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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 July 2, 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
    
    25-1799439(State of incorporation)
    
    (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(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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FORWARD-LOOKING STATEMENTS
  
    
    our expectations regarding the market share of our products, growth in the markets we serve and our market
opportunities;
    
    our 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 expectations regarding the declines in our legacy products;
    
    our plans and expectations regarding the transition of our semiconductor products to smaller line width geometries;
    
    our expectation that we will be able to sustain the recoverability of our goodwill, intangible and tangible long-term assets;
    
    our product development plans;
    
    our expectations regarding the sale of our real property in Newport Beach;
    
    our expectation that our largest customers will continue to account for a substantial portion of our revenue;
    
    our 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);
    
    our expectations, subject to the qualifications expressed, regarding the sufficiency of our existing sources of
liquidity, together with cash expected to be generated from operations, to fund our operations, research and development, anticipated
capital expenditures, and working capital for at least the next twelve months;
    
    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; and
    
    our expectations that we will be able to use our net operating losses and other tax attributes to offset future taxable
income.
  1




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##### 



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
INDEX
  
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements:Consolidated Balance Sheets  July 2, 2010 (unaudited) and October 2, 2009
    
    
    3Unaudited Consolidated Statements of Operations  Fiscal Quarter and Nine Fiscal
Months Ended July 2, 2010 and July 3, 2009
    
    
    4Unaudited Consolidated Statements of Cash Flows  Nine Fiscal Months Ended July
2, 2010 and July 3, 2009
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURE
    
    
    42EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value amount)
 July 2,
    
    
    October 2,2010
    
    
    2009 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,798
    
    
    $
    125,385Marketable securities
    
    
    23,345
    
    
    
    Restricted cash
    
    
    
    
    
    
    8,500Receivables, net of allowances of $419 and $453 at July 2, 2010 and October 2, 2009, respectively
    
    
    36,226
    
    
    
    30,110Inventories, net
    
    
    9,314
    
    
    
    9,216Other current assets
    
    
    21,651
    
    
    
    26,148Assets held for sale
    
    
    12,481
    
    
    
    Total current assets
    
    
    148,815
    
    
    
    199,359Property, plant and equipment, net of accumulated depreciation of $31,390 and $70,139
at July 2, 2010 and October 2, 2009, respectively
    
    
    6,397
    
    
    
    15,299Goodwill
    
    
    109,908
    
    
    
    109,908Other assets
    
    
    40,869
    
    
    
    25,635Total assets
    
    $
    305,989
    
    
    $
    350,201LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    61,400Short-term debt
    
    
    10,836
    
    
    
    28,653Accounts payable
    
    
    15,989
    
    
    
    24,553Accrued compensation and benefits
    
    
    6,575
    
    
    
    8,728Other current liabilities
    
    
    35,179
    
    
    
    33,978Total current liabilities
    
    
    68,579
    
    
    
    157,312Long-term debt
    
    
    173,462
    
    
    
    228,578Other liabilities
    
    
    60,451
    
    
    
    62,089Total liabilities
    
    
    302,492
    
    
    
    447,979Commitments and contingencies (Note 6)Shareholders equity (deficit):Preferred and junior preferred stock: 20,000 and 5,000 shares authorized, respectively
    
    
    
    
    
    
    Common stock, $0.01 par value: 200,000 shares authorized; 81,208 and 56,917
shares issued and outstanding at July 2, 2010 and October 2, 2009, respectively
    
    
    813
    
    
    
    570Additional paid-in capital
    
    
    4,917,855
    
    
    
    4,833,919Accumulated deficit
    
    
    (4,917,983
    )
    
    
    (4,929,743
    )Accumulated other comprehensive income (loss)
    
    
    2,812
    
    
    
    (2,524
    )Total shareholders equity (deficit)
    
    
    3,497
    
    
    
    (97,778
    )Total liabilities and shareholders equity
    
    $
    305,989
    
    
    $
    350,201
 
 (1)
    
    Amounts reflect the retrospective application of the accounting guidance
for convertible debt instruments adopted effective October 3, 2009 (See Note 3).  3




