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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended January 1, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-24923
 CONEXANT SYSTEMS, INC.
  Delaware
(State of incorporation)
    
    25-1799439
(I.R.S. Employer Identification No.)
 4000 MacArthur Boulevard
Newport Beach, California 92660-3095
 (949) 483-4600
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    our expectations, subject to the qualifications expressed, regarding the sufficiency of
our existing sources of liquidity and cash to fund our operations, research and development,
anticipated capital expenditures and our working capital needs for at least the next 12 months
and whether we will be able to repatriate cash from our foreign operations on a timely and
cost-effective basis;
    
    our expectation that we will be able to sustain the recoverability of our goodwill,
intangible and tangible long-term assets;
    
    expectations that we will have sufficient capital to repay our indebtedness as it becomes
due and to finance our ongoing business and operations and that we will be able to successfully
complete restructuring or refinancing alternatives;
    
    expectations that we will be able to use our net operating losses and other tax
attributes to offset future taxable income;
    
    expectations regarding the market share of our products, growth in the markets we serve
and our market opportunities;
    
    expectations regarding the closing of the sale of our real property in Newport Beach;
    
    expectations regarding price and product competition;
    
    continued demand and future growth in demand for our products in the communications, PC
and consumer markets we serve;
    
    our plans and expectations regarding the transition of our semiconductor products to
smaller line width geometries;
    
    our product development plans;
    
    our expectation that our largest customers will continue to account for a substantial
portion of our revenue;
    
    expectations regarding our contractual obligations and commitments;
    
    our expectation that we will be able to protect our products and services with
proprietary technology and intellectual property protection;
    
    our expectation that we will be able to meet our lease obligations (and other financial
commitments); and
    
    our expectation that we will be able to continue to rely on third party manufacturers to
manufacture, assemble and test our products to meet our customers demands.
  1




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##### 



CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets  January 1, 2010 and October 2, 2009
    
    
    3Condensed Consolidated Statements of Operations  Fiscal Quarter Ended January 1, 2010 and January 2, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows  Fiscal Quarter Ended January 1, 2010 and January 2, 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 6. Exhibits
    
    
    54SIGNATURE
    
    
    55EX-31.1EX-31.2EX-32
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED  CONSOLIDATED BALANCE SHEETS
 (unaudited, in thousands, except for share and par value amounts)
 January 1,
    
    
    October 2,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    59,084
    
    
    $
    125,385Restricted cash
    
    
    
    
    
    
    8,500Receivables, net of allowances of $352 and $453
    
    
    30,674
    
    
    
    30,110Inventories, net
    
    
    9,184
    
    
    
    9,216Other current assets
    
    
    20,582
    
    
    
    26,148Assets held for sale
    
    
    11,958
    
    
    
    Total current assets
    
    
    131,482
    
    
    
    199,359Property, plant and equipment, net of accumulated depreciation of $58,354 and $70,139
    
    
    6,872
    
    
    
    15,299Goodwill
    
    
    109,908
    
    
    
    109,908Other assets
    
    
    25,485
    
    
    
    25,635Total assets
    
    $
    273,747
    
    
    $
    350,201LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    61,400Short-term debt
    
    
    
    
    
    
    28,653Accounts payable
    
    
    20,661
    
    
    
    24,553Accrued compensation and benefits
    
    
    8,621
    
    
    
    8,728Other current liabilities
    
    
    36,430
    
    
    
    33,978Total current liabilities
    
    
    65,712
    
    
    
    157,312Long-term debt, net of debt discount of $16,468 and $21,422
    
    
    215,902
    
    
    
    228,578Other liabilities
    
    
    58,783
    
    
    
    62,089Total liabilities
    
    
    340,397
    
    
    
    447,979Commitments 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; 65,051 and 56,917
shares issued and outstanding at January 1, 2010 and October 2, 2009, respectively
    
    
    651
    
    
    
    570Additional paid-in capital
    
    
    4,854,511
    
    
    
    4,833,919Accumulated deficit
    
    
    (4,921,409
    )
    
    
    (4,929,743
    )Accumulated other comprehensive loss
    
    
    (403
    )
    
    
    (2,524
    )Shareholder notes receivable
    
    
    
    
    
    
    Total shareholders deficit
    
    
    (66,650
    )
    
    
    (97,778
    )Total liabilities and shareholders deficit
    
    $
    273,747
    
    
    $
    350,201
  3




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited, in thousands, except for share and par value amounts)
 Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Net revenues
    
    $
    61,813
    
    
    $
    57,463Cost of goods sold (1)
    
    
    24,204
    
    
    
    24,946Gross margin
    
    
    37,609
    
    
    
    32,517Operating expenses:Research and development (1)
    
    
    13,245
    
    
    
    13,567Selling, general and administrative (1)
    
    
    12,402
    
    
    
    17,866Amortization of intangible assets
    
    
    396
    
    
    
    517Gain on sale of intellectual property
    
    
    
    
    
    
    (12,858
    )Special charges
    
    
    346
    
    
    
    10,577Total operating expenses
    
    
    26,389
    
    
    
