e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 2, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-24923
CONEXANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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25-1799439 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
4000 MacArthur Boulevard
Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip code)
(949) 483-4600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of January 30, 2009, there were 49,759,643 shares of the registrants common stock outstanding.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the federal securities
laws. Any statements that do not relate to historical or current facts or matters are
forward-looking statements. You can identify some of the forward-looking statements by the use of
forward-looking words, such as may, will, could, project, believe, anticipate,
expect, estimate, continue, potential, plan, forecasts, and the like, the negatives of
such expressions, or the use of future tense. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. Examples of forward-looking
statements include, but are not limited to, statements concerning:
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our beliefs, subject to the qualifications expressed, regarding the sufficiency of our
existing sources of liquidity and cash to fund our operations, research and development,
anticipated capital expenditures and our working capital needs for at least the next 12
months and that we will be able to repatriate cash from our foreign operations on a timely
and cost effective basis and that we will be able to sustain the recoverability of our
goodwill, intangible and tangible long-term assets. |
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expectations that we will have sufficient capital needed to remain in business and repay
our indebtedness as it becomes due; |
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expectation that we will be able to continue to meet NASDAQ listing requirements; |
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expectations regarding the market share of our products, growth in the markets we serve
and our market opportunities; |
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expectations regarding price and product competition; |
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continued demand and future growth in demand for our products in the communications, PC
and consumer markets we serve; |
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our plans and expectations regarding the transition of our semiconductor products to
smaller line width geometries; |
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our product development plans; |
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our expectation that our largest customers will continue to account for a substantial
portion of our revenue; |
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expectations regarding our contractual obligations and commitments; |
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expectation that we will be able to protect our products and services with proprietary
technology and intellectual property protection; |
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expectation that we will be able to meet our lease obligations (and other financial
commitments); and |
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expectation that we will be able to continue to rely on third party manufacturers to
manufacture, assemble and test our products to meet our customers demands. |
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the forward-looking statements. You are urged
to carefully review the disclosures we make concerning risks and other factors that may affect our
business and operating results, including those made in Part II, Item 1A of this Quarterly Report
on Form 10-Q, and any of those made in our other reports filed with the Securities and Exchange
Commission. You are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document. We do not intend, and undertake no obligation, to
publish revised forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
1
CONEXANT SYSTEMS, INC.
INDEX
See accompanying notes to condensed consolidated financial statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except par value)
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January 2, |
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October 3, |
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2009 |
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2008 |
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ASSETS |
Current assets: |
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Cash and cash equivalents |
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$ |
110,327 |
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$ |
105,883 |
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Restricted cash |
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20,500 |
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26,800 |
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Receivables, net of allowances of $868 and $834 |
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40,514 |
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48,997 |
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Inventories, net |
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26,014 |
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36,439 |
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Other current assets |
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40,885 |
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38,537 |
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Total current assets |
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238,240 |
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256,656 |
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Property, plant and equipment, net |
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21,332 |
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24,912 |
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Goodwill |
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111,360 |
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110,412 |
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Intangible assets, net |
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9,910 |
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14,971 |
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Other assets |
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39,010 |
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39,452 |
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Total assets |
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$ |
419,852 |
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$ |
446,403 |
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LIABILITIES AND SHAREHOLDERS DEFICIT |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
17,707 |
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Short-term debt |
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32,868 |
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40,117 |
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Accounts payable |
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22,783 |
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34,894 |
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Accrued compensation and benefits |
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11,952 |
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14,989 |
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Other current liabilities |
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41,829 |
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44,385 |
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Total current liabilities |
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109,432 |
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152,092 |
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Long-term debt |
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391,400 |
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373,693 |
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Other liabilities |
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71,985 |
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57,352 |
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Total liabilities |
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572,817 |
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583,137 |
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Commitments and contingencies (Note 6) |
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Shareholders deficit: |
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Preferred and junior preferred stock |
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Common stock, $0.01 par value: 100,000 shares
authorized; 49,665 and 49,601 shares issued
and outstanding |
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497 |
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496 |
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Additional paid-in capital |
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4,746,395 |
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4,744,140 |
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Accumulated deficit |
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(4,896,894 |
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(4,879,208 |
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Accumulated other comprehensive loss |
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(2,884 |
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(2,083 |
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Shareholder notes receivable |
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(79 |
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(79 |
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Total shareholders deficit |
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(152,965 |
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(136,734 |
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Total liabilities and shareholders deficit |
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$ |
419,852 |
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$ |
446,403 |
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See accompanying notes to condensed consolidated financial statements.
3
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
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Fiscal Quarter Ended |
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January 2, |
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December 28, |
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2009 |
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2007 |
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Net revenues |
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$ |
86,498 |
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$ |
145,933 |
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Cost of goods sold (1) |
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40,348 |
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63,812 |
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Gross margin |
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46,150 |
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82,121 |
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Operating expenses: |
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Research and development (1) |
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26,313 |
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37,823 |
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Selling, general and administrative (1) |
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19,483 |
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20,014 |
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Amortization of intangible assets |
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3,371 |
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4,571 |
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Gain on sale of intellectual property |
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(12,858 |
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Special charges |
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10,209 |
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4,349 |
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Total operating expenses |
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46,518 |
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66,757 |
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Operating (loss) income |
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(368 |
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15,364 |
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Interest expense |
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6,054 |
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9,449 |
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Other expense, net |
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2,295 |
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5,345 |
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(Loss) income from continuing operations before income taxes and (loss) gain
on equity method investments |
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(8,717 |
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570 |
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Provision for income taxes |
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912 |
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862 |
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Loss from continuing operations before (loss) gain on equity method investments |
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(9,629 |
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(292 |
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(Loss) gain on equity method investments |
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(846 |
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3,773 |
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(Loss) income from continuing operations |
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(10,475 |
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3,481 |
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Loss from discontinued operations, net of tax (1) |
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(7,214 |
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(12,699 |
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Net loss |
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$ |
(17,689 |
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$ |
(9,218 |
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(Loss) income per share from continuing operations basic and diluted |
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$ |
(0.21 |
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$ |
0.07 |
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Loss per share from discontinued operations basic and diluted |
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$ |
(0.15 |
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$ |
(0.26 |
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Net loss per share basic and diluted |
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$ |
(0.36 |
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$ |
(0.19 |
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Shares used in computing basic per-share computations |
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49,657 |
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49,236 |
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Shares used in computing diluted per-share computations |
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49,657 |
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49,399 |
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(1) |
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These captions include non-cash employee stock-based compensation expense as follows
(see Note 7): |
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Fiscal quarter Ended |
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January 2, |
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December 28, |
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2009 |
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2007 |
Cost of goods sold |
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$ |
43 |
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$ |
114 |
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Research and development |
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511 |
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1,612 |
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Selling, general and administrative |
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1,819 |
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958 |
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Loss from discontinued operations, net of tax |
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600 |
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See accompanying notes to condensed consolidated financial statements.
4
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
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Fiscal Quarter Ended |
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January 2, |
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December 28, |
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2009 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(17,689 |
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$ |
(9,218 |
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Adjustments to reconcile net loss to net cash (used in) provided by
operating activities, net of effects of acquisitions: |
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Depreciation |
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2,649 |
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5,709 |
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Amortization of intangible assets |
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3,371 |
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4,781 |
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Asset impairments |
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130 |
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Reversal of provision for bad debts, net |
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(95 |
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Charges for inventory provisions, net |
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340 |
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2,598 |
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Deferred income taxes |
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(171 |
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5,593 |
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Stock-based compensation |
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2,373 |
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3,284 |
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Decrease in fair value of derivative instruments |
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988 |
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8,160 |
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Losses (gains) of equity method investments |
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846 |
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(542 |
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Other-than-temporary impairment of marketable securities |
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2,635 |
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Gain on sale of intellectual property |
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(12,858 |
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Other items, net |
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600 |
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32 |
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Changes in assets and liabilities: |
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Receivables |
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8,483 |
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9,274 |
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Inventories |
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10,983 |
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(323 |
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Accounts payable |
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(12,111 |
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(5,054 |
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Accrued expenses and other current liabilities |
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(4,458 |
) |
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(21,765 |
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Accrued restructuring expenses |
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11,146 |
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2,795 |
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Other, net |
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(2,590 |
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3,387 |
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Net cash (used in) provided by operating activities |
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(5,463 |
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8,746 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(181 |
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(1,614 |
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Payments for acquisitions |
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(1,953 |
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Purchases of equity securities |
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(755 |
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Release of restricted cash |
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6,300 |
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Proceeds from sale of intellectual property, net of expenses of $132 |
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14,548 |
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Net cash provided by (used in) investing activities |
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18,714 |
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(2,369 |
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Cash flows from financing activities: |
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Repayments
of short-term debt, including debt costs of $651 and $818 |
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(7,900 |
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(9,845 |
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Proceeds from issuance of common stock |
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4 |
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Interest rate swap security deposit |
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(907 |
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Net cash used in financing activities |
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(8,807 |
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(9,841 |
) |
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Net increase (decrease) in cash and cash equivalents |
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4,444 |
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(3,464 |
) |
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Cash and cash equivalents at beginning of period |
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105,883 |
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235,605 |
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Cash and cash equivalents at end of period |
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$ |
110,327 |
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$ |
232,141 |
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See accompanying notes to condensed consolidated financial statements.
5
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business
Conexant Systems, Inc. (Conexant or the Company) designs, develops and sells semiconductor system
solutions, comprised of semiconductor devices, software and reference designs for use in broadband
communications applications that enable high-speed transmission, processing and distribution of
audio, video, voice and data to and throughout homes and business enterprises worldwide. The
Companys access solutions connect people through personal communications access products, such as
personal computers (PCs), to audio, video, voice and data services over wireless and wire line
broadband connections as well as over dial-up Internet connections. The Companys central office
solutions are used by service providers to deliver high-speed audio, video, voice and data services
over copper telephone lines and optical fiber networks to homes and businesses around the globe. In
addition, media processing products enable the capture, display, storage, playback and transfer of
audio and video content in applications throughout home and small office environments. These
solutions enable broadband connections and network content to be shared throughout a home or small
office-home office environment using a variety of communications devices.
2. Basis of Presentation and Significant Accounting Policies
Interim Reporting The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes contained in the Companys
Annual Report on Form 10-K for the fiscal year ended October 3, 2008. The financial information
presented in the accompanying statements reflects all adjustments that are, in the opinion of
management, necessary for a fair statement of the periods indicated. All such adjustments are of a
normal recurring nature. The year-end condensed balance sheet data was derived from the audited
consolidated financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Fiscal Periods The Companys fiscal year is the 52- or 53-week period ending on the Friday
closest to September 30. In a 52-week year, each fiscal quarter consists of 13 weeks. The
additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14
weeks. Fiscal 2009 is a 52-week year and fiscal 2008 consisted of 53 weeks.
Revenue Recognition The Company recognizes revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the sales price and terms are fixed and determinable, and
(iv) the collection of the receivable is reasonably assured. These terms are typically met upon
shipment of product to the customer. The majority of the Companys distributors have limited stock
rotation rights, which allow them to rotate up to 10% of product in their inventory two times per
year. The Company recognizes revenue to these distributors upon shipment of product to the
distributor, as the stock rotation rights are limited and the Company believes that it has the
ability to reasonably estimate and establish allowances for expected product returns in accordance
with Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of
Return Exists. Development revenue is recognized when services are performed and was not
significant for any periods presented.
Prior to the fourth quarter of fiscal 2008, revenue with respect to sales to certain distributors
was deferred until the products were sold by the distributors to third parties. During the fiscal
quarter ended October 3, 2008, the Company evaluated three distributors for which revenue has
historically been recognized when the purchased products are sold by the distributor to a third
party due to the Companys inability in prior years to enforce the contractual terms related to any
right of return. The Companys evaluation revealed that it is able to enforce the contractual right
of return for the three distributors in an effective manner similar to that experienced with the
other distributor customers. As a result, in the fourth quarter of fiscal 2008, the Company
commenced the recognition of revenue on these three distributors upon shipment which is consistent
with the revenue recognition point of other distributor customers. As a result, in the fiscal
quarter ended October 3, 2008, the Company recognized $3.9 million of revenue on sales to these
three distributors related to the change to revenue recognition upon shipment with a corresponding
6
charge to cost of goods sold of $1.8 million. At January 2, 2009 and October 3, 2008, there is no
significant deferred revenue related to sales to the Companys distributors.
Revenue with respect to sales to customers to whom the Company has significant obligations after
delivery is deferred until all significant obligations have been completed. At January 2, 2009
there was no deferred revenue. At October 3, 2008, deferred revenue related to shipments of
products for which the Company had on-going performance obligations was $0.2 million. Deferred
revenue is included in other current liabilities on the accompanying condensed consolidated balance
sheets.
During the first quarter of fiscal 2008, the Company recorded approximately $14.7 million of
non-recurring revenue from the buyout of a future royalty stream.
Liquidity The Company has a $50.0 million credit facility with a bank, under which it had
borrowed $32.9 million as of January 2, 2009. This credit facility matures on November 27, 2009 and
is subject to additional 364-day extensions at the discretion of the bank.
The Company believes that its existing sources of liquidity, together with cash expected to be
generated from product sales, will be sufficient to fund its operations, research and development,
anticipated capital expenditures and working capital for at least the next twelve months. However,
additional operating losses or lower than expected product sales will adversely affect the
Companys cash flow and financial condition and could impair its ability to satisfy its
indebtedness obligations as such obligations come due.
Recent unfavorable economic conditions have led to a tightening in the credit markets, a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. If
the economy or markets in which we operate continue to be subject to adverse economic conditions,
our business, financial condition, cash flow and results of operations will be adversely affected.
If the credit markets remain difficult to access or worsen or our performance is unfavorable due to
economic conditions or for any other reasons, we may not be able to obtain sufficient capital to
repay amounts due under (i) our credit facility expiring November 2009 (ii) our $141.4 million
floating rate senior secured notes when they become due in November 2010 or earlier as a result of
a mandatory offer to repurchase, and (iii) our $250.0 million convertible subordinated notes when
they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. The
first mandatory repurchase date for our convertible subordinated notes is March 1, 2011. In the
event we are unable to satisfy or refinance our debt obligations as the obligations are required to
be paid, we will be required to consider strategic and other alternatives, including, among other
things, the negotiation of revised terms of our indebtedness, the exchange of new securities for
existing indebtedness obligations and the sale of assets to generate funds. There is no assurance
that we would be successful in completing any of these alternatives.
Restricted Cash The Companys short-term debt credit agreement requires that the Company and its
consolidated subsidiaries maintain minimum levels of cash on deposit with the bank throughout the
term of the agreement. The Company classified $8.5 million and $8.8 million as restricted cash with
respect to this credit agreement as of January 2, 2009 and October 3, 2008, respectively. See Note
5 for further information on the Companys short-term debt.
As of January 2, 2009, the Company had one irrevocable stand-by letter of credit outstanding. The
irrevocable stand-by letter of credit is collateralized by restricted cash balances of
$12.0 million to secure inventory purchases from a vendor. The letter of credit expires on
May 31,
2009. The restricted cash balance securing the letter of credit is classified as current
restricted cash on the condensed consolidated balance sheets. In addition, the Company has letters
of credit collateralized by restricted cash aggregating $6.7 million to secure various long-term
operating leases and the Companys self-insured workers compensation plan. The restricted cash
associated with these letters of credit is classified as other long-term assets on the condensed
consolidated balance sheets.
As of October 3, 2008, the Company had one irrevocable
stand-by letter of credit outstanding. The irrevocable stand-by letter of credit is collateralized by
restricted cash balances of $18.0 million to secure inventory purchases from a vendor. The restricted cash
balance securing the letter of credit is classified as current restricted cash on the consolidated balance sheet.
In addition, the Company has letters of credit collateralized by restricted cash aggregating $6.8 million to secure
various long-term operating leases and the Company's self-insured worker's compensation plan. The restricted cash
associated with these letters of credit is classified as other long term assets on the consolidated balance sheets.
Income
Taxes The Company utilizes the asset and liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income
Taxes, or SFAS 109. SFAS No. 109 establishes financial accounting and reporting standards for the
effect of income taxes. The objectives of accounting for income taxes are to recognize the amount
of taxes payable or refundable for the current year and deferred tax
7
liabilities and assets for the future tax consequences of events that have been recognized in an
entitys financial statements or tax returns. A valuation allowance is recorded to reduce deferred
tax assets when it is more likely than not that some of the deferred tax assets will not be
realized.
In July 2006 the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, or FIN
48. Under FIN 48, which the Company adopted effective September 29, 2007, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement.
FIN 48 also provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, and income tax
disclosures. The Company recognizes potential
accrued interest and penalties related to unrecognized tax benefits within operations as income tax
expense. Judgment is required in assessing the future tax consequences of events that have been
recognized in the Companys financial statements or tax returns. Variations in the actual outcome of these
future tax consequences could materially impact our financial position, results of operations, or
cash flows.
Review of Accounting for Research and Development Costs During the fiscal quarter ended December
28, 2007, the Company reviewed its methodology of capitalizing photo mask costs used in product
development. Photo mask designs are subject to significant verification and uncertainty regarding
the final performance of the related part. Due to these uncertainties, the Company reevaluated its
prior practice of capitalizing such costs and concluded that these costs should have been expensed
as research and development costs as incurred. As a result, in the fiscal quarter ended December
28, 2007, the Company recorded a correcting adjustment of $5.3 million, representing the
unamortized portion of the capitalized photo mask costs as of September 29, 2007. Based upon an
evaluation of all relevant quantitative and qualitative factors, and after considering the
provisions of Accounting Principles Board Opinion No. 28 Interim Financial Reporting, (APB 28),
paragraph 29, and SEC Staff Accounting Bulletin Nos. 99 Materiality (SAB 99) and 108
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108), the Company believes that this correcting adjustment was not
material to its estimated full-year results for 2008. In addition, the Company does not believe the
correcting adjustment is material to the amounts reported in previous periods.
Derivative Financial Instruments The Companys derivative financial instruments as of January 2,
2009 principally consist of (i) the Companys warrant to purchase six million shares of Mindspeed
Technologies, Inc. (Mindspeed) common stock and (ii) interest rate swaps. See Note 5 for
information regarding the Mindspeed warrant.
Interest Rate Swaps During fiscal 2008, the Company entered into three interest rate swap
agreements with Bear Stearns Capital Markets, Inc. (counterparty) for a combined notional amount of
$200 million to mitigate interest rate risk on $200 million of its Floating Rate Senior Secured
Notes due 2010. In December 2008, the interest rate swap agreements were assigned, without
modification, to J.P. Morgan Chase Bank, N.A.. Under the terms of the swaps, the Company will pay
a fixed rate of 2.98% and receive a floating rate equal to three-month LIBOR, which will offset the
floating rate paid on the Notes. The interest rate swaps meet the criteria for designation as cash
flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). As a result of the repurchase of $80 million of the Companys Floating
Rate Senior Secured Notes in the fourth quarter of fiscal 2008, one of the swap contracts with a
notional amount of $100 million was terminated. As a result of the swap contract termination, the
Company recognized a $0.3 million gain based on the fair value of the contract on the termination
date. The remaining two swap agreements require the Company to post cash collateral with the
counterparty in a minimum amount of $2.1 million. The amount of collateral will adjust monthly
based on a mark-to-market of the swaps. At January 2, 2009, the Company was required to post
$3.5 million of cash collateral with the counterparty, which is included in other non-current
assets on the accompanying condensed consolidated balance sheet. Based on the fair value of the
swap agreements, the Company recorded a derivative liability of $2.1 million at January 2, 2009,
which is included in other liabilities on the accompanying condensed consolidated balance sheet.
The gain or loss is recognized immediately in other (income) expense, net, in the statements of
operations when a designated hedging instrument is either terminated early or an improbable or
ineffective portion of the hedge is identified.
8
At October 3, 2008, the Company had outstanding foreign currency forward exchange contracts with a
notional amount of 210 million Indian Rupees, or approximately $4.4 million. All foreign currency
forward exchange contracts matured at various dates through December 2008 and were not renewed. At
January 2, 2009, there were no foreign currency forward exchange contracts outstanding.
The Company may use other derivatives from time to time to manage its exposure to changes in
interest rates, equity prices or other risks. The Company does not enter into derivative financial
instruments for speculative or trading purposes.