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009 (1)
    
    
    2010
    
    
    2009 (1)Net revenues
    
    $
    60,730
    
    
    $
    50,844
    
    
    $
    184,411
    
    
    $
    152,272Cost of goods sold
    
    
    23,645
    
    
    
    20,533
    
    
    
    71,936
    
    
    
    64,409Gross margin
    
    
    37,085
    
    
    
    30,311
    
    
    
    112,475
    
    
    
    87,863Operating expenses:Research and development
    
    
    14,569
    
    
    
    12,450
    
    
    
    41,914
    
    
    
    38,783Selling, general and administrative
    
    
    11,647
    
    
    
    14,813
    
    
    
    36,730
    
    
    
    49,739Amortization of intangible assets
    
    
    285
    
    
    
    690
    
    
    
    965
    
    
    
    2,547Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,858
    )Special charges
    
    
    723
    
    
    
    1,060
    
    
    
    859
    
    
    
    13,653Total operating expenses
    
    
    27,224
    
    
    
    29,013
    
    
    
    80,468
    
    
    
    91,864Operating income (loss)
    
    
    9,861
    
    
    
    1,298
    
    
    
    32,007
    
    
    
    (4,001
    )Interest expense
    
    
    7,159
    
    
    
    8,449
    
    
    
    24,437
    
    
    
    25,708Other expense (income), net
    
    
    9,248
    
    
    
    (3,567
    )
    
    
    (5,711
    )
    
    
    (3,455
    )(Loss) income from continuing operations before income
taxes and (loss) income on equity method investments
    
    
    (6,546
    )
    
    
    (3,584
    )
    
    
    13,281
    
    
    
    (26,254
    )Income tax provision
    
    
    322
    
    
    
    176
    
    
    
    423
    
    
    
    819(Loss) income from continuing operations before loss on equity method
investments
    
    
    (6,868
    )
    
    
    (3,760
    )
    
    
    12,858
    
    
    
    (27,073
    )Loss on equity method investments
    
    
    (130
    )
    
    
    (485
    )
    
    
    (375
    )
    
    
    (2,166
    )(Loss) income from continuing operations
    
    
    (6,998
    )
    
    
    (4,245
    )
    
    
    12,483
    
    
    
    (29,239
    )(Loss) income from discontinued operations, net of tax
    
    
    (455
    )
    
    
    3,557
    
    
    
    (723
    )
    
    
    (9,554
    )Net (loss) income
    
    $
    (7,453
    )
    
    $
    (688
    )
    
    $
    11,760
    
    
    $
    (38,793
    )(Loss) income per share from continuing operations  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.08
    )
    
    $
    0.18
    
    
    $
    (0.59
    )(Loss) income per share from discontinued operations  basic and diluted
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.19
    )Net (loss) income per share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    0.17
    
    
    $
    (0.78
    )Shares used in basic per-share computations
    
    
    81,200
    
    
    
    49,867
    
    
    
    70,120
    
    
    
    49,760Shares used in diluted per-share computations
    
    
    81,200
    
    
    
    49,867
    
    
    
    70,964
    
    
    
    49,760
 
 (1)
    
    Amounts reflect the retrospective application of the accounting guidance
for convertible debt instruments adopted effective October 3, 2009 (See Note
3).  4




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Fiscal Months EndedJuly 2,
    
    
    July 3,2010
    
    
    2009 (1)Operating activities:Net income (loss)
    
    $
    11,760
    
    
    $
    (38,793
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    2,646
    
    
    
    6,595Amortization of intangible assets
    
    
    965
    
    
    
    6,967Reversal of provision for bad debts, net
    
    
    (34
    )
    
    
    (225
    )Charges for inventory provisions, net
    
    
    83
    
    
    
    46Amortization of debt discount
    
    
    7,785
    
    
    
    10,426Deferred income taxes
    
    
    54
    
    
    
    (94
    )Stock-based compensation
    
    
    5,025
    
    
    
    5,359Increase in fair value of derivative instruments
    
    
    (11,353
    )
    
