Attached files
| file | filename |
|---|---|
| 8-K - FORM 8-K - CONEXANT SYSTEMS INC | a55063e8vk.htm |
| EX-23 - EX-23 - CONEXANT SYSTEMS INC | a55063exv23.htm |
| EX-99.1 - EX-99.1 - CONEXANT SYSTEMS INC | a55063exv99w1.htm |
| EX-99.2 - EX-99.2 - CONEXANT SYSTEMS INC | a55063exv99w2.htm |
Exhibit 99.3
Item 8. Financial Statements and Supplementary Data
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
| (in thousands, except par value) | ||||||||
| ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 125,385 | $ | 105,883 | ||||
Restricted cash |
8,500 | 26,800 | ||||||
Receivables, net of allowances for doubtful accounts of $453 and $834, respectively |
30,110 | 48,997 | ||||||
Inventories, net |
9,216 | 19,372 | ||||||
Other current assets |
26,148 | 37,938 | ||||||
Assets held for sale |
— | 29,730 | ||||||
Total current assets |
199,359 | 268,720 | ||||||
Property, plant and equipment, net |
15,299 | 17,410 | ||||||
Goodwill |
109,908 | 110,412 | ||||||
Other assets |
25,635 | 48,742 | ||||||
Total assets |
$ | 350,201 | $ | 445,284 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 61,400 | $ | 17,707 | ||||
Short-term debt |
28,653 | 40,117 | ||||||
Accounts payable |
24,553 | 34,894 | ||||||
Accrued compensation and benefits |
8,728 | 13,201 | ||||||
Other current liabilities |
33,978 | 43,189 | ||||||
Liabilities to be assumed |
— | 3,995 | ||||||
Total current liabilities |
157,312 | 153,103 | ||||||
Long-term debt, net of debt discount of $21,422 and $35,437, respectively |
228,578 | 338,256 | ||||||
Other liabilities |
62,089 | 56,341 | ||||||
Total liabilities |
447,979 | 547,700 | ||||||
Commitments and contingencies (Note 6) |
||||||||
Shareholders’ deficit: |
||||||||
Preferred and junior preferred stock: 20,000 and 5,000 shares authorized, respectively |
— | — | ||||||
Common stock, $0.01 par value: 100,000 shares authorized; 56,917 and 49,601
shares issued and outstanding at October 2, 2009 and October 3, 2008, respectively |
570 | 496 | ||||||
Additional paid-in capital |
4,833,919 | 4,810,185 | ||||||
Accumulated deficit |
(4,929,743 | ) | (4,910,935 | ) | ||||
Accumulated other comprehensive loss |
(2,524 | ) | (2,083 | ) | ||||
Shareholder notes receivable |
— | (79 | ) | |||||
Total shareholders’ deficit |
(97,778 | ) | (102,416 | ) | ||||
Total liabilities and shareholders’ deficit |
$ | 350,201 | $ | 445,284 | ||||
See accompanying notes to consolidated financial statements
1
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
Net revenues |
$ | 208,427 | $ | 331,504 | $ | 360,703 | ||||||
Cost of goods sold(1) |
86,674 | 137,251 | 161,972 | |||||||||
Gross margin |
121,753 | 194,253 | 198,731 | |||||||||
Operating expenses: |
||||||||||||
Research and development(1) |
51,351 | 58,439 | 91,885 | |||||||||
Selling, general and administrative(1) |
62,740 | 77,905 | 80,893 | |||||||||
Amortization of intangible assets |
2,976 | 3,652 | 9,555 | |||||||||
Gain on sale of intellectual property |
(12,858 | ) | — | — | ||||||||
Asset impairments |
5,672 | 277 | 225,380 | |||||||||
Special charges |
18,983 | 18,682 | 8,360 | |||||||||
Total operating expenses |
128,864 | 158,955 | 416,073 | |||||||||
Operating (loss) income |
(7,111 | ) | 35,298 | (217,342 | ) | |||||||
Interest expense |
34,693 | 40,713 | 48,798 | |||||||||
Other (income) expense, net |
(5,025 | ) | 9,223 | (36,505 | ) | |||||||
Loss from continuing operations before income taxes and (loss) gain on equity method investments |
(36,779 | ) | (14,638 | ) | (229,635 | ) | ||||||
Provision for income taxes |
871 | 849 | 798 | |||||||||
Loss from continuing operations before (loss) gain on equity method investments |
(37,650 | ) | (15,487 | ) | (230,433 | ) | ||||||
(Loss) gain on equity method investments |
(2,807 | ) | 2,804 | 51,182 | ||||||||
Loss from continuing operations |
(40,457 | ) | (12,683 | ) | (179,251 | ) | ||||||
Gain on sale of discontinued operations, net of tax |
39,170 | 6,268 | — | |||||||||
Loss from discontinued operations, net of tax (1) |
(17,521 | ) | (306,670 | ) | (235,056 | ) | ||||||
Net loss |
$ | (18,808 | ) | $ | (313,085 | ) | $ | (414,307 | ) | |||
Loss per share from continuing operations — basic and diluted |
$ | (0.81 | ) | $ | (0.26 | ) | $ | (3.67 | ) | |||
Gain per share from sale of discontinued operations — basic and diluted |
$ | 0.78 | $ | 0.13 | $ | 0.00 | ||||||
Loss per share from discontinued operations — basic and diluted |
$ | (0.35 | ) | $ | (6.21 | ) | $ | (4.80 | ) | |||
Net loss per share — basic and diluted |
$ | (0.38 | ) | $ | (6.34 | ) | $ | (8.47 | ) | |||
Shares used in basic and diluted per-share computations |
49,856 | 49,394 | 48,940 | |||||||||
| (1) | These captions include non-cash employee stock-based compensation expense as follows: |
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Cost of goods sold |
$ | 247 | $ | 370 | $ | 426 | ||||||
Research and development |
869 | 2,725 | 6,157 | |||||||||
Selling, general and administrative |
3,736 | 9,185 | 7,271 | |||||||||
Loss from discontinued operations, net of tax |
868 | 3,589 | 5,897 | |||||||||
See accompanying notes to consolidated financial statements
2
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
$ | (18,808 | ) | $ | (313,085 | ) | $ | (414,307 | ) | |||
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of acquisitions: |
||||||||||||
Depreciation |
8,198 | 19,311 | 25,091 | |||||||||
Gain on sale of business |
(39,170 | ) | (6,268 | ) | — | |||||||
Amortization of intangible assets |
7,406 | 16,144 | 22,099 | |||||||||
Debt discount amortization |
14,015 | 13,394 | 12,323 | |||||||||
Asset impairments |
10,835 | 263,535 | 350,913 | |||||||||
Impairment of marketable and non-marketable securities |
2,770 | — | — | |||||||||
(Reversal of) charges for provision for bad debts, net |
(325 | ) | (751 | ) | 20 | |||||||
(Reversal of) charges for inventory provisions, net |
(806 | ) | 7,253 | (606 | ) | |||||||
Loss on termination of defined benefit plan |
— | 6,294 | — | |||||||||
Deferred income taxes |
(15 | ) | (39 | ) | 231 | |||||||
Stock-based compensation |
5,720 | 15,869 | 19,751 | |||||||||
(Increase) decrease in fair value of derivative instruments |
(4,002 | ) | 14,881 | 952 | ||||||||
Realized loss on termination of swap |
1,087 | — | — | |||||||||
Losses (gains) on equity method investments |
3,798 | (2,804 | ) | (51,182 | ) | |||||||
Loss on resolution of divestiture/acquisition related escrows, net |
1,575 | — | — | |||||||||
Gain on sales of equity securities, investments and other assets |
(1,856 | ) | (896 | ) | (17,016 | ) | ||||||
Gain on sale of intellectual property |
(12,858 | ) | — | — | ||||||||
Other items, net |
4,149 | 4,021 | (5,398 | ) | ||||||||
Changes in assets and liabilities: |
||||||||||||
Receivables |
19,212 | 32,633 | 42,099 | |||||||||
Inventories |
15,871 | 9,326 | 36,131 | |||||||||
Accounts payable |
(10,341 | ) | (45,010 | ) | (30,732 | ) | ||||||
Accrued expenses and other current liabilities |
(17,080 | ) | (36,210 | ) | 3,710 | |||||||
Other, net |
19,101 | (15,948 | ) | (5,930 | ) | |||||||
Net cash provided by (used in) operating activities |
8,476 | (18,350 | ) | (11,851 | ) | |||||||
Cash flows from investing activities |
||||||||||||
Proceeds from sale of equity securities and other assets |
2,310 | — | 168,186 | |||||||||
Proceeds from sales and maturities of marketable debt securities |
— | — | 100,573 | |||||||||
Purchases of marketable securities |
— | — | (27,029 | ) | ||||||||
Purchases of property, plant and equipment |
(686 | ) | (5,958 | ) | (30,322 | ) | ||||||
Proceeds from sales of property, plant and equipment |
134 | 8,949 | — | |||||||||
Proceeds from sale of intellectual property, net of expenses of $132 |
14,548 | — | — | |||||||||
Payments for acquisitions, net of cash acquired |
(4,207 | ) | (16,088 | ) | (5,029 | ) | ||||||
Purchases of equity securities |
— | (755 | ) | (1,200 | ) | |||||||
Restricted cash |
18,300 | (18,000 | ) | — | ||||||||
Proceeds from resolution of divestiture/acquisition related escrows, net |
10,446 | — | — | |||||||||
Net proceeds from sale of business |
44,559 | 95,367 | — | |||||||||
Net cash provided by investing activities |
85,404 | 63,515 | 205,179 | |||||||||
Cash flows from financing activities |
||||||||||||
(Repayment) proceeds from short-term debt, net of expenses of $901, $1,118
and $1,198, respectively |
(12,365 | ) | (39,883 | ) | (1,198 | ) | ||||||
Proceeds from long-term debt, net of expenses of $10,240 |
— | — | 264,760 | |||||||||
Repurchases and retirements of long-term debt |
(80,000 | ) | (133,600 | ) | (456,500 | ) | ||||||
Proceeds from common stock offering, net of expenses of $1,514 |
18,436 | — | — | |||||||||
Proceeds from issuance of common stock under employee stock plans |
28 | 1,088 | 9,568 | |||||||||
Employee income tax paid related to vesting of restricted stock units |
(258 | ) | — | — | ||||||||
Interest rate swap security deposit |
2,517 | (2,517 | ) | — | ||||||||
Payment for swap termination |
(2,815 | ) | — | — | ||||||||
Repayment of shareholder notes receivable |
79 | 25 | 21 | |||||||||
Net cash used in financing activities |
(74,378 | ) | (174,887 | ) | (183,349 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
19,502 | (129,722 | ) | 9,979 | ||||||||
Cash and cash equivalents at beginning of year |
105,883 | 235,605 | 225,626 | |||||||||
Cash and cash equivalents at end of year |
$ | 125,385 | $ | 105,883 | $ | 235,605 | ||||||
See accompanying notes to consolidated financial statements
3
CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
| Accumulated Other | ||||||||||||||||||||||||||||||||
| Comprehensive | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In | (Loss) Income (net | Notes Receivable | Total Shareholders’ | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Accumulated Deficit | of tax) | from Stock Sales | Treasury Stock | Equity (Deficit) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Balance at September 29, 2006 |
48,648 | $ | 487 | $ | 4,703,408 | $ | (4,175,757 | ) | $ | (12,096 | ) | $ | (121 | ) | $ | (5,823 | ) | $ | 510,098 | |||||||||||||
Adjustments for FSP APB 14-1 |
— | — | 66,045 | $ | (6,973 | ) | — | — | — | 59,072 | ||||||||||||||||||||||
Balance at September 29, 2006 (as adjusted) |
48,648 | 487 | 4,769,453 | (4,182,730 | ) | (12,096 | ) | (121 | ) | (5,823 | ) | 569,170 | ||||||||||||||||||||
Net loss |
— | — | — | (414,307 | ) | — | — | — | (414,307 | ) | ||||||||||||||||||||||
Currency translation adjustment |
— | — | — | — | 5,790 | — | — | 5,790 | ||||||||||||||||||||||||
Change in unrealized gain on derivative contracts |
— | — | — | — | 200 | — | — | 200 | ||||||||||||||||||||||||
Change in unrealized losses on available-for-sale securities |
— | — | — | — | 1,855 | — | — | 1,855 | ||||||||||||||||||||||||
Minimum pension liability adjustment |
— | — | — | — | 2,866 | — | — | 2,866 | ||||||||||||||||||||||||
Comprehensive loss |
(403,596 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock |
716 | 7 | 9,930 | — | — | — | — | 9,937 | ||||||||||||||||||||||||
Cancellation of treasury stock |
(128 | ) | (1 | ) | (5,822 | ) | — | — | — | 5,823 | — | |||||||||||||||||||||
Interest earned on notes receivable |
— | — | — | — | — | (4 | ) | — | (4 | ) | ||||||||||||||||||||||
Settlement of notes receivable |
— | — | — | — | — | 22 | — | 22 | ||||||||||||||||||||||||
Employee stock-based compensation expense |
— | — | 18,213 | — | — | — | — | 18,213 | ||||||||||||||||||||||||
Balance at September 28, 2007 |
49,236 | 493 | 4,791,774 | (4,597,037 | ) | (1,385 | ) | (103 | ) | — | 193,742 | |||||||||||||||||||||
Net loss |
— | — | — | (313,085 | ) | — | — | — | (313,085 | ) | ||||||||||||||||||||||
Currency translation adjustment |
— | — | — | — | (1,686 | ) | — | — | (1,686 | ) | ||||||||||||||||||||||
Change in unrealized gain on derivative contracts |
— | — | — | — | (837 | ) | — | — | (837 | ) | ||||||||||||||||||||||
Change in unrealized losses on available-for-sale securities |
— | — | — | — | (1,934 | ) | — | — | (1,934 | ) | ||||||||||||||||||||||
Minimum pension liability adjustment |
— | — | — | — | 3,759 | — | — | 3,759 | ||||||||||||||||||||||||
Comprehensive loss |
(313,783 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock |
365 | 3 | 1,084 | — | — | — | — | 1,087 | ||||||||||||||||||||||||
Reclassification to equity award |
— | — | 1,458 | — | — | — | — | 1,458 | ||||||||||||||||||||||||
Adoption of FIN 48 |
— | — | — | (813 | ) | — | — | — | (813 | ) | ||||||||||||||||||||||
Settlement of notes receivable |
— | — | — | — | — | 24 | — | 24 | ||||||||||||||||||||||||
Employee stock-based compensation expense |
— | — | 15,869 | — | — | — | — | 15,869 | ||||||||||||||||||||||||
Balance at October 3, 2008 |
49,601 | 496 | 4,810,185 | (4,910,935 | ) | (2,083 | ) | (79 | ) | — | (102,416 | ) | ||||||||||||||||||||
Net loss |
— | — | — | (18,808 | ) | — | — | — | (18,808 | ) | ||||||||||||||||||||||
Currency translation adjustment |
— | — | — | — | (1,104 | ) | — | — | (1,104 | ) | ||||||||||||||||||||||
Change in unrealized gain on derivative contracts |
— | — | — | — | (3,017 | ) | — | — | (3,017 | ) | ||||||||||||||||||||||
Loss on termination of derivative contracts |
— | — | — | — | 1,746 | — | — | 1,746 | ||||||||||||||||||||||||
Change in unrealized losses on available-for-sale securities |
— | — | — | — | 650 | — | — | 650 | ||||||||||||||||||||||||
Other than temporary loss on available-for-sale securities |
— | — | — | — | 1,986 | — | — | 1,986 | ||||||||||||||||||||||||
Sale of available-for-sale securities |
— | — | — | — | (702 | ) | — | — | (702 | ) | ||||||||||||||||||||||
Comprehensive loss |
(19,249 | ) | ||||||||||||||||||||||||||||||
Common stock issued in offering |
7,000 | 70 | 18,366 | — | — | — | — | 18,436 | ||||||||||||||||||||||||
Common stock issued related to employee stock plans |
316 | 4 | (234 | ) | — | — | — | — | (230 | ) | ||||||||||||||||||||||
Settlement of notes receivable |
— | — | — | — | — | 79 | — | 79 | ||||||||||||||||||||||||
Employee stock-based compensation expense |
— | — | 5,602 | — | — | — | — | 5,602 | ||||||||||||||||||||||||
Balance at October 2, 2009 |
56,917 | $ | 570 | $ | 4,833,919 | $ | (4,929,743 | ) | $ | (2,524 | ) | $ | — | $ | — | $ | (97,778 | ) | ||||||||||||||
See accompanying notes to consolidated financial statements
4
1. Basis of Presentation and Significant Accounting Policies
Conexant Systems, Inc. (“Conexant” or the “Company”) designs, develops and sells
semiconductor system solutions, comprised of semiconductor devices, software and reference designs,
for imaging, audio, embedded-modem, and video applications. These solutions include a comprehensive
portfolio of imaging solutions for multifunction printers (MFPs), fax platforms, and “connected”
frame market segments. The Company’s audio solutions include high-definition (HD) audio integrated
circuits, HD audio codecs, and speakers-on-a-chip solutions for personal computers, PC peripheral
sound systems, audio subsystems, speakers, notebook docking stations, voice-over-IP speakerphones,
intercom, door phone, and audio-enabled surveillance applications. The Company also offers a full
suite of embedded-modem solutions for set-top boxes, point-of-sale systems, home automation and
security systems, and desktop and notebook PCs. Additional products include decoders and media
bridges for video surveillance and security applications, and system solutions for analog
video-based multimedia applications.
