 Copy of resolution of the Board of Directors of Rockwell,
adopted December 2, 1998, assigning to the Company
outstanding options to purchase shares of Company Common
Stock, filed as Exhibit 4.f.4 to the Company's Registration
Statement on Form S-3 (Registration No. 333-70085), is
incorporated herein by reference.
*10-b-17 Copy of resolution of the Board of Directors of the Company,
adopted November 30, 1998, assuming outstanding options to
purchase shares of Company Common Stock, filed as Exhibit
4.f.5 to the Company's Registration Statement on Form S-3
(Registration No. 333-70085), is incorporated herein by
reference.
*10-c-1 Conexant Systems, Inc. 1999 Long-Term Incentives Plan, filed
as Exhibit 10.1 to the Company's Registration Statement on
Form 10 (File No. 000-24923), is incorporated herein by
reference.
*10-c-2 Copy of resolution of the Board of Directors of the Company,
adopted April 20, 1999, amending the Company's 1999
Long-Term Incentives Plan.
*10-c-3 Form of Stock Option Agreement under the Company's 1999
Long-Term Incentives Plan, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, is incorporated herein by reference.
*10-c-4 Form of Restricted Stock Agreement (Performance Vesting)
under the Company's 1999 Long-Term Incentives Plan, filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, is incorporated herein
by reference.
*10-c-5 Form of Restricted Stock Agreement (Time Vesting) under the
Company's 1999 Long-Term Incentives Plan, filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by
reference.
*10-c-6 Copy of resolutions of the Board of Directors of the
Company, adopted July 2, 1999, accelerating the vesting of
certain outstanding restricted stock awards under the
Company's 1999 Long-Term Incentives Plan to October 1, 1999,
subject to the satisfaction of certain conditions precedent.
*10-c-7 Copy of resolutions of the Board of Directors of the
Company, adopted September 8, 1999, approving the repurchase
by the Company of shares of Common Stock from certain
executives and employees of the Company or loans to such
executives or employees, in each case, in an amount
sufficient to pay the required withholding tax in connection
with the acceleration of the vesting of certain outstanding
restricted stock awards under the Company's 1999 Long-Term
Incentives Plan.
*10-c-8 Copy of resolution of the Special Committee of the Board of
Directors of the Company, adopted September 22, 1999,
determining that the conditions precedent to the
acceleration of the vesting of certain outstanding
restricted stock awards under the Company's 1999 Long-Term
Incentives Plan have been satisfied.
*10-c-9 Copy of resolution of the Board of Directors of the Company,
adopted September 13, 1999, approving a stock dividend at
the rate of one additional share of common stock for each
share of common stock issued and outstanding (or held in the
treasury of the Company) payable to shareowners of record at
the close of business on September 24, 1999 (the "Record
Date") and to be distributed on October 29, 1999.
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
*10-d-1 Conexant Systems, Inc. Retirement Savings Plan, filed as
Exhibit 4.5 to the Company's Registration Statement on Form
S-8 (Registration No. 333-68755), is incorporated herein by
reference.
*10-e-1 Copy of resolutions of the Board of Directors of the
Company, adopted August 13, 1999 amending, among other
things, the Company's 1999 Long-Term Incentives Plan and the
Company's Retirement Savings Plan.
*10-f-1 Conexant Systems, Inc. Directors Stock Plan, filed as
Exhibit 10.2 to the Company's Registration Statement on Form
10 (File No. 000-24923), is incorporated herein by
reference.
*10-g-1 Employment Agreement dated December 15, 1998 between the
Company and B.S. Iyer, filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, is incorporated herein by
reference.
*10-g-2 Schedule identifying agreements substantially identical to
the Employment Agreement constituting Exhibit 10-g-1 hereto
entered into by the Company with M.M. Beguwala, L.C.
Brewster, A.C. D'Augustine, T.L. Ellis, R.Y. Halim, D.E.
O'Reilly, A. Rangan, F.M. Rhodes, J.P. Spoto, T.A. Stites,
K.V. Strong and W.C. Tipton, filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, is incorporated herein by
reference.
*10-g-3 Employment Agreement dated December 15, 1998 between the
Company and D.W. Decker, filed as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, is incorporated herein by
reference.
10-h-1 Distribution Agreement dated as of December 31, 1998 by and
between the Company and Rockwell International Corporation,
filed as Exhibit 2.1 to the Company's Current Report on Form
8-K dated January 12, 1999, is incorporated herein by
reference.
10-i-1 Amended and Restated Employee Matters Agreement dated as of
December 31, 1998 by and between the Company and Rockwell
International Corporation, filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K dated January 12, 1999,
is incorporated herein by reference.
10-j-1 Tax Allocation Agreement dated as of December 31, 1998 by
and between the Company and Rockwell International
Corporation, filed as Exhibit 2.3 to the Company's Current
Report on Form 8-K dated January 12, 1999, is incorporated
herein by reference.
12 Computation of Ratios.
21 List of Subsidiaries of the Company.
23 Independent Auditors' Consent.
24 Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K
dated September 13, 1999, in respect of the Company's press release reporting
the declaration on September 13, 1999 of a two-for-one stock split in the form
of a stock dividend at the rate of one additional share of Common Stock for each
share of Common Stock issued and outstanding, payable on October 29, 1999 to
shareowners of record at the close of business on September 24, 1999. (Items 5
and 7(c)).
(c) EXHIBITS
See subsection (a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See subsection (a) (1) and (2) above.
65
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newport Beach, State of California, on this 6th day of December, 1999.
CONEXANT SYSTEMS, INC.
By: /s/ DWIGHT W. DECKER
------------------------------------
Dwight W. Decker,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 6th day of December, 1999 by the
following persons on behalf of the Registrant and in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DWIGHT W. DECKER Chief Executive Officer and Chairman
- ------------------------------------------ of the Board of Directors
Dwight W. Decker (Principal Executive Officer)
BALAKRISHNAN S. IYER* Senior Vice President and Chief
- ------------------------------------------ Financial Officer
Balakrishnan S. Iyer (Principal Financial Officer)
STEVEN M. THOMSON* Vice President and Controller
- ------------------------------------------ (Principal Accounting Officer)
Steven M. Thomson
F. CRAIG FARRILL* Director
- ------------------------------------------
F. Craig Farrill
DONALD R. BEALL* Director
- ------------------------------------------
Donald R. Beall
JERRE L. STEAD* Director
- ------------------------------------------
Jerre L. Stead
RICHARD M. BRESSLER* Director
- ------------------------------------------
Richard M. Bressler
</TABLE>
*By: /s/ DWIGHT W. DECKER
-------------------------------
Dwight W. Decker,
Attorney-in-Fact**
**By authority of the power of
attorney filed as Exhibit 24
hereto.
66
<PAGE> 67
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET CHARGE
BALANCE AT (CREDIT) TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 1999
Allowance for doubtful accounts............... $ 8,975 $ 3,745 $ 3,062(a) $ 9,658
Allowance for excess and obsolete
inventory................................ $105,708 $10,067 $51,193(b) $ 64,582
Year ended September 30, 1998
Allowance for doubtful accounts............. $ 10,102 $ 2,408 $ 3,535(a) $ 8,975
Allowance for excess and obsolete
inventory................................ $ 65,553 $67,069 $26,914(b) $105,708
Year ended September 30, 1997
Allowance for doubtful accounts............. $ 25,346 $(8,792) $ 6,452(a) $ 10,102
Allowance for excess and obsolete
inventory................................ $ 87,763 $(2,402) $19,808(b) $ 65,553
</TABLE>
- ---------------
(a) Primarily uncollectible accounts receivable written off during the year.
(b) Inventory disposed of during the year.
67
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<S> <C>
10-a-3 Second Amendment to Loan Documents dated as of September 17,
1999 among the Company, certain of its subsidiaries, the
Lenders and the Issuing Banks thereunder, and Credit Suisse
First Boston, as administrative agent.
10-a-4 Third Amendment to Loan Documents dated as of October 20,
1999 among the Company, certain of its subsidiaries, the
Lenders and the Issuing Banks thereunder, and Credit Suisse
First Boston, as administrative agent.
*10-b-2 Copy of resolution of the Board of Directors of the Company,
adopted March 1, 1999, amending the Company's 1998 Stock
Option Plan.
*10-c-2 Copy of resolution of the Board of Directors of the Company,
adopted April 20, 1999, amending the Company's 1999
Long-Term Incentives Plan.
*10-c-6 Copy of resolutions of the Board of Directors of the
Company, adopted July 2, 1999, accelerating the vesting of
certain outstanding restricted stock awards under the
Company's 1999 Long-Term Incentives Plan to October 1, 1999,
subject to the satisfaction of certain conditions precedent.
*10-c-7 Copy of resolutions of the Board of Directors of the
Company, adopted September 8, 1999, approving the repurchase
by the Company of shares of Common Stock from certain
executives and employees of the Company or loans to such
executives or employees, in each case, in an amount
sufficient to pay the required withholding tax in connection
with the acceleration of the vesting of certain outstanding
restricted stock awards under the Company's 1999 Long-Term
Incentives Plan.
*10-c-8 Copy of resolution of the Special Committee of the Board of
Directors of the Company, adopted September 22, 1999,
determining that the conditions precedent to the
acceleration of the vesting of certain outstanding
restricted stock awards under the Company's 1999 Long-Term
Incentives Plan have been satisfied.
*10-c-9 Copy of resolution of the Board of Directors of the Company,
adopted September 13, 1999, approving a stock dividend at
the rate of one additional share of common stock for each
share of common stock issued and outstanding (or held in the
treasury of the Company) payable to shareowners of record at
the close of business on September 24, 1999 (the "Record
Date") and to be distributed on October 29, 1999.
