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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004* 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.)
 100 Schulz Drive
Red Bank, New Jersey 07701
(Address of principal executive offices) (Zip code) (732) 345-7500
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes x No o Number of shares of registrants common stock outstanding as of July 30, 2004
was 468,764,918.   *        
For presentation purposes of this Form 10-Q, references made to the June
30, 2004 period relate to the actual fiscal third quarter ended
July 2, 2004.




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CAUTIONARY STATEMENT This Quarterly Report contains statements relating to future results of
Conexant Systems, Inc. (including certain projections and business trends) that
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created by those
sections. Our actual results may differ materially from those projected as a
result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: the cyclical nature of the semiconductor
industry and the markets addressed by our products and our customers products;
demand for and market acceptance of new and existing products; successful
development of new products; the timing of new product introductions; the
availability of manufacturing capacity; pricing pressures and other competitive
factors; changes in product mix; product obsolescence; our ability to develop
and implement new technologies and to obtain protection of the related
intellectual property; the uncertainties of litigation; the risk that the
businesses of Conexant and GlobespanVirata will not be integrated successfully,
as well as other risks and uncertainties, including those set forth herein and
those detailed from time to time in our filings with the Securities and
Exchange Commission. These forward-looking statements are made only as of the
date hereof, and we undertake no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise. 2




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CONEXANT SYSTEMS, INC. INDEX PAGEPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Consolidated Condensed Balance Sheets  June 30, 2004 and September 30, 2003
    
    
    4Consolidated Condensed Statements of Operations  Three and Nine Months Ended June 30,
2004 and 2003
    
    
    5Consolidated Condensed Statements of Cash Flows  Nine Months Ended June 30, 2004 and
2003
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    45PART II. OTHER INFORMATIONItem 2.
    
    Changes in Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    46Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    46Signature
    
    
    47EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  3




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS CONEXANT SYSTEMS, INC. 
 Consolidated Condensed Balance Sheets
 (unaudited, in thousands, except per share amounts)
 June 30,
    
    September 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    78,549
    
    
    $
    76,186Short-term investments
    
    
    158,293
    
    
    
    99,283Receivables, net of allowance of $1,258 and $1,547 at
June 30, 2004 and September 30, 2003, respectively
    
    
    213,904
    
    
    
    79,557Inventories
    
    
    145,551
    
    
    
    59,548Deferred income taxes
    
    
    13,631
    
    
    
    13,600Mindspeed warrant-current portion
    
    
    11,700
    
    
    
    Other current assets
    
    
    31,828
    
    
    
    26,524Total current assets
    
    
    653,456
    
    
    
    354,698Property, plant and equipment, net
    
    
    84,251
    
    
    
    36,310Goodwill
    
    
    705,689
    
    
    
    56,865Intangible assets, net
    
    
    143,393
    
    
    
    12,506Deferred income taxes
    
    
    242,445
    
    
    
    241,260Mindspeed warrant
    
    
    69,151
    
    
    
    119,230Marketable securities
    
    
    188,045
    
    
    
    Other assets
    
    
    133,083
    
    
    
    110,838Total assets
    
    $
    2,219,513
    
    
    $
    931,707LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    128,211
    
    
    $
    55,909Accrued compensation and benefits
    
    
    49,584
    
    
    
    28,865Restructuring and reorganization liabilities
    
    
    20,798
    
    
    
    12,091Other current liabilities
    
    
    68,111
    
    
    
    24,816Total current liabilities
    
    
    266,704
    
    
    
    121,681Convertible subordinated notes
    
    
    711,825
    
    
    
    581,825Other liabilities
    
    
    74,436
    
    
    
    61,435Total liabilities
    
    
    1,052,965
    
    
    
    764,941Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares
authorized; 466,315 and 276,134 shares issued,
and 465,665 shares and 276,134 shares outstanding
at June 30, 2004 and September 30, 2003,
respectively
    
    
    4,663
    
    
    
    2,761Treasury stock: 650 shares at cost
    
    
    (4,778
    )
    
    
    Additional paid-in capital
    
    
    4,643,743
    
    
    
    3,506,070Accumulated deficit
    
    
    (3,506,685
    )
    
    
    (3,332,527
    )Accumulated other comprehensive income (loss)
    
    
    58,723
    
    
    
    (9,496
    )Notes receivable from stock sales
    
    
    (2,292
    )
    
    
    Unearned compensation
    
    
    (26,826
    )
    
    
    (42
    )Total shareholders equity
    
    
    1,166,548
    
    
    
    166,766Total liabilities and shareholders equity
    
    $
    2,219,513
    
    
    $
    931,707
 See accompanying notes to consolidated condensed financial statements. 4




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CONEXANT SYSTEMS, INC. 
 Consolidated Condensed Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    267,617
    
    
    $
    150,950
    
    
    $
    688,731
    
    
    $
    435,274Cost of goods sold (including $812 for the nine
months ended June 30, 2004 related to restructuring
actions in the merger-Notes 3 and 7)
    
    
    155,136
    
    
    
    86,000
    
    
    
    395,448
    
    
    
    245,569Gross margin
    
    
    112,481
    
    
    
    64,950
    
    
    
    293,283
    
    
    
    189,705Operating expenses:Research and development (including non-cash stock
compensation of $2,237 and $3,131 for the three and
nine months ended June 30, 2004, respectively, and
$45 and $444 for the three and nine months ended
June 30, 2003, respectively)
    
    
    74,317
    
    
    
    38,849
    
    
    
    167,205
    
    
    
    117,827Selling, general and administrative (including
non-cash stock compensation of $743 and $1,029 for
the three and nine months ended June 30, 2004, and
$0 and $1,272 for the three and nine months ended
June 30, 2003, respectively)
    
    
    36,371
    
    
    
    22,915
    
    
    
    89,782
    
    
    
    69,471Amortization of intangible assets
    
    
    7,956
    
    
    
    925
    
    
    
    12,564
    
    
    
    2,523In-process research and development
    
    
    
    
    
    
    
    
    
    
    160,818
    
    
    
    Special charges
    
    
    8,294
    
    
    
    6,526
    
    
    
    14,413
    
    
    
    13,585Total operating expenses
    
    
    126,938
    
    
    
    69,215
    
    
    
    444,782
    
    
    
    203,406Operating loss
    
    
    (14,457
    )
    
    
    (4,265
    )
    
    
    (151,499
    )
    
    
    (13,701
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (7,376
    )
    
    
    
    
    
    
    (42,021
    )Other (income) expense, net
    
    
    56,308
    
    
    
    (544
    )
    
    
    21,291
    
    
    
    40,785Income (loss) before income taxes
    
    
    (70,765
    )
    
    
    3,655
    
    
    
    (172,790
    )
    
    
    (12,465
    )Provision for income taxes
    
    
    661
    
    
    
    488
    
    
    
    1,368
    
    
    
    1,185Income (loss) from continuing operations
    
    
    (71,426
    )
    
    
    3,167
    
    
    
    (174,158
    )
    
    
    (13,650
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (52,297
    )
    
    
    
    
    
    
    (728,877
    )Net loss
    
    $
    (71,426
    )
    
    $
    (49,130
    )
    
    $
    (174,158
    )
    
    $
    (742,527
    )Income (loss) per share, basic:Continuing operations
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    (0.48
    )
    
    $
    (0.05
    )Discontinued operations
    
    
    
    
    
    
    (0.19
    )
    
    
    
    
    
    
    (2.73
    )Net loss
    
    $
    ( 0.15
    )
    
    $
    (0.18
    )
    
    $
    (0.48
    )
    
    $
    (2.78
    )Income (loss) per share, diluted:Continuing operations
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    (0.48
    )
    
    $
    (0.05
    )Discontinued operations
    
    
    
    
    
    
    (0.19
    )
    
    
    
    
    
    
    (2.73
    )Net loss
    
    $
    (0.15
    )
    
    $
    (0.18
    )
    
    $
    (0.48
    )
    
    $
    (2.78
    )Number of shares used in per share
computation-basic
    
    
    463,804
    
    
    
    268,469
    
    
    
    363,654
    
    
    
    266,915Number of shares used in per share
computation-diluted
    
    
    463,804
    
    
    
    271,051
    
    
    
    363,654
    
    
    
    266,915
 See accompanying notes to consolidated condensed financial statements. 5




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CONEXANT SYSTEMS, INC. 
 Consolidated Condensed Statements of Cash Flows
 (unaudited, in thousands)
 Nine months ended June 30,2004
    
    2003Cash flows from operating activities:Loss from continuing operations
    
    $
    (174,158
    )
    
    $
    (13,650
    )Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities,
net of effects of disposition of business and
acquisitions:Depreciation
    
    
    11,337
    
    
    
    13,576Amortization of intangible assets
    
    
    12,564
    
    
    
    2,523In-process research and development
    
    
    160,818
    
    
    
    Asset impairments
    
    
    4,534
    
    
    
    8,092Provision for losses on accounts receivable
    
    
    
    
    
    
    (3,912
    )Inventory provisions
    
    
    6,046
    
    
    
    12,597Decrease in fair value of Skyworks note and Mindspeed
warrant
    
    
    44,671
    
    
    
    76Write-down of non-marketable investments
    
    
    600
    
    
    
    34,402Equity in (earnings) losses of equity method investees
    
    
    (12,750
    )
    
    
    3,233Gain of extinguishment of debt
    
    
    
    
    
    
    (42,021
    )Gain of sale of investments
    
    
    (27,017
    )
    
    
    (5,228
    )Other non-cash items, net
    
    
    7,334
    
    
    
    8,148Changes in assets and liabilities:Receivables
    
    
    (42,174
    )
    
    
    (22,410
    )Inventories
    
    
    (18,631
    )
    
    
    (16,238
    )Accounts payable
    
    

    30,131
    
    
    
    (4,974
    )Accrued expenses and other current liabilities
    
    
    8,942
    
    
    
    1,157Other
    
    
    (10,589
    )
    
    
    5,612Net cash provided by (used in) operating activities
    
    
    1,658
    
    
    
    (19,017
    )Cash flows from investing activities:Cash received in (paid for) acquisitions, net
    
    
    24,752
    
    
    
    (6,796
    )Payment of acquisition related costs
    
    
    (29,764
    )
    
    
    Advances to Skyworks
    
    
    
    
    
    
    (35,000
    )Repayment of Term Notes and advances by Skyworks
    
    
    
    
    
    
    170,000Purchases of marketable securities
    
    
    (67,816
    )
    
    
    (73,511
    )Sales of marketable securities
    
    
    38,384
    
    
    
    132,900Capital expenditures
    
    
    (13,922
    )
    
    
    (13,555
    )Proceeds from sales of assets and investments
    
    
    31,580
    
    
    
    15,378Payment of deferred purchase consideration
    
    
    (4,000
    )
    
    
    Investments in businesses
    
    
    (2,619
    )
    
    
    (4,500
    )Net cash provided by (used in) investing activities
    
    
    (23,405
    )
    
    
    184,916Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    24,110
    
    
    
    7,275Repurchase of convertible subordinated notes
    
    
    
    
    
    
    (56,378
    )Net cash provided by (used in) financing activities
    
    
    24,110
    
    
    
    (49,103
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (202,971
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,363
    
    
    
    (86,175
    )Cash and cash equivalents at beginning of period
    
    
    76,186
    
    
    
    161,088Cash and cash equivalents at end of period
    
    $
    78,549
    
    
    $
    74,913
 See accompanying notes to consolidated condensed financial statements. 6




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CONEXANT SYSTEMS, INC. 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies Conexant Systems, Inc. (Conexant or the Company) designs, develops and
sells semiconductor system solutions, comprised of semiconductor devices,
software and reference designs, for use in broadband communications
applications that enable high-speed transmission, processing and distribution
of audio, video, voice and data to and throughout homes and business
enterprises worldwide. The Companys access solutions connect people through
personal communications access products such as personal computers (PCs),
set-top boxes and game consoles to audio, video, voice and data services over
wireless and wire line broadband connections as well as over dial-up Internet
connections. The Companys central office solutions are used by service
providers to deliver high-speed audio, video, voice and data services over
copper telephone lines to homes and businesses around the globe. In addition,
the Companys media processing products enable the capture, display, storage,
playback and transfer of audio and video content in applications throughout
home and small office environments. The Company operates in one reportable
segment. On February 27, 2004, Conexant completed its merger with GlobespanVirata, Inc.
(GlobespanVirata), a provider of broadband communications solutions for
consumer, enterprise and service provider markets. Following the merger,
GlobespanVirata is a wholly-owned subsidiary of Conexant. In the merger,
GlobespanVirata shareholders received 1.198 shares of Conexant common stock for
each share of GlobespanVirata common stock and Conexant issued approximately
180.6 million shares. In addition, the outstanding and unexercised common
stock options of GlobespanVirata were adjusted and converted into options to
purchase 43.6 million shares of Conexant common stock. See Note 2 for further
information. On June 27, 2003, Conexant completed the distribution to Conexant shareholders
of all outstanding shares of Mindspeed Technologies, Inc. (Mindspeed), a
wholly owned subsidiary of Conexant to which Conexant contributed its Internet
infrastructure business, including the stock of certain subsidiaries, and
certain other assets and liabilities, including approximately $100.0 million in
cash (hereinafter, the Mindspeed Spin). In the Mindspeed Spin, Conexant
shareholders received one share of Mindspeed common stock for every three
Conexant shares held and the Conexant shareholders continued to hold their
Conexant shares. Mindspeed issued to Conexant a warrant to purchase 30.0
million shares of Mindspeed common stock, representing approximately 20 percent
of Mindspeeds outstanding common stock on a fully diluted basis at the time of
the Mindspeed Spin. The warrant is exercisable for a period of ten years,
commencing one year after the completion of the Mindspeed Spin, at an exercise
price of $3.408 per share (the fair market value on the date of grant). The
warrant is recorded as an asset on the consolidated condensed balance sheet
(see Note 3) and changes in the estimated fair value of the warrant are
recorded in other (income) expense. Additionally, Conexant entered into a
senior secured revolving credit facility pursuant to which Mindspeed may borrow
up to $50.0 million for working capital and general corporate purposes. See
Note 10 for further information. The operating results of the discontinued Mindspeed Technologies Internet
infrastructure business (through June 27, 2003) included in the accompanying
unaudited consolidated condensed statements of operations were as follows (in
thousands): Three months
    
    Nine monthsended
    
    endedJune 30,
    
    June 30,2003
    
    2003Net revenues
    
    $
    20,153
    
    
    $
    58,719Loss before income taxes
    
    $
    (52,095
    )
    
    $
    (155,231
    )Provision for income taxes
    
    
    202
    
    
    
    462Cumulative effect of change in accounting for goodwill
    
    
    
    
    
    
    (573,184
    )Loss from discontinued operations
    
    $
    (52,297
    )
    
    $
    (728,877
    )
 Interim ReportingIn the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments, consisting
of adjustments of a normal recurring nature, as well as the special charges,
necessary to present fairly the Companys financial position, results of
operations and cash flows. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for a full 7




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) year.
These statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2003. Fiscal PeriodsFor presentation purposes, references made to the periods
ended June 30, 2004 and 2003 relate to the actual fiscal 2004 third quarter
ended July 2, 2004 and the actual fiscal 2003 third quarter ended June 27,
2003, respectively. Supplemental Cash Flow Information Cash paid for interest was $16.6 million
and $15.6 million for the nine months ended June 30, 2004 and 2003,
respectively. Cash paid for income taxes for the nine months ended June 30,
2004 and 2003 was $0.2 million and $1.8 million, respectively. See Note 2 for
a discussion of the common stock and options issued and net assets acquired in
acquisitions. Loss Per Share Basic loss per share is based on the weighted-average number
of shares of common stock outstanding during the period. Diluted loss per share
also includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Companys
convertible subordinated notes for the period of time such notes were
outstanding, if such stock options and convertible notes are dilutive. In
periods of a net loss position, basic and diluted weighted average shares are
the same. The following table sets forth the computation of the numerator and denominator
of basic and diluted earnings per share: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Numerator (dollars in thousands):Income (loss) from continuing operations
    