    
    (1,256
    )Losses on equity method investments
    
    
    1,229
    
    
    
    3,046Other-than-temporary impairment of marketable securities
    
    
    
    
    
    
    2,635Other-than-temporary impairment of cost method investments
    
    
    
    
    
    
    135Loss on termination of swap
    
    
    1,728
    
    
    
    Loss on extinguishment of debt
    
    
    18,581
    
    
    
    Net gain on sale of marketable securities
    
    
    (12,911
    )
    
    
    (1,856
    )Gain on resolution of pre-acquisition contingency
    
    
    
    
    
    
    (1,054
    )Gain on sale of intellectual property
    
    
    
    
    
    
    (12,858
    )Other items, net
    
    
    (1,386
    )
    
    
    1,422Changes in assets and liabilities:Receivables
    
    
    (6,082
    )
    
    
    8,634Inventories
    
    
    (181
    )
    
    
    18,009Accounts payable
    
    
    (9,405
    )
    
    
    (7,808
    )Accrued expenses and other current liabilities
    
    
    (327
    )
    
    
    (15,435
    )Other, net
    
    
    (1,896
    )
    
    
    16,787Net cash provided by operating activities
    
    
    6,280
    
    
    
    682Investing activities:Purchases of property, plant and equipment
    
    
    (836
    )
    
    
    (555
    )Proceeds from sale of property, plant and equipment
    
    
    741
    
    
    
    Proceeds from resolution of pre-acquisition contingency
    
    
    
    
    
    
    2,186Payments for acquisitions
    
    
    (625
    )
    
    
    (3,578
    )Proceeds from sales of marketable securities
    
    
    88,634
    
    
    
    2,310Purchases of marketable securities
    
    
    (95,334
    )
    
    
    Release of restricted cash
    
    
    8,500
    
    
    
    12,570Proceeds from sale of intellectual property, net of expenses of $132
    
    
    
    
    
    
    14,548Net cash provided by investing activities
    
    
    1,080
    
    
    
    27,481Financing activities:Net repayments of short-term debt, including debt costs of $483 and $901
    
    
    (29,136
    )
    
    
    (10,279
    )Extinguishment of debt, including costs of $3,445
    
    
    (288,747
    )
    
    
    Proceeds from common stock offerings, net of expenses of $4,881 and $0
    
    
    62,510
    
    
    
    28Proceeds from issuance of senior secured notes, net of expenses of $4,918
    
    
    168,442
    
    
    
    Proceeds from issuance of common stock under employee stock plans
    
    
    19
    
    
    
    Repurchase of shares upon exercise of employee stock awards
    
    
    (35
    )
    
    
    Interest rate swap security deposit
    
    
    
    
    
    
    (437
    )Repayment of shareholder note receivable
    
    
    
    
    
    
    36Net cash used in financing activities
    
    
    (86,947
    )
    
    
    (10,652
    )Net (decrease) increase in cash and cash equivalents
    
    
    (79,587
    )
    
    
    17,511Cash and cash equivalents at beginning of period
    
    
    125,385
    
    
    
    105,883Cash and cash equivalents at end of period
    
    $
    45,798
    
    
    $
    123,394
 
 (1)
    
    Amounts reflect the retrospective application of the accounting guidance
for convertible debt instruments adopted effective October 3, 2009 (See Note 3).  5




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 Notes to Unaudited Consolidated Financial Statements
 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
 Marketable Securities
  Restricted Cash
  Inventories
 7




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Assets Held for Sale
 Accounting for Convertible Debt
    July 2,
    
    
    October 2,2010
    
    
    2009Principal of the liability component of 4.00% convertible
subordinated notes
    
    $
    11,218
    
    
    $
    250,000Unamortized debt discount
    
    
    (382
    )
    
    
    (21,422
    )Net carrying amount of liability component of 4.00%
convertible subordinated notes
    
    $
    10,836
    
    
    $
    228,578Net carrying amount of equity component of 4.00% convertible
subordinated notes (net of $1,742 issuance costs)
    
