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As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-82399
PROSPECTUS
$350,000,000
CONEXANT SYSTEMS, INC.
4 1/4% CONVERTIBLE SUBORDINATED NOTES DUE MAY 1, 2006
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
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On May 12, 1999, we issued and sold $350,000,000 aggregate principal amount
of our 4 1/4% Convertible Subordinated Notes Due May 1, 2006 in a private
offering. This prospectus will be used by selling securityholders to resell the
notes and the common stock issuable upon conversion of the notes. Interest on
the notes is payable in arrears on May 1 and November 1 of each year, beginning
on November 1, 1999. The notes mature on May 1, 2006 unless earlier converted or
redeemed. The notes are unsecured and rank junior to our existing and future
senior indebtedness.
The holders of the notes may convert all or any portion of a note in
multiples of $1,000 into our common stock at a conversion price of $46.196 per
share, subject to adjustment in certain events. Our common stock is traded on
the Nasdaq National Market under the symbol "CNXT". On July 27, 1999, the last
reported sale price for our common stock on the Nasdaq National Market was
$66 1/2 per share.
Prior to May 6, 2002, we may not redeem the notes. Beginning May 6, 2002,
we may redeem all or a portion of the notes. Holders of the notes also have an
option to require us to repurchase the notes should our business undergo certain
fundamental changes. You can find a more extensive description of the notes, as
well as a list of the prices at which the notes may be redeemed, beginning on
page 33.
We will not receive any proceeds from the sale by the selling
securityholders of the notes or the common stock issuable upon conversion of the
notes. Other than selling commissions and fees and stock transfer taxes, we will
pay all expenses of the registration and sale of the notes and the common stock.
INVESTING IN THE NOTES OR THE COMMON STOCK INTO WHICH THE NOTES ARE
CONVERTIBLE INVOLVES A HIGH DEGREE OF RISK. PLEASE CONSIDER THE "RISK FACTORS"
BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is July 28, 1999.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Ratio of Earnings to Fixed Charges.......................... 19
Use of Proceeds............................................. 20
Price Range of Common Stock................................. 20
Dividend Policy............................................. 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Description of Notes........................................ 33
Description of Capital Stock................................ 43
Certain Federal Income Tax Considerations................... 47
Selling Securityholders..................................... 53
Plan of Distribution........................................ 56
Legal Matters............................................... 58
Experts..................................................... 58
How to Obtain More Information.............................. 58
Forward-Looking Statements.................................. 59
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and our financial statements, including the related notes, included or
incorporated by reference in this prospectus. You should carefully consider,
among other things, the matters set forth in "Risk Factors" beginning on page 6.
For presentation purposes, references made to any fiscal year ending September
30 relate to the fiscal year ending on the nearest Friday to September 30 of
that year, and references made to the fiscal quarters and six months ended March
31, 1998 and March 31, 1999 relate to the fiscal quarters and six months ended
April 3, 1998 and April 2, 1999, respectively.
CONEXANT SYSTEMS, INC.
Conexant Systems, Inc., which may be referred to as Conexant, we, us or
our, 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 analog modem technology, we draw upon our 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. We have aligned our business into five platforms:
- Personal Computing
- Personal Imaging
- Wireless Communications
- Digital Infotainment
- Network Access
Before December 31, 1998, Conexant was a wholly-owned subsidiary of
Rockwell International Corporation and, together with certain other subsidiaries
and divisions of Rockwell, operated Rockwell's semiconductor systems business
("Semiconductor Systems"). On December 31, 1998, all of the then outstanding
shares of our common stock were distributed to Rockwell shareowners and Conexant
became an independent, publicly-held corporation. Our principal offices are
located at 4311 Jamboree Road, Newport Beach, California 92660-3095.
Unless the context otherwise indicates, as used in this prospectus, all
references to Conexant, we, us and our are to Semiconductor Systems for periods
prior to our spin-off from Rockwell and to Conexant Systems, Inc. and its
subsidiaries for periods following the spin-off.
RECENT DEVELOPMENTS
On July 21, 1999, Conexant announced its earnings for its third fiscal
quarter ended June 30, 1999, reporting revenues of $380.3 million and net income
of $24.4 million, or $0.24 per diluted share. The press release making such
announcement is made a part of Conexant's Current Report on Form 8-K dated July
22, 1999, which is incorporated herein by reference. For further information,
you should read the financial and other information and data contained in the
Form 8-K. The results of operations for the three-month period ended June 30,
1999 are not necessarily indicative of the results of operations that may be
expected for the fiscal year ending September 30, 1999. For presentation
purposes, references made to the fiscal quarter ended June 30, 1999 relate to
the fiscal quarter ended July 2, 1999.
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SUMMARY FINANCIAL DATA
The following summary financial data have been derived from financial
statements of ours and, for periods prior to January 1, 1999, of Semiconductor
Systems as a part of Rockwell. The data should be read in conjunction with the
selected financial data under "Selected Financial Data" and our financial
statements and the related notes incorporated by reference into this prospectus.
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SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------- ----------------
1998 1997 1996 1995 1994 1999 1998
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(IN MILLIONS, EXCEPT RATIO DATA)
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CONSOLIDATED AND COMBINED
STATEMENT OF OPERATIONS DATA:
Net sales....................... $1,200 $1,412 $1,470 $ 784 $ 599 $612 $657
Gross margin.................... 311 679 622 301 252 208 301
Operating (loss) earnings....... (440)(1) 169(2) 195(2) 107 99 (87)(1) 3
Net (loss) income............... (262)(1) 126(2) 84(2) 76 67 (50)(1) 5
OTHER DATA:
Ratio of earnings to fixed
charges(3).................... -- 46.1x 98.5x 71.6x 79.9x -- 4.4x
Capital expenditures............ $ 270 $ 317 $ 380 $ 166 $ 148 $ 33 $122
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AS OF MARCH 31, 1999
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AS
ACTUAL ADJUSTED(4)
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(MILLIONS)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 159 $ 400
Working capital............................................. 239 580
Property, net............................................... 651 651
Total assets................................................ 1,317 1,567
Total debt.................................................. 100 350
Shareholders' equity........................................ 911 911
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(1) In September 1998, we recorded special charges of approximately $147 million
related to our decision to close and dispose of our wafer fabrication
facilities in Colorado Springs, Colorado, a worldwide workforce reduction
and certain other actions. In the first quarter of fiscal 1999, we recorded
additional special charges of $18 million related to the restructuring
initiated in the fourth quarter of 1998 and an additional asset impairment
charge of $20 million for the Colorado Springs wafer fabrication facility as
a result of Rockwell's decision to further write-down the facility.
(2) In fiscal 1997 and 1996, we incurred charges of $30 million and $121 million
for purchased research and development relating to the acquisitions of the
Hi-Media broadband communication chipset business of ComStream Corporation
and Brooktree Corporation, respectively.
(3) Computed by dividing (a) earnings before taxes adjusted for fixed charges by
(b) fixed charges, which include interest expense plus the portion of
interest expense under operating leases deemed by us to be representative of
the interest factor plus amortization of debt issuance costs. In the fiscal
year ended September 30, 1998 and the six months ended March 31, 1999 our
losses before taxes of $430 million and $87 million, respectively, were not
adequate to cover fixed charges of $6 million and $4 million, respectively.
(4) Reflects the issuance of the notes and the application of the net proceeds
therefrom (after deducting expenses of the offering), including the
repayment of $100 million of short-term borrowings under our existing bank
credit facility.
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THE OFFERING
SECURITIES OFFERED............ $350,000,000 aggregate principal amount of our
4 1/4% convertible subordinated notes due May
1, 2006 and shares of our common stock issuable
upon conversion of the notes.
MATURITY DATE................. May 1, 2006, unless earlier redeemed or
converted.
INTEREST...................... 4 1/4% per year. We will pay interest on May 1
and November 1 of each year, commencing
November 1, 1999.
CONVERSION.................... Holders of the notes may convert all or any
part of the notes at any time prior to
redemption or maturity at a conversion price of
$46.196 per share, subject to adjustment in
certain circumstances. You should read the
information under the heading "Description of
Notes -- Conversion of Notes" on page 35 for
more information on the conversion of the
notes.
SUBORDINATION................. The notes are subordinated to all existing and
future senior indebtedness, as described in
"Description of Notes -- Subordination of
Notes". The amount of indebtedness, including
senior indebtedness, that we may incur is not
limited by the notes or the indenture.
OPTIONAL REDEMPTION........... At any time on or after May 6, 2002, we may at
our option redeem the notes on at least 30
days' notice, in whole or in part, at the
redemption prices set forth in this prospectus
under "Description of Notes -- Optional
Redemption by Conexant", together with accrued
interest.
FUNDAMENTAL CHANGE............ Upon the occurrence of certain fundamental
changes in our business as described in
"Description of Notes -- Redemption at Option
of the Holder", each holder of a note will have
the right to require us to redeem all or any
part of the holder's notes at a redemption
price equal to 100% of the outstanding
principal amount of the notes being redeemed,
plus accrued interest.
USE OF PROCEEDS............... We will not receive any of the proceeds from
the sale of the notes or the common stock
issuable upon conversion of the notes offered
by this prospectus.
REGISTRATION RIGHTS........... Under the registration rights agreement we
entered into with the initial purchasers of the
notes, we have agreed to register the notes and
the common stock issuable upon conversion of
the notes, subject to certain conditions. For a
discussion of these conditions and the
circumstances under which we are required to
pay liquidated damages to holders of the notes
upon our failure to fulfill our registration
obligations, see "Description of
Notes -- Registration Rights of the Holders of
the Notes" beginning on page 41.
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RISK FACTORS
You should carefully consider and evaluate all of the information in this
prospectus, including the risk factors listed below. Any of these risks could
materially and adversely affect our business, financial condition and results of
operations, which in turn could materially and adversely affect the price of the
notes and the common stock.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE RECENT PAST.
We experienced rapid growth in sales and operating earnings during the five
fiscal years ended September 30, 1996. However, in fiscal 1997 sales declined
$58 million, or 4 percent, to $1,412 million and operating earnings declined
$117 million, or 37 percent, to $199 million, before acquisition-related charges
in both fiscal 1996 and 1997. Moreover, for the fiscal year ended September 30,
1998, we had sales of $1,200 million and incurred an operating loss of $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 $262 million, including inventory write-offs of $66
million, a charge for intellectual property matters of $43 million and the
fourth quarter special charges.
For the six months ended March 31, 1999, our net loss was $50 million,
which included $18 million of restructuring charges and a $20 million additional
asset impairment writedown related to the Colorado Springs wafer fabrication
facilities which were distributed to Rockwell in December 1998. Although we
reported net income of $8 million for the second quarter of fiscal 1999, we
cannot assure you we will be able to sustain profitability.
WE MAY NOT BE ABLE TO OFFSET THE DECLINING CONTRIBUTION OF OUR ANALOG PC MODEM
BUSINESS.
While we are the world's leading supplier of analog PC (personal computer)
modem chipsets for personal computing applications, revenues and gross margin
from sales of these products have been declining. This decline is attributable
to a number of factors, including:
- competitive price pressures as modem chipset suppliers aggressively
compete for market share,
- the transition to lower-priced, host-controlled or software modems, and
- the lack of a next generation upgrade path due to technological
limitations on analog modem technology.
Revenues of our Personal Computing platform declined from $1,173 million
(approximately 80 percent of sales) in fiscal 1996 to $640 million
(approximately 53 percent of sales) in fiscal 1998. For the first six months of
fiscal 1999, revenues of our Personal Computing platform were $302 million
(approximately 49 percent of sales) compared to $382 million (approximately 58
percent of sales) for the first six months of fiscal 1998. Our revenues and
margins from sales of analog PC modem products are expected to decline further
as unit growth in the markets for these products is not anticipated to offset
continued price erosion.
Recently, as a result of the significant price erosion for PCs, PC OEMs
(original equipment manufacturers) have been demanding less expensive modem
devices. This has placed significant pricing pressure on our traditional
hardware-based modem chipset products, as well as our software modem products.
Our inability to offset further declines in the analog PC modem business with
revenues and gross margin from sales of other products would have a material
adverse effect on our business, financial condition and results of operations.
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OUR FUTURE FINANCIAL PERFORMANCE AND OVERALL SUCCESS ARE DEPENDENT ON
TIMELY SUCCESS OF OUR 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:
- Personal Imaging
- Wireless Communications
- Digital Infotainment
- Network Access
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 sufficiently and soon enough to offset the
anticipated continued declining financial contribution of analog PC modem
chipset products.
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.
WE MAY NOT BE ABLE TO KEEP ABREAST OF THE RAPID TECHNOLOGICAL CHANGES IN
OUR MARKETS.
The demand for our products can change quickly and in ways we may not
anticipate because our markets generally exhibit the following characteristics:
- rapid technological developments,
- evolving industry standards,
- changes in customer requirements,
- frequent new product introductions and enhancements, and
- short product life cycles with declining prices over the life cycle of
the product.
Our products could become obsolete sooner than anticipated because of a
faster than anticipated change in one or more of the technologies related to our
products or in market demand for products based on a particular technology,
particularly due to the introduction of new technology that represents a
substantial advance over current technology. 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 may render obsolete the traditional
hardware upgrade path for our modem products.
Currently accepted industry standards are also subject to change and may
potentially contribute to the obsolescence of our products.
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OUR OPERATING RESULTS AND COMPETITIVE POSITION DEPEND ON NEW PRODUCT DEVELOPMENT
AND PRODUCT COST REDUCTIONS.
Our operating results will depend largely on our ability to continue to
introduce new and enhanced semiconductor products on a timely basis. Successful
product development and introduction depends on numerous factors, including:
- our ability to anticipate customer and market requirements and changes in
technology and industry standards,
- accurate new product definition,
- timely completion and introduction,
- differentiation from offerings of competitors, and
- market acceptance.
Furthermore, we need to continually evaluate expenditures for planned
product development and to choose among alternative technologies based upon our
expectations of future market growth. We cannot assure you that we will be able
to develop and introduce new or enhanced products in a timely and cost-
effective manner, that our products will satisfy customer requirements or
achieve market acceptance, or that we will be able to anticipate new industry
standards and technological changes. We also cannot assure you that we will be
able to respond successfully to new product announcements and introductions by
competitors.
In addition, the prices of established products decline, sometimes
significantly, over time. To remain competitive, we must continue to reduce the
cost of producing and delivering existing products at the same time that we
develop and introduce new or enhanced products. We cannot assure you that we
will be able to continue to reduce the cost of our products to remain
competitive.
WE FACE A RISK THAT CAPITAL NEEDED FOR OUR BUSINESS WILL NOT BE AVAILABLE WHEN
WE NEED IT.
For several years, we obtained significant investments from Rockwell to
help satisfy our capital needs. We can no longer rely on these investments from
Rockwell. However, we have a three-year $350 million secured revolving credit
facility which is available for working capital and other general corporate
purposes.
We believe that anticipated improved cash flows from operations resulting
in part from the recently completed restructuring actions announced in September
1998, available borrowings under our credit facility and the proceeds of the
initial private placement of the notes will be sufficient to satisfy our future
research and development, capital expenditure, working capital and other
financing requirements. However, we cannot assure you that this will occur or
that we will have access to alternative sources of liquidity.
WE MUST INCUR 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.
As part of the plan we announced in September 1998 to restructure our
business, we reduced research and development expenditures for the first six
months of fiscal 1999 to $140 million from $164 million for the first six months
of fiscal 1998. 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.
WE MUST INCUR SIGNIFICANT CAPITAL EXPENDITURES FOR MANUFACTURING CAPACITY.
To remain competitive, we need to make significant capital expenditures for
manufacturing technology and equipment. The semiconductor industry is capital
intensive. Semiconductor manufacturing requires a
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constant upgrading of process technology to remain competitive, particularly as
new and enhanced semiconductor processes are developed allowing for 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.
After several years of significant capital investments to improve
manufacturing capabilities, we expect capital expenditures in fiscal 1999 to be
approximately 20 to 30 percent less than in fiscal 1998. For the first six
months of fiscal 1999, capital expenditures were $33 million, compared to $122
million for the first six months of fiscal 1998. We cannot assure you that we
will have sufficient capital resources to make the necessary investments in
manufacturing technology and equipment.
OUR OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL QUARTERLY AND ANNUAL
FLUCTUATIONS AND TO MARKET DOWNTURNS.
These fluctuations are due to a number of factors, many of which are beyond
our control. These factors 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 those of our customers,
- 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
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 the notes and
of the common stock.
OUR BANK CREDIT FACILITY MAY RESTRICT OUR OPERATING AND FINANCIAL FLEXIBILITY.
Our credit facility is guaranteed by each of our domestic subsidiaries.
Substantially all of our assets, the assets of our domestic subsidiaries and the
stock of our domestic and foreign subsidiaries, subject to certain exceptions,
have been pledged as collateral to secure repayment of the 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
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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. A foreclosure
on the collateral would have a material adverse effect on our business,
financial condition and results of operations.
WE ENGAGE IN LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND TO
DEFEND OURSELVES AGAINST CLAIMS OF INFRINGEMENT BY OTHERS.
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, we
have found it necessary to engage in litigation to enforce our intellectual
property rights, protect our trade secrets or 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 that:
- we will prevail in pending actions,
- other actions alleging the infringement by us of third-party patents or
the invalidity of our patents will not be asserted or prosecuted against
us, or
- 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 MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS.
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 that:
- the steps that we take to prevent misappropriation or infringement of our
intellectual property or the intellectual property of our customers will
be successful,
- any existing or future patents will not be challenged, invalidated or
circumvented, or
- any of the protective 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
fail to protect our technology, it will be 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.
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OUR INTELLECTUAL PROPERTY INDEMNIFICATION POLICY MAY ADVERSELY IMPACT OUR
BUSINESS.
We have historically indemnified customers for certain of the costs and
damages of patent infringement where our product is the factor creating the
customer's infringement exposure. This policy generally excludes circumstances
where infringement arises out of the combination of our products with products
of others. This indemnification policy 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
customers. The combined costs of obtaining licenses from all holders of patent
rights essential to such standards could be high and could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE SUBJECT TO INTENSE COMPETITION.
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. We also anticipate that additional competitors will
enter our markets as a result of growth opportunities in communications
electronics, the trend toward global expansion by foreign and domestic
competitors, technological and public policy changes and relatively low barriers
to entry in certain segments of the industry.