    $
    (71,426
    )
    
    $
    3,167
    
    
    $
    (174,158
    )
    
    $
    (13,650
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (52,297
    )
    
    
    
    
    
    
    (728,877
    )Net loss
    
    $
    (71,426
    )
    
    $
    (49,130
    )
    
    $
    (174,158
    )
    
    $
    (742,527
    )Denominator (weighted-average number of shares in thousands):Weighted average shares outstanding-
basic
    
    
    463,804
    
    
    
    268,489
    
    
    
    363,654
    
    
    
    266,915Stock options and warrants (under the treasury stock
method)
    
    
    
    
    
    
    2,562
    
    
    
    
    
    
    
    Weighted average shares outstanding - diluted
    
    
    463,804
    
    
    
    271,051
    
    
    
    363,654
    
    
    
    266,915
 The potential dilutive effect of the common stock equivalents shown below was
not included in the denominator for the computation of diluted earnings per
share for the respective periods, as the effect of these securities was
antidilutive: Three months ended
    
    Nine months endedJune 30,
    
    June 30,(weighted-average number of shares, in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Stock options and warrants (under the treasury stock method)
    
    
    21,734
    
    
    
    
    
    
    
    24,239
    
    
    
    1,1504.25% Convertible Subordinated Notes due 2006
    
    
    7,364
    
    
    
    5,962
    
    
    
    7,364
    
    
    
    5,9184% Convertible Subordinated Notes due 2007
    
    
    12,137
    
    
    
    9,859
    
    
    
    12,137
    
    
    
    10,9025.25% Convertible Subordinated Notes due 2006
    
    
    5,840
    
    
    
    
    
    
    
    2,695
    
    
    
    Restricted stock
    
    
    10
    
    
    
    
    
    
    
    15
    
    
    
    81
 Stock-Based Compensation The Company accounts for employee stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
therefore no compensation expense has been recognized for fixed stock option
plans as options are granted at fair market value on the date of grant. The
Company also has an employee stock purchase plan for all eligible employees.
The Company has adopted the pro forma disclosure provisions of Statement of
Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. 8




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Had stock-based compensation been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Companys pro forma loss from continuing operations and pro forma loss from
continuing operations per share would have been the amounts indicated below (in
thousands, except per share amounts): Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income (loss) from continuing
operations, as
reported
    
    $
    (71,426
    )
    
    $
    3,167
    
    
    $
    (174,158
    )
    
    $
    (13,650
    )Add: expense determined under fair value
accounting included in loss from
continuing operations, as reported
    
    
    2,980
    
    
    
    45
    
    
    
    4,160
    
    
    
    1,716Deduct: total expense determined under
fair value accounting for all
awards
    
    
    (18,693
    )
    
    
    (11,040
    )
    
    
    (43,071
    )
    
    
    (46,519
    )Pro forma loss from continuing operations
    
    $
    (87,139
    )
    
    $
    (7,828
    )
    
    $
    (213,069
    )
    
    $
    (58,453
    )Income (loss) from continuing operations
per share  basic, as reported
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    (0.48
    )
    
    $
    (0.05
    )Pro forma loss from continuing
operations per share  basic
    
    $
    (0.19
    )
    
    $
    (0.03
    )
    
    $
    (0.59
    )
    
    $
    (0.22
    )Income (loss) from continuing operations
per share  diluted, as reported
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    (0.48
    )
    
    $
    (0.05
    )Pro forma loss from continuing
operations per share  diluted
    
    $
    (0.19
    )
    
    $
    (0.03
    )
    
    $
    (0.59
    )
    
    $
    (0.22
    )
 For purposes of pro forma disclosures under SFAS No. 123, the estimated fair
value of the stock-based awards is assumed to be amortized to expense over the
instruments vesting period. The fair value has been estimated at the date of
grant using the Black-Scholes option valuation model with the following
assumptions: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.93
    %
    
    
    3.18
    %
    
    
    3.33
    %
    
    
    3.18
    %Expected volatility
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected life (years)
    
    
    4.5
    
    
    
    4.5
    
    
    
    2.5  4.5
    
    
    
    4.5Weighted-average fair value
of options granted
    
    $
    3.63
    
    
    $
    2.02
    
    
    
    $5.04
    
    
    $
    1.33
 The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options. Cash, Cash Equivalents and Investments  marketable securitiesThe Company
considers all highly liquid investments with insignificant interest rate risk
and original maturities of three months or less from the date of purchase to be
cash equivalents. The carrying amounts of cash and cash equivalents
approximate their fair values. Short-term marketable securities consist of
debt securities with original maturity dates between ninety days and one year,
and equity securities. Long-term marketable securities consist of debt
securities with original maturity dates greater than one year. The Companys
investments are classified as available-for-sale, and are reported at fair
value at the balance sheet date. The unrealized gains and losses are reported
as a component of accumulated other comprehensive income (loss). Management
determines the appropriate classification of debt securities at the time of
purchase and reassesses the classification at each reporting date. Gains and
losses on the sale of available-for-sale investments are determined using the
specific-identification method. Equity securities included in short-term marketable securities represent the
Companys common stock holdings in publicly traded companies and are classified
as short-term based on the Companys ability and intent to liquidate the
securities as necessary to meet liquidity requirements. The reported fair
value of these equity securities is based on 9




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) the quoted market prices of the securities at each reporting date. Based on
the overall state of the stock market, the availability of buyers for the
shares when the Company wants to sell, and other restrictions, at any point in
time the amounts ultimately realized upon liquidation of these securities may
be significantly different than the carrying value. Total cash, cash equivalents and marketable securities at June 30, 2004 and at
September 30, 2003 are as follows (in thousands): June 30,
    
    September 30,2004
    
    2003Cash and cash equivalents
    
    $
    78,549
    
    
    $
    76,186Skyworks 15% convertible senior subordinated notes
    
    
    
    
    
    
    55,566Equity securities- Skyworks Solutions, Inc. (6.2
million shares at June 30, 2004, 0.5 million
shares at September 30, 2003)
    
    
    50,824
    
    
    
    4,576Equity securities- SiRF Technologies, Inc. (5.9
million shares at June 30, 2004)
    
    
    74,582
    
    
    
    Other short-term marketable securities (primarily
U.S. government agencies and corporate debt
securities)
    
    
    32,887
    
    
    
    39,141Subtotal- short-term investments
    
    
    158,293
    
    
    
    99,283Long-term marketable securities (primarily U.S.
government agencies and corporate debt
securities)
    
    
    188,045
    
    
    
    $
    424,887
    
    
    $
    175,469
 For all investment securities, unrealized losses that are other than temporary
are recognized in net income. The Company does not hold these securities for
speculative or trading purposes. ReclassificationsCertain prior year amounts have been reclassified to
conform to the current year presentation. 2. Acquisitions Merger with GlobespanVirata, Inc. On February 27, 2004, the Company completed its merger with GlobespanVirata,
with GlobespanVirata becoming a wholly-owned subsidiary of the Company. For
accounting purposes, the transaction was accounted for under the purchase
method of accounting with the Company as the acquiror. In exchange for 100% of
the outstanding shares of common stock of GlobespanVirata (approximately 150.7
million shares), the Company issued 1.198 shares of Conexant common stock for
each share of GlobespanVirata common stock outstanding (or approximately 180.6
million shares of Conexant common stock) and each outstanding option and
warrant to purchase GlobespanVirata common stock was adjusted and converted
into an option or warrant to purchase Conexant common stock based on the 1.198
merger ratio (or approximately 43.6 million options to purchase shares of
Conexant common stock). In May 2004, the GlobespanVirata, Inc. subsidiary was
renamed Conexant, Inc., and hereinafter will be referred to as Conexant, Inc.,
and the overall business combination is hereinafter referred to as the
Merger. The purchase consideration is summarized as follows (in thousands): Fair market value of Conexant common stock issued
    
    $
    1,027,342Fair value of Conexant common stock options issued
    
    
    81,011Transaction costs
    
    
    12,900Total purchase consideration
    
    $
    1,121,253
 The fair value of Conexant common stock and stock options issued of $1.1
billion has been allocated to common stock and additional paid in capital. The
fair market value of the 180.6 million shares of common stock issued was
determined using a per share price of $5.69 (the average of the closing market
prices of Conexant common stock on the day of the announcement of the Merger,
November 3, 2003, and on the three business days before and after the
announcement date). In accordance with FASB Interpretation No. 44 Accounting
for Certain Transactions Involving Stock Compensation, the $111.9 million fair
value of the 43.6 million Conexant common stock options granted to replace the
acquired common stock options was determined using a Black-Scholes option
pricing model with the following assumptions: market price of $5.69 per share,
volatility of 97%, risk-free rate of return of 3.2%, expected lives of 4.5
years and no dividend yield. Approximately $30.9 million in intrinsic value
associated with 10




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) the unvested stock options has been allocated to unearned compensation and will
be amortized to expense over the average remaining vesting period of
approximately 2.6 years. A total of $3.0 million and $4.1 million of this
unearned compensation was recognized as an expense in the three and nine months
ended June 30, 2004, respectively. In connection with the Merger, the Company began to formulate a reorganization
and restructuring plan (the Reorganization Plan). As a result of the
Reorganization Plan, the Company recorded restructuring and asset impairment
charges related to Conexants operations of $6.1 million and $9.4 million
during the three and nine months ended June 30, 2004, respectively. These
charges are included in Special Charges and Cost of Goods Sold in the
accompanying consolidated condensed statement of operations. Additionally, the
Company initially recognized $14.8 million as liabilities assumed in the
purchase business combination related to restructuring liabilities for
estimated costs related to Conexant, Inc. facilities consolidation and the
related impact on Conexant, Inc. outstanding real estate leases and Conexant,
Inc. involuntary employee terminations and relocations. In the quarter ended
June 30, 2004, these liabilities were reduced by $3.6 million against the
purchase price allocation (goodwill) for certain facilities related decisions.
These liabilities were included in the allocation of the purchase price in
accordance with SFAS No. 141 entitled Business Combinations and EITF 95-3
entitled Recognition of Liabilities in Connection with a Purchase Business
Combination. Finalization and execution of the Reorganization Plan is not yet
complete and further actions may be taken such as additional or different
facilities impairments, workforce reductions or relocations and/or product
related decisions with respect to duplicate technology licenses, duplicate
maintenance contracts, production masks and inventory of goods for which there
will no longer be an active market for the combined company. The
Reorganization Plan and its related actions are expected to be completed by the
end of calendar 2004, and when taken, charges and/or reductions will be
recorded as an adjustment to goodwill. Any actions relating to the acquiring
corporation will be charged against operations. See Note 7 for a further
description of the Companys reorganization and restructuring plans. The following sets forth the Companys estimates of the fair values of the
assets acquired and liabilities assumed in the Merger as of February 27, 2004
(in thousands). These amounts have been adjusted for the $3.6 million
Reorganization Plan changes described above, and other liability reductions
totaling $2.4 million. The amounts below may change further as the
Reorganization Plan is completed. Cash and cash equivalents
    
    $
    42,515Short-term and long-term investments
    
    
    153,099Accounts receivable
    
    
    91,259Inventories
    
    
    73,281Prepaids and other current assets
    
    
    4,056Property and equipment
    
    
    46,883Other long-term assets
    
    
    20,600Identifiable intangible assets
    
    
    137,931In-process research and development
    
    
    160,818Goodwill
    
    
    629,387Accounts payable
    
    
    (41,580
    )Accrued expenses
    
    
    (75,062
    )Accrued restructuring and reorganization liabilities
    
    
    (11,255
    )Long-term debt
    
    
    (130,000
    )Other long-term liabilities
    
    
    (23,284
    )Treasury stock
    
    
    9,188Notes receivable from stock sales
    
    
    2,469Unearned compensation
    
    
    30,948Net assets acquired
    
    $
    1,121,253
 11




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) The excess of the purchase price over the fair value of the net tangible assets
acquired has been reflected as identifiable intangible assets and goodwill.
The identifiable intangible assets and respective useful lives are as follows
(in thousands): Product licenses (7 years)
    
    $
    10,964Trademark (7 years)
    
    
    2,006Developed technologies (2  5 years)
    
    
    124,961Total identifiable intangible assets
    
    $
    137,931
 The identifiable intangible assets were valued using the income approach and a
discount rate of 18%. The developed technologies consist of eight products in
the digital subscriber line (DSL) and wireless local area network (LAN)
categories. Under the income approach, the fair value reflects the present
value of the projected cash flows that are expected to be generated by the
products incorporating the current technology. The type of income approach
utilized for the trademark was the relief from royalty methodology, under which
an estimate is made as to the appropriate royalty income that would be
negotiated in an arms length transaction if the subject intangible asset were
licensed from an independent third party owner. These assets are being
amortized on a straight-line basis over their estimated useful lives ranging
from 2 to 7 years, with a weighted-average life of approximately 5 years.
Amortization expense for these intangible assets was $6.9 million and $9.6
million for the three and nine months ended June 30, 2004, respectively. The
amount recorded as goodwill of $629.4 million is not deductible for tax
purposes. The amount allocated to in process research and development (IPR&D) of $160.8
million was expensed upon completion of the Merger (as a charge not deductible
for tax purposes) as it was determined that the underlying products had not
reached technological feasibility, had no alternative uses and successful
development was uncertain. The Company identified and valued two IPR&D
projects relating to the development of DSL and wireless LAN products. The DSL
project represented 70% of the total IPR&D acquired. Both projects were
approximately 87% complete at the date of the merger. The estimated costs to
complete for the DSL and wireless LAN projects were approximately $14.1 million
and $6.2 million, respectively. These projects will be completed in fiscal
2005. The fair values assigned to these projects were based on the income
approach and used projected cash flows which were discounted at a rate of 19%.
The discount rate was derived from a weighted-average cost of capital analysis,
adjusted upwards to reflect additional risks inherent in the development
process, including the probability of achieving technological success and
market acceptance. Each of the IPR&D projects was analyzed considering
technological innovations, the existence and utilization of core technology,
the complexity, costs and time to complete the remaining development efforts,
and stage of completion. The discount rate reflects the stage of completion
and other risks inherent in the projects. The material risks associated with
the incomplete projects are the ability to complete the items within the
outlined timeframes and within the allocated cost guidelines, and ultimately to
sell the products to end-users. Management is responsible for the amounts determined for IPR&D as well as
developed technologies and believes that that amounts are representative of
fair values. Through June 30, 2004, actual results do not materially differ
from the estimates used in the valuations of IPR&D or developed technologies. The treasury stock of $9.2 million represents the value of the 1.25 million
shares of Conexant common stock held by iCompression, a subsidiary of the
former GlobespanVirata, which were effectively repurchased at the acquisition
date of February 27, 2004. The Merger was accounted for as a purchase and the operating results of the
former GlobespanVirata have been included in the Companys operations from the
closing date. The following unaudited pro forma information represents a
summary of the results of operations as if the Merger occurred at the beginning
of each period presented and includes amortization of identifiable intangibles
and unearned compensation from that date. Three monthsended June 30,
    
    Nine months ended June, 302003
    
    2004
    
    2003Net revenues
    
    $
    225,325
    
    
    $
    875,507
    
    
    $
    629,459Net loss
    
    $
    (62,799
    )
    
    $
    (198,051
    )
    
    $
    (803,475
    )Net loss per common share  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.43
    )
    