    29,669Operating income
    
    
    11,220
    
    
    
    2,848Interest expense
    
    
    9,503
    
    
    
    8,626Other (income) expense, net
    
    
    (7,204
    )
    
    
    1,927Income (loss) from continuing operations before income taxes and loss on
equity method investments
    
    
    8,921
    
    
    
    (7,705
    )Income tax (benefit) provision
    
    
    (230
    )
    
    
    468Income (loss) from continuing operations before loss on equity method
investments
    
    
    9,151
    
    
    
    (8,173
    )Loss on equity method investments
    
    
    (454
    )
    
    
    (846
    )Income (loss) from continuing operations
    
    
    8,697
    
    
    
    (9,019
    )Loss from discontinued operations, net of tax (1)
    
    
    (363
    )
    
    
    (11,973
    )Net income (loss)
    
    $
    8,334
    
    
    $
    (20,992
    )Income (loss) per share from continuing operations  basic and diluted
    
    $
    0.14
    
    
    $
    (0.18
    )Loss per share from discontinued operations  basic and diluted
    
    $
    0.00
    
    
    $
    (0.24
    )Net income (loss) per share  basic and diluted
    
    $
    0.14
    
    
    $
    (0.42
    )Shares used in basic per-share computations
    
    
    60,023
    
    
    
    49,657Shares used in diluted per-share computations
    
    
    60,091
    
    
    
    49,657
  
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows (in
thousands) (see Note 7): Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Cost of goods sold
    
    $
    58
    
    
    $
    37Research and development
    
    
    401
    
    
    
    435Selling, general and administrative
    
    
    1,037
    
    
    
    1,713Loss from discontinued operations, net of tax
    
    
    (35
    )
    
    
    188
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Cash flows from operating activities:Net Income (loss)
    
    $
    8,334
    
    
    $
    (20,992
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of effects of acquisitions:Depreciation
    
    
    1,067
    
    
    
    2,649Amortization of intangible assets
    
    
    396
    
    
    
    3,371Reversal of provision for bad debts, net
    
    
    (101
    )
    
    
    Charges for inventory provisions, net
    
    
    (191
    )
    
    
    340Amortization of debt discount
    
    
    3,562
    
    
    
    3,421Deferred income taxes
    
    
    13
    
    
    
    (171
    )Stock-based compensation
    
    
    1,461
    
    
    
    2,373(Increase) decrease in fair value of derivative instruments
    
    
    (4,285
    )
    
    
    988Losses on equity method investments
    
    
    1,308
    
    
    
    846Other-than-temporary impairment of marketable securities
    
    
    
    
    
    
    2,635Loss on termination of swap
    
    
    1,728
    
    
    
    Loss on repurchase of secured debt
    
    
    614
    
    
    
    Loss on exchange of convertible debt for common stock
    
    
    510
    
    
    
    Gain on sale of marketable securities
    
    
    (4,113
    )
    
    
    Gain on sale of intellectual property
    
    
    
    
    
    
    (12,858
    )Other items, net
    
    
    303
    
    
    
    483Changes in assets and liabilities:Receivables
    
    
    (463
    )
    
    
    8,483Inventories
    
    
    223
    
    
    
    10,983Accounts payable
    
    
    (3,980
    )
    
    
    (12,111
    )Accrued expenses and other current liabilities
    
    
    2,970
    
    
    
    (7,487
    )Other, net
    
    
    849
    
    
    
    11,584Net cash provided by (used in) operating activities
    
    
    10,205
    
    
    
    (5,463
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (219
    )
    
    
    (181
    )Proceeds from sale of property, plant and equipment
    
    
    163
    
    
    
    Payments for acquisitions
    
    
    (625
    )
    
    
    (1,953
    )Proceeds from sales of marketable securities
    
    
    4,274
    
    
    
    Release of restricted cash
    
    
    8,500
    
    
    
    6,300Proceeds from sale of intellectual property, net of expenses of $132
    
    
    
    
    
    
    14,548Net cash provided by investing activities
    
    
    12,093
    
    
    
    18,714Cash flows from financing activities:Net repayments of short-term debt, including debt costs of $483 and $651
    
    
    (29,136
    )
    
    
    (7,900
    )Repurchases and retirements of long-term debt
    
    
    (62,014
    )
    
    
    Proceeds from issuance of common stock
    
    
    2,551
    
    
    
    Interest rate swap security deposit
    
    
    
    
    
    
    (907
    )Net cash used in financing activities
    
    
    (88,599
    )
    
    
    (8,807
    )Net (decrease) increase in cash and cash equivalents
    
    
    (66,301
    )
    
    
    4,444Cash and cash equivalents at beginning of period
    
    
    125,385
    
    
    
    105,883Cash and cash equivalents at end of period
    
    $
    59,084
    
    
    $
    110,327
  5




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Description of Business
  2. Sale of Assets and Discontinued Operations
 Sale of Property
  Sale of Broadband Access Business
     Sale of Broadband Media Processing Business
  6