    $
    66,045
    
    
    $
    66,045
  Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009
    
    
    2010
    
    
    2009Contractual interest coupon
    
    $
    514
    
    
    $
    2,500
    
    
    $
    5,271
    
    
    $
    7,500Amortization of the debt discount on the liability component
    
    
    725
    
    
    
    3,531
    
    
    
    7,683
    
    
    
    10,426Total
    
    $
    1,239
    
    
    $
    6,031
    
    
    $
    12,954
    
    
    $
    17,926Effective interest rate for the liability component for the period
    
    
    9.63
    %
    
    
    9.65
    %
    
    
    9.89
    %
    
    
    9.56
    %
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FY 2010
    
    FY 2011Estimated debt discount amortization expense
    
    $
    142
    
    
    $
    240
  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 July 3, 2009
    
    
    Nine Fiscal Months Ended July 3, 2009As
    
    
    Effect of
    
    
    As
    
    
    As
    
    
    Effect of
    
    
    AsReported
    
    
    Change
    
    
    Adjusted
    
    
    Reported
    
    
    Change
    
    
    AdjustedInterest expense
    
    $
    5,035
    
    
    $
    3,414
    
    
    $
    8,449
    
    
    $
    15,634
    
    
    $
    10,074
    
    
    $
    25,708Loss from continuing operations before income taxes and (loss) gain
on equity method investments
    
    
    (170
    )
    
    
    (3,414
    )
    
    
    (3,584
    )
    
    
    (16,180
    )
    
    
    (10,074
    )
    
    
    (26,254
    )Loss from continuing operations before (loss) gain on equity method
investments
    
    
    (346
    )
    
    
    (3,414
    )
    
    
    (3,760
    )
    
    
    (16,999
    )
    
    
    (10,074
    )
    
    
    (27,073
    )(Loss) income from continuing operations
    
    
    (831
    )
    
    
    (3,414
    )
    
    
    (4,245
    )
    
    
    (19,165
    )
    
    
    (10,074
    )
    
    
    (29,239
    )Net loss
    
    $
    2,726
    
    
    $
    (3,414
    )
    
    $
    (688
    )
    
    $
    (28,719
    )
    
    $
    (10,074
    )
    
    $
    (38,793
    )
 9




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Fiscal Months Ended July 3, 2009As Reported
    
    
    Effect of Change
    
    
    As AdjustedOperating activitiesNet loss
    
    $
    (28,719
    )
    
    $
    (10,074
    )
    
    $
    (38,793
    )Debt discount amortization
    
    $
    
    
    
    $
    10,426
    
    
    $
    10,426Other items, net
    
    $
    1,773
    
    
    $
    (352
    )
    
    $
    1,421Net cash provided by operating activities
    
    $
    682
    
    
    $
    (0
    )
    
    $
    682
 Derivative Financial Instruments
 Supplemental Cash Flow Information
 Net (Loss) income Per Share
  Fiscal Quarter Ended
    
    Nine Fiscal Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2010
    
    2009
    
    2010
    
    2009Employee stock options
    
    
    2,789
    
    
    
    5,054
    
    
    
    3,301
    
    
    
    5,9054.00% convertible subordinated notes due March 2026
    
    
    1,046
    
    
    
    5,081
    
    
    
    3,550
    
    
    
    5,0813,835
    
    
    
    10,135
    
    
    
    6,851
    
    
    
    10,986
  Fiscal Quarter Ended
    
    Nine Fiscal Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2010
    
    2009
    
    2010
    
    2009Weighted average shares for basic net (loss) income per share
    
    
    81,200
    
    
    
    49,867
    
    
    
    70,120
    
    
    
    49,760Employee stock options and restricted stock units
    
    
    
    
    
    
    
    
    
    
    844
    
    
    
    Weighted average shares for diluted (loss) income per share
    
    
    81,200
    
    
    
    49,867
    
    
    
    70,964
    
    
    
    49,760
 Acquisitions
 Goodwill
 Recently Adopted Accounting Pronouncements
  10




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##### Table of Contents



Recently Issued Accounting Pronouncements
   4. Fair Value of Certain Financial Assets and Liabilities
  Level 1
    