We currently enjoy substantial market shares in our analog data and fax
modem chipset product lines. However, as we pursue our diversification strategy
and develop expansion platforms, we will be competing in certain new markets in
which we have little or no market share and where existing competitors have
dominant market positions. Moreover, as with many companies in the semiconductor
industry, certain of our customers offer products that compete with similar
products offered by us.
We believe that the principal competitive factors in our 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 semiconductor
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.
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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 our existing or potential
customers, resellers or other third parties. These relationships may affect
customers' purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. We cannot assure you that we will be 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 electronics industry and the "time-to-market" pressures on
suppliers to decrease the time required for product conception, research and
development, sampling and production launch prior to the product reaching the
market. 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.
WE ARE SUBJECT TO NUMEROUS RISKS IN OUR MANUFACTURING OPERATIONS.
Our manufacturing operations are complex and subject to disruption due to
causes beyond our control. The fabrication of integrated circuits is an
extremely complex and precise process consisting of hundreds of separate steps.
It requires production in a highly controlled, clean environment. Minute
impurities, errors in any step of the fabrication process, defects in the masks
used to print circuits on a wafer or a number of other factors can cause a
substantial percentage of wafers to be rejected or a substantial number of die
on each wafer not to function.
We operate our own manufacturing, assembly and test facilities. We also
have arrangements with third parties, including entities outside the United
States, for the production, assembly and testing of semiconductor products. Our
assembly and test facility in Mexicali, Mexico and our international subcontract
manufacturing arrangements are subject to a number of risks of operating abroad.
We, as well as the semiconductor industry in general, have in the past
experienced periods of excess wafer fabrication capacity. When there is excess
wafer fabrication capacity in the industry in general, outside foundries
typically reduce their prices significantly, thereby creating large pricing
advantages for our competitors who rely primarily on outside foundries. If we
experience an excess of our own wafer fabrication capacity, we could also be at
a relative disadvantage to certain of our competitors who rely primarily on
outside foundries because our wafer fabrication facilities involve substantial
fixed costs and investment.
We continue to increase our use of outside foundries worldwide as an
integral part of our wafer manufacturing strategy. In addition, we will explore
alternative strategic alliances to secure an assured source of wafer supply
going forward. We cannot assure you that we will succeed in implementing any
such alternatives.
Our operations may be affected by lengthy or recurring disruptions at any
of our production facilities or those of our subcontractors. These disruptions
may include labor strikes, work stoppages, fire, earthquake, flooding or other
natural disasters. These disruptions could cause significant delays in shipments
until we are able to shift the products from an affected facility or
subcontractor to another facility or subcontractor.
12
<PAGE> 13
In the event of these types of delays, we cannot assure you that required
alternate capacity, particularly wafer production capacity, would be available
on a timely basis or at all. Even if capacity is available, we cannot assure you
that it could be obtained on favorable terms. If we cannot obtain alternate
capacity on favorable terms we could lose customers. If we cannot obtain
sufficient manufacturing capacities to meet demand, either at our own facilities
or through foundry or similar arrangements with others, our business, financial
condition and results of operations could be materially and adversely affected.
Certain of our manufacturing facilities are located near major earthquake
fault lines, including our Newport Beach, California wafer fabrication facility
and our Mexicali, Mexico assembly and test facility. We have only minimal
earthquake insurance coverage with respect to these facilities.
The gallium arsenide semiconductor manufacturing process used at our
Newbury Park, California wafer fabrication facility is highly specialized in
nature. In the event of a disruption, alternate gallium arsenide production
capacity would not be readily available from third-party sources. In addition,
we are currently dependent on a single source supplier for epitaxial wafers used
in the gallium arsenide manufacturing processes. The number of qualified
alternative suppliers for such wafers is limited and the process of qualifying a
new epitaxial wafer supplier could require a substantial leadtime.
Any disruption of operations at our Newbury Park, California wafer
fabrication facility or the interruption in the supply of epitaxial wafers used
in its gallium arsenide process could have a material adverse effect on our
business, financial condition and results of operations, particularly with
respect to our Wireless Communications and Network Access products.
In the past, we have not had any significant difficulties in obtaining an
adequate supply of raw materials and components necessary for our manufacturing
operations. However, 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.
WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES WHICH MAY RESULT IN OBSOLETE
OR EXCESS INVENTORY.
We are subject to inventory risks because we do not control the timing or
volume of orders placed by our customers. We typically make sales through
individual purchase orders. We generally do not have long-term supply
arrangements with our customers. Our policy is to allow customers to cancel
orders until 30 days before the shipping date. In addition, we sell some
products through distributors who have certain rights to return unsold products
to us.
Moreover, semiconductor companies, including Conexant, routinely
manufacture or purchase inventory based on estimates of customer demand for
their products, which is often difficult to predict. We could hold excess or
obsolete inventory resulting from the cancellation or deferral of product
orders, the return of previously sold products or overproduction due to
over-estimating orders. This excess or obsolete inventory could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY.
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand.
The industry has experienced significant downturns, often connected with,
or in anticipation of, maturing product cycles of both semiconductor companies'
and their customers' products and declines in general economic conditions. These
downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices.
We have recently experienced these conditions in our analog PC modem
chipset business and may experience downturns in the future. In fiscal 1998,
average selling prices for our PC products fell by approximately 50 percent, the
annual growth rate for such products fell to approximately 20 percent and, in
the fourth quarter, we made a provision for excess and obsolete inventories of
$66 million. Any future
13
<PAGE> 14
downturns of this nature could have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND ON OUR 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 our 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 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 given the significant use of incentive
compensation both by us and our competitors. 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.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS.
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,
- 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.
For the six months ended March 31, 1999, we made approximately 65 percent
of our total sales to customers located outside the United States, primarily in
Japan, other Asian-Pacific countries and Europe. In addition, we have facilities
and suppliers located outside the United States. These include our assembly and
test facility in Mexicali, Mexico and third-party foundries located in the
Asia-Pacific region.
Most of our international sales are currently denominated in U.S. dollars.
As a result, our products could become less competitive in international markets
if the value of the U.S. dollar increases relative to foreign currencies. Sales
to Japan, which are denominated principally in Japanese yen, are not affected to
the same extent.
Moreover, we may be competitively disadvantaged relative to our competitors
located outside the United States, including Japan, who may benefit from a
devaluation of their local currency. The above factors may
14
<PAGE> 15
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.
The economic situation in Japan and the Asia-Pacific region in fiscal 1998
impacted several of our businesses, most notably the Personal Imaging platform.
Although the economic situation appears to be improving, we cannot assure you
that these regions will achieve a full economic recovery. Sales to customers in
Japan and other countries in the Asia-Pacific region, principally Taiwan, South
Korea and Hong Kong, represented approximately 54 percent of our total sales for
the six months ended March 31, 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 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.
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:
- the diversion of management resources,
- dilutive issuances of equity securities,
- large one-time write-offs,
- the incurrence of debt and contingent liabilities,
- amortization of expenses related to goodwill and other intangible assets,
and
- other acquisition related costs.
Any of these events could materially adversely affect our business, financial
condition and results of operations and the price of the notes and 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.
OUR MANAGEMENT FACES SIGNIFICANT DEMANDS ON THEIR 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 we have sufficient management resources to
execute each of these initiatives, we cannot assure you that we will have these
resources or that our 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.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS AND THE RISK OF ENVIRONMENTAL
LIABILITY.
We use a variety of chemicals in our manufacturing operations and are
subject to a wide range of environmental protection regulations in the United
States and Mexico. While we have not experienced any material adverse effect on
our operations as a result of such regulations, we cannot assure you that
current or
15
<PAGE> 16
future regulations would not have a material adverse effect on our business,
financial condition and results of operations.
In the United States, environmental regulations often require parties to
fund remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. We cannot assure you that the amount of expense and capital
expenditures that might be required to complete remedial actions and to continue
to comply with applicable environmental laws will not have a material adverse
effect on our business, financial condition and results of operations. We have
been designated as a potentially responsible party, together with two additional
potentially responsible parties who are insolvent, at one site in Parker Ford,
Pennsylvania for which we have accrued approximately $3 million at March 31,
1999 for the cost of groundwater remediation. In addition, we are engaged in two
other remediations of groundwater contaminations at our Newport Beach and
Newbury Park, California facilities for which we have accrued approximately $5
million for the costs of remediation at March 31, 1999.
WE COULD BE ADVERSELY IMPACTED BY YEAR 2000 ISSUES.
We believe, based on available information, that we will be able to manage
our total year 2000 transition without any material adverse effect on our
business, financial condition and results of operations. However, we could be
adversely impacted by the year 2000 issues faced by major suppliers,
distributors, customers, vendors and financial services organizations with which
we interact. In addition, we may be adversely affected by the failure of
federal, state, local and international governments to address year 2000 issues
affecting their systems.
Our greatest area of uncertainty centers primarily in the supplier area,
due to the number of materials suppliers involved and their various stages of
readiness for year 2000. In particular, we are dependent on suppliers to upgrade
their systems to ensure an uninterrupted supply of materials. A year
2000-related failure by a significant materials supplier could result in the
temporary slowdown of our production. We estimate this slowdown would not last
more than a few days.
WE HAVE A LIMITED HISTORY AS AN INDEPENDENT COMPANY.
We have a limited operating history as an independent company. Accordingly,
the financial information presented in or incorporated into this prospectus for
periods prior to January 1, 1999 may not necessarily reflect the results of
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. Rockwell
continues to provide us with certain transitional services. However, we must
maintain our own sources of funding, banking relationships and administrative
functions and eventually develop functions covered by the transitional services
from Rockwell.
THE VALUE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY ITS LIMITED TRADING
HISTORY, MARKET VOLATILITY AND THE SUBSTANTIAL NUMBER OF SHARES WHICH MAY BE
SOLD TO THE PUBLIC.
The notes are convertible into common stock, which has a limited trading
history and has fluctuated widely in price. The market value of the notes will
be affected by the fluctuations in the price of the common stock. The common
stock began trading on the Nasdaq National Market on January 4, 1999. We cannot
assure you that an active trading market in the common stock will be sustained
in the future.
The trading price of the common stock fluctuates significantly. Since the
common stock began trading publicly, the reported closing price of the common
stock on the Nasdaq National Market has been as high as $66 9/16 and as low as
$14 3/8 per share. This price may be influenced by many factors, including:
- our performance and prospects,
- the depth and liquidity of the market for the common stock,
- investor perception of Conexant and the industry in which it operates,
16
<PAGE> 17
- changes in earnings estimates or buy/sell recommendations by analysts,
- general financial and other market conditions, and
- domestic and international economic conditions.
In addition, public stock markets have experienced extreme price and
trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the common stock.
The Rockwell International Corporation Salaried Retirement Savings Plan,
which as of December 31, 1998 held approximately 19.5 percent of the outstanding
shares of the common stock, provides plan participants (including our employees
who maintain account balances in the Rockwell savings plan) with the authority
to determine if and when shares of common stock held in participant accounts
will be sold and reinvested in accordance with the provisions of the Rockwell
savings plan. Under the Rockwell savings plan, subject to certain limitations,
dispositions of common stock will be effected only at the direction and on
behalf of individual participants.
THE NOTES ARE SUBORDINATED TO OUR SENIOR INDEBTEDNESS.
The notes are unsecured and subordinated in right of payment to all
existing and future senior indebtedness. In the event of our bankruptcy,
liquidation or reorganization or upon acceleration of the notes due to an event
of default under the indenture relating to the notes and in certain other
events, our assets will be available to pay obligations on the notes only after
all senior indebtedness has been paid, and there may not be sufficient assets
remaining to pay amounts due on any or all of the notes then outstanding. The
notes also are effectively subordinated to the liabilities, including trade
payables, of any of our subsidiaries. The indenture does not prohibit or limit
the incurrence of senior indebtedness or the incurrence of other indebtedness
and other liabilities by us or any of our subsidiaries. The incurrence of
additional indebtedness and other liabilities by us or any of our subsidiaries
could adversely affect our ability to pay our obligations on the notes. As of
June 30, 1999, we had approximately $70 million of senior indebtedness
outstanding under foreign exchange contracts, certain leases and letters of
credit. We anticipate that from time to time we will incur additional
indebtedness, including senior indebtedness, and that our subsidiaries will from
time to time incur other additional indebtedness and liabilities. See
"Description of Notes -- Subordination of Notes".
WE MAY BE UNABLE TO REDEEM THE NOTES WHEN REQUIRED TO DO SO.
Upon a fundamental change, you may, at your option, require us to redeem
all or a portion of your notes. If a fundamental change were to occur, we cannot
assure you that we would have sufficient funds to pay the redemption price for
all notes tendered by the holders of the notes. In addition, in many cases, a
fundamental change would result in an event of default under our existing credit
facility. Any future credit agreements or other agreements relating to other
indebtedness, including other senior indebtedness, to which we become a party
may contain similar provisions, may expressly prohibit the repurchase of the
notes upon a fundamental change or may provide that a fundamental change
constitutes an event of default under that agreement.
If a fundamental change occurs at a time when we are prohibited from
purchasing or redeeming notes, we could seek the consent of our lenders to the
redemption of notes or could attempt to refinance the borrowings that contain
such prohibition. If we do not obtain a consent to repay those borrowings, we
could not purchase or redeem the notes. Our failure to redeem tendered notes
would constitute an event of default under the indenture, which might constitute
a default under the terms of our other indebtedness. In such circumstances, or
if a fundamental change would constitute an event of default under our senior
indebtedness, the subordination provisions of the indenture would restrict
payments to the holders of notes.
The term "fundamental change" is limited to certain specified transactions
and may not include other events that might adversely affect our financial
condition. Our obligation to offer to redeem the notes upon a
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<PAGE> 18
fundamental change would not necessarily afford holders of the notes protection
in the event of a highly leveraged transaction, reorganization, merger or
similar transaction involving Conexant. See "Description of Notes -- Redemption
at Option of the Holder".
THERE MAY BE A LIMITED MARKET FOR YOUR NOTES.
In May 1999, we issued the notes to the initial purchasers in a private
placement. The notes are eligible to trade on the PORTAL market. However, the
notes resold pursuant to this prospectus will no longer trade on the PORTAL
market. As a result, there may be a limited market for your notes. We do not
intend to list the notes on any national securities exchange or on the Nasdaq
National Market.
A public market may not develop for the notes. Although the investment
banking firms who were the initial purchasers of the notes advised us that they
intend to make a market in the notes, they are not obligated to do so and may
discontinue such market making at any time without notice. In addition, the
Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of
1934 (the "Exchange Act") impose limitations on market making activities.
Accordingly, we cannot assure you that any market for the notes will develop or,
if one does develop, that it will be maintained. If an active market for the
notes fails to develop or be sustained, the trading price of the notes could be
materially adversely affected.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS, OUR RIGHTS AGREEMENT
AND DELAWARE LAW MAY DETER TAKEOVER ATTEMPTS.
We have established certain anti-takeover measures that may affect the
common stock and the notes. Our certificate of incorporation, our by-laws, the
Rights Agreement, as defined below, and the General Corporation Law of the State
of Delaware (the "DGCL") contain several provisions that would make it more
difficult to acquire control of Conexant in a transaction not approved by our
board of directors. Our certificate and by-laws include provisions such as:
- the ability of our board of directors to issue shares of preferred stock
in one or more series without further authorization of our shareholders,
- a fair price provision,
- a prohibition on shareholder action by written consent,
- a requirement that shareholders provide advance notice of any shareholder
nominations of directors or any proposal of new business to be considered
at any meeting of shareholders,
- a requirement that a supermajority vote be obtained to remove a director
for cause or to amend or repeal certain provisions of our certificate or
by-laws,
- elimination of the right of shareholders to call a special meeting of
shareholders, 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 shareholders certain rights that would substantially increase
the cost of acquiring us in a transaction not approved by our board of
directors.
In addition to the Rights Agreement and the provisions in our certificate
and 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 shareholder during the three-year period following the time that such
shareholder becomes an interested shareholder. The restrictions of Section 203
of the DGCL, in certain circumstances, make it more difficult for a person who
would be an interested shareholder to effect various business combinations with
a corporation during that three-year period. The provisions of Section 203 of
the DGCL provide that the shareholder 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 shareholder becoming an
interested shareholder.
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WE MAY BE RESPONSIBLE FOR CERTAIN FEDERAL INCOME TAX LIABILITIES RELATING TO OUR
SPIN-OFF FROM ROCKWELL.
In connection with our spin-off from Rockwell, the IRS issued a tax ruling
to Rockwell stating that the spin-off would qualify as a tax-free reorganization
within the meaning of Section 368(a)(1)(D) of the Internal Revenue 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 that we will be
responsible for any taxes imposed on Rockwell, Conexant or Rockwell shareholders
as a result of either:
- the failure of the spin-off from Rockwell to qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(D) of the Internal
Revenue Code, or
- the subsequent disqualification of the spin-off from Rockwell as a
tax-free transaction to Rockwell under Section 361(c)(2) of the Internal
Revenue Code,
if the failure or disqualification is attributable to certain post-spin-off
actions by or in respect of Conexant (including its subsidiaries) or its
shareholders, such as our acquisition by a third-party at a time and in a manner
that would cause the failure or disqualification.
The Tax Allocation Agreement also 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:
- required to do so by law,
- the other party has given its prior written consent, or
- in certain circumstances, a supplemental ruling permitting the action is
obtained.
Rockwell and Conexant have indemnified each other for any tax liability
resulting from each entity's failure to comply with these provisions.
In addition, we effected various 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 shareholders in respect of those
intragroup spin-offs if the taxes are attributable to certain post-spin-off
actions by or in respect of Conexant (including its subsidiaries) or its
shareholders, such as our acquisition by a third-party at a time and in a manner
that would cause the taxes to be incurred.
If we were required to pay any of the taxes described above, the payment
would have a material adverse effect on our financial position, results of
operations and cash flow.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is computed by dividing (1) earnings
before taxes adjusted for fixed charges by (2) fixed charges, which include
interest expense plus the portion of interest expense under operating leases
deemed by us to be representative of the interest factor plus amortization of
debt issuance costs.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------------------- ----------------
1998 1997 1996 1995 1994 1999 1998
----- ----- ----- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges....... -- 46.1 98.5 71.6 79.9 -- 4.4
</TABLE>
In the fiscal year ended September 30, 1998 and the six months ended March 31,
1999 our losses before taxes of $430 million and $87 million, respectively, were
not adequate to cover fixed charges of $6 million and $4 million, respectively.
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USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
under this prospectus of the notes and the common stock issuable upon conversion
of the notes. We will not receive any proceeds from these sales.