Basis of Presentation — The consolidated financial statements, prepared in accordance
with accounting principles generally accepted in the United States of America, include the accounts
of the Company and each of its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year — The Company’s fiscal year is the 52- or 53-week period ending on the
Friday closest to September 30. Fiscal year 2009 was a 52-week year and ended on October 2, 2009.
Fiscal year 2008 was a 53-week year and ended on October 3, 2008. Fiscal year 2007 was a 52-week
year and ended on September 28, 2007.
Use of Estimates — The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Among the significant estimates affecting the consolidated financial statements
are those related to business combinations, revenue recognition, allowance for doubtful accounts,
inventories, long-lived assets (including goodwill and intangible assets), derivatives, deferred
income taxes, valuation of warrants, valuation of equity securities, stock-based compensation,
restructuring charges and litigation. On an on-going basis, management reviews its estimates based
upon currently available information. Actual results could differ materially from those estimates.
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 Company’s 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 FASB ASC 605-15 (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.
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
October 2, 2009 and October 3, 2008, deferred revenue related to shipments of products for which
the Company has on-going performance obligations was $0.1 million and $0.2 million, respectively.
Deferred revenue is included in other current liabilities on the accompanying
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.
Research and Development — The Company’s 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. The Company’s R&D expenses also include the costs for
design automation, advanced package development and non-cash stock-based compensation charges for
R&D personnel.
Shipping and Handling — In accordance with FASB ASC 605-45 (Emerging Issues Task Force (EITF)
Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”), the Company includes
shipping and handling fees billed to customers in net revenues. Amounts incurred by the Company for
freight are included in cost of goods sold.
Cash and Cash Equivalents — The Company considers all highly liquid investments with
insignificant interest rate risk and original maturities of three months or less from the date of
purchase to be cash equivalents. The carrying amounts of cash and cash equivalents approximate
their fair values.
Restricted Cash — The Company’s short-term debt credit agreement that expires on
November 27, 2009 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 October 2, 2009 and October 3, 2008, respectively.
5
The Company had one irrevocable stand-by letter of credit outstanding as of October 3,
2008 that expired on August 31, 2009. The irrevocable stand-by letter of credit was 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 was classified as current restricted cash on
the consolidated balance sheet as of October 3, 2008. In addition, the Company has letters of
credit collateralized by restricted cash aggregating $6.4 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.
Liquidity — The Company has a $50.0 million credit facility with a bank that expires on
November 27, 2009. There were outstanding borrowings under the credit facility of $28.7 million as
of October 2, 2009. As permitted by the terms of the credit facility, the Company plans to repay
any outstanding balance under the credit facility on or before May 27, 2010 through the collection
of receivables in the ordinary course of business or out of our cash balances.
In September 2009, the Company raised net proceeds of approximately $18.4 million in a
common stock offering and used the proceeds for general corporate purposes, including the repayment
of indebtedness and for capital expenses.
Recent tightening of the credit markets and unfavorable economic conditions have led to a
low level of liquidity in many financial markets and extreme volatility in the credit and equity
markets. As demonstrated by recent activity, the Company was able to access the equity markets to
raise cash in September 2009. However, there is no assurance that the Company will be able to do so
in future periods or on similar terms and conditions. In addition, if signs of improvement in the
global economy do not progress as expected and the economic slowdown continues or worsens, the
Company’s business, financial condition, cash flow and results of operations will be adversely
affected. If that happens, the Company’s ability to access the capital or credit markets may worsen
and it may not be able to obtain sufficient capital to repay its $250 million principal amount of
its 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 the convertible subordinated notes is March 1, 2011. In addition to
the equity offering mentioned above, the Company has completed certain business restructuring
activities including the sale of our BMP and BBA businesses for cash as well as operating expense
reductions which have improved its financial performance. The Company also initiated various
actions including the exchange of new securities for a portion of its outstanding convertible
subordinated notes and the repurchase of its outstanding senior secured notes. The Company will
continue to explore other restructuring and re-financing alternatives as well as supplemental
financing alternatives including, but not limited to, an accounts receivable credit facility. In
the event the Company is unable to satisfy or refinance all of its outstanding debt obligations as
the obligations are required to be paid, it will be required to consider strategic and other
alternatives, including, among other things, the sale of assets to generate funds, the negotiation
of revised terms of its indebtedness, additional exchanges of its existing indebtedness obligations
for new securities and additional equity offerings. The Company has retained financial advisors to
assist it in considering these strategic, restructuring or other alternatives. There is no
assurance that the Company would be successful in completing any of these alternatives. Further,
the Company may not be able to refinance any portion of its debt on favorable terms or at all. The
Company’s failure to satisfy or refinance any of its indebtedness obligations as they come due,
including through additional exchanges of new securities for existing indebtedness obligations or
additional equity offerings, would result in a default and potential acceleration of its remaining
indebtedness obligations and would have a material adverse effect on its business.
Given these actions taken to date, 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.
Inventories — Inventories are stated at the lower of cost or market. Cost is computed
using the average cost method on a currently adjusted standard basis (which approximates actual
cost) and market is based upon estimated net realizable value. The valuation of inventories at the
lower of cost or market requires the use of estimates as to the amounts of current inventories that
will be sold and the estimated average selling price. These estimates are dependent on the
Company’s assessment of current and expected orders from its customers, and orders generally are
subject to cancellation with limited advance notice prior to shipment.
Property, Plant and Equipment — Property, plant and equipment are stated at cost.
Depreciation is based on estimated useful lives (principally 10 to 27 years for buildings and
improvements, 3 to 5 years for machinery and equipment, and the shorter of the remaining lease
terms or the estimated useful lives of the improvements for land and leasehold improvements).
Maintenance and repairs are charged to expense.
Investments — The Company accounts for non-marketable investments using the equity
method of accounting if the investment gives the Company the ability to exercise significant
influence over, but not control of, an investee. Significant influence generally exists if the
Company has an ownership interest representing between 20% and 50% of the voting stock of the
investee. Under the equity method of accounting, investments are stated at initial cost and are
adjusted for subsequent additional investments and the Company’s proportionate share of earnings or
losses and distributions. Additional investments by other parties in the investee will result in a
reduction in the Company’s ownership interest, and the resulting gain or loss will be recorded in
the consolidated statements of operations. Where the Company is unable to exercise significant
influence over the investee, investments are accounted for under the cost method. Under the cost
method, investments are carried at cost and adjusted only for other-than-temporary declines in fair
value, distributions of earnings or additional investments.
6
Long-Lived Assets — Long-lived assets, including fixed assets and intangible assets
(other than goodwill) are amortized over their estimated useful lives. They are also continually
monitored and are reviewed for impairment whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the use of an asset and its eventual
disposition. The estimate of cash flows is based upon, among other things, certain assumptions
about expected future operating performance, growth rates and other factors. Estimates of
undiscounted cash flows may differ from actual cash flows due to, among other things, technological
changes, economic conditions, changes to the business model or changes in operating performance. If
the sum of the undiscounted cash flows (excluding interest) is less than the
carrying value, an impairment loss will be recognized, measured as the amount by which the
carrying value exceeds the fair value of the asset. Fair value is determined using available market
data, comparable asset quotes and/or discounted cash flow models.
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 FASB ASC 350-10 (SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”)). Under FASB ASC 350-10 (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 is tested annually during the fourth fiscal quarter and, if necessary,
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Goodwill impairment testing is a two-step process.
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. In our
annual test in the fourth fiscal quarter of 2009, we assessed the fair value of our reporting units
for purposes of goodwill impairment testing based upon the Company’s fair value based on the quoted
market price of the Company’s common stock and a market multiple analysis, both under the market
approach. The resulting fair value of the reporting unit is then compared to the carrying amounts
of the net assets of the reporting unit, including goodwill. As we have only one reporting unit,
the carrying amount of the reporting unit equals the net book value of the Company. We elected not
to use the Discounted Cash Flow Analysis in our fiscal 2009 analysis because we believe that our
fair value calculated based on quoted market prices and market multiples is a more accurate method.
Fair Value based on Quoted Market price Analysis: The fair value of the Company is calculated
based on the quoted market price of the Company’s common stock listed on the NASDAQ Global Select
Market as of the date of the goodwill impairment analysis multiplied by shares outstanding also as
of that date. The fair value of the Company is then compared to the carrying value of the Company
as of the date of the goodwill impairment analysis.
Fair Value based on Market Multiple Analysis: We select several companies which we
believe are comparable to our business and calculate their revenue multiples (market capitalization
divided by annual revenue) based on available revenue information and related stock prices as of
the date of the goodwill impairment analysis. The comparable companies are selected based upon
similarity of products. We used a revenue multiple of 2.0 in our analysis of comparable companies
multiples for the IPM reporting unit as of October 2, 2009 compared to a revenue multiple of 4.3 in
our 2008 annual goodwill evaluation. This significant decline reflects the downward impact of the
economic environment during the year. We then calculate our fair value by multiplying the revenue
multiple by an estimate of our future revenues. The estimate is based on our internal forecasts
used by management.
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.
All of the goodwill reported on our balance sheet is attributable to the Company’s single
reporting unit. During the fourth fiscal quarter of 2009, we determined, based on the methods
described above, that the fair value of the Company’s single reporting unit is greater than the
carrying value of the Company’s single reporting unit and therefore there is no impairment of
goodwill as of October 2, 2009.
In fiscal 2008, the Company’s reporting units were comprised of the Broadband Media
Processing (“BMP”) reporting unit, the BBA reporting unit and the Imaging and PC Media (“IPM”)
reporting unit. During the second quarter of fiscal 2008, the Company reevaluated its reporting
unit operations with particular attention given to various scenarios for the BMP business. The
determination was made that the carrying value of the BMP business unit was greater than its fair
value. As a result, the Company recorded a goodwill impairment charge of $119.6 million during the
second quarter of fiscal 2008. This impairment charge is included in net loss from discontinued
operations. In addition, in the third quarter of fiscal 2008 the Company continued its review and
assessment of the future prospects of its businesses, products and projects with particular
attention given to the BBA business unit. The challenges in the competitive DSL market resulted in
the carrying value of the BBA business unit to be greater than the fair market value of the BBA
business unit. As a result, the Company recorded a goodwill impairment charge of $108.6 million
during the third quarter of fiscal 2008. The impairment charges have been included in loss from
discontinued operations.
7
During fiscal 2007, the Company recorded goodwill impairment charges of $184.7 million in
its results from continuing operations because the carrying value of the embedded wireless network
products business was greater than its fair value and because the Company decided to discontinue
further investment in stand-alone wireless networking products business. In addition, during fiscal
2007, the Company’s loss from discontinued operations includes goodwill impairment charges of
$124.8 million because the carrying value of the BMP business was greater than its fair value.
Foreign Currency Translation and Remeasurement — The Company’s foreign operations are
subject to exchange rate fluctuations and foreign currency transaction costs. The functional
currency of the Company’s principal foreign subsidiaries is the local currency. Assets and
liabilities denominated in foreign functional currencies are translated into U.S. dollars at the
rates of exchange in effect at the balance sheet dates and income and expense items are translated
at the average exchange rates prevailing during the period. The resulting foreign currency
translation adjustments are included in accumulated other comprehensive income (loss). For the
remainder of the Company’s foreign subsidiaries, the functional currency is the U.S. dollar.
Inventories, property, plant and equipment, cost of goods sold, and depreciation for those
operations are remeasured from foreign currencies into U.S. dollars at historical exchange rates;
other accounts are translated at current exchange rates. Gains and losses resulting from those
remeasurements are included in earnings. Gains and losses resulting from foreign currency
transactions are recognized currently in earnings.
Interest Rate Swaps — During fiscal 2008, the Company entered into three interest rate
swap agreements with Bear Stearns Capital Markets, Inc. (the “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 FASB ASC 815-10 (SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”). The changes in the value of the interest rate
swaps are recorded as an increase or reduction in stockholders’ equity (deficit) through other
comprehensive income (loss). Such changes are reversed out of other comprehensive income (loss) and
are recorded in net income when the interest rate swap is settled. As a result of the repurchase of
$80 million of the Company’s 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. As a result of the repurchase of $80 million of the
Company’s floating rate senior secured notes in the fourth quarter of fiscal 2009, the remaining
two $50 million swap agreements were terminated resulting in a loss of $2.8 million, $1.1 million
of which was recognized in the fiscal quarter ended October 2, 2009. The remaining $1.7 million
unrecognized loss, which is recorded in accumulated other comprehensive income, will be recognized
over the remaining term of the floating rate senior secured notes due 2010 in order to match the
loss with the cash flows it was intended to hedge against. All of the collateral the Company was
required to post with the counterparty was returned as of October 2, 2009. Interest expense related
to the swap contracts was $1.4 million and $0.1 million for the twelve fiscal months ended October
2, 2009 and October 3, 2008, respectively.
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 October 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.
Net Loss Per Share — Net loss per share is computed in accordance with FASB ASC 260-10
(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 Company’s
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 Year Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Stock options and warrants |
5,624 | 8,576 | 8,119 | |||||||||
4.00% convertible subordinated notes due February 2007 |
— | — | 489 | |||||||||
4.00% convertible subordinated notes due March 2026 |
5,081 | 5,081 | 5,081 | |||||||||
| 10,705 | 13,657 | 13,689 | ||||||||||
8
Stock-Based Compensation — In December 2004, the Financial Accounting Standards Board
(FASB) issued FASB ASC 718-10 (SFAS No. 123(R), “Share-Based Payment”). This pronouncement amends
SFAS No. 123, “Accounting for Stock- Based Compensation” and supersedes Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” FASB ASC 718-10 (SFAS No. 123(R))
requires that companies account for awards of equity instruments issued to employees under the fair
value method of accounting and recognize such amounts in their statements of operations. The
Company adopted FASB ASC 718-10 (SFAS No. 123(R)) on October 1, 2005 using the modified prospective
method and, accordingly, has not restated the consolidated statements of operations for prior
interim periods or fiscal years. Under FASB ASC 718-10 (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 consolidated statements of operations over the service period
that the awards are expected to vest. As permitted under FASB ASC 718-10 (SFAS No. 123(R)), the
Company has elected to recognize compensation cost for all options with graded vesting granted on
or after October 1, 2005 on a straight-line basis over the vesting period of the entire option. For
options with graded vesting granted prior to October 1, 2005, the Company will continue to
recognize compensation cost over the vesting period following the accelerated recognition method
described in FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans,” as if each underlying vesting date represented a separate
option grant.
Under FASB ASC 718-10 (SFAS No. 123(R)), the Company records in its consolidated
statements of operations (i) compensation cost for options granted, modified, repurchased or
cancelled on or after October 1, 2005 under the provisions of FASB ASC 718-10 (SFAS No. 123(R)) and
(ii) compensation cost for the unvested portion of options granted prior to October 1, 2005 over
their remaining vesting periods using the fair value amounts previously measured under FASB ASC
718-10 (SFAS No. 123(R)) for pro forma disclosure purposes.
Consistent with the valuation method for the disclosure-only provisions of FASB ASC
718-10 (SFAS No. 123(R)), the Company uses the Black-Scholes-Merton model to value the compensation
expense associated with stock options under FASB ASC 718-10 (SFAS No. 123(R)). In addition,
forfeitures are estimated when recognizing compensation expense, and the estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual forfeitures differ, or
are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized
through a cumulative catch-up adjustment in the period of change and will also impact the amount of
compensation expense to be recognized in future periods.
Consistent with the provisions of FASB ASC 718-10 (SFAS No. 123(R)), the Company measures
the fair value of service-based awards and performance-based awards on the date of grant.
Income Taxes — The provision for income taxes is determined in accordance with FASB ASC
740-10 (SFAS No. 109, “Accounting for Income Taxes”). Deferred tax assets and liabilities are
determined based on the temporary differences between the financial reporting and tax bases of
assets and liabilities, applying enacted statutory tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it is more likely than
not that some or all of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, the Company considers all positive and
negative evidence, including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies, and recent financial performance. Forming a conclusion
that a valuation allowance is not required is difficult when there is negative evidence such as
cumulative losses in recent years. As a result of the Company’s cumulative losses in the U.S. and
the full utilization of our loss carryback opportunities, management has concluded that a full
valuation allowance against its net deferred tax assets is appropriate in such jurisdictions. In
certain other foreign jurisdictions where the Company does not have cumulative losses, a valuation
allowance is recorded to reduce the net deferred tax assets to the amount management believes is
more likely than not to be realized. In the future, if the Company realizes a deferred tax asset
that currently carries a valuation allowance, a reduction to income tax expense may be recorded in
the period of such realization.
On September 29, 2007, the Company adopted the provisions of the FASB ASC 740-10
(Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — an interpretation of FASB Statement No. 109”), which provides a financial
statement recognition threshold and measurement attribute for a tax position taken or expected to
be taken in a tax return. Under FASB ASC 740-10 (FIN 48), a 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 should be measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. The Company recognizes interest and penalties related to these unrecognized tax
benefits in the income tax provision.