    
    Level 2
    
    
    TotalAssets:Cash and cash equivalents
    
    $
    45,798
    
    
    $
    
    
    
    $
    45,798Marketable securities
    
    
    3,266
    
    
    
    20,079
    
    
    
    23,345Mindspeed warrant
    
    
    
    
    
    
    16,407
    
    
    
    16,407Long-term restricted cash
    
    
    5,899
    
    
    
    
    
    
    
    5,899Total Assets
    
    $
    54,963
    
    
    $
    36,486
    
    
    $
    91,449
     5. Supplemental Financial Information
 Inventories
  July 2,
    
    
    October 2,2010
    
    
    2009Work-in-process
    
    $
    5,980
    
    
    $
    5,002Finished goods
    
    
    3,334
    
    
    
    4,214Total inventories, net
    
    $
    9,314
    
    
    $
    9,216
 11




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##### Table of Contents



Intangible Assets
  July 2, 2010
    
    
    October 2, 2009Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueProduct licenses
    
    
    2,400
    
    
    
    (912
    )
    
    
    1,488
    
    
    $
    2,400
    
    
    $
    (628
    )
    
    $
    1,772Other intangible assets
    
    
    6,830
    
    
    
    (3,726
    )
    
    
    3,104
    
    
    
    6,830
    
    
    
    (3,045
    )
    
    
    3,785$
    9,230
    
    
    $
    (4,638
    )
    
    $
    4,592
    
    
    $
    9,230
    
    
    $
    (3,673
    )
    
    $
    5,557
  2010
    
    2011
    
    2012
    
    2013
    
    ThereafterAmortization expense
    
    $
    284
    
    
    $
    1,137
    
    
    $
    1,137
    
    
    $
    1,017
    
    
    $
    1,017
 Assets Held for Sale
  July 2,2010Land
    
    $
    1,662Land and leasehold improvements, net
    
    
    307Buildings, net
    
    
    5,312Machinery and equipment, net
    
    
    268Site development costs
    
    
    4,932$
    12,481
  Mindspeed Warrant
   12




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##### Table of Contents



Debt
  July 2,
    
    
    October 2,2010
    
    
    20094.00% convertible subordinated notes due March 2026, net of debt discount of $0.4 million (1)
    
    $
    10,836
    
    
    $
    Accounts receivable financing facility
    
    
    
    
    
    
    28,653Current portion of long-term debt
    
    
    
    
    
    
    61,400Short-term debt
    
    $
    10,836
    
    
    $
    90,053
 July 2,
    
    
    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 $21.4 million (1)
    
    
    
    
    
    
    228,57811.25% senior secured notes due March 2015, net of discount of $1,538
    
    
    173,462
    
    
    
    Total
    
    
    173,462
    
    
    
    289,978Less: current portion of long-term debt
    
    
    
    
    
    
    (61,400
    )Long-term debt
    
    $
    173,462
    
    
    $
    228,578
 
 (1)
    
    Amounts reflect the retrospective application of the accounting
guidance for convertible debt instruments adopted effective
October 3, 2009 (See Note 3). 11.25% senior secured notes due 2015
 Floating rate senior secured notes due November 2010
 13




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##### Table of Contents



4.00% convertible subordinated notes due March 2026
  Accounts
Receivable Financing Facility
    6. Commitments and Contingencies
 Legal Matters
  14




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##### Table of Contents



Guarantees and Indemnifications
   7. Stock-Based Award Plans
  Stock Options
   Weighted AverageShares
    
    Exercise PriceOutstanding, October 2, 2009
    
    
    4,210
    
    
    $
    23.20Granted
    
    
    
    
    
    
    Exercised
    
    
    (30
    )
    
    
    0.59Forfeited
    
    
    (1,836
    )
    
    
    25.41Outstanding, July 2, 2010
    
    
    2,344
    
    
    
    21.76Shares vested and expected to vest, July 2, 2010
    
    
    2,342
    
    
    