    $
    (1.80
    )
 12




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) The pro forma results are based on various assumptions and are not necessarily
indicative of what would have occurred had the merger closed on October 1, 2003
and 2002, respectively. Acquisition of Amphion Semiconductor On June 29, 2004, the Company purchased all the outstanding capital stock of
Amphion Semiconductor Limited (Amphion), a company located in Belfast, Northern
Ireland specializing in developing video compression technology. The Company
completed this strategic acquisition as a complement to existing products. The
consideration for this purchase was $20.0 million in cash, 600,000 shares of
common stock (valued at $6.0 million) and $0.4 million in transaction costs.
Net tangible assets acquired were $2.6 million. The excess of the purchase
price over the net tangible assets was assigned to developed technology of $4.2
million and $19.6 million to goodwill. The developed technology will be
amortized on a straight-line basis over five years. The amount recorded as
goodwill of $19.6 million is not deductible for tax purposes. The purchase
price allocation is preliminary and is subject to change. Under the stock purchase agreement, the Company guaranteed the value of the
shares issued to the former Amphion shareholders for a defined period through
June 29, 2006 (subject to certain conditions and elections). The guaranty is
subject to adjustment for any stock split, stock dividend, recapitalization,
merger or similar transaction. In the event that the market price of the
Conexant common stock does not equal or exceed $10.00 for at least five
consecutive trading days during this period, Conexant would be required to make
an additional payment (in cash or additional shares of common stock at
Conexants option) to former Amphion shareholders for the difference between
the $10.00 and the market price per share of such shares as of specified dates.
Consequently, the Company has valued the shares delivered to the former
Amphion shareholders at the guaranteed value of $10.00 per share, or a total of
$6.0 million. To the extent the Company is required to make an additional
payment under the guaranty, the payment will not increase the total purchase
price. The terms of this acquisition include provisions under which the former
shareholders of Amphion could receive additional consideration of up to $4.0
million during the twelve to eighteen months following the acquisition if
certain technology milestones are achieved. This contingent consideration has
not been included in the purchase price allocation and if earned, such amounts
will be capitalized as an addition to goodwill. The pro forma effect of this acquisition was not material to the Companys
results of operations for fiscal 2004 or 2003. 3. Supplemental Financial Statement Data Marketable
Securities 


Marketable securities consist of short-term investments and long-term
investments, all of which are classified as available-for-sale securities as
follows: Gross
    
    GrossUnrealized
    
    UnrealizedAmortized
    
    Holding
    
    Holding
    
    FairShort-term investments (in thousands):
    
    Cost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004:U.S. government agencies
    
    $
    28,138
    
    
    $
    
    
    
    $
    (91
    )
    
    $
    28,047Foreign government securities
    
    
    502
    
    
    
    
    
    
    
    
    
    
    
    502Corporate debt securities
    
    
    1,797
    
    
    
    
    
    
    
    (16
    )
    
    
    1,781Equity securities
    
    
    57,374
    
    
    
    72,289
    
    
    
    (1,700
    )
    
    
    127,963$
    87,811
    
    
    $
    72,289
    
    
    $
    (1,807
    )
    
    $
    158,293September 30, 2003:Skyworks 15% convertible senior subordinated notes
    
    $
    46,542
    
    
    $
    9,024
    
    
    $
    
    
    
    $
    55,566U.S. government agencies
    
    
    14,640
    
    
    
    25
    
    
    
    (18
    )
    
    
    14,647Foreign government securities
    
    
    2,044
    
    
    
    15
    
    
    
    
    
    
    
    2,059Corporate debt securities
    
    
    21,625
    
    
    
    74
    
    
    
    (59
    )
    
    
    21,640Equity securities
    
    
    2,320
    
    
    
    3,051
    
    
    
    
    
    
    
    5,371$
    87,171
    
    
    $
    12,189
    
    
    $
    (77
    )
    
    $
    99,283
 13




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) The Company accounted for the Skyworks 15% convertible senior subordinated
notes as available-for-sale securities carried at their fair value. Unrealized
gains or losses resulting from changes in the fair value of the underlying debt
were included in other comprehensive income. The right to convert the Skyworks
15% convertible senior subordinated notes into shares of Skyworks common stock
was, for financial accounting purposes, an embedded derivative instrument.
Changes in the fair value of the Skyworks 15% convertible senior subordinated
notes resulting from changes in the value of the conversion right were included
in other (income) expense, net each period. During the quarter ended June 30,
2004, the Company converted the notes into 5.7 million shares of Skyworks
common stock at the conversion price of $7.87 per share (see Note 4). Gross
    
    GrossUnrealized
    
    UnrealizedAmortized
    
    Holding
    
    Holding
    
    FairLong-term investments (in thousands):
    
    Cost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004:U.S. government agencies
    
    $
    159,033
    
    
    $
    
    
    
    $
    (806
    )
    
    $
    158,227Corporate debt securities
    
    
    29,974
    
    
    
    
    
    
    
    (156
    )
    
    
    29,818$
    189,007
    
    
    $
    
    
    
    $
    (962
    )
    
    $
    188,045
 The Companys long-term marketable securities principally have original
contractual maturities from one to three years. Inventories Inventories consist of the following (in thousands): June 30,
    
    September 30,2004
    
    2003Work-in-process
    
    $
    74,629
    
    
    $
    42,662Finished goods
    
    
    70,922
    
    
    
    16,886$
    145,551
    
    
    $
    59,548
 In the quarter ended March 31, 2004, as a result of strategic decisions made at
the time of the Merger, the Company wrote down $0.8 million of on-hand
inventory products which will no longer be actively marketed or sold. This
amount was charged to cost of goods sold. Goodwill During the first nine months of fiscal 2004, goodwill was adjusted as follows
(in thousands): Goodwill, September 30, 2003
    
    $
    56,865Merger
    
    
    635,261Goodwill, March 31, 2004
    
    
    692,126Adjustment to purchase price allocations
    
    
    (5,999
    )Acquisitions
    
    
    19,562Goodwill, June 30, 2004
    
    $
    705,689
 Intangible Assets Intangible assets consist of the following (in thousands): June 30, 2004
    
    September 30, 2003Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedAsset
    
    Amortization
    
    Net
    
    Asset
    
    Amortization
    
    NetDeveloped technology
    
    $
    145,893
    
    
    $
    (18,065
    )
    
    $
    127,828
    
    
    $
    15,904
    
    
    $
    (7,456
    )
    
    $
    8,448Customer base
    
    
    2,050
    
    
    
    (725
    )
    
    
    1,325
    
    
    
    2,050
    
    
    
    (358
    )
    
    
    1,692Other intangible assets
    
    
    20,908
    
    
    
    (6,668
    )
    
    
    14,240
    
    
    
    7,443
    
    
    
    (5,077
    )
    
    
    2,366$
    168,851
    
    
    $
    (25,458
    )
    
    $
    143,393
    
    
    $
    25,397
    
    
    $
    (12,891
    )
    
    $
    12,506
 14




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Intangible assets are amortized over a weighted-average period of approximately
five years. Annual amortization expense is expected to be as follows (in
thousands): Remainder of2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterAmortization expense
    
    $
    8,206
    
    
    $
    31,624
    
    
    $
    29,881
    
    
    $
    29,157
    
    
    $
    28,714
    
    
    $
    15,811
 Mindspeed Warrant The Company accounts for the Mindspeed warrant as a derivative instrument, and
changes in the fair value of the warrant are included in other (income)
expense, net each period. At June 30, 2004, the aggregate fair value of the
Mindspeed warrant included on the accompanying consolidated condensed balance
sheet was $80.9 million. The current portion of $11.7 million was determined
using current pricing data, and the remaining portion was valued using a
Black-Scholes model with terms for portions of the warrant varying from 1 to 5
years, volatility of 90%, a risk-free interest rate of 3.2% and no dividend
yield. It is the Companys intent to liquidate the portion of this warrant
classified as current in the next twelve months. The valuation of this derivative instrument is subjective, and option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Changes in these assumptions can
materially affect the fair value estimate. The Company could, at any point in
time, ultimately realize amounts significantly different than the carrying
value. Convertible Subordinated Notes The Company and its consolidated subsidiaries have three issues of convertible
subordinated notes, including the 5.25% convertible subordinated notes due May
2006 which were acquired in the Merger. At June 30, 2004, the components of
convertible subordinated notes are as follows (in thousands): 4.0% Convertible Subordinated Notes due February 2007 with a
conversion price of $42.43
    
    $
    515,0004.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $9.08
    
    
    66,8255.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $22.26
    
    
    130,000Total convertible subordinated notes
    
    $
    711,825
 The significant terms of the 5.25% convertible subordinated notes acquired by
the Company in the Merger in February 2004 are as follows: The 5.25%
convertible subordinated notes are unsecured obligations of Conexant, Inc., are
contractually subordinated in right of payment to all senior indebtedness of
Conexant, Inc., and mature on May 15, 2006. The holders may convert the notes
into shares of Conexant common stock at any time prior to maturity at a
conversion price of $22.262 per share, subject to adjustment. On and after May
20, 2004, Conexant, Inc. at its option may redeem the notes at any time, in
whole or in part, at the redemption price shown in the notes, plus accrued
interest, if any. Through June 30, 2004, none of the 5.25% Convertible
Subordinated Notes have been redeemed. 15




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Other (Income) Expense, Net Other (income) expense, net consists of the following (in thousands): Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Investment and interest income
    
    $
    (1,404
    )
    
    $
    (3,585
    )
    
    $
    (6,703
    )
    
    $
    (13,134
    )Decrease in fair value of Skyworks 15% convertible
senior subordinated notes
    
    
    17,837
    
    
    
    76
    
    
    
    6,292
    
    
    
    1,832Decrease in fair value of the Mindspeed warrant
    
    
    60,924
    
    
    
    
    
    
    
    38,379
    
    
    
    Interest expense
    
    
    8,373
    
    
    
    6,254
    
    
    
    22,322
    
    
    
    21,424Equity in (earnings) losses of equity method investees
    
    
    (1,934
    )
    
    
    2,423
    
    
    
    (12,750
    )
    
    
    3,233Gains on sales of investments
    
    
    (27,017
    )
    
    
    (5,228
    )
    
    
    (27,017
    )
    
    
    (5,228
    )Write down of non-marketable investments
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    34,402Other
    
    
    (471
    )
    
    
    (484
    )
    
    
    168
    
    
    
    (1,744
    )$
    56,308
    
    
    $
    (544
    )
    
    $
    21,291
    
    
    $
    40,785
 During the nine months ended June 30, 2004, an unrelated party repaid a $30.0
million note issued in connection with a previous equity investment in an
entity in which the Company owns a 38% interest. In accordance with Staff
Accounting Bulletin No. 51, the Company recognized an $11.4 million gain upon
the payment of this note, which is included in equity in earnings of equity
method investees. During the quarter ended June 30, 2004, SiRF Technology Holdings, Inc. (SiRF)
completed its initial public offering of shares of its common stock at a public
offering price of $12.00 per share. The Company sold approximately 2.5 million
shares in the SiRF offering for net proceeds of $28.2 million and recorded a
related gain of $26.5 million, which is included in gains on sales of
investments above. 4. Skyworks Notes In November 2002, the Company restructured its previous financing agreements
with Skyworks whereby Skyworks repaid $105.0 million of the principal amount
and all accrued interest owed to the Company under the $150.0 million
promissory notes issued by Skyworks and certain Skyworks subsidiaries and
collateralized by substantially all of the assets of Skyworks (the Term Notes),
and the remaining principal amount of the Term Notes was exchanged for $45.0
million principal amount of the Skyworks 15% convertible senior subordinated
notes with a maturity date of June 30, 2005. At the same time, Skyworks also
repaid all amounts outstanding under the previous credit facility, the credit
facility was cancelled and the Company released all security interests in
Skyworks assets and properties. The Company received a notice dated April 22, 2004 from Skyworks advising that
on May 12, 2004, Skyworks would redeem in full the 15% convertible senior
subordinated notes held by the Company. The Company exercised its right to
convert all of the notes into shares of Skyworks common stock prior to the
scheduled redemption date at the conversion price of $7.87 per share. On May
10, 2004, the Company received 5.7 million shares of Skyworks common stock in
full satisfaction of the notes. 5. Commitments and Contingencies Certain claims have been asserted against the Company, including claims
alleging the use of the intellectual property rights of others in certain of
the Companys products. The resolution of these matters may entail the
negotiation of a license agreement, a settlement, or the adjudication of such
claims through arbitration or litigation. Texas Instruments, Inc.The Companys Conexant, Inc. subsidiary has been
involved in a dispute with Texas Instruments, Inc. (Texas Instruments) over a
group of patents (and related foreign patents) that Texas Instruments alleges
are essential to certain industry standards for implementing ADSL technology.
On June 12, 2003, Conexant, Inc. filed a complaint against Texas Instruments,
Stanford University and its Board of Trustees, and Stanford University OTL, LLC
(collectively, the Defendants) in the U.S. District Court of New Jersey. The
complaint asserts, among other things, that the Defendants have violated the
antitrust laws by creating an illegal patent pool, by 16




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) manipulating the patent process and by abusing the process for setting industry
standards related to ADSL technology. The complaint also asserts that the
Defendants patents relating to ADSL are unenforceable, invalid and/or not
infringed by Conexant, Inc. products. Conexant, Inc. is seeking, among other
things, (i) a finding that the Defendants have violated the federal antitrust
laws and treble damages based upon such a finding, (ii) an injunction
prohibiting the Defendants from engaging in anticompetitive practices, (iii) a
declaratory judgment that the claims of the Defendants ADSL patents are
invalid, unenforceable, void, and/or not infringed by Conexant, Inc and (iv) an
injunction prohibiting the Defendants from pursuing patent litigation against
Conexant, Inc. and its customers. On August 11, 2003 and September 9, 2003,
the Defendants answered the complaint, denied Conexant, Inc.s claims and filed
counterclaims alleging that Conexant, Inc. has infringed certain of their ADSL
patents. In addition to other relief, the Defendants are seeking to collect
damages foralleged past infringement and to enjoin Conexant, Inc. from
continuing to use the Defendants ADSL patents. Although the Company believes
that Conexant, Inc. has strong arguments in favor of its position in this
dispute, it can give no assurance that Conexant, Inc. will prevail on any of
these grounds in litigation. If any such litigation is adversely resolved,
Conexant, Inc. could be held responsible for the payment of damages and/or
future royalties and/or have the sale of certain of Conexant, Inc products
stopped by an injunction, any of which could have a material adverse effect on
the Companys business, financial condition and results of operations. Agere Systems, Inc. On October 17, 2002, Agere Systems, Inc. (Agere) filed
suit against Intersil Corporation (Intersil) in the U.S. District Court of
Delaware. Conexant, Inc. acquired the WLAN Group of Intersil in August 2003.
Agere alleges that Intersil infringes certain of its U.S. patents. Intersil
has counterclaimed against Agere for infringement of certain patents, some of
which are now owned by the Companys Conexant, Inc. subsidiary and licensed to
Intersil for purposes of the suit. The parties have filed a stipulated order
adding Conexant, Inc. as a party to the suit. On July 22, 2003, Agere filed a
separate suit against Intersil in the U.S. District Court of Delaware alleging
that Intersil infringes certain additional U.S. patents. Conexant, Inc. has
also been added as a party to this action. Conexant, Inc. has the benefit of
an indemnity and/or warranty from Intersil which the Company believes limits
Conexant, Inc.s liability for monetary damages related to these suits, but the
possibility exists that the court could issue an injunction against future
sales of affected wireless products. The Company believes that this litigation
is unlikely to have a material adverse effect on its business, financial
condition, or results of operations. On October 30, 2002, Intersil and certain of its affiliated companies filed a
suit against Agere in the U.S. District Court for the District of Philadelphia
alleging that Agere misappropriated certain Media Access Control Wireless Local
Area Network technology. This action seeks an injunction to prevent Agere,
either alone or in cooperation with others, from developing, making, and/or
selling products that use that technology. Agere has made similar
counterclaims against Conexant, Inc. and its affiliated companies and Intersil
and its affiliated companies. As a result of the acquisition of Intersils
WLAN Products Group and its Choice-Intersil Microsystems, Inc. subsidiary,
which is a party to this suit and the only remaining plaintiff, Conexant, Inc.
has become involved in this suit. Conexant, Inc. has the benefit of an
indemnity and/or warranty from Intersil which the Company believes limits
Conexant, Inc.s liability for monetary damages, but the possibility exists
that the court could issue an injunction against future sales of affected
wireless products. The Company believes that this litigation is unlikely to
have a material adverse effect on its business, financial condition, or results
of operations. IPO Litigation.In November 2001, Collegeware Asset Management, LP, on behalf
of itself and a putative class of persons who purchased Conexant, Inc. common
stock between June 23, 1999 and December 6, 2000, filed a complaint in the U.
S. District Court for the Southern District of New York alleging violations of
federal securities laws by the underwriters of Conexant, Inc.s initial and
secondary public offerings as well as certain Conexant, Inc. officers and
directors. The complaint alleges that the defendants violated federal
securities laws by issuing and selling Conexant, Inc.s common stock in the
initial and secondary offerings without disclosing to investors that the
underwriters had (1) solicited and received undisclosed and excessive
commissions or other compensation and (2) entered into agreements requiring
certain of their customers to purchase the stock in the aftermarket at
escalating prices. The complaint seeks unspecified damages. The complaint was
consolidated with approximately 300 other actions making similar allegations
regarding the public offerings of hundreds of other companies during 1998
through 2000. In June 2003, the issuers, the individual defendants and
plaintiffs reached a tentative settlement agreement that would, among other
things, result in the dismissal with prejudice of all claims against Conexant,
Inc.s officers and directors. The settlement remains subject to a number of
conditions, including class certification 17