As a multinational corporation, the Company is subject to taxation in many jurisdictions,
and the calculation of its tax liabilities involves dealing with uncertainties in the application
of complex tax laws and regulations in various taxing jurisdictions. If, based on new facts that
arise in a period, management ultimately determines that the payment of these liabilities will be
unnecessary, the liability will be reversed and the Company will recognize a tax benefit during the
period in which it is determined the liability no longer applies. Conversely, the Company records
additional tax charges in a period in which it is determined that a recorded tax liability is less
than the ultimate assessment is expected to be.
9
The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change
as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and
court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially
different from management’s estimates, which could result in the need to record additional tax
liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are
included in tax expense.
FASB ASC 740-10 (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. Upon
adoption, the Company recognized a $0.8 million charge to beginning retained deficit as a
cumulative effect of a change in accounting principle.
Prior to fiscal 2008, the Company recorded estimated income tax liabilities to the extent
they were probable and could be reasonably estimated.
Accounting for Convertible Debt — On October 3, 2009 the Company adopted FASB ASC 470-20 (FSP
APB 14-1), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).” FASB ASC 470-20 (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 issuer’s hypothetical nonconvertible debt borrowing rate. The guidance
resulted in the Company recognizing higher interest expense in the statement of operations due to
amortization of the discount that results from separating the liability and equity components. The
provisions of FASB ASC 470-20 (FSP APB 14-1) were retrospectively applied, all prior period amounts
have been adjusted to apply the new method of accounting.
FASB ASC 470-20 (FSP APB 14-1) applies to our 4.00% convertible subordinated notes issued in
2006. 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 Company’s 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 Company’s 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 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 applied the guidance in FASB ASC 470-20 (FSP APB 14-1) to measure the fair value of the
liability component of the notes using a discounted cash flow model. We assessed the expected life
and approximate discount rate of the liability component to be 5.0 years and 11.8% for the $200.0
million note and 4.8 years and 10.3% for the $50.0 million note, based on yields of similarly rated
nonconvertible instruments. We determined the carrying amount of the equity component by deducting
the fair value of the liability component from the principal amount of the notes. The Company’s
effective tax rate is zero, therefore there was no tax effect of the temporary basis difference
associated with the liability component of the notes.
In 2006, we capitalized approximately $6.4 million of transaction costs related to the
issuance of the notes, $4.7 million related to the liability component and $1.7 million classified
with the equity component. We amortize the transaction costs related to the liability component to
interest expense over the expected life of the Notes.
The adoption of FASB ASC 470-20 (FSP APB 14-1) resulted in the following amounts recognized in
our financial statements:
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Principal of the liability component of 4.00% convertible
subordinated notes |
$ | 250,000 | $ | 250,000 | ||||
Unamortized debt discount |
(21,422 | ) | (35,437 | ) | ||||
Net carrying amount of liability component of 4.00%
convertible subordinated notes |
$ | 228,578 | $ | 214,563 | ||||
Net carrying amount of equity component of 4.00% convertible
subordinated notes (net of $1,742 issuance costs) |
$ | 66,045 | $ | 66,045 | ||||
10
Interest expense related to the 4.00% convertible subordinated notes:
| 2009 | 2008 | 2007 | ||||||||||
Contractual interest coupon |
$ | 10,000 | $ | 10,000 | $ | 10,000 | ||||||
Amortization of the debt discount on the liability component |
14,015 | 13,394 | 12,323 | |||||||||
Total |
$ | 24,015 | $ | 23,394 | $ | 22,323 | ||||||
Effective interest rate for the liability component for the period |
9.61 | % | 9.36 | % | 8.93 | % | ||||||
The estimated amortization expense for the debt discount for the 4.00% convertible
subordinated notes through the remaining expected life is as follows:
| 2010 | 2011 | |||||||
Estimated debt discount amortization expense |
$ | 14,025 | $ | 6,005 | ||||
The adoption of FASB ASC 470-20 (FSP APB 14-1) requires the retrospective application to all
periods presented as of the beginning of the first period presented. As of October 3, 2009, FASB
ASC 470-20 (FSP APB 14-1) was adopted and comparative financial statements of prior years have been
adjusted to apply FASB ASC 470-20 (FSP APB 14-1) retrospectively. The line items for the financial
statements which are affected by the change in accounting principle are indicated below.
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 2, 2009 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (in thousands) | ||||||||||||
ASSETS |
||||||||||||
Total current assets: |
$ | 199,359 | $ | — | $ | 199,359 | ||||||
Property, plant and equipment, net |
15,299 | — | 15,299 | |||||||||
Goodwill |
109,908 | — | 109,908 | |||||||||
Other assets |
26,284 | (649 | ) | 25,635 | ||||||||
Total assets |
$ | 350,850 | $ | (649 | ) | $ | 350,201 | |||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||||||||
Total current liabilities: |
$ | 157,312 | $ | — | $ | 157,312 | ||||||
Long-term debt |
250,000 | (21,422 | ) | 228,578 | ||||||||
Other liabilities |
62,089 | — | 62,089 | |||||||||
Total liabilities |
469,401 | (21,422 | ) | 447,979 | ||||||||
Commitments and contingencies |
||||||||||||
Shareholders’ deficit: |
||||||||||||
Preferred and junior preferred stock |
— | — | — | |||||||||
Common stock |
570 | — | 570 | |||||||||
Additional paid-in capital |
4,767,874 | 66,045 | 4,833,919 | |||||||||
Accumulated deficit |
(4,884,471 | ) | (45,272 | ) | (4,929,743 | ) | ||||||
Accumulated other comprehensive loss |
(2,524 | ) | — | (2,524 | ) | |||||||
Shareholder notes receivable |
— | — | — | |||||||||
Total shareholders’ deficit |
(118,551 | ) | 20,773 | (97,778 | ) | |||||||
Total liabilities and shareholders’ deficit |
$ | 350,850 | $ | (649 | ) | $ | 350,201 | |||||
11
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 3, 2008 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (in thousands) | ||||||||||||
ASSETS |
||||||||||||
Total current assets: |
$ | 268,720 | $ | — | $ | 268,720 | ||||||
Property, plant and equipment, net |
17,410 | — | 17,410 | |||||||||
Goodwill |
110,412 | — | 110,412 | |||||||||
Other assets |
49,861 | (1,119 | ) | 48,742 | ||||||||
Total assets |
$ | 446,403 | $ | (1,119 | ) | $ | 445,284 | |||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||||||||
Total current liabilities: |
$ | 153,103 | $ | — | $ | 153,103 | ||||||
Long-term debt |
373,693 | (35,437 | ) | 338,256 | ||||||||
Other liabilities |
56,341 | — | 56,341 | |||||||||
Total liabilities |
583,137 | (35,437 | ) | 547,700 | ||||||||
Commitments and contingencies |
||||||||||||
Shareholders’ deficit: |
||||||||||||
Preferred and junior preferred stock |
— | — | — | |||||||||
Common stock |
496 | — | 496 | |||||||||
Additional paid-in capital |
4,744,140 | 66,045 | 4,810,185 | |||||||||
Accumulated deficit |
(4,879,208 | ) | (31,727 | ) | (4,910,935 | ) | ||||||
Accumulated other comprehensive loss |
(2,083 | ) | — | (2,083 | ) | |||||||
Shareholder notes receivable |
(79 | ) | — | (79 | ) | |||||||
Total shareholders’ deficit |
(136,734 | ) | 34,318 | (102,416 | ) | |||||||
Total liabilities and shareholders’ deficit |
$ | 446,403 | $ | (1,119 | ) | $ | 445,284 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended October 2, 2009 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Interest expense |
$ | 21,148 | $ | 13,545 | $ | 34,693 | ||||||
Loss from continuing operations before income taxes and (loss) gain
on equity method investments |
(23,234 | ) | (13,545 | ) | (36,779 | ) | ||||||
Loss from continuing operations before (loss) gain on equity method
investments |
(24,105 | ) | (13,545 | ) | (37,650 | ) | ||||||
(Loss) income from continuing operations |
(26,912 | ) | (13,545 | ) | (40,457 | ) | ||||||
Net loss |
$ | (5,263 | ) | $ | (13,545 | ) | $ | (18,808 | ) | |||
12
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended October 3, 2008 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Interest expense
|
$ | 27,804 | $ | 12,909 | $ | 40,713 | ||||||
Loss from continuing operations before income taxes and (loss) gain
on equity method investments |
(1,729 | ) | (12,909 | ) | (14,638 | ) | ||||||
Loss from continuing operations before (loss) gain on equity method
investments |
(2,578 | ) | (12,909 | ) | (15,487 | ) | ||||||
(Loss) income from continuing operations |
226 | (12,909 | ) | (12,683 | ) | |||||||
Net loss
|
$ | (300,176 | ) | $ | (12,909 | ) | $ | (313,085 | ) | |||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended September 28, 2007 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Interest expense
|
$ | 36,953 | $ | 11,845 | $ | 48,798 | ||||||
Loss from continuing operations before income taxes and (loss) gain
on equity method investments |
(217,790 | ) | (11,845 | ) | (229,635 | ) | ||||||
Loss from continuing operations before (loss) gain on equity method
investments |
(218,588 | ) | (11,845 | ) | (230,433 | ) | ||||||
(Loss) income from continuing operations |
(167,406 | ) | (11,845 | ) | (179,251 | ) | ||||||
Net loss
|
$ | (402,462 | ) | $ | (11,845 | ) | $ | (414,307 | ) | |||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended October 2, 2009 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
$ | (5,263 | ) | $ | (13,545 | ) | $ | (18,808 | ) | |||
Debt discount amortization |
— | 14,015 | 14,015 | |||||||||
Other items, net
|
4,619 | (470 | ) | 4,149 | ||||||||
Net cash provided by (used in) operating activities |
$ | 8,476 | $ | (0 | ) | $ | 8,476 | |||||
13
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended October 3, 2008 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss
|
$ | (300,176 | ) | $ | (12,909 | ) | $ | (313,085 | ) | |||
Debt discount amortization |
— | 13,394 | 13,394 | |||||||||
Other items, net
|
4,506 | (485 | ) | 4,021 | ||||||||
Net cash provided by (used in) operating activities |
$ | (18,350 | ) | $ | — | $ | (18,350 | ) | ||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended September 28, 2007 | ||||||||||||
| Effect of | ||||||||||||
| As Reported | Change | As Adjusted | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss
|
$ | (402,462 | ) | $ | (11,845 | ) | $ | (414,307 | ) | |||
Debt discount amortization |
— | 12,323 | 12,323 | |||||||||
Other items, net
|
(4,920 | ) | (478 | ) | (5,398 | ) | ||||||
Net cash provided by (used in) operating activities |
$ | (11,851 | ) | $ | — | $ | (11,851 | ) | ||||
As a result of the accounting change, our accumulated deficit as of September 29, 2006,
increased $7.0 million from $4.176 million to $4.183 million.
Concentrations — Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, marketable securities, and trade
accounts receivable. The Company invests its cash balances through high-credit quality financial
institutions. The Company places its investments in investment-grade debt securities and limits its
exposure to any one issuer. The Company’s trade accounts receivable primarily are derived from
sales to manufacturers of communications products, consumer products and personal computers and
distributors. Management believes that credit risks on trade accounts receivable are moderated by
the diversity of its products and end customers. The Company performs ongoing credit evaluations of
its customers’ financial condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
At October 2, 2009 and October 3, 2008, there was one customer that accounted for 17% and
12% of the Company’s accounts receivable, respectively.
In fiscal 2009, 2008 and 2007, there was one distributor that accounted for 23%, 23% and
23% of net revenues, respectively.
Supplemental Cash Flow Information — Cash paid for interest was $20.3 million,
$34.0 million and $43.0 million during fiscal 2009, 2008 and 2007, respectively. Net income taxes
paid were $1.4 million, $3.9 million and $2.1 million during fiscal 2009, 2008 and 2007,
respectively.
Accumulated Other Comprehensive Loss — Other comprehensive loss includes foreign currency
translation adjustments, unrealized gains (losses) on marketable securities, unrealized gains
(losses) on foreign currency forward exchange contracts and unrealized gains (losses) on interest
rate swaps. The components of accumulated other comprehensive loss are as follows (in
thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Foreign currency translation adjustments |
$ | (796 | ) | $ | 308 | |||
Unrealized losses on marketable securities |
— | (1,934 | ) | |||||
Unrealized (losses) gains on derivative instruments |
(1,728 | ) | (457 | ) | ||||
Accumulated other comprehensive (loss) income |
$ | (2,524 | ) | $ | (2,083 | ) | ||
14
Business Enterprise Segments
The Company operates in one reportable segment. FASB ASC 280-10 (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 their
annual consolidated financial statements. Following the sale of the Company’s BBA operating
segment, the results of which have been classified in discontinued operations, the Company has one
remaining operating segment, comprised of one reporting unit, which was identified based upon the
availability of discrete financial information and the chief operating decision makers regular
review of the financial information for this operating segment.
Recently Adopted Accounting Pronouncements
On
October 3, 2009 the Company adopted FASB ASC 470-20 (FSP APB 14-1), “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FASB ASC 470-20 (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
issuer’s hypothetical nonconvertible debt borrowing rate. The guidance resulted in the Company
recognizing higher interest expense in the statement of operations due to amortization of the
discount that results from separating the liability and equity components. The provisions of FASB
ASC 470-20 (FSP APB 14-1) were retrospectively applied; all prior period amounts have been adjusted
to apply the new method of accounting.
On January 3, 2009, the Company adopted FASB ASC 815-10 (SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities”). FASB ASC 815-10 (SFAS No. 161) requires expanded
disclosures regarding the location and amount of derivative instruments in an entity’s financial
statements, how derivative instruments and related hedged items are accounted for under FASB ASC
815-10 (SFAS No. 133) and how derivative instruments and related hedged items affect an entity’s
financial position, operating results and cash flows. As a result of the adoption of FASB ASC
815-10 (SFAS No. 161), the Company expanded its disclosures regarding its derivative instruments.
On October 4, 2008, the Company adopted FASB ASC 820-10 (SFAS No. 157, “Fair Value
Measurements”), for its financial assets and liabilities. The Company’s adoption of FASB ASC 820-10
(SFAS No. 157) did not have a material impact on its financial position, results of operations or
liquidity.
FASB ASC 820-10 (SFAS No. 157) provides a framework for measuring fair value and requires
expanded disclosures regarding fair value measurements. FASB ASC 820-10 (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. FASB ASC 820-10 (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.
| • | Level 1: Quoted prices in active markets for identical assets or liabilities. | ||
| • | 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. | ||
| • | 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. |
FASB ASC 820-10 (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 ASC 820-10 (FSP FAS 157-2, “Effective Date of FASB Statement
No. 157”), the Company elected to
defer until October 3, 2009 the adoption of FASB ASC 820-10 (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 FASB ASC 820-10 (SFAS No. 157) for those
assets and liabilities within the scope of FASB ASC 820-10 (FSP FAS 157-2) is not expected to have
a material impact on the Company’s financial position, results of operations or liquidity.
On October 4, 2008, the Company adopted FASB ASC 825-10 (SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement
No. 115”), 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
15
with FASB ASC 320-15 (SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities”). The adoption of FASB ASC 825-10 (SFAS No. 159) did not have an impact
on the Company’s condensed consolidated financial statements as management did not elect the fair
value option for any other financial instruments or certain other assets and liabilities.
On April 4, 2009, the Company adopted FASB ASC 825-10 (FSP FAS 107-1, “Interim Disclosures
about Fair Value of Financial Instruments”) and FASB ASC 270-10 (APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments”), which enhanced the disclosure of instruments under the
scope of FASB ASC 820-10 (SFAS No. 157). The Company’s adoption of FASB ASC 825-10 (FSP FAS 107-1)
and FASB ASC 270-10 (APB 28-1) did not have a material impact on its financial position, results of
operations or liquidity.
On April 4, 2009, the Company adopted FASB ASC 820-10 (FSP FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly”), which provides guidance on how to determine
the fair value of assets and liabilities under FASB ASC 820-10 (SFAS No. 157) in the current
economic environment and reemphasizes that the objective of a fair value measurement remains an
exit price. The Company’s adoption of FASB ASC 820-10 (FSP FAS 157-4) did not have a material
impact on its financial position, results of operations or liquidity.
On April 4, 2009, the Company adopted SFAS No. 165, “Subsequent Events” (“SFAS No. 165”),
which establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. In
particular SFAS No. 165 sets forth:
1. The period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements.
2. The circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements.
3. The disclosures that an entity should make about events or transactions that occurred
after the balance sheet date.
The Company’s adoption of SFAS No. 165 did not have a material impact on its financial
position, results of operations or liquidity.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued FASB ASC 805-10 (SFAS No. 141 (revised 2007), “Business
Combinations”), which replaced SFAS No. 141. The statement requires a number of changes to the
purchase method of accounting for acquisitions, 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 FASB ASC 805-10 (SFAS No. 141R) in the first quarter of fiscal 2010 and it
will apply prospectively to business combinations completed on or after that date. FASB ASC 805-10
(SFAS No. 141R) also requires that changes in acquired deferred tax assets and liabilities or
pre-acquisition tax liabilities be recorded to the tax provision as opposed to goodwill as was
required under prior guidance. Beginning in the first quarter of fiscal 2010, the tax aspects of
FASB ASC 805-10 (SFAS No. 141R) will be applicable to all business combinations regardless of the
completion date.