    21.77Exercisable, July 2, 2010
    
    
    2,257
    
    
    $
    22.33
   15




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##### Table of Contents



Restricted Stock Units
   WeightedAverageGrant DateShares
    
    Fair ValueOutstanding, October 2, 2009
    
    
    165
    
    
    $
    2.82Granted
    
    
    4,015
    
    
    
    2.89Vested
    
    
    (66
    )
    
    
    3.54Forfeited
    
    
    (110
    )
    
    
    2.79Outstanding, July 2, 2010
    
    
    4,004
    
    
    $
    2.88
  Employee Stock Purchase Plan
   16




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##### Table of Contents



8. Comprehensive (Loss) Income
  Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009
    
    
    2010
    
    
    2009Net (loss) income
    
    $
    (7,453
    )
    
    $
    (688
    )
    
    $
    11,760
    
    
    $
    (38,793
    )Other comprehensive (loss) income:Foreign currency translation adjustments
    
    
    (374
    )
    
    
    525
    
    
    
    446
    
    
    
    (1,230
    )Change in unrealized (losses) gains on marketable securities
    
    
    (741
    )
    
    
    
    
    
    
    9,728
    
    
    
    650Unrealized losses on foreign currency forward hedge contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153
    )Unrealized losses on interest rate swap contracts
    
    
    
    
    
    
    (211
    )
    
    
    
    
    
    
    (2,803
    )Realized loss on impairment of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,986Sale of marketable securities
    
    
    (6,566
    )
    
    
    (702
    )
    
    
    (6,566
    )
    
    
    (702
    )Realized loss on interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    1,728
    
    
    
    Gains on settlement of foreign currency forward hedge contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    659Other comprehensive (loss) income
    
    
    (7,681
    )
    
    
    (388
    )
    
    
    5,336
    
    
    
    (1,593
    )Comprehensive (loss) income
    
    $
    (15,134
    )
    
    $
    (1,076
    )
    
    $
    17,096
    
    
    $
    (40,386
    )
  July 2,
    
    
    October 2,2010
    
    
    2009Foreign currency translation adjustments
    
    $
    (350
    )
    
    $
    (796
    )Unrealized gains on marketable securities
    
    $
    3,162
    
    
    $
    Unrealized losses on derivative instruments
    
    
    
    
    
    
    (1,728
    )Accumulated other comprehensive income (loss)
    
    $
    2,812
    
    
    $
    (2,524
    )
 9. Income Taxes
  10. Gain on Sale of Intellectual Property
  11. Special Charges
  Restructuring Charges
   17




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Fiscal 2009 Restructuring Actions  .
 Fiscal 2008 Restructuring Actions  Fiscal 2007
Restructuring Actions
   Facilityand OtherRestructuring balance, October 2, 2009
    
    $
    27,233Charged to costs and expenses
    
    
    1,069Cash payments
    
    
    (4,941
    )Restructuring balance, July 2, 2010
    
    $
    23,361
 Fiscal 2006 and 2005 Restructuring Actions
   Facilityand OtherRestructuring balance, October 2, 2009
    
    $
    13,851Charged to costs and expenses
    
    
    553Cash payments
    
    
    (1,484
    )Restructuring balance, July 2, 2010
    
    $
    12,920
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##### Table of Contents



12. Other Expense (Income), net
  Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009
    
    
    2010
    
    
    2009Investment and interest income
    
    $
    (137
    )
    
    $
    (281
    )
    
    $
    (257
    )
    
    $
    (1,589
    )Gain on sale of investments
    
    
    (5,177
    )
    
    
    (1,803
    )
    
    
    (12,911
    )
    
    
    (1,856
    )Loss on extinguishment of debt
    
    
    7,976
    
    
    
    
    
    
    
    18,581
    
    
    
    Other-than-temporary impairment of marketable securities
and cost based investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,770Decrease (increase) in the fair value of derivative instruments
    
    
    6,848
    
    
    
    (1,166
    )
    
    
    (11,353
    )
    
    
    (1,762
    )Other
    
    
    (262
    )
    
    
    (317
    )
    
    
    229
    
    
    
    (1,018
    )Other expense (income), net
    
    $
    9,248
    
    
    $
    (3,567
    )
    