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) and approval of the settlement by the court. It is possible that the parties
will not reach agreement on the final settlement or that the settlement will
not be approved. Even if the settlement is approved, individual class members
will have an opportunity to opt out of the class and to file their own
lawsuits, and some may do so. In either event, the Company believes that the
Conexant, Inc. officers and directors have meritorious defenses to the
plaintiffs claims and expects that those defendants will defend themselves
vigorously. The Company also believes that it has sufficient insurance
coverage to cover any indemnification obligations to the directors and officers
related to this litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief and there can
be no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
the Company. Based on its evaluation of matters which are pending or asserted
and taking into account the Companys reserves for such matters, management
believes the disposition of such matters will not have a material adverse
effect on the financial condition or results of operations of the Company. The Company has been designated as a potentially responsible party and is
engaged in groundwater remediation at one Superfund site located at a former
silicon wafer manufacturing facility and steel fabrication plant in Parker
Ford, Pennsylvania formerly occupied by the Company. In addition, the Company
is engaged in remediation of groundwater contamination at its former Newport
Beach, California wafer fabrication facility. Management currently estimates
the aggregate remaining costs for these remediations to be approximately $3.0
million and has accrued for these costs as of June 30, 2004. The Company leases certain facilities and equipment under non-cancelable
operating leases which expire at various dates through 2021 and contain various
provisions for rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases generally contain
renewal provisions for varying periods of time. Rental expense under operating
leases was approximately $15.5 million and $12.5 million for the nine months
ended June 30, 2004 and 2003, respectively. At June 30, 2004, future minimum lease payments under operating leases were as
follows (in thousands): Fiscal Year2004 remaining 3 months
    
    $
    7,2202005
    
    
    23,3702006
    
    
    18,5632007
    
    
    14,8762008
    
    
    11,059Thereafter
    
    
    63,431Total future minimum lease payments
    
    $
    138,519
 The summary of future minimum lease payments includes an aggregate of $18.3
million of lease obligations that principally expire through fiscal 2011, which
have been accrued for in connection with the Companys reorganization and
restructuring actions (see Note 7). The Company purchases a portion of its requirements for silicon-based
semiconductor products from Jazz Semiconductor, Inc. (Jazz). During the first
two years of the long-term supply arrangement entered into with Jazz in March
2002, the Companys cost of wafers was an amount which approximated its
historical cost. Thereafter, the cost of wafers is based on market prices.
Additionally, the Company is obligated to purchase certain minimum annual
volumes of wafers during the first three years of the arrangement. In the event
the Companys actual wafer purchases are less than the required minimum
volumes, it will be required to make additional payments to Jazz. The Companys
expected minimum purchase obligations under the long-term supply agreement with
Jazz, net of a portion of the wafer purchase obligations assumed by a third
party, will be approximately $6.6 million for the remainder of fiscal year 2004
and $13.1 million in fiscal 2005. 18




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Additionally, the Company entered into a long-term supply agreement with
Skyworks in June 2002, under which Skyworks provides semiconductor assembly and
test services at the Companys former Mexicali, Mexico facility. Under this
supply agreement, the Company is obligated to purchase certain minimum amounts
of assembly and test services for the remainder of fiscal 2004 and for fiscal
2005 in the amounts of $4.4 million and $10.9 million, respectively. In the
event the Companys purchases of assembly and test services are less than the
required minimum amounts, it will be required to make additional payments to
Skyworks. The Company currently anticipates meeting each of the annual minimum purchase
obligations under the long-term supply agreements with Jazz and Skyworks. At June 30, 2004, the Company is contingently liable for approximately $26.7
million in operating lease commitments on facility leases that were assigned to
Mindspeed and Skyworks at the time of their separation from the Company. In connection with certain non-marketable equity investments, the Company may
be required to invest up to an additional $6.2 million as of June 30, 2004. 6. Comprehensive Loss Comprehensive loss is as follows (in thousands): Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (71,426
    )
    
    $
    (49,130
    )
    
    $
    (174,158
    )
    
    $
    (742,527
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (556
    )
    
    
    700
    
    
    
    346
    
    
    
    1,327Reclassification adjustment-accumulated
translation adjustment- discontinued
operations
    
    
    
    
    
    
    17,617
    
    
    
    
    
    
    
    17,713Change in unrealized gains on
available-for-sale securities, net of
tax
    
    
    65,762
    
    
    
    934
    
    
    
    67,441
    
    
    
    1,537Minimum pension liability adjustments
    
    
    87
    
    
    
    (213
    )
    
    
    260
    
    
    
    1,382Effect of income taxes
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    Other comprehensive income
    
    
    65,293
    
    
    
    19,038
    
    
    
    68,219
    
    
    
    21,959Comprehensive loss
    
    $
    (6,133
    )
    
    $
    (30,092
    )
    
    $
    (105,939
    )
    
    $
    (720,568
    )
 The components of accumulated other comprehensive income (loss) are as follows
(in thousands): June 30,
    
    September 30,2004
    
    2003Foreign currency translation adjustments
    
    $
    (2,677
    )
    
    $
    (3,023
    )Unrealized gains on available-for-sale securities, net of tax
    
    
    69,520
    
    
    
    1,907Minimum pension liability adjustments
    
    
    (8,120
    )
    
    
    (8,380
    )Accumulated other comprehensive income (loss)
    
    $
    58,723
    
    
    $
    (9,496
    )
 7. Special Charges Special charges consist of the following (in thousands): Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Asset impairments
    
    $
    2,508
    
    
    $
    5,611
    
    
    $
    4,534
    
    
    $
    8,092Restructuring charges
    
    
    3,627
    
    
    
    
    
    
    
    4,075
    
    
    
    1,904Integration charges
    
    
    1,565
    
    
    
    
    
    
    
    4,168
    
    
    
    Other
    
    
    594
    
    
    
    915
    
    
    
    1,636
    
    
    
    3,589$
    8,294
    
    
    $
    6,526
    
    
    $
    14,413
    
    
    $
    13,585
 19




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Asset Impairments During the first nine months of 2003, the Company recorded asset impairment
charges of $8.1 million, related to leasehold improvements associated with
properties no longer occupied by the Company and other assets that management
determined to abandon or scrap. During the first nine months of 2004 in connection with the Merger, the Company
recorded asset impairment charges of $4.5 million related to various Conexant
operating assets which were determined to be redundant and no longer required
as a result of the Merger. These assets have been abandoned. Restructuring Charges In fiscal 2002 and continuing into fiscal 2003, the Company implemented a
number of cost reduction initiatives to improve its operating cost structure.
The cost reduction initiatives included workforce reductions, temporary
shutdowns of the Companys manufacturing facilities, significant reductions in
capital spending, the closure or consolidation of certain facilities and salary
reductions for the senior management team until the Company returned to
profitability. In the second and third quarters of fiscal 2004 in connection
with the Merger, the Company implemented further workforce reductions and
facility consolidations. The Company continuously evaluates the business in
light of current market and competitive conditions to ensure that operating
expenses are in line with expectations of revenue levels. As a result, future
periods may require further actions to reduce operating expenses. The costs and expenses associated with all the restructuring activities are
included in special charges in the accompanying consolidated condensed
statements of operations. 2002 Corporate and Manufacturing Restructuring Plan During fiscal 2002, the
Company initiated a further reduction of its workforce throughout its
operations primarily as a result of the divestiture of its Newport Beach wafer
fabrication operations and the spin-off of its former wireless communications
division. In connection with the fiscal 2002 corporate and manufacturing
restructuring actions, the Company terminated approximately 120 employees and
recorded charges aggregating $2.4 million based upon estimates of the cost of
severance benefits for the affected employees. The Company completed these
actions in fiscal 2002. In addition, the Company recorded restructuring
charges of $12.5 million for costs associated with the consolidation of certain
facilities and commitments under license obligations that management determined
would not be used in the future. As part of the 2002 Corporate and Manufacturing Restructuring Plan, during the
first quarter of fiscal 2003, the Company initiated a further workforce
reduction affecting 58 employees and recorded additional charges of $1.9
million based upon estimates of the cost of severance benefits for the affected
employees. During the third quarter of fiscal 2003, the Company revised its
estimate of liabilities for severance benefits and facility costs due to
unfavorable sublease experience to date, and charged an additional $1.5 million
to restructuring expense. In the fourth quarter of 2003, the Company reversed
$1.1 million of the estimated cost to settle the remaining commitment under a
license obligation after its favorable resolution, and increased the estimate
of remaining facility costs due to unfavorable sublease experience. Activity and liability balances related to the 2002 Corporate and Manufacturing
Restructuring Plan through June 30, 2004 were as follows (in thousands): Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    2,437
    
    
    $
    12,519
    
    
    $
    14,956Cash payments
    
    
    (1,664
    )
    
    
    (431
    )
    
    
    (2,095
    )Restructuring balance, September 30, 2002
    
    
    773
    
    
    
    12,088
    
    
    
    12,861Charged to costs and expenses
    
    
    2,898
    
    
    
    888
    
    
    
    3,786Expense reversal
    
    
    
    
    
    
    (1,100
    )
    
    
    (1,100
    )Cash payments
    
    
    (3,173
    )
    
    
    (3,930
    )
    
    
    (7,103
    )Restructuring balance, September 30, 2003
    
    
    498
    
    
    
    7,946
    
    
    
    8,444Cash payments
    
    
    (447
    )
    
    
    (3,114
    )
    
    
    (3,561
    )Restructuring balance, June 30, 2004
    
    $
    51
    
    
    $
    4,832
    
    
    $
    4,883
 20




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) 2003 Corporate Restructuring Plan In the fourth quarter of fiscal 2003, the
Company initiated another workforce reduction, closed a design center and
consolidated some facilities. The Company involuntarily terminated
approximately 35 employees in the sales and administration areas and recorded
charges aggregating $1.2 million based upon estimates of the cost of severance
benefits for the affected employees. The Company also recorded restructuring
costs of $2.8 million relating to the consolidation of certain facilities under
non-cancelable leases which were vacated. In the first quarter of fiscal 2004,
as a continuation of the 2003 Corporate Restructuring Plan, the Company vacated
an additional facility and involuntarily terminated additional employees which
resulted in an additional $0.4 million in restructuring expense. Activity and liability balances related to the 2003 Corporate Restructuring
Plan through June 30, 2004 were as follows (in thousands): Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    1,181
    
    
    $
    2,830
    
    
    $
    4,011Cash payments
    
    
    (364
    )
    
    
    
    
    
    
    (364
    )Restructuring balance, September 30, 2003
    
    
    817
    
    
    
    2,830
    
    
    
    3,647Charged to costs and expenses
    
    
    350
    
    
    
    98
    
    
    
    448Cash payments
    
    
    (1,084
    )
    
    
    (755
    )
    
    
    (1,839
    )Restructuring balance, June 30, 2004
    
    $
    83
    
    
    $
    2,173
    
    
    $
    2,256
 2004 Merger Restructuring and Reorganization Plans In connection with the
Merger, in order to achieve operational efficiencies, the Company approved a
plan of workforce reductions and facilities consolidation actions. These
actions commenced in the quarter ended June 30, 2004 and are expected to
continue through the December 2004 quarter. The Company will charge such
amounts to restructuring expense in the period when the required actions are
taken. As the restructuring progresses, approximately 200 employees of the
Company, including approximately 50 employees of Conexant, Inc. in the 2004
Reorganization Plan described below, will be impacted by the actions. Through
June 30, 2004, approximately 150 employees, including approximately 25
employees of Conexant, Inc., have been impacted by the actions. The Company
involuntarily terminated approximately 125 employees in the sales and
administration, and information technology areas and recorded charges
aggregating $1.9 million based upon estimates of the cost of severance benefits
for the affected employees. The Company also recorded restructuring costs of
$1.8 million relating to the consolidation of certain facilities under
non-cancelable leases which were vacated. Activity and liability balances related to the 2004 Merger Restructuring Plan
through June 30, 2004 were as follows (in thousands): Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    1,877
    
    
    $
    1,750
    
    
    $
    3,627Cash payments
    
    
    (733
    )
    
    
    (86
    )
    
    
    (819
    )Restructuring balance, June 30, 2004
    
    $
    1,144
    
    
    $
    1,664
    
    
    $
    2,808
 In connection with the Merger, the Company also began to formulate the 2004
Reorganization Plan, which consisted primarily of workforce reductions to
eliminate redundant positions and consolidation of the worldwide facilities of
Conexant, Inc. In accordance with EITF 95-3 and SFAS No. 141, the estimated
costs of $11.3 million related to these actions were accrued as liabilities as
part of the purchase price allocation (see Note 2). As a result of the 2004 Reorganization Plan, approximately 50 employees of
Conexant, Inc. will be part of an involuntary workforce reduction. These
employees are primarily located in the United States in sales and
administrative functions. The workforce related charges of $1.3 million were
based upon estimates of the severance and fringe benefits for the affected
employees, in addition to relocation benefits for others. The plan for
consolidation of worldwide facilities consisted of vacating or impairing
properties and leases. This resulted in an initial charge of $13.5 million and
included assumptions regarding sublease rates and time periods and other costs
to 21




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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) prepare and sublease those spaces. Additionally, as of the date of the Merger,
there had been a decline in the real estate market in certain geographic
regions in which Conexant, Inc. has lease facilities. A portion of the
facilities-related charges represent adjustments to fair market value rates of
those leases. These non-cancelable lease commitments range from near term to
17 years in length. In the quarter ended June 30, 2004, certain decisions were
made in relation to two operating facilities. As a result, $3.6 million of
accrued facility charges were reduced against the purchase price
allocation (goodwill). Future adjustments to the 2004 Reorganization Plan as
currently intended, whether favorable or unfavorable, will be recorded as an
adjustment to the purchase price allocation. Activity and liability balances related to the 2004 Reorganization Plan through
June 30, 2004 were as follows (in thousands): Workforce
    
    Facilityreductions
    
    and other
    
    TotalRecorded in purchase price allocation
    
    $
    1,300
    
    
    $
    13,509
    
    
    $
    14,809Cash payments
    
    
    
    
    
    
    (89
    )
    
    
    (89
    )Restructuring balance, March 31, 2004
    
    
    1,300
    
    
    
    13,420
    
    
    
    14,720Adjusted to purchase price allocation
    
    
    
    
    
    
    (3,554
    )
    
    
    (3,554
    )Cash payments
    
    
    (73
    )
    
    
    (242
    )
    