In April 2008, the FASB issued FASB ASC 350-30 (FSP FAS 142-3, “Determination of the
Useful Life of Intangible Assets”). FASB ASC 350-30 (FSP FAS 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 FASB ASC 350-10 (SFAS No. 142). This change is intended to
improve the consistency between the useful life of a recognized intangible asset under FASB ASC
350-10 (SFAS No. 142) and the period of expected cash flows used to measure the fair value of the
asset under FASB ASC 805-10 (SFAS No. 141R) and other US 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. FASB ASC 350-30 (FSP FAS 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 FASB ASC 350-30
(FSP FAS 142-3) on its condensed consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets” (“SFAS No. 166”), an amendment of FASB SFAS No. 140. SFAS No. 166 improves the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a transferor’s
continuing involvement, if any, in transferred financial assets. SFAS No. 166 will be effective for
financial statements issued for fiscal years beginning after November 15, 2009, and interim periods
within those fiscal years. Early adoption is not permitted. The Company is currently assessing the
potential impact that adoption of SFAS No. 166 would have on its financial position and results of
operations.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“SFAS No. 167”). SFAS No. 167 improves financial reporting by enterprises involved with variable
interest entities. SFAS No. 167 will be effective for
16
financial statements issued for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. Early adoption is
not permitted. The Company does not believe that adoption of SFAS No. 167 will have a material
impact on its financial position and results of operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-5, “Measuring
Liabilities at Fair Value” (“ASU No. 2009-05”). ASU 2009-05 amends Accounting Standards
Codification Topic 820, “Fair Value Measurements.” Specifically, ASU 2009-05 provides clarification
that in circumstances in which a quoted price in an active market for the identical liability is
not available, a reporting entity is required to measure fair value using one or more of the
following methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or similar
liabilities when traded as assets and/or 2) a valuation technique that is consistent with the
principles of Topic 820 of the Accounting Standards Codification. ASU 2009-05 also clarifies that
when estimating the fair value of a liability, a reporting entity is not required to adjust to
include inputs relating to the existence of transfer restrictions on that liability. ASU 2009-05 is
effective for the first reporting period after the issuance, which will require the Company to
adopt these provisions in the first quarter of fiscal 2010. The Company does not believe that
adoption of ASU 2009-05 will have a material impact on its financial position and results of
operations.
2. Sales of Assets
Fiscal 2009
On August 24, 2009, the Company completed the sale of its BBA business to Ikanos
Communications, Inc. (“Ikanos”). Assets sold pursuant to the agreement with Ikanos include, among
other things, specified patents, inventory, contracts and tangible assets. Ikanos assumed certain
liabilities, including obligations under transferred contracts and certain employee-related
liabilities. We also granted to Ikanos a license to use certain of the Company’s retained
technology assets in connection with Ikanos’s current and future products in certain fields of use,
along with a patent license covering certain of the Company’s retained patents to make, use, and
sell such products (or, in some cases, components of such products).
At the closing of the transaction, the Company recorded aggregate proceeds of $52.8 million,
which was comprised of $46.3 million in cash and $6.5 million of escrow funds, which represents the
net present value of $6.8 million in escrowed funds deposited. The escrow account will remain in
place for twelve months following the closing of the transaction to satisfy potential
indemnification claims by Ikanos. Investment banking, legal and other fees of $1.7 million that
were directly related to the transaction were offset against the proceeds to calculate net proceeds
from the sale of $51.1 million. As a result of the completion of the transaction, the following
assets and liabilities were applied to the proceeds received to calculate the net gain on the sale
of $39.2 million (in thousands):
Inventories, net |
$ | 13,056 | ||
Total current assets |
13,056 | |||
Goodwill |
1,000 | |||
Total assets |
$ | 14,056 | ||
Accrued compensation and benefits |
$ | 1,732 | ||
Other current liabilities |
456 | |||
Total liabilities |
$ | 2,188 | ||
In accordance with FASB ASC 360-10 (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), the Company determined that the BBA business, which constituted an
operating segment of the Company, qualifies as a discontinued operation. The results of the BBA
business have been reported as discontinued operations in the condensed consolidated statements of
operations for all periods presented. Interest expense has been allocated based on the provisions
of FASB ASC 205-20 (EITF 87-24, Allocation of Interest to Discontinued Operations). For the fiscal
years ended October 2, 2009, October 3, 2008 and September 28, 2007, interest expense allocated to
discontinued operations was $2.7 million, $3.8 million and $3.8 million, respectively.
For the fiscal years ended October 2, 2009, October 3, 2008 and September 28, 2007, BBA
revenues and pretax loss classified as discontinued operations was $113.6 million and $4.8 million,
$171.2 million and $130.0 million, and $212.9 million and $51.5 million, respectively.
The Company has entered into a short-term transitional services agreement (TSA) with
Ikanos which provides for ongoing logistical support by the Company to Ikanos, for which Ikanos
will reimburse the Company. As of October 2, 2009, the Company had a receivable under the TSA from
Ikanos of approximately $3.4 million, which is classified in other current assets. The Company also
recorded approximately $0.4 million in royalty revenue under the TSA agreement.
Fiscal 2008
On August 8, 2008, the Company completed the sale of its BMP business to NXP B.V.
(“NXP”). Pursuant to the asset purchase agreement with NXP, NXP acquired certain assets including,
among other things, specified patents, inventory and contracts and
17
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
Company’s employees at locations in the United States, Europe, Israel, Asia-Pacific and Japan.
At the closing of the transaction, the Company recorded proceeds of an aggregate of
$110.4 million, which was comprised of $100.1 million in cash and $10.3 million of escrow funds,
which represents the net present value of the $11.0 million in escrowed funds deposited. Investment
banking, legal and other fees of $3.6 million that were directly related to the transaction were
offset against the proceeds to calculate net proceeds from the sale of $106.8 million. As a result
of the completion of the transaction, the following assets and liabilities, as well as $1.8 million
of income tax on the gain on sale, were applied to the proceeds received to calculate the net gain
on the sale of $6.3 million (in thousands):
Cash and cash equivalents |
$ | 3,104 | ||
Accounts receivable |
27 | |||
Inventories, net |
12,953 | |||
Other current assets |
431 | |||
Total current assets |
16,515 | |||
Property, plant and equipment, net |
10,268 | |||
Goodwill |
72,028 | |||
Intangible assets, net |
840 | |||
Other assets |
1,000 | |||
Total assets |
$ | 100,651 | ||
Accrued compensation and benefits |
$ | 1,476 | ||
Other current liabilities |
382 | |||
Total current liabilities |
1,858 | |||
Other liabilities |
25 | |||
Total liabilities |
$ | 1,883 | ||
In the fourth fiscal quarter of 2009, $8.4 million was released to the Company from
escrow. The remaining $2.6 million of funds in escrow were returned to NXP to satisfy
indemnification claims, and were charged to discontinued operations.
In accordance with FASB ASC 360-10 (Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ), the Company determined that the
assets and liabilities of the BMP business, which constituted an operating segment of the Company,
were classified as held for sale on the consolidated balance sheet at September 28, 2007, and the
results of the BMP business are being reported as discontinued operations in the consolidated
statements of operations for all periods presented. Interest expense has been allocated based on
the provisions of FASB ASC 205-20 (EITF No. 87-24, Allocation of Interest to Discontinued
Operations). Interest expense reclassed to discontinued operations for fiscal years ended
October 3, 2008 and September 28, 2007 was $9.0 million and $8.2 million, respectively.
For the fiscal years ended October 2, 2009, October 3, 2008 and September 28, 2007, BMP
revenues and pretax loss classified as discontinued operations were $3.0 million and $11.2 million,
$180.0 million and $172.1 million and $235.3 million and $180.0 million, respectively.
Fiscal 2007
In February 2007, the Company sold its approximate 42% ownership interest in Jazz
Semiconductor to Acquicor Technology Inc. (Acquicor), which was renamed Jazz Technologies, Inc.
(Jazz) after the transaction, and Jazz Semiconductor became a wholly-owned subsidiary of Jazz. The
Company received proceeds of $105.6 million and recognized a gain on the sale of the investment of
$50.3 million in fiscal 2007. Additionally, immediately prior to the closing of the sale, the
Company made an equity investment of $10.0 million in stock of Jazz, which the Company sold in the
fourth quarter of fiscal 2007 resulting in a realized loss of $5.8 million on the sale of the
shares.
18
3. Business Combinations
Fiscal 2009
In December 2008, the Company acquired certain assets from Analog Devices Inc. (“ADI”)
used in the operation of ADI’s “Integrated Audio Group” (“ADI Audio”) and a license to the right to
manufacture and sell certain products related to ADI Audio. Of the $3.8 million purchase price,
$1.3 million was allocated to net tangible assets and $2.5 million was allocated to the cost of the
license. As of October 2, 2009 the Company has paid $3.2 million in cash and recorded a payable of
$0.6 million representing the final installment payment on the license.
Fiscal 2008
In July 2008, the Company acquired Imaging Systems Group (ISG), Sigmatel Inc.’s
multi-function printer imaging products, for an aggregate purchase price of $16.1 million. Of the
$16.1 million purchase price, $2.5 million was allocated to net tangible assets, $7.8 million was
allocated to identifiable intangible assets, $5.0 million was allocated to goodwill and
$0.8 million was expensed as in-process research and development in accordance with EITF No. 86-14
“Purchased Research and Development Projects in a Business Combination.” The identifiable
intangible assets are being amortized on a straight-line basis over their weighted average
estimated useful lives of approximately three years.
Fiscal 2007
In October 2006, the Company acquired the assets of Zarlink Semiconductor Inc.’s
(Zarlink) packet switching business for an aggregate purchase price of $5.8 million. Of the
$5.8 million purchase price, $0.7 million was allocated to net tangible assets, approximately
$2.4 million was allocated to identifiable intangible assets, and the remaining $2.7 million was
allocated to goodwill. The acquired assets are included in assets held for sale at October 3, 2008
and were included in the BBA sale transaction.
All three acquisitions were accounted for using the purchase method of accounting in
accordance with FASB ASC 805-10 (SFAS No. 141 “Business Combinations”). The Company’s statements of
operations include the results of ADI, ISG and Zarlink from the date of acquisition. The pro forma
effect of the transactions was not material to the Company’s statement of operations for the fiscal
years ended October 2, 2009, October 3, 2008 and September 28, 2007.
4. Fair Value of Certain Financial Assets and Liabilities
In accordance with FASB ASC 820-10 (SFAS No. 157), the following represents the Company’s
fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring
basis as of October 2, 2009 (in thousands):
| Level 1 | Level 2 | Total | ||||||||||
Assets: |
||||||||||||
Cash and cash equivalents |
$ | 125,385 | $ | — | $ | 125,385 | ||||||
Restricted cash |
8,500 | — | 8,500 | |||||||||
Mindspeed warrant |
— | 5,053 | 5,053 | |||||||||
Long-term restricted cash |
6,423 | — | 6,423 | |||||||||
Total Assets |
$ | 140,308 | $ | 5,053 | $ | 145,361 | ||||||
Level 1 assets consist of the Company’s cash and cash equivalents and restricted cash.
Level 2 assets consist of the Company’s warrant to purchase approximately 6.1 million
shares of Mindspeed common stock at an exercise price of $16.74 per share through June 2013. At
October 2, 2009, the warrant was valued using the Black-Scholes-Merton model with an expected term
of 3.7 years, expected volatility of 87%, a weighted average risk-free interest rate of 1.70% and
no dividend yield.
The Company had no financial assets or liabilities classified as Level 3 as of October 2,
2009.
The fair value of other financial instruments as of October 2, 2009 are as follows:
| Total | ||||
Short-term debt: senior secured notes |
$ | 61,400 | ||
Short-term debt |
28,653 | |||
Long-term debt: convertible subordinated notes |
211,875 | |||
| $ | 301,928 | |||
Liabilities consist of the Company’s short-term credit facility, the Company’s senior
secured notes, and convertible subordinated notes. The fair value of the convertible subordinated
notes was calculated using a quoted market price in an active market. The fair value of the senior secured notes and the short-term debt is their carrying value.
19
5. Supplemental Balance Sheet Data
Inventories
Inventories consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Work-in-process |
$ | 5,002 | $ | 8,413 | ||||
Finished goods |
4,214 | 10,959 | ||||||
Total inventories, net |
$ | 9,216 | $ | 19,372 | ||||
At October 2, 2009 and October 3, 2008, inventories are net of excess and obsolete (E&O)
inventory reserves of $6.4 million and $12.6 million, respectively.
Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Land |
$ | 1,662 | $ | 1,662 | ||||
Land and leasehold improvements |
6,887 | 6,406 | ||||||
Buildings |
19,824 | 19,823 | ||||||
Machinery and equipment |
56,979 | 67,738 | ||||||
Construction in progress |
86 | 127 | ||||||
| 85,438 | 95,756 | |||||||
Accumulated depreciation and amortization |
(70,139 | ) | (78,346 | ) | ||||
| $ | 15,299 | $ | 17,410 | |||||
Property, plant and equipment are continually monitored and are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts may not be
recoverable. For determining the fair value of property, plant and equipment, the Company utilizes
discounted cash flow techniques associated with an asset or long-lived asset group. During fiscal
2009, the Company recorded an impairment charge of $0.9 million on its fixed assets, $0.2 million
of which were charged to continuing operations and $0.7 million of which were charged to
discontinued operations. During fiscal 2008, the Company determined that the current challenges in
the DSL market resulted in the net book value of certain assets within the BBA business unit to be
considered not fully recoverable. As a result, the Company recorded an impairment charge of
$6.5 million related to the BBA business unit’s property, plant, and equipment. In addition, during
fiscal 2008, the Company reevaluated its reporting unit operations with particular attention given
to various scenarios for the BMP business. The determination was made that the net book value of
certain assets within the BMP business unit were considered not fully recoverable. As a result, the
Company recorded an impairment charge of $2.1 million related to the BMP business unit’s property,
plant and equipment. The impairment charges related to BMP and BBA property, plant and equipment
have been included in net loss from discontinued operations.
During fiscal 2007, the Company decided to discontinue further investment in stand-alone
wireless networking products resulting in the recognition of $6.1 million in impairment charges
related to property, plant and equipment supporting the stand-alone wireless products.
20
Goodwill
The changes in the carrying amounts of goodwill were as follows (in thousands):
| Fiscal Year Ended | ||||||||
| 2009 | 2008 | |||||||
Goodwill at beginning of period |
$ | 110,412 | $ | 106,065 | ||||
Additions |
1,000 | 4,997 | ||||||
Disposals |
(1,000 | ) | — | |||||
Impairments |
— | (180 | ) | |||||
Other adjustments |
(504 | ) | (470 | ) | ||||
Goodwill at end of period |
$ | 109,908 | $ | 110,412 | ||||
Impairments
In the Company’s annual test in the fourth fiscal quarter of 2009, it assessed the fair
value of its reporting units for purposes of goodwill impairment testing based upon the Company’s
fair value calculated based on the quoted market price of the Company multiplied by shares
outstanding and a market multiple analysis, both under the market approach. The resulting fair
value of the reporting unit is then compared to the carrying amounts of the net assets of the
reporting unit, including goodwill. As the Company has only one reporting unit, the carrying amount
of the reporting unit equals the net book value of the Company.
All of the goodwill reported on the Company’s balance sheet is attributable to the
Company’s single reporting unit. During the fourth fiscal quarter of 2009, we determined that the
fair value of the Company’s single reporting unit is greater than the carrying value of the
Company’s single reporting unit and therefore there is no impairment of goodwill as of October 2,
2009. The Company believes, based on projected revenues, cash flows and our financial position,
that the remaining carrying amounts of goodwill are recoverable.
In fiscal 2008, the Company reevaluated its reporting unit operations with particular
attention given to various scenarios for the BMP business. The determination was made that the
carrying value of the BMP business unit was greater than its fair value. As a result, the Company
recorded a goodwill impairment charge of $119.6 million. In addition, in fiscal 2008 the Company
continued its review and assessment of the future prospects of its businesses, products and
projects with particular attention given to the BBA business unit. The current challenges in the
competitive DSL market described above had resulted in the carrying value of the BBA business unit
to be greater than its fair value. As a result, the Company recorded a goodwill impairment charge
of $108.8 million. The impairment charges are included in net loss from discontinued operations.
During fiscal 2007, the Company recorded goodwill impairment charges of $184.7 million in
its results from continuing operations because the carrying value of the embedded wireless network
products business was greater than its fair value and because the Company decided to discontinue
further investment in stand-alone wireless networking products business. In addition, during fiscal
2007, the Company’s loss from discontinued operations includes goodwill impairment charges of
$124.8 million because the carrying value of the BMP business was greater than its fair value.
Additions
During fiscal 2009, the Company recorded $1.0 million of additional goodwill resulting
from the final payment for the acquisition of Zarlink Semiconductor.
During fiscal 2008, the Company recorded $5.0 million of additional goodwill as a result
of the acquisition of a multi-function printer imaging business.