PRICE RANGE OF COMMON STOCK
The common stock began trading on the Nasdaq National Market under the
symbol "CNXT" on January 4, 1999. The following table lists the high and low per
share sale prices for the common stock as reported by the Nasdaq National Market
for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ending September 30, 1999:
Second quarter............................................ $28 7/8 $13 11/16
Third quarter............................................. $68 3/8 $25 1/4
Fourth quarter (through July 27, 1999).................... $69 1/2 $55
</TABLE>
On July 27, 1999, the reported last bid price of the common stock as
reported on the Nasdaq National Market was $66 1/2 per share. As of July 2,
1999, there were approximately 56,000 holders of record of common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. In addition, our existing
credit facility limits our ability to declare and pay dividends.
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SELECTED FINANCIAL DATA
The following selected financial data have been derived from financial
statements and financial information of ours and, for periods prior to January
1, 1999, of Semiconductor Systems as part of Rockwell. The data should be read
in conjunction with our financial statements and the notes thereto incorporated
by reference into this prospectus. The statement of operations data for the
years ended September 30, 1998, 1997, 1996 and 1995 and the balance sheet data
as of September 30, 1998, 1997 and 1996 have been derived from the audited
combined financial statements of Semiconductor Systems as a part of Rockwell.
The statement of operations data for the year ended September 30, 1994 and the
balance sheet data as of September 30, 1995 and 1994 have been derived from
unaudited combined financial information of Semiconductor Systems as a part of
Rockwell. The statement of operations data for the six months ended March 31,
1998 and the balance sheet data as of March 31, 1998 have been derived from
unaudited combined financial information of Semiconductor Systems as a part of
Rockwell. The statement of operations data for the six months ended March 31,
1999 and the balance sheet data as of March 31, 1999 have been derived from our
unaudited consolidated financial information which, in the opinion of
management, include all adjustments necessary for a fair presentation of
financial position as of such dates and results of operations for such period.
Results for the six months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the entire year ending September 30,
1999.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------------------- ---------------
1998 1997 1996 1995 1994 1999 1998
------ ------ ------ ---- ---- ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED AND COMBINED STATEMENT OF
OPERATIONS DATA:
Net sales............................. $1,200 $1,412 $1,470 $784 $599 $612 $657
Cost of sales......................... 889 733 848 483 347 404 356
------ ------ ------ ---- ---- ---- ----
Gross margin.......................... 311 679 622 301 252 208 301
Research and development.............. 342 280 155 91 74 140 164
Selling, general and administrative... 251 191 150 103 79 113 128
Amortization of intangibles........... 11 9 1 -- -- 4 6
Purchased research and
development(1)...................... -- 30 121 -- -- -- --
Special charges(2).................... 147 -- -- -- -- 38 --
------ ------ ------ ---- ---- ---- ----
Operating (loss) earnings............. (440) 169 195 107 99 (87) 3
Other income, net..................... 10 11 3 4 1 -- 6
------ ------ ------ ---- ---- ---- ----
(Loss) income before income taxes..... (430) 180 198 111 100 (87) 9
------ ------ ------ ---- ---- ---- ----
(Benefit) provision for income
taxes............................... (168) 54 114 35 33 (37) 4
------ ------ ------ ---- ---- ---- ----
Net (loss) income..................... $ (262) $ 126 $ 84 $ 76 $ 67 $(50) $ 5
====== ====== ====== ==== ==== ==== ====
OTHER DATA:
Ratio of earnings to fixed
charges(3).......................... -- 46.1x 98.5x 71.6x 79.9x -- 4.4x
Capital expenditures.................. $ 270 $ 317 $ 380 $166 $148 $ 33 $122
</TABLE>
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<TABLE>
<CAPTION>
AS OF
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------- ---------------
1998 1997 1996 1995 1994 1999 1998
------ ------ ------ ---- ---- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED AND COMBINED STATEMENT
OF OPERATIONS DATA:(4)
Cash and cash equivalents........... $ 14 $ 14 $ 14 $ 14 $ 14 $ 159 $ 14
Working capital..................... 256 222 229 130 95 239 308
Property, net....................... 713 802 656 351 215 651 836
Total assets........................ 1,418 1,486 1,383 671 448 1,317 1,567
Total debt.......................... 14 14 14 14 14 100 14
Shareholders' equity/Rockwell's net
investment........................ 1,009 1,107 899 478 301 911 1,242
</TABLE>
- ---------------
(1) In fiscal 1997 and 1996, we incurred charges of $30 million and $121 million
for purchased research and development relating to the acquisitions of the
Hi-Media broadband communication chipset business of ComStream Corporation
and Brooktree Corporation, respectively.
(2) In September 1998, we recorded special charges of approximately $147 million
related to our decision to close and dispose of our wafer fabrication
facilities in Colorado Springs, Colorado, a worldwide workforce reduction
and certain other actions. In the first quarter of fiscal 1999, we recorded
additional special charges of $18 million related to the restructuring
initiated in the fourth quarter of 1998 and an additional asset impairment
charge of $20 million for the Colorado Springs wafer fabrication facility as
a result of Rockwell's decision to further write-down the facility.
(3) Computed by dividing (a) earnings before taxes adjusted for fixed charges by
(b) fixed charges, which includes interest expense plus the portion of
interest expense under operating leases deemed by us to be representative of
the interest factor plus amortization of debt issuance costs. In the fiscal
year ended September 30, 1998 and the six months ended March 31, 1999 our
losses before taxes of $430 million and $87 million, respectively, were not
adequate to cover fixed charges of $6 million and $4 million, respectively.
(4) In December 1998, we distributed our wafer fabrication facilities in
Colorado Springs, Colorado (and the related tax benefit) to Rockwell. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Also in December 1998, Rockwell contributed $64
million in cash to us, which was placed in an escrow account and used in
February 1999 to satisfy our obligation with respect to the judgment
rendered against us in the intellectual property litigation brought by
Celeritas Technologies, Ltd.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain of our
statement of operations data:
<TABLE>
<CAPTION>
1999 FISCAL
1998 FISCAL QUARTERS QUARTERS
---------------------------------- ---------------
FIRST SECOND THIRD FOURTH FIRST SECOND
----- ------ ----- ------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $383 $274 $278 $ 265 $295 $317
Cost of sales.............................. 203 153 184 349 217 187
---- ---- ---- ----- ---- ----
Gross margin............................... 180 121 94 (84) 78 130
Research and development................... 84 80 91 87 71 69
Selling, general and administrative........ 59 69 62 61 65 48
Amortization of intangibles................ 3 3 3 2 2 2
Special charges............................ -- -- -- 147 38 --
---- ---- ---- ----- ---- ----
Operating earnings (loss).................. 34 (31) (62) (381) (98) 11
Other income, net.......................... 4 2 1 3 -- --
---- ---- ---- ----- ---- ----
Income (loss) before income taxes.......... 38 (29) (61) (378) (98) 11
Provision (benefit) for income taxes....... 17 (13) (28) (144) (40) 3
---- ---- ---- ----- ---- ----
Net income (loss).......................... $ 21 $(16) $(33) $(234) $(58) $ 8
==== ==== ==== ===== ==== ====
</TABLE>
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the world's largest company focused exclusively on providing
semiconductor products for communications electronics. We continue to implement
a strategic transition from a narrow offering of primarily analog PC modem
products to a more broadly diversified product portfolio. Our product portfolio
is now comprised of our Personal Computing platform, which includes analog PC
modems, and the following expansion platforms which generated over 50% of our
total sales during the six months ended March 31, 1999:
- Personal Imaging
- Digital Infotainment
- Wireless Communications
- Network Access
During the second quarter of 1999, we returned to profitability with net
income of $8 million, compared to a net loss of $58 million in the prior
quarter. This was attributable to:
- sequential revenue growth in each of the expansion platforms,
- unseasonally strong performance in the Personal Computing platform
attributable to continued market-share gains at PC OEMs, sustained demand
in the PC retail aftermarkets and reduced price erosion in this product
category,
- operation of both the Newport Beach and Newbury Park wafer fabrication
facilities at full factory loading throughout the second quarter of
fiscal 1999, and
- reduced operating expenses driven by the elimination of costs associated
with our restructuring and spin-off activities.
We reported an operating loss of $98 million in the first fiscal quarter of
1999. The operating loss included a special charge for an additional asset
impairment of $20 million for the Colorado Springs wafer fabrication facilities
as a result of Rockwell's decision to further write-down the facilities, which
were distributed to Rockwell in connection with our spin-off. The non-cash
charge was required to be reported in our last quarter as a subsidiary of
Rockwell. Also included in the first fiscal quarter 1999 operating loss is a
special charge of $18 million primarily related to the voluntary early
retirement program we offered in September 1998. The first quarter charge
related to those employees who accepted our offer after September 30, 1998. The
operating loss also included higher advertising costs related to the
introduction of our new identity campaign, corporate set-up expenses and higher
operating costs related to the residual effects of lower manufacturing capacity
utilization over the last four months of fiscal 1998. We were able to increase
production to near full capacity in the first quarter of fiscal 1999 and were
able to meet inventory reduction goals by quarter's end.
After five years of rapid growth, with average annual revenue growth of
nearly 30 percent, our operating performance during fiscal year 1998 was
disappointing. The decline in operating performance was attributable to a number
of factors, including greatly intensified price competition in the markets for
our K56Flex(TM) product and our older V.34 modems which resulted in:
- greater than expected price declines,
- lower than expected demand for these products, and
- increasing investments in our expansion product platforms and
manufacturing process technology.
This decline in operating performance was exacerbated by worldwide excess
capacity in the semiconductor industry and the weakened economic environment in
the Asia-Pacific region.
23
<PAGE> 24
Our full-year fiscal 1998 pre-tax loss was $430 million ($262 million after
tax). The fourth quarter pre-tax loss was $378 million ($234 million after tax)
and included $275 million associated with the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Special charges............................................. $147(1)
Included in cost of sales:
Inventory write-offs...................................... 66(2)
Intellectual property matters............................. 43(3)
Manufacturing capacity underutilization................... 19(4)
----
Total.................................................. $275
====
</TABLE>
- ---------------
(1) In September 1998, we implemented a comprehensive plan to restructure our
business to position it for future profitability. A key element of this plan
was the decision to close and dispose of our wafer fabrication facilities in
Colorado Springs, Colorado. In addition, management decided to reduce our
worldwide workforce by 10 percent and to curtail certain market and product
development activities. This plan resulted in special charges of $147
million, including $103 million related to the write-down of the Colorado
Springs facilities to fair value, $15 million for employee severance costs
and costs associated with a voluntary early retirement program, $11 million
for intangible asset write-offs, and $18 million of other costs, principally
lease termination costs, contractual liabilities and other asset write-offs.
(2) In the first quarter of fiscal 1998, we experienced strong demand for our
modem products, particularly our older V.34 products. As a result of this
first quarter demand and forecasts of high demand throughout the balance of
fiscal 1998, we substantially increased production levels, including the
expanded use of external foundries. In the second half of fiscal 1998,
market acceptance of the V.90 standard for 56 kilobits per second (Kbps)
modem technology, coupled with the precipitous drop in V.90 modem prices due
to intensified competition, substantially reduced the demand for our V.34
modem inventory, much of which was produced in early 1998. Lower than
anticipated modem sales in the third and fourth quarters of fiscal 1998 and
downward revisions to forecasted demand for certain of our products over the
next six months, particularly for the V.34 modems, caused us to record
additional inventory reserves of $66 million in the fourth quarter of fiscal
1998.
(3) On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed
a trial court's judgment of $57 million, plus interest, related to our
dispute with Celeritas Technologies, Ltd. As a result, we recorded a charge
of $35 million to increase our reserve for this matter to $65 million. We
also recorded additional provisions of $8 million in the fourth quarter
related to other intellectual property matters.
(4) In July 1998, we reduced production at our manufacturing facilities to
levels significantly below capacity, in order to align inventory levels with
anticipated market demand. We estimate the cost of this manufacturing
capacity underutilization in the fourth quarter of fiscal 1998 was
approximately $19 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our net sales by
product platform:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- ----------------
1998 1997 1996 1999 1998
------ ------ ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Personal Computing............................. $ 640 $ 861 $1,173 $302 $382
Personal Imaging............................... 102 131 113 37 59
Wireless Communications........................ 170 115 45 102 76
Digital Infotainment........................... 145 112 32 82 77
Network Access................................. 143 193 107 89 63
------ ------ ------ ---- ----
Total..................................... $1,200 $1,412 $1,470 $612 $657
====== ====== ====== ==== ====
</TABLE>
24
<PAGE> 25
The following table sets forth, for the periods indicated, certain of our
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- -----------------
1998 1997 1996 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 74.1 51.9 57.7 66.0 54.1
----- ----- ----- ----- -----
Gross margin...................................... 25.9 48.1 42.3 34.0 45.9
Research and development.......................... 28.5 19.9 10.5 22.9 25.0
Selling, general and administrative............... 20.9 13.5 10.2 18.5 19.5
Amortization of intangibles....................... 0.9 0.6 0.1 0.6 0.9
Purchased research and development................ -- 2.1 8.2 -- --
Special charges................................... 12.2 -- -- 6.2 --
----- ----- ----- ----- -----
Operating (loss) earnings......................... (36.6) 12.0 13.3 (14.2) 0.5
Other income, net................................. 0.8 0.7 0.2 -- 0.9
----- ----- ----- ----- -----
(Loss) income before income taxes................. (35.8) 12.7 13.5 (14.2) 1.4
(Benefit) provision for income taxes.............. (14.0) 3.8 7.8 (6.0) 0.6
----- ----- ----- ----- -----
Net (loss) income................................. (21.8)% 8.9% 5.7% (8.2)% 0.8%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
Net sales. For the six months ended March 31, 1999, net sales of $612
million were 7 percent less than net sales of $657 million for the six months
ended March 31, 1998, on a 34 percent increase in unit shipments. Net sales
declined in two of the five product platforms during the six months ended March
31, 1999 compared to the same period in fiscal 1998. Net sales for Personal
Computing decreased 21 percent. Personal Computing sales comprised 49 percent of
our net sales compared to 58 percent for the same period in the previous year.
Net sales declined due to a shift towards lower priced products such as the Host
Controllerless (HCF) product line and a decline in average selling prices. Net
sales for Personal Imaging declined 37 percent. This decrease was primarily
related to a reduction in facsimile modem shipments to the Asian market. The
decline in net sales from Personal Computing and Personal Imaging compared to
the first six months of fiscal 1998 were partially offset by unit shipment and
revenue growth in the other three product platforms. Net sales for Wireless
Communications increased from $76 million to $102 million, or 34 percent. This
growth was due primarily to the CDMA (Code Division Multiple Access) power
amplifier product line. Net sales for Network Access increased from $63 million
to $89 million, or 41 percent. Net sales for Digital Infotainment increased from
$77 million to $82 million, or 6 percent, and was driven by increased shipments
of encoder/decoder products and set-top box tuners.
Gross margin. Cost of sales consists predominantly of purchased materials,
labor and overhead (including depreciation) associated with product
manufacturing, royalty and other intellectual property costs, warranty and
sustaining engineering expenses pertaining to products sold. Gross margin for
the six months ended March 31, 1999 decreased 31 percent to $208 million, from
$301 million for the six months ended March 31, 1998. As a percentage of net
sales, gross margin decreased to 34 percent from 46 percent in the same period
of the prior year, primarily due to pricing pressure in Personal Computing and
unusually high inventory costs associated with lower manufacturing capacity
utilization in the first fiscal quarter of 1999.
Research and development. Research and development expenses consist
primarily of salaries and selected costs of employees engaged in product/process
research, design and development activities, as well as related subcontracting
activities, prototype development, cost of design tools and technology license
agreement expenses. These expenses for the six months ended March 31, 1999 were
$140 million, 14.8 percent lower than the $164 million in the six months ended
March 31, 1998. The decrease in research and development expenses for the fiscal
1999 period was driven principally by cost reduction actions initiated in the
fourth quarter of
25
<PAGE> 26
fiscal 1998 to reduce our overall cost structure. These actions included
headcount reductions, design center closures and project cancellations.
Selling, general and administrative. Selling, general and administrative
expenses consist mainly of employee expenses not related to product
manufacturing or research and development, commissions to sales representatives,
advertising, marketing expenses, legal costs and provisions for doubtful
accounts. These expenses for the six months ended March 31, 1999 were $113
million, 12 percent lower than the $128 million for the same period of the prior
year. The decline was due to reductions in headcount, advertising and consulting
expenses.
Amortization of intangibles. Amortization of intangibles consists
primarily of the amortization of goodwill related to the various acquisitions
made by us. Amortization of intangibles for the six months ended March 31, 1999
was $4 million, 27 percent lower than the $6 million for the same period of the
prior year. The decline was due to a write-off of goodwill related to the
acquisition of certain technologies that were abandoned in the fourth quarter of
fiscal 1998 in conjunction with the restructuring activities.
Special charges. In the first six months of fiscal 1999, we recorded
special charges of $38 million. In the first fiscal quarter of 1999, we recorded
a special charge for an additional asset impairment of $20 million for the
Colorado Springs wafer fabrication facilities as a result of Rockwell's decision
to further write-down the facilities, which were retained by Rockwell as part of
the spin-off. This non-cash charge was required to be reported in our last
fiscal quarter as a subsidiary of Rockwell. Other special charges were $18
million. These special charges included approximately $17 million related to a
voluntary early retirement program and $1 million related to equipment
decommission and contract cancellation at the Colorado Springs wafer fabrication
facilities.
Operating (loss) earnings. We incurred an operating loss of $87 million
for the first six months of fiscal 1999, compared to operating earnings of $3
million for the first six months of fiscal 1998.
Other income, net. Other income, net for the six months ended March 31,
1999 of $240,000 decreased from $6 million in the first six months of fiscal
1998 primarily due to a $3 million cash payment that was received in the first
quarter of fiscal 1998 in connection with a contract cancellation as well as the
interest expense of $2 million recorded in the six months ended March 31, 1999.
1998 COMPARED TO 1997
Net sales. Net sales decreased 15 percent to $1,200 million in fiscal 1998
from $1,412 million in fiscal 1997. This decrease was principally due to a
decline in sales of $221 million from PC modems in Personal Computing and $50
million from central site modems in Network Access. The decrease in modem sales
in 1998 was due to significant price declines of our V.34 and 56 Kbps products,
partially offset by an 18 percent increase in modem unit volume. Personal
Imaging sales also declined 22 percent to $102 million, reflecting lower product
demand, principally as a result of the protracted Asia-Pacific recession. These
sales declines were partially offset by an increase in sales from Wireless
Communications and Digital Infotainment. Wireless Communications sales grew 48
percent to $170 million, driven by increased volume of digital cordless
telephone chipsets and power amplifier components. Digital Infotainment sales
grew 30 percent to $145 million as a result of increased demand for video
encoders/decoders and broadband communications products.