    
    (315
    )Restructuring balance, June 30, 2004
    
    $
    1,227
    
    
    $
    9,624
    
    
    $
    10,851
 At June 30, 2004, the Company has a remaining accrued restructuring and
reorganization liability balance of $20.8 million. The Company expects to pay
the amounts accrued for the workforce reductions through fiscal 2005 and
expects to pay the obligations for the non-cancelable lease and other
commitments over their respective terms, which expire through fiscal 2021. Cash
payments to complete the restructuring and reorganization actions will be
funded from available cash reserves and funds from product sales, and are not
expected to significantly impact the Companys liquidity. Integration Charges During the three and nine months ended June 30, 2004, the Company incurred $1.6
million and $4.2 million, respectively, of costs related to the integration
efforts of the employees, customers, operations and other business aspects
related to the Merger. Other Other special charges in the first nine months of 2003 principally consist of a
$2.7 million loss on the sale of certain semiconductor test equipment. Other
special charges in the three months ended June 30, 2004 of $0.6 million
principally consist of stock option modification charges and, in addition, the
nine months ended June 30, 2004 also included $1.0 million of one-time
executive bonuses which were contractually committed in the closing of the
Merger. 8. Segment Information The Company operates and tracks its results in one reportable segment (see Note
1). Net revenues by geographic area, based upon country of destination, are as
follows (in thousands): Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Americas
    
    $
    29,499
    
    
    $
    15,565
    
    
    $
    77,442
    
    
    $
    50,593Asia-Pacific
    
    
    215,797
    
    
    
    125,606
    
    
    
    554,457
    
    
    
    352,581Europe, Middle East and Africa
    
    
    22,321
    
    
    
    9,779
    
    
    
    56,832
    
    
    
    32,100$
    267,617
    
    
    $
    150,950
    
    
    $
    688,731
    
    
    $
    435,274
 The Company believes a substantial portion of the products sold to original
equipment manufacturers (OEMs) and third-party manufacturing service providers
in the Asia-Pacific region are ultimately shipped to end-markets in the 22




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited) Americas and Europe. For the three and nine months ended June 30, 2004, no
customer accounted for 10% of net revenues. For each of the three and nine
months ended June 30, 2003, two customers (foreign resellers) accounted for 22%
of net revenues. No other customer accounted for 10% or more of the Companys
net revenues for the three or nine months ended June 30, 2003. 9. Guarantees The Company has made guarantees and indemnities, under which it may be required
to make payments to a guaranteed or indemnified party, in relation to certain
transactions. In connection with the Companys spin-off from Rockwell, the
Company assumed responsibility for all contingent liabilities and then current
and future litigation (including environmental and intellectual property
proceedings) against Rockwell or its subsidiaries in respect of the operations
of the semiconductor systems business of Rockwell. In connection with the
Companys contribution of certain of its manufacturing operations to Jazz
Semiconductor, Inc. (Jazz), the Company agreed to indemnify Jazz for certain
environmental matters and other customary divestiture-related matters. In
connection with the sales of its products, the Company provides intellectual
property indemnities to its customers. In connection with certain facility
leases, the Company has indemnified its lessors for certain claims arising from
the facility or the lease. The Company indemnifies its directors and officers
to the maximum extent permitted under the laws of the State of Delaware. The
duration of the guarantees and indemnities varies, and in certain cases is
indefinite. The guarantees and indemnities to customers in connection with
product sales generally are subject to limits based upon the amount of the
related product sales. The majority of other guarantees and indemnities do not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for
these guarantees and indemnities in the accompanying consolidated balance
sheets. Product warranty costs are not significant. 10. Mindspeed Credit Facility In connection with the Mindspeed Spin, the Company entered into a senior
secured revolving credit facility pursuant to which Mindspeed may borrow up to
$50.0 million for working capital and general corporate purposes. Mindspeed
may borrow under the credit facility only to restore its cash balance to $25.0
million. Borrowings accrue interest at 10% per annum, payable at maturity, and
are collateralized by substantially all the assets of Mindspeed. The credit
facility expires on June 29, 2007. As of June 30, 2004, no amounts were
outstanding under the credit facility. In connection with the credit facility, Mindspeed issued to the Company
warrants to purchase up to approximately 8.3 million shares of Mindspeed common
stock. The number of shares that may be acquired under the warrants will
depend on the level of borrowings under the credit facility, increasing pro
rata as the principal balance of Mindspeeds borrowings increases. The
warrants will be exercisable for a period of ten years after the Mindspeed Spin
at a price per share equal to the fair market value of a share of Mindspeed
common stock at the time of issuance of the warrants or at the time of the
borrowing that entitles the Company to acquire shares thereunder, whichever is
lower. 11. Related Party Transaction As of June 30, 2004, loans
originally made by the former GlobespanVirata, Inc. to certain
executive officers of the Company, were outstanding in the principal
amount of approximately $2.7 million, with accrued interest of
approximately $0.8 million. Subsequent to June 30, 2004,
those loans were settled. 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with our unaudited consolidated
condensed financial statements and the notes thereto included in this Quarterly
Report, and our audited consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2003. Overview Except where otherwise noted, this discussion of our financial condition and
results of operations represents our continuing operations, excluding our
discontinued Mindspeed Technologies business which we spun off in June 2003.
See Note 1 of Notes to Consolidated Condensed Financial Statements for further
information on this transaction. We are a leading provider of integrated circuits and software for broadband
communications solutions addressing consumer, business enterprise and service
provider markets. Our expertise in mixed-signal processing allows us to deliver
semiconductor devices and complete integrated systems that connect the client,
or end-customer, side of personal communications access products such as PCs,
set-top boxes, residential gateways and game consoles to audio, video, voice
and data services over broadband wire line communications networks, including
virtually all varieties of digital subscriber line (DSL), cable and Ethernet
networks, over wireless local area networks (LAN) and over direct broadcast
satellite, terrestrial and fixed wireless systems. We also deliver highly
integrated, system-level solutions for telephone company central office
equipment, such as DSL access multiplexers (DSLAMs) used in the provisioning of
broadband audio, video, voice and data services. Our dial-up access products
include a broad portfolio of modem chipsets and software for desktop and
notebook PC applications as well as embedded equipment applications including
fax machines, multifunction peripherals (MFPs), point-of-sale (POS) terminals,
set-top boxes, gaming consoles and Internet terminals. Our wide variety of
wireless networking chip sets and reference designs enable wireless
connectivity in notebooks, PDAs, digital cameras, MP3 players and other
handheld networking appliances in the home and business enterprise
environments. And our media processing solutions include silicon tuners,
demodulators and a variety of broadcast audio and video decoder and encoder
devices that enable the capture, display, storage, playback and transfer of
audio and video content in consumer-oriented products such as PCs, set-top
boxes, gaming consoles, personal video recorders and digital versatile disk
(DVD) applications. We operate in one reportable business segment. We market and sell our semiconductor products and system solutions directly to
leading original equipment manufacturers (OEMs) of communication electronics
products, and indirectly through electronic components distributors. We also
sell our products to third-party electronic manufacturing service providers,
who manufacture products incorporating our semiconductor products for OEMs.
Sales to distributors and other resellers accounted for approximately 35% of
net revenues in the first nine months of fiscal 2004. No customer accounted for
10% of our net revenues in the first nine months of fiscal 2004. Our top 20
customers accounted for approximately 58% of net revenues for the first nine
months of fiscal 2004. Revenues derived from customers located in the Americas,
Europe and the Asia-Pacific region were 11%, 8% and 81%, respectively, of our
net revenues for the first nine months of fiscal 2004. We believe a substantial
portion of the products we sell to OEMs and third-party manufacturing service
providers in the Asia-Pacific region are ultimately shipped to end-markets in
the Americas and Europe. Recent Developments On February 27, 2004, we
completed our merger with GlobespanVirata, Inc., or
GlobespanVirata, a provider of broadband communications solutions for consumer,
enterprise and service provider markets, hereinafter referred to as the Merger.
In May 2004, GlobespanVirata was renamed Conexant, Inc. See Note 2 of Notes to
Consolidated Condensed Financial Statements for further information. The
results of operations of Conexant, Inc. have been included in our consolidated
results commencing February 28, 2004, and are therefore included for the full
quarter ended June 30, 2004 and only four months of the nine months ended June
30, 2004. 24




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##### Table of Contents



If the Merger had been completed on January 1, 2004, the net revenues for the
combined companies for the full quarter ended March 31, 2004 would have been
$293.3 million, or $49.5 million higher than the reported net revenues of
$243.8 million. Our actual revenues for the quarter ended June 30, 2004 were
$267.6 million, or a decrease of approximately 9% from the pro forma prior
quarter amount. This sequential decrease in revenues was predominately
attributable to a sequential decline in our wireless LAN product line revenues
as a result of reduced demand due to low-priced solutions emerging in the
Taiwanese market, which has caused pricing pressure and increased channel
inventories at our customers. We expect that net revenues for the quarter ending September 30,
2004 will decline sequentially from the $267.6 million net
revenues in the quarter ended June 30, 2004 as a result of channel inventory
levels at our direct customers, distributors and resellers. The use of net revenues for the combined companies as if the Merger had closed
at the beginning of the quarter ended March 31, 2004 is a non-GAAP financial
measure, is used by management to provide useful information in establishing a
meaningful comparison of sequential revenue levels which is not necessarily
reflected in the results of operations as presented below. It is not intended
to be an alternative to GAAP measures. At the time of the Merger, we announced certain workforce reductions and
facilities consolidation actions in order to achieve operational efficiencies.
Certain of these actions have been taken, and others have yet to be executed.
The cost savings of these actions has not yet been fully reflected in our
operating results for the periods discussed below. We continuously evaluate
our business in light of current market and competitive conditions to ensure
that our operating expenses are in line with our expected revenue forecasts.
As a result, future periods may require further actions to reduce operating
expenses. We do not believe that the actions taken to date, or possible future
actions, have or will inhibit our ability to invest in appropriate levels of
research and development growth areas and be competitive in the marketplace. Results of Operations Net Revenues We recognize revenues from product sales upon shipment and transfer of title,
in accordance with the shipping terms specified in the arrangement with the
direct customer, distributor, or other reseller. Revenue recognition is
deferred in all instances where the earnings process is incomplete. We sell a
portion of our products to electronic component distributors under agreements
allowing for a right to return unsold products. We defer the recognition of
revenue on all sales to these distributors until the products are sold by the
distributors to a third party. We record a reserve for sales returns and
allowances for direct customers and other resellers based on historical
experience or specific identification of an event necessitating a reserve.
Development revenue is recognized when services are performed and was not
significant for any of the periods presented. The following table summarizes
our net revenues: Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2004
    
    June 2003(in millions)
    
    2004
    
    2004
    
    2003
    
    Quarter
    
    QuarterNet revenues
    
    $
    267.6
    
    
    $
    243.8
    
    
    $
    151.0
    
    
    
    10
    %
    
    
    77
    %Nine months ended June 30,2004
    
    
    
    2003
    
    
    ChangeNet revenues
    
    $
    688.7
    
    
    $
    435.3
    
    
    
    58
    %
 Net revenues for the three months ended June 30, 2004, increased $116.6 million
or 77% over the comparable period in 2003. The increase is attributable to
increased volumes of DSL and wireless LAN products associated with the Merger,
as well as increases in sales of satellite set-top box solutions, convergence
video products using MPEG codec technology and higher speed document imaging
products and soft modem product revenues from the PCTEL business acquired in
the third quarter of fiscal 2003. Net revenues for the nine months ended June 30, 2004 increased $253.4 million
or 58% over the comparable period in 2003. This increase is associated with
increased unit shipments of our DSL and wireless LAN products associated with
the Merger, as well as the increase in sales of satellite set-top box
solutions, convergence video 25




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##### Table of Contents



products using MPEG codec technology, higher speed document imaging products
and embedded modem solutions and soft modem product revenues from the
PCTEL business acquired in the third quarter of fiscal 2003. Net revenues for the three months ended June 30, 2004 increased $23.8 million
or 10% sequentially from the previous quarter. The increase was driven by
increased volume shipments of DSL and wireless LAN products associated with the
Merger. Gross Margin Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2004
    
    June 2003(in millions)
    
    2004
    
    2004
    
    2003
    
    Quarter
    
    QuarterGross margin
    
    $
    112.5
    
    
    $
    101.7
    
    
    $
    65.0
    
    
    
    11
    %
    
    
    73
    %Percent of net revenues
    
    
    42
    %
    
    
    42
    %
    
    
    43
    %Nine months ended June 30,2004
    
    
    
    2003
    
    
    ChangeGross margin
    
    $
    293.3
    
    
    $
    189.7
    
    
    
    55
    %Percent of net revenues
    
    
    43
    %
    
    
    44
    %
 Gross margin represents net revenues less cost of goods sold. As a fabless
semiconductor company, we use third parties for wafer production, assembly and
test services. Our cost of goods sold consists predominantly of purchased
finished wafers, assembly and test services, royalty and other intellectual
property costs and labor and overhead associated with product procurement. Our gross margin for the third quarter of fiscal 2004 was 42% compared with the
similar period of fiscal 2003 gross margin of 43%. The gross margin percentage
decrease is attributable to the effects of additional revenues of lower margin
products and the decreased average selling prices experienced in the current
competitive environment which were offset by cost reduction actions. Our gross margin for the first nine months of fiscal 2004 was 43% compared with
the similar period of fiscal 2003 gross margin of 44%. Gross margin would have
been 41% in the 2003 period excluding the sales of inventory previously written
down to zero cost. The increase from year to year in adjusted gross margin
percentage reflects the additional revenues from our higher margin universal
access and convergence video products, as well as reductions in vendor
inventory prices. When compared with the immediately preceding quarter, our gross margins for the
third quarter of fiscal 2004 stayed constant at 42% of net revenues. Our products are used by communications electronics OEMs that have designed our
products into communications equipment. For many of our products, we gain these
design wins through a lengthy sales cycle, which often includes providing
technical support to the OEM customer. Moreover, once a customer has designed a
particular suppliers components into a product, substituting another
suppliers components often requires substantial design changes which involve
significant cost, time, effort and risk. In the event of the loss of business
from existing OEM customers, we may be unable to secure new customers for our
existing products without first achieving new design wins. When the quantities
of inventory on hand exceed foreseeable demand from existing OEM customers into
whose products our products have been designed, we generally will be unable to
sell our excess inventories to others, and the estimated realizable value of
such inventories to us is generally zero. Once established, these write-downs
are considered permanent adjustments to the cost basis of the excess inventory.
Permanent write-downs are typically a consequence of specific events. For
example during 2001, we experienced sharply reduced end-customer demand when
the overall communication semiconductor market declined swiftly and
dramatically, resulting in a significant number of order cancellations and a
decline in the volume of new orders. These events triggered a permanent
impairment of certain of our inventory. Our gross margin for the first nine months of fiscal 2003 benefited from the
sale of inventories with an original cost of $10.9 million, respectively, that
we had written down to a zero cost basis during fiscal year 2001. Our gross 26




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##### Table of Contents



margin for the three months ended June 30, 2003 did not benefit from these zero
cost inventory sales. These sales resulted from renewed demand for certain
products that was not anticipated at the time of the write-downs. The
previously written-down inventories were generally sold at prices which
exceeded their original cost. Had we not previously written down the cost basis
of these goods, our cost of goods sold would include the original cost of such
goods, and our gross margin for the first nine months of fiscal 2003 would have
been $178.8 million (41% of our net revenues). As of June 30, 2003, all such
inventories had been scrapped or sold. On an operational basis and unrelated to any significant single event we assess
the recoverability of our inventories at least quarterly through a review of
inventory levels in relation to foreseeable demand (generally over six to
twelve months). Foreseeable demand is based upon all available information,
including sales backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable demand, we reserve
for the excess which, at the time of our review, we expect to be unable to
sell. The amount of the inventory reserve is the excess of historical cost over
estimated realizable value. We base our assessment of the recoverability of our inventories, and the
amounts of any reserves, on currently available information and assumptions
about future demand and market conditions. Demand for our products may
fluctuate significantly over time, and actual demand and market conditions may
be more or less favorable than those projected by management. In the event that
actual demand is lower than originally projected, additional inventory reserves
may be required. Under our long-term supply arrangement with Jazz Semiconductor, Inc. (Jazz), we
are obligated to purchase certain minimum annual volumes of wafers through
March 2005. Additionally, under a long-term supply agreement with Skyworks, we
are obligated to purchase certain minimum amounts of assembly and test services
during fiscal years 2004 and 2005. In the event our actual purchases under
these arrangements are less than the required minimum volumes, we will be
required to make additional payments, which would adversely affect our gross
margin. We currently anticipate meeting each of the annual minimum purchase
obligations under the long-term supply agreements with Jazz and Skyworks. Research and Development Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2004
    