Other Current Assets
Other current assets consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Other receivables |
$ | 6,988 | $ | 11,642 | ||||
Deferred tax asset |
327 | 375 | ||||||
Prepaid technical licenses |
3,775 | 10,042 | ||||||
Other prepaid expenses |
5,026 | 7,584 | ||||||
Other current assets |
10,032 | 8,295 | ||||||
| $ | 26,148 | $ | 37,938 | |||||
21
Other Assets
Other assets consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Mindspeed warrant |
$ | 5,053 | $ | 545 | ||||
Technology license |
— | 8,310 | ||||||
Non-current letters of credit |
6,423 | 6,759 | ||||||
Electronic design automation tools |
1,136 | 4,223 | ||||||
Deferred debt issuance costs |
2,619 | 6,205 | ||||||
Investments |
4,805 | 8,822 | ||||||
Intangible assets |
5,557 | 10,611 | ||||||
Other non-current assets |
691 | 4,386 | ||||||
| $ | 26,284 | $ | 49,861 | |||||
Mindspeed Warrant
The Company has a warrant to purchase approximately 6.1 million shares of Mindspeed
common stock at an exercise price of $16.74 per share through June 2013. At October 2, 2009 and
October 3, 2008, the market value of Mindspeed common stock was $3.05 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 October 2, 2009 and October 3, 2008, the aggregate fair value of the Mindspeed warrant included
on the accompanying consolidated balance sheets was $5.1 million and $0.5 million, respectively. At
October 2, 2009, the warrant was valued using the Black-Scholes-Merton model with an expected term
of 3.7 years, expected volatility of 87%, a weighted average risk-free interest rate of 1.70% and
no dividend yield. The aggregate fair value of the warrant is reflected as a long-term asset on the
accompanying 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.
Technology License
As a result of the sale of our BBA business and decrease in revenues in the continuing
business, the Company determined that the technology license with Freescale Semiconductor Inc. had
no value and therefore recorded an impairment charge of $8.3 million for the license, of which
$3.3 million was recorded in discontinued operations and $5.0 million in operating expenses in the
year ended October 2, 2009.
Intangible Assets
Intangible assets consist of the following (in thousands):
| October 2, 2009 | October 3, 2008 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Carrying | Accumulated | Book | Carrying | Accumulated | Book | |||||||||||||||||||
| Amount | Amortization | Value | Amount | Amortization | Value | |||||||||||||||||||
Developed technology |
$ | — | $ | — | $ | — | $ | 11,042 | $ | (9,963 | ) | $ | 1,079 | |||||||||||
Product licenses |
2,400 | (628 | ) | 1,772 | 11,032 | (7,105 | ) | 3,927 | ||||||||||||||||
Other intangible assets |
6,830 | (3,045 | ) | 3,785 | 8,240 | (2,635 | ) | 5,605 | ||||||||||||||||
| $ | 9,230 | $ | (3,673 | ) | $ | 5,557 | $ | 30,314 | $ | (19,703 | ) | $ | 10,611 | |||||||||||
Intangible assets are being amortized over a weighted-average period of approximately 5.3
years. Annual amortization expense is expected to be as follows (in thousands):
| Fiscal Year Ending | ||||||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||
Amortization expense |
$ | 1,250 | $ | 1,137 | $ | 1,137 | $ | 1,017 | $ | 446 | $ | 570 | ||||||||||||
Intangible assets are continually monitored and reviewed for impairment or revisions to
estimated useful life whenever events or
22
changes in circumstances indicate that their carrying amounts may not be recoverable. For
determining the fair value of intangible assets, the Company utilizes discounted cash flow
techniques associated with an asset or long-lived asset group.
During fiscal 2009, the Company recorded impairment charges related to intangible assets
of $0.3 million, which were charged to discontinued operations.
During fiscal 2008, the Company continued its review and assessment of the future
prospects of its businesses, products and projects with particular attention given to the BBA
business unit. The challenges in the competitive DSL market described above resulted in the net
book value of certain assets within the BBA business unit to be considered not fully recoverable.
As a result, the Company recorded an impairment charge of $1.9 million related to intangible
assets. The impairment charge is included in net loss from discontinued operations.
In fiscal 2007, due to declines in the performance of embedded wireless network products
coupled with the Company’s decision to discontinue further investment in the stand-alone wireless
networking products, impairment testing was performed on the intangible assets supporting the
embedded wireless products. The fair values of the intangible assets were determined using a
non-discounted cash flow model for those intangible assets with no future contribution to the
discontinued wireless technology. As a result of this impairment test, the Company recorded an
impairment charge of $30.3 million in fiscal 2007.
Other Current Liabilities
Other current liabilities consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Restructuring and reorganization liabilities |
9,197 | 10,422 | ||||||
Accrued technical licenses |
5,552 | 12,475 | ||||||
Taxes payable |
3,909 | 1,865 | ||||||
Other |
15,320 | 18,427 | ||||||
| $ | 33,978 | $ | 43,189 | |||||
Other Liabilities
Other liabilities consist of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Restructuring and reorganization liabilities |
33,533 | 17,933 | ||||||
Deferred gain on sale of building |
13,205 | 16,108 | ||||||
Taxes payable |
6,411 | 7,201 | ||||||
Accrued technical licenses |
3,413 | 8,472 | ||||||
Other |
5,527 | 6,627 | ||||||
| $ | 62,089 | $ | 56,341 | |||||
23
6. Income Taxes
The components of the provision for income taxes are as follows (in thousands):
| Fiscal Year Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
United States |
$ | (149 | ) | $ | (33 | ) | $ | — | ||||
Foreign |
269 | 886 | 605 | |||||||||
State and local |
(10 | ) | 19 | 97 | ||||||||
Total current |
110 | 872 | 702 | |||||||||
Deferred: |
||||||||||||
United States |
— | — | — | |||||||||
Foreign |
761 | (23 | ) | 96 | ||||||||
Total deferred |
761 | (23 | ) | 96 | ||||||||
| $ | 871 | $ | 849 | $ | 798 | |||||||
Deferred income tax assets and liabilities consist of the tax effects of temporary
differences related to the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Intangible assets |
$ | 139,377 | $ | 154,377 | ||||
Capitalized research and development |
270,426 | 316,545 | ||||||
Net operating losses |
581,786 | 474,783 | ||||||
Research and development and investment credits |
153,938 | 152,869 | ||||||
Other, net |
108,948 | 171,189 | ||||||
Valuation allowance |
(1,199,860 | ) | (1,213,944 | ) | ||||
Total deferred tax assets |
54,615 | 55,819 | ||||||
Deferred tax liabilities: |
||||||||
Deferred state taxes |
(55,066 | ) | (55,510 | ) | ||||
Total deferred tax liabilities |
(55,066 | ) | (55,510 | ) | ||||
| $ | (451 | ) | $ | 309 | ||||
In assessing the realizability of deferred income tax assets, FASB ASC 740-10 (SFAS No.
109) establishes a more likely than not standard. If it is determined that it is more likely than
not that deferred income tax assets will not be realized, a valuation allowance must be established
against the deferred income tax assets. The ultimate realization of the assets is dependent on the
generation of future taxable income during the periods in which the associated temporary
differences become deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income and tax planning strategies when making this
assessment.
FASB ASC 740-10 (SFAS No. 109) further states that forming a conclusion that a valuation
allowance is not required is difficult when there is negative evidence such as cumulative losses in
recent years. As a result of the Company’s cumulative losses, the Company concluded that a full
valuation allowance was required as of October 1, 2004. In fiscal 2009 and 2008, foreign operations
recorded a $0.5 million net deferred tax liability and a $0.3 million net deferred tax asset,
respectively.
The valuation allowance decreased $14.1 million and $33.0 million during fiscal 2009 and
2008, respectively. The 2009 decrease was primarily due to current year losses that were fully
reserved offset by net operating losses that were fully reserved that expired. The decrease in 2008
was primarily related to the reductions in deferred tax assets attributed to the adoption of FASB
ASC 740-10 (FIN 48) and offset by fiscal 2008 losses that were fully reserved. The deferred income
tax assets at October 2, 2009 include $377.0 million of deferred income tax assets acquired in the
merger with GlobespanVirata, Inc. Under FASB ASC 805-10 (SFAS 141R), which is effective for fiscal
2010, the benefit (if any) from the realization of these acquired net deferred income tax assets
will decrease the Company’s provision for income taxes.
As a result of FASB ASC 718-10 (SFAS 123(R)), the Company’s deferred tax assets at
October 2, 2009 and October 3, 2008 do not include $20.8 million and $20.6 million, respectively,
of excess tax benefits from employee stock option exercises that are a component of the Company’s
net operating loss carryovers. Equity will be increased by $20.8 million if and when such excess
tax benefits are ultimately realized.
24
As of October 2, 2009, the Company has U.S. federal net operating loss carryforwards of
approximately $1.6 billion that expire at various dates through 2029 and aggregate state net
operating loss carryforwards of approximately $846 million that expire at various dates through
2019. The Company also has U.S. federal and state income tax credit carryforwards of approximately
$89.0 million and $65.0 million, respectively. The U.S. federal credits expire at various dates
through 2029. The state credit carryforwards include California Manufacturer’s Investment Credits
of approximately $0.6 million that expire at various dates through 2011, while the remaining state
credits have no expiration date. A reconciliation of income taxes computed at the U.S. federal
statutory income tax rate to the provision for income taxes is as follows (in thousands):
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 2 | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
U.S. Federal statutory tax at 35% |
$ | (8,132 | ) | $ | (605 | ) | $ | (76,227 | ) | |||
State taxes, net of federal effect |
711 | (844 | ) | 5,508 | ||||||||
U.S. and foreign income taxes on foreign earnings |
7,863 | 6,346 | 2,466 | |||||||||
Research and development credits |
(939 | ) | (3,655 | ) | (5,229 | ) | ||||||
Valuation allowance |
(13,911 | ) | 4,499 | 26,587 | ||||||||
Detriment/(benefit) from discontinued operations
and equity method investments, net of
impairments |
6,670 | (7,986 | ) | (19,131 | ) | |||||||
Asset impairments |
4,494 | — | 63,012 | |||||||||
Stock options |
3,189 | 2,271 | 2,022 | |||||||||
Other |
926 | 823 | 1,790 | |||||||||
Provision for income taxes |
$ | 871 | $ | 849 | $ | 798 | ||||||
Loss from continuing operations before income taxes and (loss) gain on equity
investments consists of the following components (in thousands):
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 2 | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
United States |
$ | (19,192 | ) | $ | 733 | $ | (215,449 | ) | ||||
Foreign |
(4,042 | ) | (2,462 | ) | (2,341 | ) | ||||||
| $ | (23,234 | ) | $ | (1,729 | ) | $ | (217,790 | ) | ||||
Certain of the Company’s foreign income tax returns for the years 2001 through 2007 are
currently under examination. Management believes that adequate provision for income taxes has been
made for all years, and the results of the examinations will not have a material impact on the
Company’s financial position, cash flows or results of operations.
No provision has been made for U.S. federal, state or additional foreign income taxes
which would be due upon the actual or deemed distribution of approximately $0.1 million and $6.3
million of undistributed earnings of foreign subsidiaries as of October 2, 2009 and October 3,
2008, respectively, which have been or are intended to be permanently reinvested.
On September 29, 2007, the Company adopted the provisions of FASB ASC 740-10 (FIN 48).
The adoption had the following impact on the Company’s financial statements: increased long-term
liabilities by $5.9 million and retained deficit by $0.8 million and decreased its long-term assets
by $0.3 million and current income taxes payable by $5.3 million.
The following table summarizes the fiscal 2009 and 2008 activity related to our
unrecognized tax benefits:
| 2009 | 2008 | |||||||
Beginning balance |
$ | 77,304 | $ | 74,370 | ||||
Increases related to current year tax positions |
730 | 4,279 | ||||||
Expiration of the statue of limitations for the assessment of taxes |
(4,429 | ) | (1,504 | ) | ||||
Other |
232 | 159 | ||||||
Ending balance |
$ | 73,837 | $ | 77,304 | ||||
25
Included in the unrecognized tax benefits of $73.8 million at October 2, 2009 are $66.3
million of tax benefits primarily related to federal and state acquired net operation loss and
credit carryovers that, if recognized, would be offset by the Company’s valuation allowance, and
$1.2 million of tax benefits that were acquired in business combinations that, if recognized, would
under FASB ASC 805-10 (SFAS 141R) be recorded to tax expense as opposed to goodwill as required
before the adoption of FASB ASC 805-10 (SFAS 141R). The balance of the Company’s uncertain tax
positions are related to various foreign locations.
The Company also accrued potential interest of $0.5 million and $0.4 million related to
these unrecognized tax benefits during fiscal 2009 and 2008 respectively, and in total, as of
October 2, 2009, the Company has recorded a liability for potential interest and penalties of $1.2
million related to these positions. The Company expects $10.2 million of the unrecognized tax
benefits, primarily related to acquired net operating losses and tax credits to expire unutilized
over the next 12 months. The Company does not expect its uncertain tax positions to otherwise
change materially over the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with
varying statutes of limitations. The fiscal 2005 through 2009 tax years generally remain subject to
examination by federal and most state tax authorities.
7. Debt
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 Company’s 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 that is equal to 1.0%, on a per annum basis, of the uncollected
value of the accounts receivable.
Concurrent with the Company’s agreements with Conexant USA, Conexant USA entered into an
$80.0 million credit facility that 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. The credit agreement was renewed effective November 2008 at a $50.0
million borrowing limit. 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 1.49% at October 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 facility expires on November 27, 2009. During its term, the credit facility
required 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 cause all borrowings under the
credit facility to immediately become due and payable. At October 2, 2009, Conexant USA had
borrowed $28.7 million under this credit facility and the Company was in compliance with all credit
facility requirements. As permitted by the terms of the credit facility, outstanding balances under
the credit facility are required to be repaid on or before May 27, 2010.
Long-Term Debt
Long-term debt consists of the following (in thousands):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
Floating rate senior secured notes due November 2010 |
$ | 61,400 | $ | 141,400 | ||||
4.00% convertible subordinated notes due March 2026, net of debt
discount of $21,422 and $35,437, respectively (1) |
228,578 | 214,563 | ||||||
Total |
289,978 | 355,963 | ||||||
Less: current portion of long-term debt |
(61,400 | ) | (17,707 | ) | ||||
Long-term debt |
$ | 228,578 | $ | 338,256 | ||||
| (1) | Amounts reflect the retrospective application of the provisions of FASB ASC 470-20 (FSP APB 14-1) which was adopted October 3, 2009. See Note 1 for additional information about the impact of FASB ASC 470-20 (FSP APB 14-1) on the accounting for our convertible debt. |
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
26
redemption prices that generally
include premiums, which are defined in the indenture for the notes, plus accrued and unpaid
interest. The 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 Company’s 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 Company’s existing and future
senior debt and senior to all of its existing and future subordinated debt. The notes are
guaranteed by certain of the Company’s 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 Company’s 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.
The indenture governing the senior secured notes contains a number of covenants that
restrict, subject to certain exceptions, the Company’s 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 Company’s 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 Company’s cash investments in assets (other than current assets) related to
the Company’s 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 Company’s 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, 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 Company’s
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.
Following the sale of the BBA business unit, the Company made an offer to repurchase
$73.0 million of the senior secured notes at 100% of the principal amount plus any accrued and
unpaid interest in August 2009. As a result of the 100% acceptance of the offer by the Company’s
bondholders, $73.0 million of the senior secured notes were repurchased during the fourth quarter
of fiscal 2009. In a separate transaction in the fourth quarter of fiscal 2009, the Company
purchased an additional $7.0 million of the senior secured notes at 100% of the principal amount
plus any accrued and unpaid interest. The Company recorded a pretax loss on debt repurchase of $0.9
million during the fourth quarter of fiscal 2009 which included the write-off of deferred debt
issuance costs, $0.4 million was recorded in interest expense in continuing operations, $0.5
million was recorded in net loss from discontinued operations.
Subsequent to October 2, 2009, the Company issued a redemption notice announcing that it
will redeem all of the remaining $61.4 million senior secured notes on December 18, 2009. The
redemption price will be equal to 101% of the principal amount of the senior secured notes plus
accrued and unpaid interest to the redemption date. Accordingly, the remaining $61.4 million senior
secured notes have been classified as current in the Company’s consolidated balance sheets as of
October 2, 2009.
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 Company’s
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 Company’s 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 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.
27
8. Commitments and Contingencies
Lease Commitments
The Company leases certain facilities and equipment under non-cancelable operating leases
which expire at various dates through 2021 and contain various provisions for rental adjustments
including, in certain cases, adjustments based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time. Rental expense under operating
leases was approximately $14.9 million, $21.0 million, and $12.0 million during fiscal 2009, 2008
and 2007, respectively.
At October 2, 2009, future minimum lease payments, net of sublease income, under
non-cancelable operating leases were as follows (in thousands):
| Lease | Sublease | Net | ||||||||||
| Fiscal Year Ending | Payments | Income | Obligations | |||||||||
2010 |
$ | 19,446 | $ | (4,827 | ) | $ | 14,619 | |||||
2011 |
15,661 | (2,352 | ) | 13,309 | ||||||||
2012 |
13,704 | (1,746 | ) | 11,958 | ||||||||
2013 |
13,941 | (1,510 | ) | 12,431 | ||||||||
2014 |
14,009 | (1,212 | ) | 12,797 | ||||||||
Thereafter |
35,196 | (2,269 | ) | 32,927 | ||||||||
Total future minimum lease payments |
$ | 111,957 | $ | (13,916 | ) | $ | 98,041 | |||||
The summary of future minimum lease payments includes an aggregate gross amount of $89.5
million of lease obligations that principally expire through fiscal 2021, which have been accrued
for in connection with the Company’s reorganization and restructuring actions and previous actions
taken by GlobespanVirata, Inc. prior to its merger with the Company in February 2004.