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3. Basis of Presentation and Significant Accounting Policies
 Interim Reporting 
  Fiscal Periods
 Use of Estimates 
 Revenue Recognition 
 Liquidity
 7




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Restricted Cash
  Investments 
 8




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Income Taxes
      Accounting for Convertible Debt 
 9




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January 1,
    
    
    October 2,2010
    
    
    2009Principal of
the liability component of 4.00% convertible subordinated
notes
    
    $
    232,370
    
    
    $
    250,000Unamortized debt
discount
    
    
    (16,468
    )
    
    
    (21,422
    )Net carrying
amount of liability component of 4.00% convertible subordinated
notes
    
    $
    215,902
    
    
    $
    228,578Net carrying
amount of equity component of 4.00% convertible subordinated notes (net of $1,742 issuance costs)
    
    $
    66,045
    
    
    $
    66,045
  10




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Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Contractual interest coupon
    
    $
    2,324
    
    
    $
    2,500Amortization of the debt discount on the liability component
    
    
    3,562
    
    
    
    3,421Total
    
    $
    5,886
    
    
    $
    5,921Effective interest rate for the liability component for the period
    
    
    9.63
    %
    
    
    9.47
    %
  2010
    
    
    2011Estimated debt discount
amortization
expense
    
    $
    10,463
    
    
    $
    6,005
  11




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CONDENSED CONSOLIDATED BALANCE SHEETS
 October 2, 2009Effect ofAs Reported
    
    
    Change
    
    
    As Adjusted(in thousands)ASSETSTotal current assets:
    
    $
    199,359
    
    
    $
    
    
    
    $
    199,359Property, plant and equipment, net
    
    
    15,299
    
    
    
    
    
    
    
    15,299Goodwill
    
    
    109,908
    
    
    
    
    
    
    
    109,908Other assets
    
    
    26,284
    
    
    
    (649
    )
    
    
    25,635Total assets
    
    $
    350,850
    
    
    $
    (649
    )
    
    $
    350,201LIABILITIES AND SHAREHOLDERS DEFICITTotal current liabilities:
    
    $
    157,312
    
    
    $
    
    
    
    $
    157,312Long-term debt
    
    
    250,000
    
    
    
    (21,422
    )
    
    
    228,578Other liabilities
    
    
    62,089
    
    
    
    
    
    
    
    62,089Total liabilities
    
    
    469,401
    
    
    
    (21,422
    )
    
    
    447,979Commitments and contingenciesShareholders deficit:Preferred and junior preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    570
    
    
    
    
    
    
    
    570Additional paid-in capital
    
    
    4,767,874
    
    
    
    66,045
    
    
    
    4,833,919Accumulated 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
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Quarter Ended January 2, 2009Effect ofAs Reported
    
    
    Change
    
    
    As Adjusted(In thousands)Interest expense
    
    $
    5,323
    
    
    $
    3,303
    
    
    $
    8,626Loss from continuing operations before income taxes and
loss on equity method investments
    
    
    (4,402
    )
    
    
    (3,303
    )
    
    
    (7,705
    )Loss from continuing operations before loss on equity method
investments
    
    
    (4,870
    )
    
    
    (3,303
    )
    
    
    (8,173
    )Loss  from continuing operations
    
    
    (5,716
    )
    
    
    (3,303
    )
    
    
    (9,019
    )Net loss
    
    $
    (17,689
    )
    
    $
    (3,303
    )
    
    $
    (20,992
    )
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Quarter Ended January 2, 2009Effect ofAs Reported
    
    
    Change
    
    
    As Adjusted(In thousands)Cash flows from operating activitiesNet loss
    
    $
    (17,689
    )
    
    $
    (3,303
    )
    
    $
    (20,992
    )Debt discount amortization
    
    
    
    
    
    
    3,421
    
    
    
    3,421Other items, net
    
    
    600
    
    
    
    (117
    )
    
    
    483Net cash used in operating activities
    
    $
    (5,463
    )
    
    $
    0
    
    
    $
    (5,463
    )
 Derivative Financial Instruments
 Interest Rate Swaps
  Supplemental Cash Flow Information
 Net Income (loss) Per Share
  13




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Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Employee stock options
    
    
    6,103
    
    
    
    6,8724.00% convertible subordinated notes due March 2026
    
    
    4,723
    
    
    
    5,08110,826
    
    
    
    11,953
 Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Weighted average shares for basic net income (loss) per share
    
    
    60,023
    
    
    
    49,657Employee stock options and restricted stock units
    
    
    68
    
    
    
    Weighted average shares for diluted income (loss) per share
    
    
    60,091
    
    
    
    49,657
 Business Enterprise Segments
 Goodwill
  Fair Value Based on Quoted Market Price Analysis:
 Fair Value Based on Market Multiple Analysis:
 14




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Recently Adopted Accounting Pronouncements
     
    
    Level 1:Quoted prices in active markets for identical assets or liabilities.
 15




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##### Table of Contents




    
    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.
      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.
   16




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Recently Issued Accounting Pronouncements
   4. Fair Value of Certain Financial Assets and Liabilities
  17