Gross margin. Gross margin decreased 54 percent to $311 million in fiscal
1998 from $679 million in fiscal 1997. As a percentage of net sales, gross
margin declined to 26 percent in 1998 from 48 percent in fiscal 1997. This
decline was due primarily to a 45 percent reduction in average selling prices of
PC modem products, slightly offset by higher margins on Wireless Communications
and Digital Infotainment products. Gross margin was also adversely impacted by
the fourth quarter fiscal 1998 inventory write-off of $66 million (5.5 percent
of net sales), the $43 million charge (3.6 percent of net sales) for
intellectual property matters and $19 million (1.6 percent of net sales) related
to the underutilization of manufacturing capacity. The 50-day strike that ended
in July 1998 had little or no effect on our full-year operating results.
Research and development. Investments in new product and process
development increased 22 percent to $342 million in fiscal 1998 from $280
million in fiscal 1997. This increase was due primarily to investments
26
<PAGE> 27
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 (Asynchronous Transfer Mode), T1/E1 (high speed digital transmission) and
SONET (Synchronous Optical Network) portfolio expansion, GSM (Global System for
Mobile Communications) and CDMA radio frequency integrated circuits, GSM
systems, broadband communication products, including cable modems, and
multifunction peripheral products. We also continued our investments in
specialty process development activities, including Bipolar, BiCMOS (Bipolar
Complementary Metal-Oxide Semiconductor) and gallium arsenide processes.
Selling, general and administrative expenses. These expenses increased 31
percent to $251 million in fiscal 1998 from $191 million in fiscal 1997. This
increase was primarily due to higher costs of cooperative advertising programs
associated with various channel and brand development campaigns of approximately
$26 million and $11 million related to the growth of the worldwide sales
organization to support our 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.
Amortization of intangibles. Fiscal year 1998 amortization of intangibles
increased by $2 million over fiscal 1997 due to the full year impact of the
acquisition of the Hi-Media broadband communication chipset business of
ComStream Corporation which was completed in May 1997.
Operating (loss) earnings. We incurred an operating loss of $440 million,
including special charges of $147 million, in fiscal 1998, compared to operating
earnings of $169 million, including a $30 million charge for purchased research
and development, in fiscal 1997.
Other income, net. Other income consists of royalty income from technology
license agreements, gains and losses on sales of property and investments and
other non-operating income and expense.
Net (loss) income. The net loss for fiscal 1998 was $262 million, compared
to fiscal 1997's net income of $126 million.
1997 COMPARED TO 1996
Net sales. Net sales decreased 3.9 percent to $1,412 million in fiscal
1997 from $1,470 million in fiscal 1996 despite the addition of sales resulting
from the acquisition of Brooktree Corporation at the end of fiscal 1996.
Personal Computing sales decreased $312 million due to severe price declines in
all of our PC modem products, primarily in connection with the introduction of
our K56Flex(TM) product. Average selling prices for PC modem products declined
by 34 percent compared to fiscal 1996, partially offset by a modem unit volume
increase of 23 percent. This sales decrease was partially offset by sales
increases in our expansion platforms. Personal Imaging sales grew 16 percent to
$131 million, led by a strong demand for fax modem chipsets. Network Access
sales grew 80 percent to $193 million, related to sales of remote access
concentrators. Digital Infotainment sales grew 250 percent to $112 million,
driven by video encoder/decoder product rollouts and the introduction of radio
frequency tuner products. Sales in Wireless Communications increased $70 million
(or 156 percent) over the prior year primarily due to growth in sales of our
digital cordless telephone products and power amplifier components.
Gross margin. Gross margin increased 9.2 percent to $679 million in fiscal
1997 from $622 million in fiscal 1996. As a percentage of sales, gross margin
increased to 48 percent from 42 percent. This increase was due to $107 million
of lower costs of intellectual property matters in fiscal 1997 compared to
fiscal 1996, partially offset by the impact of approximately 25 percent lower
average selling prices for modem products.
Research and development. Investments in new product and process
development increased 81 percent to $280 million in fiscal 1997 from $155
million in fiscal 1996. This increase was due primarily to an increase in
investments in mixed signal and manufacturing process technologies and the
inclusion of research and development expenditures from Brooktree, Hi-Media and
our other acquisitions.
Selling, general and administrative. These expenses increased 27 percent
to $191 million in fiscal 1997 from $150 million in fiscal 1996. The increase
was due to the inclusion of selling, general and administrative
27
<PAGE> 28
costs from Brooktree, costs of $6 million related to the growth in our worldwide
sales organization and a $7 million increase in advertising costs for the
K56Flex(TM) campaign. The increase was partially offset by a decrease in bad
debt expense of $24 million associated with receipt of payments for accounts
which were previously reserved.
Amortization of intangibles. Amortization of intangibles increased to $9
million in fiscal 1997 compared to $1 million in fiscal 1996 due to the impact
of the Brooktree acquisition which was consummated in September 1996.
Operating earnings. Operating earnings, including a $30 million charge for
purchased research and development in connection with the acquisition of
Hi-Media, were $169 million in fiscal 1997, a decrease of $26 million from
operating earnings, including a $121 million charge for purchased research and
development in connection with the Brooktree acquisition, of $195 million in
fiscal 1996.
Other income, net. Other income increased $8 million from 1996 to 1997,
principally resulting from $7 million of income related to the favorable
settlement of a technology license dispute in 1997.
Net income (loss). Net income in 1997 was $126 million, compared with net
income of $84 million in 1996.
INCOME TAXES
Our effective income tax rates determined on a stand-alone basis were 39.1
percent in 1998, 30.0 percent in 1997 and 57.6 percent in 1996.
The effective tax rates are generally lower than the statutory rate due to
tax benefits we utilized related to export sales and research credits. The
effective tax rate was higher in fiscal 1996 due to the non-deductible charge
recorded in connection with the Brooktree acquisition.
The income tax provision for the six months ended March 31, 1999 was a
benefit of $37 million, or 43 percent of the loss before income taxes. For the
six months ended March 31, 1998, an income tax provision of $4 million, or 46
percent of income before income taxes, was provided. The effective tax rate for
the remainder of the fiscal year is expected to remain at 30 percent, down from
earlier quarters, primarily due to the positive impact of various tax credits
available to us. The effective tax rate includes state tax credits and federal
research and experimentation tax credits.
ACQUISITIONS
In September 1996, we acquired Brooktree, a designer and supplier of
mixed-signal integrated circuits for high-speed digital communications and media
processing applications, for $254 million, net of cash acquired. The excess of
the purchase price over the fair value of tangible net assets of $178 million
was allocated to intangible assets, including $50 million for developed
technology, $7 million for assembled workforce and $121 million for purchased
research and development. Developed technology and assembled workforce are being
amortized on a straight-line basis over eight and ten years, respectively.
Purchased research and development, which represented the value assigned to
projects in process at Brooktree at the date of acquisition which had not yet
reached technological feasibility and had no alternative future use, was charged
immediately to expense. The research and development projects related to three
categories of products in process:
- Communications, which includes products for the telecommunications
industry and high-speed T1/E1 applications, as well as WAN (wide area
network) and ATM products,
- Graphics and Imaging, which includes integrated circuits that enable PC
vendors to offer cost-effective graphic and video processing, and
- Multimedia, which includes products that enable PCs to simultaneously
control graphics, text, animation, sound and video through use of
"packeted data".
28
<PAGE> 29
At the date of the acquisition, Brooktree had several projects in process
at various stages of completion. The efforts to complete these projects included
finalization of design, device layout, fabrication, testing and systems
integration. At the date of the acquisition, the estimated amount and timing of
effort to complete these projects varied by product platform and averaged
approximately $40 million annually for the first five years after the
acquisition, declining steadily thereafter.
In May 1997, we acquired Hi-Media for $42 million in cash. The purchase
price allocation included $30 million ($19 million after-tax) for purchased
research and development. The projects in process at Hi-Media at the date of
acquisition which had not yet reached technological feasibility and had no
alternative future use related to integrated circuits for the direct broadcast
satellite, wireless (MMDS) and cable modem markets. The efforts to complete
these projects included finalization of design, device layout, fabrication,
testing and systems integration. At the date of the acquisition, the estimated
amount and timing of effort to complete these projects varied by product
platform and averaged approximately $11 million annually for the first five
years after the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
In December 1998, Conexant and three of our subsidiaries entered into a
bank credit facility with a group of banks. The credit facility includes
facilities for revolving loans and swingline loans in multiple currencies and
letters of credit. The credit facility is guaranteed by substantially all of our
domestic subsidiaries. It is also secured by (1) a first-priority security
interest in substantially all of our domestic assets and our domestic
subsidiaries and (2) a pledge of the stock of our domestic and foreign
subsidiaries, subject to certain exceptions.
Prior to our spin-off from Rockwell, we obtained significant investments
from Rockwell as the business pursued its strategies of product diversification
and development of world-class manufacturing capabilities. Net transfers of cash
to Rockwell from us totaled $45 million for the first six months of fiscal 1999
and net transfers of cash from Rockwell were $172 million in fiscal 1998, $86
million in fiscal 1997 and $341 million in fiscal 1996.
Cash provided by operating activities was $134 million for the six months
ended March 31, 1999, compared to $8 million of cash used by operating
activities in the same period of fiscal 1998. Net operating cash flows were
favorably impacted due to a net decrease in inventories of $54 million in the
first six months of fiscal 1999, as compared to a net increase of $87 million in
the same period for the prior year, reflecting the results of our efforts to
reduce inventory quantities and unit costs. In addition, net receivables were
reduced by $20 million during the six months ended March 31, 1999, driven by an
improved rate of collections. Net income in the first six months of fiscal 1999
was reduced by non-cash special charges of $38 million and non-cash charges for
depreciation and amortization of $104 million. These items were partially offset
by a $22 million decrease in trade payables and a $17 million decrease in other
current liabilities from September 30, 1998.
Cash provided by operating activities was $98 million in fiscal 1998, $296
million in fiscal 1997 and $315 million in fiscal 1996. Our fiscal 1998
operating activities generated almost $100 million in cash despite the
significant net loss, due in part to improvement in accounts receivable
collections and the non-cash special and other charges included in 1998's net
loss. Fiscal 1997's operating cash flow was due to our strong profitability,
offset somewhat by the settlement of certain intellectual property matters.
Fiscal 1996's operating cash flow was driven by explosive revenue growth
principally for our V.34 PC modem products, partially offset by increases in
receivables and inventories of $205 million, related to this strong market
demand.
Investing activities used $33 million in cash during the six months ended
March 31, 1999, compared to $122 million in the same period of fiscal 1998.
Lower current period investments relate to the timing of capital expenditures
for additional capacity and new process technologies. Capital expenditures for
the entire 1999 fiscal year, previously expected to be approximately $160
million, are currently expected to be approximately $195 million.
We have made significant investments in product and process technology,
including capital expenditures of $270 million in fiscal 1998, $317 million in
fiscal 1997 and $380 million in fiscal 1996. The capital
29
<PAGE> 30
expenditures included capacity expansion at our main fabrication facility in
Newport Beach, California and investments in manufacturing process technology to
reduce manufacturing costs. We also made several strategic acquisitions to
broaden our product portfolio and market positions. These acquisitions included
Brooktree, for approximately $254 million (net of cash acquired) in fiscal 1996
and Hi-Media for approximately $42 million in fiscal 1997. Investing activities
from fiscal 1996 through fiscal 1998 also included approximately $128 million of
cash used for our wafer fabrication facilities in Colorado Springs, Colorado.
These investments have historically been funded by cash from operations and
transfers by Rockwell.
Our financing activities provided cash of $45 million during the six months
ended March 31, 1999, compared to $131 million during the same period of fiscal
1998. Financing sources of cash for the first six months of fiscal 1999 were
$100 million of short-term borrowings under our bank credit facility. These
items were partially offset by the repayment of a loan at our Japanese
subsidiary and net transfers to Rockwell. In fiscal 1998, the financing sources
of cash were predominantly transfers of cash from Rockwell.
The net proceeds of $340,375,000 from the initial private placement of the
notes were used to repay $100 million of short-term borrowings, plus accrued
interest, under our credit facility. We expect to use the remainder of these
proceeds 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.
We believe that our existing sources of liquidity and cash expected to be
generated from future operations are sufficient to fund operations, capital
expenditures and research and development efforts for the foreseeable future.
YEAR 2000 READINESS DISCLOSURE
We are addressing the impact of the year 2000 on each of five major areas:
- products;
- business systems (our computer systems that handle business processes);
- infrastructure (our servers, desktop computers, networks, telecom systems
and software);
- manufacturing systems (our computer systems used in our manufacturing
process); and
- suppliers (our 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 of our assets are inventoried to
identify those that have any type of software or hardware year
2000-related issues;
- second, in the assessment phase, all inventoried items are assessed to
confirm that a year 2000-related issue is present and the extent of
remediation required;
- third, in the strategy phase, a remediation strategy is created to ensure
that all critical systems are upgraded to be year 2000 ready by December
31, 1999;
- fourth, in the conversion/upgrade phase, upgrades are performed on all
items identified in the assessment and strategy phases; and
- finally, in the certification phase, all upgraded items receive final
certification testing to verify year 2000 readiness.
We have completed the inventory phase for all five areas. In addition, we
have completed the assessment and strategy phases and are currently in the
conversion and certification phases for the products, business systems,
infrastructure and manufacturing systems areas. We have completed the assessment
and strategy phases and are now in the remediation and certification phases for
the suppliers area. We have begun auditing those suppliers who did not perform
up to standards during the assessment phase. We are integrating our testing
efforts with SEMATECH, a consortium of semiconductor manufacturing companies, to
ensure best
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practice testing. The manufacturing systems, hardware systems and software
applications areas are being tested under the SEMATECH guidelines.
Our 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, we are dependent on
suppliers to upgrade their systems to ensure an uninterrupted supply of
materials. Approximately 95 percent of our manufacturing tools have achieved
certification. A year 2000-related failure by a significant materials supplier
could result in the temporary slowdown of our production, the duration of which
we reasonably estimate would be not more than a few days. As a result, our
contingency plan centers heavily on the supplier area. For the top five to ten
percent of our critical materials and manufacturing suppliers, we are performing
on-site audits and intend to monitor specific year 2000-based milestones to
ensure readiness. We have completed our assessment of all Tier 1 critical
suppliers and have begun our audit process. In the event a supplier has not met
our milestones for year 2000 readiness, we have identified specific target dates
for all critical materials suppliers and have implemented a contingency plan
that includes alternate sourcing and stockpiling of materials.
Part of our 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. We have received
responses from all of those questioned. We are following up the questionnaires,
where necessary, with on-site audits to ensure year 2000 readiness. We have also
contacted our major customers with respect to their year 2000 readiness efforts
and do not believe that customers will have any year 2000 readiness problems
that would have a material adverse effect on our business.
In connection with our receipt of transition services pursuant to the
Transition Agreement entered into with Rockwell, we will rely on certain of
Rockwell's computer systems, including our payroll and benefits administration
systems, for a period of up to two years after our spin-off. We believe that the
Rockwell systems on which we rely for transition services will be year 2000
ready, such that our reliance thereon will not have a material adverse effect on
our financial position or results of operations.
Overall, utilizing both internal and external resources to address the year
2000 issue, we have substantially completed our year 2000 certification as of
June 30, 1999 and expect to be completed by December 31, 1999. The current
estimate of total project cost is approximately $6 million, which includes the
cost of purchasing certain hardware and software. Approximately $5 million of
this amount is for capital investments, with the remainder being expenses,
primarily salary costs. As of March 31, 1999, approximately $2 million had been
spent, with the majority of the remaining amount to be spent by the end of this
fiscal year. We continue to evaluate the estimated costs associated with these
efforts based on actual experience. Management believes, based on available
information, that we will be able to remediate year 2000-related issues in the
products, business systems and infrastructure areas without any material adverse
effect on our business operations, products or financial condition. However, we
could be adversely impacted by the year 2000 issues faced by major suppliers,
distributors, customers, vendors and financial services organizations with which
we interact. Any disruption in our 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 our business operations, products and financial condition.
We have begun initial preparation of a year 2000 contingency plan for the
entire company, with an expectation to complete this plan by September 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and short-term debt. At March 31,
1999, the carrying values of our financial instruments approximated their fair
values based on current market prices and rates.
It is our policy not to enter into derivative financial instruments for
speculative purposes. We enter into foreign currency forward exchange contracts
to protect ourself from adverse currency rate fluctuations on foreign currency
commitments entered into in the ordinary course of business. These commitments
are
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generally for terms of less than one year. The foreign currency forward exchange
contracts are executed with creditworthy banks and are denominated in currencies
of major industrial countries. The notional amount of all our outstanding
foreign currency forward exchange contracts aggregated $14 million at March 31,
1999, $17 million at September 30, 1998 and $28 million at September 30, 1997.
The gains and losses relating to these foreign currency forward exchange
contracts are deferred and included in the measurement of the foreign currency
transaction subject to the hedge. We believe that any gain or loss incurred on
foreign currency forward exchange contracts is offset by the effects of currency
movements on the respective underlying hedged transactions.
Based on our overall currency rate exposure at March 31, 1999, a 10 percent
change in currency rates would not have had a material effect on our financial
position, results of operations or cash flows.
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<PAGE> 33
DESCRIPTION OF NOTES
The notes are issued under an indenture dated as of May 1, 1999 between us
and The First National Bank of Chicago, as trustee. This section summarizes
certain provisions of the notes, the indenture and the registration rights
agreement that we entered into with the initial purchasers of the notes. This
section is not a complete description of all the provisions of the notes and is
subject to, and qualified by reference to, the indenture and the registration
rights agreement, including the definitions in those documents of certain terms
which are not otherwise defined in this prospectus. You may obtain a copy of the
indenture and the registration rights agreement from the trustee. Wherever
particular provisions or defined terms of the indenture, or of the form of note
which is a part of the indenture, or the registration rights agreement are
referred to, those provisions or defined terms are incorporated by reference
into this prospectus. The terms we, us, our and Conexant in this section refer
solely to Conexant and do not include our subsidiaries. The term you in this
section refers to record holders of notes in registered form or owners of
beneficial interests in a global note held by The Depository Trust Company, as
the context may require.