At October 2, 2009, the Company is contingently liable for approximately $2.6 million in
operating lease commitments on facility leases that were assigned to Mindspeed at the time of its
separation from the Company.
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 Company’s 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 Company’s reserves for such
matters, management believes the disposition of such matters will not have a material adverse
effect on the Company’s 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 Company’s 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 alleged 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 was
consolidated for purposes of discovery and other pretrial proceedings with class actions against
more than 300 other companies making similar allegations regarding the public offerings of those
companies during 1998 through 2000. On June 10, 2009, the court gave preliminary approval, and on
October 5, 2009, the court gave final approval, to a $586 million aggregate settlement of the
consolidated class actions. For purposes of the settlement, the plaintiff classes do not include
certain institutions allocated shares from the “institutional pots” in any of the public offerings
at issue in the consolidated class actions and persons associated with those institutions. Pursuant
to the terms of the settlement, the Company’s and the individual GlobeSpan defendants’ share of the
cost of the settlement will be paid by GlobeSpan’s insurers. Several appeals have been taken from
the approval of the settlement; at this time the
Company does not believe that these appeals will have a material impact on the Company.
Class Action Suit — In February 2005, the Company and certain of its current and former
officers and the Company’s 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 Company’s
401(k) Plan (Plan) during a specified class period. This suit was filed in the U.S. District Court
of New
28
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
plaintiffs filed an amended complaint on August 11, 2005. The amended complaint alleged that the
plaintiffs 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 the 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 plaintiffs 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. The plaintiffs 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
Court’s order dismissing plaintiffs’ 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 the plaintiffs agreed in principle to settle all outstanding claims in the
litigation for $3.25 million. On May 21, 2009, plaintiffs’ attorneys filed with the District Court
a motion asking the court to grant its preliminary approval of the proposed settlement and set a
date for a final hearing on the settlement, after notice to the class, the obtaining of an
allocation of the dollar recovery, and certain other preconditions set forth in the settlement
agreement. By order dated June 18, 2009, the District Court granted preliminary approval of the
proposed settlement and set September 11, 2009 as the date of the final Settlement Fairness
hearing. On September 11, 2009, the Court approved the proposed settlement. In fiscal 2009, the
Company deposited $3.25 million into an escrow account and anticipates that the settlement will be
paid in December 2009.
Wi-Lan Litigation — On October 1, 2009, Wi-Lan, Inc. (“Wi-Lan”) filed a complaint in the
United States District Court for the Eastern District of Texas accusing the Company of infringing
one United States patent. Wi-Lan alleges that certain past sales from the Company’s former BBA
business infringe the patent, which allegedly relates to Asymmetric Digital Subscriber Line
(“ADSL”) technology. The Company has not been served with the complaint. The Company believes it
does not infringe the Wi-Lan patent, and it will defend any lawsuit related to this patent. Wi-Lan
and the Company have been engaged in licensing discussions concerning the asserted patent since
April 2008 and those discussions continue.
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 Company’s spin-off from Rockwell International Corporation (“Rockwell”), 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 Company’s contribution of certain of its manufacturing operations to Jazz, the
Company agreed to indemnify Jazz for certain environmental matters and other customary
divestiture-related matters. In connection with the Company’s sale of the BMP business to NXP, the
Company agreed to indemnify NXP for certain claims related to the transaction. In connection with
the Company’s sale of the BBA business to Ikanos, the Company agreed to indemnify Ikanos for
certain claims related to the transaction. 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 Company’s 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.
Other
Tax Matter — During fiscal 2008, the Company settled certain proposed tax assessments
related to an acquired foreign subsidiary. The final settlement related to pre-acquisition tax
periods and the Company has been fully indemnified for the amount due. The settlement resulted in a
reversal of $1.4 million of reserves, of which $0.6 million was recorded as a reduction to Goodwill
and $0.9 million as a reduction to Special Charges.
The Company has recorded $8.9 million of unrecognized tax benefits as liabilities in
accordance with FASB ASC 740-10 (FIN 48), and the Company is uncertain as to if or when such
amounts may be settled. Related to these unrecognized tax benefits, the Company has also recorded a
liability for potential penalties and interest of $1.2 million as of October 2, 2009.
9. Shareholders’ Equity
The Company’s authorized capital consists of 100,000,000 shares of common stock, par
value $0.01 per share, and 25,000,000 shares of preferred stock, without par value, of which
5,000,000 shares are designated as Series A junior participating preferred stock (the Junior
Preferred Stock).
29
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 Company’s common stock. As of
October 2, 2009, approximately 9.2 million shares of the Company’s 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 FASB ASC 718-10 (SFAS
No. 123(R), “Share-Based Payment”). Under FASB ASC 718-10 (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 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.
The following weighted average assumptions were used in the estimated grant date fair value
calculations for share-based payments:
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September 28, | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Stock option plans: |
||||||||||||
Expected dividend yield |
$ | — | $ | — | $ | — | ||||||
Expected stock price volatility |
79 | % | 67 | % | 68 | % | ||||||
Risk free interest rate |
2.12 | % | 3.20 | % | 4.60 | % | ||||||
Average expected life (in years) |
4.87 | 5.25 | 4.93 | |||||||||
Stock purchase plans: |
||||||||||||
Expected dividend yield |
$ | — | $ | — | $ | — | ||||||
Expected stock price volatility |
74 | % | 69 | % | 60 | % | ||||||
Risk free interest rate |
3.14 | % | 3.10 | % | 4.80 | % | ||||||
Average expected life (in years) |
0.50 | 0.50 | 0.50 | |||||||||
The expected stock price volatility rates are based on the historical volatility of the
Company’s 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.
A summary of stock option activity is as follows (shares in thousands):
| Weighted | ||||||||
| Average | ||||||||
| Exercise | ||||||||
| Shares | Price | |||||||
Outstanding, October 3, 2008 |
7,357 | $ | 23.54 | |||||
Granted |
77 | 1.07 | ||||||
Exercised |
— | — | ||||||
Forfeited |
(3,224 | ) | 23.45 | |||||
Outstanding, October 2, 2009 |
4,210 | 23.20 | ||||||
Shares vested and expected to vest, October 2, 2009 |
4,159 | 23.33 | ||||||
Exercisable, October 2, 2009 |
3,840 | $ | 24.24 | |||||
At October 2, 2009, of the 4.2 million stock options outstanding, approximately 3.4
million options were held by current employees and directors of the Company, and approximately 0.8
million options were held by employees of former businesses of the
Company (i.e., Mindspeed, Skyworks) who remain employed by one of these businesses. At October
2, 2009, stock options outstanding had an aggregate intrinsic value of approximately $0.1 million
and a weighted-average remaining contractual term of 2.5 years. At October 2, 2009, exercisable
stock options had an immaterial aggregate intrinsic value and a weighted-average remaining
contractual term of
30
2.2 years. No options were exercised during the fiscal year ended October 2,
2009. The total intrinsic values of options exercised during fiscal 2008 was immaterial. The total
intrinsic value of options exercised in 2007 was $2.1 million. At October 2, 2009, the total
unrecognized fair value compensation cost related to non-vested stock option awards was $2.5
million, which is expected to be recognized over a remaining weighted average period of
approximately 1.2 years.
Restricted stock units issued under the 2000 Non-Qualified Plan are as follows:
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Outstanding, October 3, 2008 |
— | $ | — | |||||
Granted |
136 | 2.38 | ||||||
Vested |
— | — | ||||||
Forfeited |
— | — | ||||||
Outstanding, October 2, 2009 |
136 | $ | 2.38 | |||||
During fiscal 2009, the Company recognized compensation expense of $0.04 million related
to share awards issued under the 2000 Non-Qualified Plan. At October 2, 2009, the total
unrecognized fair value stock-based compensation cost related to non-vested 2000 Non-Qualified Plan
was $0.3 million, which is expected to be recognized over a weighted average period of 0.9 years.
1999 Long Term Incentive Plan, 2001 Performance Share Plan and 2004 New Hire Equity Incentive
Plan
The Company’s 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 one to two years of the date of award) or, in certain cases, if prescribed performance
criteria are not met. The Company maintains the 1999 Long Term Incentive Plan, under which it
reserved 2.8 million shares for issuance, the 2001 Performance Share Plan, under which it reserved
0.4 million shares for issuance, as well as the 2004 New Hire Equity Incentive Plan (“2004 New Hire
Plan”), under which it reserved 1.2 million shares for issuance.
1999 Long Term Incentive Plan
The awards issued under this plan may be settled, at the Company’s 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 1999 Long Term Incentive Plan is as follows (shares in
thousands):
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Outstanding, October 3, 2008 |
225 | $ | 5.31 | |||||
Granted |
— | — | ||||||
Vested |
(213 | ) | 5.30 | |||||
Forfeited |
— | — | ||||||
Outstanding, October 2, 2009 |
12 | $ | 5.67 | |||||
During fiscal 2009 and 2008, the Company recognized compensation expense of $0.6 million
and $0.5 million, respectively,
related to the 1999 Long Term Incentive Plan. At October 2, 2009, the total unrecognized fair
value compensation cost related to non-vested 1999 Long Term Incentive Plan awards was $0.1
million, which is expected to be recognized over a remaining weighted average period of
approximately 0.8 years. The plan expired on December 31, 2008. There are no shares available to
grant.
31
2001 Performance Share Plan
The performance-based awards may be settled, at the Company’s 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 2001 Performance Share Plan is as follows (shares in
thousands):
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Outstanding, October 3, 2008 |
175 | $ | 8.00 | |||||
Granted |
— | — | ||||||
Vested |
(175 | ) | 8.00 | |||||
Forfeited |
— | — | ||||||
Outstanding, October 2, 2009 |
— | $ | — | |||||
During fiscal 2009, the Company recorded expense of $0.6 million related to the 2001
Performance Share Plan. During fiscal 2008, 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 $0.9 million related to
outstanding awards. During fiscal 2007 the Company recorded expense of $1.4 million. At October 2,
2009, there was no unrecognized compensation cost related to non-vested Performance Plan share
awards. At October 2, 2009, approximately 0.2 million shares of the Company’s common stock are
available for issuance under this 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 Date | ||||||||
| Shares | Fair Value | |||||||
Outstanding, October 3, 2008 |
74 | $ | 10.59 | |||||
Granted |
— | — | ||||||
Vested |
(32 | ) | 11.33 | |||||
Forfeited |
(25 | ) | 13.70 | |||||
Outstanding, October 2, 2009 |
17 | $ | 4.50 | |||||
During fiscal 2009, 2008 and 2007, the Company recognized $0.3 million, $1.1 million and
$0.3 million in stock based compensation expense related to the New Hire Plan, respectively. In
addition, due to the departure of the Company’s former President and CEO in fiscal 2008, the
vesting period of 0.2 million service-based awards was accelerated and 0.1 million market condition
awards were forfeited due to non-achievement of vesting conditions resulting in the recognition of
$1.3 million of stock based compensation and the reversal of $0.3 million of stock based
compensation, respectively. At October 2, 2009, the total unrecognized fair value compensation cost
related to non-vested New Hire Plan was $0.05 million, which is expected to be recognized over a
remaining weighted average period of approximately 1.5 years.
Employee Stock Purchase Plan
Effective January 31, 2009, the Company suspended the Employee Stock Purchase Plan
(“ESPP”) for all employees. The last purchase of 49,592 shares under the ESPP occurred on January
30, 2009. During fiscal 2009, 2008 and 2007, the Company recognized
stock-based compensation expense of $0.1 million, $0.5 million and $1.4 million for stock
purchase plans, in its condensed consolidated statements of operations.
Directors Stock Plan
Effective February 13, 2009, the Company suspended the Directors Stock Plan (“DSP”) that
provided for each non-employee
32
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 could elect to receive all or a portion of the cash retainer
to which the director was entitled through the issuance of common stock. During fiscal 2008, 0.01
million stock option grants were awarded under the DSP.
10. Employee Benefit Plans
Retirement Savings Plan
The Company sponsors 401(k) retirement savings plans that allow eligible U.S. employees
to contribute a portion of their compensation, on a pre-tax or after-tax basis, subject to annual
limits. The Company may match employee contributions in whole or in part up to specified levels,
and the Company may make an additional discretionary contribution at fiscal year-end, based on the
Company’s performance. The Company contributions are made in cash, and are allocated based on the
employee’s current investment elections. Expense under the retirement savings plans was $0.5
million, $1.7 million, and $2.1 million for fiscal 2009, 2008 and 2007, respectively. In the second
quarter of fiscal 2009 the Company suspended the company match for the domestic 401(k) plan.
Retirement Medical Plan
The Company has a retirement medical plan which covers certain of its employees and
provides for medical payments to eligible employees and dependents upon retirement. At the time of
the spin-off from Rockwell in fiscal 1999, the Company ceased offering retirement medical coverage
to active salaried employees. Effective January 1, 2003, the Company elected to wind-down this
plan, and it was phased out as of December 31, 2007. Retirement medical credit, consisting
principally of interest accrued on the accumulated retirement medical obligation and the effects of
the wind-down of the plan beginning in fiscal 2003, was approximately $0.6 million and $2.0 million
in fiscal 2008 and 2007, respectively. The wind-down of the plan was completed in fiscal 2008. No
material payments are expected beyond fiscal 2009.
Pension Plans
In connection with a restructuring plan initiated in September 1998, the Company offered
a voluntary early retirement program (VERP) to certain salaried employees. Pension benefits under
the VERP were paid from a then newly established pension plan (the VERP Plan) of Conexant. Benefits
payable under the VERP Plan were equal to the excess of the total early retirement pension benefit
over the vested benefit obligation retained by Rockwell under a pension plan sponsored by Rockwell
prior to Rockwell’s spin-off of the Company. The Company also has certain pension plans covering
its non-U.S. employees and retirees.
In May 2008, the Company determined it would terminate its VERP which it had offered to
certain salaried employees in association with a restructuring plan initiated in September 1998.
The Company settled its liability related to the VERP via the purchase of a non-participating
annuity contract. During fiscal 2008, the Company recorded a pension settlement charge of $6.3
million. As a result of the termination, no further contributions or benefit payouts will occur.
Net pension expense was a credit of approximately $0.1 million for fiscal 2008 and expense of
approximately $0.2 million for fiscal 2007.
11. 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.
12. Asset Impairments
Fiscal 2009
During fiscal 2009, the Company recorded impairment charges of $10.8 million, consisting
primarily of an $8.3 million impairment of a patent license with Freescale Semiconductor, Inc.,
land and fixed asset impairments of $1.4 million, electronic design automation (“EDA”) tool
impairments of $0.8 million, intangible asset impairments of $0.3 million. Asset impairments
recorded in continuing operations were $5.7 million, asset impairments related to the BMP and BBA
business units of $5.1 million were recorded in discontinued operations.
Fiscal 2008
During fiscal 2008, the Company continued its review and assessment of the future
prospects of its businesses, products and projects with particular attention given to the BBA
business unit. The challenges in the competitive DSL market resulted in the net book value of
certain assets within the BBA business unit to be considered not fully recoverable. As a result,
the Company recorded
33
impairment charges of $108.8 million related to goodwill, $1.9 million related
to intangible assets, $6.5 million related to property, plant and equipment and $3.4 million
related to EDA tools. The impairment charges have been included in net loss from discontinued
operations.
During fiscal 2008, the Company reevaluated its reporting unit operations with particular
attention given to various scenarios for the BMP business. The determination was made that the net
book value of certain assets within the BMP business unit were considered not fully recoverable. As
a result, the Company recorded impairment charges of $119.6 million related to goodwill, $21.1
million related to EDA tools and technology licenses and $2.1 million related to property, plant
and equipment, respectively. The impairment charges have been included in net loss from
discontinued operations.
Fiscal 2007
During fiscal 2007, the Company recorded asset impairment charges of $225.4 million,
consisting primarily of goodwill impairment charges of $184.7 million, intangible impairment
charges of $30.3 million and property, plant and equipment impairment charges of $6.1 million
resulting from declines in the embedded wireless network products coupled with the Company’s
decision to discontinue further investment in stand-alone wireless networking products. In
addition, during fiscal 2007, the Company’s loss from discontinued operations includes asset
impairment charges of $128.2 million. The fiscal 2007 asset impairment charges included in
discontinued operations is comprised of goodwill impairment charges of $124.8 million which
resulted from declines in the performance of certain broadband media products in the prior fiscal
year.
13. Special Charges
Special charges consist of the following (in thousands):
| Fiscal Year Ended | ||||||||||||
| October 2, | October 3, | September | ||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
Litigation charges |
$ | 3,475 | $ | — | $ | 1,497 | ||||||
Restructuring charges |
15,116 | 11,539 | 7,227 | |||||||||
Voluntary Early Retirement
Plan (“VERP”) settlement
charge |
— | 6,294 | — | |||||||||
Loss on disposal of property |
392 | 961 | — | |||||||||
Other special charges |
— | (112 | ) | (364 | ) | |||||||
| $ | 18,983 | $ | 18,682 | $ | 8,360 | |||||||
Litigation Charges
Litigation charges in fiscal 2009 resulted from the settlement of the class action
lawsuit related to the Company’s 401(k) savings plan.