*10-e-1 Copy of resolutions of the Board of Directors of the
Company, adopted September 13, 1999 amending, among other
things, the Company's 1999 Long-Term Incentives Plan and the
Company's Retirement Savings Plan.
12 Computation of Ratios.
21 List of Subsidiaries of the Company.
23 Independent Auditors' Consent.
24 Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 10-a-3
SECOND AMENDMENT TO LOAN DOCUMENTS
THIS SECOND AMENDMENT ("Amendment"), dated as of September 17, 1999, is
entered into by and among Conexant Systems, Inc., (the "Company"), each of the
Subsidiaries party to the Credit Agreement (as defined below) as of the date
hereof (the "Borrower Subsidiaries" and together with the Company, each a
"Borrower" and collectively, the "Borrowers"), the Lenders party to the Credit
Agreement, the Issuing Bank (as defined in the Credit Agreement) and Credit
Suisse First Boston, a bank organized under the laws of Switzerland, acting
through its New York branch, as administrative agent (in such capacity, the
"Administrative Agent") and as collateral agent for the Lenders (in such
capacity, the "Collateral Agent", and together with the Administrative Agent,
the "Agents").
RECITALS
A. The Borrowers, Lenders, the Issuing Bank and the Agents are parties
to a certain Credit Agreement dated as of December 21, 1998 (as amended prior to
the date hereof, the "Credit Agreement") pursuant to which the Lenders have
agreed to extend credit to the Borrower.
B. The Company has requested that the Lenders amend certain provisions
of the Credit Agreement, the Pledge Agreement and the Security Agreement.
C. The parties are willing to amend and modify the Credit Agreement,
the Pledge Agreement and the Security Agreement subject to the terms and
conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement, as amended.
<PAGE> 2
2. AMENDMENTS OF CREDIT AGREEMENT; WAIVER.
2.1 SEC Filings. Section 5.4(d) of the Credit Agreement is amended to
read in its entirety as follows:
"(d) promptly after the same become publicly available, copies of
all periodic and other reports, proxy statements and other materials
filed by the Company or any Subsidiary with the SEC, or with any
national securities exchange, or distributed to its shareholders, as
the case may be; provided, however, that, unless otherwise requested
under Section 5.4(e), the Company shall not be required to furnish
copies of any prospectus supplement filed in respect of, or
post-effective amendment of, the Company's Registration Statement on
Form S-3 (Registration No. 333-82399) if such prospectus supplement or
post-effective amendment is filed solely to amend or supplement
information concerning any matter under the headings "Selling
Securityholders" or "Plan of Distribution" set forth in such
Registration Statement or in any other prospectus supplement relating
to, or post-effective amendment of, such Registration Statement;"
2.2 Stock Plan Loans. Section 6.4(b)(iii) is amended to read in its
entirety as follows:
"(iii) loans and advances to officers and employees in the
ordinary course of business, consistent with past practice, and loans
and advances to participants in any stock-based benefit plan of the
Company or any Subsidiary of the Company, which loan or advance is made
pursuant to or in connection with any such plan;"
2.3 Investment of Net Cash Proceeds. Section 6.4(b)(xi) is amended to
read in its entirety as follows:
"(xi) Investments made with the Net Cash Proceeds from issuance
of equity securities or Convertible Debt of the Company (x) within six
months of receipt of such Net Cash Proceeds or (y) within eighteen
months of receipt of such Net Cash Proceeds if within six months of
such receipt (1) the Company has a binding commitment to make such
Investment within such eighteen month period subject only to the
satisfaction of closing conditions normal and customary for the type of
Investment to be made or to the satisfaction of post-closing conditions
for such Investment, including any earnout, escrow, reserve, deferred
payment or contingent purchase price payment provisions, as the
Company, in its reasonable discretion, may consider necessary or
appropriate for the Investment to be made and (2) the Company has
furnished to the Administrative Agent written notice of any such
Investment which notice identifies the Investment to be made and the
aggregate amount of Net Cash Proceeds to be used to make such
Investment; provided that such issuance is made in connection with and
for the express purpose of making the specific Investment then being
made or committed to be made;"
2
<PAGE> 3
2.4 Waiver of SEC Filings. Any Default or Event of Default that may
exist on or before the Closing Date (as defined below) solely as a result of the
failure to furnish any prospectus supplement relating to, or post-effective
amendment of, the Registration Statement referred to in Section 2.1 of this
Amendment, to the extent and only to the extent that the Company would not have
been required to furnish such prospectus supplement or post-effective amendment
if this Amendment had been in effect at the time such materials were filed with
the SEC, is hereby waived.
3. AMENDMENTS OF SECURITY DOCUMENTS.
3.1 No Pledge of Employee Notes. Section 1.1(b) of the Pledge Agreement
is amended to read in its entirety as follows:
"(b)(i) the debt securities listed opposite the name of the Pledgor on
Schedule II hereto, (ii) any debt securities in the future issued to
the Pledgor and (iii) the promissory notes and any other instruments
evidencing such debt securities (the "Pledged Debt Securities");
provided, however, that Pledged Debt Securities shall not include any
debt securities, promissory notes or other instruments evidencing debt
that may be issued to the Pledgor or held by the Pledgor in connection
with any loans or advances of the type referred to in Section
6.4(b)(iii) of the Credit Agreement;"
3.2 Exclusion of Employee Loans from Collateral. The definition of
"Excluded Property" in Section 1.2 of the Security Agreement is amended by (x)
deleting, in the first sentence of that definition, the words "and (v)" and (y)
inserting, in lieu thereof, the following:
(v) any right, title or interest of the Grantor in, to or under any
loans or advances of the type referred to in Section 6.4(b)(iii) of the
Credit Agreement (including (1) any debt securities, promissory notes
or other instruments evidencing debt that may be issued to the Grantor
or held by the Grantor in connection with any such loans or advances
and (2) any setoff right or collateral security that may be granted or
issued to or held by the Grantor in connection with any such loans or
advances and (3) any cash or non-cash proceeds of any such loans or
advances), and (vi)"
3
<PAGE> 4
4. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and
warrant to the Administrative Agent and the Lenders as follows:
(a) No Default or Event of Default has occurred and is continuing
after giving effect to this Amendment.
(b) The execution, delivery and performance by the Borrowers of this
Amendment has been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person in order to be effective and enforceable.
Each of the Credit Agreement, the Pledge Agreement and the Security Agreement,
as amended by this Amendment, constitutes the legal, valid and binding
obligation of the Borrowers parties thereto, enforceable against them in
accordance with its terms.
(c) All representations and warranties of the Borrowers contained in
the Credit Agreement and in the other Loan Documents are true and correct in all
material respects as of the date hereof with the same effect as though made on
the date hereof and as though applied to the Credit Agreement, the Pledge
Agreement and the Security Agreement, as herein amended, except to the extent
such representations and warranties expressly relate to an earlier date.
(d) The Borrowers are entering into this Amendment on the basis of
their own investigation and for their own reasons, without reliance upon the
Agents, the Lenders or any other Person.
5. EFFECTIVENESS DATE. This Amendment shall become effective as of the
date (the "Closing Date") as of which the Administrative Agent shall have
received, in form and substance satisfactory to the Administrative Agent,
counterparts (or if elected by the Administrative Agent, an executed facsimile
copy) of (i) this Amendment executed by the Required Lenders, the Borrowers and
the Agents and (ii) the Guarantor Acknowledgment and Consent annexed to this
Amendment, executed by each of the Guarantors.
6. RESERVATION OF RIGHTS. The Borrowers acknowledge and agree that the
execution and delivery by the Agents and the Lenders of this Amendment, shall
not be deemed (i) to create a course of dealing or otherwise obligate the Agents
or the Lenders to
4
<PAGE> 5
forbear or execute similar amendments under the same or similar circumstances in
the future, or (ii) to amend, relinquish or impair any right of the Agents or
the Lenders to receive any indemnity or similar payment from any Person or
entity as a result of any matter arising from or relating to this Amendment.
7. MISCELLANEOUS.
(a) Except as herein amended, all terms, covenants and provisions of
the Credit Agreement, the Pledge Agreement and the Security Agreement are and
shall remain in full force and effect and all references therein to the Credit
Agreement, the Pledge Agreement and the Security Agreement shall henceforth
refer to the Credit Agreement, the Pledge Agreement and the Security Agreement,
as amended by this Amendment. This Amendment shall be deemed incorporated into,
and a part of, the Credit Agreement, the Pledge Agreement and the Security
Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. No third party
beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of New York, without regard to the conflict of laws
principles thereof.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the
Administrative Agent of a facsimile transmitted document purportedly bearing the
signature of a Lender or a Borrower shall bind such Lender or such Borrower,
respectively, with the same force and effect as the delivery of a hard copy
original. Any failure by the Administrative Agent to receive the hard copy
executed original of such document shall not diminish the binding effect of
receipt of the facsimile transmitted executed original of such document of the
party whose hard copy page was not received by the Administrative Agent.
(e) This Amendment, together with the Credit Agreement and the other
Loan Documents, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein. This
Amendment supersedes all prior drafts and communications with respect thereto.
This Amendment may not be amended except in accordance with the provisions of
Section 9.8 of the Credit Agreement.
5
<PAGE> 6
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or of
the Credit Agreement, the Pledge Agreement and the Security Agreement.
(g) The Borrowers covenant to pay to or reimburse the Administrative
Agent, upon demand, for all reasonable costs and expenses (including costs of
its outside legal counsel and allocated costs of in-house counsel) actually
incurred by the Administrative Agent in connection with the development,
preparation, negotiation, execution and delivery of this Amendment.