GENERAL
We issued $350,000,000 aggregate principal amount of the notes on May 12,
1999 in a private placement. The notes:
- bear interest at an annual rate of 4 1/4%, payable semiannually, as
described below under "-- Interest",
- mature on May 1, 2006, unless earlier converted or redeemed,
- are convertible, at your option, into our common stock, as described
under "-- Conversion of Notes",
- are redeemable, at our option, as described under "-- Optional Redemption
by Conexant" and at your option as described under "-- Redemption at
Option of the Holder",
- are unsecured general obligations and are subordinate in right of payment
to certain other indebtedness, as described under "-- Subordination of
Notes", and
- are issued only in multiples of $1,000.
The indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of indebtedness, including senior
indebtedness, or the issuance or repurchase of our securities. The indenture
does not protect you in the event of a highly leveraged transaction or a change
in control of Conexant except to the extent described below under "-- Redemption
at Option of the Holder".
INTEREST
The notes bear interest at an annual rate of 4 1/4% from May 12, 1999, or
from the most recent payment date on which we have paid interest. We compute
interest on the basis of a 360-day year composed of twelve 30-day months. We
will make interest payments semiannually on May 1 and November 1, beginning on
November 1, 1999, to holders of record at the close of business on the preceding
April 15 and October 15, respectively. There are exceptions to the payment to
record holders in certain situations involving redemptions and conversions, as
described under "-- Optional Redemption by Conexant", "-- Redemption at Option
of the Holder" and "-- Conversion of Notes".
We will pay interest at the office we maintain for that purpose in the
Borough of Manhattan, the City of New York, which initially is an office of the
trustee. We may pay you interest (1) by check mailed to you, (2) if you own
notes with an aggregate principal amount in excess of $5 million, at your
election, by wire transfer in immediately available funds, or (3) to an account
maintained by you located in the United States. In addition, we will make
payments to The Depository Trust Company, New York, New York by wire transfer of
immediately available funds to the account of the Depository Trust Company or
its nominee.
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FORM, DENOMINATION AND REGISTRATION
We issued the notes in fully registered form, without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Global Note, Book-Entry Form. The notes that were sold to "qualified
institutional buyers" as defined in Rule 144A under the Securities Act are
evidenced by global notes which were deposited with the Depository Trust Company
and registered in the name of Cede & Co. as the nominee of the DTC. The notes
sold pursuant to this prospectus may be evidenced in whole or in part by one or
more global notes deposited with the DTC and registered in the name of Cede &
Co. as the nominee of the DTC. Except as set forth below, a global note may be
transferred, in whole or in part, only to another nominee of the DTC or to a
successor of the DTC or its nominee.
You may hold an interest in a global note directly through the DTC if you
are a participant in the DTC, or indirectly through organizations which are
participants in the DTC. Transfers between the DTC participants are effected in
the ordinary way in accordance with the DTC rules and are settled in clearing
house funds.
If you are not a DTC participant you may own a beneficial interest in a
global note held by the DTC only through participants, or certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a participant. So long as Cede & Co., as
the nominee of the DTC, is the registered owner of a global note, Cede & Co. for
all purposes will be considered the sole holder of the global note. Except as
provided below, owners of beneficial interests in a global note do not have
certificates registered in their names, do not receive or are not entitled to
receive physical delivery of certificates in definitive registered form, and are
not considered the holders of the notes.
We will pay interest on and the redemption price of a global note to Cede &
Co., the nominee for the DTC as the registered owner of the global note, by wire
transfer of immediately available funds on each interest payment date or the
redemption or repurchase date, as the case may be. Neither we, the trustee nor
any paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in a global note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The DTC has informed us that its practice is to credit participants'
accounts on the payment date for any payment of interest or redemption price
with amounts proportionate to their respective beneficial interests in the
principal amount of a global note, unless the DTC has reason to believe that it
will not receive payment. Payments by participants to owners of beneficial
interests in a global note held through the participants will be the
responsibility of the participants.
Because the DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, if you hold a beneficial
interest in a global note, rather than registered notes evidenced by a physical
certificate, your ability to pledge that interest to persons or entities that do
not participate in the DTC system, or take other actions in respect of that
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither we nor the trustee (nor any registrar, paying agent or conversion
agent under the indenture) are responsible for the performance by the DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations. The DTC has advised us that it
will take any action permitted to be taken by a holder of notes only at the
direction of one or more of its participants with an interest in a global note,
and then only in respect of the principal amount of the notes as to which
directions have been given by those participants.
The DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York,
- a member of the Federal Reserve System,
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- a "clearing corporation" within the meaning of the Uniform Commercial
Code, and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
The DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical movement of certificates. The DTC's
participants include securities brokers and dealers, banks, trust companies and
clearing corporations, and may include certain other organizations such as the
initial purchasers of the notes. Certain of the DTC's participants or their
representatives, together with other entities, own the DTC. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
participant, either directly or indirectly.
Although the DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in a global note among participants, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If the DTC is at any time unwilling
or unable to continue as depositary and a successor depositary is not appointed
by us within 90 days, we will issue notes in definitive registered form in
exchange for global notes.
Certificated Notes. The notes that were sold to institutional "accredited
investors", as defined in Rule 501 (a) (1), (2), (3) or (7) under the Securities
Act, were issued in definitive registered form. We will issue certificated notes
in exchange for notes represented by a global note upon request by the DTC. As
described above, the DTC has informed us that it will request such an exchange
only to the extent requested by a participant with respect to its interest in a
global note.
CONVERSION OF NOTES
You are entitled at any time before the close of business on May 1, 2006,
subject to prior redemption, to convert all or any portion of a note, in
multiples of $1,000, into common stock. The conversion price is $46.196 per
share, subject to adjustment as described below. Except as described below, we
will not make any payment or other adjustment on conversion of any notes for
accrued interest or for dividends on the common stock.
If you convert any notes during the period from, but excluding, a record
date for any interest payment date to, but excluding, the interest payment date,
you must provide us with funds equal to the interest payable on that interest
payment date on the principal amount being converted unless those notes have
been called for redemption on a redemption date that occurs during that period
or those notes are to be redeemed in connection with a fundamental change on a
repurchase date that occurs during that period. If you convert any notes during
that period and those notes have been called for redemption on a redemption date
that occurs during that period or those notes are to be redeemed in connection
with a fundamental change on a repurchase date that occurs during that period,
those notes will be deemed to have been redeemed and you will be entitled to
interest on those notes as described below under "-- Optional Redemption by
Conexant" and "-- Redemption at Option of the Holder".
We will not issue fractional shares of common stock upon conversion of
notes. Instead, we will pay a cash adjustment based upon the market price of
common stock on the last business day prior to the date of conversion.
Conversion rights on notes called for redemption will expire at the close
of business on the business day preceding the redemption date unless we default
in the payment of the redemption price. If you exercise your option to require
redemption upon a fundamental change, you may convert your note only if you
withdraw your election to require redemption in accordance with the terms of the
indenture.
We will adjust the conversion price in certain events, including:
(a) the issuance of common stock as a dividend or distribution on
common stock;
(b) the issuance to all holders of common stock of certain rights or
warrants to purchase common stock;
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(c) certain subdivisions and combinations of common stock;
(d) the distribution to all holders of common stock of capital stock
(other than our common stock) or evidences of indebtedness of Conexant or
of assets, including securities, but excluding those rights, warrants,
dividends and distributions referred to in clauses (a) and (b) above or
paid in cash;
(e) distributions consisting of cash, excluding any quarterly cash
dividend on common stock to the extent that the aggregate cash dividend per
share of common stock in any quarter does not exceed the greater of:
(1) the amount per share of common stock of the last quarterly cash
dividend on common stock to the extent that the last quarterly dividend
did not require an adjustment of the conversion price pursuant to this
clause (e), as adjusted to reflect subdivisions or combinations of
common stock, and
(2) 3.75% of the average of the last reported sale prices of common
stock during the ten trading days immediately prior to the date of
declaration of such dividend, and excluding any dividend or distribution
in connection with the liquidation, dissolution or winding up of
Conexant.
If an adjustment is required to be made under this clause (e) as a
result of a distribution that is a quarterly dividend, that adjustment
would be based upon the amount by which such distribution exceeds the
amount of the quarterly cash dividend permitted to be excluded as described
above. If an adjustment is required to be made under this clause (e) as a
result of a distribution that is not a quarterly dividend, the adjustment
would be based upon the full amount of the distribution;
(f) payment in respect of a tender offer or exchange offer by us or
any of our subsidiaries for our common stock to the extent that the cash
and value of any other consideration included in such payment per share of
common stock exceeds the current market price per share of common stock on
the trading day next following the last date for tenders or exchanges; and
(g) payment in respect of a tender offer or exchange offer by a person
other than us or any of our subsidiaries in which, as of the closing date
of the offer, our board of directors is not recommending rejection of the
offer. This adjustment will only be made if the tender offer or exchange
offer is for an amount that increases the offeror's ownership of our common
stock to more than 25% of the total shares of common stock outstanding, and
if the cash and value of any other consideration included in such payment
per share of common stock exceeds the current market price per share of
common stock on the trading day next succeeding the last date for tenders
or exchanges. The adjustment described in this clause (g) will generally
not be made, if, as of the closing of the offer, the offering documents
with respect to the tender or exchange offer disclose a plan or an
intention to cause us to engage in a consolidation or merger or a sale of
all or substantially all of our assets.
The indenture includes certain rules for determining the current market
price of our common stock and valuing other consideration for purposes of the
conversion price adjustments summarized above.
Under the indenture, we have agreed to use all reasonable efforts to amend
the Rights Agreement described below to provide that upon conversion of the
notes into common stock, to the extent that the Rights Agreement and any rights
granted thereunder remain outstanding and in effect upon conversion, you will
receive, in addition to common stock, our preferred share purchase rights as
more fully described below under "Description of Capital Stock -- Conexant
Rights Plan". Subject to certain limited customary exceptions, you will receive
the preferred share purchase rights whether or not such rights have separated
from common stock at the time of conversion. We have also agreed that any future
shareholder rights plan adopted by us will contain similar provisions with
respect to the receipt of preferred share purchase rights.
If we reclassify the common stock, complete a consolidation, merger or
combination involving Conexant or sell or convey to another person our property
and assets as an entirety or substantially as an entirety, and as a result the
holders of common stock are entitled to receive stock, other securities, other
property or assets (including cash) with respect to or in exchange for such
common stock, then you may convert your notes into the kind and amount of shares
of stock, other securities or other property or assets (including cash) that you
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would have owned or been entitled to receive had you converted your notes into
common stock immediately prior to such transaction, assuming that you had not
exercised any rights of election as to the stock, other securities or other
property or assets (including cash).
In the event of a taxable distribution to holders of common stock or in
certain circumstances requiring an adjustment to the conversion price, you may
be deemed to have received a distribution subject to U.S. income tax as a
dividend. In certain other circumstances, the absence of such an adjustment may
result in a taxable dividend to the holders of common stock. See "Certain
Federal Income Tax Considerations" for a discussion of such income tax matters.
To the extent permitted by law, we may reduce the conversion price by any
amount for any period of at least 20 days. If we do so, we will give you at
least 15 days' notice. We may, at our option, make additional reductions in the
conversion price, as our board of directors deems advisable to avoid or diminish
any income tax to holders of common stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "Certain Federal Income Tax Considerations"
for a discussion of such income tax matters.
We are not required to make any adjustment in the conversion price unless
it would change the conversion price by at least 1%. We will carry forward any
adjustment that would otherwise be required and take it into account in any
future adjustment. Except as stated above, we will not adjust the conversion
price for the issuance of common stock or any securities convertible into or
exchangeable for common stock or carrying the right to purchase any of the
foregoing.
OPTIONAL REDEMPTION BY CONEXANT
The notes are not entitled to any sinking fund. At any time on or after May
6, 2002, we may redeem the notes as a whole or in part. We will give you at
least 30 days' notice of any redemptions by us. The redemption will be made at
the following prices (expressed as a percentage of the principal amount),
together with accrued interest to, but excluding, the redemption date:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C>
Beginning on May 6, 2002 and ending on April 30, 2003....... 102.429%
Beginning on May 1, 2003 and ending on April 30, 2004....... 101.821
Beginning on May 1, 2004 and ending on April 30, 2005....... 101.214
Beginning on May 1, 2005 and ending on April 30, 2006....... 100.607
</TABLE>
and 100.000% on May 1, 2006. Accrued interest due on the redemption date will be
paid to you upon surrender of your redeemed notes, unless the redemption date is
an interest payment date. If the redemption date is an interest payment date,
the interest due on the redeemed notes will instead be paid to the registered
holder of the notes on the record date for interest payments.
If we redeem less than all of the outstanding notes, the trustee will
select the notes to be redeemed in principal amounts of $1,000 or integral
multiples thereof by lot, pro rata or by another method the trustee considers
fair and appropriate. If a portion of your notes is selected for partial
redemption and you convert a portion of these notes, the trustee will consider
the converted portion to be of the portion selected for redemption for all
purposes hereof, notwithstanding that any such note is converted as a whole or
in part before the mailing of the notice of redemption.
We may not give notice of any redemption of notes if we have defaulted in
the payment of interest or premium on the notes and the default is continuing.
Upon the issuance of a notice regarding our intent to redeem the notes, we will
issue a press release announcing the redemption.
REDEMPTION AT OPTION OF THE HOLDER
If a fundamental change, as described below, occurs at any time prior to
May 1, 2006, you may require us to redeem any or all of your notes 30 days after
the date of our notice of the fundamental change (the
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"repurchase date"). We will redeem the notes in multiples of $1,000 principal
amount at a price equal to 100% of the principal amount to be redeemed plus
accrued interest to, but excluding, the repurchase date. If the repurchase date
is an interest payment date, then we will pay the interest due to the
recordholder of the notes on the relevant record date for interest payments.
The indenture defines a "fundamental change" as any transaction or event in
connection with which all or substantially all common stock shall be exchanged
for, converted into, acquired for or constitute solely the right to receive,
consideration (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) which is not all or substantially all common stock listed (or, upon
consummation of or immediately following such transaction or event, which will
be listed) on a U.S. national securities exchange or approved for quotation on
the Nasdaq National Market or any similar U.S. system of automated dissemination
of quotations of securities prices.
We will mail you a notice of the occurrence of a fundamental change on or
before the tenth day after the fundamental change occurs advising you of your
redemption right. We will also issue a press release announcing the occurrence
of a fundamental change simultaneously with the issuance of the notice to you
and will give the trustee a copy of that notice.
To exercise the redemption right, you must deliver to us or our designated
agent, on or before the 30th day after the date of our notice of a fundamental
change, written notice of your exercise, together with the notes to be redeemed,
duly endorsed for transfer. We will make payment for notes surrendered for
redemption promptly following the repurchase date, unless you withdraw the
redemption request prior to the expiration of this 30-day period.
We will comply with the provisions of Rule 13e-4 and any other tender offer
rules under the Exchange Act to the extent then applicable in connection with
your redemption rights in the event of a fundamental change.
These redemption rights could discourage a potential acquiror of Conexant.
The fundamental change redemption feature, however, is not the result of our
knowledge of any specific effort to obtain control of Conexant by means of a
merger, tender offer, solicitation or otherwise. The term "fundamental change"
is limited to specified transactions and does not include other events that
might adversely affect our financial condition. The redemption rights do not
necessarily afford you protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction.
If a fundamental change were to occur, we cannot assure you that we would
have sufficient funds to pay the redemption price for all the notes tendered for
redemption. In addition, in many cases, a fundamental change would result in an
event of default under our existing credit facility. Any future credit
agreements or other agreements relating to other indebtedness, including senior
indebtedness, to which we become a party may contain similar provisions or may
expressly prohibit the repurchase of the notes on a fundamental change or may
provide that a fundamental change constitutes an event of default. If we are
prohibited from redeeming the notes, we could seek the consent of our lenders to
the redemption of the notes or could attempt to refinance the borrowings
containing that prohibition. If we do not obtain consent or repay these
borrowings, we would remain prohibited from redeeming the notes. In that case,
our failure to redeem tendered notes would be an event of default under the
indenture and may be a default under the terms of other indebtedness that we may
enter into from time to time. In these circumstances, or if the occurrence of a
fundamental change itself is an event of default under senior indebtedness, the
subordination provisions in the indenture would restrict or prohibit us from
making payments to the holders of notes.
SUBORDINATION OF NOTES
The notes are subordinated to the extent provided in the indenture to the
prior payment in full of all of our senior indebtedness, as described below. The
notes also are effectively subordinated to all indebtedness and other
liabilities, including trade payables and lease obligations, if any, of our
subsidiaries. Upon any distribution of our assets upon any dissolution, winding
up, liquidation or reorganization, the payment of the principal of, or premium,
if any, and interest, including the liquidated damages set forth in the
indenture, if
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any, on the notes is subordinated to the extent provided in the indenture in
right of payment to the prior payment in full of all of our senior indebtedness.
In the event of any acceleration of the notes because of an event of default,
the holders of any senior indebtedness then outstanding would be entitled to
payment in full of all obligations in respect of such senior indebtedness before
you or other holders of the notes are entitled to receive any payment or
distribution. The indenture requires that we promptly notify holders of senior
indebtedness if payment of the notes is accelerated because of an event of
default.
We also may not make any payment on the notes, including upon redemption,
if:
- a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of senior indebtedness occurs and is
continuing beyond any applicable period of grace, or
- any other default occurs and is continuing with respect to designated
senior indebtedness, as described below, that permits a holder of
designated senior indebtedness to accelerate its maturity and the trustee
receives a notice of that default from us or another person permitted to
give that notice under the indenture.
We will resume payments on the notes:
- in case of a payment default, upon the date on which the default is
cured, waived or ceases to exist, and
- in case of a default other than a payment default, as described above,
the earlier of the date on which the non-payment default is cured, waived
or ceases to exist or 179 days after the date on which the applicable
notice of default delivered to the trustee is received.
No new period of payment blockage for a non-payment default may be
commenced unless and until:
- 365 days have elapsed since the initial effectiveness of the immediately
prior default notice blocking payment on the notes for a non-payment
default, and
- all scheduled payments of principal, premium, if any, and interest,
including any liquidated damages, on the notes that have come due have
been paid in full in cash. No non-payment default that existed or was
continuing on the date of delivery of any default notice to the trustee
can be the basis for a subsequent default notice.