    $
    (5,711
    )
    
    $
    (3,455
    )
   13. Related Party Transactions
 Mindspeed Technologies, Inc.
  Lease Agreement 
 19




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##### Table of Contents



14. Geographic Information
  Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    $
    5,458
    
    
    $
    715
    
    
    $
    11,299
    
    
    $
    4,391Other Americas
    
    
    1,033
    
    
    
    536
    
    
    
    3,418
    
    
    
    2,682Total Americas
    
    
    6,491
    
    
    
    1,251
    
    
    
    14,717
    
    
    
    7,073China
    
    
    37,326
    
    
    
    33,522
    
    
    
    108,537
    
    
    
    97,360Other Asia-Pacific
    
    
    16,249
    
    
    
    15,467
    
    
    
    58,794
    
    
    
    45,483Total Asia-Pacific
    
    
    53,575
    
    
    
    48,989
    
    
    
    167,331
    
    
    
    142,843Europe, Middle East and Africa
    
    
    664
    
    
    
    604
    
    
    
    2,363
    
    
    
    2,356$
    60,730
    
    
    $
    50,844
    
    
    $
    184,411
    
    
    $
    152,272
   July 2,
    
    
    October 2,2010
    
    
    2009United States
    
    $
    23,093
    
    
    $
    26,064India
    
    
    1,074
    
    
    
    1,971China
    
    
    856
    
    
    
    2,309Other Asia-Pacific
    
    
    1,241
    
    
    
    610Europe, Middle East and Africa
    
    
    3
    
    
    
    18$
    26,267
    
    
    $
    30,972
  15. Subsequent Events
  20




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   Critical Accounting Policies
  Sale of Property
  21




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##### Table of Contents



Sale of Broadband Access Products Business
  Sale of Broadband Media Processing Business
  Recent Financing Activities
       Results of Operations
 Net Revenues
     22




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##### Table of Contents



Gross Margin
    Research and Development
    Selling, General and Administrative
    Amortization of Intangible Assets
    23




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Gain on Sale of Intellectual Property
  Special Charges
   Interest Expense
   Other expense (income), net
  Fiscal Quarter Ended
    
    
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2010
    
    
    2009
    
    
    2010
    
    
    2009Investment and interest income
    
    $
    (137
    )
    
    $
    (281
    )
    
    $
    (257
    )
    
    $
    (1,589
    )Gain on sale of investments
    
    
    (5,177
    )
    
    
    (1,803
    )
    
    
    (12,911
    )
    
    
    (1,856
    )Loss on extinguishment of debt
    
    
    7,976
    
    
    
    
    
    
    
    18,581
    
    
    
    Other-than-temporary impairment of marketable securities
and cost based investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,770Decrease (increase) in the fair value of derivative instruments
    
    
    6,848
    
    
    
    (1,166
    )
    
    
    (11,353
    )
    
    
    (1,762
    )Other
    
    
    (262
    )
    
    
    (317
    )
    
    
    229
    
    
    
    (1,018
    )Other expense (income), net
    
    $
    9,248
    
    
    $
    (3,567
    )
    
    $
    (5,711
    )
    
    $
    (3,455
    )
  24




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Provision for Income Taxes
  Liquidity and Capital Resources
    Nine Fiscal Months EndedJuly 2,
    
    
    July 3,2010
    
    
    2009Net cash provided by operating activities
    
    $
    6,280
    
    
    $
    682Net cash provided by investing activities
    
    
    1,080
    
    
    
    27,481Net cash used in financing activities
    
    
    (86,947
    )
    
    
    (10,652
    )Net (decrease) increase in cash and cash equivalents
    
    
    (79,587
    )
    
    
    17,511Cash and cash equivalents at the beginning of period
    
    
    125,385
    
    
    
    105,883Cash and cash equivalents at the ending of period
    
    $
    45,798
    
    
    $
    123,394
 Operating Activities
  Investing Activities
  Financing Activities
  25




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Contractual Obligations
  Off-Balance Sheet Arrangements
   26




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Special Purpose Entity
      Recently Issued and Adopted Accounting Pronouncements
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    27




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##### Table of Contents



Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    45,798
    
    
    $
    45,798Marketable securities
    
    
    23,345
    
    
    
    23,345Mindspeed warrant
    
    
    16,407
    
    
    
    16,407Long-term restricted cash
    
    
    5,899
    
    
    
    5,899Short-term debt: convertible subordinated notes
    
    
    11,218
    
    
    
    11,190Long-term debt: senior secured notes
    
    
    175,000
    
    
    
    175,875
 Exchange Rate Risk
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 None
 
 ITEM 1A.
    