(h) The Borrowers (and each Guarantor by execution of the
Acknowledgement) confirm that the Security Documents secure the Obligations
under the Credit Agreement, the Pledge Agreement and the Security Agreement as
amended by this Amendment. Each Guarantor by execution of the Acknowledgement
confirms that the benefit of such Guarantor's Company Guarantee Agreement or
Subsidiary Guarantee Agreement, as applicable, applies to all Obligations under
the Credit Agreement, the Pledge Agreement and the Security Agreement as amended
by this Amendment.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
CONEXANT SYSTEMS, INC.
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Vice President and Treasurer
CONEXANT SYSTEMS FRANCE S.A.S.
By: /s/ Marc Ugolini
-----------------------------------
Name: Marc Ugolini
Title: Director of Finance &
Administration, Europe
CONEXANT SYSTEMS U.K. LIMITED
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Treasurer
CONEXANT SYSTEMS HOLDINGS LIMITED
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Treasurer
7
<PAGE> 8
CREDIT SUISSE FIRST BOSTON,
as a Lender, Issuing Bank,
Administrative Agent, Collateral Agent
and Swingline Lender
By: /s/ Chris T. Horgan
-----------------------------------
Name: Chris T. Horgan
Title: Vice President
By: /s/ Kristin Lepri
-----------------------------------
Name: Kristin Lepri
Title: Associate
UNION BANK OF CALIFORNIA, N.A.
as a Lender
By: /s/ Glenn Leyrer
-----------------------------------
Name: Glenn Leyrer
Title: Vice President
BANK POLSKA KASA OPIEKI, S.A.-PEKAO
S.A. GROUP, NEW YORK BRANCH,
as a Lender
By: /s/ Hussein B. El-Tawil
-----------------------------------
Name: Hussein B. El-Tawil
Title: Vice President
8
<PAGE> 9
BANQUE NATIONALE DE PARIS, as a Lender
By: /s/ C. Bettles
-----------------------------------
Name: C. Bettles
Title: Senior Vice President &
Manager
By: /s/ Tjalling Terpstra
-----------------------------------
Name: Tjalling Terpstra
Title: Vice President
COMERICA WEST INCORPORATED, as a Lender
By: /s/ Emmanuel M. Skevofilax
-----------------------------------
Name: Emmanuel M. Skevofilax
Title: Vice President
BANK ONE, N.A.
(formerly known as The First National
Bank of Chicago), as a Lender
By: /s/ Mark A. Isley
-----------------------------------
Name: Mark A. Isley
Title: First Vice President
9
<PAGE> 10
KEYBANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Mary K. Young
-----------------------------------
Name: Mary K. Young
Title: Assistant Vice President
NATIONAL BANK OF CANADA, as a Lender
By: /s/ David W. Shaw
-----------------------------------
Name: David W. Shaw
Title: Vice President
By: /s/ David L. Mortensen
-----------------------------------
Name: David L. Mortensen
Title: Assistant Vice President
TRANSAMERICA COMMERCIAL FINANCE
CORPORATION, as a Lender
By: /s/ Mark Wrend
-----------------------------------
Name: Mark Wrend
Title: Vice President
10
<PAGE> 11
CHIAO TUNG BANK, as a Lender
By: /s/ Mike Chiu
-----------------------------------
Name: Mike Chiu
Title: Senior Vice President &
General Manager
HAMILTON BANK, as a Lender
By: /s/ Hector F. Ramirez
-----------------------------------
Name: Hector F. Ramirez
Title: Senior Vice President
By: /s/ Adolfo D. Martinez
-----------------------------------
Name: Adolfo D. Martinez
Title: Senior Vice President
IBM CREDIT CORPORATION, as a Lender
By:
-----------------------------------
Name:
Title:
11
<PAGE> 12
UBS AG, STAMFORD BRANCH, as a Lender
By: /s/ Robert H. Riley III
-----------------------------------
Name: Robert H. Riley III
Title: Executive Director
By: /s/ Wilfred Saint
-----------------------------------
Name: Wilfred Saint
Title: Associate Director
Loan Portfolio Support, US
12
<PAGE> 13
GUARANTOR ACKNOWLEDGMENT AND CONSENT
The undersigned, each a guarantor or third party pledgor with respect
to the Borrowers' obligations to the Agents and the Lenders under the Credit
Agreement, each hereby (i) acknowledges and consents to the execution, delivery
and performance by the Company and the Borrower Subsidiaries of the foregoing
Second Amendment to Credit Agreement ("Amendment"), and (ii) reaffirm and agree
that the respective guaranty, pledge agreement or security agreement to which
the undersigned is party and all other documents and agreements executed and
delivered by the undersigned to the Administrative Agent or the Collateral Agent
and the Lenders in connection with the Credit Agreement are in full force and
effect, without defense, offset or counterclaim. (Capitalized terms used herein
have the meanings specified in the Amendment.)
GUARANTORS
CONEXANT SYSTEMS, INC.
CONEXANT SYSTEMS WORLDWIDE, INC.
BROOKTREE CORPORATION
BROOKTREE WORLDWIDE SALES CORPORATION
By: /s/ Kerry K. Petry
---------------------------------
Name: Kerry K. Petry
Title: Treasurer
September 17, 1999
13
<PAGE> 1
EXHIBIT 10-a-4
THIRD AMENDMENT TO LOAN DOCUMENTS
THIS THIRD AMENDMENT ("Amendment"), dated as of October 20, 1999, is
entered into by and among Conexant Systems, Inc., (the "Company"), each of the
Subsidiaries party to the Credit Agreement (as defined below) as of the date
hereof (the "Borrower Subsidiaries" and together with the Company, each a
"Borrower" and collectively, the "Borrowers"), the Lenders party to the Credit
Agreement, the Issuing Bank (as defined in the Credit Agreement) and Credit
Suisse First Boston, a bank organized under the laws of Switzerland, acting
through its New York branch, as administrative agent (in such capacity, the
"Administrative Agent") and as collateral agent for the Lenders (in such
capacity, the "Collateral Agent", and together with the Administrative Agent,
the "Agents").
RECITALS
A. The Borrowers, Lenders, the Issuing Bank and the Agents are parties
to a certain Credit Agreement dated as of December 21, 1998 (as amended prior to
the date hereof, the "Credit Agreement") pursuant to which the Lenders have
agreed to extend credit to the Borrower.
B. The Company has requested that the Lenders amend certain provisions
of the Credit Agreement.
C. The parties are willing to amend and modify the Credit Agreement
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement, as amended.
2. AMENDMENT OF CREDIT AGREEMENT.
2.1 Investments. Section 6.4(b)(xiii)(z) of the Credit Agreement is
amended by substituting "$100,000,000" for "$35,000,000".
3. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and
warrant to the Administrative Agent and the Lenders as follows:
(a) No Default or Event of Default has occurred and is continuing
after giving effect to this Amendment.
<PAGE> 2
(b) The execution, delivery and performance by the Borrowers of this
Amendment has been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person in order to be effective and enforceable. The
Credit Agreement, as amended by this Amendment, constitutes the legal, valid and
binding obligation of the Borrowers parties thereto, enforceable against them in
accordance with its terms.
(c) All representations and warranties of the Borrowers contained in
the Credit Agreement and in the other Loan Documents are true and correct in all
material respects as of the date hereof with the same effect as though made on
the date hereof and as though applied to the Credit Agreement as herein amended,
except to the extent such representations and warranties expressly relate to an
earlier date.
(d) The Borrowers are entering into this Amendment on the basis of
their own investigation and for their own reasons, without reliance upon the
Agents, the Lenders or any other Person.
4. EFFECTIVENESS DATE. This Amendment shall become effective as of the
date (the "Closing Date") as of which the Administrative Agent shall have
received, in form and substance satisfactory to the Administrative Agent,
counterparts (or if elected by the Administrative Agent, an executed facsimile
copy) of this Amendment executed by the Required Lenders, the Borrowers and the
Agents.
5. RESERVATION OF RIGHTS. The Borrowers acknowledge and agree that the
execution and delivery by the Agents and the Lenders of this Amendment, shall
not be deemed (i) to create a course of dealing or otherwise obligate the Agents
or the Lenders to forbear or execute similar amendments under the same or
similar circumstances in the future, or (ii) to amend, relinquish or impair any
right of the Agents or the Lenders to receive any indemnity or similar payment
from any Person or entity as a result of any matter arising from or relating to
this Amendment.
6. MISCELLANEOUS.
(a) Except as herein amended, all terms, covenants and provisions of
the Credit Agreement are and shall remain in full force and effect and all
references therein to the Credit Agreement shall henceforth refer to the Credit
Agreement as amended by this Amendment. This Amendment shall be deemed
incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. No third party
beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of New York.
2
<PAGE> 3
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the
Administrative Agent of a facsimile transmitted document purportedly bearing the
signature of a Lender or a Borrower shall bind such Lender or such Borrower,
respectively, with the same force and effect as the delivery of a hard copy
original. Any failure by the Administrative Agent to receive the hard copy
executed original of such document shall not diminish the binding effect of
receipt of the facsimile transmitted executed original of such document of the
party whose hard copy page was not received by the Administrative Agent.
(e) This Amendment, together with the Credit Agreement and the other
Loan Documents, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein. This
Amendment supersedes all prior drafts and communications with respect thereto.
This Amendment may not be amended except in accordance with the provisions of
Section 9.8 of the Credit Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or of
the Credit Agreement, the Pledge Agreement and the Security Agreement.
(g) The Borrowers covenant to pay to or reimburse the Administrative
Agent, upon demand, for all reasonable costs and expenses (including costs of
its outside legal counsel and allocated costs of in-house counsel) actually
incurred by the Administrative Agent in connection with the development,
preparation, negotiation, execution and delivery of this Amendment.