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Level 1
    
    
    Level 2
    
    
    TotalAssets:Cash and cash equivalents
    
    $
    59,084
    
    
    $
    
    
    
    $
    59,084Mindspeed warrant
    
    
    
    
    
    
    9,338
    
    
    
    9,338Long-term restricted cash
    
    
    5,762
    
    
    
    
    
    
    
    5,762Total Assets
    
    $
    64,846
    
    
    $
    9,338
    
    
    $
    74,184
     5. Supplemental Financial Information
 Inventories
  January 1,
    
    
    October 2,2010
    
    
    2009Work-in-process
    
    $
    5,850
    
    
    $
    5,002Finished goods
    
    
    3,334
    
    
    
    4,214Total inventories, net
    
    $
    9,184
    
    
    $
    9,216
  Intangible Assets
  January 1, 2010
    
    
    October 2, 2009Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueProduct licenses
    
    
    2,400
    
    
    
    (729
    )
    
    
    1,671
    
    
    $
    2,400
    
    
    $
    (628
    )
    
    $
    1,772Other intangible assets
    
    
    6,830
    
    
    
    (3,340
    )
    
    
    3,490
    
    
    
    6,830
    
    
    
    (3,045
    )
    
    
    3,785$
    9,230
    
    
    $
    (4,069
    )
    
    $
    5,161
    
    
    $
    9,230
    
    
    $
    (3,673
    )
    
    $
    5,557
  18




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2010
    
    
    2011
    
    
    2012
    

    
    2013
    
    
    ThereafterAmortization expense
    
    $
    853
    
    
    $
    1,137
    
    
    $
    1,137
    
    
    $
    1,017
    
    
    $
    1,017
 Goodwill
  Goodwill at October 2, 2009
    
    $
    109,908Additions
    
    
    Other adjustments
    
    
    Goodwill at January 1, 2010
    
    $
    109,908
  Assets Held for Sale
  January 1,2010Land
    
    $
    1,662Land and leasehold improvements, net
    
    
    307Buildings, net
    
    
    5,312Machinery and equipment, net
    
    
    268Site development costs
    
    
    4,409$
    11,958
 Mindspeed Warrant
   19




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Short-Term Debt
     Long-Term Debt
  January 1,
    
    
    October 2,2010
    
    
    2009Floating rate senior secured notes due November 2010
    
    $
    
    
    
    $
    61,4004.00% convertible subordinated notes due March 2026,
net of debt discount of $16.5 million and $21.4 million, respectively (1)
    
    
    215,902
    
    
    
    228,578Total
    
    
    215,902
    
    
    
    289,978Less: current portion of long-term debt
    
    
    
    
    
    
    (61,400
    )Long-term debt
    
    $
    215,902
    
    
    $
    228,578
 
 (1)
    
    Amounts reflect the retrospective application of the provisions of new accounting
guidance for convertible debt which was adopted October 3, 2009. See Note 3 for additional
information about the impact of the new accounting guidance on the accounting for our
convertible debt. 20




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##### Table of Contents



Floating rate senior secured notes due November 2010
 4.00% convertible subordinated notes due March 2026
  Acquisitions
 6. Commitments and Contingencies
 Legal Matters
  Wi-Lan Litigation
 21




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##### Table of Contents



Guarantees and Indemnifications
   7. Stock-Based Award Plans
  Stock Options
   22




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##### Table of Contents



Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Stock option plans:Expected dividend yield
    
    $
    
    
    
    $
    Expected stock price volatility
    
    
    
    
    
    
    75
    %Risk free interest rate
    
    
    
    
    
    
    2.5
    %Average expected life (in years)
    
    
    
    
    
    
    5.25Stock purchase plans:Expected dividend yield
    
    $
    
    
    
    $
    Expected stock price volatility
    
    
    
    
    
    
    74
    %Risk free interest rate
    
    
    
    
    
    
    3.1
    %Average expected life (in years)
    
    
    
    
    
    
    0.50
   WeightedAverageExerciseShares
    
    
    PriceOutstanding, October 2, 2009
    
    
    4,210
    
    
    $
    23.20Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (582
    )
    
    
    18.72Outstanding, January 1, 2010
    
    
    3,628
    
    
    
    23.92Shares vested and expected to vest, January 1, 2010
    
    
    3,613
    
    
    
    23.63Exercisable, January 1, 2010
    
    
    3,314
    
    
    $
    25.13
   Restricted Stock Units
 23




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##### Table of Contents



WeightedAverageGrant DateShares
    
    
    Fair ValueOutstanding, October 2, 2009
    
    
    165
    
    
    $
    2.82Granted
    
    
    3,301
    
    
    
    2.79Vested
    
    
    (34
    )
    
    
    2.38Forfeited
    
    
    (15
    )
    
    
    2.79Outstanding, January 1, 2010
    
    
    3,417
    
    
    $
    2.79
  Employee Stock Purchase Plan
   24




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##### Table of Contents



8. Comprehensive Loss
  Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Net income (loss)
    
    $
    8,334
    
    
    $
    (20,992
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    393
    
    
    