Restructuring Charges
The Company has implemented a number of cost reduction initiatives 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 October 2, 2009, the Company has remaining restructuring accruals of $42.7 million,
of which $1.6 million relates to workforce reductions and $41.1 million relates to facility and
other costs. Of the $42.7 million of restructuring accruals at October 2, 2009, $9.2 million is
included in other current liabilities and $33.5 million is included in other non-current
liabilities in the accompanying consolidated balance sheet. The Company expects to pay the amounts
accrued for the workforce reductions through fiscal 2010 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 FASB ASC 420-10 (SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”). As a result, the Company recorded the net present value of the future lease
obligations and will accrete the remaining amounts into expense over the remaining terms of the
non-cancellable leases.
Fiscal 2009 Restructuring Actions — As part of a workforce reduction implemented during
the fiscal year ended October 2, 2009, the Company completed actions that resulted in the
elimination of 183 positions worldwide. In relation to these restructuring actions in fiscal 2009,
the Company recorded $4.9 million of total charges for the cost of severance benefits for the
affected employees, $0.6 million of which were included in discontinued operations related to our
BBA business.
34
Activity and liability balances recorded as part of the fiscal 2009 restructuring actions
through October 2, 2009 were as follows (in thousands):
| Workforce | ||||
| Reductions | ||||
Charged to costs and expenses |
$ | 4,893 | ||
Cash payments |
(3,311 | ) | ||
Restructuring balance, October 2, 2009 |
$ | 1,582 | ||
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, the Company has 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 which were vacated. As a result of the sale of the BBA business, restructuring expenses of
$0.8 million incurred in fiscal 2008, which related to fiscal 2008 restructuring actions, were
reclassified to discontinued operations in the consolidated statements of operations.
Restructuring charges in fiscal year ended October 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 October 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 |
580 | 36 | 616 | |||||||||
Reclassification to other current
liabilities and other liabilities |
— | (127 | ) | (127 | ) | |||||||
Cash payments |
(673 | ) | (876 | ) | (1,549 | ) | ||||||
Restructuring balance, October 2, 2009 |
$ | — | $ | 64 | $ | 64 | ||||||
Fiscal 2007 Restructuring Actions — During fiscal 2007, the Company announced several
facility closures and workforce reductions. In total, the Company 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 Company’s 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 the fiscal
2007 restructuring actions and were reclassified to discontinued operations in the condensed
consolidated statements of operations. The domestic economic downturn experienced during the fiscal
year ended October 2, 2009 resulted in declines in real estate lease rates and adversely impacted
the Company’s ability to secure sub tenants for a facility located in San Diego. These declines
resulted in a decrease in estimated future projected sub lease rental income causing a $14.3
million additional restructuring charge for the facility. The remaining additional facility
restructuring charge of $1.8 million is due to accretion of lease liability. The majority of the
facility supported the operations of the BMP business sold in August 2008. The additional
restructuring charge of $16.1 million was allocated between the BMP business and continuing
operations based upon the historical use of the facility. Of the $16.1 million restructuring
charge, $10.8 million was included in discontinued operations and $5.3 million was charged to
operating expenses.
As a result of the sale of the BBA business, restructuring expenses of $2.7 million,
incurred in fiscal 2007, which related to fiscal 2007 restructuring actions, were reclassed to
discontinued operations in the consolidated statements of operations.
35
Activity and liability balances recorded as part of the Fiscal 2007 Restructuring Actions
through October 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 | ) | 16,130 | 16,129 | ||||||||
Cash payments |
(15 | ) | (5,579 | ) | (5,594 | ) | ||||||
Restructuring balance, October 2, 2009 |
$ | — | $ | 27,233 | $ | 27,233 | ||||||
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 year ended October 2, 2009 related to the fiscal
2006 and 2005 restructuring actions included $4.2 million due to a decrease in estimated future
rental income from sub-tenants resulting from declines in sub lease activity and $0.8 million due
to accretion of lease liability.
Activity and liability balances recorded as part of the Fiscal 2006 and 2005 Restructuring
Actions through October 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 |
— | 4,989 | 4,989 | |||||||||
Cash payments |
— | (2,175 | ) | (2,175 | ) | |||||||
Restructuring balance, October 2, 2009 |
$ | — | $ | 13,851 | $ | 13,851 | ||||||
36
14. Other (Income) Expense, Net
Other (income) expense, net consists of the following (in thousands):
| Fiscal Year Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Investment and interest income |
$ | (1,747 | ) | $ | (7,237 | ) | $ | (13,833 | ) | |||
(Increase) decrease in the fair value of derivative instruments |
(4,508 | ) | 14,974 | 952 | ||||||||
Impairment of equity securities |
2,770 | — | — | |||||||||
Loss on rental property |
— | 1,435 | — | |||||||||
Loss on swap termination |
1,087 | — | — | |||||||||
Realized gains on sales of equity securities |
(1,856 | ) | (896 | ) | (17,016 | ) | ||||||
Other |
(771 | ) | 947 | (6,608 | ) | |||||||
Other (income) expense, net |
$ | (5,025 | ) | $ | 9,223 | $ | (36,505 | ) | ||||
Other income, net for fiscal 2009 was primarily comprised of $4.5 million increase in the
fair value of the Company’s warrant to purchase 6.1 million shares of Mindspeed common stock,
$1.9 million gains on sales of equity securities, $1.7 million of investment and interest income on
invested cash balances offset by $2.8 million of impairments on equity securities and a
$1.1 million realized loss on the termination of interest rate swaps.
Other expense, net for fiscal 2008 was primarily comprised of $7.2 million of investment
and interest income on invested cash balances, a $15.0 million decrease in the fair value of the
Company’s warrant to purchase 6.1 million shares of Mindspeed common stock, and $1.4 million of
expense related to a rental property.
Other income, net for fiscal 2007 was primarily comprised of $13.8 million of investment
and interest income on invested cash balances, $17.0 million of gains on sales of equity
securities, including primarily the gain of $16.3 million on the sale of our Skyworks shares and
investment credits realized on asset disposals.
15. Related Party Transactions
Mindspeed Technologies, Inc.
As of October 2, 2009 the Company holds a warrant to purchase 6.1 million shares of
Mindspeed common stock at an exercise price of $16.74 per share exercisable through June 2013. In
addition, two members of the Company’s Board of Directors also serve on the Board of Mindspeed. No
significant amounts were due to or receivable from Mindspeed at October 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. The Company recorded income related to
the Mindspeed sublease agreement of $1.8 million in fiscal 2009, $2.6 million in fiscal 2008 and
$2.5 million in fiscal 2007. Additionally, Mindspeed made payments directly to the Company’s
landlord totaling $3.4 million, $4.0 million and $4.1 million in fiscal 2009, 2008 and 2007,
respectively.
Skyworks Solutions, Inc. (Skyworks)
One member of the Company’s Board of Directors also serves on the Board of Skyworks. No
significant amounts were due to or receivable from Skyworks at October 2, 2009.
Inventory Purchases — During fiscal 2009, 2008 and 2007, the Company purchased inventory
from Skyworks totaling $0.5 million, $4.8 million and $1.2 million, respectively.
16. Segment Information
Geographic Regions:
Net revenues by geographic regions, based upon the country of destination, were as
follows (in thousands):
37
| Fiscal Year Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
United States |
$ | 5,983 | $ | 9,139 | $ | 12,515 | ||||||
Other Americas |
3,101 | 9,761 | 10,375 | |||||||||
Total Americas |
9,084 | 18,900 | 22,890 | |||||||||
China |
132,827 | 213,847 | 214,265 | |||||||||
Asia-Pacific |
63,709 | 91,988 | 114,618 | |||||||||
Total Asia-Pacific |
196,536 | 305,835 | 328,883 | |||||||||
Europe, Middle East and Africa |
2,807 | 6,769 | 8,930 | |||||||||
| $ | 208,427 | $ | 331,504 | $ | 360,703 | |||||||
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. For fiscal 2009, 2008 and 2007, there was one
distribution customer that accounted for 23%, 23% and 23% of net revenues, respectively. Sales to
the Company’s twenty largest customers represented approximately 87%, 83% and 85% of net revenues
for fiscal 2009, 2008 and 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):
| October 2, | October 3, | |||||||
| 2009 | 2008 | |||||||
United States |
$ | 26,064 | $ | 49,240 | ||||
India |
1,971 | 2,627 | ||||||
Other Asia-Pacific |
2,919 | 4,209 | ||||||
Europe, Middle East and Africa |
18 | 34 | ||||||
| $ | 30,972 | $ | 56,110 | |||||
17. Quarterly Results of Operations (Unaudited)
| Fiscal Quarter Ended | ||||||||||||||||
| Fiscal 2009 | Oct. 2, 2009 | Jul. 3, 2009 | Apr. 3, 2009 | Jan. 2, 2009 | ||||||||||||
Net revenues |
$ | 56,155 | $ | 50,844 | $ | 43,965 | $ | 57,463 | ||||||||
Gross margin |
33,890 | 30,311 | 25,035 | 32,517 | ||||||||||||
Net loss from continuing operations |
(11,218 | ) | (4,245 | ) | (15,975 | ) | (9,019 | ) | ||||||||
Gain on sale of discontinued operations |
39,170 | — | — | — | ||||||||||||
Net (loss) income from discontinued operations |
(7,967 | ) | 3,557 | (1,138 | ) | (11,973 | ) | |||||||||
Net income (loss) |
19,985 | (688 | ) | (17,113 | ) | (20,992 | ) | |||||||||
Net loss per share from continuing operations, basic and fully diluted |
(0.22 | ) | (0.08 | ) | (0.32 | ) | (0.18 | ) | ||||||||
Net gain per share from sale of discontinued operations, basic and fully diluted |
0.78 | — | — | — | ||||||||||||
Net (loss) income per share from discontinued operations, basic and fully diluted |
(0.16 | ) | 0.07 | (0.02 | ) | (0.24 | ) | |||||||||
Net income (loss) per share, basic and fully diluted |
0.40 | (0.01 | ) | (0.34 | ) | (0.42 | ) | |||||||||
38
| Fiscal Quarter Ended | ||||||||||||||||
| Fiscal 2008 | Oct. 3, 2008 | Jun. 27, 2008 | Mar. 28, 2008 | Dec. 28, 2007 | ||||||||||||
Net revenues |
$ | 81,115 | $ | 73,902 | $ | 76,238 | $ | 100,249 | ||||||||
Gross margin |
46,954 | 41,593 | 44,059 | 61,647 | ||||||||||||
Net (loss) income from continuing operations |
(4,953 | ) | (6,690 | ) | (5,604 | ) | 4,564 | |||||||||
Gain on sale of discontinued operations |
6,268 | — | — | — | ||||||||||||
Net loss from discontinued operations |
(3,894 | ) | (146,371 | ) | (139,537 | ) | (16,868 | ) | ||||||||
Net loss |
(2,579 | ) | (153,061 | ) | (145,141 | ) | (12,304 | ) | ||||||||
Net (loss) income per share from continuing operations, basic and fully diluted |
(0.10 | ) | (0.14 | ) | (0.11 | ) | 0.09 | |||||||||
Net gain per share from sale of discontinued operations, basic and fully diluted |
0.13 | — | — | — | ||||||||||||
Net loss per share from discontinued operations, basic and fully diluted |
(0.08 | ) | (2.96 | ) | (2.83 | ) | (0.34 | ) | ||||||||
Net loss per share, basic and fully diluted |
(0.05 | ) | (3.10 | ) | (2.94 | ) | (0.25 | ) | ||||||||
18. Supplemental Guarantor Financial Information
In November 2006, the Company issued $275.0 million of floating rate senior secured notes
due November 2010, of which $61.4 million was outstanding as of October 2, 2009. The floating rate
senior secured notes rank equally in right of payment with all of the Company’s (the Parent’s)
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
Parent’s 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 Parent’s 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 Parent’s and Subsidiary Guarantors’ 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 Company’s discontinued
operations.
39
The following tables present the Company’s condensed consolidating balance sheets as of
October 2, 2009 and October 3, 2008 (in thousands):
| October 2, 2009 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 98,120 | $ | — | $ | 27,265 | $ | — | $ | 125,385 | ||||||||||
Restricted cash |
— | — | 8,500 | — | 8,500 | |||||||||||||||
Receivables, net |
— | 169,158 | 32,060 | (171,108 | ) | 30,110 | ||||||||||||||
Inventories |
9,216 | — | — | — | 9,216 | |||||||||||||||
Other current assets |
21,114 | — | 5,034 | — | 26,148 | |||||||||||||||
Total current assets |
128,450 | 169,158 | 72,859 | (171,108 | ) | 199,359 | ||||||||||||||
Property and equipment, net |
10,865 | — | 4,434 | — | 15,299 | |||||||||||||||
Goodwill |
17,910 | 88,901 | 3,097 | — | 109,908 | |||||||||||||||
Other assets |
24,246 | — | 1,389 | — | 25,635 | |||||||||||||||
Investments in subsidiaries |
275,273 | 25,093 | — | (300,366 | ) | — | ||||||||||||||
Total assets |
$ | 456,744 | $ | 283,152 | $ | 81,779 | $ | (471,474 | ) | $ | 350,201 | |||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 61,400 | $ | — | $ | — | $ | — | $ | 61,400 | ||||||||||
Short-term debt |
— | — | 28,653 | — | 28,653 | |||||||||||||||
Accounts payable |
167,991 | — | 27,670 | (171,108 | ) | 24,553 | ||||||||||||||
Accrued compensation and benefits |
5,620 | — | 3,108 | — | 8,728 | |||||||||||||||
Other current liabilities |
30,628 | 932 | 2,418 | — | 33,978 | |||||||||||||||
Total current liabilities |
265,639 | 932 | 61,849 | (171,108 | ) | 157,312 | ||||||||||||||
Long-term debt |
228,578 | — | — | — | 228,578 | |||||||||||||||
Other liabilities |
60,305 | — | 1,784 | — | 62,089 | |||||||||||||||
Total liabilities |
554,522 | 932 | 63,633 | (171,108 | ) | 447,979 | ||||||||||||||
Shareholders’ (deficit) equity |
(97,778 | ) | 282,220 | 18,146 | (300,366 | ) | (97,778 | ) | ||||||||||||
Total liabilities and equity (deficit) |
$ | 456,744 | $ | 283,152 | $ | 81,779 | $ | (471,474 | ) | $ | 350,201 | |||||||||
40
| 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 |
19,372 | — | — | — | 19,372 | |||||||||||||||
Other current assets |
32,998 | 3 | 4,937 | — | 37,938 | |||||||||||||||
Current assets held for sale |
25,248 | — | 4,482 | — | 29,730 | |||||||||||||||
Total current assets |
165,356 | 169,161 | 111,948 | (177,745 | ) | 268,720 | ||||||||||||||
Property and equipment, net |
11,292 | — | 6,118 | — | 17,410 | |||||||||||||||
Goodwill |
17,911 | 89,404 | 3,097 | — | 110,412 | |||||||||||||||
Other assets |
39,801 | 5,992 | 2,949 | — | 48,742 | |||||||||||||||
Investments in subsidiaries |
291,511 | 26,694 | — | (318,205 | ) | — | ||||||||||||||
Total assets |
$ | 525,871 | $ | 291,251 | $ | 124,112 | $ | (495,950 | ) | $ | 445,284 | |||||||||
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 |
10,841 | — | 2,360 | — | 13,201 | |||||||||||||||
Other current liabilities |
39,592 | 932 | 2,665 | — | 43,189 | |||||||||||||||
Current liabilities to be assumed |
3,135 | — | 860 | — | 3,995 | |||||||||||||||
Total current liabilities |
235,332 | 932 | 94,584 | (177,745 | ) | 153,103 | ||||||||||||||
Long-term debt |
338,256 | — | — | — | 338,256 | |||||||||||||||
Other liabilities |
54,699 | — | 1,642 | — | 56,341 | |||||||||||||||
Total liabilities |
628,287 | 932 | 96,226 | (177,745 | ) | 547,700 | ||||||||||||||
Shareholders’ (deficit) equity |
(102,416 | ) | 290,319 | 27,886 | (318,205 | ) | (102,416 | ) | ||||||||||||
Total liabilities and equity (deficit) |
$ | 525,871 | $ | 291,251 | $ | 124,112 | $ | (495,950 | ) | $ | 445,284 | |||||||||
41
The following tables present the Company’s condensed consolidating statements of
operations for the fiscal years ended October 2, 2009, October 3, 2008 and September 28, 2007 (in
thousands):
| Fiscal Year Ended October 2, 2009 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 183,456 | $ | 2,784 | $ | 22,187 | $ | — | $ | 208,427 | ||||||||||
Cost of goods sold |
67,296 | — | 19,378 | — | 86,674 | |||||||||||||||
Gross margin |
116,160 | 2,784 | 2,809 | — | 121,753 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
51,351 | — | — | — | 51,351 | |||||||||||||||
Selling, general and administrative |
59,031 | — | 3,709 | — | 62,740 | |||||||||||||||
Amortization of intangible assets |
2,976 | — | — | — | 2,976 | |||||||||||||||
Gain on sale of intellectual property |
(12,858 | ) | — | — | — | (12,858 | ) | |||||||||||||