If the trustee, any paying agent on our behalf or any holder of the notes
receives any payment or distribution of our assets of any kind in contravention
of any of the subordination provisions of the indenture, in respect of the notes
before all senior indebtedness is paid in full, then the recipient must hold
such payment or distribution in trust for the benefit of holders of senior
indebtedness or their representatives to the extent necessary to make payment in
full of all senior indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holders
of senior indebtedness.
By reason of the subordination provisions described above, in the event of
our bankruptcy, dissolution or reorganization, holders of senior indebtedness
may receive more, ratably, and holders of the notes may receive less, ratably,
than our other creditors. That subordination will not prevent the occurrence of
any event of default under the indenture.
The term "senior indebtedness" is defined in the indenture and includes
principal, premium, interest, rent, fees, costs, expenses and other amounts
accrued or due on our existing or future indebtedness, as defined below, or any
existing or future indebtedness guaranteed or in effect guaranteed by us,
subject to certain exceptions. The term does not include:
- any indebtedness that by its express terms is not senior to the notes or
is pari passu or junior to the notes, or
- any indebtedness we owe to a subsidiary in which we directly or
indirectly own a majority of the voting stock.
The term "indebtedness" is also defined in the indenture and includes, in
general terms, our liabilities in respect of borrowed money, notes, bonds,
debentures, letters of credit, bank guarantees, bankers' acceptances,
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capital and certain other leases, interest rate and foreign currency derivative
contracts or similar arrangements, guarantees and certain other obligations
described in the indenture, subject to certain exceptions. The term does not
include, for example, any account payable or other accrued current liability or
obligation incurred in the ordinary course of business in connection with the
obtaining of materials or services.
The term "designated senior indebtedness" is defined in the indenture and
includes, in general terms, our credit facility and any other senior
indebtedness that by its terms expressly provides that it is "designated senior
indebtedness" for purposes of the indenture.
As of June 30, 1999, we had approximately $70 million of indebtedness
outstanding under foreign exchange contracts, certain leases and letters of
credit, that would have constituted senior indebtedness. The indenture does not
limit us or any of our subsidiaries from incurring or guaranteeing additional
indebtedness, including additional senior indebtedness.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against certain losses, liabilities or expenses incurred
by it in connection with its duties relating to the notes. The trustee's claims
for such payments will generally be senior to those of the holders of the notes
in respect of all funds collected or held by the trustee.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The indenture provides that each of the following constitutes an event of
default:
- default in payment of the principal of or premium, if any, upon
redemption or otherwise, on the notes, whether or not such payment is
permitted to be made under the subordination provisions described above,
- default for 30 days in payment of any installment of interest, including
any liquidated damages, on the notes, whether or not such payment is
permitted to be made under the subordination provisions described above,
- default by us for 60 days after notice in the observance or performance
of any other covenants in the indenture, or
- certain events involving the bankruptcy, insolvency or reorganization of
Conexant or certain of our significant subsidiaries, as defined in the
indenture.
The indenture provides that the trustee may withhold notice to the holders of
the notes of any default except in payment of principal or premium, if any, or
interest, including any liquidated damages, with respect to the notes if the
trustee considers it in the interest of the holders of the notes to do so.
If an event of default occurs and is continuing, the trustee or the holders
of not less than 25% in principal amount of the outstanding notes may declare
the principal of, premium, if any, and accrued interest, including any
liquidated damages, on the notes to be due and payable immediately. In the case
of certain events of bankruptcy or insolvency of Conexant, the notes
automatically become immediately due and payable. However, if we cure all
defaults, except the nonpayment of amounts which have become due by acceleration
and certain other conditions are met, with certain exceptions, the acceleration
may be canceled and past defaults may be waived by the holders of a majority of
the principal amount of the outstanding notes.
Any payment of principal, premium, if any, or interest, including any
liquidated damages, that is not made when due will accrue interest, to the
extent legally permissible, at an annual rate of 4 1/4% from the date on which
such payment was required under the terms of the indenture until the date of
payment. This interest amount will accrue whether or not payment of the other
amount is permitted under the subordination provisions described above.
The holders of a majority in principal amount of the notes then outstanding
have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the trustee, subject to limitations
specified in the indenture.
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No holder of the notes may pursue any remedy under the indenture, except in
the case of certain payment defaults, unless:
- the holder has previously given to the trustee written notice of a
continuing event of default,
- the holders of at least 25% in principal amount of the outstanding notes
make a written request and offer reasonable indemnity to the trustee to
pursue the remedy,
- the trustee does not receive from the holders of a majority in principal
amount of the outstanding notes a direction inconsistent with such
request, and
- the trustee fails to comply with such request within 60 days after
receipt.
MODIFICATION OF THE INDENTURE
With the consent of the holders of a majority in principal amount of the
outstanding notes, we and the trustee may modify the indenture or any
supplemental indenture or the rights of the holders of the notes. Without the
consent of the holder of each affected note, no such modification will:
- extend the fixed maturity of any note,
- reduce the rate or extend the time for payment of interest,
- reduce the principal amount or premium, if any,
- reduce any amount payable upon redemption,
- change our redemption obligation upon the happening of any fundamental
change in a manner adverse to the holders of the notes,
- impair the right of a holder to institute suit for payment,
- change the currency in which the notes are payable,
- impair the right to convert the notes into common stock subject to the
terms in the indenture, or
- modify the provisions of the indenture with respect to the subordination
of the notes in a manner adverse to the holders of the notes.
No modification may reduce the percentage of notes required for consent to
any modification of the indenture or any supplemental indenture without the
consent of the holders of all of the notes then outstanding. The indenture also
provides for certain modifications of its terms without the consent of the
holders of the notes.
REGISTRATION RIGHTS OF THE HOLDERS OF THE NOTES
On May 12, 1999, we entered into a registration rights agreement with the
initial purchasers of the notes. If you sell the notes or common stock issued on
conversion of the notes pursuant to this prospectus, you generally will be
required to be named as a selling securityholder, deliver this prospectus to
purchasers and be bound by certain provisions of the registration rights
agreement.
Under the registration rights agreement, we are required to keep the shelf
registration statement of which this prospectus is a part effective until the
earlier of:
- the sale of all the securities registered under this prospectus and
- the expiration of the holding period applicable for the securities held
by persons who are not our affiliates under Rule 144(k) under the
Securities Act, subject to certain permitted exceptions.
We may suspend the use of this prospectus under certain circumstances
relating to pending corporate developments, public filings with the Securities
and Exchange Commission and similar events. We are not permitted to do this more
than once in any three-month period or four times in any 12-month period. A
single period of suspension generally may not exceed 30 days. In the aggregate,
these suspension periods may not
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exceed 60 days in any three-month period or 90 days in any 12-month period. We
are permitted to suspend the use of the prospectus for a period not to exceed 60
days under certain circumstances relating to possible acquisitions,
acquisitions, financings or similar transactions. If the prospectus is
unavailable for periods in excess of those permitted above, we must pay
liquidated damages (1) in respect of the notes, at a rate per annum equal to
0.5% of the principal amount of the notes, and (2) in respect of any shares of
common stock, at a rate per annum equal to 0.5% of the then applicable
conversion price.
We will pay all expenses of the shelf registration statement, provide to
each registered holder copies of the prospectus and take certain other actions
as are required to permit unrestricted resales of the notes and the common
stock.
INFORMATION CONCERNING THE TRUSTEE
We have appointed The First National Bank of Chicago, trustee under the
indenture, as paying agent, conversion agent, registrar and custodian with
regard to the notes. The trustee is a lender under our existing credit facility.
The indenture contains certain limitations on the rights of the trustee, as long
as it or any of its affiliates remains our creditor, to obtain payment of claims
in certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. The trustee and its affiliates are
permitted to engage in other transactions with us. If the trustee or any
affiliate of the trustee continues to have any conflicting interest (as defined)
and a default occurs with respect to the notes, the trustee must eliminate that
conflict or resign.
RATING OF NOTES
One or more rating agencies may rate the notes. We cannot assure you that
an agency or agencies will rate the notes or, if they do, what rating or ratings
they will assign to the notes. The market price of the notes and common stock
could be materially adversely affected if rating agencies assign the notes a
rating lower than that expected by investors.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock, as amended or superseded by
any applicable prospectus supplement, includes a summary of certain provisions
of our certificate of incorporation and our by-laws. This description is subject
to the detailed provisions of, and is qualified by reference to, our certificate
of incorporation and our by-laws, copies of which have been filed as exhibits to
the registration statement of which this prospectus is a part.
We are authorized to issue (1) 500,000,000 shares of common stock, of which
97,267,836 shares of common stock were outstanding as of July 2, 1999, and (2)
25,000,000 shares of preferred stock, without par value, of which our board of
directors has designated 1,500,000 shares as Series A Junior Participating
Preferred Stock for issuance in connection with the exercise of our preferred
share purchase rights. For a more detailed discussion of our preferred share
purchase rights and how they relate to our common stock, see "-- Conexant
Preferred Share Purchase Rights Plan". The authorized shares of common stock and
preferred stock will be available for issuance without further action by our
shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded. If the approval of our shareholders is not so required, our
board of directors may determine not to seek shareholder approval.
Certain of the provisions described under this section entitled
"Description of Capital Stock" could have the effect of discouraging
transactions that might lead to a change of control of Conexant.
COMMON STOCK
Our certificate of incorporation and by-laws:
- establish a classified board of directors,
- require shareholders to provide advance notice of any shareholder
nominations of directors or any proposal of new business to be considered
at any meeting of shareholders,
- require a supermajority vote to remove a director or to amend or repeal
certain provisions of our certificate of incorporation or by-laws, and
- preclude shareholders from calling a special meeting of shareholders.
Holders of common stock are entitled to such dividends as may be declared
by our board of directors out of funds legally available therefor. Dividends may
not be paid on common stock unless all accrued dividends on preferred stock, if
any, have been paid or set aside. In the event of our liquidation, dissolution
or winding up, the holders of common stock will be entitled to share pro rata in
the assets remaining after payment to creditors and after payment of the
liquidation preference plus any unpaid dividends to holders of any outstanding
preferred stock. Each holder of common stock will be entitled to one vote for
each such share outstanding in such holder's name. No holder of common stock
will be entitled to cumulate votes in voting for directors. Our certificate
provides that, unless otherwise determined by our board of directors, no holder
of common stock will have any right to purchase or subscribe for any stock of
any class which we may issue or sell.
ChaseMellon Shareholder Services, L.L.C. is the transfer agent and
registrar for our common stock.
PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors to
establish one or more series of preferred stock of up to an aggregate of
25,000,000 shares and to determine, with respect to any series of our preferred
stock, the terms and rights of the series. Although our board of directors has
no intention at the present time of doing so, it could issue a series of
preferred stock that could, depending on the terms of such series, impede the
completion of a merger, tender offer or other takeover attempt.
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CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
Our certificate and by-laws contain various provisions intended to (1)
promote the stability of our shareholder base and (2) render more difficult
certain unsolicited or hostile attempts to take over Conexant which could
disrupt Conexant, divert the attention of our directors, officers and employees
and adversely affect the independence and integrity of our business.
Pursuant to our certificate, the number of directors is fixed by our board
of directors. Other than directors elected by the holders of any series of
preferred stock or any other series or class of stock except common stock, our
directors are divided into three classes, each class to consist as nearly as
possible of one-third of the directors. Directors elected by shareholders at an
annual meeting of shareholders will be elected by a plurality of all votes cast.
Initially, the terms of office of the three classes of directors expire,
respectively, at our annual meetings in 2000, 2001 and 2002. The term of the
successors of each such class of directors expires three years from the year of
election.
Our certificate of incorporation contains a fair price provision pursuant
to which a Business Combination (as defined in our certificate of incorporation)
between Conexant or one of our subsidiaries and an Interested Shareowner (as
defined in our certificate of incorporation) requires approval by the
affirmative vote of the holders of not less than 80 percent of the voting power
of all the outstanding capital stock of Conexant entitled to vote generally in
the election of directors, voting together as a single class, unless the
Business Combination is approved by at least two-thirds of the Continuing
Directors (as defined in our certificate of incorporation) or certain fair price
criteria and procedural requirements specified in the fair price provision are
met. If either the requisite approval of our board of directors or the fair
price criteria and procedural requirements were met, the Business Combination
would be subject to the voting requirements otherwise applicable under the DGCL,
which for most types of Business Combinations currently would be the affirmative
vote of the holders of a majority of the outstanding shares of stock of Conexant
entitled to vote thereon. Any amendment or repeal of the fair price provision,
or the adoption of provisions inconsistent therewith, must be approved by the
affirmative vote of the holders of not less than 80 percent of the voting power
of all the outstanding capital stock of Conexant entitled to vote generally in
the election of directors, voting together as a single class, unless such
amendment, repeal or adoption were approved by at least two-thirds of the
Continuing Directors, in which case the provisions of the DGCL would require the
affirmative vote of the holders of a majority of the outstanding shares of our
capital stock entitled to vote thereon.
Our certificate of incorporation and by-laws provide that a special meeting
of shareholders may be called only by a resolution adopted by a majority of the
entire board of directors. Shareholders are not permitted to call, or to require
that the board of directors call, a special meeting of shareholders. Moreover,
the business permitted to be conducted at any special meeting of shareholders is
limited to the business brought before the meeting pursuant to the notice of the
meeting given by us. In addition, our certificate provides that any action taken
by our shareholders must be effected at an annual or special meeting of
shareholders and may not be taken by written consent in lieu of a meeting. Our
by-laws establish an advance notice procedure for shareholders to nominate
candidates for election as directors or to bring other business before meetings
of our shareholders.
Our certificate of incorporation provides that the affirmative vote of at
least 80 percent of the voting power of all of our outstanding capital stock
entitled vote generally in the election of directors, voting together as a
single class, would be required to:
- amend or repeal the provisions of our certificate with respect to (a) the
election of directors, (b) the right to call a special shareholders'
meeting or (c) the right to act by written consent,
- adopt any provision inconsistent with such provisions, or
- amend or repeal the provisions of our certificate of incorporation with
respect to amendments to our certificate of incorporation or by-laws.
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In addition, our certificate of incorporation provides that our board of
directors may make, alter, amend and repeal our by-laws and that the amendment
or repeal by shareholders of any of our by-laws would require the affirmative
vote of at least 80 percent of the voting power described above, voting together
as a single class.
CONEXANT RIGHTS PLAN
Each outstanding share of common stock also evidences one preferred share
purchase right. Each preferred share purchase right entitles the registered
holder to purchase from us one one-hundredth of a share of Series A Junior
Participating Preferred Stock, at $75, subject to adjustment. The description
and terms of the preferred share purchase rights are set forth in the Rights
Agreement.
Until the earlier to occur of (1) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
common stock or (2) 10 business days, or such later date as may be determined by
our board of directors prior to such time as any person or group becomes an
Acquiring Person, following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 20% or more of the
outstanding common stock, preferred share purchase rights will be attached to
common stock and will be owned by the registered owners of common stock.
The Rights Agreement provides that, until the preferred share purchase
rights are no longer attached to the common stock, or until the earlier
redemption or expiration of the preferred share purchase rights:
- the preferred share purchase rights will be transferred with and only
with common stock,
- certificates representing common stock and statements in respect of
shares of common stock registered in book-entry or uncertificated form
will contain a notation incorporating the terms of the preferred share
purchase rights by reference, and
- the transfer of any shares of common stock will also constitute the
transfer of the associated preferred share purchase rights.
As soon as practicable following the date the preferred share purchase rights
are no longer attached to the common stock, separate certificates evidencing
preferred share purchase rights will be mailed to holders of record of common
stock as of the close of business on the date the preferred share purchase
rights are no longer attached to the common stock and the separate certificates
alone will evidence preferred share purchase rights.
Preferred share purchase rights will not be exercisable until the date the
preferred share purchase rights are no longer attached to the common stock.
Preferred share purchase rights will expire on December 31, 2008, unless this
expiration date is extended or unless preferred share purchase rights are
earlier redeemed by us, in each case, as described below.
The purchase price payable, and the number of shares of Series A junior
preferred stock or other securities or property issuable, upon exercise of the
preferred share purchase rights will be subject to adjustment from time to time
to prevent dilution upon the occurrence of the following events:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, Series A junior preferred stock,
- upon the grant to holders of shares of Series A junior preferred stock of
certain rights or warrants to subscribe for or purchase shares of Series
A junior preferred stock at a price, or securities convertible into
shares of Series A junior preferred stock with a conversion price, less
than the then current market price of the shares of Series A junior
preferred stock, or
- upon the distribution to holders of shares of Series A junior preferred
stock of evidences of indebtedness or assets (excluding regular periodic
cash dividends or dividends payable in shares of Series A junior
preferred stock) or of subscription rights or warrants (other than those
referred to above).
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The number of outstanding preferred share purchase rights and the number of
one one-hundredths of a share of Series A junior preferred stock issuable upon
exercise of each preferred share purchase right will also be subject to
adjustment in the event of a stock split of common stock or a stock dividend on
common stock payable in common stock or subdivisions, consolidations or
combinations of common stock occurring, in any such case, prior to the date the
preferred share purchase rights are no longer attached to the common stock.
We cannot redeem shares of Series A junior preferred stock purchasable upon
exercise of preferred share purchase rights. Each share of Series A junior
preferred stock will be entitled to a minimum preferential quarterly dividend
payment of $1 per share but will be entitled to an aggregate dividend of 100
times the dividend declared per share of common stock whenever such dividend is
declared. In the event of liquidation, the holders of Series A junior preferred
stock will be entitled to a minimum preferential liquidation payment of $100 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of common stock. Each share of Series A junior preferred stock will
have 100 votes, voting together with common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are
exchanged, each share of Series A junior preferred stock will be entitled to
receive 100 times the amount received per share of common stock. These rights
will be protected by customary antidilution provisions.
Because of the nature of the Series A junior preferred stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A junior preferred stock purchasable upon exercise of each
preferred share purchase right should approximate the value of one share of
common stock.
In the event that, at any time after a person has become an Acquiring
Person, we are acquired in a merger or other business combination transaction or
50% or more of our consolidated assets or earning power is sold, proper
provision will be made so that each holder of a preferred share purchase right
will thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of a preferred share purchase right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of a
preferred share purchase right. In the event that any person becomes an
Acquiring Person, proper provision shall be made so that each holder of a
preferred share purchase right, other than preferred share purchase rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise, in lieu of shares of Series
A junior preferred stock, that number of shares of common stock having a market
value of two times the exercise price of a preferred share purchase right.