    (1,095
    )Unrealized losses on marketable securities
    
    
    
    
    
    
    (14
    )Unrealized losses on foreign currency forward hedge contracts
    
    
    
    
    
    
    (153
    )Unrealized losses on interest rate swap contracts
    
    
    
    
    
    
    (2,184
    )Realized loss on impairment of marketable securities
    
    
    
    
    
    
    1,986Realized loss on interest rate swap contracts
    
    
    1,728
    
    
    
    Gains on settlement of foreign currency forward hedge contracts
    
    
    
    
    
    
    659Other comprehensive income (loss)
    
    
    2,121
    
    
    
    (801
    )Comprehensive income (loss)
    
    $
    10,455
    
    
    $
    (21,793
    )
  January 1,
    
    
    October 2,2010
    
    
    2009Foreign currency translation adjustments
    
    $
    (403
    )
    
    $
    (796
    )Unrealized losses on derivative instruments
    
    
    
    
    
    
    (1,728
    )Accumulated other comprehensive loss
    
    $
    (403
    )
    
    $
    (2,524
    )
 9. Income Taxes
  10. Gain on Sale of Intellectual Property
  11. Special Charges
  Restructuring Charges
 25




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Fiscal 2009 Restructuring Actions 
  WorkforceReductionsCharged to costs and expenses
    
    $
    4,893Cash payments
    
    
    (3,311
    )Restructuring balance, October 2, 2009
    
    
    1,582Charged to costs and expenses
    
    
    (243
    )Cash payments
    
    
    (805
    )Restructuring balance, January 1, 2010
    
    $
    534
 Fiscal 2008 Restructuring Actions
   26




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##### Table of Contents



Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalCharged to costs and expenses
    
    $
    6,254
    
    
    $
    1,762
    
    
    $
    8,016Cash payments
    
    
    (6,161
    )
    
    
    (731
    )
    
    
    (6,892
    )Restructuring balance, October 3, 2008
    
    
    93
    
    
    
    1,031
    
    
    
    1,124Charged to costs and expenses
    
    
    580
    
    
    
    36
    
    
    
    616Reclassification to other current liabilities and other liabilities
    
    
    
    
    
    
    (127
    )
    
    
    (127
    )Cash payments
    
    
    (673
    )
    
    
    (876
    )
    
    
    (1,549
    )Restructuring balance, October 2, 2009
    
    
    
    
    
    
    64
    
    
    
    64Charged to costs and expenses
    
    
    
    
    
    
    73
    
    
    
    73Cash payments
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Restructuring balance, January 1, 2010
    
    $
    
    
    
    $
    123
    
    
    $
    123
 Fiscal 2007 Restructuring Actions
    27




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##### Table of Contents



Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalCharged to costs and expenses
    
    $
    9,477
    
    
    $
    2,040
    
    
    $
    11,517Non-cash items
    
    
    
    
    
    
    4,868
    
    
    
    4,868Cash payments
    
    
    (5,841
    )
    
    
    (268
    )
    
    
    (6,109
    )Restructuring balance, September 28, 2007
    
    
    3,636
    
    
    
    6,640
    
    
    
    10,276Charged to costs and expenses
    
    
    11
    
    
    
    6,312
    
    
    
    6,323Non-cash items
    
    
    
    
    
    
    8,039
    
    
    
    8,039Cash payments
    
    
    (3,631
    )
    
    
    (4,309
    )
    
    
    (7,940
    )Restructuring balance, October 3, 2008
    
    
    16
    
    
    
    16,682
    
    
    
    16,698Charged to costs and expenses
    
    
    (1
    )
    
    
    16,130
    
    
    
    16,129Cash payments
    
    
    (15
    )
    
    
    (5,579
    )
    
    
    (5,594
    )Restructuring balance, October 2, 2009
    
    
    
    
    
    
    27,233
    
    
    
    27,233Charged to costs and expenses
    
    
    
    
    
    
    630
    
    
    
    630Cash payments
    
    
    
    
    
    
    (1,214
    )
    
    
    (1,214
    )Restructuring balance, January 1, 2010
    
    $
    
    
    
    $
    26,649
    
    
    $
    26,649
 Fiscal 2006 and 2005 Restructuring Actions
   28




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##### Table of Contents



Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, October 1, 2005
    
    $
    3,609
    
    
    $
    25,220
    
    
    $
    28,829Charged to costs and expenses
    
    
    1,852
    
    
    
    1,407
    
    
    
    3,259Reclassification from accrued compensation and benefits and other
    
    
    1,844
    
    
    
    55
    
    
    
    1,899Cash payments
    
    
    (5,893
    )
    
    
    (8,031
    )
    
    
    (13,924
    )Restructuring balance, September 29, 2006
    
    
    1,412
    
    
    
    18,651
    
    
    
    20,063Reclassification to other current liabilities and other liabilities
    
    
    
    
    
    
    (2,687
    )
    
    
    (2,687
    )Charged to costs and expenses
    
    
    55
    
    
    
    559
    
    
    
    614Cash payments
    
    
    (1,336
    )
    
    
    (4,007
    )
    