Supplemental Cash Flow Information Cash paid for interest was $2.7 million and $6.5 million for
the fiscal quarter ended January 2, 2009 and December 28, 2007, respectively. Cash paid for income
taxes for the fiscal quarter ended January 2, 2009 and December 28, 2007 was $0.5 million and $1.6
million, respectively. In the fiscal quarter ended January 2, 2009,
non-cash investing activities included a $1.0 million accrual for a
purchase payment to Zarlink Semiconductor, Inc. (see Note 5).
Net Loss Per Share Net loss per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Basic net loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted net loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding and potentially dilutive
securities outstanding during the period. Potentially dilutive securities include stock options and
warrants and shares of stock issuable upon conversion of the Companys convertible subordinated
notes. The dilutive effect of stock options and warrants is computed under the treasury stock
method, and the dilutive effect of convertible subordinated notes is computed using the
if-converted method. Potentially dilutive securities are excluded from the computations of diluted
net loss per share if their effect would be antidilutive.
The following potentially dilutive securities have been excluded from the diluted net loss per
share calculations because their effect would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
January 2, |
|
December 28, |
|
|
2009 |
|
2007 |
Stock options and warrants |
|
|
6,872 |
|
|
|
9,472 |
|
4.00% convertible subordinated notes due March 2026 |
|
|
5,081 |
|
|
|
5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11,953 |
|
|
|
14,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
January 2, |
|
December 28, |
|
|
2009 |
|
2007 |
Weighted average shares for basic net loss per share |
|
|
49,657 |
|
|
|
49,236 |
|
Employee stock options and restricted stock units |
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for diluted (loss) income per share |
|
|
49,657 |
|
|
|
49,399 |
|
|
|
|
|
|
|
|
|
|
Reclassifications The Company has reclassified the change in accrued restructuring expenses from
accrued expenses and other current liabilities, and other, net, to accrued restructuring expenses
on its condensed consolidated statements of cash flows for the fiscal quarter ended December 28,
2007. The Company has also reclassified expenses related to short-term debt from other, net, to
repayments of short-term debt, net of expenses, for the fiscal quarter ended December 28, 2007.
These reclassifications on the condensed consolidated statements cash flows did not affect the
Companys reported net increase (decrease) in cash and cash equivalents for the period.
9
|
|
|
|
|
|
|
Fiscal Quarter |
|
|
|
Ended |
|
|
|
December 28, 2007 |
|
Accrued expenses and other current liabilities, before reclassification |
|
$ |
(18,970 |
) |
Accrued restructuring expenses |
|
|
(2,795 |
) |
|
|
|
|
Accrued expenses and other current liabilities, after reclassification |
|
$ |
(21,765 |
) |
|
|
|
|
Other, net, before reclassification |
|
$ |
2,569 |
|
Expenses related to short-term debt |
|
|
818 |
|
|
|
|
|
Other, net, after reclassification |
|
$ |
3,387 |
|
|
|
|
|
Repayments of short-term debt, net of expenses, before reclassification |
|
$ |
(9,027 |
) |
Expenses related to short-term debt |
|
|
(818 |
) |
|
|
|
|
Repayments of short-term debt, net of expenses, after reclassification |
|
$ |
(9,845 |
) |
|
|
|
|
Business Enterprise Segments The Company operates in one reportable segment, broadband
communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises report information
about operating segments in condensed consolidated financial statements. Although the
Company had two operating segments at January 2, 2009, under the aggregation criteria set forth in
SFAS No. 131, it only operates in one reportable segment, broadband communications. The Companys
reporting units, which are also the Companys operating units, Imaging and PC Media (IPM) and
Broadband Access Products (BBA) were identified based upon the availability of discrete financial
information and the chief operating decision makers regular review
of the financial information for these operating segments. The
Company evaluated these reporting units for components and noted that
there are none below the IPM and BBA reporting units.
Under SFAS No. 131, two or more operating segments may be aggregated into a single operating
segment for financial reporting purposes if aggregation is consistent with the objective and basic
principles of SFAS No. 131, if the segments have similar economic characteristics, and if the
segments are similar in each of the following areas:
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the nature of their products and services; |
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|
|
the nature of their production processes; |
|
|
|
|
the type or class of customer for their products and services; and |
|
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|
|
the methods used to distribute their products or provide their services. |
The Company meets each of the aggregation criteria for the following reasons:
|
|
|
the sale of semiconductor products is the only material source of revenue for each of the
Companys two operating segments; |
|
|
|
|
the products sold by each of the Companys operating segments use the same standard
manufacturing process; |
|
|
|
|
the products marketed by each of the Companys operating segments are sold to similar
customers; and |
|
|
|
|
all of the Companys products are sold through its internal sales force and common
distributors. |
Because the Company meets each of the criteria set forth above and each of its operating segments
has similar economic characteristics, the Company aggregates its results of operations in one
reportable segment.
Goodwill Goodwill is not amortized. Instead, goodwill is tested for impairment on an annual basis
and between annual tests whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable, in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is tested at the reporting unit level, which is defined as an
operating segment or one level below the operating segment. Goodwill impairment testing is a
two-step process.
10
The first step of the goodwill impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying amount, including goodwill. For
estimating fair values for purposes the goodwill impairment tests,
the Company uses a weighted-average of present value techniques, specifically discounted cash flows and the use of multiples of
revenues and earnings associated with comparable companies. The discounted cash flow technique
considers the estimated internal value based upon the Companys marketing and investment
strategies. The use of revenues and earnings multiples of comparable companies considers external
performance metrics. The Company applies a weighted-average of the
two models, with the internal discounted cash flow model weighted more heavily than the revenue and earnings multiple model. The Company believes
the resulting fair value provides a balance of both internal and external measurement components.
If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test must be performed to measure the amount of impairment loss, if any. The
second step of the goodwill impairment test, used to measure the amount of impairment loss,
compares the implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss must be recognized in an amount equal to that excess. Goodwill
impairment testing requires significant judgment and management estimates, including, but not
limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other
assets and liabilities to be allocated to the reporting units and (iii) the fair values of the
reporting units. The estimates and assumptions described above, along with other factors such as
discount rates, will significantly affect the outcome of the impairment tests and the amounts of
any resulting impairment losses.
Goodwill is tested at the reporting unit level annually and, if necessary, whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. The global
decline in consumer confidence and spending has dramatically impacted the Companys financial
performance as well as many of our competitors, peers, customers, and suppliers. This impact
resulted in the Companys evaluation of the recoverability of Goodwill during the first quarter of
fiscal 2009.
The
Companys IPM business unit accounted for approximately 57 percent of
the
Companys total revenues in the first quarter of fiscal 2009 and is associated with $110 million of goodwill as of
January 2, 2009. Overall financial performance declines in the first quarter of fiscal 2009 resulted in an
interim test for goodwill impairment. Based upon the results of the testing for the quarter ended January 2, 2009,
the Company determined that despite recent declines in the IPM
business unit, performance levels remain sufficient to
support the current IPM related goodwill. The Company's fair value methods used for purposes of the goodwill impairment
tests incorporated a weighted-average of present value techniques, specifically discounted cash flows and the use of
multiples of revenues and earnings associated with comparable companies.
Recently Adopted Accounting Pronouncements
On October 4, 2008, the Company adopted Statement of Financial Accounting Standard (SFAS)
No. 157, Fair Value Measurements (SFAS No. 157), for its financial assets and liabilities. The
Companys adoption of SFAS No. 157 did not have a material impact on its financial position,
results of operations or liquidity.
SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements.
SFAS No. 157 defines fair value as the price that would be
received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs, where available. The following summarizes the three levels
of inputs required by the standard that the Company uses to measure fair value.
|
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|
Level 1: Quoted prices in active markets for identical assets or liabilities. |
|
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|
|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. |
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|
|
Level 3: Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. |
11
SFAS No. 157 requires the use of observable market inputs (quoted market prices) when measuring
fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
In accordance with FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement
No. 157 (FSP FAS 157-2), the Company elected to defer until October 3, 2009 the adoption of SFAS
No. 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis. The adoption of SFAS No. 157 for those
assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact
on the Companys financial position, results of operations or liquidity.
On October 4, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Company already records marketable securities at fair value in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of SFAS
No. 159 did not have an impact on the Companys condensed consolidated financial statements as
management did not elect the fair value option for any other financial instruments or certain other
assets and liabilities.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R), which replaces SFAS No 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes in the way assets
and liabilities are recognized in the purchase accounting. It also changes the recognition of
assets acquired and liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. The Company will adopt SFAS No. 141R no later than the first
quarter of fiscal 2010 and it will apply prospectively to business combinations completed on or
after that date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51, (SFAS No. 160) which changes the accounting and reporting
for minority interests. Minority interests will be recharacterized as noncontrolling interests and
will be reported as a component of equity separate from the parents equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling interest will be included
in consolidated net income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value with any gain or
loss recognized in earnings. The Company will adopt
SFAS No. 160 no later than the first quarter of
fiscal 2010 and it will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company is currently assessing the potential
impact that adoption of SFAS No. 160 would have on its financial position and results of
operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161).
SFAS No. 161 requires expanded disclosures regarding the location and
amount of derivative instruments in an entitys financial statements, how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and how derivative instruments and
related hedged items affect an entitys financial position, operating results and cash flows. SFAS
No. 161 is effective for periods beginning on or after November 15, 2008. The Company does not
believe that the adoption of SFAS No. 161 will have a material impact on its financial statement
disclosures.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142. This change is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting
principles (GAAP). The requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure requirements must be applied
prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
FSP 142-3 is effective
12
for financial statements issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years, which will require the Company to adopt these provisions in the
first quarter of fiscal 2010. The Company is currently evaluating the impact of adopting FSP 142-3
on its condensed consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1
requires the issuer to separately account for the liability and equity components of convertible
debt instruments in a manner that reflects the issuers nonconvertible debt borrowing rate. The
guidance will result in companies recognizing higher interest expense in the statement of
operations due to amortization of the discount that results from separating the liability and
equity components. FSP APB 14-1 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Based on its
initial analysis, the Company expects that the adoption of FSP APB 14-1 will result in an increase
in the interest expense recognized on its convertible subordinated notes. See Note 5 to the
Condensed Consolidated Financial Statements for further information on long-term debt.
In December 2008, the FASB issued FSP (FSP) FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP 140-4 and FIN 46(R)-8). FSP 140-4 and FIN 46(R)-8 amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to
require public entities to provide additional disclosures about transfers of financial assets. It
also amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, to require public enterprises, including sponsors that have a variable interest in a
variable interest entity, to provide additional disclosures about their involvement with variable
interest entities. Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE) that holds a variable
interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to
the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable
interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to
the qualifying SPE. FSP 140-4 and FIN 46(R)-8 is effective for periods beginning on or after
December 15, 2008. The Company does not believe that the adoption of FSP 140-4 and FIN 46(R)-8 will
have a material impact on its financial statement disclosures.
3. Sale of Assets and Discontinued Operations
On August 11, 2008, the Company announced that it had completed the sale of its Broadband Media
Processing (BMP) product lines to NXP B.V. (NXP). Pursuant to the Asset Purchase Agreement
(the agreement), NXP acquired certain assets including, among other things, specified patents,
inventory and contracts, and assumed certain employee-related liabilities. Pursuant to the
agreement, the Company obtained a license to utilize technology that was sold to NXP and NXP
obtained a license to utilize certain intellectual property that the Company retained. In addition,
NXP agreed to provide employment to approximately 700 of the Companys employees at locations in
the United States, Europe, Israel, Asia-Pacific and Japan.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the Company determined that the BMP business, which constituted an operating segment of the
Company, qualifies as a discontinued operation. The results of the BMP business are being reported
as discontinued operations in the condensed consolidated statements of operations for all periods
presented. In accordance with the provisions of EITF No. 87-24, Allocation of Interest to
Discontinued Operations, interest expense is allocated to discontinued operations based on the
expected proceeds from the sale, net of any expected permitted investments, over the next twelve
months. For the fiscal quarter ended December 28, 2007, interest expense allocated to discontinued
operations was $2.1 million.
For the fiscal quarters ended January 2, 2009 and December 28, 2007, BMP revenues and pretax loss
classified as discontinued operations were $1.0 million and
$7.2 million and $51.0 million and
$12.7 million, respectively.
13
4. Fair Value of Certain Financial Assets and Liabilities
In accordance with SFAS No. 157, the following represents the Companys fair value hierarchy for
its financial assets and liabilities measured at fair value on a recurring basis as of January 2,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents |
|
|
|
|
|
$ |
110,327 |
|
|
$ |
|
|
|
$ |
110,327 |
|
Restricted cash |
|
|
|
|
|
|
20,500 |
|
|
|
|
|
|
|
20,500 |
|
Marketable
securities |
|
|
|
|
|
|
403 |
|
|
|
|
|
|
|
403 |
|
Mindspeed
warrant |
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
|
|
|
|
$ |
131,230 |
|
|
$ |
63 |
|
|
$ |
131,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap financial instruments |
|
|
|
|
|
$ |
|
|
|
$ |
2,135 |
|
|
$ |
2,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities |
|
|
|
|
|
$ |
|
|
|
$ |
2,135 |
|
|
$ |
2,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 assets consist of the Companys warrant to purchase six million shares of Mindspeed common
stock at an exercise price of $17.04 per share through June 2013. At January 2, 2009, the warrant
was valued using the Black-Scholes-Merton model with expected terms for portions of the warrant
varying from one to five years, expected volatility of 64%, a weighted average risk-free interest
rate of 1.05% and no dividend yield (see Note 5).
Level 2 liabilities consist of the Companys interest rate swap derivatives.
The fair value of interest rate swap derivatives is primarily based on third-party pricing service models. These models use discounted
cash flows that utilize the appropriate market-based forward swap curves commensurate with the terms of the underlying instruments.
5. Supplemental Financial Information
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Work-in-process |
|
$ |
13,656 |
|
|
$ |
16,082 |
|
Finished goods |
|
|
12,358 |
|
|
|
20,357 |
|
|
|
|
|
|
|
|
|
|
$ |
26,014 |
|
|
$ |
36,439 |
|
|
|
|
|
|
|
|
At January 2, 2009 and October 3, 2008, inventories were net of excess and obsolete (E&O) inventory
reserves of $14.6 million and $17.6 million, respectively.
14
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2009 |
|
|
October 3, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Developed technology |
|
$ |
53,928 |
|
|
$ |
(50,898 |
) |
|
$ |
3,030 |
|
|
$ |
67,724 |
|
|
$ |
(62,285 |
) |
|
$ |
5,439 |
|
Product licenses |
|
|
3,510 |
|
|
|
(1,357 |
) |
|
|
2,153 |
|
|
|
11,032 |
|
|
|
(7,105 |
) |
|
|
3,927 |
|
Other intangible assets |
|
|
7,240 |
|
|
|
(2,513 |
) |
|
|
4,727 |
|
|
|
8,240 |
|
|
|
(2,635 |
) |
|
|
5,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,678 |
|
|
$ |
(54,768 |
) |
|
$ |
9,910 |
|
|
$ |
86,996 |
|
|
$ |
(72,025 |
) |
|
$ |
14,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over a weighted-average period of approximately five years. Annual
amortization expense is expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
Amortization expense |
|
$ |
4,035 |
|
|
$ |
1,353 |
|
|
$ |
1,237 |
|
|
$ |
1,237 |
|
|
$ |
1,031 |
|
|
$ |
1,017 |
|
In
October 2008, the Company sold intellectual property to a third
party (see Note 10).
Goodwill
Goodwill is tested at the reporting unit level annually and, if necessary, whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. The global
decline in consumer confidence and spending has dramatically impacted the Companys financial
performance as well as many of our competitors, peers, customers, and suppliers. This impact
resulted in the Companys evaluation of the recoverability of Goodwill during the first quarter of
fiscal 2009.
The
Companys IPM business unit accounted for approximately
57 percent of the
Companys total revenues in the first
quarter and is associated with $110 million of goodwill as of January 2, 2009.
Overall financial performance declines in the first quarter of fiscal
2009 resulted in an interim test for goodwill impairment. Based upon
the results of the testing for the quarter ended January 2, 2009, the
Company determined that despite recent declines
in the IPM business unit, performance levels remain sufficient to
support the current IPM related goodwill balance. The Companys fair value methods used for purposes the goodwill impairment tests
incorporates a weighted average of present value techniques, specifically discounted cash flows and
the use of multiples of revenues and earnings associated with comparable companies.
The changes in the carrying amounts of goodwill were as follows (in thousands):
|
|
|
|
|
Goodwill at October 3, 2008 |
|
$ |
110,412 |
|
Additions |
|
|
1,000 |
|
Other adjustments |
|
|
(52 |
) |
|
|
|
|
Goodwill at January 2, 2009 |
|
$ |
111,360 |
|
|
|
|
|
In October 2006, we acquired the assets of Zarlink Semiconductor Inc.s packet switching business
for $5.0 million. Under the terms of the Zarlink acquisition, we were required to pay additional
amounts based upon the achievement of certain revenue targets. In the fiscal quarter ended January
2, 2009 we recorded an additional and final purchase payment of $1.0 million paid in January 2009.
Mindspeed Warrant
The Company has a warrant to purchase six million shares of Mindspeed common stock at an exercise
price of $17.04 per share through June 2013. At January 2, 2009 and October 3, 2008, the market
value of Mindspeed common stock was $0.92 and $2.08 per share, respectively. The Company accounts
for the Mindspeed warrant as a derivative instrument, and changes in the fair value of the warrant
are included in other (expense) income, net each period. At January 2, 2009 and October 3, 2008,
the aggregate fair value of the Mindspeed warrant included on the accompanying condensed
consolidated balance sheets was $0.1 million and $0.5 million, respectively. At
January 2, 2009,
the warrant was valued using the Black-Scholes-Merton model with expected terms for portions of the
warrant varying from one to five years, expected volatility of 64%, a weighted average risk-free
interest rate of 1.05% and
15
no dividend yield. The aggregate fair value of the warrant is reflected as a long-term asset on the
accompanying condensed consolidated balance sheets because the Company does not intend to liquidate
any portion of the warrant in the next twelve months.
The valuation of this derivative instrument is subjective, and option valuation models require the
input of highly subjective assumptions, including the expected stock price volatility. Changes in
these assumptions can materially affect the fair value estimate. The Company could, at any point in
time, ultimately realize amounts significantly different than the carrying value.
Short-Term Debt
On November 29, 2005, the Company established an accounts receivable financing facility whereby it
sells, from time to time, certain accounts receivable to Conexant USA, LLC (Conexant USA), a
special purpose entity which is a consolidated subsidiary of the Company. Under the terms of the
Companys agreements with Conexant USA, the Company retains the responsibility to service and
collect accounts receivable sold to Conexant USA and receives a weekly fee from Conexant USA for
handling administrative matters which is equal to 1.0%, on a per annum basis, of the uncollected
value of the accounts receivable.
Concurrent with the Companys agreements with Conexant USA, Conexant USA entered into a credit
facility which is secured by the assets of Conexant USA. Conexant USA is required to maintain
certain minimum amounts on deposit (restricted cash) with the bank during the term of the credit
agreement. Borrowings under the credit facility, which cannot exceed the lesser of $50.0 million
and 85% of the uncollected value of purchased accounts receivable that are eligible for coverage
under an insurance policy for the receivables, bear interest equal to 7-day LIBOR (reset weekly)
plus 1.25% and was approximately 1.65% at January 2, 2009. In addition, Conexant USA pays a fee of
0.2% per annum for the unused portion of the line of credit. The credit agreement matures in
November 2009 and remains subject to additional 364-day renewal periods at the discretion of the
bank. In connection with the renewal in November 2008, the interest rate applied to borrowings
under the credit facility increased from 7-day LIBOR plus 0.6% to 7-day LIBOR plus 1.25%.
The credit facility requires the Company and its consolidated subsidiaries to maintain minimum
levels of shareholders equity and cash and cash equivalents. Further, any failure by the Company
or Conexant USA to pay their respective debts as they become due would allow the bank to terminate
the credit agreement and cause all borrowings under the credit facility to immediately become due
and payable. At January 2, 2009, Conexant USA had borrowed $32.9 million under this credit facility
and the Company was in compliance with all credit facility requirements.
Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Floating rate senior secured notes due November 2010 |
|
$ |
141,400 |
|
|
$ |
141,400 |
|
4.00% convertible subordinated notes due March 2026
with a conversion price of $49.20 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
Total |
|
|
391,400 |
|
|
|
391,400 |
|
Less: current portion of long-term debt |
|
|
|
|
|
|
(17,707 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
391,400 |
|
|
$ |
373,693 |
|
|
|
|
|
|
|
|
Floating rate senior secured notes due November 2010 In November 2006, the Company issued
$275.0 million aggregate principal amount of floating rate senior secured notes due November 2010.
Proceeds from this issuance, net of fees paid or payable, were approximately $264.8 million. The
senior secured notes bear interest at three-month LIBOR (reset quarterly) plus 3.75%, and interest
is payable in arrears quarterly on each February 15, May 15, August 15 and November 15, beginning
on February 15, 2007. The senior secured notes are redeemable in whole or in part, at the option of
the Company, at any time on or after November 15, 2008 at varying redemption prices that generally
include premiums, which are defined in the indenture for the notes, plus accrued and unpaid
interest. The
16
Company is required to offer to repurchase, for cash, notes at a price of 100% of the principal
amount, plus any accrued and unpaid interest, with the net proceeds of certain asset dispositions
if such proceeds are not used within 360 days to invest in assets (other than current assets)
related to the Companys business. In addition, upon a change of control, the Company is required
to make an offer to redeem all of the senior secured notes at a redemption price equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest. The floating rate senior
secured notes rank equally in right of payment with all of the Companys existing and future senior
debt and senior to all of its existing and future subordinated debt. The notes are guaranteed by
certain of the Companys U.S. subsidiaries (the Subsidiary Guarantors). The guarantees rank equally
in right of payment with all of the Subsidiary Guarantors existing and future senior debt and
senior to all of the Subsidiary Guarantors existing and future subordinated debt. The notes and
guarantees (and certain hedging obligations that may be entered into with respect thereto) are
secured by first-priority liens, subject to permitted liens, on substantially all of the Companys
and the Subsidiary Guarantors assets (other than accounts receivable and proceeds therefrom and
subject to certain exceptions), including, but not limited to, the intellectual property, real
property, plant and equipment now owned or hereafter acquired by the Company and the Subsidiary
Guarantors. See Note 15 for financial information regarding the Subsidiary Guarantors.
The indenture governing the senior secured notes contains a number of covenants that restrict,
subject to certain exceptions, the Companys ability and the ability of its restricted subsidiaries
to: incur or guarantee additional indebtedness or issue certain redeemable or preferred stock;
repurchase capital stock; pay dividends on or make other distributions in respect of its capital
stock or make other restricted payments; make certain investments; create liens; redeem junior
debt; sell certain assets; consolidate, merge, sell or otherwise dispose of all or substantially
all of its assets; enter into certain types of transactions with affiliates; and enter into
sale-leaseback transactions.
The sale of the Companys investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the
sale of two other equity investments in January 2007 qualified as asset dispositions requiring the
Company to make offers to repurchase a portion of the notes no later than 361 days following the
February 2007 asset dispositions. Based on the proceeds received from these asset dispositions and
the Companys cash investments in assets (other than current assets) related to the Companys
business made within 360 days following the asset dispositions, the Company was required to make an
offer to repurchase not more than $53.6 million of the senior secured notes, at 100% of the
principal amount plus any accrued and unpaid interest in February 2008. As a result of 100%
acceptance of the offer by the Companys bondholders, $53.6 million of the senior secured notes
were repurchased during the second quarter of fiscal 2008. The Company recorded a pretax loss on
debt repurchase of $1.4 million during the second quarter of fiscal 2008 which included the
write-off of deferred debt issuance costs.
Following the sale of the BMP business unit in August 2008 (see Note 3), the Company made an offer
to repurchase $80.0 million of the senior secured notes at 100% of the principal amount plus any
accrued and unpaid interest in September 2008. As a result of the 100% acceptance of the offer by
the Companys bondholders, $80.0 million of the senior secured notes were repurchased during the
fourth quarter of fiscal 2008. The Company recorded a pretax loss on debt repurchase of
$1.6 million during the fourth quarter of fiscal 2008 which included the write-off of deferred debt
issuance costs. The pretax loss on debt repurchase of $1.6 million has been included in net loss
from discontinued operations. During the fiscal quarter ended
January 2, 2009, we did not have additional sufficient asset
dispositions to trigger another required repurchase offer.
4.00% convertible subordinated notes due March 2026 In March 2006, the Company issued
$200.0 million principal amount of 4.00% convertible subordinated notes due March 2026 and, in May
2006, the initial purchaser of the notes exercised its option to purchase an additional
$50.0 million principal amount of the 4.00% convertible subordinated notes due March 2026. Total
proceeds to the Company from these issuances, net of issuance costs, were $243.6 million. The notes
are general unsecured obligations of the Company. Interest on the notes is payable in arrears
semiannually on each March 1 and September 1, beginning on September 1, 2006. The notes are
convertible, at the option of the holder upon satisfaction of certain conditions, into shares of
the Companys common stock at a conversion price of $49.20 per share, subject to adjustment for
certain events. Upon conversion, the Company has the right to deliver, in lieu of common stock,
cash or a combination of cash and common stock. Beginning on March 1, 2011, the notes may be
redeemed at the Companys option at a price equal to 100% of the principal amount, plus any accrued
and unpaid interest. Holders may require the Company to repurchase, for cash, all or part
17
of their notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the
principal amount, plus any accrued and unpaid interest.
6. Commitments and Contingencies
Legal Matters
Certain claims have been asserted against the Company, including claims alleging the use of the
intellectual property rights of others in certain of the Companys products. The resolution of
these matters may entail the negotiation of a license agreement, a settlement, or the adjudication
of such claims through arbitration or litigation. The outcome of litigation cannot be predicted
with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably for the
Company. Many intellectual property disputes have a risk of injunctive relief and there can be no
assurance that a license will be granted. Injunctive relief could have a material adverse effect on
the financial condition or results of operations of the Company. Based on its evaluation of matters
which are pending or asserted and taking into account the Companys reserves for such matters,
management believes the disposition of such matters will not have a material adverse effect on the
Companys financial condition, results of operations, or cash flows.
IPO Litigation In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased the common stock of GlobeSpan, Inc. (GlobeSpan, Inc. later
became GlobespanVirata, Inc., and is now the Companys Conexant, Inc. subsidiary) between June 23,
1999 and December 6, 2000, filed a complaint in the U.S. District Court for the Southern District
of New York alleging violations of federal securities laws by the underwriters of GlobeSpan, Inc.s
initial and secondary public offerings as well as by certain GlobeSpan, Inc. officers and
directors. The complaint alleges that the defendants violated federal securities laws by issuing
and selling GlobeSpan, Inc.s common stock in the initial and secondary offerings without
disclosing to investors that the underwriters had (1) solicited and received undisclosed and
excessive commissions or other compensation and (2) entered into agreements requiring certain of
their customers to purchase the stock in the aftermarket at escalating prices. The complaint seeks
unspecified damages. The complaint was consolidated with class actions against approximately 300
other companies making similar allegations regarding the public offerings of those companies from
1998 through 2000. A tentative settlement of the claims against issuers and their officers and
directors, including the GlobeSpan, Inc. officers and directors, was reached in 2004, but the
settlement was never finally approved, and was abandoned after the United States Court of Appeals
for the Second Circuit ruled, in an appeal by the underwriter defendants, that certification of
similarly-defined classes was improper. The tentative settlement was abandoned in 2007, in light of
a decision of the U.S. Court of Appeals for the Second Circuit vacating orders certifying
similarly-defined classes in cases against the underwriters. The Company does not believe the
ultimate outcome of this litigation will have a material adverse impact on its financial condition,
results of operations, or cash flows.
Class Action Suit In February 2005, the Company and certain of its current and former officers
and the Companys Employee Benefits Plan Committee were named as defendants in Graden v. Conexant,
et al., a lawsuit filed on behalf of all persons who were participants in the Companys 401(k) Plan
(Plan) during a specified class period. This suit was filed in the U.S. District Court of New
Jersey and alleges that the defendants breached their fiduciary duties under the Employee
Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The
plaintiff filed an amended complaint on August 11, 2005. The amended complaint alleged that
plaintiff lost money in the Plan due to (i) poor Company merger-related performance, (ii)
misleading disclosures by the Company regarding the merger, (iii) breaches of fiduciary duty
regarding management of Plan assets, (iv) being encouraged to invest in Conexant Stock Fund, (v)
being unable to diversify out of said fund and (vi) having the Company make its matching
contributions in said fund. On October 12, 2005, the defendants filed a motion to dismiss this
case. The plaintiff responded to the motion to dismiss on December 30, 2005, and the defendants
reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered
it closed. Plaintiff filed a notice of appeal on April 17, 2006. The appellate argument was held
on April 19, 2007. On July 31, 2007, the Third Circuit Court of Appeals vacated the District
Courts order dismissing Gradens complaint and remanded the case for further proceedings. On
August 27, 2008, the motion to dismiss was granted in part and denied in part. The judge left in
claims against all of the individual defendants as well as against the Company. In January 2009,
the Company and plaintiff agreed in principle to settle all outstanding claims in the litigation
for $3.25 million. The Company recorded a Special Charge of $3.7 million as of January 2, 2009, to
cover this settlement and any
18
associated costs. The settlement remains subject to the negotiation of a definitive settlement
agreement, confirmatory discovery, and approval by the District Court.
Based on its evaluation of legal matters which are pending or asserted, management believes the
disposition of such matters will not have a material adverse effect on the Companys financial
condition, results of operations, or cash flows.
Guarantees and Indemnifications
The Company has made guarantees and indemnities, under which it may be required to make payments to
a guaranteed or indemnified party, in relation to certain transactions. In connection with the
Companys spin-off from Rockwell International Corporation, the Company assumed responsibility for
all contingent liabilities and then-current and future litigation (including environmental and
intellectual property proceedings) against Rockwell or its subsidiaries in respect of the
operations of the semiconductor systems business of Rockwell. In connection with the Companys
contribution of certain of its manufacturing operations to Jazz Semiconductors, Inc., the Company
agreed to indemnify Jazz for certain environmental matters and other customary divestiture-related
matters. In connection with the sales of its products, the Company provides intellectual property
indemnities to its customers. In connection with certain facility leases, the Company has
indemnified its lessors for certain claims arising from the facility or the lease. The Company
indemnifies its directors and officers to the maximum extent permitted under the laws of the State
of Delaware.
The durations of the Companys guarantees and indemnities vary, and in many cases are indefinite.
The guarantees and indemnities to customers in connection with product sales generally are subject
to limits based upon the amount of the related product sales. The majority of other guarantees and
indemnities do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for these guarantees and
indemnities in the accompanying condensed consolidated balance sheets as they are not estimated to
be material. Product warranty costs are not significant.
7. Stock Option Plans
The Company has stock option plans and long-term incentive plans under which employees and
directors may be granted options to purchase shares of the Companys common stock. As of January 2,
2009, approximately 7.7 million shares of the Companys common stock are available for grant under
the stock option and long-term incentive plans. Stock options are granted with exercise prices of
not less than the fair market value at grant date, generally vest over four years and expire eight
or ten years after the grant date. The Company settles stock option exercises with newly issued
shares of common stock. The Company has also assumed stock option plans in connection with business
combinations.
The Company accounts for its stock option plans in accordance with SFAS No. 123(R), Share-Based
Payment. Under SFAS No. 123(R), the Company is required to measure compensation cost for all
stock-based awards at fair value on the date of grant and recognize compensation expense in its
condensed consolidated statements of operations over the service period that the awards are
expected to vest. The Company measures the fair value of service-based awards and performance-based
awards on the date of grant. Performance-based awards are evaluated for vesting probability each
reporting period. Awards with market conditions are valued on the date of grant using the Monte
Carlo Simulation Method giving consideration to the range of various vesting probabilities.
The following weighted average assumptions were used in the estimated grant date fair value
calculations for share-based payments. There were no stock purchase plan grants in the quarters
ended January 2, 2009 or December 28, 2007.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
January 2, |
|
December 28, |
|
|
2009 |
|
2007 |
Stock option plans: |
|
|
|
|
|
|
|
|
Expected dividend yield |
|
$ |
|
|
|
$ |
|
|
Expected stock price volatility |
|
|
75 |
% |
|
|
66 |
% |
Risk free interest rate |
|
|
2.5 |
% |
|
|
4.0 |
% |
Average expected life (in years) |
|
|
5.25 |
|
|
|
4.88 |
|
19
The expected stock price volatility rates are based on the historical volatility of the Companys
common stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected life of the option or award. The
average expected life represents the weighted average period of time that options or awards granted
are expected to be outstanding, as calculated using the simplified method described in the SECs
Staff Accounting Bulletin No. 110.
A summary of stock option activity is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Exercise Price |
Outstanding, October 3, 2008 |
|
|
7,357 |
|
|
$ |
23.54 |
|
Granted |
|
|
20 |
|
|
|
1.97 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(978 |
) |
|
|
22.74 |
|
|
|
|
|
|
|
|
|
|
Outstanding, January 2, 2009 |
|
|
6,399 |
|
|
|
23.60 |
|
|
|
|
|
|
|
|
|
|
|
Shares vested and expected to vest, January 2, 2009 |
|
|
6,239 |
|
|
|
23.80 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable, January 2, 2009 |
|
|
5,447 |
|
|
|
24.95 |
|
|
|
|
|
|
|
|
|
|
At January 2, 2009, of the 6.4 million stock options outstanding, approximately 5.1 million options
were held by current employees and directors of the Company, and approximately 1.3 million options
were held by employees of former businesses of the Company (i.e., Mindspeed and Skyworks Solutions,
Inc.) who remain employed by one of these businesses. At January 2, 2009, stock options outstanding
had an immaterial aggregate intrinsic value and a weighted-average remaining contractual term of
3.2 years. At January 2, 2009, exercisable stock options had an immaterial aggregate intrinsic
value and a weighted-average remaining contractual term of 2.7 years. The total intrinsic value of
options exercised and total cash received from employees as a result of stock option exercises
during the fiscal quarter ended January 2, 2009 and December 28, 2007 was immaterial.
Directors Stock Plan
The Company has a Directors Stock Plan (DSP) that provides for each non-employee director to
receive specified levels of stock option grants upon election to the Board of Directors and
periodically thereafter. Under the DSP, each non-employee director may elect to receive all or a
portion of the cash retainer to which the director is entitled through the issuance of common
stock. During the fiscal quarter ended January 2, 2009, no grants were awarded under the DSP. At
January 2, 2009, approximately 0.1 million shares of the Companys common stock are available for
grant under the DSP.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (ESPP) that allows eligible employees to purchase
shares of the Companys common stock at six-month intervals during an offering period at 85% of the
lower of the fair market value on the first day of the offering period or the purchase date. Under
the ESPP, employees may authorize the Company to withhold up to 15% of their compensation for each
pay period to purchase shares under the plan, subject to certain limitations, and employees are
limited to the purchase of 200 shares per offering period. Offering periods generally commence on
the first trading day of February and August of each year and are generally six months in duration,
but may be terminated earlier under certain circumstances. No shares were issued under the ESPP
during the fiscal quarter ended January 2, 2009. At January 2, 2009, approximately 2.0 million
shares of the Companys common stock are reserved for future issuance under the ESPP, of which 1.3
million shares will become available in 0.3 million share annual increases, subject to the Board of
Directors selecting a lower amount. Effective January 31, 2009, the Company has suspended the ESPP
plan for domestic (U.S.) employees.
During the fiscal quarter ended January 2, 2009 and December 28, 2007, the Company recognized
compensation expense of $1.4 million and $2.9 million, respectively, for stock options, and $0.1
million and $0.2 million for stock purchase plans in its condensed consolidated statements of
operations. The Company classified stock-based
20
compensation expense of $0.6 million to discontinued operations for the fiscal quarter ended
December 28, 2007. At January 2, 2009, the total unrecognized fair value compensation cost related
to non-vested stock options and employee stock purchase plan awards was $7.9 million, which is
expected to be recognized over a remaining weighted average period of approximately 1.4 years.
2001 Performance Share Plan and 2004 New Hire Equity Incentive Plan
The Companys long-term incentive plans also provide for the issuance of share-based awards to
officers and other employees and certain non-employees of the Company. These awards are subject to
forfeiture if employment terminates during the prescribed vesting period (generally within four
years of the date of award) or, in certain cases, if prescribed performance criteria are not met.
The Company has the 2001 Performance Share Plan (Performance Plan), under which it originally
reserved 0.4 million shares for issuance as well as the 2004 New Hire Equity Incentive Plan (New
Hire Plan), under which it originally reserved 1.2 million shares for issuance.
Performance Plan
The performance-based awards may be settled, at the Companys election at the time of payment, in
cash, shares of common stock or any combination of cash and common stock. A summary of share-based
award activity under the Performance Plan is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant |
|
|
Shares |
|
Date Fair Value |
Outstanding, October 3, 2008 |
|
|
400 |
|
|
$ |
6.49 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(100 |
) |
|
|
5.30 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 2, 2009 |
|
|
300 |
|
|
$ |
6.88 |
|
|
|
|
|
|
|
|
|
|
During the fiscal quarter ended January 2, 2009, the Company recognized expense of $0.6 million
related to the Performance Plan. During the fiscal quarter ended December 28, 2007, the Company
recorded a reversal of previously recognized stock based compensation expense of $1.1 million
related to the non-achievement of certain performance criteria and stock based compensation expense
of $0.1 million related to award grants that were still outstanding. At January 2, 2009, the total
unrecognized fair value compensation cost related to non-vested Performance Plan share awards was
$0.7 million, which is expected to be recognized in fiscal 2009. As of January 2, 2009, no
performance criteria apply to any unvested shares. At January 2, 2009, approximately 0.2 million
shares of the Companys common stock are available for issuance under the Performance Plan.
2004 New Hire Plan
The New Hire Plan contains service-based awards as well as awards which vest based on the
achievement of certain stock price appreciation conditions. A summary of share-based award activity
under the New Hire Plan is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Outstanding, October 3, 2008 |
|
|
74 |
|
|
$ |
10.59 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(25 |
) |
|
|
13.70 |
|
|
|
|
|
|
|
|
Outstanding, January 2, 2009 |
|
|
49 |
|
|
$ |
9.01 |
|
|
|
|
|
|
|
|
Shares of the market condition awards may vest based upon two years of service and certain stock
price appreciation conditions. The Company measures share awards with market conditions at fair
value on the grant-date using valuation techniques in accordance with SFAS No. 123(R), which gives
consideration to the range of various vesting probabilities.
21
During the fiscal quarter ended January 2, 2009 and December 28, 2007, the Company recognized $0.1
million and $0.5 million in stock based compensation expense related to the New Hire Plan,
respectively. In addition, due to the termination of the Companys former CFO during the fiscal
quarter ended January 2, 2009, the vesting period of 24 service-based awards was accelerated and 25
market condition awards were forfeited due to non-achievement of performance criteria resulting in
the recognition of $0.3 million of stock based compensation and the reversal of $0.1 million of
stock based compensation, respectively. The 24 service based awards will fully vest in February
2009. At January 2, 2009, the total unrecognized fair value compensation cost related to
non-vested New Hire Plan was $0.1 million, which is expected to be recognized in fiscal 2009.
8. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
|
|
2009 |
|
|
2007 |
|
Net loss |
|
$ |
(17,689 |
) |
|
$ |
(9,218 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(1,095 |
) |
|
|
299 |
|
Unrealized losses on marketable securities |
|
|
(14 |
) |
|
|
|
|
Unrealized losses on foreign currency forward hedge contracts |
|
|
(153 |
) |
|
|
(377 |
) |
Unrealized losses on interest rate swap contracts |
|
|
(2,184 |
) |
|
|
|
|
Other-than-temporary impairment of marketable securities |
|
|
1,986 |
|
|
|
|
|
Gains on settlement of foreign currency forward hedge contracts |
|
|
659 |
|
|
|
|
|
Minimum pension liability adjustments |
|
|
|
|
|
|
(1,110 |
) |
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(801 |
) |
|
|
(1,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(18,490 |
) |
|
$ |
(10,407 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
Foreign currency translation adjustments |
|
$ |
(787 |
) |
|
$ |
308 |
|
Unrealized gains (losses) on marketable securities |
|
|
38 |
|
|
|
(1,934 |
) |
Unrealized losses on derivative instruments |
|
|
(2,135 |
) |
|
|
(457 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(2,884 |
) |
|
$ |
(2,083 |
) |
|
|
|
|
|
|
|
9. Income Taxes
The
Company recorded a tax provision of $0.9 million for the quarter ended January 2, 2009 and the quarter
ended December 28, 2007, primarily reflecting income taxes imposed on our foreign subsidiaries. All
of our U.S. Federal income taxes and the majority of our state income taxes are offset by fully
reserved deferred tax assets.