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of common stock, our board of
directors may exchange preferred share purchase rights (other than preferred
share purchase rights owned by such person or group, which will have become void
after such person became an Acquiring Person) for common stock or Series A
junior preferred stock, in whole or in part, at an exchange ratio of one share
of common stock, or one hundredth of a share of Series A junior preferred stock
(or of a share of another series of preferred stock having equivalent rights,
preferences and privileges), per preferred share purchase right (subject to
adjustment).
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1%. No
fractional shares of Series A junior preferred stock will be issued, other than
fractions which are integral multiples of one one-hundredth of a share of Series
A junior preferred stock, which may, at our election, be evidenced by depository
receipts. Instead, an adjustment in cash will be made based on the market price
of Series A junior preferred stock on the last trading day prior to the date of
exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of common stock, our board of directors may redeem preferred share
purchase rights in whole, but not in part, at a price of $.01 per preferred
share purchase right. The redemption of preferred share purchase rights may be
made effective at such time, on such basis and with such conditions as our board
of directors may determine, in its sole discretion. Immediately upon any
redemption of preferred share purchase rights, the right to exercise preferred
share purchase rights will
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terminate and the only right of the holders of preferred share purchase rights
will be to receive the redemption price.
The terms of preferred share purchase rights may be amended by our board of
directors without the consent of the holders of preferred share purchase rights,
including an amendment to decrease the threshold at which a person becomes an
Acquiring Person from 20% to not less than 10%, except that from and after such
time as any person becomes an Acquiring Person no such amendment may adversely
affect the interests of the holders of preferred share purchase rights.
Until a preferred share purchase right is exercised, the holder thereof, as
such, will have no rights as a shareholder of Conexant, including, without
limitation, the right to vote or to receive dividends.
The foregoing summary of the material terms of preferred share purchase
rights is qualified by reference to the Rights Agreement, a copy of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the notes
and common stock into which the notes may be converted. This discussion is based
on laws, regulations, rulings and decisions now in effect, all of which are
subject to change or differing interpretation (possibly with retroactive
effect). We cannot assure you that the IRS will not challenge one or more of the
tax consequences described in this discussion, and we have not obtained, and do
not intend to obtain, a ruling from the IRS with respect to the U.S. federal
income tax consequences of acquiring or holding notes or common stock.
This discussion does not deal with all aspects of U.S. federal income
taxation that may be important to holders of the notes or common stock and does
not deal with tax consequences arising under the laws of any foreign, state or
local jurisdiction. This discussion is for general information purposes only,
and does not purport to address all tax consequences that may be important to
particular holders in light of their personal circumstances (for example,
persons subject to the alternative minimum tax provisions of the Internal
Revenue Code), or to certain types of holders (such as certain financial
institutions, insurance companies, tax-exempt entities, dealers in securities or
persons who hold the notes or common stock as part of a hedging or conversion
transaction or straddle or persons deemed to sell notes or common stock under
the constructive sale provisions of the Internal Revenue Code) that may be
subject to special rules. This discussion assumes that each holder holds the
notes and any common stock received upon conversion of the notes as capital
assets under Section 1221 of the Internal Revenue Code.
For purposes of this discussion, a "U.S. holder" refers to any holder that
is a U.S. person, and a "non-U.S. holder" refers to any holder that is not a
U.S. person. The term "U.S. person" means:
- a citizen or resident of the United States,
- a corporation, partnership (or other entity treated as a corporation or a
partnership for U.S. federal income tax purposes) created or organized in
the United States or any state of the United States or the District of
Columbia,
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or
- a trust subject to the primary supervision of a court in the United
States and controlled by one or more U.S. persons.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF YOUR OWNERSHIP AND DISPOSITION OF THE
NOTES, INCLUDING CONVERSION OF THE NOTES, AND THE EFFECT THAT YOUR PARTICULAR
CIRCUMSTANCES MAY HAVE ON THESE TAX CONSEQUENCES.
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U.S. HOLDERS
THE FOLLOWING DISCUSSION APPLIES ONLY TO A U.S. HOLDER OF NOTES OR COMMON
STOCK INTO WHICH THE NOTES MAY BE CONVERTED.
Taxation of Interest
You must generally include stated interest on the notes in gross income as
ordinary income at the time it is treated as received or accrued, in accordance
with your regular method of accounting for U.S. federal income tax purposes.
Under Treasury Regulations promulgated under the Internal Revenue Code, the
possibility of an additional payment under a note may be disregarded for
purposes of determining the amount of interest or original issue discount income
to be recognized by you in respect of such note (or the timing of such
recognition) if the likelihood of the payment, as of the date the notes are
issued, is remote. Our failure to file or cause to be declared effective the
shelf registration statement as described under "Description of
Notes -- Registration Rights of the Noteholders" may result in the payment of
predetermined liquidated damages in the manner described therein. In addition,
you may require us to redeem any and all of your notes in the event of a
fundamental change. We believe that the likelihood of a liquidated damages
payment with respect to the notes is remote and do not intend to treat such
possibility as affecting the yield to maturity of any note. Similarly, we intend
to take the position that a "fundamental change" is remote under the Treasury
Regulations, and likewise do not intend to treat the possibility of a
"fundamental change" as affecting the yield to maturity of any note. There can
be no assurance that the Internal Revenue Service will agree with these
positions. In the event either contingency occurs, it would affect the amount
and timing of the income that must be recognized by you.
Sale, Exchange or Redemption of the Notes
Upon your sale, exchange (other than a conversion), retirement, redemption
or other disposition of a note, you generally will recognize gain or loss equal
to the difference between:
- the amount of cash proceeds and the fair market value of any property you
receive on the sale, exchange, retirement, redemption or other
disposition (except to the extent such amount is attributable to accrued
interest income not previously included in income, which will be taxable
as ordinary income, or is attributable to accrued interest that was
previously included in income, which amount may be received without
generating further income), and
- your adjusted tax basis in the note.
Your adjusted tax basis in a note generally will equal your cost of the note,
increased by the amount of any market discount (as discussed below) you
previously took into income or decreased by any bond premium you amortized with
respect to the note. Any gain or loss recognized on the sale, exchange,
retirement, redemption or other disposition of a note should be capital gain or
loss and will generally be long-term capital gain or loss if you held the note
or were deemed to have held the note for more than one year at the time of the
sale, exchange, retirement, redemption or other disposition. Long-term capital
gains recognized by certain noncorporate U.S. holders, including individuals,
will generally be subject to a maximum rate of tax of 20%. The deductibility of
capital losses is subject to limitations.
Market Discount
The market discount rules discussed below apply to any note purchased after
its original issuance at a price which is less than its principal amount as well
as to any note purchased at its original issuance for an amount which is less
than the price at which a substantial amount of the notes were originally sold.
If you purchase a note at a market discount you generally will be required
to treat any principal payments on, or any gain on the disposition or maturity
of, such note as ordinary income to the extent of the accrued market discount
(not previously included in income) at the time of such payment or disposition.
In general, subject to a de minimis exception, market discount is the amount by
which the note's principal amount exceeds your tax basis in the note immediately
after the note is acquired. A note is not treated as purchased at
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<PAGE> 49
a market discount, however, if the market discount is less than .25 percent of
the principal amount of the note multiplied by the number of complete years to
maturity from the date when you acquired the note. Market discount on a note
will accrue on a straight-line basis, unless you elect to accrue such discount
on a constant yield to maturity basis. This election is irrevocable and applies
only to the note for which it is made. You may also elect to include market
discount in income currently as it accrues. This election, once made, applies to
all market discount obligations acquired on or after the first day of the first
taxable year to which the election applies and may not be revoked without the
consent of the IRS. If you dispose of a note acquired at a market discount in
any non-taxable transaction (other than a nonrecognition transaction defined in
Section 1276(c) of the Internal Revenue Code), accrued market discount will be
includible in your income as ordinary income as if you had sold the note at its
fair market value. You may be required to defer until the maturity of the note
or, in certain circumstances, its earlier disposition, the deduction or all or a
portion of the interest expense attributable to debt incurred or continued to
purchase or carry a note with market discount, unless you make an election to
include the market discount on a current basis.
Amortizable Bond Premium
If you purchase a note for an amount in excess of its principal amount, you
generally will be considered to have purchased the note with "amortizable bond
premium". You generally may elect to amortize such premium using the constant
yield to maturity method. The amount amortized in any year will generally be
treated as a reduction of your interest income on the note. If the amortizable
bond premium allocable to a year exceeds the amount of interest allocable to
that year, the excess would be allowed as a deduction for that year but only to
the extent of your prior interest inclusions on the note. If you do not make
such an election, the premium on the note will decrease the gain or increase the
loss otherwise recognized on the sale, redemption, retirement or other
disposition of the note. The election to amortize the premium on a constant
yield to maturity method, once made, generally applies to all bonds held or
subsequently acquired by you on or after the first day of the first taxable year
to which the election applies and may not be revoked without the consent of the
Internal Revenue Service.
Conversion of the Notes
You generally will not recognize any income, gain or loss upon conversion
of a note into common stock except to the extent the common stock is considered
attributable to accrued interest not previously included in income (which will
be taxable as ordinary income) or with respect to cash received in lieu of a
fractional share of common stock. Your tax basis in common stock received on
conversion of a note will be the same as your adjusted tax basis in the note at
the time of conversion (reduced by any basis allocable to a fractional share
interest), and your holding period for common stock received on conversion will
generally include the holding period of the note converted. However, your tax
basis in shares of common stock considered attributable to accrued interest
generally will equal the amount of such accrued interest included in income, and
the holding period for such shares will begin on the date of conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and your adjusted tax basis
in the fractional share).
Dividends
Distributions, if any, made on common stock after a conversion generally
will be included in your income as ordinary dividend income to the extent of our
current or accumulated earnings and profits. Distributions in excess of our
current and accumulated earnings and profits will be treated as a return of
capital to the extent of your basis in common stock and thereafter as capital
gain.
You may, in certain circumstances, be deemed to have received a
constructive distribution where the conversion price of a note is adjusted.
Adjustments to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of your
interest in a note,
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<PAGE> 50
however, will generally not be considered to result in a constructive
distribution of stock. Certain of the possible adjustments provided in the notes
(including, without limitation, adjustments in respect of taxable dividends to
our shareholders) will not qualify as being pursuant to a bona fide reasonable
adjustment formula. If such an adjustment is made, you will be deemed to have
received a constructive distribution taxable as a dividend to the extent of our
current and accumulated earnings and profits even though you have not received
any cash or property as a result of the adjustment. In certain circumstances the
failure to provide for such an adjustment may result in taxable dividend income
to you.
Sale of Common Stock
Upon the sale or exchange of common stock you generally will recognize
capital gain or loss equal to the difference between:
- the amount of cash and the fair market value of any property received
upon the sale or exchange and
- your adjusted tax basis in the common stock.
Such capital gain or loss will be long-term capital gain or loss if your holding
period in the common stock is more than one year at the time of the sale or
exchange. Long-term capital gains recognized by certain non-corporate U.S.
holders, including individuals, will generally be subject to a maximum rate of
tax of 20%. Your basis and holding period in common stock received upon
conversion of a note are determined as discussed above under "Conversion of the
Notes". The deductibility of capital losses is subject to limitations.
SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
THE FOLLOWING DISCUSSION APPLIES ONLY TO A NON-U.S. HOLDER OF NOTES OR
COMMON STOCK INTO WHICH THE NOTES MAY BE CONVERTED.
In general, subject to the discussion below concerning backup withholding:
- Payments of principal or interest on the notes to you will not be subject
to U.S. withholding tax, provided that, in the case of interest,
- you do not own, actually or constructively, 10% or more of the total
combined voting power of all classes of our stock entitled to vote,
within the meaning of Section 871(h)(3) of the Internal Revenue Code,
- you are not a "controlled foreign corporation" with respect to which
we are a "related person" within the meaning of the Internal Revenue
Code,
- you are not a bank receiving interest described in Section
881(c)(3)(A) of the Internal Revenue Code, and
- the certification requirements under Section 871(h) or Section 881(c)
of the Internal Revenue Code and the Treasury Regulations (discussed
below) are satisfied.
- You will not be subject to U.S. federal income tax on gains realized on
the sale, exchange or other disposition of a note or common stock into
which the notes may be converted unless
- you are an individual who is present in the United States for 183 days
or more in the taxable year of sale, exchange or other disposition,
and certain conditions are met,
- the gain is effectively connected with the conduct by you of a trade
or business in the United States and, if certain U.S. income tax
treaties apply, is attributable to a U.S. permanent establishment
maintained by you,
- you are subject to Internal Revenue Code provisions applicable to
certain U.S. expatriates, or
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<PAGE> 51
- in the case of common stock, you hold more than 5% of such stock and
we are or have been, at any time within the shorter of the five-year
period preceding such sale or other disposition or the period you held
the common stock, a U.S. real property holding corporation for U.S.
federal income tax purposes. We do not believe that we are currently a
U.S. real property holding corporation or that we will become one in
the future.
- Interest on notes not excluded from U.S. withholding tax as described
above and dividends on common stock after conversion generally will be
subject to U.S. withholding tax at a 30% rate, except where an applicable
tax treaty provides for the reduction or elimination of such withholding
tax.
To satisfy the certification requirements referred to above, Sections
871(h) and 881(c) of the Internal Revenue Code and the currently effective
Treasury Regulations thereunder require that either:
- the beneficial owner of a note must certify, under penalties of perjury,
to us or our paying agent, that the owner is a non-U.S. holder and must
provide its name and address and U.S. taxpayer identification number, if
any, or
- a securities clearing organization, bank or other financial institution
that holds customer securities in the ordinary course of its trade or
business and holds the note on behalf of the beneficial owner thereof
must certify, under penalties of perjury, to us or our paying agent, that
such certificate has been received from the beneficial owner and must
furnish the payor with a copy thereof.
Such requirement will be fulfilled if the beneficial owner of a note
certifies on Internal Revenue Service Form W-8, under penalties of perjury, that
it is a non-U.S. holder and provides its name and address or any such financial
institution holding the note on behalf of the beneficial owner files a statement
with the withholding agent to the effect that it has received such a statement
from the beneficial owner (and furnishes the withholding agent with a copy of
the beneficial owner's statement).
Treasury Regulations effective for payments made after December 31, 1999,
will provide alternative methods for satisfying the certification requirements
described above and below, subject to certain grandfathering provisions. These
new regulations also require, in the case of notes held by a foreign
partnership, that
- the certification be provided by the partners rather than by the foreign
partnership and
- the partnership provide certain information, including a taxpayer
identification number.
A look-through rule will apply in the case of tiered partnerships.
If you are engaged in a trade or business in the United States and if
interest on the note, dividends on common stock, or gain realized on the sale,
exchange or other disposition of the note or common stock is effectively
connected with the conduct of such trade or business (and, if certain tax
treaties apply, is attributable to a U.S. permanent establishment maintained by
you in the United States), although you are exempt from U.S. withholding tax
(provided that the certification requirements discussed in the next sentence are
met), you will generally be subject to U.S. federal income tax on such interest,
dividends or gain on a net income basis in the same manner as if you were a U.S.
holder. In lieu of the certificate described above, you will be required, under
currently effective Treasury Regulations, to provide us with a properly executed
IRS Form 4224 in order to claim an exemption from withholding tax. In addition,
if you are a foreign corporation, you may be subject to a branch profits tax
equal to 30% (or such lower rate provided by an applicable treaty) of your
effectively connected earnings and profits for the taxable year, subject to
certain adjustments.
U.S. Federal Estate Tax
A note held by an individual who at the time of death is not a citizen or
resident of the United States (as specially defined for U.S. federal estate tax
purposes) will not be subject to U.S. federal estate tax if the individual did
not actually or constructively own 10% or more of the total combined voting
power of all classes of our stock and, at the time of the individual's death,
payments with respect to such note would not have been effectively connected
with the conduct by such individual of a trade or business in the United States.
Common
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<PAGE> 52
stock held by an individual who at the time of death is not a citizen or
resident of the United States (as specially defined for U.S. federal estate tax
purposes) will be included in such individual's estate for U.S. federal estate
tax purposes, unless an applicable estate tax treaty otherwise applies.
IF YOU ARE A NON-U.S. HOLDER, YOU SHOULD CONSULT WITH YOUR TAX ADVISORS
REGARDING U.S. AND FOREIGN TAX CONSEQUENCES WITH RESPECT TO THE NOTES AND COMMON
STOCK.
BACKUP WITHHOLDING AND INFORMATION REPORTING
THE FOLLOWING DISCUSSION APPLIES TO BOTH U.S. HOLDERS AND NON-U.S. HOLDERS.
If you are a U.S. holder, backup withholding of U.S. federal income tax at
a rate of 31% may apply to payments made in respect of a note or common stock if
you are not an "exempt recipient" and you fail to provide certain identifying
information (such as your taxpayer identification number) in the manner
required. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities are exempt recipients. Payments made in respect of a
note or common stock must be reported to the Internal Revenue Service, unless
your are an exempt recipient or otherwise establish an exemption.
If you are a non-U.S. holder, the Treasury Regulations provide that backup
withholding and information reporting will not apply to payments of interest
with respect to which either requisite certification has been received or an
exemption has otherwise been established (provided that neither we nor our
paying agent has actual knowledge that you are a U.S. holder or that the
conditions of any other exemption are not in fact satisfied).
If you are a non-U.S. holder, dividends on common stock that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax but will be subject to certain information reporting.
Payments of the proceeds of the sale of a note or common stock to or
through a foreign office of a broker that is a U.S. related person (a
"controlled foreign corporation" (within the meaning of the Internal Revenue
Code) or a foreign person, 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year preceding
the payment was effectively connected with the conduct of a trade or business
within the United States) are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is a non-U.S. holder and no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury Regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury Regulations, payments of
the proceeds of a sale of a note or common stock to or through the U.S. office
of a broker will be subject to information reporting and backup withholding
unless the payee certifies under penalties of perjury as to his or her status as
a non-U.S. holder and satisfies certain other qualifications (and no agent or
broker who is responsible for receiving or reviewing such statement has actual
knowledge that it is incorrect) and provides his or her name and address or the
payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to
you will be allowed as a refund or credit against your U.S. federal income tax
provided that the required information is furnished to the IRS in a timely
manner.