    
    (5,343
    )Restructuring balance, September 28, 2007
    
    
    131
    
    
    
    12,516
    
    
    
    12,647Reclassification from other current liabilities and other liabilities
    
    
    
    
    
    
    3,359
    
    
    
    3,359Charged to costs and expenses
    
    
    (130
    )
    
    
    285
    
    
    
    155Cash payments
    
    
    (1
    )
    
    
    (5,123
    )
    
    
    (5,124
    )Restructuring balance, October 3, 2008
    
    
    
    
    
    
    11,037
    
    
    
    11,037Charged to costs and expenses
    
    
    
    
    
    
    4,989
    
    
    
    4,989Cash payments
    
    
    
    
    
    
    (2,175
    )
    
    
    (2,175
    )Restructuring balance, October 2, 2009
    
    
    
    
    
    
    13,851
    
    
    
    13,851Charged to costs and expenses
    
    
    
    
    
    
    269
    
    
    
    269Cash payments
    
    
    
    
    
    
    (485
    )
    
    
    (485
    )Restructuring balance, January 1, 2010
    
    $
    
    
    
    $
    13,635
    
    
    $
    13,635
 12. Other (Income) Expense, net
  Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Investment and interest income
    
    $
    (55
    )
    
    $
    (857
    )Gain on sale of investments
    
    
    (4,113
    )
    
    
    Loss on repurchase of secured debt
    
    
    614
    
    
    
    Loss on exchange of convertible debt for common stock
    
    
    510
    
    
    
    Other-than-temporary impairment of marketable securities
    
    
    
    
    
    
    and cost based investments
    
    
    
    
    
    
    2,635(Increase) decrease in the fair value of derivative instruments
    
    
    (4,285
    )
    
    
    482Other
    
    
    125
    
    
    
    (333
    )Other (income) expense, net
    
    $
    (7,204
    )
    
    $
    1,927
   29




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##### Table of Contents



13. Related Party Transactions
 Mindspeed Technologies, Inc.
  Lease Agreement 
 14. Geographic Information
  Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009United States
    
    $
    2,738
    
    
    $
    2,227Other Americas
    
    
    1,256
    
    
    
    1,490Total Americas
    
    
    3,994
    
    
    
    3,717China
    
    
    35,750
    
    
    
    35,287Other Asia-Pacific
    
    
    21,055
    
    
    
    17,458Total Asia-Pacific
    
    
    56,805
    
    
    
    52,745Europe, Middle East and Africa
    
    
    1,014
    
    
    
    1,001$
    61,813
    
    
    $
    57,463
   January 1,
    
    
    October 2,2010
    
    
    2009United States
    
    $
    13,945
    
    
    $
    26,064India
    
    
    1,520
    
    
    
    1,971China
    
    
    1,845
    
    
    
    2,309Other Asia-Pacific
    
    
    686
    
    
    
    610Europe, Middle East and Africa
    
    
    6
    
    
    
    18$
    18,002
    
    
    $
    30,972
 30




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##### Table of Contents



15. Subsequent Events
    31




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   Critical Accounting Policies
  Sale of Property
  32




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##### Table of Contents



Sale of Broadband Access Products Business
  Sale of Broadband Media Processing Business
  Results of Operations
 Net Revenues
   Gross Margin
    33




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##### Table of Contents



Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009E&O reserves at beginning of period
    
    $
    6,392
    
    
    $
    12,579Additions
    
    
    228
    
    
    
    620Release upon sales of product
    
    
    (419
    )
    
    
    (665
    )Scrap
    
    
    (1,891
    )
    
    
    (1,713
    )Standards adjustments and other
    
    
    (13
    )
    
    
    (245
    )E&O reserves at end of period
    
    $
    4,297
    
    
    $
    10,576
    Research and Development
   34




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Selling, General and Administrative
   Amortization of Intangible Assets
   Gain on Sale of Intellectual Property
  Special Charges
   Interest Expense
  Other (income) expense, net
  35




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##### Table of Contents



Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Investment and interest income
    
    $
    (55
    )
    
    $
    (857
    )Gain on sale of investments
    
    
    (4,113
    )
    
    
    Loss on repurchase of secured debt
    
    
    614
    
    
    
    Loss on exchange of convertible debt for common stock
    
    
    510
    
    
    
    Other-than-temporary impairment of marketable securities and cost based investments
    
    
    
    
    
    
    2,635(Increase) decrease in the fair value of derivative instruments
    
    
    (4,285
    )
    
    
    482Other
    
    
    125
    
    
    
    (333
    )Other (income) expense, net
    
    $
    (7,204
    )
    
    $
    1,927
   Provision for Income Taxes
  Liquidity and Capital Resources
    36




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##### Table of Contents



Fiscal Quarter EndedJanuary 1,
    
    
    January 2,2010
    
    
    2009Net cash provided by (used in) operating activities
    
    $
    10,205
    
    
    $
    (5,463
    )Net cash provided by investing activities
    
    
    12,093
    
    
    
    18,714Net cash used in financing activities
    
    
    (88,599
    )
    