    June 2003(in millions)
    
    2004
    
    2004
    
    2003
    
    Quarter
    
    QuarterResearch and development
    
    $
    74.3
    
    
    $
    53.7
    
    
    $
    38.8
    
    
    
    38
    %
    
    
    92
    %Percent of net revenues
    
    
    28
    %
    
    
    22
    %
    
    
    26
    %Nine months ended June 30,2004
    
    
    
    2003
    
    
    ChangeResearch and development
    
    $
    167.2
    
    
    $
    117.8
    
    
    
    42
    %Percent of net revenues
    
    
    24
    %
    
    
    27
    %
 Our research and development (R&D) expenses consist principally of direct
personnel costs to develop new communications and semiconductor products,
photomask and other costs for pre-production evaluation and testing of new
devices and design and test tool costs. Our R&D expenses also include the costs
for design automation and advanced package development, and non-cash stock
compensation charges related to the amortization of the unvested stock options
exchanged in the Merger. The $35.5 million increase in R&D expenses for the third quarter of fiscal 2004
compared to the similar period of fiscal 2003 primarily reflects additional
development costs associated with DSL and wireless LAN products as a result of
the Merger, an increase of $2.2 million in stock compensation charges as a
result of the Merger, and to a much lesser extent, increased R&D project costs
associated with increases in labor, purchased R&D and electronic design
automation tools. The $49.4 million increase in R&D expenses for the nine months ended June 30,
2004 compared to the similar period of fiscal 2003 primarily reflects
additional headcount to support the development of DSL and wireless LAN
products as a result of the Merger, an increase of $2.7 million in stock
compensation charges as a result of the 27




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Merger, and to a much lesser extent, increased R&D project costs associated
with labor, purchased R&D, electronic design automation tools and recruiting. When compared to the immediately preceding quarter, R&D increased $20.6 million
to $74.3 million from $53.7 million. This increase reflects additional
development costs associated with DSL and wireless LAN products as a result of
the Merger, and an increase of $1.4 million in stock compensation charges as a
result of the Merger. In addition, R&D project costs also increased as labor,
photomask and electronic design automation tool costs were slightly higher. Selling, General and Administrative Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2004
    
    June 2003(in millions)
    
    2004
    
    2004
    
    2003
    
    Quarter
    
    QuarterSelling, general and administrative
    
    $
    36.4
    
    
    $
    30.6
    
    
    $
    22.9
    
    
    
    19
    %
    
    
    59
    %Percent of net revenues

    
    
    14
    %
    
    
    13
    %
    
    
    15
    %Nine months ended June 30,2004
    
    
    
    2003
    
    
    ChangeSelling, general and administrative
    
    $
    89.8
    
    
    $
    69.5
    
    
    
    29
    %Percent of net revenues
    
    
    13
    %
    
    
    16
    %
 Our selling, general and administrative (SG&A) expenses include personnel
costs, sales representative commissions, advertising and other marketing costs.
Our SG&A expenses also include costs of corporate functions including legal,
accounting, treasury, human
resources, real estate, information systems, customer service, sales,
marketing, field application engineering and other services and non-cash stock compensation charges related to the
amortization of the unvested stock options exchanged in the Merger. The $13.5 million and $20.3 million increases in SG&A expense for the three and
nine months ended June 30, 2004, respectively, compared to the same periods of
fiscal 2003 are attributable to additional SG&A costs as a result of the
Merger, a $0.7 million increase in stock compensation charges in the three
months ended June 30, 2004 and reductions in bad debt charges in the nine
months ended June 30, 2003 associated with improving collections experience at
that time. When compared to the immediately preceding quarter, SG&A expense increased $5.8
million to $36.4 million from $30.6 million. This increase reflects additional
SG&A costs as a result of the Merger and a $0.5 million increase in stock
compensation charges. Amortization of Intangible Assets Three months ended June 30,
    
    Nine months ended June 30,(in millions)
    
    2004
    
    Change
    
    2003
    
    2004
    
    Change
    
    2003Amortization of intangible assets
    
    $
    8.0
    
    
    nm
    
    $
    0.9
    
    
    $
    12.6
    
    
    nm
    
    $
    2.5Percent of net revenues
    
    nm
    
    
    
    
    
    nm
    
    nm
    
    
    
    
    
    nm
 nm = not meaningful Amortization expense is recorded for intangible assets other than goodwill
pursuant to SFAS Nos. 141 and 142. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method and provides new
criteria for recording intangible assets separately from goodwill. Goodwill
must be tested at least annually for impairment and written down when impaired. The increased amortization expense in the three and nine months ended June 30,
2004 compared to the three and nine months ended June 30, 2003 is primarily
attributable to additional intangibles acquired in an acquisition in the latter
half of fiscal 2003 and the Merger completed on February 27, 2004. See Note 2
of Notes to Consolidated 28




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##### Table of Contents



Condensed Financial Statements for further information. We expect that
amortization of intangible assets will be approximately $8.2 million for the
remainder of fiscal 2004. In-Process Research and Development Three months ended June 30,
    
    Nine months ended June 30,(in millions)
    
    2004
    
    Change
    
    2003
    
    2004
    
    Change
    
    2003In-process research and development
    
    $
    
    
    
    nm
    
    $
    
    
    
    $
    160.8
    
    
    nm
    
    $
    Percent of net revenues
    
    nm
    
    
    
    
    
    nm
    
    nm
    
    
    
    
    
    nm
 nm= not meaningful The in-process research and development (IPR&D) charge of $160.8 million in the
nine months ended June 30, 2004 is related to the Merger completed on February
27, 2004. See Note 2 of Notes to Consolidated Condensed Financial Statements
for a discussion of the IPR&D charge. Special Charges Special charges consist of the following: Three months ended June 30,
    
    Nine months ended June 30,(in millions)
    
    2004
    
    Change
    
    2003
    
    2004
    
    Change
    
    2003Restructuring charges
    
    $
    3.6
    
    
    nm
    
    $
    
    
    
    $
    4.1
    
    
    nm
    
    $
    1.9Asset impairment charges
    
    
    2.5
    
    
    nm
    
    
    5.6
    
    
    
    4.5
    
    
    nm
    
    
    8.1Integration charges
    
    
    1.6
    
    
    nm
    
    
    
    
    
    
    4.2
    
    
    nm
    
    
    Other special charges
    
    
    0.6
    
    
    nm
    
    
    0.9
    
    
    
    1.6
    
    
    nm
    
    
    3.6$
    8.3
    
    
    
    
    
    
    $
    6.5
    
    
    $
    14.4
    
    
    
    
    
    
    $
    13.6
 nm= not meaningful See Note 7 of Notes to Consolidated Condensed Financial Statements for a
discussion of asset impairment charges, restructuring charges, integration
charges and other special charges. Other (Income) Expense, Net Three months ended June 30,
    
    Nine months ended June 30,(in millions)
    
    2004
    
    Change
    
    2003
    
    2004
    
    Change
    
    2003Other (income) expense, net
    
    $
    56.3
    
    
    nm
    
    $
    (0.5
    )
    
    $
    21.3
    
    
    nm
    
    $
    40.8Percent of net revenues
    
    nm
    
    
    
    
    
    nm
    
    nm
    
    
    
    
    
    nm
 nm= not meaningful Other expense, net for the first nine months of fiscal 2004 was comprised of a
$38.4 million decrease in the fair value of the Mindspeed warrant, a $6.3
million decrease in the fair value of the conversion right under the Skyworks
15% convertible senior subordinated note prior to its conversion into Skyworks
common stock in May 2004, $22.3 million of interest expense primarily from our
convertible subordinated notes, and impairments of non-marketable investments
of $0.6 million, offset by $12.8 million of income in our equity method
investments (including a $11.4 million gain in accordance with Staff
Accounting Bulletin No. 51 for the realization of an additional investment made
by another party in Jazz Semiconductor), $27.0 million in gains of sales of
certain of our investments and assets, and $6.7 million of investment and
interest income on invested cash balances. The $11.4 million gain in our
investment in Jazz Semiconductor is the result of our ownership in Jazz
decreasing from 45% to approximately 38% when the additional favorable
investment was realized. Due to variations in the fair value of the common
stock underlying the Mindspeed warrant, we expect that other (income) expense
may fluctuate significantly in future periods until this derivative instrument
is liquidated. Other expense, net for the first nine months of the previous year was comprised
of $13.1 million of investment and interest income on invested cash balances, a
gain on the sale of an investment of $5.2 million, more than offset by a 29




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##### Table of Contents



$1.8 million decrease in the fair value of the conversion right under the
Skyworks 15% convertible senior subordinated notes, $3.2 million of losses in
our equity method investments, $21.4 million of interest expense primarily from
our convertible subordinated notes, and impairments of non-marketable
investments of $34.4 million. As a result of the acquisition of $130.0 million of the 5.25% convertible
subordinated notes in the Merger, interest expense in the three and nine months
ended June 30, 2004 was higher than in the three and nine months ended June 30,
2003. Additionally, as a result of the acquisition of approximately $195.6
million in cash, short-term and long-term investments in the Merger, investment
and interest income in the three and nine months ended June 30, 2004 was higher
than in the three and nine months ended June 30, 2003. The carrying values of non-marketable investments are at cost, or their
estimated fair values, if lower. These investments consist of equity interests
in early stage technology companies for which we have accounted under the cost
method. We estimate the fair value of these investments based upon available
financial and other information, including the then-current and projected
business prospects for the subject companies, and when we determine that the
decline in the fair value of these investments is other than temporary, they
are written down to fair value. Provision for Income Taxes We recorded income tax expense of $1.4 million and $1.2 million for the nine
months ended June 30, 2004 and 2003, respectively, primarily reflecting taxes
imposed on our foreign subsidiaries. No federal income tax expense was
recorded with respect to the results for both periods as they will be offset by
net operating loss carryovers that have not been previously recognized. Except
to the extent of the federal alternative minimum tax, we expect this will
continue for the foreseeable future. We do not expect to recognize any income
tax benefits relating to future operating losses until we believe that such tax
benefits are more likely than not to be realized. As of September 30, 2003, Conexant had generated $668.0 million of deferred tax
assets and as of December 31, 2003 Conexant, Inc. had $338.0 million of fully
reserved deferred tax assets, both of which are available to offset future tax
obligations subject to limitations imposed by section 382 of the Internal
Revenue Code. We had a valuation allowance of approximately $413.0 million for
the generated deferred tax assets that we do not expect to realize through the
reduction of future income tax payments. We believe the remaining portion of
our deferred tax assets will be realized based on our current expectations of
future earnings and tax planning strategies available to us. We evaluate the
realizability of our deferred tax assets quarterly and in the event that we
determine that we will not be able to realize all or part of our generated
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged or credited to income in the period such determination is
made. To the extent that we realize a benefit from the acquired deferred tax
assets, the benefit will be credited to goodwill. Liquidity and Capital Resources Our cash and cash equivalents increased by $2.4 million during the first nine
months of fiscal 2004. Cash provided by operating activities was $1.7 million
for the first nine months of fiscal 2004, compared to cash used in operating
activities of $19.0 million for the comparable period in fiscal 2003. Operating
cash flows for the first nine months of fiscal 2004 reflect our loss from
continuing operations of $174.2 million, offset by non-cash charges of $208.1
million and a net increase in the components of working capital of $32.3
million. Non-cash charges consist primarily of IPR&D of $160.8 million,
depreciation and amortization of $23.9 million, a net decrease in fair value of
the Mindspeed warrant and the Skyworks convertible notes of $44.7 million,
offset by gains on sales of assets and investments of $27.0 million, and a net
increase in equity in earnings of equity method investees of $12.8 million. The
working capital increase principally consists of a $42.2 million increase in
accounts receivable, an $18.6 million increase in inventories, and a $10.6
million increase in other assets/liabilities, primarily increased prepaid
expenses, offset by a $39.1 million increase in accounts payable and accrued
expenses, all attributable to the timing of sales and purchases at quarter end. Cash used in investing activities of $23.4 million for the first nine months of
fiscal 2004 includes net cash and cash equivalents acquired in acquisitions of
$24.8 million, capital expenditures of $13.9 million, net purchases of 30




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marketable securities of $29.4 million, payment of deferred purchase
consideration of $4.0 million, payment of acquisition costs of $29.8 million,
and investments of $2.6 million. Cash provided by investing activities of
$184.9 million in the first nine months of fiscal 2003 principally consisted of
the repayment of the Skyworks note (net of the credit facility of $35.0
million), $15.4 million in proceeds from the sale of assets and investments,
$59.4 million of net sales of marketable securities, partially offset by
capital expenditures of $13.6 million and an acquisition of a business of $6.8
million. Cash provided by financing activities of $24.1 million for the first nine
months of fiscal 2004 consisted of proceeds from the exercise of stock options,
and cash used by financing activities in the first nine months of fiscal 2003
consisted of $56.4 million in repurchases of convertible subordinated notes
offset by $7.3 million from the exercise of stock options. As of June 30, 2004, our principal sources of liquidity are our existing cash
reserves and marketable securities (of which there is a short-term and a
long-term portion), the current portion of the Mindspeed warrant and cash
generated from product sales. Our working capital at June 30, 2004 was $386.8
million compared to $233.0 million at September 30, 2003. In addition, at June
30, 2004, we held $188.0 million in long-term marketable securities which we
could liquidate to fund operations and/or future acquisitions. Total cash, cash equivalents and marketable securities are as follows: June 30,
    
    September 30,(in millions)
    
    2004
    
    2003Cash and cash equivalents
    
    $
    78.5
    
    
    $
    76.2Skyworks 15% convertible senior subordinated notes
    
    
    
    
    
    
    55.6Equity securities- Skyworks Solutions, Inc. (6.2
million shares at June 30, 2004, 0.5 million
shares at September 30, 2003)
    
    
    50.8
    
    
    
    4.6Equity securities- SiRF Technologies, Inc. (5.9
million shares at June 30, 2004)
    
    
    74.6
    
    
    
    Other short-term marketable securities (primarily
U.S. government agencies and corporate debt
securities)
    
    
    33.0
    
    
    
    39.1Long-term marketable securities (primarily U.S.
government agencies and corporate debt
securities)
    
    
    188.0
    
    
    
    $
    424.9
    
    
    $
    175.5
 The current portion of the Mindspeed warrant at June 30, 2004 is $11.7 million,
and the long-term portion is $69.2 million. The valuation of this derivative
instrument is subjective, and at any point in time and could ultimately result
in the realization of amounts significantly different than the carrying value. In connection with the Mindspeed Spin in June 2003, we entered into a senior
secured revolving credit facility with Mindspeed, pursuant to which Mindspeed
may borrow up to $50.0 million from us for working capital and general
corporate purposes. Mindspeed may borrow under the credit facility only to
restore its cash balance to $25.0 million. The credit facility is available
through June 29, 2007 and as of June 30, 2004, no amounts were outstanding. We believe that our existing sources of liquidity will be sufficient to fund
our operations, research and development efforts, anticipated capital
expenditures, remaining accrued restructuring and reorganization liabilities
balance of $20.8 million, contingent consideration commitments on past
acquisitions, and other capital requirements, including our commitment under
the credit facility with Mindspeed, for at least the next twelve months. We
will need to continue a focused program of capital expenditures to meet our
research and development and corporate requirements. We may also consider
acquisition opportunities to extend our technology portfolio and design
expertise and to expand our product offerings. In order to fund capital
expenditures, increase our working capital or complete any acquisitions, we may
seek to obtain additional debt financing or issue additional shares of our

common stock. However, we cannot assure you that such financing will be
available to us on favorable terms, or at all. 31




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The following summarizes our contractual obligations at June 30, 2004: Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    More than 5(in millions)

    
    Total
    
    Year
    
    1-3 years
    
    3-5 years
    
    yearsConvertible subordinated notes
    
    $
    711.8
    
    
    $
    
    
    
    $
    711.8
    
    
    $
    
    
    