As noted above, new regulations will generally be applicable to payments
made after December 31, 1999. In general, these new regulations do not
significantly alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
reliance standards. Under these new regulations, special rules apply which
permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. You should
consult with your tax advisor regarding the application of the backup
withholding rules to your particular situation, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
impact of these new regulations on payments made with respect to notes or common
stock after December 31, 1999.
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<PAGE> 53
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD
CONSULT YOUR OWN TAX ADVISER AS TO THE PARTICULAR U.S. FEDERAL, STATE, AND LOCAL
TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND COMMON
STOCK APPLICABLE TO YOU. TAX ADVISORS SHOULD ALSO BE CONSULTED AS TO THE U.S.
ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING,
HOLDING AND DISPOSING OF THE NOTES AND COMMON STOCK, AS WELL AS THE CONSEQUENCES
OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
SELLING SECURITYHOLDERS
The notes were originally issued by Conexant and sold by the initial
purchasers of the notes in a transaction exempt from the registration
requirements of the Securities Act to persons reasonably believed by the initial
purchasers to be qualified institutional buyers or other institutional
accredited investors. Selling securityholders, including their transferees,
pledgees or donees or their successors, may from time to time offer and sell
pursuant to this prospectus any or all of the notes and shares of common stock
into which the notes are convertible.
The following table sets forth information, as of July 28, 1999, with
respect to the selling securityholders and the principal amounts of notes
beneficially owned by each selling securityholder that may be offered pursuant
to this prospectus. The information is based on information provided by or on
behalf of the selling securityholders. The selling securityholders may offer
all, some or none of the notes or common stock into which the notes are
convertible. Because the selling securityholders may offer all or some portion
of the notes or the common stock, we cannot estimate the amount of the notes or
the common stock that will be held by the selling securityholders upon
termination of any of these sales. In addition, the selling securityholders
identified below may have sold, transferred or otherwise disposed of all or a
portion of their notes since the date on which they provided the information
regarding their notes in transactions exempt from the registration requirements
of the Securities Act. The percentage of notes outstanding beneficially owned by
each selling securityholder is based on $350,000,000 aggregate principal amount
of notes outstanding. The number of shares of common stock owned prior to the
offering includes shares of common stock into which the notes are convertible.
The number of shares of common stock offered hereby is based on a conversion
price of $46.196 per share of common stock and a cash payment in lieu of any
fractional share. No selling securityholder named in the table below
beneficially owns one percent or more of our common stock assuming conversion of
a selling securityholder's notes and based on 97,267,836 shares of common stock
outstanding on July 2, 1999. Information concerning other selling
securityholders will be set forth in prospectus supplements from time to time,
if required. The number of shares of common stock owned by the other selling
securityholders or any future transferee from any such holder assumes that they
do not beneficially own any common stock other than common stock into which the
notes are convertible at a conversion price of $46.196 per share.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES COMMON
BENEFICIALLY PERCENTAGE OF STOCK OWNED COMMON
OWNED AND NOTES PRIOR TO THE STOCK
NAME OFFERED HEREBY OUTSTANDING OFFERING OFFERED HEREBY
- ---- ---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Argent Classic Convertible Arbitrage
Fund (Bermuda) L.P. ............... $ 20,500,000 5.9% 443,761 443,761
Argent Classic Convertible Arbitrage
Fund L.P. ......................... 4,700,000 1.3% 101,740 101,740
Argent Convertible Arbitrage Fund
Ltd. .............................. 3,000,000 * 64,940 64,940
Associated Electric and Gas Insurance
Services Ltd. ..................... 450,000 * 9,741 9,741
Bear, Stearns & Co. ................. 4,000,000 1.1% 86,587 86,587
Black Diamond Offshore, Ltd. ........ 708,000 * 15,326 15,326
Christian Science Trustees for Gifts
and Endowment...................... 320,000 * 6,927 6,927
Chrysler Corporation Master
Retirement Trust................... 930,000 * 20,131 20,131
Conseco Direct Life-Palladin......... 600,000 * 12,988 12,988
</TABLE>
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<PAGE> 54
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES COMMON
BENEFICIALLY PERCENTAGE OF STOCK OWNED COMMON
OWNED AND NOTES PRIOR TO THE STOCK
NAME OFFERED HEREBY OUTSTANDING OFFERING OFFERED HEREBY
- ---- ---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Convexity Partners................... 250,000 * 5,411 5,411
Declaration of Trust for the Defined
Benefit Plans of ICI American
Holdings Inc. ..................... 850,000 * 18,399 18,399
Declaration of Trust for the Defined
Benefit Plans of Zeneca Holdings
Inc. .............................. 560,000 * 12,122 12,122
Delaware State Employees' Retirement
Fund............................... 650,000 * 14,070 14,070
Delta Airlines Master Trust.......... 345,000 * 7,468 7,468
Double Black Diamond Offshore, LDC... 1,198,000 * 25,932 25,932
First Church of Christ, Scientist-
Endowment.......................... 355,000 * 7,684 7,684
Goldman Sachs & Company.............. 695,000 * 15,044 15,044
Jackson Investment Fund Ltd. ........ 4,280,000 1.2% 92,648 92,648
Jefferies & Company, Inc. ........... 2,500,000 * 54,117 54,117
JMG Convertible Investments, L.P. ... 1,000,000 * 21,646 21,646
Lehman Brothers, Inc. ............... 1,072,000 * 23,205 23,205
Lipper Convertibles Series II,
L.P. .............................. 3,000,000 * 64,940 64,940
Lipper Offshore Convertibles L.P. ... 3,400,000 1.0% 73,599 73,599
Lipper Offshore Convertibles L.P.
#2................................. 600,000 * 12,988 12,988
Morgan Stanley Dean Witter........... 15,000,000 4.3% 324,703 324,703
Morgan Stanley Dean Witter
Convertible Securities Ltd. ....... 2,000,000 * 43,293 43,293
Motion Picture Industry Health Plan-
Active Member Fund................. 105,000 * 2,272 2,272
Motion Picture Industry Health Plan-
Retiree Member Fund................ 55,000 * 1,190 1,190
National Bank of Canada.............. 1,000,000 * 21,646 21,646
New York Life Insurance Annuity
Corp. ............................. 1,000,000 * 21,646 21,646
New York Life Insurance Company...... 10,500,000 3.0% 227,292 227,292
OCM Convertible Limited
Partnership........................ 35,000 * 757 757
OCM Convertible Trust................ 660,000 * 14,286 14,286
Palladin Securities LLC.............. 950,000 * 20,564 20,564
Partner Reinsurance Company Ltd. .... 95,000 * 2,056 2,056
PGEP III LLC......................... 450,000 * 9,741 9,741
PIMCO Convertible Bond Fund.......... 350,000 * 7,576 7,576
Raytheon Company Master Pension
Trust.............................. 570,000 * 12,338 12,338
SG Cowen Securities Corp. ........... 4,500,000 1.3% 97,411 97,411
Spear, Leeds & Kellogg............... 2,000,000 * 43,293 43,293
State Employees' Retirement Fund of
the State of Delaware.............. 325,000 * 7,035 7,035
State of Connecticut Combined
Investment Funds................... 995,000 * 21,538 21,538
Summer Hill Global Partners L.P. .... 85,000 * 1,839 1,839
Triton Capital Investments, Ltd. .... 1,000,000 * 21,646 21,646
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES COMMON
BENEFICIALLY PERCENTAGE OF STOCK OWNED COMMON
OWNED AND NOTES PRIOR TO THE STOCK
NAME OFFERED HEREBY OUTSTANDING OFFERING OFFERED HEREBY
- ---- ---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Vanguard Convertible Notes Fund,
Inc. .............................. 625,000 * 13,529 13,529
White River Securities LLC........... 4,000,000 1.1% 86,587 86,587
Worldwide Transactions Ltd. ......... 94,000 * 2,034 2,034
Any other holder of notes or future
transferee from any such holder.... 247,643,000 70.8% 5,360,727 5,360,727
------------ ----- --------- ---------
Total...................... $350,000,000 100.0% 7,576,413 7,576,413
============ ===== ========= =========
</TABLE>
- ---------------
* Less than 1%.
None of the selling securityholders nor any of their affiliates, officers,
directors or principal equity holders has held any position or office or has had
any material relationship with Conexant within the past three years, except that
Morgan Stanley & Co. Incorporated acted as lead manager and Lehman Brothers,
Inc. acted as a co-lead manager in connection with the offer and sale of the
notes in May 1999 and each was an initial purchaser in that offering. In
addition, Morgan Stanley & Co. Incorporated acted as financial advisor in
connection with our spin-off from Rockwell.
The initial purchasers purchased all of the notes from Conexant in a
private transaction on May 12, 1999. All of the notes were "restricted
securities" under the Securities Act prior to this registration. The selling
securityholders have represented to us that they purchased the shares for their
own account for investment only and not with a view toward selling or
distributing them, except pursuant to sales registered under the Securities Act
or exempt from such registration.
Information concerning other selling securityholders will be set forth in
prospectus supplements from time to time, if required. Information concerning
the selling securityholders may change from time to time and any changed
information will be set forth in supplements to this prospectus if and when
necessary. In addition, the conversion price, and therefore, the number of
shares of common stock issuable upon conversion of the notes, is subject to
adjustment under certain circumstances. Accordingly, the aggregate principal
amount of notes and the number of shares of common stock into which the notes
are convertible may increase or decrease.
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<PAGE> 56
PLAN OF DISTRIBUTION
The selling securityholders and their successors, which term includes their
transferees, pledgees or donees or their successors, may sell the notes and the
underlying common stock directly to purchasers or through underwriters,
broker-dealers or agents, who may receive compensation in the form of discounts,
concessions or commissions from the selling securityholders or the purchasers.
These discounts, concessions or commissions as to any particular underwriter,
broker-dealer or agent may be in excess of those customary in the types of
transactions involved.
The notes and the underlying common stock may be sold in one or more
transactions at:
- fixed prices,
- prevailing market prices at the time of sale,
- prices related to the prevailing market prices,
- varying prices determined at the time of sale, or
- negotiated prices.
These sales may be effected in transactions:
- on any national securities exchange or quotation service on which the
notes or the underlying common stock may be listed or quoted at the time
of sale, including the Nasdaq National Market in the case of the common
stock,
- in the over-the-counter market,
- otherwise than on such exchanges or services or in the over-the-counter
market,
- through the writing of options, whether the options are listed on an
options exchange or otherwise, or
- through the settlement of short sales.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as agent on both sides of the trade.
In connection with the sale of the notes and the underlying common stock or
otherwise, the selling securityholders may enter into hedging transactions with
broker-dealers or other financial institutions. These broker-dealers or
financial institutions may in turn engage in short sales of the notes or the
underlying common stock in the course of hedging the positions they assume with
selling securityholders. The selling securityholders may also sell the notes and
the underlying common stock short and deliver these securities to close out such
short positions, or loan or pledge the notes or the underlying common stock to
broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling securityholders from the sale of the
notes or the underlying common stock offered by them hereby will be the purchase
price of the notes or common stock less discounts and commissions, if any. Each
of the selling securityholders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed
purchase of notes or common stock to be made directly or through agents. We will
not receive any of the proceeds from this offering.
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the notes for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the notes.
In order to comply with the securities laws of some states, if applicable,
the notes and the underlying common stock may be sold in these jurisdictions
only through registered or licensed brokers or dealers. In addition, in some
states the notes may not be sold unless they have been registered or qualified
for sale or an exemption from registration or qualification requirements is
available and is complied with.
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<PAGE> 57
The selling securityholders and any broker-dealers or agents that
participate in the sale of the notes and the underlying common stock may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Profits on the sale of the notes and the underlying common stock
by selling securityholders and any discounts, commissions or concessions
received by any broker-dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act. Selling securityholders who
are deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act will be subject to the prospectus delivery requirements of the
Securities Act. To the extent the selling securityholders may be deemed to be
"underwriters", they may be subject to statutory liabilities, including, but not
limited to, Sections 11, 12 and 17 of the Securities Act.
The selling securityholders and any other person participating in a
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder. Regulation M of the Exchange Act may limit
the timing of purchases and sales of any of the securities by the selling
securityholders and any other person. In addition, Regulation M may restrict the
ability of any person engaged in the distribution of the securities to engage in
market-making activities with respect to the particular securities being
distributed for a period of up to five business days before the distribution.
The selling securityholders have acknowledged that they understand their
obligations to comply with the provisions of the Exchange Act and the rules
thereunder relating to stock manipulation, particularly Regulation M, and have
agreed that they will not engage in any transaction in violation of such
provisions.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholder and any underwriter,
broker-dealer or agent regarding the sale of the notes and the underlying common
stock by the selling securityholders.
A selling securityholder may decide not to sell any notes or common stock
described in this prospectus. We cannot assure you that any selling
securityholder will use this prospectus to sell any or all of the notes or the
underlying common stock. Any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold
under Rule 144 or Rule 144A rather than pursuant to this prospectus. In
addition, a selling securityholder may transfer, devise or gift the notes and
the underlying common stock by other means not described in this prospectus.
With respect to a particular offering of the notes and the underlying
common stock, to the extent required, an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement of
which this prospectus is a part will be prepared and will set forth the
following information:
- the specific notes or common stock to be offered and sold,
- the names of the selling securityholders,
- the respective purchase prices and public offering prices and other
material terms of the offering,
- the names of any participating agents, broker-dealers or underwriters,
and
- any applicable commissions, discounts, concessions and other items
constituting compensation from the selling securityholders.
We entered into the registration rights agreement for the benefit of
holders of the notes to register their notes and the underlying common stock
under applicable federal and state securities laws under certain circumstances
and at certain times. The registration rights agreement provides that the
selling securityholders and Conexant will indemnify each other and their
respective directors, officers and controlling persons against specific
liabilities in connection with the offer and sale of the notes and the
underlying common stock, including liabilities under the Securities Act, or will
be entitled to contribution in connection with those liabilities. We will pay
all of our expenses and specified expenses incurred by the selling
securityholders incidental to the registration, offering and sale of the notes
and the underlying common stock to the public, but each selling securityholder
will be responsible for payment of commissions, concessions, fees and discounts
of underwriters, broker-dealers and agents.
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LEGAL MATTERS
The validity of the issuance of the notes and the common stock issuable on
conversion of the notes will be passed upon for us by Chadbourne & Parke LLP,
New York, New York.
EXPERTS
The combined financial statements and related financial statement schedule
of Semiconductor Systems as of September 30, 1998 and 1997 and for each of the
three fiscal years in the period ended September 30, 1998 incorporated by
reference in this prospectus from the Registration Statement on Form 10 of
Conexant Systems, Inc. have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
HOW TO OBTAIN MORE INFORMATION
In accordance with the Exchange Act, we file reports, proxy and information
statements and other information with the Securities and Exchange Commission.
You may read and copy these reports, proxy and information statements and other
information that we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements and other information regarding registrants (including Conexant) that
file electronically with the SEC (http://www.sec.gov). Our internet site is
http://www.conexant.com.
You also may inspect reports, proxy statements and other information about
Conexant at the offices of The Nasdaq Stock Market, Inc. National Market System,
1735 K Street, N.W., Washington, D.C. 20006-1500.
We have filed with the SEC a registration statement on Form-S-3 under the
Securities Act. This prospectus does not contain all of the information in the
registration statement. We have omitted certain parts of the registration
statement, as permitted by the rules and regulations of the SEC. You may inspect
and copy the registration statement, including exhibits, at the SEC's public
reference room or internet site. Our statements in this prospectus about the
contents of any contract or other document are not necessarily complete. You
should refer to the copy of each contract or other document we have filed as an
exhibit to the registration statement for complete information.
The SEC's rules allow us to "incorporate by reference" into this prospectus
the information we file with the SEC. This means that we can disclose important
information to you by referring you to those filings. This information we
incorporate by reference is considered a part of this prospectus, and subsequent
information that we file with the SEC will automatically update and supersede
this information. Any such information so modified or superseded will not
constitute a part of this prospectus, except as so modified or superseded. We
incorporate by reference the following documents and any future filings we make
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until
the selling securityholders sell all of the notes or the shares of common stock
offered by this prospectus:
- Our Registration Statement on Form 10, as amended (File Number 000-24923)
(including the description of our common stock and our preferred share
purchase rights),
- Our Quarterly Report on Form 10-Q for the quarter ended January 1, 1999,
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
- Our Current Report on Form 8-K dated January 12, 1999,
- Our Current Report on Form 8-K dated January 20, 1999,
- Our Current Report on Form 8-K dated May 3, 1999,
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- Our Current Report on Form 8-K dated May 12, 1999,
- Our Current Report on Form 8-K dated June 11, 1999, and
- Our Current Report on Form 8-K dated July 22, 1999.
Upon written or oral request, we will provide you with a copy of any of the
incorporated documents without charge (not including exhibits to the documents
unless the exhibits are specifically incorporated by reference into the
documents). You may submit such a request for this material to Dennis E.
O'Reilly, Esq., Senior Vice President, General Counsel and Secretary, Conexant
Systems, Inc., 4311 Jamboree Road, Newport Beach, California 92660-3095
(telephone number (949) 483-4600).
FORWARD-LOOKING STATEMENTS
In addition to historical information, this prospectus contains statements
relating to our future results. These statements include certain projections and
business trends which are "forward looking" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
made only as of the date of this prospectus. We do not undertake to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise.
Our actual results may differ materially from projected results as a result
of certain risks and uncertainties. These risks and uncertainties include,
without limitation, those described under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as those set forth below and those detailed from time to time in our
filings with the SEC:
- global and market conditions, including, without limitation, the cyclical
nature of the semiconductor industry and the markets related to our and
our customers' products,
- demand for and market acceptance of new and existing products,
- successful development of new products,
- timing of new product introductions,
- availability and extent of use of manufacturing capacity,
- pricing pressures and other competitive factors,
- changes in product mix,
- fluctuations in manufacturing yields,
- product obsolescence,
- our ability to develop and implement new technologies and to obtain
protection of the related intellectual property,
- the successful implementation of our diversification strategy,
- our labor relations and those of our customers and suppliers,
- timely completion of year 2000 modifications by us and by our key
suppliers and customers,
- uncertainties of litigation, and
- other risks and uncertainties.
------------------------
The Conexant logo and K56Flex(TM) are trademarks of Conexant Systems, Inc.
Other brands, names and trademarks contained in this prospectus are the property
of their respective owners.
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$350,000,000
CONEXANT SYSTEMS, INC.
4 1/4% CONVERTIBLE SUBORDINATED NOTES DUE MAY 1, 2006
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
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PROSPECTUS
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE OF THIS PROSPECTUS. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
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