    
    (8,807
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (66,301
    )
    
    $
    4,444
  37




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##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
    Special Purpose Entities
   38




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##### Table of Contents



Recently Issued and Adopted Accounting Pronouncements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      39




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##### Table of Contents



Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    59,084
    
    
    $
    59,084Other equity securities
    
    
    3,336
    
    
    
    3,336Mindspeed warrant
    
    
    9,338
    
    
    
    9,338Long-term restricted cash
    
    
    5,762
    
    
    
    5,762Long-term debt: convertible subordinated notes
    
    
    215,902
    
    
    
    215,523
 Exchange Rate Risk
   
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Wi-Lan Litigation
 40




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##### Table of Contents



ITEM 1A. RISK FACTORS
    We face a risk that capital needed for our business and to repay our debt obligations will not
be available when we need it.
   There could be a negative effect on the price of our common stock if we issue equity securities to
raise capital or in connection with a restructuring of any or all of our 4.00% convertible
subordinated notes.
  We are a much smaller company than in the recent past and dependent on fewer products for our
success.
  41




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We are subject to the risks of doing business internationally.
  
    
    difficulty in obtaining distribution and support;
    
    local economic and political conditions;
    
    limitations on our ability under local laws to protect our intellectual property;
    
    currency exchange rate fluctuations;
    
    disruptions of commerce and capital or trading markets due to or related to
terrorist activity, armed conflict, or natural disasters;
    
    restrictive governmental actions, such as restrictions on the transfer or
repatriation of funds and trade protection measures, including export duties and
quotas and customs duties and tariffs;
    
    changes in legal or regulatory requirements;
    
    the laws and policies of the U.S. and other countries affecting trade, foreign
investment and loans, and import or export licensing requirements; and
    
    tax laws, including the cost of services provided and products sold between us
and our subsidiaries which are subject to review by taxing authorities.
    42




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We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns that may negatively impact our business, financial condition, cash flow and results of
operations.
  We are subject to intense competition.
   
    
    time-to-market;
    
    product quality, reliability and performance;
    
    level of integration;
    
    price and total system cost;
    
    compliance with industry standards;
 43




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
    
    design and engineering capabilities;
    
    strategic relationships with customers;
    
    customer support;
    
    new product innovation; and
    
    access to manufacturing capacity.
   We own or lease a significant amount of space in which we do not conduct operations and doing
so exposes us to the financial risks of default by our tenants and subtenants and expenses related
to carrying vacant property.
  Our revenues, cash flow from operations and results of operations have fluctuated in the past and
may fluctuate in the future, particularly given adverse domestic and global economic conditions.
  
    
    changes in end-user demand for the products manufactured and sold by our customers;
    
    the timing of receipt, reduction or cancellation of significant orders by customers;
    
    adverse economic conditions, including the unavailability or high cost of credit to
our customers;
 44




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
    
    the inability of our customers to forecast demand based on adverse economic conditions;
    
    seasonal customer demand;
    
    the gain or loss of significant customers;
    
    market acceptance of our products and our customers products;
    
    our ability to develop, introduce and market new products and technologies on a timely
basis;
    
    the timing and extent of product development costs;
    
    new product and technology introductions by competitors;
    
    changes in the mix of products we develop and sell;
    
    fluctuations in manufacturing yields;
    
    availability and cost of products from our suppliers;
    
    intellectual property disputes; and
    
    the effect of competitive pricing pressures, including decreases in average selling
prices of our products.
  We have historically incurred substantial GAAP losses and may incur additional future GAAP losses.
  Our ability to use our net operating losses (NOLs) and other tax attributes to offset future
taxable income could be limited by an ownership change and/or decisions by California and other
states to suspend the use of NOLs.
  45




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Our success depends on our ability to timely develop competitive new products and reduce
costs.
  
    
    anticipate customer and market requirements and changes in technology and industry
standards;
    
    accurately define new products;
    
    complete development of new products and bring our products to market on a timely basis;
    
    differentiate our products from offerings of our competitors;
    
    achieve overall market acceptance of our products; and
    
    coordinate product development efforts between and among our sites, particularly in
India and China, to manage the development of products at remote geographic locations.
   We have significant goodwill and intangible assets, and future impairment of our goodwill and
intangible assets could have a material negative impact on our financial condition and results of
operations.
   46




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The loss of a key customer could seriously impact our revenue levels and harm our business. In
addition, if we are unable to continue to sell existing and new products to our key customers in
significant quantities or to attract new significant customers, our future operating results could
be adversely affected.
   
    
    most of our customers can stop incorporating our products into their own
products with limited notice to us and suffer little or no penalty;
    
    our agreements with our customers typically do not require them to purchase a
minimum quantity of our products;
    
    our customers perceptions of our liquidity and viability may have a negative
impact on their decisions to incorporate our products into their own products;
    
    many of our customers have pre-existing or concurrent relationships with our
current or potential competitors that may affect the customers decisions to
purchase our products;
    
    our customers face intense competition from other manufacturers that do not use
our products;
    
    some of our customers offer or may offer products that compete with our products;
    
    some of our customers liquidity may be negatively affected by continued
uncertainty in global economic conditions; and
    
    our small size, our cost-savings efforts and any future liquidity constraints
may limit our ability to develop and deliver new products to customers.
   47