(h) The Borrowers (and each Guarantor by execution of the
Acknowledgement) confirm that the Security Documents secure the Obligations
under the Credit Agreement as amended by this Amendment. Each Guarantor by
execution of the Acknowledgement confirms that the benefit of such Guarantor's
Company Guarantee Agreement or Subsidiary Guarantee Agreement, as applicable,
applies to all Obligations under the Credit Agreement as amended by this
Amendment.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
CONEXANT SYSTEMS, INC.
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Vice President and Treasurer
CONEXANT SYSTEMS FRANCE S.A.S.
By: /s/ Marc Ugolini
-----------------------------------
Name: Marc Ugolini
Title: Director, Fe A Europe
CONEXANT SYSTEMS U.K. LIMITED
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Treasurer
CONEXANT SYSTEMS HOLDINGS LIMITED
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Treasurer
4
<PAGE> 5
CREDIT SUISSE FIRST BOSTON, as a
Lender, Issuing Bank, Administrative
Agent, Collateral Agent and Swingline
Lender
By: /s/ Chris T. Horgan
-----------------------------------
Name: Chris T. Horgan
Title: Vice President
By: /s/ Robert Hetu
-----------------------------------
Name: Robert Hetu
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
as a Lender
By: /s/ Glenn Leyrer
-----------------------------------
Name: Glenn Leyrer
Title: Vice President
BANK POLSKA KASA OPIEKI, S.A.-PEKAO
S.A. GROUP, NEW YORK BRANCH,
as a Lender
By: /s/ Hussein B. El-Tawil
-----------------------------------
Name: Hussein B. El-Tawil
Title: Vice President
5
<PAGE> 6
BANQUE NATIONALE DE PARIS, as a Lender
By: /s/ Tjalling Terpstra
-----------------------------------
Name: Tjalling Terpstra
Title: Vice President
By: /s/ Janice Ho
-----------------------------------
Name: Janice Ho
Title: Vice President
COMERICA WEST INCORPORATED, as a Lender
By: /s/ Emmanuel M. Skevofilax
-----------------------------------
Name: Emmanuel M. Skevofilax
Title: Vice President
BANK ONE, NA
(f/k/a THE FIRST NATIONAL BANK OF
CHICAGO), as a Lender
By: /s/ Mark A. Isley
-----------------------------------
Name: Mark A. Isley
Title: First Vice President
KEYBANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Mary K. Young
-----------------------------------
Name: Mary K. Young
Title:
6
<PAGE> 7
NATIONAL BANK OF CANADA, as a Lender
By: /s/ David W. Shaw
-----------------------------------
Name: David W. Shaw
Title: Vice President
By: /s/ David L. Mortensen
-----------------------------------
Name: David L. Mortensen
Title: Assistant Vice President
TRANSAMERICA COMMERCIAL FINANCE
CORPORATION, as a Lender
By:
-----------------------------------
Name:
Title:
CHIAO TUNG BANK, as a Lender
By: /s/ Mike Chiu
-----------------------------------
Name: Mike Chiu
Title: Senior Vice President &
General Manager
7
<PAGE> 8
HAMILTON BANK, as a Lender
By: /s/ Hector F. Ramirez
----------------------------------
Name: Hector F. Ramirez
Title: Senior Vice President,
Hamilton Bank, N.A.
By: /s/ Adolfo D. Martinez
----------------------------------
Name: Adolfo D. Martinez
Title: Senior Vice President,
Hamilton Bank, N.A.
IBM CREDIT CORPORATION, as a Lender
By: /s/ Tracey Wyatt
-----------------------------------
Name: Tracey Wyatt
Title: Region Operations Manager
UBS AG, STAMFORD BRANCH, as a Lender
By: /s/ Robert H. Riley III
----------------------------------
Name: Robert H. Riley III
Title: Executive Director
By: /s/ Winfred Saint
----------------------------------
Name: Winfred Saint
Title: Associate Director, Loan
Portfolio Support, US
8
<PAGE> 9
GUARANTOR ACKNOWLEDGMENT AND CONSENT
The undersigned, each a guarantor or third party pledgor with respect
to the Borrowers' obligations to the Agents and the Lenders under the Credit
Agreement, each hereby (i) acknowledges and consents to the execution, delivery
and performance by the Company and the Borrower Subsidiaries of the foregoing
Third Amendment to Credit Agreement ("Amendment"), and (ii) reaffirm and agree
that the respective guaranty, pledge agreement or security agreement to which
the undersigned is party and all other documents and agreements executed and
delivered by the undersigned to the Administrative Agent or the Collateral Agent
and the Lenders in connection with the Credit Agreement are in full force and
effect, without defense, offset or counterclaim. (Capitalized terms used herein
have the meanings specified in the Amendment.)
GUARANTORS
CONEXANT SYSTEMS, INC.
CONEXANT SYSTEMS WORLDWIDE, INC.
BROOKTREE CORPORATION
BROOKTREE WORLDWIDE SALES CORPORATION
By: /s/ Kerry K. Petry
-----------------------------------
Name: Kerry K. Petry
Title: Treasurer
October 20, 1999
9
<PAGE> 1
EXHIBIT 10-b-2
MARCH 1, 1999
AMENDMENTS TO 1998 STOCK OPTION PLAN
Upon motion duly made and seconded, Mr. Bressler abstaining, the following
resolution was adopted:
RESOLVED, that the amendments to the Conexant Systems, Inc.
1998 Stock Option Plan as described in the document entitled
"Memorandum of Proposed Amendments to Conexant Systems, Inc. 1998 Stock
Option Plan", a copy of which was presented to, and ordered filed with
the supporting records for, this meeting, be, and they hereby are,
approved and adopted effective immediately.
<PAGE> 2
EXHIBIT 10-b-2
MEMORANDUM OF PROPOSED AMENDMENTS TO
CONEXANT SYSTEMS, INC. 1998 STOCK OPTION PLAN
It is proposed to amend the Conexant Systems, Inc. 1998 Stock Option
Plan (the "Plan"), including to clarify the terms of options issued thereunder
to any director of Conexant Systems, Inc. ("Conexant") who was not also a
director of Rockwell International Corporation ("Rockwell") at the time of the
spin-off of Conexant by Rockwell.
New matter is set forth in underscored italics and deleted matter is
lined through.
1. Amend subsection 2(e) to read in its entirety as follows:
e. Committee. The Compensation and Management Development Committee
designated by the Board of Directors from among its members.
2. Amend subsection 2(q) to read in its entirety as follows:
q. Non-Employee Director. A present or former Non-Employee Director
of Rockwell (other than a person who was a director of Conexant but not
also a director of Rockwell on the Conexant Distribution Date).
3. Amend subsection 2(r) to read in its entirety as follows:
r. Participant. (i) Any Employee (a Continuing USA Participant) as
of the close of business on May 31, 1996 who then held one or more
outstanding Rockwell Options and who on or before the close of business
on the Merger Closing Date became an employee of United Space Alliance,
LLC (USA) immediately upon termination of employment (by retirement or
otherwise) by Rockwell or a subsidiary corporation of Rockwell, but
only for purposes of determining such an Employee's rights with respect
to his or her outstanding Conexant Options and only so long as such
Employee shall remain an employee of USA and Boeing North American,
Boeing or any of their respective subsidiaries shall continue to own at
least 50% of the total ownership interests in USA; (ii) any Employee (a
Continuing
<PAGE> 3
Boeing Participant) as of the opening of business on the Merger
Closing Date who then held one or more outstanding Rockwell Options and
who as of the close of business on that date remained or became an
employee of Boeing North American, Boeing or any of their respective
subsidiaries, but only for purposes of determining such an Employee's
rights with respect to his or her outstanding Conexant Options and only
so long as such Employee shall remain an employee of Boeing North
American, Boeing, or any of their respective subsidiaries; (iii) any
Employee (a Continuing Meritor Participant) as of the opening of
business on the Meritor Distribution Date who then held one or more
outstanding Rockwell Options and who as of the close of business on
that date remained or became an employee of Meritor or any of its
subsidiaries, but only for purposes of determining such an Employee's
rights with respect to his or her outstanding Conexant Options and only
so long as such an Employee shall remain an employee of Meritor or any
of its subsidiaries; (iv) any Employee (or any director of Conexant who
was not also a director of Rockwell on the Conexant Distribution Date)
(a Continuing Conexant Participant) as of the opening of business on
the Conexant Distribution Date who then held one or more outstanding
Rockwell Options and who as of the close of business on that date
remains or becomes an employee of Conexant or any of its subsidiaries
(or a director of Conexant), but only for purposes of determining such
an Employee's (or director's) rights with respect to his or her
outstanding Conexant Options and only so long as such an Employee shall
remain an employee of Conexant or any of its subsidiaries (or a
director of Conexant); and (v) any other person (a Continuing Rockwell
Participant) who on the Conexant Distribution Date held one or more
outstanding Rockwell Options, but only for purposes of determining the
rights of such a person with respect to his or her outstanding Conexant
Options and only so long as such person (or his or her legatees, heirs
or permitted assigns) shall remain entitled to exercise the Rockwell
Options from which his or her Conexant Options are derived.
4. Amend subsection 4(a) to read in its entirety as follows:
a. If the employment by Rockwell or any of its subsidiaries of a
Continuing Rockwell Participant, the service as a director of
2
<PAGE> 4
Rockwell of any Non-Employee Director, the employment by USA of a
Continuing USA Participant, the employment by Boeing North American,
Boeing or any of their respective subsidiaries of a Continuing Boeing
Participant, the employment by Meritor or any of its subsidiaries of a
Continuing Meritor Participant or the employment by Conexant or any of
it subsidiaries (or the service as a director of Conexant) of a
Continuing Conexant Participant who (or whose permitted transferee)
holds any outstanding Conexant Options terminates by reason of the
death of the Participant, the Conexant Options not theretofore
exercised may be exercised from and after the date of the death of the
Participant for a period of three years (or until the expiration date
specified in the Rockwell Option from which the Conexant Option is
derived, if earlier) even if any of them was not exercisable at the
date of death.