    RISK FACTORS
   We are a much smaller company than in the recent past and dependent on fewer products for our
success.
  28




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##### Table of Contents



Our success depends on our ability to timely develop competitive new products to offset
declines in our legacy products, increase market share, 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.
  The average selling prices of our established legacy products in our markets have historically
decreased rapidly and will likely do so in the future, which could harm our revenue and gross
profits.
  We are subject to intense competition.
  29




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##### Table of Contents




    
    time-to-market;
    
    product quality, reliability and performance;
    
    level of integration;
    
    price and total system cost;
    
    compliance with industry standards;
    
    design and engineering capabilities;
    
    strategic relationships with customers;
    
    customer support;
    
    new product innovation; and
    
    access to manufacturing capacity.
   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.
  30




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Since we have limited visibility as to the volume of sales of our products by our customers and
inventory levels of our products held by our customers, our ability to forecast accurately future
demand for and sales of our products is limited.
  Our products typically have lengthy sales cycles. A customer may decide to cancel or change its
product plans, which could cause us to lose anticipated sales and we may incur significant expenses
before we generate any revenues
  We will continue to expend substantial resources developing products for new applications or
markets and may never achieve the sales volume that we anticipate for these products, which may
limit our future growth and harm our results of operations.
  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. In addition, if a second source supplier becomes available to a key
customer for whom we are the sole supplier, our revenue from that key customer could be adversely
affected.
   31




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
    
    most of our customers can stop incorporating our products into their own products
with limited notice to us and suffer little or no penalty;
    
    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.
   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;
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
    
    evolving industry standards; and
    
    constant 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.
  If OEMs of electronics products do not design our products into their equipment, we will be unable
to sell those products. Moreover, a design win from a customer does not guarantee future sales to
that customer.
  Our operating and financial flexibility is limited by the terms of the agreement governing our
accounts receivable financing facility and the terms of the indenture governing our senior secured
notes due in 2015.
  We are subject to the risks of doing business internationally.
  33




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
    
    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;
    
    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.
    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;
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
    
    amortization expenses related to intangible assets; and
    
    the diversion of managements attention from other business concerns.
   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.
   35




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##### Table of Contents



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.
   36




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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.
 The price of our common stock may fluctuate significantly, which may make it difficult for you to
resell your common stock when you want or at prices you find attractive.
  
    
    our operating and financial performance and prospects;
    
    the depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry in which we operate;
    
    the level of research coverage of our common stock;
    
    changes in earnings estimates or buy/sell recommendations by analysts;
    
    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.
  37




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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.
  We have historically incurred substantial losses and may incur additional future losses.
  The value of our warrant to purchase 6.1 million shares of Mindspeed common stock is subject to
material increases and decreases in value based on factors beyond our control.
   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.
  38




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Litigation could be costly and harmful to our business.
  If any of the tax holidays or favorable tax incentives under which we operate in certain foreign
jurisdictions are terminated, our results of operations may be materially and adversely affected.
  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.
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In the event of a change of control, we may not be able to repurchase our outstanding debt as
required by the applicable indenture, which would result in a default under the indenture.
  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.
   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;
    
    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;
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
    
    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.
  
 ITEM 5. OTHER INFORMATION
 None
 
 ITEM 6. EXHIBITS
 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.
 41




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SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: August 2, 2010
    By
    /s/ JEAN HUJean HuChief Financial Officer, Treasurer and
Senior Vice President, Business Development
(principal financial officer) 42




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ExhibitNo.
    
    Description31.1
    
    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.
 43