10. Gain on Sale of Intellectual Property
In October 2008, the Company sold a portfolio of
patents including patents related to its prior
wireless networking technology to a third party for cash of $14.5 million, net of costs, and
recognized a gain of $12.9 million on the transaction. In accordance with the terms of the agreement with
the third party, the Company retains a cross-license to this portfolio of patents.
11. Special Charges
For the fiscal quarter ended January 2, 2009, special charges primarily consist of $6.6 million of
restructuring charges related to revised sublease assumptions associated with vacated facilities
and a $3.7 million charge for a legal settlement (See Note 6). For the fiscal quarter ended
December 28, 2007, special charges consisted of $5.2
22
million of restructuring charges offset by the reversal of a $0.9 million reserve for the
settlement of a proposed tax assessment related to an acquired foreign subsidiary.
Restructuring Charges
The Company has implemented a number of cost reduction initiatives since fiscal 2005 to improve its
operating cost structure. The cost reduction initiatives included workforce reductions and the
closure or consolidation of certain facilities, among other actions.
As of January 2, 2009, the Company has remaining restructuring accruals of $40.0 million, of which
$0.1 million relates to workforce reductions and $39.9 million relates to facility and other costs.
Of the $40.0 million of restructuring accruals at January 2, 2009, $7.9 million is included in
other current liabilities and $32.1 million is included in other non-current liabilities in the
accompanying condensed consolidated balance sheets. The Company expects to pay the amounts accrued
for the workforce reductions through fiscal 2009 and expects to pay the obligations for the
non-cancelable lease and other commitments over their respective terms, which expire at various
dates through fiscal 2021. The facility charges were determined in accordance with the provisions
of SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. The Companys accrued liabilities
include the net present value of the future lease
obligations of $67.8 million, net of contracted
sublease income of $10.3 million, and projected sublease income of
$17.6 million, and will accrete the remaining amounts into expense over the remaining terms of
the non-cancellable leases. Cash payments to complete the restructuring actions will be funded from
available cash reserves and funds from product sales, and are not expected to significantly impact
the Companys liquidity.
Fiscal 2008 Restructuring Actions During fiscal 2008, the Company announced its decision to
discontinue investments in standalone wireless networking solutions and other product areas. In
relation to these announcements in fiscal 2008, the Company recorded $6.3 million of total charges
for the cost of severance benefits for the affected employees. Additionally, the Company recorded
charges of $1.8 million relating to the consolidation of certain facilities under non-cancelable
leases that were vacated. Restructuring charges in the fiscal quarter ended January 2, 2009
related to the fiscal 2008 restructuring actions included $0.6 million of additional severance
charges.
Activity and liability balances recorded as part of the Fiscal 2008 Restructuring Actions through
January 2, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
6,254 |
|
|
$ |
1,762 |
|
|
$ |
8,016 |
|
Cash payments |
|
|
(6,161 |
) |
|
|
(731 |
) |
|
|
(6,892 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
93 |
|
|
|
1,031 |
|
|
|
1,124 |
|
Charged to costs and expenses |
|
|
600 |
|
|
|
196 |
|
|
|
796 |
|
Reclassification to other current liabilities and other liabilities |
|
|
|
|
|
|
(175 |
) |
|
|
(175 |
) |
Cash payments |
|
|
(561 |
) |
|
|
(118 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, January 2, 2009 |
|
$ |
132 |
|
|
$ |
934 |
|
|
$ |
1,066 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Restructuring Actions During fiscal 2007, the Company announced several facility
closures and workforce reductions. In total, the Company has notified approximately 670 employees
of their involuntary termination and recorded $9.5 million of total charges for the cost of
severance benefits for the affected employees. Additionally, the Company recorded charges of
$2.0 million relating to the consolidation of certain facilities under non-cancelable leases which
were vacated. The non-cash facility accruals resulted from the reclassification of deferred gains
on the previous sale-leaseback of two facilities totaling $8.0 million in fiscal 2008 and
$4.9 million in fiscal 2007. As a result of the Companys sale of its BMP business unit in fiscal
2008, $2.9 million and $2.2 million, incurred in fiscal 2008 and 2007, respectively, related to
fiscal 2007 restructuring actions were reclassified to discontinued operations in the condensed
consolidated statements of operations. Restructuring charges in the fiscal quarter ended January
2, 2009 related to the fiscal 2007 restructuring actions included $9.1 million due to a decrease in
estimated future rental income from sub-tenants resulting from declines in sublease activity. Of
the $9.1 million charge, $7.0 million related to facilities associated with the sale of the BMP
business and have been included in discontinued operations for the quarter ended January 2, 2009.
23
Activity and liability balances recorded as part of the Fiscal 2007 Restructuring Actions through
January 2, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Charged to costs and expenses |
|
$ |
9,477 |
|
|
$ |
2,040 |
|
|
$ |
11,517 |
|
Non-cash items |
|
|
|
|
|
|
4,868 |
|
|
|
4,868 |
|
Cash payments |
|
|
(5,841 |
) |
|
|
(268 |
) |
|
|
(6,109 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007 |
|
|
3,636 |
|
|
|
6,640 |
|
|
|
10,276 |
|
Charged to costs and expenses |
|
|
11 |
|
|
|
6,312 |
|
|
|
6,323 |
|
Non-cash items |
|
|
|
|
|
|
8,039 |
|
|
|
8,039 |
|
Cash payments |
|
|
(3,631 |
) |
|
|
(4,309 |
) |
|
|
(7,940 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
16 |
|
|
|
16,682 |
|
|
|
16,698 |
|
Charged to costs and expenses |
|
|
(1 |
) |
|
|
9,125 |
|
|
|
9,124 |
|
Cash payments |
|
|
(15 |
) |
|
|
(1,206 |
) |
|
|
(1,221 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, January 2, 2009 |
|
$ |
|
|
|
$ |
24,601 |
|
|
$ |
24,601 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 and 2005 Restructuring Actions During fiscal years 2006 and 2005, the Company
announced operating site closures and workforce reductions. In total, the Company notified
approximately 385 employees of their involuntary termination. During fiscal 2006 and 2005, the
Company recorded total charges of $24.1 million based on the estimates of the cost of severance
benefits for the affected employees and the estimated relocation benefits for those employees who
were offered and accepted relocation assistance. Additionally, the Company recorded charges of
$21.3 million relating to the consolidation of certain facilities under non-cancelable leases that
were vacated. Restructuring charges in the fiscal quarter ended January 2, 2009 related to the
fiscal 2006 and 2005 restructuring actions included $3.7 million due to a decrease in estimated
future rental income from sub-tenants resulting from declines in sub lease activity.
Activity and liability balances recorded as part of the Fiscal 2006 and 2005 Restructuring Actions
through January 2, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
Facility |
|
|
|
|
|
|
Reductions |
|
|
and Other |
|
|
Total |
|
Restructuring balance, October 1, 2005 |
|
$ |
3,609 |
|
|
$ |
25,220 |
|
|
$ |
28,829 |
|
Charged to costs and expenses |
|
|
1,852 |
|
|
|
1,407 |
|
|
|
3,259 |
|
Reclassification from accrued compensation and benefits and other |
|
|
1,844 |
|
|
|
55 |
|
|
|
1,899 |
|
Cash payments |
|
|
(5,893 |
) |
|
|
(8,031 |
) |
|
|
(13,924 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 29, 2006 |
|
|
1,412 |
|
|
|
18,651 |
|
|
|
20,063 |
|
Reclassification to other current liabilities and other liabilities |
|
|
|
|
|
|
(2,687 |
) |
|
|
(2,687 |
) |
Charged to costs and expenses |
|
|
55 |
|
|
|
559 |
|
|
|
614 |
|
Cash payments |
|
|
(1,336 |
) |
|
|
(4,007 |
) |
|
|
(5,343 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007 |
|
|
131 |
|
|
|
12,516 |
|
|
|
12,647 |
|
Reclassification from other current liabilities and other liabilities |
|
|
|
|
|
|
3,359 |
|
|
|
3,359 |
|
Charged to costs and expenses |
|
|
(130 |
) |
|
|
285 |
|
|
|
155 |
|
Cash payments |
|
|
(1 |
) |
|
|
(5,123 |
) |
|
|
(5,124 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008 |
|
|
|
|
|
|
11,037 |
|
|
|
11,037 |
|
Charged to costs and expenses |
|
|
|
|
|
|
3,738 |
|
|
|
3,738 |
|
Cash payments |
|
|
|
|
|
|
(431 |
) |
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, January 2, 2009 |
|
$ |
|
|
|
$ |
14,344 |
|
|
$ |
14,344 |
|
|
|
|
|
|
|
|
|
|
|
Litigation
In the quarter ended January 2, 2009, the Company recorded $3.7 million in litigation charges
related to the settlement of its class action suit discussed in Note 6 regarding legal matters.
24
12. Other expense, net
Other expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
|
|
2009 |
|
|
2007 |
|
Investment and interest income |
|
$ |
(857 |
) |
|
$ |
(2,771 |
) |
Other-than-temporary impairment of marketable securities |
|
|
2,635 |
|
|
|
|
|
Decrease in the fair value of derivative instruments |
|
|
482 |
|
|
|
8,364 |
|
Other |
|
|
35 |
|
|
|
(248 |
) |
|
|
|
|
|
|
|
Other expense, net |
|
$ |
2,295 |
|
|
$ |
5,345 |
|
|
|
|
|
|
|
|
Other expense, net during the fiscal quarter ended January 2, 2009 was primarily comprised of an
other-than-temporary impairment of marketable securities of $2.6 million and a $0.5 million
decrease in the fair value of the Companys warrant to purchase six million shares of Mindspeed
common stock, offset by $0.9 million of investment and interest income on invested cash balances.
Other expense, net during the fiscal quarter ended December 28, 2007 was primarily comprised of an
$8.3 million decrease in the fair value of the Companys warrant to purchase six million shares of
Mindspeed common stock mainly due to a decrease in Mindspeeds stock price during the period,
offset by $2.8 million of investment and interest income on invested cash balances.
13. Related Party Transactions
Mindspeed Technologies, Inc.
As of January 2, 2009, the Company holds a warrant to purchase six million shares of Mindspeed
common stock at an exercise price of $17.04 per share exercisable through June 2013. In addition,
two members of the Companys Board of Directors also serve on the Board of Mindspeed. No
significant amounts were due to or receivable from Mindspeed at January 2, 2009.
Lease Agreement The Company subleases an office building to Mindspeed. Under the sublease
agreement, Mindspeed pays amounts for rental expense and operating expenses, which include
utilities, common area maintenance, and security services. During each of the three-month periods
ended January 2, 2009, and December 28, 2007, the Company recorded income related to the Mindspeed
sublease agreement of $0.4 million. Additionally, Mindspeed made payments directly to the
Companys landlord totaling $0.8 million during each of the three-month periods ended January 2,
2009 and December 28, 2007.
25
14. Geographic Information
Net revenues by geographic area, based upon country of destination, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
|
|
2009 |
|
|
2007 |
|
United States |
|
$ |
4,830 |
|
|
$ |
6,363 |
|
Other Americas |
|
|
1,645 |
|
|
|
3,372 |
|
|
|
|
|
|
|
|
Total Americas |
|
|
6,475 |
|
|
|
9,735 |
|
|
|
|
|
|
|
|
|
|
China |
|
|
54,495 |
|
|
|
87,488 |
|
Taiwan |
|
|
6,931 |
|
|
|
8,306 |
|
Japan |
|
|
3,834 |
|
|
|
7,078 |
|
Malaysia |
|
|
3,465 |
|
|
|
3,832 |
|
Thailand |
|
|
2,973 |
|
|
|
4,148 |
|
Singapore |
|
|
2,625 |
|
|
|
13,891 |
|
South Korea |
|
|
1,347 |
|
|
|
3,973 |
|
Other Asia-Pacific |
|
|
792 |
|
|
|
189 |
|
|
|
|
|
|
|
|
Total Asia-Pacific |
|
|
76,462 |
|
|
|
128,905 |
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
|
|
3,561 |
|
|
|
7,293 |
|
|
|
|
|
|
|
|
|
|
$ |
86,498 |
|
|
$ |
145,933 |
|
|
|
|
|
|
|
|
The Company believes a portion of the products sold to original equipment manufacturers (OEMs) and
third-party manufacturing service providers in the Asia-Pacific region are ultimately shipped to
end-markets in the Americas and Europe. One distributor accounted for 13% and 14% of net revenues
for the fiscal quarter ended January 2, 2009 and December 28, 2007, respectively. Sales to the
Companys twenty largest customers represented approximately 69% and 74% of net revenues for the
fiscal quarter ended January 2, 2009 and December 28, 2007, respectively.
Long-lived assets consist of property, plant and equipment and certain other long-term assets.
Long-lived assets by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
October 3, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
50,735 |
|
|
$ |
52,515 |
|
India |
|
|
3,747 |
|
|
|
4,499 |
|
Other Asia-Pacific |
|
|
5,683 |
|
|
|
6,766 |
|
Europe, Middle East and Africa |
|
|
30 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
$ |
60,195 |
|
|
$ |
63,814 |
|
|
|
|
|
|
|
|
15. Supplemental Guarantor Financial Information
In November 2006, the Company issued $275.0 million of floating rate senior secured notes due
November 2010. The floating rate senior secured notes rank equally in right of payment with all of
the Companys (the Parents) existing and future senior debt and senior to all of its existing and
future subordinated debt. The notes are also jointly, severally and unconditionally guaranteed, on
a senior basis, by three of the Parents wholly owned U.S. subsidiaries: Conexant, Inc., Brooktree
Broadband Holding, Inc., and Ficon Technology, Inc. (collectively, the Subsidiary Guarantors). The
guarantees rank equally in right of payment with all of the Subsidiary Guarantors existing and
future senior debt and senior to all of the Subsidiary Guarantors existing and future subordinated
debt.
The notes and guarantees (and certain hedging obligations that may be entered into with respect
thereto) are secured by first-priority liens, subject to permitted liens, on substantially all of
the Parents and the Subsidiary Guarantors assets (other than accounts receivable and proceeds
therefrom and subject to certain exceptions), including, but not limited to, the intellectual
property, owned real property, plant and equipment now owned or hereafter acquired by the Parent
and the Subsidiary Guarantors.
In lieu of providing separate financial statements for the Subsidiary Guarantors, the Company has
included the accompanying condensed consolidating financial statements. These condensed
consolidating financial statements are presented on the equity method of accounting. Under this
method, the Parents and Subsidiary Guarantors
26
investments in their subsidiaries are recorded at cost and adjusted for their share of the
subsidiaries cumulative results of operations, capital contributions and distributions and other
equity changes. The financial information of the three Subsidiary Guarantors has been combined in
the condensed consolidating financial statements.
The following guarantor financial information has been adjusted to reflect the Companys
discontinued operations. See Note 3 for further information regarding the sale of the Companys BMP
product line during fiscal 2008.
In addition, subsequent to the issuance of the Companys condensed consolidated
interim financial statements for the fiscal quarter ended December 28, 2007, the Company has corrected its guarantor financial
information to: (1) properly apply the equity method of accounting to its condensed consolidating statements of operations for the
fiscal quarter ended December 28, 2007; and (2) properly present the results of its intercompany transactions within its condensed
consolidating statements of cash flows (as financing activities rather than operating activities) for the fiscal quarter ended December
28, 2007 in accordance with SEC Regulation S-X, Rule 3-10(f).