5. Amend Section 4 by adding thereto a new subsection 4(e) as follows:
e. If a Continuing Conexant Participant who was a director of
Conexant but not also a director of Rockwell on the Conexant
Distribution Date who (or whose permitted transferee) holds outstanding
Conexant Options retires as a director of Conexant after attaining age
72 or completing an aggregate of ten years of service as a director of
Rockwell or of Conexant whether or not any portion of those Conexant
Options was exercisable at the date of retirement, the Conexant Options
not theretofore exercised may be exercised from and after the date upon
which they are first exercisable under the terms thereof for a period
of five years from the date of retirement (or until the expiration date
specified in the terms thereof, if earlier) even if any of them was not
exercisable at the date of retirement.
3
<PAGE> 1
EXHIBIT 10-c-2
APRIL 20, 1999
AMENDMENT OF 1999 LONG-TERM INCENTIVES PLAN
D. E. O'Reilly discussed the benefits to the Company of amending the 1999
Long-Term Incentives Plan to allow the grant of stock options to persons not
employed by the Company.
Upon motion duly made and seconded, the following resolution was
adopted:
RESOLVED, that the amendments to the Conexant Systems, Inc. 1999
Long-Term Incentives Plan as described in the document entitled
"Memorandum of Proposed Amendments to Conexant Systems, Inc. 1999
Long-Term Incentives Plan", a copy of which was presented to, and
ordered filed with the supporting records for, this meeting, be, and
they hereby are, approved and adopted effective immediately.
<PAGE> 2
EXHIBIT 10-c-2
MEMORANDUM OF PROPOSED AMENDMENTS TO
CONEXANT SYSTEMS, INC. 1999 LONG-TERM INCENTIVES PLAN
It is proposed to amend the Conexant Systems, Inc. 1999 Long-Term
Incentives Plan (the "Plan") to provide for the grant of non-qualified stock
option awards to prospective employees, contractors and consultants of Conexant
Systems, Inc. and its subsidiaries.
New matter is set forth in underscored italics and deleted matter is
lined through.
1. Amend Section 1 to read in its entirety as follows:
Section 1: Purpose
The purpose of the Plan is to provide incentive compensation to
officers, executives and other employees, and prospective employees,
contractors and consultants of the Corporation and its Subsidiaries; to
attract and retain individuals of outstanding ability; and to align the
interests of such officers, executives and other employees, and
prospective employees, contractors and consultants with the interests
of the Corporation's shareowners.
2. Amend Section 2 by adding thereto a definition of "Non-Employee"
after the definition of "Incentive Stock Option" as follows:
"Non-Employee" means an individual who (1) has been extended an offer
of employment with the Corporation or a Subsidiary but who has not yet
accepted said offer and become an Employee or (2) performs consulting,
contracting or other services for the Corporation or a Subsidiary other
than in a capacity as an Employee or who has been extended an offer to
perform consulting, contracting or other services for the Corporation
or a Subsidiary.
<PAGE> 3
3. Amend the definition of "Participant" in Section 2 to read in its
entirety as follows:
"Participant" means any Employee or Non-Employee who has been granted
an Award pursuant to this Plan.
4. Amend Section 3 to read in its entirety as follows:
Section 3: Eligibility
Persons eligible for Awards shall consist of Employees and
Non-Employees who hold or are proposed to hold positions of significant
responsibility with the Corporation and/or a Subsidiary or whose
performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Corporation and/or a
Subsidiary. Notwithstanding the foregoing, only Employees will be
eligible for Awards of Incentive Stock Options and/or Restricted Stock
under this Plan.
5. Amend the first sentence of Subsection 4(a) to read in its entirety
as follows:
A Non-qualified Stock Option is an Award to an Employee or Non-Employee
in the form of an option to purchase a specific number of shares of
Stock exercisable at such time or times, and during such specified time
not to exceed ten (10) years, as the Committee may determine, at a
price not less than 100% of the Fair Market Value of the Stock on the
date the option is granted.
6. Amend the first sentence of Subsection 4(b) to read in its entirety
as follows:
An Incentive Stock Option is an Award to an Employee in the form of an
option to purchase a specified number of shares of Stock that complies
with the requirements of Code Section 422, which option shall, subject
to the following provisions, be exercisable at such time or times, and
during such specified time, as the Committee may determine.
2
<PAGE> 4
7. Amend the first sentence of Subsection 4(c) to read in its entirety
as follows:
Restricted Stock is an Award of Stock that is issued to an Employee
subject to restrictions on transfer and such other restrictions on
incidents of ownership as the Committee may determine.
8. Amend the second sentence of Subsection 5(a) to read in its entirety
as follows:
No single Participant shall receive, in any one calendar year, Awards
which, over any three-year period exceed a per-year average of (i)
500,000 stock options, whether Non-qualified Stock Options or (in the
case of Employees only) Incentive Stock Options and (ii) 100,000 shares
of (in the case of Employees only) Restricted Stock.
9. Amend the first paragraph of Section 6 to read in its entirety as
follows:
Each Award under the Plan shall be evidenced by an Award Agreement.
Each Award Agreement shall set forth the number of shares of Stock
subject to the Award and shall include the terms set forth below and
such other terms and conditions applicable to the Award, as determined
by the Committee, not inconsistent with the terms of the Plan.
Notwithstanding the foregoing, the provisions of subsection (b) below
may be modified to the extent deemed advisable by the Committee in
Award Agreements pertaining to Non-Employees providing consulting,
contracting or other services to the Corporation or a Subsidiary. In
the event of any conflict between an Award Agreement and this Plan, the
terms of the Plan shall govern.
10. Amend the last sentence of Subsection 8(a) to read in its entirety
as follows:
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among Employees and Non-Employees who
receive, or who are eligible to receive, Awards under the Plan, whether
or not such persons are similarly situated.
3
<PAGE> 5
11. Amend Subsection 11(e) to read in its entirety as follows:
e. Rights of Employees and Non-Employees. Status as an eligible
Employee or Non-Employee shall not be construed as a commitment
that any Award shall be made under this Plan to such eligible
Employee or Non-Employee or to eligible Employees or
Non-Employees generally. Nothing contained in this Plan or in
any Award Agreement shall confer upon any Employee or
Non-Employee any right to continue in the employ or other
service of or, in the case of prospective employees, become
employed by the Corporation or a Subsidiary or constitute any
contract or limit in any way the right of the Corporation or a
Subsidiary to change such person's compensation or other
benefits or, in the case of prospective employees, prospective
compensation or benefits or to terminate the employment or other
service or, in the case of prospective employees, withdraw an
offer of employment of such person with or without Cause.
4
<PAGE> 1
EXHIBIT 10-C-6
CONEXANT SYSTEMS, INC.
UNANIMOUS WRITTEN CONSENT
OF
BOARD OF DIRECTORS
The undersigned, being all the members of the Board of Directors of
Conexant Systems, Inc., a Delaware corporation (the "Company"), do hereby
consent in writing, pursuant to Section 141(f) of the Delaware General
Corporation Law and the Company's By-Laws, to the taking of the action embodied
in the following resolutions, effective as of July 2, 1999 and do further hereby
direct the Secretary of the Company to file this Consent with the minutes of the
proceedings of the Board of Directors:
ACCELERATION OF RESTRICTED STOCK GRANTS
WHEREAS, this Board of Directors at a special meeting held on June
30, 1999 reviewed the performance of the Company for fiscal year 1999 to
date and concurred that based on such performance, it is in the best
interests of the Company and its shareowners to accelerate the earning of
all shares of restricted stock of the Company issued to employees or new
hires under the Company's 1999 Long-Term Incentives Plan (the "Plan")
pursuant to the Company's Horizons, ICP, Key Contributor, and MBO programs
for fiscal year 1999, subject to the satisfaction of certain conditions
set forth below; and
WHEREAS, the directors acknowledge that D.W. Decker has a financial
interest in the actions effected by this Consent as to certain shares of
restricted stock granted to him under the Plan and that Mr. Decker is
executing this Consent insofar as it pertains to his shares of restricted
stock only because Section 141(f) of the Delaware General Corporation Law
and the Company's By-Laws require that action by written consent be taken
by all directors of the Company;
NOW, THEREFORE, BE IT RESOLVED, that in accordance with Section 7 of
the Plan, each outstanding award of restricted stock granted to employees
of the Company under the Plan pursuant to the Company's Horizons, ICP, Key
Contributor, and MBO programs for fiscal 1999 (and expressly excluding
awards of restricted stock outside of such programs, such as special
awards for purposes of employee retention and other special awards outside
of such programs) be, and it hereby is, amended such that the Restricted
Shares (as defined in the award agreement relating thereto) shall be
deemed to have been earned on the earlier of (a) October 1, 1999; (b) such
employee's death or Disability; or (c) a Change of Control (as such
capitalized terms are defined in the Plan); provided, however, that the
forfeiture provisions of each such award agreement will continue to apply;
and, provided, further, that as determined by this Board of Directors or
by the committee of this Board, established pursuant to the next following
resolution, the following objectives shall have been met for the third and
fourth fiscal quarters:
(i) the Company shall have maintained its key customer
relations; and
<PAGE> 2
(ii) during each of the three month periods ended July 2, 1999 and
October 1, 1999, the Company's revenues shall have equaled or
exceeded revenues in each of the preceding three-month periods;
and further
(iii) during each of the three month periods ended July 2, 1999 and
October 1, 1999, the Company's profitability shall have exceeded
the profitability in each of the preceding three month periods;
RESOLVED, that pursuant to Article IV, Section 1 of the Company's
By-Laws and Section 141 of the Delaware General Corporation Law, D.W.