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We may not be able to keep abreast of the rapid technological changes in our markets.
  
    
    rapid technological developments;
    
    rapid changes in customer requirements;
    
    frequent new product introductions and enhancements;
    
    short product life cycles with declining prices over the life cycle of the products; and
    
    evolving industry standards.
  We may be subject to claims of infringement of third-party intellectual property rights or
demands that we license third-party technology, which could result in significant expense and loss
of our ability to use, make, sell, export or import our products or one or more components
comprising our products.
  
    
    pay substantial damages;
    
    cease the manufacture, use or sale of infringing products, processes or technologies;
    
    discontinue the use of infringing technology;
    
    expend significant resources to develop non-infringing technology, which we may not
be successful in developing; or
    
    license technology from the third party claiming infringement, which license may not
be available on commercially reasonable terms, or at all.
 48




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If OEMs of communications electronics products do not design our products into their equipment, we
will be unable to sell those products. Moreover, a design win from a customer does not guarantee
future sales to that customer.
  Because of the lengthy sales cycles of many of our products, we may incur significant expenses
before we generate any revenues related to those products.
  Uncertainties involving the ordering and shipment of our products could adversely affect our
business.
  We are dependent upon third parties for the manufacture, assembly and test of our products.
  49




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We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries, increased expenses and loss of design wins to our competitors.
  50




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If we are not successful in protecting our intellectual property rights, it may harm our
ability to compete.
  
    
    the steps we take to prevent misappropriation or infringement of our intellectual
property or the intellectual property of our customers will be successful;
    
    any existing or future patents will not be challenged, invalidated or circumvented; or
    
    any of the measures described above would provide meaningful protection.
  Our success depends, in part, on our ability to effect suitable investments, alliances,
acquisitions and where appropriate, divestitures and restructurings.
   
    
    large initial one-time write-offs of in-process research and development;
    
    the incurrence of substantial debt and assumption of unknown liabilities;
    
    the potential loss of key employees from the acquired company;
    
    amortization expenses related to intangible assets; and
    
    the diversion of managements attention from other business concerns.
  51




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We may not be able to attract and retain qualified management, technical and other personnel
necessary for the design, development and sale of our products. Our success could be negatively
affected if key personnel leave.
  Litigation could be costly and harmful to our business.
  We currently operate under tax holidays and favorable tax incentives in certain foreign
jurisdictions.
  The price of our common stock may fluctuate significantly.
  
    
    our operating and financial performance and prospects;
    
    our ability to repay or restructure our debt;
    
    the depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry in which we operate;
    
    investor perception of us as a going concern and of our ability to operate
successfully as a company with a smaller cash flow and with significant debt
obligations;
    
    the level of research coverage of our common stock;
    
    changes in earnings estimates or buy/sell recommendations by analysts;
 52




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
    
    general financial, domestic, international, economic and other market conditions;
    
    proposed acquisitions by us or our competitors;
    
    the hiring or departure of key personnel; and
    
    adverse judgments or settlements obligating us to pay damages.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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##### Table of Contents



Exhibit No.
    
    Description2.1
    
    Asset Purchase Agreement, dated as of April 21, 2009, by and between Conexant Systems, Inc. and
Ikanos Communications, Inc. (incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed on April 24, 2009).3.1
    
    Bylaws of the Company, as of December 18, 2009 (incorporated by reference to Exhibit 3.2 of the
Companys Current Report on Form 8-K filed on December 24, 2009).10.1
    
    Loan and Security Agreement, dated as of December 22, 2009, by and between Conexant CF, LLC and
Silicon Valley Bank (incorporated by reference to Exhibit 99.2 of the Companys Current Report on
Form 8-K filed on December 24, 2009).31.1
    
    Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(a) or
15d-15(a).31.2
    
    Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(a) or
15d-15(a).32
    
    Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to
18 U.S.C. Section 1350.
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##### Table of Contents



SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: February 8, 2010
    By
    /s/ JEAN HUJean HuChief Financial Officer, Treasurer and Senior Vice
President, Business Development

(principal financial officer) 55




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EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    Asset Purchase Agreement, dated as of April 21, 2009, by and between Conexant Systems, Inc. and
Ikanos Communications, Inc. (incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed on April 24, 2009).3.1
    
    Bylaws of the Company, as of December 18, 2009 (incorporated by reference to Exhibit 3.2 of the
Companys Current Report on Form 8-K filed on December 24, 2009).10.1
    
    Loan and Security Agreement, dated as of December 22, 2009, by and between Conexant CF, LLC and
Silicon Valley Bank (incorporated by reference to Exhibit 99.2 of the Companys Current Report on
Form 8-K filed on December 24, 2009).31.1
    
    Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(a) or
15d-15(a).31.2
    
    Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(a) or
15d-15(a).32
    
    Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to
18 U.S.C. Section 1350.
 56