The following tables present the Companys condensed consolidating balance sheets as of January 2,
2009 and October 3, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
77,877 |
|
|
$ |
|
|
|
$ |
32,450 |
|
|
$ |
|
|
|
$ |
110,327 |
|
Restricted cash |
|
|
12,000 |
|
|
|
|
|
|
|
8,500 |
|
|
|
|
|
|
|
20,500 |
|
Receivables, net |
|
|
|
|
|
|
169,158 |
|
|
|
43,948 |
|
|
|
(172,592 |
) |
|
|
40,514 |
|
Inventories |
|
|
26,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,014 |
|
Other current assets |
|
|
35,032 |
|
|
|
3 |
|
|
|
5,850 |
|
|
|
|
|
|
|
40,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
150,923 |
|
|
|
169,161 |
|
|
|
90,748 |
|
|
|
(172,592 |
) |
|
|
238,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
12,512 |
|
|
|
|
|
|
|
8,820 |
|
|
|
|
|
|
|
21,332 |
|
Goodwill |
|
|
18,911 |
|
|
|
89,352 |
|
|
|
3,097 |
|
|
|
|
|
|
|
111,360 |
|
Intangible assets, net |
|
|
7,341 |
|
|
|
2,150 |
|
|
|
419 |
|
|
|
|
|
|
|
9,910 |
|
Other assets |
|
|
36,517 |
|
|
|
|
|
|
|
2,493 |
|
|
|
|
|
|
|
39,010 |
|
Investments in subsidiaries |
|
|
286,981 |
|
|
|
19,728 |
|
|
|
|
|
|
|
(306,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
513,185 |
|
|
$ |
280,391 |
|
|
$ |
105,577 |
|
|
$ |
(479,301 |
) |
|
$ |
419,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
32,868 |
|
|
|
|
|
|
|
32,868 |
|
Accounts payable |
|
|
157,460 |
|
|
|
|
|
|
|
37,915 |
|
|
|
(172,592 |
) |
|
|
22,783 |
|
Accrued compensation and benefits |
|
|
8,629 |
|
|
|
|
|
|
|
3,323 |
|
|
|
|
|
|
|
11,952 |
|
Other current liabilities |
|
|
38,326 |
|
|
|
933 |
|
|
|
2,570 |
|
|
|
|
|
|
|
41,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
204,415 |
|
|
|
933 |
|
|
|
76,676 |
|
|
|
(172,592 |
) |
|
|
109,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
391,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
391,400 |
|
Other liabilities |
|
|
70,335 |
|
|
|
|
|
|
|
1,650 |
|
|
|
|
|
|
|
71,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
666,150 |
|
|
|
933 |
|
|
|
78,326 |
|
|
|
(172,592 |
) |
|
|
572,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity |
|
|
(152,965 |
) |
|
|
279,458 |
|
|
|
27,251 |
|
|
|
(306,709 |
) |
|
|
(152,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit) |
|
$ |
513,185 |
|
|
$ |
280,391 |
|
|
$ |
105,577 |
|
|
$ |
(479,301 |
) |
|
$ |
419,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69,738 |
|
|
$ |
|
|
|
$ |
36,145 |
|
|
$ |
|
|
|
$ |
105,883 |
|
Restricted cash |
|
|
18,000 |
|
|
|
|
|
|
|
8,800 |
|
|
|
|
|
|
|
26,800 |
|
Receivables |
|
|
|
|
|
|
169,158 |
|
|
|
57,584 |
|
|
|
(177,745 |
) |
|
|
48,997 |
|
Inventories |
|
|
36,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,439 |
|
Other current assets |
|
|
33,543 |
|
|
|
3 |
|
|
|
4,991 |
|
|
|
|
|
|
|
38,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
157,720 |
|
|
|
169,161 |
|
|
|
107,520 |
|
|
|
(177,745 |
) |
|
|
256,656 |
|
Property and equipment, net |
|
|
14,366 |
|
|
|
|
|
|
|
10,546 |
|
|
|
|
|
|
|
24,912 |
|
Goodwill |
|
|
17,911 |
|
|
|
89,404 |
|
|
|
3,097 |
|
|
|
|
|
|
|
110,412 |
|
Intangible assets, net |
|
|
8,527 |
|
|
|
5,992 |
|
|
|
452 |
|
|
|
|
|
|
|
14,971 |
|
Other assets |
|
|
36,955 |
|
|
|
|
|
|
|
2,497 |
|
|
|
|
|
|
|
39,452 |
|
Investments in subsidiaries |
|
|
291,511 |
|
|
|
19,188 |
|
|
|
|
|
|
|
(310,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
526,990 |
|
|
$ |
283,745 |
|
|
$ |
124,112 |
|
|
$ |
(488,444 |
) |
|
$ |
446,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
17,707 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,707 |
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
40,117 |
|
|
|
|
|
|
|
40,117 |
|
Accounts payable |
|
|
164,057 |
|
|
|
|
|
|
|
48,582 |
|
|
|
(177,745 |
) |
|
|
34,894 |
|
Accrued compensation and benefits |
|
|
12,078 |
|
|
|
|
|
|
|
2,911 |
|
|
|
|
|
|
|
14,989 |
|
Other current liabilities |
|
|
40,479 |
|
|
|
932 |
|
|
|
2,974 |
|
|
|
|
|
|
|
44,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
234,321 |
|
|
|
932 |
|
|
|
94,584 |
|
|
|
(177,745 |
) |
|
|
152,092 |
|
Long-term debt |
|
|
373,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,693 |
|
Other liabilities |
|
|
55,710 |
|
|
|
|
|
|
|
1,642 |
|
|
|
|
|
|
|
57,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
663,724 |
|
|
|
932 |
|
|
|
96,226 |
|
|
|
(177,745 |
) |
|
|
583,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity |
|
|
(136,734 |
) |
|
|
282,813 |
|
|
|
27,886 |
|
|
|
(310,699 |
) |
|
|
(136,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit) |
|
$ |
526,990 |
|
|
$ |
283,745 |
|
|
$ |
124,112 |
|
|
$ |
(488,444 |
) |
|
$ |
446,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys condensed consolidating statements of operations for the
fiscal quarter ended January 2, 2009 and December 28, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended January 2, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
82,710 |
|
|
$ |
5,894 |
|
|
$ |
3,788 |
|
|
$ |
(5,894 |
) |
|
$ |
86,498 |
|
Cost of goods sold |
|
|
36,760 |
|
|
|
|
|
|
|
3,588 |
|
|
|
|
|
|
|
40,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
45,950 |
|
|
|
5,894 |
|
|
|
200 |
|
|
|
(5,894 |
) |
|
|
46,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
26,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,313 |
|
Selling, general and administrative |
|
|
18,303 |
|
|
|
|
|
|
|
1,180 |
|
|
|
|
|
|
|
19,483 |
|
Amortization of intangible assets |
|
|
1,185 |
|
|
|
2,152 |
|
|
|
34 |
|
|
|
|
|
|
|
3,371 |
|
Gain on sale of intellectual property |
|
|
(12,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,858 |
) |
Special charges |
|
|
10,157 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
10,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
43,100 |
|
|
|
2,152 |
|
|
|
1,266 |
|
|
|
|
|
|
|
46,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,850 |
|
|
|
3,742 |
|
|
|
(1,066 |
) |
|
|
(5,894 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) equity in income of subsidiaries |
|
|
(1,896 |
) |
|
|
539 |
|
|
|
|
|
|
|
1,357 |
|
|
|
|
|
Interest expense |
|
|
5,474 |
|
|
|
|
|
|
|
580 |
|
|
|
|
|
|
|
6,054 |
|
Other expense (income), net |
|
|
4,368 |
|
|
|
|
|
|
|
(2,073 |
) |
|
|
|
|
|
|
2,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and gain
(loss) on equity method investments |
|
|
(8,888 |
) |
|
|
4,281 |
|
|
|
427 |
|
|
|
(4,537 |
) |
|
|
(8,717 |
) |
Provision for income taxes |
|
|
667 |
|
|
|
|
|
|
|
245 |
|
|
|
|
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before loss on equity method
investments |
|
|
(9,555 |
) |
|
|
4,281 |
|
|
|
182 |
|
|
|
(4,537 |
) |
|
|
(9,629 |
) |
Loss on equity method investments |
|
|
(846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
|
|
(10,401 |
) |
|
|
4,281 |
|
|
|
182 |
|
|
|
(4,537 |
) |
|
|
(10,475 |
) |
Net (loss) gain from discontinued operations |
|
|
(7,288 |
) |
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
(7,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(17,689 |
) |
|
$ |
4,281 |
|
|
$ |
256 |
|
|
$ |
(4,537 |
) |
|
$ |
(17,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended December 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenues |
|
$ |
119,969 |
|
|
$ |
11,196 |
|
|
$ |
25,964 |
|
|
$ |
(11,196 |
) |
|
$ |
145,933 |
|
Cost of goods sold |
|
|
40,223 |
|
|
|
|
|
|
|
23,589 |
|
|
|
|
|
|
|
63,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
79,746 |
|
|
|
11,196 |
|
|
|
2,375 |
|
|
|
(11,196 |
) |
|
|
82,121 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended December 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
37,648 |
|
|
|
|
|
|
|
175 |
|
|
|
|
|
|
|
37,823 |
|
Selling, general and administrative |
|
|
16,516 |
|
|
|
|
|
|
|
3,498 |
|
|
|
|
|
|
|
20,014 |
|
Amortization of intangible assets |
|
|
466 |
|
|
|
244 |
|
|
|
3,861 |
|
|
|
|
|
|
|
4,571 |
|
Special charges |
|
|
3,977 |
|
|
|
|
|
|
|
372 |
|
|
|
|
|
|
|
4,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
58,607 |
|
|
|
244 |
|
|
|
7,906 |
|
|
|
|
|
|
|
66,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
21,139 |
|
|
|
10,952 |
|
|
|
(5,531 |
) |
|
|
(11,196 |
) |
|
|
15,364 |
|
|
Equity in (loss) income of subsidiaries |
|
|
(2,115 |
) |
|
|
1,641 |
|
|
|
|
|
|
|
474 |
|
|
|
|
|
Interest expense |
|
|
7,659 |
|
|
|
|
|
|
|
1,790 |
|
|
|
|
|
|
|
9,449 |
|
Other expense (income), net |
|
|
11,183 |
|
|
|
|
|
|
|
(5,838 |
) |
|
|
|
|
|
|
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and
gain (loss) on equity method
investments |
|
|
182 |
|
|
|
12,593 |
|
|
|
(1,483 |
) |
|
|
(10,722 |
) |
|
|
570 |
|
Provision for income taxes |
|
|
474 |
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain (loss) on
equity method investments |
|
|
(292 |
) |
|
|
12,593 |
|
|
|
(1,871 |
) |
|
|
(10,722 |
) |
|
|
(292 |
) |
Gain on equity method investments |
|
|
3,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
3,481 |
|
|
|
12,593 |
|
|
|
(1,871 |
) |
|
|
(10,722 |
) |
|
|
3,481 |
|
Net loss from discontinued operations |
|
|
(12,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,218 |
) |
|
$ |
12,593 |
|
|
$ |
(1,871 |
) |
|
$ |
(10,722 |
) |
|
$ |
(9,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys condensed consolidating statements of cash flows for the
fiscal quarter ended January 2, 2009 and December 28, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended January 2, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by (used in) operating
activities |
|
$ |
(19,686 |
) |
|
$ |
1,017 |
|
|
$ |
5,389 |
|
|
$ |
7,817 |
|
|
$ |
(5,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property plant and equipment |
|
|
(111 |
) |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
(181 |
) |
Payments for acquisitions |
|
|
(1,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,953 |
) |
Purchases of accounts receivable |
|
|
|
|
|
|
|
|
|
|
(67,360 |
) |
|
|
67,360 |
|
|
|
|
|
Proceeds from collection of purchased
accounts receivable |
|
|
|
|
|
|
|
|
|
|
75,177 |
|
|
|
(75,177 |
) |
|
|
|
|
Release of restricted cash |
|
|
6,000 |
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
6,300 |
|
Proceeds from sale of intellectual
property, net |
|
|
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities |
|
|
18,484 |
|
|
|
|
|
|
|
8,047 |
|
|
|
(7,817 |
) |
|
|
18,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term debt, net of
expenses |
|
|
|
|
|
|
|
|
|
|
(7,900 |
) |
|
|
|
|
|
|
(7,900 |
) |
Intercompany, net |
|
|
10,248 |
|
|
|
(1,017 |
) |
|
|
(9,231 |
) |
|
|
|
|
|
|
|
|
Interest rate swap security deposit |
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
9,341 |
|
|
|
(1,017 |
) |
|
|
(17,131 |
) |
|
|
|
|
|
|
(8,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
8,139 |
|
|
|
|
|
|
|
(3,695 |
) |
|
|
|
|
|
|
4,444 |
|
Cash and cash equivalents at beginning of
period |
|
|
69,738 |
|
|
|
|
|
|
|
36,145 |
|
|
|
|
|
|
|
105,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
77,877 |
|
|
$ |
|
|
|
$ |
32,450 |
|
|
$ |
|
|
|
$ |
110,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended December 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by (used in) operating
activities |
|
$ |
10,712 |
|
|
$ |
(458 |
) |
|
$ |
(7,340 |
) |
|
$ |
5,832 |
|
|
$ |
8,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property plant and equipment |
|
|
(566 |
) |
|
|
|
|
|
|
(1,048 |
) |
|
|
|
|
|
|
(1,614 |
) |
Purchases of accounts receivable |
|
|
|
|
|
|
|
|
|
|
(145,848 |
) |
|
|
145,848 |
|
|
|
|
|
Proceeds from collection of purchased accounts
receivable |
|
|
|
|
|
|
|
|
|
|
151,680 |
|
|
|
(151,680 |
) |
|
|
|
|
Purchases of equity securities and other assets |
|
|
(755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing
activities |
|
|
(1,321 |
) |
|
|
|
|
|
|
4,784 |
|
|
|
(5,832 |
) |
|
|
(2,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term debt, net of expenses |
|
|
|
|
|
|
|
|
|
|
(9,845 |
) |
|
|
|
|
|
|
(9,845 |
) |
Intercompany, net |
|
|
(5,136 |
) |
|
|
458 |
|
|
|
4,678 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
(5,132 |
) |
|
|
458 |
|
|
|
(5,167 |
) |
|
|
|
|
|
|
(9,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
4,259 |
|
|
|
|
|
|
|
(7,723 |
) |
|
|
|
|
|
|
(3,464 |
) |
Cash and cash equivalents at beginning of
period |
|
|
199,263 |
|
|
|
|
|
|
|
36,342 |
|
|
|
|
|
|
|
235,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
203,522 |
|
|
$ |
|
|
|
$ |
28,619 |
|
|
$ |
|
|
|
$ |
232,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
Subsequent to January 2, 2009, the Company completed actions that resulted in the elimination of
approximately 140 positions worldwide. In the second fiscal quarter of 2009, the Company recorded
a charge for $2.2 million related to the headcount reduction.
The Company has also suspended the company match for the domestic
401(k) plan.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included in Part I Item 1 of this Quarterly
Report, as well as other cautionary statements and risks described elsewhere in this Quarterly
Report, and our audited consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K for the fiscal year ended October 3, 2008.
Overview
We design, develop and sell semiconductor system solutions, comprised of semiconductor devices,
software and reference designs for use in broadband communications applications that enable
high-speed transmission, processing and distribution of audio, video, voice and data to and
throughout homes and business enterprises worldwide. Our access solutions connect people through
personal communications access products, such as personal computers (PCs), to audio, video, voice
and data services over wireless and wire line broadband connections as well as over dial-up
Internet connections. Our central office solutions are used by service providers to deliver
high-speed audio, video, voice and data services over copper telephone lines and optical fiber
networks to homes and businesses around the globe. In addition, media processing products enable
the capture, display, storage, playback and transfer of audio and video content in applications
throughout home and small office environments. These solutions enable broadband connections and
network content to be shared throughout a home or small office-home office environment using a
variety of communications devices.
We market and sell our semiconductor products and system solutions directly to leading original
equipment manufacturers (OEMs) of communication electronics products, and indirectly through
electronic components distributors. We also sell our products to third-party electronic
manufacturing service providers, who manufacture
30
products incorporating our semiconductor products for OEMs. Sales to distributors and other
resellers accounted for approximately 25% of our net revenues in the fiscal quarter ended January
2, 2009, compared to 25% of our net revenues in the fiscal quarter ended December 28, 2007. One
distributor accounted for 13% and 14% of net revenues for the fiscal quarter ended January 2, 2009
and December 28, 2007, respectively. Our top 20 customers accounted for approximately 69% and 74%
of net revenues for the fiscal quarter ended January 2, 2009 and December 28, 2007, respectively.
Revenues derived from customers located in the Americas, the Asia-Pacific region and Europe
(including the Middle East and Africa) were 7%, 88% and 4%, respectively, of our net revenues for
the fiscal quarter ended January 2, 2009 and were 7%, 88% and 5%, respectively, of our net revenues
for the fiscal quarter ended December 28, 2007. We believe a portion of the products we sell to
OEMs and third-party manufacturing service providers in the Asia-Pacific region are ultimately
shipped to end-markets in the Americas and Europe.
Critical Accounting Policies
The condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, which require us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the condensed
consolidated financial statements, revenues and expenses during the periods reported and related
disclosures. Actual results could differ from those estimates. Information with respect to our
critical accounting policies that we believe have the most significant effect on our reported
results and require subjective or complex judgments of management is contained on pages 38-43 of
the Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the fiscal year ended October 3, 2008. Management believes that at
January 2, 2009, there has been no material change to this information.
Business Enterprise Segments
We operate in one reportable segment, broadband communications. Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for the way that public business enterprises report information about
operating segments in annual condensed consolidated financial statements. Although we had two
operating segments at January 2, 2009, under the aggregation criteria set forth in SFAS No. 131, we
only operate in one reportable segment, broadband communications. The Companys reporting units,
which are also the Companys operating units, Imaging and PC Media (IPM) and Broadband Access
Products (BBA) were identified based upon the
availability of discrete financial information and the chief
operating decision makers regular review of the financial
information for these operating segments. The Company evaluated these reporting units for components and noted that there are none below the IPM and BBA reporting units.
Under SFAS No. 131, two or more operating segments may be aggregated into a single operating
segment for financial reporting purposes if aggregation is consistent with the objective and basic
principles of SFAS No. 131, if the segments have similar economic characteristics, and if the
segments are similar in each of the following areas:
|
|
|
the nature of their products and services; |
|
|
|
|
the nature of their production processes; |
|
|
|
|
the type or class of customer for their products and services; and |
|
|
|
|
the methods used to distribute their products or provide their services. |
We meet each of the aggregation criteria for the following reasons:
|
|
|
the sale of semiconductor products is the only material source of revenue for each of our
two operating segments; |
|
|
|
|
the products sold by each of our operating segments use the same standard manufacturing
process; |
|
|
|
|
the products marketed by each of our operating segments are sold to similar
customers; and |
|
|
|
|
all of our products are sold through our internal sales force and common distributors. |
31
Because we meet each of the criteria set forth above and each of our operating segments has similar
economic characteristics, we aggregate our results of operations in one reportable segment.
In early fiscal 2008, we decided to discontinue our investments in stand-alone wireless networking
products and technologies. As a result, we have moved gateway-oriented embedded wireless networking
products and technologies, which enable and support our DSL gateway solutions, into our BBA product
line beginning in fiscal 2008. In August 2008, we completed the sale of our Broadband Media
Processing (BMP) product lines to NXP. As a result, the revenues generated by sales of BMP
products have been reported as discontinued operations for all periods presented.
Net revenues from continuing operations by product line are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
|
|
2009 |
|
|
2007 |
|
Imaging and PC Media |
|
$ |
49,662 |
|
|
$ |
75,445 |
|
Broadband Access Products |
|
|
36,836 |
|
|
|
70,488 |
|
|
|
|
|
|
|
|
|
|
$ |
86,498 |
|
|
$ |
145,933 |
|
|
|
|
|
|
|
|
Results of Operations
Net Revenues
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred, (iii) the sales price and terms are fixed and determinable, and (iv) the collection of
the receivable is reasonably assured. These terms are typically met upon shipment of product to the
customer. The majority of our distributors have limited stock rotation rights, which allow them to
rotate up to 10% of product in their inventory two times per year. We recognize revenue to these
distributors upon shipment of product to the distributor, as the stock rotation rights are limited
and we believe that we have the ability to reasonably estimate and establish allowances for
expected product returns in accordance with Statement of Financial Accounting Standards (SFAS)
No. 48, Revenue Recognition When Right of Return Exists. Development revenue is recognized when
services are performed and was not significant for any periods presented.
Prior to the fourth quarter of fiscal 2008, revenue with respect to sales to certain distributors
was deferred until the products were sold by the distributors to third parties. During the fourth
fiscal quarter ended October 3, 2008, we evaluated three distributors for which revenue has
historically been recognized when the purchased products are sold by the distributor to a third
party due to our inability in prior years to enforce the contractual terms related to any right of
return. Our evaluation revealed that we are able to enforce the contractual right of return for the
three distributors in an effective manner similar to that experienced with the other distributor
customers. As a result, in the fourth quarter of fiscal 2008, we commenced the recognition of
revenue on these three distributors upon shipment, which is consistent with the revenue recognition
point of other distributor customers. At January 2, 2009 and October 3,2008, there is no
significant deferred revenue related to sales to our distributors.
Revenue with respect to sales to customers to whom we have significant obligations after delivery
is deferred until all significant obligations have been completed. At January 2, 2009, there was no
deferred revenue. At October 3, 2008, deferred revenue related to shipments of products for which
the Company had on-going performance obligations was $0.2 million.
Our net revenues decreased 41% to $86.5 million in the
fiscal quarter ended January 2, 2009 from
$145.9 million in the fiscal quarter ended December 28,
2007. The fiscal quarter ended December 28, 2007 included
approximately $14.7 million of non-recurring revenue from the buyout
of a future royalty stream. The decline in net revenues, excluding
the impact of the non-recurring revenue, was driven by a 34%
decrease in net revenues generated by our Imaging and PC Media (IPM) business, which comprises 57%
of our total net revenues. The decrease in our IPM business was attributable to a 37% decrease in
unit volume shipments which was offset slightly by a 4% increase in average selling price (ASPs).
In addition, net revenues generated by our Broadband Access (BBA) business decreased 48%. BBA
revenue, which comprises 43% of our total net revenues, decreased a result of a 46% decline in unit
volume shipments coupled with a 21% decrease in ASPs.
32
The global economic recession severely dampened semiconductor industry sales in the first quarter
of fiscal 2009, historically a strong quarter for the industry. Weakening demand for the major
drivers of semiconductor sales which includes automotive products, personal computers, cell phones,
and corporate information technology products, resulted in a sharp drop in semiconductor industry
sales. More than 50% of semiconductor demand and the fortunes of the semiconductor industry are increasingly
linked to macroeconomic conditions such as gross domestic product, consumer confidence, and disposable income. Demand for all
of our products has experienced significant decline in line with the industry decline. We expect
revenues to further decline in the fiscal quarter ended April 3, 2009 as compared to the fiscal
quarter ended January 2, 2009 as a result of the effects of the overall economic environment.
Facing these challenges, the Company has been working to reduce operating costs and actively
managing working capital, while continuing to focus on delivering innovative products to gain
market share when a market recovery commences.
Gross Margin
Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company,
we use third parties for wafer production and assembly and test services. Our cost of goods sold
consists predominantly of purchased finished wafers, assembly and test services, royalties, other
intellectual property costs, labor and overhead associated with product procurement and non-cash
stock-based compensation charges for procurement personnel.
Our gross margin percentage for the fiscal quarter ended January 2, 2009 was 53.4% compared with
56.3% for the fiscal quarter ended December 28, 2007. Excluding the $14.7 million royalty
buy-out in the fiscal quarter ended December 28, 2007, our gross margin percentage would have been
51.4% compared to 53.4% for the fiscal quarter ended January 2, 2009. The two point gross margin
percentage increase in the fiscal quarter ended January 2, 2009 is primarily attributable to a
shift in product mix.