Decker and D.R. Beall be, and they hereby are, appointed as a committee of
the Board of Directors (the "Committee") with full authority and power,
pursuant to the Plan, to determine on or before October 1, 1999 whether the
conditions set forth in the second proviso of the immediately preceding
resolution have been substantially satisfied for purposes of the
effectiveness of the amendment of outstanding awards of Restricted Shares
set forth therein; provided, however, that the Committee shall report such
determination made pursuant to this resolution to the Board of Directors at
its first meeting following such determination, and further
RESOLVED, that the officers and the Assistant Secretaries of the
Company be, and each of them hereby is, authorized and empowered, in the
name and on behalf of the Company, to take or cause to be taken such other
actions as any of them may deem appropriate to carry out the purpose and
intent of the foregoing resolutions.
This Unanimous Written Consent may be executed in several counterparts
with the same effect as if the signatures were shown on one document.
Dated: July 2, 1999
/s/ D. R. BEALL /s/ R. M. BRESSLER
- ----------------------------------- -----------------------------------
D. R. Beall R. M. Bressler
/s/ F. C. FARRILL /s/ J. L. STEAD
- ----------------------------------- -----------------------------------
F. C. Farrill J. L. Stead
/s/ D. W. DECKER
- -----------------------------------
D. W. Decker
2
<PAGE> 1
EXHIBIT 10-c-7
SEPTEMBER 8, 1999
ACCELERATION OF VESTING OF RESTRICTED STOCK -- REPURCHASE OF RESTRICTED SHARES
AND LOANS TO OFFICERS
D. Decker updated the Board on the acceleration of the vesting of certain of the
Company's restricted common stock and noted that the restriction would lapse
during a period of time in which company officers and certain other "insiders"
were precluded from selling any shares on the public market. After discussion
and upon motion duly made and seconded, it was approved unanimously:
WHEREAS, this Board of Directors adopted resolutions effective
July 2, 1999 (the "July 2 Resolutions") providing for the acceleration
of the earning of all shares of restricted Common Stock of the Company
issued to employees or new hires under the Company's 1999 Long-Term
Incentives Plan pursuant to the Company's Horizons, ICP, Key
Contributor and MBO programs for fiscal year 1999 (the "Restricted
Shares") whereby the Restricted Shares will be earned on October 1,
1999 upon the satisfaction of the conditions set forth in the July 2
Resolutions, as determined by this Board of Directors or by the
committee of this Board established pursuant to the July 2 Resolutions
(the "Acceleration"); and
WHEREAS, the holders of the Restricted Shares will be subject to
withholding tax with respect to such Restricted Shares upon such
Restricted Shares being earned; and
WHEREAS, in order to facilitate the payment of such withholding
taxes by certain executive officers and employees of the Company (who
are set forth on Exhibit A attached hereto) who are subject to certain
restrictions on their ability to resell shares of Common Stock of the
Company ("Insiders"), including the Restricted Shares, the Company
desires (i) to purchase from each such Insider up to that number of
Restricted Shares which shall yield proceeds to such Insider sufficient
to pay taxes required to be withheld by law with respect to such
Restricted Shares when such Restricted Shares are earned, at a price
per share equal to the average of the daily sale prices of the
Company's Common Stock over a five-day period to be determined by
Credit Suisse First Boston Corporation and (ii) to make a loan to each
such Insider who does not sell such Restricted Shares to the Company or
otherwise tender funds sufficient to pay the withholding tax with
respect to such Insider's Restricted Shares, which loan shall be in the
principal amount required to yield proceeds to such Insider sufficient
to pay taxes required to be withheld by law with respect to such
Restricted Shares when such Restricted Shares are earned and shall be
secured by all such Insider's Restricted Shares; and
<PAGE> 2
WHEREAS, this Board of Directors acknowledges that such
repurchases of Restricted Shares by the Company will not impair the
capital of the Company; and
WHEREAS, in the judgment of this Board of Directors, such loans
to the Insiders may reasonably be expected to benefit the Company; and
WHEREAS, the directors acknowledge that D.W. Decker has a
financial interest in the actions effected by this Consent as to
certain Restricted Shares granted to him and that Mr. Decker is
executing this Consent insofar as it pertains to his Restricted Shares
only because Section 141(f) of the Delaware General Corporation Law and
the Company's By-Laws require that action by written consent be taken
by all directors of the Company;
NOW, THEREFORE, BE IT RESOLVED, that in connection with the
Acceleration, the Company be, and it hereby is, authorized and
empowered to repurchase from each Insider up to that number of
Restricted Shares which shall yield proceeds to such Insider sufficient
to pay taxes required to be withheld by law with respect to such
Restricted Shares when such Restricted Shares are earned, at a price
per share equal to the average of the daily sale prices of the
Company's Common Stock over a five-day period to be determined by
Credit Suisse First Boston Corporation; the consideration to be paid by
the Company for such Restricted Shares to be paid from the surplus of
the Company; and further
RESOLVED, that shares of the Company's Common Stock acquired by
the Company pursuant to the immediately preceding resolution be held in
the Treasury of the Company; and further
RESOLVED, that in connection with the Acceleration and in
accordance with Article VI, Section 2 of the Company's By-Laws and
Section 143 of the Delaware General Corporation Law, the Company be,
and it hereby is, authorized and empowered to make a loan to each
Insider who does not sell Restricted Shares to the Company or otherwise
tender funds sufficient to pay the withholding tax with respect to such
Insider's Restricted Shares, which loan shall (i) be in the principal
amount required to yield proceeds to such Insider sufficient to pay
taxes required to be withheld by law with respect to such Restricted
Shares when such Restricted Shares are earned, (ii) be secured by all
such Insider's Restricted Shares, (iii) bear interest at a rate per
annum not less than the then applicable Short-Term Applicable Federal
Rate under Section 1274(d) of the Internal Revenue Code on the date of
the loan and (iv) be due and payable not later than the earliest to
occur of (A) any sale of such Insider's Restricted Shares, (B) 10 days
following the termination of such Insider's employment with the Company
for any reason and (C) October 1, 2000; and further
2
<PAGE> 3
RESOLVED, that each of (i) the form of promissory note (the
"Note") attached hereto as Exhibit B to be executed by each Insider
receiving the loan referred to in the preceding resolution and (ii) the
form of pledge agreement (the "Pledge Agreement") attached hereto as
Exhibit C to be executed by each Insider receiving the loan referred to
in the preceding resolution and securing such Insider's Restricted
Shares, be, and each of them hereby is, approved and adopted and that
the officers of the Company be, and each of them hereby is, authorized
and empowered, in the name and on behalf of the Company, to accept
Notes and Pledge Agreements executed by such Insiders in substantially
such forms, with such omissions or insertions therein as may be
approved by the officer accepting the same, such officer's acceptance
thereof to be conclusive evidence of such approval; and further
RESOLVED, that the officers and the Assistant Secretaries of
the Company be, and each of them hereby is, authorized, in the name and
on behalf of the Company, to take or cause to be taken such other
actions and to execute and deliver, or cause to be executed and
delivered, such instruments, certificates and other documents as any of
them may deem appropriate to carry out the purpose and intent of the
foregoing resolutions.
3
<PAGE> 1
EXHIBIT 10-c-8
CONEXANT SYSTEMS, INC.
UNANIMOUS WRITTEN CONSENT
OF
SPECIAL COMMITTEE
OF
BOARD OF DIRECTORS
The undersigned, being all of the members of the Special Committee of
the Board of Directors of Conexant Systems, Inc., a Delaware Corporation (the
"Company"), appointed by action of the Board of Directors taken on July 2, 1999,
do hereby consent in writing, pursuant to Section 141(f) of the Delaware General
Corporation Law and the Company's By-Laws, to the taking of action embodied in
the following resolutions, effective as of September 22, 1999 and do further
hereby direct the Secretary of the Company to file this Consent with the minutes
of the proceedings of the Board of Directors:
WHEREAS, the Board of Directors by unanimous written consent
dated July 2, 1999 (the "July 2 Consent") in accordance with Section 7
of the Company's 1999 Long-Term Incentives Plan (the "Plan")
accelerated the earning of all shares of restricted stock of the
Company issued to employees or new hires under the Plan pursuant to the
Company's Horizons, ICP, Key Contributor and MBO programs for fiscal
year 1999 (and expressly excluding awards of restricted stock outside
of such programs, such as special awards for purposes of employee
retention and other special awards outside of such programs) (the
"Restricted Shares"), subject to the satisfaction of certain objectives
set forth in the July 2 Consent;
WHEREAS, the Board of Directors pursuant to the July 2 Consent
appointed this Special Committee to determine whether such objectives
shall have been met for the third and fourth fiscal quarters of 1999
and to report such determination to the Board of Directors at its first
meeting following such determination; and
WHEREAS, this Special Committee has been provided with an
internal memo from D. W. Decker, Chairman and Chief Executive Officer;
and a second internal memo from L. Brewster, Senior Vice President of
Worldwide Sales detailing the rationale for successful completion of
the three conditions set forth in the July 2 Consent;
<PAGE> 2
NOW, THEREFORE, BE IT RESOLVED, that this Special Committee
hereby determines that the following conditions set forth in the July 2
Consent have been substantially satisfied for purposes of the
effectiveness of the amendment of outstanding awards of Restricted
Shares in accordance with the Plan for the third and fourth fiscal
quarters of 1999:
(i) the Company has maintained its key customer relations;
and
(ii) during each of the three-month periods ending July 2,
1999 and October 1, 1999, the Company's revenues have equaled or
exceeded revenues in each of the preceding three-month periods;
and
(iii) during each of the three-month periods ended July 2,
1999 and October 1, 1999, the Company's profitability has
exceeded the profitability in each of the preceding three-month
periods; and further
RESOLVED, that this Special Committee shall report the
determination set forth in the immediately preceding resolution to the
Board of Directors at its next meeting; and further
RESOLVED, that the officers and the Assistant Secretaries of the
Company be, and each of them hereby is, authorized, in the name and on
behalf of the Company, to take or cause to be taken such other actions
as any of them may deem appropriate to carry out the purpose and intent
of the foregoing resolutions.