    $
    Operating leases
    
    
    138.5
    
    
    
    24.7
    
    
    
    35.6
    
    
    
    23.1
    
    
    
    55.1Assigned leases
    
    
    26.7
    
    
    
    3.2
    
    
    
    15.9
    
    
    
    2.5
    
    
    
    5.1Contingent consideration on acquisitions
    
    
    4.0
    
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    Capital commitments
    
    
    6.2
    
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    Purchase commitments
    
    
    35.0
    
    
    
    35.0
    
    
    
    
    
    
    
    
    
    
    
    $
    922.2
    
    
    $
    69.1
    
    
    $
    767.3
    
    
    $
    25.6
    
    
    $
    60.2
 Off-Balance Sheet Arrangements Our off-balance arrangements consist of conventional operating leases, the
Mindspeed senior secured revolving credit facility, capital commitments and
purchase commitments as described in Notes 5 and 10 of Notes to Consolidated
Condensed Financial Statements. We also have contingent liabilities for other
items assigned to Mindspeed and Skyworks at the time of their separation from
Conexant. See Note 5 of Notes to Consolidated Condensed Financial Statements.
We do not have any special purpose entities or variable interest entities as of
June 30, 2004. Critical Accounting Policies The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates affecting our
consolidated financial statements are those relating to allowances for doubtful
accounts, inventories, long-lived assets, in-process research and development
(IPR&D), the valuation of and estimated lives of identifiable intangible
assets, income taxes, valuation of derivative instruments, restructuring costs,
long-term employee benefit plans and other contingencies. We regularly evaluate
our estimates and assumptions based upon historical experience and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. To
the extent actual results differ from those estimates, our future results of
operations may be affected. Business combinations We account for acquired businesses using the purchase method of accounting
which requires that the assets and liabilities assumed be recorded at the date
of acquisition at their respective fair values. Because of the expertise
required to value intangible assets and IPR&D, we typically engage a third
party valuation firm to assist management in determining those values.
Valuation of intangible assets and IPR&D entails significant estimates and
assumptions including, but not limited to: determining the timing and expected
costs to complete projects, estimating future cash flows from product sales,
and developing appropriate discount rates and probability rates by project. We
believe that the fair values assigned to the assets acquired and liabilities
assumed are based on reasonable assumptions. To the extent actual results
differ from those estimates, our future results of operations may be affected.
Additionally, estimates for the purchase price allocation may change as
subsequent information becomes available. Impairment of long-lived assets Long-lived assets, including fixed assets and intangible assets (other than
goodwill), are continually monitored and are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of any
such asset may not be recoverable. The determination of recoverability is based
on an estimate of undiscounted cash flows expected to result from the use of an
asset and its eventual disposition. The estimate of cash flows is based 32




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upon, among other things, certain assumptions about expected future operating
performance, growth rates and other factors. Our estimates of undiscounted cash
flows may differ from actual cash flows due to, among other things,
technological changes, economic conditions, changes to our business model or
changes in our operating performance. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. We determine fair value by using available market
data, comparable asset quotes and/or discounted cash flow models. Goodwill is tested for impairment annually, or when a possible impairment is
indicated, using the fair value based test prescribed by SFAS No. 142. The
estimates and assumptions described above (along with other factors such as
discount rates) will affect the outcome of our impairment tests and the amounts
of any resulting impairment losses. Deferred income taxes We evaluate the realizability of our deferred tax assets and assess the need
for a valuation allowance quarterly. We record a valuation allowance to reduce
our deferred tax assets to the net amount that is more likely than not to be
realized. Our assessment of the need for a valuation allowance is based upon
our expectations of future taxable income and the ongoing prudent and feasible
tax planning strategies available to us. In the event that we determine that we
will not be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged against
income in the period such determination is made. Likewise, in the event we were
to determine that we will be able to realize our deferred tax assets in the
future in excess of the net recorded amount, an adjustment to the deferred tax
assets would increase income in the period such determination is made. To the
extent that we realize a benefit from acquired deferred tax assets, the benefit
will be credited to goodwill. Inventories We write down our inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than our
estimates, additional inventory write-downs may be required. Allowance for doubtful accounts We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, our actual losses may exceed
our estimates, and additional allowances would be required. Non-Marketable Equity Securities We have a portfolio of strategic investments in non-marketable equity
securities. Our ability to recover our investments in private, non-marketable
equity securities and to earn a return on these investments is primarily
dependent on how successfully these companies are able to execute to their
business plans and how well their products are accepted, as well as their
ability to obtain venture capital funding to continue operations and to grow.
We review all of our investments periodically for impairment and an impairment
analysis of non-marketable equity securities requires significant judgment.
This analysis includes assessment of each investees financial condition, the
business outlook for its products and technology, its projected results and
cash flows, the likelihood of obtaining subsequent rounds of financing and the
impact of any relevant contractual equity preferences held by us or by others.
Equity prices, including non-marketable equity securities, have declined
significantly over the past two years and we have experienced substantial
impairments in the value of non-marketable equity securities investments we
hold. Future adverse changes in market conditions or poor operating results of
underlying investments could result in an inability to recover the carrying
value of our investments that may not be reflected in their current carrying
values, which could require additional impairment charges to write down the
carrying values of such investments. Revenue Recognition Revenue from product sales is recognized upon shipment to the customer, when
the risk of loss has been transferred to the customer, price and terms are
fixed, no significant vendor obligation exists and collection of the resulting
receivable is reasonably assured. Our revenue recognition policy is
significant because our revenue is a key component of our operations and the
timing of revenue recognition determines the timing of certain expenses, such 33




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as sales commissions. In addition, we record reductions to revenue for
estimated product returns, and allowances such as competitive pricing programs
and rebates. We follow very specific and detailed guidelines in measuring
revenue. Revenue results are difficult to predict, and any shortfall in
revenues could cause our operating results to vary significantly from period to
period. Valuation of Derivative Instruments We had two primary types of derivatives our warrant to purchase shares of
common stock of Mindspeed and the conversion right of the Skyworks 15%
convertible senior subordinated notes. Until its conversion to common stock in
May 2004, we determined the fair value of the conversion right of the Skyworks
notes using the actual trading price of the underlying shares of Skyworks
common stock. We determine the fair value of the current portion of the
Mindspeed warrant using current pricing data. The fair value of the long-term
portion of the Mindspeed warrant is determined using a standard Black-Scholes
pricing model with assumptions consistent with current market conditions and
our current intent to liquidate the warrant over a specified time period. The
Black-Scholes pricing model requires the input of highly subjective assumptions
including expected stock price volatility. Changes in these assumptions, or in
the underlying valuation model, could cause the fair value of the Mindspeed
warrant to vary significantly from period to period. Restructuring Charges We recorded $3.6 million and $4.1 million of restructuring charges in the three
and nine months ended June 30, 2004. We recorded $5.2 million, $16.1 million
and $16.9 million of restructuring charges in fiscal years 2003, 2002 and 2001,
respectively. These charges relate primarily to reductions in our workforce
and related impact on the use of facilities. The estimated charges contain
estimates and assumptions made by management about matters which are uncertain
at the time, for example the timing and amount of sublease income that will be
achieved on vacated property and the operating costs to be paid until lease
termination. While we have used our best estimates based on facts and
circumstances available at the time, different estimates reasonably could have
been used in the relevant periods, and the actual results may be different, and
those differences could have a material impact on the presentation of our
financial condition or results of operations. Our policies require us to
review the estimates and assumptions periodically and reflect the effects of
those revisions in the period that they are determined to be necessary. In
addition, as a result of the Merger in February 2004, we acquired $11.3 million
(as adjusted) of additional restructuring liabilities which were recorded
through the purchase price allocation. Such amounts also contain estimates and
assumptions made by management, and will be reviewed periodically and adjusted
accordingly. Employee Benefit Plans We have long-term liabilities recorded for a retirement medical plan and a
pension plan. These obligations and the related effects on operations are
determined using actuarial valuations. There are critical assumptions used in
these valuation models such as the discount rate, expected return on assets,
compensation levels, turnover rates and mortality rates. The discount rate
used is representative of a high-quality fixed income investment. The other
assumptions do not tend to change materially over time. We evaluate all
assumptions annually and they are updated to reflect our experience. Certain Business Risks Our business, financial condition and operating results can be impacted by a
number of factors, any one of which could cause our actual results to vary
materially from recent results or from our anticipated future results. Any of
these risks could materially and adversely affect our business, financial
condition and results of operations, which in turn could materially and
adversely affect the price of our common stock or other securities. Unless the context otherwise indicates, as used in this section, the terms
Conexant and GlobespanVirata refer to the separate businesses of Conexant
Systems, Inc. and GlobespanVirata, Inc., respectively, as they were conducted
for periods prior to the completion of the merger of Conexant and
GlobespanVirata on February 27, 2004. References to we, us, our, the
combined company and other similar terms refer to the combined Conexant and
GlobespanVirata business from and after the completion of the merger. 34




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References in this section to Conexants fiscal year refer to the fiscal year
ending on the Friday nearest September 30 of each year and references to
GlobespanViratas fiscal year refer to the fiscal year ending December 31 of
each year. Each of Conexant, GlobespanVirata and the combined company has recently
incurred substantial losses. Our net revenues for the three and nine months ended June 30, 2004 were $267.6
million and $688.7 million, respectively. Our loss from continuing operations
for the three and nine months ended June 30, 2004 was $71.4 million and $174.2
million, respectively. Conexants net revenues in fiscal 2003 were $600.0 million compared to $521.7
million in fiscal 2002 and $541.7 million in fiscal 2001. Although Conexant had
income from continuing operations of $23.6 million in fiscal 2003, it incurred
losses from continuing operations of $143.8 million in fiscal 2002 and $660.9
million in fiscal 2001. Including discontinued operations, Conexant incurred
net losses of $705.3 million in fiscal 2003, $880.8 million in fiscal 2002, and
$1.4 billion in fiscal 2001. GlobespanViratas net revenues for fiscal 2003
were $379.1 million compared to $228.9 million in fiscal 2002 and $264.9
million in fiscal 2001. GlobespanVirata also had losses from continuing
operations of $49.6 million in fiscal 2003, $636.9 million in fiscal 2002 and
$372.0 million in fiscal 2001. Including discontinued operations,
GlobespanVirata incurred net losses of $59.3 million in fiscal 2003, $655.0
million in fiscal 2002, and $377.5 million in fiscal 2001. We operate in the highly cyclical semiconductor industry, which is subject to
significant downturns. The semiconductor industry is highly cyclical and is characterized by constant
and rapid technological change, rapid product obsolescence and price erosion,
evolving technical standards, short product life cycles and wide fluctuations
in product supply and demand. From time to time these and other factors,
together with changes in general economic conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturns have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated erosion of
average selling prices. These factors have caused substantial fluctuations in
our revenues and results of operations and those of Conexant and
GlobespanVirata. Conexant and GlobespanVirata experienced these cyclical
fluctuations in their businesses in the past and we have experienced, and may
in the future experience, cyclical fluctuations. Demand for our products in each of the communications electronics end-markets
which we address is subject to a unique set of factors, and a downturn in
demand affecting one market may be more pronounced, or last longer, than a
downturn affecting another of our markets. We are subject to intense competition. The communications semiconductor industry in general and the markets in which
we compete in particular are intensely competitive. We compete worldwide with a
number of United States and international semiconductor providers that are both
larger and smaller than us in terms of resources and market share. We currently
face significant competition in our markets and expect that intense price and
product competition will continue. This competition has resulted in and is
expected to continue to result in declining average selling prices for our
products. We also anticipate that additional competitors will enter our markets
as a result of expected growth opportunities in communications electronics, the
trend toward global expansion by foreign and domestic competitors,
technological and public policy changes and relatively low barriers to entry in
certain markets of the industry. Moreover, as with many companies in the
semiconductor industry, customers for certain of our products offer other
products that compete with similar products offered by us. Many of our
competitors have certain advantages over us, such as significantly greater
sales and marketing, manufacturing, distribution, technical and other
resources. We believe that the principal competitive factors for semiconductor suppliers in our addressed markets are:  
    
    time-to-market;  
    
    product quality, reliability and performance;  
    
    level of integration;  
    
    price and total system cost; 35




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
    
    compliance with industry standards;  
    
    design and engineering capabilities;  
    
    strategic relationships with customers;  
    
    customer support;  
    
    new product innovation; and  
    
    access to manufacturing capacity. We cannot assure you that we will be able to successfully address these
factors. Current and potential competitors also have established or may establish
financial or strategic relationships among themselves or with our existing or
potential customers, resellers or other third parties. These relationships may
affect customers purchasing decisions. Accordingly, it is possible that new
competitors or alliances could emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully
against current and potential competitors. Our success depends on our ability to timely develop competitive new products
and reduce costs. Our operating results will depend largely on our ability to continue to
introduce new and enhanced semiconductor products on a timely basis. Successful
product development and introduction depends on numerous factors, including,
among others:  
    
    our ability to anticipate customer and market requirements and
changes in technology and industry standards;  
    
    our ability to accurately define new products;  
    
    our ability to timely complete development of new products and
bring our products to market on a timely basis;  
    
    our ability to differentiate our products from offerings of our competitors;  
    
    overall market acceptance of our products; and  
    
    our ability to invest in significant amounts of research and development. We cannot assure you that we will have sufficient resources to make the
substantial investment in research and development in order to develop and
bring to market new and enhanced products. Furthermore, we are required to
continually evaluate expenditures for planned product development and to choose
among alternative technologies based on our expectations of future market
growth. We cannot assure you that we will be able to develop and introduce new
or enhanced products in a timely and cost-effective manner, that our products
will satisfy customer requirements or achieve market acceptance, or that we
will be able to anticipate new industry standards and technological changes. We
also cannot assure you that we will be able to respond successfully to new
product announcements and introductions by competitors. In addition, prices of established products may decline, sometimes
significantly and rapidly, over time. We believe that in order to remain
competitive we must continue to reduce the cost of producing and delivering
existing products at the same time that we develop and introduce new or
enhanced products. We cannot assure you that we will be able to continue to
reduce the cost of our products to remain competitive. If we are unable to
reduce manufacturing costs in response to declines in selling prices for our
products, it will lead to declines in gross margins for such products. We may not be able to keep abreast of the rapid technological changes in our
markets. The demand for our products can change quickly and in ways we may not
anticipate because our markets generally exhibit the following characteristics:  
    
    rapid technological developments;  
    
    rapid changes in customer requirements; 36




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
    
    frequent new product introductions and enhancements;  
    
    short product life cycles with declining prices over the life cycle of the products; and  
    
    evolving industry standards. Our products could become obsolete sooner than anticipated because of a faster
than anticipated change in one or more of the technologies related to our
products or in market demand for products based on a particular technology,
particularly due to the introduction of new technology that represents a
substantial advance over current technology. Currently accepted industry
standards are also subject to change, which may contribute to the obsolescence
of our products. We may not be able to attract and retain qualified personnel necessary for the
design, development and sale of our products. Our success could be negatively
affected if key personnel leave. Our future success depends on our ability to attract, retain and motivate
qualified personnel, including executive officers and other key management and
technical personnel. As the source of our technological and product
innovations, our key technical personnel represent a significant asset. The
competition for such personnel can be intense in the semiconductor industry.
While we have entered into employment agreements with some of our key
personnel, we cannot assure you that we will be able to attract and retain
qualified management and other personnel necessary for the design, development
and sale of our products. We may have particular difficulty attracting and retaining key personnel during
periods of poor operating performance. The loss of the services of one or more
of our key personnel, including Armando Geday, our Chief Executive Officer, F.
Matthew Rhodes, our President, or certain key design and technical personnel,
or our inability to attract, retain and motivate qualified personnel could have
a material adverse effect on our ability to operate our business. If OEMs of communications electronics products do not design our products into
their equipment, we will be unable to sell those products. Moreover, a design
win from a customer does not guarantee future sales to that customer. Our products are not sold directly to the end-user but are components of other
products. As a result, we rely on OEMs of communications electronics products
to select our products from among alternative offerings to be designed into
their equipment. We may be unable to achieve these design wins. Without
design wins from OEMs, we would be unable to sell our products. Once an OEM
designs another suppliers semiconductors into one of its product platforms, it
will be more difficult for us to achieve future design wins with that OEMs
product platform because changing suppliers involves significant cost, time,
effort and risk. Achieving a design win with a customer does not ensure that we
will receive significant revenues from that customer and we may be unable to
convert design wins into actual sales. Even after a design win, the customer is
not obligated to purchase our products and can choose at any time to stop using
our products if, for example, it or its own products are not commercially
successful. Because of the lengthy sales cycles of many of our products, we may incur
significant expenses before we generate any revenues related to those products. Our customers may need six months or longer to test and evaluate our products
and an additional six months or more to begin volume production of equipment
that incorporates our products. The lengthy period of time required also
increases the possibility that a customer may decide to cancel or change
product plans, which could reduce or eliminate sales to that customer. As a
result of this lengthy sales cycle, we may incur significant research and
development, and selling, general and administrative expenses before we
generate the related revenues for these products, and we may never generate the
anticipated revenues if our customer cancels or changes its product plans. Uncertainties involving the ordering and shipment of our products could
adversely affect our business. Our sales are typically made pursuant to individual purchase orders and we
generally do not have long-term supply arrangements with our customers.
Generally, our customers may cancel orders until 30 days prior to shipment. In
addition, we sell a portion of our products through distributors and other
resellers, some of whom have a right to return unsold products to us. Sales to
distributors and other resellers accounted for approximately 40% of Conexants 37