We assess the recoverability of our inventories on a quarterly basis through a review of inventory
levels in relation to foreseeable demand, generally over the following twelve months. Foreseeable
demand is based upon available information, including sales backlog and forecasts, product
marketing plans and product life cycle information. When the inventory on hand exceeds the
foreseeable demand, we write down the value of those inventories which, at the time of our review,
we expect to be unable to sell. The amount of the inventory write-down is the excess of historical
cost over estimated realizable value. Once established, these write-downs are considered permanent
adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate
significantly over time, and actual demand and market conditions may be more or less favorable than
those projected by management. In the event that actual demand is lower than originally projected,
additional inventory write-downs may be required. Similarly, in the event that actual demand
exceeds original projections, gross margins may be favorably impacted in future periods. During the
fiscal quarter ended January 2, 2009 and December 28, 2007, we recorded $0.3 million and $2.7
million, respectively, of net charges for excess and obsolete (E&O) inventory. Activity in our E&O
inventory reserves for the applicable periods in fiscal 2008 and 2007 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
(in thousands) |
|
2009 |
|
|
2007 |
|
E&O reserves at beginning of period |
|
$ |
17,579 |
|
|
$ |
17,139 |
|
Additions |
|
|
1,096 |
|
|
|
3,535 |
|
Release upon sales of product |
|
|
(809 |
) |
|
|
(870 |
) |
Scrap |
|
|
(3,006 |
) |
|
|
(1,353 |
) |
Standards adjustments and other |
|
|
(256 |
) |
|
|
94 |
|
|
|
|
|
|
|
|
E&O reserves at end of period |
|
$ |
14,604 |
|
|
$ |
18,545 |
|
|
|
|
|
|
|
|
We review our E&O inventory balances at the product line level on a quarterly basis and regularly
evaluate the disposition of all E&O inventory products. It is possible that some of these reserved
products will be sold, which will benefit our gross margin in the period sold. During the fiscal
quarter ended January 2, 2009 and December 28, 2007, we sold $0.8 million and $0.9 million,
respectively, of reserved products.
33
Our products are used by communications electronics OEMs that have designed our products into
communications equipment. For many of our products, we gain these design wins through a lengthy
sales cycle, which often includes providing technical support to the OEM customer. Moreover, once a
customer has designed a particular suppliers components into a product, substituting another
suppliers components often requires substantial design changes, which involve significant cost,
time, effort and risk. In the event of the loss of business from existing OEM customers, we may be
unable to secure new customers for our existing products without first achieving new design wins.
When the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into
whose products our products have been designed, we generally will be unable to sell our excess
inventories to others, and the estimated realizable value of such inventories to us is generally
zero.
On a quarterly basis, we also assess the net realizable value of our inventories. When the
estimated ASP, less costs to sell our inventory, falls below our inventory cost, we adjust our
inventory to its current estimated market value. During the fiscal quarter ended January 2, 2009
and December 28, 2007, credits to adjust certain products to their estimated market values were
immaterial. Increases to the lower of cost or market (LCM) inventory reserves may be required based
upon actual ASPs and changes to our current estimates, which would impact our gross margin
percentage in future periods.
Research and Development
Our research and development (R&D) expenses consist principally of direct personnel costs to
develop new semiconductor products, allocated indirect costs of the R&D function, photo mask and
other costs for pre-production evaluation and testing of new devices, and design and test tool
costs. Our R&D expenses also include the costs for design automation advanced package development
and non-cash stock-based compensation charges for R&D personnel.
R&D expense decreased $11.5 million, or 30%, in the fiscal quarter ended January 2, 2009 compared
to the fiscal quarter ended December 28, 2007. The decrease is due to a 35% reduction in R&D
headcount from December 2007 to December 2008, restructuring activities and cost cutting measures,
lower non-cash stock compensation of $1.1 million and a correcting adjustment of $5.3 million in
the fiscal quarter ended December 28, 2007, representing the unamortized portion of the capitalized
photo mask costs as of September 29, 2007. Based upon an evaluation of all relevant quantitative
and qualitative factors, and after considering the provisions of APB 28, paragraph 29, and SAB Nos.
99 and 108, we believe that this correcting adjustment is not material to our full year results for
fiscal 2008. In addition, we do not believe the correcting adjustment is material to the amounts
reported in previous periods.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses include personnel costs, sales
representative commissions, advertising and other marketing costs. Our SG&A expenses also include
costs of corporate functions including legal, accounting, treasury, human resources, customer
service, sales, marketing, field application engineering, allocated indirect costs of the SG&A
function, and non-cash stock-based compensation charges for SG&A personnel.
SG&A expense decreased $0.5 million, or 3%, in the fiscal quarter ended January 2, 2009 compared to
the fiscal quarter ended December 28, 2007. The decrease is primarily due to the 22% decline in
SG&A headcount from December 2007 to December 2008, as well as restructuring measures and other
cost cutting efforts, partially offset by an increase in non-cash stock compensation expense of
$0.9 million.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense for intangible assets acquired
in various business combinations. Our intangible assets are being amortized over a weighted-average
period of approximately two years.
Amortization expense decreased $1.2 million, or 26%, in the fiscal quarter ended January 2, 2009
compared to the fiscal quarter ended December 28, 2007. The decrease in amortization expense is
primarily attributable to the
34
intangible assets we sold to a third party in October 2008 and other intangible assets that became
fully amortized in fiscal 2008.
Gain on Sale of Intellectual Property
In October 2008, the Company sold a portfolio of patents including patents related to its prior
wireless networking technology to a third party for cash of $14.5 million, net of costs, and
recognized a gain of $12.9 million on the transaction. In accordance with the terms of the agreement with the third party, the Company retains a cross-license to this portfolio of patents.
Special Charges
Special charges in the fiscal quarter ended January 2, 2009 included $6.6 million of restructuring
charges related to our fiscal 2008, 2007, 2006 and 2005 restructuring actions primarily due to a
decrease in estimated future rental income from sub-tenants based on tenant defaults in the fiscal
quarter and a review of subleasing assumptions and a charge of $3.7 million related to a legal
settlement.
Special charges in the fiscal quarter ended December 28, 2007 were comprised of $3.4 million of
restructuring charges that were attributable to employee severance and termination benefit costs
related to our fiscal 2008, 2007 and 2006 restructuring actions and $1.8 million of facilities
related charges resulting from the accretion of rent expense related to our prior restructuring
actions. These special charges were offset by the reversal of a $0.9 million reserve related to the
settlement of a proposed tax assessment for an acquired foreign subsidiary.
Interest Expense
Interest expense decreased $3.4 million, or 36%, in the fiscal quarter ended January 2, 2009
compared to the fiscal quarter ended December 28, 2007. The decrease is primarily attributable to
the repurchase of $53.6 million and $80.0 million of our senior secured notes in March and
September 2008, respectively, debt refinancing activities implemented in fiscal 2007, and declines
in interest rates on our variable rate debt.
Other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
(in thousands) |
|
2009 |
|
|
2007 |
|
Investment and interest income |
|
$ |
(857 |
) |
|
$ |
(2,771 |
) |
Other-than-temporary impairment of marketable securities |
|
|
2,635 |
|
|
|
|
|
Decrease in the fair value of derivative instruments |
|
|
482 |
|
|
|
8,364 |
|
Other |
|
|
35 |
|
|
|
(248 |
) |
|
|
|
|
|
|
|
Other expense (income), net |
|
$ |
2,295 |
|
|
$ |
5,345 |
|
|
|
|
|
|
|
|
Other expense, net during the fiscal quarter ended January 2, 2009 was primarily comprised of an
other-than-temporary impairment of marketable securities of $2.6 million and a $0.5 million
decrease in the fair value of the Companys warrant to purchase six million shares of Mindspeed
common stock, offset by $0.9 million of investment and interest income on invested cash balances.
Other expense, net during the fiscal quarter ended December 28, 2007 was primarily comprised of an
$8.3 million decrease in the fair value of the Companys warrant to purchase six million shares of
Mindspeed common stock mainly due to a decrease in Mindspeeds stock price during the period,
offset by $2.8 million of investment and interest income on invested cash balances.
Provision for Income Taxes
We recorded a tax provision of $0.9 million for the quarter ended January 2, 2009 and the quarter
ended December 28, 2007, primarily reflecting income taxes imposed on our foreign subsidiaries. All
of our U.S. Federal income taxes and the majority of our state income taxes are offset by fully
reserved deferred tax assets
35
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, sales of non-core assets and
operating cash flow.
We believe that our existing sources of liquidity, together with cash expected to be generated from
product sales, will be sufficient to fund our operations, research and development, anticipated
capital expenditures and working capital for at least the next twelve months. However, additional
operating losses or lower than expected product sales will adversely affect our cash flow and
financial condition and could impair our ability to satisfy our indebtedness obligations as such
obligations come due.
Recent unfavorable economic conditions have led to a tightening in the credit markets, a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. If
the economy or markets in which we operate continue to be subject to adverse economic conditions,
our business, financial condition, cash flow and results of operations will be adversely affected.
If the credit markets remain difficult to access or worsen or our performance is unfavorable due to
economic conditions or for any other reasons, we may not be able to obtain sufficient capital to
repay amounts due under (i) our credit facility expiring November 2009 (ii) our $141.4 million
floating rate senior secured notes when they become due in November 2010 or earlier as a result of
a mandatory offer to repurchase, and (iii) our $250.0 million convertible subordinated notes when
they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. The
first mandatory repurchase date for our convertible subordinated notes is March 1, 2011. In the
event we are unable to satisfy or refinance our debt obligations as the obligations are required to
be paid, we will be required to consider strategic and other alternatives, including, among other
things, the negotiation of revised terms of our indebtedness, the exchange of new securities for
existing indebtedness obligations and the sale of assets to generate funds. There is no assurance
that we would be successful in completing any of these alternatives.
Our cash and cash equivalents increased $4.4 million between October 3, 2008 and January 2, 2009.
The increase was primarily due to $14.5 million in net cash proceeds from the sale of intellectual
property related to our prior wireless networking technology, $6.3 million released from a standby
letter of credit, offset by $5.5 million of cash used in operations and $7.9 million of net
repayments on the credit facility.
At January 2, 2009, we had a total of $250.0 million aggregate principal amount of convertible
subordinated notes outstanding. These notes are due in March 2026, but the holders may require us
to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and March 1,
2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest.
At January 2, 2009, we also had a total of $141.4 million aggregate principal amount of floating
rate senior secured notes outstanding. These notes are due in November 2010, but we are required to
offer to repurchase, for cash, the notes at a price of 100% of the principal amount, plus any
accrued and unpaid interest, with the net proceeds of certain asset dispositions if such proceeds
are not used within 360 days to invest in assets (other than current assets) related to our
business. The sale of the our investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and
the sale of two other equity investments in January 2007 qualified as asset dispositions requiring
us to make offers to repurchase a portion of the notes no later than 361 days following the
February 2007 asset dispositions. Based on the proceeds received from these asset dispositions and
our cash investments in assets (other than current assets) related to our business made within
360 days following the asset dispositions, we were required to make an offer to repurchase not more
than $53.6 million of the senior secured notes, at 100% of the principal amount plus any accrued
and unpaid interest in February 2008. As a result of 100% acceptance of the offer by our
bondholders, $53.6 million of the senior secured notes were repurchased during the second quarter
of fiscal 2008. We recorded a pretax loss on debt repurchase of $1.4 million during the second
quarter of fiscal 2008, which included the write-off of deferred debt issuance costs.
The sale of the Companys investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the
sale of two other equity investments in January 2007 qualified as asset dispositions requiring the
Company to make offers to repurchase a portion of the notes no later than 361 days following the
February 2007 asset dispositions. Based on the proceeds received from these asset dispositions and
the Companys cash investments in assets (other than current assets) related to the Companys
business made within 360 days following the asset dispositions, the Company was required to make an
offer to repurchase not more than $53.6 million of the senior secured notes, at 100% of the
36
principal amount plus any accrued and unpaid interest in February 2008. As a result of 100%
acceptance of the offer by the Companys bondholders, $53.6 million of the senior secured notes
were repurchased during the second quarter of fiscal 2008. The Company recorded a pretax loss on
debt repurchase of $1.4 million during the second quarter of fiscal 2008 which included the
write-off of deferred debt issuance costs.
Following the sale of the BMP business unit, we made an offer to repurchase $80.0 million of the
senior secured notes at 100% of the principal amount plus any accrued and unpaid interest in
September 2008. As a result of the 100% acceptance of the offer by our bondholders, $80.0 million
of the senior secured notes were repurchased during the fourth quarter of fiscal 2008. We recorded
a pretax loss on debt repurchase of $1.6 million during the fourth quarter of fiscal 2008, which
included the write-off of deferred debt issuance costs. The pretax loss on debt repurchase of
$1.6 million has been included in net loss from discontinued
operations. During the fiscal
quarter ended January 2, 2009, we did not have additional sufficient asset dispositions to trigger
another required repurchase offer.
We also have a $50.0 million credit facility with a bank, under which we had borrowed $ 32.9
million as of January 2, 2009. The term of this credit facility has been extended through
November 27, 2009, and the facility remains subject to additional 364-day extensions at the
discretion of the bank.
Cash flows are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
|
|
January 2, |
|
|
December 28, |
|
(in thousands) |
|
2009 |
|
|
2007 |
|
Net cash (used in) provided by operating activities |
|
$ |
(5,463 |
) |
|
$ |
8,746 |
|
Net cash (used in) provided by investing activities |
|
|
18,714 |
|
|
|
(2,369 |
) |
Net cash used in financing activities |
|
|
(8,807 |
) |
|
|
(9,841 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
4,444 |
|
|
$ |
(3,464 |
) |
|
|
|
|
|
|
|
Cash used in operating activities was $5.5 million for the fiscal quarter ended January 2, 2009
compared to cash provided by operations of $8.7 million for the fiscal quarter ended December 28,
2007. During the fiscal quarter ended January 2, 2009, we used $12.9 million of cash from
operations and generated $7.4 million in working capital improvements (accounts receivable,
inventories and accounts payable). The cash generated from working capital was primarily driven by
a $8.5 million decrease in accounts receivable and an $10.4 million decrease in inventory levels
due to the overall lower business volumes and the general economic downturn.
Cash provided by investing activities was $18.7 million for the fiscal quarter ended January 2,
2009 compared to cash used in investing activities of $2.4 million for the fiscal quarter ended
December 28, 2007. In the first quarter of fiscal 2009, we sold intellectual property for net
proceeds of $14.5 million related to our prior wireless networking technology and $6.3 million of
restricted cash was released associated with a standby letter of credit.
Cash used in financing activities was $8.8 million for the fiscal quarter ended January 2, 2009
compared to $9.8 million for the fiscal quarter ended December 28, 2007, and in both periods were
primarily attributable to scheduled debt payments.
Contractual Commitments
There have been no material changes to our contractual commitments from those previously disclosed
in our Annual Report on Form 10-K for our fiscal year ended October 3, 2008. For a summary of the
contractual commitments at October 3, 2008, see Part II, Item 7, page 36 in our 2008 Annual Report
on Form 10-K.
Off-Balance Sheet Arrangements
We have made guarantees and indemnities, under which we may be required to make payments to a
guaranteed or indemnified party, in relation to certain transactions. In connection with our
spin-off from Rockwell International Corporation (Rockwell), we assumed responsibility for all
contingent liabilities and then-current and future litigation
37
(including environmental and intellectual property proceedings) against Rockwell or its
subsidiaries in respect of the operations of the semiconductor systems business of Rockwell. In
connection with our contribution of certain of our manufacturing operations to Jazz, we agreed to
indemnify Jazz for certain environmental matters and other customary divestiture-related matters.
In connection with the sales of our products, we provide intellectual property indemnities to our
customers. In connection with certain facility leases, we have indemnified our lessors for certain
claims arising from the facility or the lease. We indemnify our directors and officers to the
maximum extent permitted under the laws of the State of Delaware.
The durations of our guarantees and indemnities vary, and in many cases are indefinite. The
guarantees and indemnities to customers in connection with product sales generally are subject to
limits based upon the amount of the related product sales. The majority of other guarantees and
indemnities do not provide for any limitation of the maximum potential future payments we could be
obligated to make. We have not recorded any liability for these guarantees and indemnities in our
condensed consolidated balance sheets. Product warranty costs are not significant.
Special Purpose Entities
We have one special purpose entity, Conexant USA, LLC, which was formed in September 2005 in
anticipation of establishing the credit facility. This special purpose entity is a wholly-owned,
consolidated subsidiary of ours. Conexant USA, LLC is not permitted, nor may its assets be used, to
guarantee or satisfy any of our obligations or those of our subsidiaries.
On November 29, 2005, we established an accounts receivable financing facility whereby we will
sell, from time to time, certain insured accounts receivable to Conexant USA, LLC, and Conexant
USA, LLC entered into a revolving credit agreement with a bank that is secured by the assets of the
special purpose entity. The revolving credit facility currently matures on November 27, 2009 and is
subject to annual renewal. Our borrowing limit on the revolving credit agreement is $50.0 million,
of which $32.9 million is outstanding at January 2, 2009.
Recently Adopted Accounting Pronouncements
On October 4, 2008, the Company adopted Statement of Financial Accounting Standard (SFAS)
No. 157, Fair Value Measurements (SFAS No. 157), for its financial assets and liabilities. The
Companys adoption of SFAS No. 157 did not have a material impact on its financial position,
results of operations or liquidity.
SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be
received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs, where available. The following summarizes the three levels
of inputs required by the standard that the Company uses to measure fair value.
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Level 1: Quoted prices in active markets for identical assets or liabilities. |
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|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. |
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|
Level 3: Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. |
SFAS No. 157 requires the use of observable market inputs (quoted market prices) when measuring
fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
In accordance with FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement
No. 157 (FSP FAS 157-2), the Company elected to defer until October 3, 2009 the adoption of SFAS
No. 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a
38
recurring basis. The adoption of SFAS No. 157 for those assets and liabilities within the scope of
FSP FAS 157-2 is not expected to have a material impact on the Companys financial position,
results of operations or liquidity.
On October 4, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Company already records marketable securities at fair value in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of SFAS
No. 159 did not have an impact on the Companys condensed consolidated financial statements as
management did not elect the fair value option for any other financial instruments or certain other
assets and liabilities.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R), which replaces SFAS No 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes in the way assets
and liabilities are recognized in the purchase accounting. It also changes the recognition of
assets acquired and liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. The Company will adopt SFAS No. 141R no later than the first
quarter of fiscal 2010 and it will apply prospectively to business combinations completed on or
after that date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51, (SFAS No. 160) which changes the accounting and reporting
for minority interests. Minority interests will be recharacterized as noncontrolling interests and
will be reported as a component of equity separate from the parents equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling interest will be included
in consolidated net income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value with any gain or
loss recognized in earnings. The Company will adopt SFAS No. 160 no later than the first quarter of
fiscal 2010 and it will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company is currently assessing the potential
impact that adoption of SFAS No. 160 would have on its financial position and results of
operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161). SFAS No. 161 requires expanded disclosures regarding the location and
amount of derivative instruments in an entitys financial statements, how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and how derivative instruments and
related hedged items affect an entitys financial position, operating results and cash flows. SFAS
No. 161 is effective for periods beginning on or after November 15, 2008. The Company does not
believe that the adoption of SFAS No. 161 will have a material impact on its financial statement
disclosures.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142. This change is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting
principles (GAAP). The requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure requirements must be applied
prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
FSP 142-3 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, which will require the Company to
adopt these provisions in the first quarter of fiscal 2010. The Company is currently evaluating the
impact of adopting FSP 142-3 on its condensed consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1
requires the issuer
39
to separately account for the liability and equity components of convertible debt instruments in a
manner that reflects the issuers nonconvertible debt borrowing rate. The guidance will result in
companies recognizing higher interest expense in the statement of operations due to amortization of
the discount that results from separating the liability and equity components. FSP APB 14-1 will be
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Based on its initial analysis, the Company expects that
the adoption of FSP APB 14-1 will result in an increase in the interest expense recognized on its
convertible subordinated notes. See Note 5 to the Condensed Consolidated Financial Statements for
further information on long-term debt.
In December 2008, the FASB issued FSP (FSP) FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP 140-4 and FIN 46(R)-8). FSP 140-4 and FIN 46(R)-8 amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to
require public entities to provide additional disclosures about transfers of financial assets. It
also amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, to require public enterprises, including sponsors that have a variable interest in a
variable interest entity, to provide additional disclosures about their involvement with variable
interest entities. Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE) that holds a variable
interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to
the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable
interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to
the qualifying SPE. FSP 140-4 and FIN 46(R)-8 is effective for periods beginning on or after
December 15, 2008. The Company does not believe that the adoption of FSP 140-4 and FIN 46(R)-8 will
have a material impact on its financial statement disclosures.
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ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash and cash equivalents, the Mindspeed warrant, short-term debt
and long-term debt. Our main investment objectives are the preservation of investment capital and
the maximization of after tax returns on our investment portfolio. Consequently, we invest with
only high credit quality issuers, and we limit the amount of our credit exposure to any one issuer.
Our cash and cash equivalents are not subject to significant interest rate risk due to the short
maturities of these instruments. As of January 2, 2009, the carrying value of our cash and cash
equivalents approximates fair value.