This Unanimous Written Consent may be executed in several counterparts
with the same effect as if the signatures were shown on one document.
Dated: September 22, 1999
/s/ D. R. BEALL
------------------------------
D. R. Beall
/s/ D. W. DECKER
------------------------------
D. W. Decker
2
<PAGE> 1
EXHIBIT 10-c-9
CONEXANT SYSTEMS, INC.
UNANIMOUS WRITTEN CONSENT
OF
BOARD OF DIRECTORS
The undersigned, being all the members of the Board of Directors of
Conexant Systems, Inc., a Delaware corporation (the "Company"), do hereby
consent in writing, pursuant to Section 141(f) of the Delaware General
Corporation Law and the Company's By-Laws, to the taking of the action embodied
in the following resolutions, effective as of Monday, September 13, 1999 and do
further hereby direct the Secretary of the Company to file this Consent with
the minutes of the proceedings of the Board of Directors:
WHEREAS, on August 13, 1999 the Board of Directors appointed a
Dividend Committee to monitor market conditions and to declare a stock
dividend if deemed appropriate;
WHEREAS, said Committee took no action and the Board of Directors now
prefers to adopt resolutions pertaining to a stock dividend by Unanimous
Written Consent; and
WHEREAS, the Company has available a sufficient number of authorized
but unissued shares of common stock and sufficient available funds to
declare a dividend of one share per share on the common stock of this
Company;
THEREFORE, BE IT RESOLVED, that the Dividend Committee of the Board,
appointed at its August 13, 1999, regularly scheduled meeting, is hereby
dissolved;
RESOLVED FURTHER, that a stock dividend (the "Stock Dividend") is
hereby declared on the Common Stock of the Company at the rate of one
additional share of Common Stock for each share of Common Stock issued and
outstanding (or held in the treasury of the Company) payable to shareowners
of record at the close of business on September 24, 1999 (the "Record
Date") and to be distributed on October 29, 1999;
RESOLVED FURTHER, that there be delivered with each share of Common
Stock issued pursuant to the Stock Dividend with respect to any share of
Common Stock issued and outstanding on the Record Date one Preferred Share
Purchase Right (a "Right") upon the terms and conditions set forth in the
Rights Agreement dated as of November 30, 1998 (the "Rights Agreement")
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent;
RESOLVED FURTHER, that for each share of Common Stock issued pursuant
to the Stock Dividend, the surplus account of the Company (designated
"Additional paid-in capital" on the books of the Company) shall be charged
with, and the Common Stock account of the Company shall be credited with,
$1.00 per share;
<PAGE> 2
RESOLVED FURTHER, that ChaseMellon Shareholder Services, L.L.C., as
Transfer Agent and Registrar for the Common Stock, be, and it hereby is,
authorized and directed (i) as soon as practicable after the time the Stock
Dividend shall have become payable, (a) to issue and record in its records,
as such Transfer Agent and Registrar, in the name of each holder of Common
Stock of record on the Record Date (including the Company as holder of
record of treasury shares, if any), that number of shares of Common Stock
equal to the number of shares of Common Stock held by such holder of record
as of the close of business on the Record Date and (b) if any shares of
Common Stock held by such holder of record are represented by a certificate
or certificates, to sign as such Transfer Agent and Registrar a certificate
or certificates for such number of additional shares of Common Stock and
(ii) as soon as practicable after the Stock Dividend shall have been paid,
to mail to each registered holder of Common Stock on the Record Date an
account statement indicating the number of additional shares of Common
Stock issued to such holder pursuant to the Stock Dividend and/or such
additional certificate or certificates representing the number of
additional shares of Common Stock issued to such holder pursuant to the
Stock Dividend, addressed to such holder at such holder's address as it
appears on its records;
RESOLVED FURTHER, that, upon the Stock Dividend being paid, the
authority heretofore granted to ChaseMellon Shareholder Services, L.L.C. as
Transfer Agent and Registrar for the Common Stock, be, and it hereby is,
extended to include all shares of Common Stock issued in connection with
the Stock Dividend;
RESOLVED FURTHER, that, upon the Stock Dividend being paid and in
order to adjust for the dilution due to such dividend of Common Stock, the
Company reserve and set aside such additional full number of shares of
Common Stock (from its authorized but unissued shares of Common Stock, or
from treasury shares, if any, as appropriate) as are necessary for delivery
upon (i) exercise of stock options granted under the 1998 Stock Option Plan
of the Company, (ii) exercise of stock options and payment of restricted
stock awards granted under the 1999 Long-Term Incentives Plan of the
Company, (iii) exercise of stock options granted under the Directors Stock
Plan of the Company and the payment of restricted stock in lieu of cash
retainer fees under such plan, (iv) purchases made under the 1999 Employee
Stock Purchase Plan of the Company, (v) purchases made under the 1999
Non-Qualified Employee Stock Purchase Plan of the Company and (vi)
conversion of the Company's outstanding 4-1/4% Convertible Subordinated
Notes Due May 1, 2006;
RESOLVED FURTHER, that, upon the Stock Dividend being paid,
appropriate adjustments shall be made to (i) the conversion price
applicable to the conversion of the Company's outstanding 4-1/4%
Convertible Subordinated Notes Due May 1, 2006 into shares of Common Stock
pursuant to the terms and conditions of such Notes and the Indenture under
which such Notes were issued and (ii) the number of one one-hundredths of a
share of Series A Junior Participating Preferred Stock of the Company
purchasable pursuant to the terms and conditions of the Rights Agreement,
and that the officers of the Company be, and each of them hereby is,
authorized and empowered, in the name and on behalf of the Company, to
execute and deliver all certificates and to publish or cause to be
published all notices as may be required in connection therewith:
2
<PAGE> 3
RESOLVED FURTHER, that the officers of the Company be, and each of
them hereby is, authorized and empowered, in the name and on behalf of the
Company, to execute and file with the Nasdaq Stock Market, Inc. ("Nasdaq")
an application or applications for the listing of the additional shares of
Common Stock (including the associated Rights) issuable upon payment of the
Stock Dividend on the Nasdaq National Market System, and in connection
therewith to file such other information and documents, and to enter into
such agreements with Nasdaq in the name and on behalf of the Company, as
may be deemed necessary, appropriate or advisable, and to take all such
other actions as may be required to effect such listing;
RESOLVED FURTHER, that the officers and assistant secretaries of the
Company be, and each of them hereby is, authorized and empowered, in the
name and on behalf of the Company, to make such applications, enter into
such agreements and undertakings and do or cause to be done such acts and
things as may be necessary or desirable to list the additional shares of
Common Stock issuable upon payment of the Stock Dividend (including the
associated Rights) on such other stock exchanges as any such officers may
deem necessary or appropriate; and
RESOLVED FURTHER, that the officers and assistant secretaries of the
Company be, and each of them hereby is, authorized and empowered, in the
name and on behalf of the Company and under its corporate seal or
otherwise, to make, execute and deliver, or cause to be made, executed and
delivered, all such agreements, certificates instruments, assurances and
other documents, and to do or cause to be done all such acts or things as
may be deemed necessary or appropriate to effectuate or carry out the
purposes and intent of the foregoing resolutions.
This Unanimous Written Consent may be executed in several counterparts
with the same effect as if the signatures were shown on one document.
Dated: September 13, 1999
/s/ D. R. BEALL /s/ R. M. BRESSLER
- ---------------------------------- -------------------------------
D. R. Beall R. M. Bressler
/s/ F. C. FARRILL /s/ J. L. STEAD
- ---------------------------------- -------------------------------
F. C. Farrill J. L. Stead
/s/ D. W. DECKER
- ----------------------------------
D. W. Decker
3
<PAGE> 1
EXHIBIT 10-e-1
AUGUST 13, 1999
UPDATE OF BENEFIT PLANS; AMENDMENT TO DEFINITION OF "EMPLOYEE' IN THE COMPANY'S
BENEFIT PLANS; AMENDMENT TO RETIREMENT SAVINGS PLAN FOR SALARIED EMPLOYEES
[401(k)]
D. E. O'Reilly briefed the Board on (a) the stock option pool, (b) the issues
relating to long term use of contract labor and proposed that the definition of
"employee" in the Company's benefit plans be amended, and (c) on the
desirability of amending the 401(k) Plan.
After discussion and upon motion duly made and seconded, the following
resolutions were approved unanimously:
WHEREAS the Company needs to maintain flexibility in conducting
its business by utilizing the optimal mix of services provided by
permanent employees and by independent contractors, sometimes referred
to as "temporary employees;" and
WHEREAS the Company's various benefit plans, which refer to the
term "employee" need to be amended to better reflect the Company's
flexibility;
NOW, THEREFORE, BE IT RESOLVED, that, all the Company's benefit
plans be, and they hereby are, amended to delete their current
definitions of "employee" or "employees" and to replace them in their
entirety to read as follows:
Subject to the exclusions set forth below, the terms "employee"
and "employees" shall include those individuals who were hired
(and advised that they were being hired) directly by Conexant as
regular employees and who perform regular employment services
directly for Conexant.
EXCLUSIONS:
The terms "employee" or "employees" as used in this Plan shall
not include any individuals who work, or who were hired to work,
or who were advised that they work:
(1) as independent contractors or employees of independent
contractors; or
<PAGE> 2
(2) as temporary employees, regardless of the length of time that
they work at Conexant; or
(3) through a temporary employment agency, job placement agency,
or other third party; or
(4) as part of an employee leasing arrangement between Conexant
and any third party.