Asset impairments |
4,492 | — | 1,180 | — | 5,672 | |||||||||||||||
Special charges |
16,872 | — | 2,111 | — | 18,983 | |||||||||||||||
Total operating expenses |
121,864 | — | 7,000 | — | 128,864 | |||||||||||||||
Operating income (loss) |
(5,704 | ) | 2,784 | (4,191 | ) | — | (7,111 | ) | ||||||||||||
Equity (loss) in income of subsidiaries |
2,300 | 1,449 | — | (3,749 | ) | — | ||||||||||||||
Interest expense |
32,883 | — | 1,810 | — | 34,693 | |||||||||||||||
Other (income) expense, net |
6,384 | — | (11,409 | ) | — | (5,025 | ) | |||||||||||||
(Loss) income from continuing operations before income
taxes and loss on equity method investments |
(42,671 | ) | 4,233 | 5,408 | (3,749 | ) | (36,779 | ) | ||||||||||||
Provision for income taxes |
(689 | ) | — | 1,560 | — | 871 | ||||||||||||||
(Loss) income from continuing operations before loss on
equity method investments |
(41,982 | ) | 4,233 | 3,848 | (3,749 | ) | (37,650 | ) | ||||||||||||
Loss on equity method investments |
(2,807 | ) | — | — | — | (2,807 | ) | |||||||||||||
(Loss) income from continuing operations |
(44,789 | ) | 4,233 | 3,848 | (3,749 | ) | (40,457 | ) | ||||||||||||
Gain on sale of discontinued operations |
39,045 | — | 125 | — | 39,170 | |||||||||||||||
Loss from discontinued operations |
(13,064 | ) | (4,302 | ) | (155 | ) | — | (17,521 | ) | |||||||||||
Net income (loss) |
$ | (18,808 | ) | $ | (69 | ) | $ | 3,818 | $ | (3,749 | ) | $ | (18,808 | ) | ||||||
42
| Fiscal Year Ended October 3, 2008 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 298,265 | $ | 8,180 | $ | 25,059 | $ | — | $ | 331,504 | ||||||||||
Cost of goods sold |
117,226 | — | 20,025 | — | 137,251 | |||||||||||||||
Gross margin |
181,039 | 8,180 | 5,034 | — | 194,253 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
58,439 | — | — | — | 58,439 | |||||||||||||||
Selling, general and administrative |
70,344 | — | 7,561 | — | 77,905 | |||||||||||||||
Amortization of intangible assets |
2,885 | — | 767 | — | 3,652 | |||||||||||||||
Asset impairments |
255 | — | 22 | — | 277 | |||||||||||||||
Special charges |
14,784 | — | 3,898 | — | 18,682 | |||||||||||||||
Total operating expenses |
146,707 | — | 12,248 | — | 158,955 | |||||||||||||||
Operating (loss) income |
34,332 | 8,180 | (7,214 | ) | — | 35,298 | ||||||||||||||
(Loss) equity in income of subsidiaries |
(201,224 | ) | 7,493 | — | 193,731 | — | ||||||||||||||
Interest expense |
36,220 | — | 4,493 | — | 40,713 | |||||||||||||||
Other expense (income), net |
34,789 | — | (25,566 | ) | — | 9,223 | ||||||||||||||
(Loss) income from continuting operations before income
taxes and gain on equity method investments |
(237,901 | ) | 15,673 | 13,859 | 193,731 | (14,638 | ) | |||||||||||||
Provision for income taxes |
(1,007 | ) | — | 1,856 | — | 849 | ||||||||||||||
(Loss) income from continuting operations before gain on
equity method investments |
(236,894 | ) | 15,673 | 12,003 | 193,731 | (15,487 | ) | |||||||||||||
Gain on equity method investments |
2,804 | — | — | — | 2,804 | |||||||||||||||
(Loss) income from continuing operations |
(234,090 | ) | 15,673 | 12,003 | 193,731 | (12,684 | ) | |||||||||||||
Gain on sale of discontinued operations |
1,777 | 1,609 | 2,882 | 6,268 | ||||||||||||||||
(Loss) income from discontinued operations |
(80,772 | ) | (226,923 | ) | 1,025 | — | (306,670 | ) | ||||||||||||
Net (loss) income |
$ | (313,085 | ) | $ | (209,641 | ) | $ | 15,910 | $ | 193,731 | $ | (313,085 | ) | |||||||
43
| Fiscal Year Ended September 28, 2007 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 298,906 | $ | 6,549 | $ | 55,248 | $ | — | $ | 360,703 | ||||||||||
Cost of goods sold |
117,897 | — | 44,075 | — | 161,972 | |||||||||||||||
Gross margin |
181,009 | 6,549 | 11,173 | — | 198,731 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
89,694 | — | 2,191 | — | 91,885 | |||||||||||||||
Selling, general and administrative |
67,972 | 3 | 12,918 | — | 80,893 | |||||||||||||||
Amortization of intangible assets |
8,569 | — | 986 | — | 9,555 | |||||||||||||||
Asset impairments |
10,252 | 214,972 | 156 | — | 225,380 | |||||||||||||||
Special charges |
4,864 | — | 3,496 | — | 8,360 | |||||||||||||||
Total operating expenses |
181,351 | 214,975 | 19,747 | — | 416,073 | |||||||||||||||
Operating income (loss) |
(342 | ) | (208,426 | ) | (8,574 | ) | — | (217,342 | ) | |||||||||||
(Loss) equity in income of subsidiaries |
(331,771 | ) | 799 | — | 330,972 | — | ||||||||||||||
Interest expense |
42,208 | — | 6,590 | — | 48,798 | |||||||||||||||
Other expense (income), net |
706 | 8 | (37,219 | ) | — | (36,505 | ) | |||||||||||||
(Loss) income from continuing operations before income
taxes and loss on equity method investments |
(375,027 | ) | (207,635 | ) | 22,055 | 330,972 | (229,635 | ) | ||||||||||||
Provision for income taxes |
(1,559 | ) | — | 2,357 | — | 798 | ||||||||||||||
(Loss) income from continuing operations before
loss on equity method investments |
(373,468 | ) | (207,635 | ) | 19,698 | 330,972 | (230,433 | ) | ||||||||||||
Gain on equity method investments |
51,182 | — | — | — | 51,182 | |||||||||||||||
(Loss) income from continuing operations |
(322,286 | ) | (207,635 | ) | 19,698 | 330,972 | (179,251 | ) | ||||||||||||
Loss from discontinued operations |
(92,021 | ) | (143,035 | ) | — | — | (235,056 | ) | ||||||||||||
Net (loss) income |
$ | (414,307 | ) | $ | (350,670 | ) | $ | 19,698 | $ | 330,972 | $ | (414,307 | ) | |||||||
44
The following tables present the Company’s condensed consolidating statements of cash
flows for the fiscal years ended October 2, 2009, October 3, 2008 and September 28, 2007 (in
thousands):
| Year Ended October 2, 2009 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (14,805 | ) | $ | 9,619 | $ | (12,624 | ) | $ | 26,286 | $ | 8,476 | ||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sales of equity securities |
2,310 | — | — | — | 2,310 | |||||||||||||||
Purchases of property, plant and equipment |
(333 | ) | — | (353 | ) | — | (686 | ) | ||||||||||||
Sales of property, plant and equipment |
110 | — | 24 | — | 134 | |||||||||||||||
Proceeds from sale of intellectual property, net |
14,548 | — | — | — | 14,548 | |||||||||||||||
Payments for acquisitions |
(4,207 | ) | — | — | — | (4,207 | ) | |||||||||||||
Purchases of accounts receivable |
— | — | (239,820 | ) | 239,820 | — | ||||||||||||||
Proceeds from collection of purchased accounts receivable |
— | — | 266,106 | (266,106 | ) | — | ||||||||||||||
Release of restricted cash |
18,000 | — | 300 | — | 18,300 | |||||||||||||||
Proceeds from resolution of pre-acquisition contingencies |
10,446 | — | — | — | 10,446 | |||||||||||||||
Net proceeds from sale of business |
44,522 | — | 37 | — | 44,559 | |||||||||||||||
Net cash provided by (used in) investing activities |
85,396 | — | 26,294 | (26,286 | ) | 85,404 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayment of short-term debt, net of expenses |
— | — | (12,365 | ) | — | (12,365 | ) | |||||||||||||
Repurchases and retirements of long-term debt |
(80,000 | ) | — | — | — | (80,000 | ) | |||||||||||||
Proceeds from issuance of company stock |
18,436 | — | — | — | 18,436 | |||||||||||||||
Proceeds from issuance of common stock under employee stock plans |
28 | — | — | — | 28 | |||||||||||||||
Employee income tax paid related to vesting of restricted stock units |
(258 | ) | — | — | — | (258 | ) | |||||||||||||
Intercompany, net |
19,804 | (9,619 | ) | (10,185 | ) | — | — | |||||||||||||
Interest rate swap security deposit |
2,517 | — | — | — | 2,517 | |||||||||||||||
Payment for swap termination |
(2,815 | ) | — | — | — | (2,815 | ) | |||||||||||||
Repayment of shareholder note receivable |
79 | — | — | — | 79 | |||||||||||||||
Net cash provided by (used in) financing activities |
(42,209 | ) | (9,619 | ) | (22,550 | ) | — | (74,378 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents |
28,382 | — | (8,880 | ) | — | 19,502 | ||||||||||||||
Cash and cash equivalents at beginning of period |
69,738 | — | 36,145 | — | 105,883 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 98,120 | $ | — | $ | 27,265 | $ | — | $ | 125,385 | ||||||||||
45
| Year Months Ended October 3, 2008 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (65,165 | ) | $ | (2,922 | ) | $ | 39,185 | $ | 10,552 | $ | (18,350 | ) | |||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sale of business |
82,035 | 13,332 | — | 95,367 | ||||||||||||||||
Proceeds from sale of property, plant and equipment |
574 | — | 8,375 | — | 8,949 | |||||||||||||||
Purchases of property, plant and equipment |
(3,601 | ) | — | (2,357 | ) | — | (5,958 | ) | ||||||||||||
Payments for acquisitions, net of cash acquired |
(16,088 | ) | — | — | (16,088 | ) | ||||||||||||||
Purchases of equity securites |
(755 | ) | — | — | — | (755 | ) | |||||||||||||
Restricted cash |
(18,000 | ) | — | — | (18,000 | ) | ||||||||||||||
Purchases of accounts receivable |
— | — | (520,643 | ) | 520,643 | — | ||||||||||||||
Collections of accounts receivable |
— | — | 531,195 | (531,195 | ) | — | ||||||||||||||
Net cash (used in) provided by investing activities |
44,165 | — | 29,902 | (10,552 | ) | 63,515 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayment of short-term debt, net of expenses |
— | — | (39,883 | ) | — | (39,883 | ) | |||||||||||||
Repurchases and retirements of long-term debt |
(133,600 | ) | — | — | — | (133,600 | ) | |||||||||||||
Proceeds from issuance of common stock |
1,088 | — | — | — | 1,088 | |||||||||||||||
Repayment of shareholder notes receivables |
25 | — | — | 25 | ||||||||||||||||
Interest rate swap security deposit |
(2,517 | ) | — | — | (2,517 | ) | ||||||||||||||
Intercompany balances, net |
26,479 | 2,922 | (29,401 | ) | — | — | ||||||||||||||
Net cash used in financing activities |
(108,525 | ) | 2,922 | (69,284 | ) | — | (174,887 | ) | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
(129,525 | ) | — | (197 | ) | — | (129,722 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
199,263 | — | 36,342 | — | 235,605 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 69,738 | $ | — | $ | 36,145 | $ | — | $ | 105,883 | ||||||||||
46
| Year Months Ended September 28, 2007 | ||||||||||||||||||||
| Non- | ||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (185,293 | ) | $ | 84,155 | $ | 109,973 | $ | (20,686 | ) | $ | (11,851 | ) | |||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sale of equity securities and other assets |
168,186 | — | — | — | 168,186 | |||||||||||||||
Proceeds from sales and maturities of marketable debt securities |
100,573 | — | — | — | 100,573 | |||||||||||||||
Purchases of marketable securities |
(27,029 | ) | — | — | (27,029 | ) | ||||||||||||||
Purchases of property, plant and equipment |
(15,970 | ) | — | (14,352 | ) | — | (30,322 | ) | ||||||||||||
Payments for acquisitions, net of cash acquired |
(5,029 | ) | — | — | — | (5,029 | ) | |||||||||||||
Purchases of equity securites |
(1,200 | ) | — | — | — | (1,200 | ) | |||||||||||||
Purchases of accounts receivable |
— | — | (606,122 | ) | 606,122 | — | ||||||||||||||
Collections of accounts receivable |
— | — | 601,131 | (601,131 | ) | — | ||||||||||||||
Net cash (used in) provided by investing activities |
219,531 | — | (19,343 | ) | 4,991 | 205,179 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayment of short-term debt, net of expenses |
— | — | (1,198 | ) | — | (1,198 | ) | |||||||||||||
Proceeds from long-term debt, net |
264,760 | — | — | — | 264,760 | |||||||||||||||
Repurchases and retirements of long term debt |
(456,500 | ) | — | — | — | (456,500 | ) | |||||||||||||
Proceeds from issuance of common stock |
9,568 | — | — | — | 9,568 | |||||||||||||||
Repayment of shareholder notes receivables |
21 | — | — | — | 21 | |||||||||||||||
Dividends paid |
— | — | (15,695 | ) | 15,695 | — | ||||||||||||||
Intercompany balances, net |
171,778 | (84,155 | ) | (87,623 | ) | — | — | |||||||||||||
Net cash used in financing activities |
(10,373 | ) | (84,155 | ) | (104,516 | ) | 15,695 | (183,349 | ) | |||||||||||
Net (decrease) increase in cash and cash equivalents |
23,865 | — | (13,886 | ) | — | 9,979 | ||||||||||||||
Cash and cash equivalents at beginning of period |
175,398 | — | 50,228 | — | 225,626 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 199,263 | $ | — | $ | 36,342 | $ | — | $ | 235,605 | ||||||||||
19. Subsequent events
The Company has evaluated events subsequent to October 2, 2009 to assess the need for
potential recognition or disclosure in this Report. Such events were evaluated through November 25,
2009, the date these financial statements were issued. Based upon this evaluation, it was
determined that no subsequent events occurred that require recognition in the financial statements
and that the following items represent events that merits disclosure herein:
On October 14, 2009, the Company’s underwriter exercised its over-allotment option to
purchase an additional 1,050,000 shares of the company’s common stock, at a price of $2.85 per
share. Net proceeds to the Company, after expenses were approximately $2.6 million.
On November 18, 2009, pursuant to Article 5 of the indenture dated as of November 13,
2006 between Conexant Systems, Inc. (the “Company”) and The Bank of New York Trust Company, N.A.
(to the interests of which as indenture trustee The Bank of New York Mellon Trust Company, N. A.
has succeeded) relating to the Company’s Floating Rate Senior Secured Notes due 2010 (the “Notes”),
the Company issued a redemption notice announcing that it will redeem all of the outstanding Notes
on December 18, 2009. The Notes are scheduled to mature on November 13, 2010. An aggregate
principal amount of $61.4 million of the Notes are outstanding. The redemption price will be equal
to 101% of the principal amount of the Notes plus accrued and unpaid interest to the redemption
date.
Between November 6, 2009 and November 25, 2009 the Company entered into exchange
agreements (the “Exchanges”) with certain holders (the “Holders”) of its outstanding 4% Convertible
Subordinated Notes due 2026 (the “Notes”) to issue an aggregate of 3.1 million shares of the
Company’s common stock (the “Shares”), par value $0.01 per share, in exchange for $7.9 million
aggregate principal amount of the Notes. The Company is also paying the Holders accrued and unpaid
interest in cash on the Notes exchanged. The holders of the Notes may require the Company to
repurchase, for cash, all or part of their Notes on March 1, 2011 at a price of 100% of the
principal amount, plus any accrued and unpaid interest. The Shares were issued in transactions that
were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon an exemption from
registration provided under Section 3(a)(9) of the Act. The Exchanges qualified for the 3(a)(9)
exemption because the Shares and the Notes were both issued by the Company, the Shares
47
were issued exclusively in exchanges with the Company’s existing security holders, the exchanges were not
solicited and no commission or other remuneration was paid or given directly or indirectly for
soliciting the Exchanges.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Conexant Systems, Inc.
Newport Beach, California
Conexant Systems, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheets of Conexant Systems, Inc.
and subsidiaries (the “Company”) as of October 2, 2009 and October 3, 2008, and the related
consolidated statements of operations, cash flows and shareholders’ equity (deficit) and
comprehensive loss for each of the three years in the period ended October 2, 2009. Our audits also
included the financial statement schedule listed in Item 15 (not presented herein). These consolidated financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Conexant Systems, Inc. and subsidiaries as of October 2, 2009
and October 3, 2008, and the results of their operations and their cash flows for each of the three
years in the period ended October 2, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the consolidated financial
statements have been retrospectively adjusted for the October 3, 2009 adoption of Accounting
Standards Codification Subtopic 470-20, Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash Settlement).
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
October 2, 2009, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
November 25, 2009 expressed (not presented herein) an unqualified opinion on the Company’s internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
November 25, 2009 (February 8, 2010 as to the effect of the October 3, 2009 adoption of the new accounting standard requiring retrospective application described in Note 1)
November 25, 2009 (February 8, 2010 as to the effect of the October 3, 2009 adoption of the new accounting standard requiring retrospective application described in Note 1)
49