We hold a warrant to purchase six million shares of Mindspeed common stock at an exercise price of
$17.04 per share through June 2013. For financial accounting purposes, this is a derivative
instrument and the fair value of the warrant is subject to significant risk related to changes in
the market price of Mindspeeds common stock. As of January 2, 2009, a 10% decrease in the market
price of Mindspeeds common stock would result in an immaterial decrease in the fair value of this
warrant. At January 2, 2009, the market price of Mindspeeds common stock was $0.92 per share.
During the fiscal quarter ended January 2, 2009, the market price of Mindspeeds common stock
ranged from a low of $0.56 per share to a high of $2.17 per share.
Our short-term debt consists of borrowings under a 364-day credit facility. Interest related to our
short-term debt is at 7-day LIBOR plus 1.25%, which is reset weekly and was approximately 1.65% at
January 2, 2009. In connection with our extension of the term of this credit facility through
November 27, 2009, the interest rate applied to our borrowings under the facility increased from
7-day LIBOR plus 0.6% to 7-day LIBOR plus 1.25%. We do not believe our short-term debt is subject
to significant market risk.
Our long-term debt consists of convertible subordinated notes with interest at fixed rates and
floating rate senior secured notes. Interest related to our floating rate senior secured notes is
at three-month LIBOR plus 3.75%, which is reset quarterly and was approximately 5.90% at January 2,
2009. At January 2, 2009, we are party to two interest rate swap agreements for a combined notional
amount of $100 million to eliminate interest rate risk on $100 million of our floating rate senior
secured notes due 2010. Under the terms of the swaps, we will pay a fixed rate of 2.98% and receive
a floating rate equal to three-month LIBOR, which will offset the floating rate paid on the notes.
The
40
fair value of our convertible subordinated notes is subject to significant fluctuation due to their
convertibility into shares of our common stock.
The following table shows the fair values of our financial instruments as of January 2, 2009 (in
thousands):
|
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|
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|
|
|
|
|
|
Carrying Value |
|
Fair Value |
|
|
(In thousands) |
Cash and cash equivalents |
|
$ |
110,327 |
|
|
$ |
110,327 |
|
Restricted
cash |
|
|
27,261 |
|
|
|
27,261 |
|
Marketable available-for-sale securities |
|
|
403 |
|
|
|
403 |
|
Other equity securities |
|
|
7,976 |
|
|
|
7,976 |
|
Mindspeed warrant |
|
|
63 |
|
|
|
63 |
|
Short-term debt |
|
|
32,868 |
|
|
|
32,868 |
|
Interest rate swap financial instruments |
|
|
2,135 |
|
|
|
2,135 |
|
Long-term debt: senior secured notes |
|
|
141,400 |
|
|
|
134,330 |
|
Long-term debt: convertible subordinated notes |
|
|
250,000 |
|
|
|
112,500 |
|
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently,
sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United
States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the
value of the United States dollar relative to other currencies could make our products more
expensive, which could negatively impact our ability to compete. Conversely, decreases in the value
of the United States dollar relative to other currencies could result in our suppliers raising
their prices to continue doing business with us. Fluctuations in currency exchange rates could
affect our business in the future.
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ITEM 4. |
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CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended, as of the end of the period covered by this report. Based on this
evaluation, our principal executive officer and our principal financial officer concluded that, as
of the end of the period covered by this report, our disclosure controls and procedures were
effective.
There were no changes in our internal control over financial reporting during the quarter ended
January 2, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
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ITEM 1. |
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LEGAL PROCEEDINGS |
IPO Litigation In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased the common stock of GlobeSpan, Inc. (GlobeSpan, Inc. later
became GlobespanVirata, Inc., and is now the Companys Conexant, Inc. subsidiary) between June 23,
1999 and December 6, 2000, filed a complaint in the U.S. District Court for the Southern District
of New York alleging violations of federal securities laws by the underwriters of GlobeSpan, Inc.s
initial and secondary public offerings as well as by certain GlobeSpan, Inc. officers and
directors. The complaint alleges that the defendants violated federal securities laws by issuing
and selling GlobeSpan, Inc.s common stock in the initial and secondary offerings without
disclosing to investors that the underwriters had (1) solicited and received undisclosed and
excessive commissions or other compensation and (2) entered into agreements requiring certain of
their customers to purchase the stock in the aftermarket at escalating prices. The complaint seeks
unspecified damages. The complaint was consolidated with class actions against approximately 300
other companies making similar allegations regarding the public offerings of those companies from
1998 through 2000. A tentative settlement of the claims against issuers and their officers and
directors, including the GlobeSpan, Inc. officers and directors, was reached in 2004, but the
settlement was never finally approved, and was abandoned after the United States Court of Appeals
for the Second Circuit ruled, in
41
an appeal by the underwriter defendants, that certification of similarly-defined classes was
improper. The tentative settlement was abandoned in 2007, in light of a decision of the U.S. Court
of Appeals for the Second Circuit vacating orders certifying similarly-defined classes in cases
against the underwriters. The Company does not believe the ultimate outcome of this litigation
will have a material adverse impact on its financial condition, results of operations, or cash
flows.
Class Action Suit In February 2005, the Company and certain of its current and former officers
and the Companys Employee Benefits Plan Committee were named as defendants in Graden v. Conexant,
et al., a lawsuit filed on behalf of all persons who were participants in the Companys 401(k) Plan
(Plan) during a specified class period. This suit was filed in the U.S. District Court of New
Jersey and alleges that the defendants breached their fiduciary duties under the Employee
Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The
plaintiff filed an amended complaint on August 11, 2005. The amended complaint alleged that
plaintiff lost money in the Plan due to (i) poor Company merger-related performance, (ii)
misleading disclosures by the Company regarding the merger, (iii) breaches of fiduciary duty
regarding management of Plan assets, (iv) being encouraged to invest in Conexant Stock Fund, (v)
being unable to diversify out of said fund and (vi) having the Company make its matching
contributions in said fund. On October 12, 2005, the defendants filed a motion to dismiss this
case. The plaintiff responded to the motion to dismiss on December 30, 2005, and the defendants
reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered
it closed. Plaintiff filed a notice of appeal on April 17, 2006. The appellate argument was held
on April 19, 2007. On July 31, 2007, the Third Circuit Court of Appeals vacated the District
Courts order dismissing Gradens complaint and remanded the case for further proceedings. On
August 27, 2008, the motion to dismiss was granted in part and denied in part. The judge left in
claims against all of the individual defendants as well as against the Company. In January 2009,
the Company and plaintiff agreed in principle to settle all outstanding claims in the litigation
for $3.25 million. The Company recorded a Special Charge of $3.7 million as of January 2, 2009, to
cover this settlement and any associated costs. The settlement remains subject to the negotiation
of a definitive settlement agreement, confirmatory discovery, and approval by the District Court.
ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations can be impacted by a number of risk
factors, any one of which could cause our actual results to vary materially from recent results or
from our anticipated future results. 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 our common stock or other securities.
We have updated the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for
the year ended October 3, 2008, as set forth below. We do not believe any of the updates constitute
material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for
the year ended October 3, 2008.
References in this section to our fiscal year refer to the fiscal year ending on the Friday nearest
September 30 of each year. References in this section to our fiscal quarter refer to the fiscal
quarter ending on the Friday nearest December 31 of each year.
We face a risk that capital needed for our business and to repay our debt obligations will not be
available when we need it.
At January 2, 2009, we had $141.4 million aggregate principal amount of floating rate senior
secured notes outstanding due November 2010 and $250.0 million aggregate principal amount of
convertible subordinated notes outstanding. The convertible notes are due in March 2026, but the
holders may require us to repurchase, for cash, all or part of their notes on March 1, 2011, March
1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid
interest.
We also have a $50.0 million credit facility with a bank, under which we had borrowed $32.9 million
as of January 2, 2009. The term of this credit facility has been extended through November 27,
2009, and the facility remains subject to additional 364-day extensions at the discretion of the
bank.
42
Recent unfavorable economic conditions have led to a tightening in the credit markets, a low level
of liquidity in many financial markets and extreme volatility in the credit and equity markets. In
addition, if the economy or markets in which we operate continue to be subject to adverse economic
conditions, our business, financial condition, cash flow and results of operations will be
adversely affected. If the credit markets remain difficult to access or worsen or our performance
is unfavorable due to economic conditions or for any other reasons, we may not be able to obtain
sufficient capital to repay amounts due under (i) our credit facility expiring November 2009 (ii)
our $141.4 million floating rate senior secured notes when they become due in November 2010 or
earlier as a result of a mandatory offer to repurchase, and (iii) our $250.0 million convertible
subordinated notes when they become due in March 2026 or earlier as a result of the mandatory
repurchase requirements. The first mandatory repurchase date for our convertible subordinated notes
is March 1, 2011. In the event we are unable to satisfy or refinance our debt obligations as the
obligations are required to be paid, we will be required to consider strategic and other
alternatives, including, among other things, the negotiation of revised terms of our indebtedness,
the exchange of new securities for existing indebtedness obligations and the sale of assets to
generate funds. There is no assurance that we would be successful in completing any of these
alternatives. Further, we may not be able to refinance any portion of this debt on favorable terms
or at all. Our failure to satisfy or refinance any of our indebtedness obligations as they come due
would result in a cross default and potential acceleration of our remaining indebtedness
obligations, and would have a material adverse effect on our business.
In addition, in the future, we may need to make strategic investments and acquisitions to help us
grow our business, which may require additional capital resources. We cannot assure you that the
capital required to fund these investments and acquisitions will be available in the future.
Our operating and financing flexibility is limited by the terms of our senior notes and our credit
facility.
The terms of our credit facility and floating rate senior notes contain financial and other
covenants that may limit our ability or prevent us from taking certain actions that we believe are
in the best interests of our business and our stockholders. For example, our floating rate secured
senior notes indenture contains covenants that restrict, subject to certain exceptions, the
Companys ability and the ability of its restricted subsidiaries to: incur or guarantee additional
indebtedness or issue certain redeemable or preferred stock; repurchase capital stock; pay
dividends on or make other distributions in respect of its capital stock or make other restricted
payments; make certain investments; create liens; redeem junior debt; sell certain assets;
consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; enter into
certain types of transactions with affiliates; and enter into sale-leaseback transactions. These
restrictions may prevent us from taking actions that could help to grow our business or increase
the value of our securities.
If we fail to continue to meet all applicable continued listing requirements of The NASDAQ Global
Market and NASDAQ determines to delist our common stock, the market liquidity and market price of
our common stock could decline.
Our common stock is listed on the NASDAQ Global Select Market. In order to maintain that listing,
we must satisfy minimum financial and other continued listing requirements. For example, NASDAQ
rules require that we maintain a minimum bid price of $1.00 per share for our common stock. Our
common stock is currently and has in the past fallen below this minimum bid price requirement and
it may do so again in the future. NASDAQ has currently suspended this bid price requirement through
April 20, 2009. However, if NASDAQ does not further extend this suspension and our stock price is
below $1.00 at the time the suspension is lifted or falls below $1.00 after that time or if we in
the future fail to meet other requirements for continued listing on the NASDAQ Global Select
Market, our common stock could be delisted from The NASDAQ Global Select Market if we are unable to
cure the events of noncompliance in a timely or effective manner. If our common stock were
threatened with delisting from The NASDAQ Global Market, we may, depending on the circumstances,
seek to extend the period for regaining compliance with NASDAQ listing requirements by moving our
common stock to the NASDAQ Capital Market. For example, if appropriate, we may request, as we have
done in the past, approval by our stockholders to implement a reverse stock split in order to
regain compliance with NASDAQs minimum bid price requirement. If our common stock is not eligible
for quotation on another market or exchange, trading of our common stock could be conducted in the
over-the-counter market or on an electronic bulletin board established for unlisted securities such
as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to
dispose of, or obtain accurate quotations for the price of our common stock, and there would likely
also be a reduction in our coverage by security
43
analysts and the news media, which could cause the price of our common stock to decline further. In
addition, in the event that our common stock is delisted, we would be in default under the terms
and conditions of our floating rate senior secured notes as well as our convertible subordinated
notes.
The value of our common stock may be adversely affected by market volatility and other factors.
The trading price of our common stock fluctuates significantly and may be influenced by many
factors, including:
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our operating and financial performance and prospects; |
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our ability to repay our debt; |
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the depth and liquidity of the market for our common stock; |
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investor perception of us and the industry and markets in which we operate; |
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our inclusion in, or removal from, any equity market indices; |
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|
the level of research coverage of our common stock; |
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changes in earnings estimates or buy/sell recommendations by analysts; |
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judgments favorable or adverse to us; and |
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general financial, domestic, international, economic and other market conditions |
We are subject to the risks of doing business internationally.
For the fiscal quarters ended January 2, 2009 and December 28, 2007, net revenues from customers
located outside of the United States, primarily in the Asia-Pacific region represented 94% and 96%
of our total net revenues, respectively. In addition, a significant portion of our workforce and
many of our key suppliers are located outside of the United States. Our international operations
consist of research and development, sales offices, and other general and administrative functions.
Our international operations are subject to a number of risks inherent in operating abroad. These
include, but are not limited to, risks regarding:
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difficulty in obtaining distribution and support; |
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limitations on our ability under local laws to protect our intellectual property; |
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currency exchange rate fluctuations; |
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local economic and political conditions; |
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disruptions of commerce and capital or trading markets due to or related to terrorist
activity or armed conflict; |
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|
restrictive governmental actions, such as restrictions on the transfer or repatriation of
funds and trade protection measures, including export duties and quotas and customs duties
and tariffs; |
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changes in legal or regulatory requirements; |
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the laws and policies of the United States and other countries affecting trade, foreign
investment and loans, and import or export licensing requirements; and |
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tax laws, including the cost of services provided and products sold between us and our
subsidiaries which are subject to review by taxing authorities. |
44
We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns that may negatively impact our business, financial condition, cash flow and results of
operations.
The semiconductor industry is highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price erosion, evolving technical standards,
short product life cycles (for semiconductors and for the end-user products in which they are used)
and wide fluctuations in product supply and demand. Recent domestic and global economic conditions
have presented unprecedented and challenging conditions reflecting continued concerns about the
availability and cost of credit, the U.S. mortgage market, declining real estate values, increased
energy costs, decreased consumer confidence and spending and added concerns fueled by the U.S.
federal governments interventions in the U.S. financial and credit markets. These conditions have
contributed to instability in both U.S. and international capital and credit markets and diminished
expectations for the U.S. and global economy. In addition, these conditions make it extremely
difficult for our customers to accurately forecast and plan future business activities and could
cause our U.S. and foreign businesses to slow spending on our products, which could cause our sales
to decrease or result in an extension of our sales cycles. Further, given the current unfavorable
economic environment, our customers may have difficulties obtaining capital at adequate or
historical levels to finance their ongoing business and operations, which could impair their
ability to make timely payments to us. If that were to occur, we may be required to increase our
allowance for doubtful accounts and our days sales outstanding would be negatively impacted. We
cannot predict the timing, strength or duration of any economic slowdown or subsequent economic
recovery, worldwide or within our industry. If the economy or markets in which we operate continue
to be subject to these adverse economic conditions, our business, financial condition, cash flow
and results of operations will be adversely affected.
We are subject to intense competition.
The communications semiconductor industry in general and the markets in which we compete in
particular are intensely competitive. We compete worldwide with a number of United States and
international semiconductor providers that are both larger and smaller than us in terms of
resources and market share. We continually face significant competition in our markets. This
competition results in declining average selling prices for our products. We also anticipate that
additional competitors will enter our markets as a result of expected growth opportunities,
technological and public policy changes and relatively low barriers to entry in certain markets of
the industry. Many of our competitors have certain advantages over us, such as significantly
greater sales and marketing, manufacturing, distribution, technical, financial and other resources.
We believe that the principal competitive factors for semiconductor suppliers in our addressed
markets are:
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time-to-market; |
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product quality, reliability and performance; |
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level of integration; |
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price and total system cost; |
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compliance with industry standards; |
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design and engineering capabilities; |
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strategic relationships with customers; |
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customer support; |
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new product innovation; and |
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access to manufacturing capacity. |
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Many of our competitors have certain advantages over us, such as significantly greater sales and
marketing, manufacturing, distribution, technical, financial and other resources. Many of our
current and potential competitors have a stronger financial position, less indebtedness and greater
financial resources than we do. These competitors may be able to devote greater financial resources
to the development, promotion and sale of their products than we can. In addition, the financial
stability of suppliers is an important consideration in our customers purchasing decisions. Our
relationship with existing and potential customers could be adversely affected if our customers
perceive that we lack an appropriate level of financial stability.
Current and potential 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 could emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against current and
potential competitors.
We own or lease a significant amount of space in which we do not conduct operations and doing so
exposes us to the financial risks of default by our tenants and subtenants.
As a result of our various reorganization and restructuring related activities, we lease or own a
number of domestic facilities in which we do not operate. At January 2, 2009, we had 602,000 square
feet of vacant leased space and 456,000 square feet of owned space, of which approximately 88% is
being sub-leased to third parties and 12% is currently vacant and offered for sublease. Included in
these amounts are 389,000 square feet of owned space in Newport Beach that we have leased to Jazz
Semiconductor, Inc. and 126,000 square feet of leased space in Newport Beach that we have
sub-leased to Mindspeed Technologies, Inc.
The aggregate amount owed to landlords under space we lease but do not operate over the remaining
terms of the leases is approximately $107 million and, of this amount, we have subtenants that
currently have lease obligations to us in the aggregate amount of $29 million. The space we have
subleased to others is, in some cases, at rates less than the amounts we are required to pay
landlords and, of the aggregate obligations we have to landlords for unused space, approximately
$33 million is attributable to space we are attempting to sublease. In the event one or more of our
subtenants fails to make lease payments to us or otherwise defaults on their obligations to us, we
could incur substantial unanticipated payment obligations to landlords. In addition, in the event
tenants of space we own fail to make lease payments to us or otherwise default on their obligations
to us, we could be required to seek new tenants and we cannot assure that our efforts to do so
would be successful or that the rates at which we could do so would be attractive. In the event our
estimates regarding our ability to sublet our available space are incorrect, we would be required
to adjust our restructuring reserves which could have a material impact on our financial results in
the future.
Our success depends on our ability to timely develop competitive new products and reduce costs.
Our operating results depend largely on our ability to introduce new and enhanced semiconductor
products on a timely basis. Successful product development and introduction depends on numerous
factors, including, among others, our ability to:
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anticipate customer and market requirements and changes in technology and industry
standards; |
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accurately define new products; |
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complete development of new products and bring our products to market on a timely basis; |
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differentiate our products from offerings of our competitors; |
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achieve overall market acceptance of our products; |
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coordinate product development efforts between and among our sites, particularly in India
and China, to manage the development of products at remote geographic locations. |
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We may not have sufficient resources to make the substantial investment in research and development
in order to develop and bring to market new and enhanced products. 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, prices of established products may decline, sometimes significantly and rapidly, over
time. We believe that in order 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 successful and as a result gross margins
may decline in future periods.
Our revenues, cash flow from operations and results of operations have fluctuated in the past and
may fluctuate in the future, particularly given adverse domestic and global economic conditions.
Our revenues, cash flow and results of operations have fluctuated in the past and may fluctuate in
the future. These fluctuations are due to a number of factors, many of which are beyond our
control. These factors include, among others:
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changes in end-user demand for the products manufactured and sold by our customers; |
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the timing of receipt, reduction or cancellation of significant orders by customers; |
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adverse economic conditions, including the unavailability or high cost of credit to our
customers; |
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the inability of our customers to forecast demand based on adverse economic conditions; |
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seasonal customer demand; |
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the gain or loss of significant customers; |
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market acceptance of our products and our customers products; |
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our ability to develop, introduce and market new products and technologies on a timely
basis; |
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the timing and extent of product development costs; |
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new product and technology introductions by competitors; |
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changes in the mix of products we develop and sell; |
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fluctuations in manufacturing yields; |
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availability and cost of products from our suppliers; |
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intellectual property disputes; and |
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the effect of competitive pricing pressures, including decreases in average selling
prices of our products. |
The foregoing factors are difficult to forecast, and these as well as other factors could
materially adversely affect our business, financial condition, cash flow and results of operations.
We have recently incurred substantial losses and may incur additional future losses.