For the purposes of this Plan, the exclusions described above
shall remain in effect even if the described individuals
could otherwise be construed as employees under any
applicable common law.
And
WHEREAS, the Company's Retirement Savings Plan for salaried
employees (the "401(k) Plan") allows employees to defer the maximum
permissible amount of income under the Internal Revenue Code, as
amended, and the Company desires to enable employees to defer an amount
which, when combined with a potential maximum Company match equal to
8%, would not exceed the current 25% combined legal limit on
compensation that may be contributed to a qualified plan; and
WHEREAS Section 2.060 of the Plan was originally left blank,
pending an evaluation of the Company's performance in Fiscal Year 1999,
and effective October 1, 1999 the Company desires to be able to
increase its matching contributions at the end of a fiscal year if
sales growth and profitability performance criteria, selected at the
beginning of said fiscal year, are achieved,
NOW, THEREFORE, BE IT RESOLVED, that Section 2.030 of the
Company's Retirement Savings Plan for salaried employees (the "401(k)
Plan") is amended read in its entirety as follows:
2.030 Supplemental Contributions. If a participant has made the
elections and/or authorizations described in Section 2.010, he
shall then be permitted to take either or both of the actions
described in subsections (a) and (b) below:
(a) elect or defer receipt of an amount equal to 5% through 17%
of his regular base Compensation (such deferral to be elected
in whole percentages), which amount shall be paid to the Plan
as a Supplemental Pre-Tax Contribution to his Pre-Tax
Contribution Account;
2
<PAGE> 3
(b) authorize having an amount equal to 5% through 17% deducted
from his regular Base Compensation (such deduction to be
authorized in whole percentages) and then have the amount of
such deduction (as adjusted for all applicable taxes due on
that amount) paid to the Plan as a Supplemental Post-Tax
Contribution to his Past-Tax Contribution Account;
provided, however, that the percentages elected to be
deferred or deducted and then made as Supplemental Pre-Tax
and Supplemental Post-Tax Contributions shall together not
exceed 13% of the participant's base Compensation;
RESOLVED FURTHER, that Section 2.060(b) of the Plan shall read in its
entirety as follows:
(b) Effective as of October 1, 1999, the Company Matching
Contribution shall be credited to the Account of each
Participant in an amount equal to One Hundred Percent (100%)
of the Participant's Basic Pre-Tax and Basic Post-Tax
Contributions. Also, after the end of the Company's fiscal
year, an additional Company Matching Contribution may be made
based on financial performance criteria, selected by the
Employee benefit Plan Committee within thirty days of the
beginning of said fiscal year, which emphasize the Company's
profitability and sales growth. This additional Company
Matching Contribution may range from 0% to 100% of the
Participant's Basic Pre-tax and Basic Post-Tax Contributions.
3
<PAGE> 1
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before
provision (benefit)
for taxes on income $ 2,756 $(430,328) $ 179,762 $ 197,161 $ 110,487
Add - Fixed charges
net of capitalized
interest 15,283 5,795 3,984 2,022 1,566
--------- --------- --------- --------- ---------
Income before taxes
and fixed charges
(net of capitalized
interest) 18,039 (424,533) 183,746 199,183 112,053
--------- --------- --------- --------- ---------
Fixed charges:
Interest (1) 10,800 -- -- -- --
Capitalized interest 1,511 -- -- -- --
Estimated interest
component of rental
expense 4,483 5,795 3,984 2,022 1,566
--------- --------- --------- --------- ---------
Total 16,794 5,795 3,984 2,022 1,566
--------- --------- --------- --------- ---------
Ratio of earnings before
taxes and fixed charges,
to fixed charges 1.1 --(2) 46.1 98.5 71.6
========= ========= ========= ========= =========
</TABLE>
- ------------------
(1) Interest expense includes the amortization of underwriting fees for the
relevant periods outstanding
(2) As a result of the loss incurred for fiscal year 1998, the Company was
unable to fully cover fixed charges. The amount of such deficiency in
fiscal 1998 was approximately $5.8 million
<PAGE> 1
EXHIBIT 21
LISTING OF SUBSIDIARIES
<TABLE>
<S> <C>
DOMESTIC
Brooktree Corporation Conexant Systems Worldwide, Inc.
Incorporated in the state of California Incorporated in the state of Delaware
Brooktree Worldwide Sales Corporation DeviceGuys, Inc.
Incorporated in the state of California Incorporated in the state of Washington
Conexant Systems, Inc.
Incorporated in the state of Neveda
FOREIGN
Brooktree International Ltd. Conexant Systems Israel Commercial Ltd.
Incorporated in the Cayman Islands Incorporated in Israel
Brooktree Technologies Ltd. Conexant Systems Japan Company Ltd.
Incorporated in the Cayman Islands Incorporated in Japan
Conexant Systems Asia Pacific Ltd. Conexant Systems Korea Ltd.
Incorporated in Hong Kong, People's Incorporated in Korea
Republic of China
Conexant Foreign Sales Corporation Conexant Systems S.A. de C.V.
Incorporated in Barbados Incorporated in Mexico
Conexant Systems France S.A.S. Conexant Systems Scandinavia AB
Incorporated in France Incorporated in Sweden
Conexant Systems Germany G.m.b.H. Conexant Systems Singapore Pte. Limited
Incorporated in Germany Incorporated in Singapore
Conexant Systems Holdings Limited. Conexant Systems Taiwan Co., Ltd.
Incorporated in the United Kingdom Incorporated in Taiwan
Conexant Systems Iceland Ehf. (Ltd.) Conexant Systems UK Limited.
Incorporated in Iceland Incorporated in the United Kingdom
Conexant Systems Israel (1996) Ltd.
Incorporated in Israel
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-91347, 333-84187, 333-69385 and 333-68755, of Conexant Systems, Inc. on Form
S-8 and Registration Statement Nos. 333-82399 and 333-70085, of Conexant
Systems, Inc. on Form S-3 of our report dated October 29, 1999, appearing in
this Annual Report on Form 10-K of Conexant Systems, Inc. for the year ended
September 30, 1999.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
December 6, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned Director and/or Officer of Conexant Systems, Inc., a
Delaware corporation (the Company), hereby constitute DWIGHT W. DECKER,
BALAKRISHNAN S. IYER and DENNIS E. O'REILLY, and each of them singly, my true
and lawful attorneys with full power to them and each of them to sign for me,
and in my name and in the capacity or capacities indicated below, (1) the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999 and any amendments thereto; (2) any and all amendments (including
supplements and post-effective amendments) to (a) the Registration Statement on
Form S-3 registering securities to be sold pursuant to the Company's 1998 Stock
Option Plan (Registration No. 333-70085); (b) the Registration Statement on
Form S-8 registering securities to be sold pursuant to the Company's 1999
Long-Term Incentives Plan and Directors Stock Plan (Registration No.
333-69385); (c) the Registration Statement on Form S-8 registering securities
to be sold pursuant to the Company's Retirement Savings Plan, as amended
(Registration No. 333-68755); (d) the Registration Statement on Form S-8
registering securities to be sold pursuant to the Company's 1999 Employee
Stock Purchase Plan and 1999 Non-Qualified Employee Stock Purchase Plan
(Registration No. 333-84187); and (e) the Registration Statement on Form S-8
registering securities to be sold pursuant to the Company's 2000 Non-Qualified
Stock Plan (Registration No. 333-91347); and (3) any and all amendments
(including supplements and post-effective amendments) to the Registration
Statement on Form S-3 (Registration No. 333-82399) registering $350,000,000
aggregate principal amount of the Company's 4 1/4% Convertible Subordinated
Notes due May 1, 2006 (the Notes) and shares of Common Stock, par value $1 per
share, of the Company (including the associated Preferred Share Purchase
Rights) issuable or deliverable upon conversion of the Notes.
Signature Title Date
- --------- ----- ----
/s/ DWIGHT W. DECKER Chairman of the Board November 24, 1999
- ------------------------ and Chief Executive
Dwight W. Decker Officer (principal
executive officer)
/s/ DONALD R. BEALL Director November 23, 1999
- ------------------------
Donald R. Beall
<PAGE> 2
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ RICHARD M. BRESSLER Director November 23, 1999
- ------------------------
Richard M. Bressler
/s/ F. CRAIG FARRILL Director November 29, 1999
- ------------------------
F. Craig Farrill
/s/ JERRE L. STEAD Director November 24, 1999
- ------------------------
Jerre L. Stead
/s/ BALAKRISHNAN S. IYER Senior Vice President November 24, 1999
- ------------------------ and Chief Financial
Balakrishnan S. Iyer Officer (principal)
financial officer)
/s/ STEVEN M. THOMSON Vice President and November 24, 1999
- ------------------------ Controller (principal
Steven M. Thomson accounting officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 CONSOLIDATED CONDENSED BALANCE SHEETS, CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 398,516
<SECURITIES> 0
<RECEIVABLES> 248,598
<ALLOWANCES> 9,658
<INVENTORY> 224,447
<CURRENT-ASSETS> 979,174
<PP&E> 1,600,022
<DEPRECIATION> 877,009
<TOTAL-ASSETS> 1,841,950
<CURRENT-LIABILITIES> 374,721
<BONDS> 0
0
0
<COMMON> 196,387
<OTHER-SE> 838,766
<TOTAL-LIABILITY-AND-EQUITY> 1,841,950
<SALES> 1,444,114
<TOTAL-REVENUES> 1,444,114
<CGS> 863,252
<TOTAL-COSTS> 863,252
<OTHER-EXPENSES> 584,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,448
<INCOME-PRETAX> 2,756
<INCOME-TAX> (10,173)
<INCOME-CONTINUING> 12,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,929
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.06
</TABLE>