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Our net loss from continuing operations for the fiscal quarter ended January 2, 2009 was $10.5
million. Our net losses from continuing operations for fiscal 2008, 2007 and 2006 were $133.4
million, $221.2 million, and $97.1 million, respectively. These results have had a negative impact
on our financial condition and operating cash flows. Our primary sources of liquidity include
borrowing under our credit facility, available cash and cash equivalents. We believe that our
existing sources of liquidity, together with cash expected to be generated from product sales, will
be sufficient to fund our operations, research and development, anticipated capital expenditures
and working capital for at least the next twelve months. However, we cannot provide any assurance
that our business will become profitable or that we will not incur additional substantial losses in
the future. Additional operating losses or lower than expected product sales will adversely affect
our cash flow and financial condition and could impair our ability to satisfy our indebtedness
obligations as such obligations come due. If at a future date we are unable to demonstrate that we
have sufficient cash to meet our obligations for at least the following twelve months, we may no
longer be able to use the going concern basis of presentation in our financial statements. The
receipt of a going concern qualification in future financial statements would likely adversely
impact our ability to access the capital and credit markets and impede our ability to conduct
business with suppliers and customers.
We have significant goodwill and intangible assets, and future impairment of our goodwill and
intangible assets could have a material negative impact on our financial condition and results of
operations.
At January 2, 2009, we had $111.4 million of goodwill and $9.9 million of intangible assets, net,
which together represented approximately 28.9% of our total assets. In periods subsequent to an
acquisition, at least on an annual basis or when indicators of impairment exist, we must evaluate
goodwill and acquisition-related intangible assets for impairment. When such assets are found to be
impaired, they will be written down to estimated fair value, with a charge against earnings. If our
market capitalization drops below our book value for a prolonged period of time, if our assumptions
regarding our future operating performance change or if other indicators of impairment are present,
we may be required to write-down the value of our goodwill and acquisition-related intangible
assets by taking a non-cash charge against earnings. Because of the significance of our remaining
goodwill and intangible asset balances, any future impairment of these assets could also have a
material adverse effect on our financial condition and results of operations, although, as a
non-cash charge, it would have no effect on our cash flow. Significant impairments may also impact
shareholders equity.
The loss of a key customer could seriously impact our revenue levels and harm our business. In
addition, if we are unable to continue to sell existing and new products to our key customers in
significant quantities or to attract new significant customers, our future operating results could
be adversely affected.
We have derived a substantial portion of our past revenue from sales to a relatively small number
of customers. As a result, the loss of any significant customer could materially and adversely
affect our financial condition and results of operations.
Sales to our twenty largest customers, including distributors, represented approximately 69% and
74% of our net revenues in the fiscal quarters ended January 2, 2009 and December 28, 2007,
respectively. For the fiscal quarters ended January 2, 2009 and December 28, 2007, there was one
distribution customer that accounted for 13% and 14% of our net revenues, respectively. We expect
that our largest customers will continue to account for a substantial portion of our net revenue in
future periods. The identities of our largest customers and their respective contributions to our
net revenue have varied and will likely continue to vary from period to period. We may not be able
to maintain or increase sales to certain of our key customers for a variety of reasons, including
the following:
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most of our customers can stop incorporating our products into their own products with
limited notice to us and suffer little or no penalty; |
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our agreements with our customers typically do not require them to purchase a minimum
quantity of our products; |
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many of our customers have pre-existing or concurrent relationships with our current or
potential competitors that may affect the customers decisions to purchase our products; |
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our customers face intense competition from other manufacturers that do not use our
products; |
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some of our customers offer or may offer products that compete with our products; |
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some of our customers liquidity may be negatively affected by the recent domestic and
global credit crisis;and; |
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customers perceptions of our liquidity may have a negative impact on their decisions to
incorporate our products into their own products. |
In addition, our longstanding relationships with some larger customers may also deter other
potential customers who compete with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain customers favorable prices on our
products. The loss of a key customer, a reduction in sales to any key customer or our inability to
attract new significant customers could seriously impact our revenue and materially and adversely
affect our results of operations.
Further, our product portfolio consists predominantly of semiconductor solutions for the
communications, PC, and consumer markets. Current unfavorable domestic and global economic
conditions are likely to have an adverse impact on demand in these end-user markets by reducing
overall consumer spending or shifting consumer spending to products other than those made by our
customers. Reduced sales by our customers in these end-markets will adversely impact demand by our
customers for our products and could also slow new product introductions by our customers and by
us. Lower net sales of our product would have an adverse effect on our revenue, cash flow and
results of operations.
Approximately $32.2 million of our $110.3 million of cash and cash equivalents at January 2, 2009
is located in foreign countries where we conduct business, including approximately $19.6 million in
India and $3.4 million in China. These amounts are not freely available for dividend repatriation
to the United States without the imposition and payment, where applicable, of local taxes. Further,
the repatriation of these funds is subject to compliance with applicable local government laws and
regulations, and in some cases, requires governmental consent, including in India and China. Our
inability to repatriate these funds quickly and without any required governmental consents may
limit the resources available to us to fund our operations in the United States and other locations
or to pay indebtedness.
Because most of our international sales are currently denominated in U.S. dollars, our products
could become less competitive in international markets if the value of the U.S. dollar increases
relative to foreign currencies.
From time to time, we may enter into foreign currency forward exchange contracts 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. Our financial condition and results of operations could be affected
(adversely or favorably) by currency fluctuations.
We also conduct a significant portion of our international sales through distributors. Sales to
distributors and other resellers accounted for approximately 25% and 25% of our net revenues in the
fiscal quarters ended January 2, 2009 and December 28, 2007. Our arrangements with these
distributors are terminable at any time, and the loss of these arrangements could have an adverse
effect on our operating results.
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:
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rapid technological developments; |
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rapid changes in customer requirements; |
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frequent new product introductions and enhancements; |
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short product life cycles with declining prices over the life cycle of the products; and |
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evolving industry standards. |
For example, a portion of our analog modem business that is bundled into PCs is becoming debundled
as broadband communications become more ubiquitous. Several of our PC OEM customers have indicated
that the trend toward debundling may become more significant, which may have an adverse effect on
both our revenues and profitability. Further, 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. Currently accepted industry standards are also subject to change, which may contribute
to the obsolescence of our products.
We may be subject to claims of infringement of third-party intellectual property rights or demands
that we license third-party technology, which could result in significant expense and loss of our
ability to use, make, sell, export or import our products or one or more components comprising our
products.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual
property rights. From time to time, third parties have asserted and may in the future assert
patent, copyright, trademark and other intellectual property rights to technologies that are
important to our business and have demanded and may in the future demand that we license their
patents and technology. Any litigation to determine the validity of claims that our products
infringe or may infringe these rights, including claims arising through our contractual
indemnification of our customers, regardless of their merit or resolution, could be costly and
divert the efforts and attention of our management and technical personnel. We cannot assure you
that we would prevail in litigation given the complex technical issues and inherent uncertainties
in intellectual property litigation. We have incurred substantial expense settling certain
intellectual property litigation in the past, such as our $70.0 million charge in fiscal 2006
related to the settlement of our patent infringement litigation with Texas Instruments
Incorporated. If litigation results in an adverse ruling we could be required to:
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pay substantial damages; |
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cease the manufacture, use or sale of infringing products, processes or technologies; |
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discontinue the use of infringing technology; |
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expend significant resources to develop non-infringing technology; or |
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license technology from the third party claiming infringement, which license may not be
available on commercially reasonable terms, or at all. |
If OEMs of communications electronics products do not design our products into their equipment, we
will be unable to sell those products. Moreover, a design win from a customer does not guarantee
future sales to that customer.
Our products are components of other products. As a result, we rely on OEMs of communications
electronics products to select our products from among alternative offerings to be designed into
their equipment. We may be unable to achieve these design wins. Without design wins from OEMs, we
would be unable to sell our products. Once an OEM designs another suppliers semiconductors into
one of its product platforms, it will be more difficult for us to achieve future design wins with
that OEMs product platform because changing suppliers involves significant cost, time, effort and
risk. Achieving a design win with a customer does not ensure that we will receive significant
revenues from that customer and we may be unable to convert design wins into actual sales. Even
after a design win, the customer is not obligated to purchase our products and can choose at any
time to stop using our products if, for example, it or its own products are not commercially
successful.
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Because of the lengthy sales cycles of many of our products, we may incur significant expenses
before we generate any revenues related to those products.
Our customers may need six months or longer to test and evaluate our products and an additional six
months or more to begin volume production of equipment that incorporates our products. The lengthy
period of time required also increases the possibility that a customer may decide to cancel or
change product plans, which could reduce or eliminate sales to that customer. Thus, we may incur
significant research and development, and selling, general and administrative expenses before we
generate the related revenues for these products, and we may never generate the anticipated
revenues if our customer cancels or changes its product plans.
Uncertainties involving the ordering and shipment of our products could adversely affect our
business.
Our sales are typically made pursuant to individual purchase orders and we generally do not have
long-term supply arrangements with our customers. Generally, our customers may cancel orders until
30 days prior to shipment. In addition, we sell a portion of our products through distributors and
other resellers, some of whom have a right to return unsold products to us. Sales to distributors
and other resellers accounted for approximately 25% and 25% of our net revenues in the fiscal
quarters ended January 2, 2009 and December 28, 2007. Our distributors may offer products of
several different suppliers, including products that may be competitive with ours. Accordingly,
there is a risk that the distributors may give priority to other suppliers products and may not
sell our products as quickly as forecasted, which may impact the distributors future order levels.
We routinely purchase inventory based on estimates of end-market demand for our customers
products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs
indirectly through distributors and other resellers or contract manufacturers, or both, as our
forecasts of demand are then based on estimates provided by multiple parties. In addition, our
customers may change their inventory practices on short notice for any reason. The cancellation or
deferral of product orders, the return of previously sold products or overproduction due to the
failure of anticipated orders to materialize could result in our holding excess or obsolete
inventory, which could result in write-downs of inventory.
We are dependent upon third parties for the manufacture, assembly and test of our products.
We are entirely dependent upon outside wafer fabrication facilities (known as foundries or fabs).
Therefore, our revenue growth is dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer production capacity. If the semiconductor industry
experiences a shortage of wafer fabrication capacity in the future, we risk experiencing delays in
access to key process technologies, production or shipments and increased manufacturing costs.
Moreover, our foundry partners often require significant amounts of financing in order to build or
expand wafer fabrication facilities. However, current unfavorable economic conditions have also
resulted in a tightening in the credit markets, decreased the level of liquidity in many financial
markets and resulted in significant volatility in the credit and equity markets. These conditions
may make it difficult for foundries to obtain adequate or historical levels of capital to finance
the building or expansion of their wafer fabrication facilities, which would have an adverse impact
on their production capacity and could in turn negatively impact our wafer output. In addition,
certain of our suppliers have required that we keep in place standby letters of credit for all or
part of the products we order. Such requirement, or a requirement that we shorten our payment cycle
times in the future, may negatively impact our liquidity and cash position, or may not be available
to us due to our then current liquidity or cash position, and would have a negative impact on our
ability to produce and deliver products to our customers on a timely basis.
The foundries we use may allocate their limited capacity to fulfill the production requirements of
other customers that are larger and better financed than us. If we choose to use a new foundry, it
typically takes several months to redesign our products for the process technology and intellectual
property cores of the new foundry and to complete the qualification process before we can begin
shipping products from the new foundry.
We are also dependent upon third parties for the assembly and testing of our products. Our reliance
on others to assemble and test our products subjects us to many of the same risks that we have with
respect to our reliance on outside wafer fabrication facilities.
Wafer fabrication processes are subject to obsolescence, and foundries may discontinue a wafer
fabrication process used for certain of our products. In such event, we generally offer our
customers a last time buy program to satisfy
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their anticipated requirements for our products. The unanticipated discontinuation of wafer
fabrication processes on which we rely may adversely affect our revenues and our customer
relationships.
In the event of a disruption of the operations of one or more of our suppliers, we may not have a
second manufacturing source immediately available. Such an event could cause significant delays in
shipments until we could shift the products from an affected facility or supplier to another
facility or supplier. The manufacturing processes we rely on are specialized and are available from
a limited number of suppliers. Alternate sources of manufacturing capacity, particularly wafer
production capacity, may not be available to us on a timely basis. Even if alternate wafer
production capacity is available, we may not be able to obtain it on favorable terms, or at all.
All such delays or disruptions could impair our ability to meet our customers requirements and
have a material adverse effect on our operating results.
In addition, the highly complex and technologically demanding nature of semiconductor manufacturing
has caused foundries from time to time to experience lower than anticipated manufacturing yields,
particularly in connection with the introduction of new products and the installation and start-up
of new process technologies. Lower than anticipated manufacturing yields may affect our ability to
fulfill our customers demands for our products on a timely basis and may adversely affect our cost
of goods sold and our results of operations.
We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries, increased expenses and loss of design wins to our competitors.
To remain competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to modify the manufacturing
processes for our products and to redesign some products, as well as standard cells and other
integrated circuit designs that we may use in multiple products. We periodically evaluate the
benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to
reduce our costs. In the past, we have experienced some difficulties in shifting to smaller
geometry process technologies or new manufacturing processes, which resulted in reduced
manufacturing yields, delays in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to smaller geometry
processes. We are dependent on our relationships with our foundries to transition to smaller
geometry processes successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our existing foundry
relationships or develop new ones. If our foundries or we experience significant delays in this
transition or fail to implement this transition efficiently, we could experience reduced
manufacturing yields, delays in product deliveries and increased expenses, all of which could
negatively affect our relationships with our customers and result in the loss of design wins to our
competitors, which in turn would adversely affect our results of operations. As smaller geometry
processes become more prevalent, we expect to continue to integrate greater levels of
functionality, as well as customer and third party intellectual property, into our products.
However, we may not be able to achieve higher levels of design integration or deliver new
integrated products on a timely basis, or at all. Moreover, even if we are able to achieve higher
levels of design integration, such integration may have a short-term adverse impact on our
operating results, as we may reduce our revenue by integrating the functionality of multiple chips
into a single chip.
If we are not successful in protecting our intellectual property rights, it may harm our ability
to compete.
We use a significant amount of intellectual property in our business. 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. At times, we incorporate
the intellectual property of our customers into our designs, and we have obligations with respect
to the non-use and non-disclosure of their intellectual property. In the past, we have engaged in
litigation to enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of proprietary rights of others, including our customers. We may
engage in future litigation on similar grounds, which may require us to expend significant
resources and to divert the efforts and attention of our management from our business operations.
We cannot assure you that:
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the steps we take to prevent misappropriation or infringement of our intellectual
property or the intellectual property of our customers will be successful; |
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any existing or future patents will not be challenged, invalidated or circumvented; or |
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any of the measures described above would provide meaningful protection. |
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use
our technology without authorization, develop similar technology independently or design around our
patents. If any of our patents fails to protect our technology, it would make it easier for our
competitors to offer similar products. In addition, effective patent, copyright, trademark and
trade secret protection may be unavailable or limited in certain countries.
Our success depends, in part, on our ability to effect suitable investments, alliances,
acquisitions and where appropriate, divestitures and restructurings.
Although we invest significant resources in research and development activities, the complexity and
speed of technological changes make it impractical for us to pursue development of all
technological solutions on our own. On an ongoing basis, we review 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:
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large initial one-time write-offs of in-process research and development; |
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the incurrence of substantial debt and assumption of unknown liabilities; |
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the potential loss of key employees from the acquired company; |
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amortization expenses related to intangible assets; and |
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the diversion of managements attention from other business concerns. |
Integrating acquired organizations and their products and services may be expensive, time-consuming
and a strain on our resources and our relationships with employees and customers, and ultimately
may not be successful. The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of one or more of our product lines and the loss of key
personnel. The diversion of managements attention and any delays or difficulties encountered in
connection with acquisitions and the integration of multiple operations could have an adverse
effect on our business, results of operations or financial condition. Moreover, in the event that
we have unprofitable operations or product lines we may be forced to restructure or divest such
operations or product lines. There is no guarantee that we will be able to restructure or divest
such operations or product lines on a timely basis or at a value that will avoid further losses or
that will successfully mitigate the negative impact on our overall operations or financial results.
We are required to use proceeds of certain asset dispositions to offer to repurchase our Floating
Rate Senior Secured Notes due November 2010 if we do not use the proceeds within 360 days to
invest in assets (other than current assets), and this requirement limits our ability to use asset
sale proceeds to fund our operations.
At January 2, 2009, we had $141.4 million aggregate principal amount of floating rate senior
secured notes outstanding. We are required to repurchase, for cash, notes at a price of 100% of the
principal amount, plus any accrued and unpaid interest, with the net proceeds of certain asset
dispositions if such proceeds are not used within 360 days to invest in assets (other than current
assets) related to our business. The sale of our Broadband Media Processing business in August 2008
qualified as an asset disposition requiring us to make offers to repurchase a portion of the notes
no later than 361 days following the respective asset dispositions. In September 2008, we completed
a tender offer for $80 million of the senior secured notes. Based on the proceeds received from
this asset disposition and our estimates of cash investments in assets (other than current assets)
related to our business to be made within 360 days following the asset dispositions, we estimate
that we will be required to make offers to repurchase approximately $17.6 million of the senior
secured notes, at 100% of the principal amount plus any
53
accrued and unpaid interest, in the fourth quarter of fiscal 2009. This requirement limits our
ability to use existing and future asset sale proceeds to fund our operations.
We may not be able to attract and retain qualified management, technical and other personnel
necessary for the design, development and sale of our products. Our success could be negatively
affected if key personnel leave.
Our future success depends on our ability to attract and to retain the continued service and
availability of skilled personnel at all levels of our business. As the source of our technological
and product innovations, our key technical personnel represent a significant asset. The competition
for such personnel can be intense. While we have entered into employment agreements with some of
our key personnel, we cannot assure you that we will be able to attract and retain qualified
management and other personnel necessary for the design, development and sale of our products.
Uncertainties involving litigation could adversely affect our business.
We and certain of our current and former officers and our Employee Benefits Plan Committee have
been named as defendants in a purported breach of fiduciary duties class action lawsuit. While the
parties have reached a settlement in principle, this or other lawsuits may divert managements
attention and resources from other matters, which could also adversely affect our business,
financial position and results of operations.
We currently operate under tax holidays and favorable tax incentives in certain foreign
jurisdictions.
While we believe we qualify for these incentives that reduce our income taxes and operating costs,
the incentives require us to meet specified criteria which are subject to audit and review. We
cannot assure that we will continue to meet such criteria and enjoy such tax holidays and
incentives. If any of our tax holidays or incentives are terminated, our results of operations may
be materially and adversely affected.
54
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
|
|
|
*10.1
|
|
Conexant Systems, Inc. 2009 Performance Incentive Plan (incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed
on November 18, 2008) |
|
|
|
*10.2
|
|
Employment Agreement by and between Dwight W. Decker and Conexant Systems,
Inc., dated December 4, 2008 (incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on December 9, 2008) |
|
|
|
*10.3
|
|
Separation Agreement and Release dated as of December 18, 2008 between
Conexant Systems, Inc. and Karen L. Roscher (incorporated by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K filed on December
30, 2008) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-15(a) or 15d-15(a). |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-15(a) or 15d-15(a). |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer of
Periodic Report Pursuant to 18 U.S.C. Section 1350. |
|
|
|
*
|
|
Management contract or compensatory plan or arrangement |
55
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
CONEXANT SYSTEMS, INC.
(Registrant)
|
|
Date: February 11, 2009 |
By |
/s/ JEAN HU
|
|
|
|
Jean Hu |
|
|
|
Chief Financial Officer and Senior Vice President,
Business Development
(principal financial officer) |
|
|
56
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
|
|
|
*10.1
|
|
Conexant Systems, Inc. 2009 Performance Incentive Plan (incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed
on November 18, 2008) |
|
|
|
*10.2
|
|
Employment Agreement by and between Dwight W. Decker and Conexant Systems,
Inc., dated December 4, 2008 (incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on December 9, 2008) |
|
|
|
*10.3
|
|
Separation Agreement and Release dated as of December 18, 2008 between
Conexant Systems, Inc. and Karen L. Roscher (incorporated by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K filed on December
30, 2008) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-14(a) or 15d-14(a). |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-15(a) or 15d-14(a). |
|
|
|
32
|
|
Certification by Chief Executive Officer and Chief Financial Officer of
Periodic Report Pursuant to 18 U.S.C. Section 1350. |
|
|
|
*
|
|
Management contract or compensatory plan or arrangement |
57