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net revenues for fiscal 2003, whereas GlobespanViratas sales were primarily to
OEM customers. For the three and nine months ended June 30, 2004, approximately
30% and 35%, respectively, of our sales were to distributors and other
resellers. We routinely purchase inventory based on estimates of end-market
demand for our customers products, which is difficult to predict. This
difficulty may be compounded when we sell to OEMs indirectly through
distributors and other resellers or contract manufacturers, or both, as our
forecasts of demand are then based on estimates provided by multiple parties.
In addition, our customers may change their inventory practices on short notice
for any reason. The cancellation or deferral of product orders, the return of
previously sold products or overproduction due to the failure of anticipated
orders to materialize could result in our holding excess or obsolete inventory,
which could result in write-downs of inventory. We are dependent upon third parties for the manufacture, assembly and test of
our products. We are entirely dependent upon outside wafer fabrication facilities (known as
foundries), including Jazz Semiconductor, Inc., in which we hold a minority
interest. Under our fabless business model, our long-term revenue growth is
dependent on our ability to obtain sufficient external manufacturing capacity,

including wafer production capacity. If the semiconductor industry experiences
a shortage of wafer fabrication capacity in the future, we may experience
delays in shipments or increased manufacturing costs. There are significant risks associated with our reliance on third-party
foundries, including:  
    
    the lack of assured wafer supply, potential wafer shortages and higher wafer prices;  
    
    limited control over delivery schedules, manufacturing yields, production costs and product quality; and  
    
    the unavailability of, or delays in obtaining, access to key process technologies. Although we have a long-term supply arrangement with Jazz to obtain external
wafer manufacturing capacity, the foundries we use may allocate their limited
capacity to fulfill the production requirements of other customers that are
larger and better financed than we. If we choose to use a new foundry, it
typically takes several months to redesign our products for the process
technology and intellectual property cores of the new foundry and to complete
the qualification process before we can begin shipping products from the new
foundry. We are also dependent upon third parties, including Skyworks Solutions, Inc.,
for the assembly and test of our products. Our reliance on others to assemble
and test our products subjects us to many of the same risks as are described
above with respect to our reliance on outside wafer fabrication facilities. Wafer fabrication processes are subject to obsolescence, and foundries may
discontinue a wafer fabrication process used for certain of our products. In
such event, we generally offer our customers a last time buy program to
satisfy their anticipated requirements for our products. The unanticipated
discontinuation of wafer fabrication processes on which we rely may adversely
affect our revenues and our customer relationships. The foundries and other suppliers on whom we rely may experience financial
difficulties or suffer disruptions in their operations due to causes beyond our
control, including labor strikes, work stoppages, electrical power outages,
fire, earthquake, flooding or other natural disasters. Certain of our
suppliers manufacturing facilities are located near major earthquake fault
lines in California, Mexico and the Asia-Pacific region. In the event of a
disruption of the operations of one or more of our suppliers, we may not have a
second manufacturing source immediately available. Such an event could cause
significant delays in shipments until we could shift the products from an
affected facility or supplier to another facility or supplier. The
manufacturing processes we rely on are specialized and are available from a
limited number of suppliers. Alternate sources of manufacturing capacity,
particularly wafer production capacity, may not be available to us on a timely
basis. Even if alternate wafer production capacity is available, we may not be
able to obtain it on favorable terms, or at all. Difficulties or delays in
securing an adequate supply of our products on favorable terms, or at all,
could impair our ability to meet our customers requirements and have a
material adverse effect on our operating results. In addition, the highly complex and technologically demanding nature of
semiconductor manufacturing has caused foundries to experience from time to
time lower than anticipated manufacturing yields, particularly in connection
with the introduction of new products and the installation and start-up of new
process technologies. Lower than anticipated manufacturing yields may affect
our ability to fulfill our customers demands for our products on a 38




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timely basis. Moreover, lower than anticipated manufacturing yields may
adversely affect our cost of goods sold and our results of operations. Our success depends, in part, on our ability to effect suitable investments,
alliances and acquisitions. Although we invest significant resources in research and development
activities, the complexity and rapidity of technological changes make it
impractical for us to pursue development of all technological solutions on our
own. On an ongoing basis, we review investment, alliance and acquisition
prospects that would complement our existing product offerings, augment our
market coverage or enhance our technological capabilities. However, we cannot
assure you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future. Moreover, if we consummate such transactions, they could result in:  
    
    issuances of equity securities dilutive to our existing shareholders;  
    
    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. Additionally, in periods subsequent to an acquisition, we must evaluate
goodwill and acquisition-related intangible assets for impairment. When such
assets are found to be impaired, they will be written down to estimated fair
value, with a charge against earnings. We may have difficultly integrating businesses we acquire. In particular, we
may be unable to integrate successfully the operations of Conexant and
GlobespanVirata and realize the full cost savings we anticipate. Integrating acquired organizations and their products and services may be
expensive, time-consuming and a strain on our resources and our relationships
with employees and customers, and ultimately may not be successful. The merger of Conexant and GlobespanVirata involves the integration of two
companies that previously operated independently. The difficulties of
combining the operations of the companies include:  
    
    the challenge of effecting integration while carrying on an ongoing business;  
    
    the necessity of coordinating geographically separate organizations;  
    
    retaining and integrating personnel with diverse business backgrounds;  
    
    the challenge of realizing expected operating efficiencies of combining two companies;  
    
    retaining existing customers and strategic partners of each company; and  
    
    implementing and maintaining consistent standards, controls,
procedures, policies and information systems. The process of integrating operations could cause an interruption of, or loss
of momentum in, the activities of one or more of our businesses and the loss of
key personnel. The diversion of managements attention and any delays or
difficulties encountered in connection with the merger and the integration of
the two operations could have an adverse effect on our business, results of
operations or financial condition. We cannot assure you that the economies of
scale and operating efficiencies that we expect to result from the merger will
be realized within the time periods contemplated or at all. We face a risk that capital needed for our business will not be available when
we need it. We believe that our existing sources of liquidity together with cash expected
to be generated from product sales will be sufficient to fund our operations,
research and development, anticipated capital expenditures, working capital and
other financing requirements for at least the next twelve months. However, we
cannot assure you that this will be the case and we may need to obtain
alternate sources of financing in the future. We cannot assure you that we will
have access to additional sources of capital on favorable terms or at all. 39




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We hold as marketable securities available for sale a significant amount of
equity securities in publicly traded companies. For most of our equity
security holdings, there are risks associated with the overall state of the
stock market, having available buyers for the shares we sell, and ultimately
being able to liquidate the securities at a favorable price. We cannot assure
you that the carrying value of these assets will ultimately be realized. In addition, any strategic investments and acquisitions that we may make to
help us grow our business may require additional capital resources. We cannot
assure you that the capital required to fund these investments and acquisitions
will be available in the future. We are subject to the risks of doing business internationally. For the three and nine months ended June 30, 2004, approximately 92% and 91%,
respectively, of our net revenues were from customers located outside of the
United States, primarily in the Asia-Pacific region and Europe. Approximately
90% of Conexants net revenues for fiscal 2003 and approximately 92% of
GlobespanViratas net revenues for fiscal 2003 were from customers located
outside the United States, primarily in the Asia-Pacific region and Europe. In
addition, we have design centers and suppliers located outside the United
States, including the Skyworks assembly and test facility in Mexico and
assembly and test service providers and foundries located in the Asia-Pacific
region. Our international sales and operations are subject to a number of risks
inherent in selling and operating abroad. These include, but are not limited
to, risks regarding:  
    
    currency exchange rate fluctuations;  
    
    local economic and political conditions;  
    
    disruptions of capital and trading markets;  
    
    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;  
    
    difficulty in obtaining distribution and support;  
    
    the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or export
licensing requirements;  
    
    tax laws; and  
    
    limitations on our ability under local laws to protect our intellectual property. Because most of our international sales, other than sales to Japan (which are
denominated principally in Japanese yen), are currently denominated in U.S.
dollars, our products could become less competitive in international markets if
the value of the U.S. dollar increases relative to foreign currencies. We
cannot assure you that the factors described above will not have a material
adverse effect on our ability to increase or maintain our foreign sales. From time to time, we may enter into foreign currency forward exchange
contracts to minimize risk of loss from currency exchange rate fluctuations for
foreign currency commitments entered into in the ordinary course of business.
We have not entered into foreign currency forward exchange contracts for other
purposes. Our financial condition and results of operations could be affected
(adversely or favorably) by currency fluctuations. Our operating results may be negatively affected by substantial quarterly and
annual fluctuations and market downturns. The revenues, earnings and other operating results of Conexant and
GlobespanVirata fluctuated in the past and our revenues, earnings and other
operating results may fluctuate in the future. These fluctuations are due to a
number of factors, many of which are beyond our control. These factors include,
among others:  
    
    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;  
    
    seasonal customer demand;  
    
    the gain or loss of significant customers;  
    
    market acceptance of our products and our customers products; 40




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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 effects of competitive pricing pressures, including decreases
in average selling prices of our products. The foregoing factors are difficult to forecast, and these as well as other
factors could materially adversely affect our quarterly or annual operating
results. If our operating results fail to meet the expectations of analysts or
investors, it could materially and adversely affect the price of our common
stock and other securities. The value of our common stock may be adversely affected by market volatility. The trading price of our common stock fluctuates significantly and may be
influenced by many factors, including:  
    
    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 and markets in which we operate;  
    
    our inclusion in, or removal from, any equity market indices;  
    
    the level of research coverage of our common stock;  
    
    changes in earnings estimates or buy/sell recommendations by analysts; and  
    
    general financial, domestic, international, economic and other market conditions. In addition, public stock markets have experienced, and are currently
experiencing, extreme price and trading volume volatility, particularly in the
technology sectors of the market. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately impacted by the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock. We may be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party technology, which could
result in significant expense and loss of our ability to use, make, sell,
export or import our products or one or more components comprising our
products. The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, third parties have asserted
and may in the future assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business
and have demanded and may in the future demand that we license their patents
and technology. Any litigation to determine the validity of claims that our
products infringe or may infringe these rights, including claims arising
through our contractual indemnification of our customers, regardless of their
merit or resolution, could be costly and divert the efforts and attention of
our management and technical personnel. We cannot assure you that we would
prevail in litigation given the complex technical issues and inherent
uncertainties in intellectual property litigation. If litigation results in an
adverse ruling we could be required to:  
    
    pay substantial damages;  
    
    cease the manufacture, use or sale of infringing products;  
    
    discontinue the use of infringing technology;  
    
    expend significant resources to develop non-infringing technology; or  
    
    license technology from the third party claiming infringement,
which license may not be available on commercially reasonable terms, or
at all. 41




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If we are not successful in protecting our intellectual property rights, it may
harm our ability to compete. We rely primarily on patent, copyright, trademark and trade secret laws, as
well as nondisclosure and confidentiality agreements and other methods, to
protect our proprietary technologies and processes. At times we incorporate the
intellectual property of our customers into our designs, and we have
obligations with respect to the non-use and non-disclosure of their
intellectual property. In the past, Conexant and GlobespanVirata engaged in
litigation to enforce their intellectual property rights, to protect their
trade secrets or to determine the validity and scope of proprietary rights of
others, including their customers. We may engage in future litigation on
similar grounds, which may require us to expend significant resources and to
divert the efforts and attention of our management from our business
operations. We cannot assure you that:  
    
    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. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization, develop similar
technology independently or design around our patents. If any of our patents
fails to protect our technology it would make it easier for our competitors to
offer similar products. In addition, effective patent, copyright, trademark and
trade secret protection may be unavailable or limited in certain countries. We may be liable for penalties under environmental laws, rules and regulations,
which could adversely impact our business. Conexants former manufacturing operations used a variety of chemicals and were
subject to a wide range of environmental protection regulations in the United
States and Mexico. In connection with Conexants spin-off from Rockwell
International Corporation (now Rockwell Automation, Inc.) in December 1998,
Conexant assumed all liabilities in respect of environmental matters related to
the former operations of its business. We have been designated as a potentially
responsible party and are engaged in groundwater remediation at one Superfund
site located at a former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly occupied by Conexant.
In addition, we are engaged in remediations of groundwater contamination at
Conexants former Newport Beach, California wafer fabrication facility. We
currently estimate the remaining costs for these remediations to be
approximately $3.0 million and have accrued for these costs as of June 30,
2004. In the United States, environmental regulations often require parties to fund
remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. While we have not experienced any material adverse effects on our
operations as a result of such regulations, we cannot assure you that the costs
that might be required to complete remedial actions, if any, will not have a
material adverse effect on our business, financial condition and results of
operations. We may be limited in the future in the amount of net operating losses that we
can use to offset taxable income. As of September 30, 2003, Conexant had approximately $1 billion of U.S. federal
income tax net operating loss, or NOL, carryforwards that can be used to offset
taxable income in subsequent years. The NOL carryforwards are scheduled to
expire at various dates through 2024. Section 382 of the Internal Revenue Code
could limit the future use of some or all of the NOL carryforwards if the
ownership of our common stock changes by more than 50 percentage points in
certain circumstances over a three-year testing period. Based on information
known to us, we have not undergone such a change of ownership and the merger of
Conexant and GlobespanVirata did not constitute a change of ownership, although
the shares of our common stock issued in the merger will be taken into account
in any change of ownership computations. Direct or indirect transfers of our
common stock, when taken together with the shift in ownership resulting from
the merger, could result in a change of ownership that would trigger the
section 382 limitation. If such an ownership change occurs, section 382 would
limit our use of NOL carryforwards in each subsequent taxable year to an amount
equal to a federal long-term tax-exempt rate published by the Internal Revenue
Service at the time of the ownership change, multiplied by our fair market
value at such time; any unused annual limitation amounts may also be carried
forward. The merger resulted in a change of 42




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ownership of GlobespanVirata and the future use of GlobespanViratas NOL
carryforwards are subject to the section 382 limitation (or further limitation
in the case of NOL carryforwards already subject to limitation as a result of
previous transactions) based on the fair market value of GlobespanVirata at the
time of the merger. Provisions in our organizational documents and rights agreement and Delaware
law may make it difficult for someone to acquire control of us. We have established certain anti-takeover measures that may affect our common
stock and convertible notes. Our restated certificate of incorporation, our
by-laws, our rights agreement with Mellon Investor Services LLC, as rights
agent, dated as of November 30, 1998, as amended, and the Delaware General
Corporation Law contain several provisions that would make more difficult an
acquisition of control of us in a transaction not approved by our board of
directors. Our restated certificate of incorporation and by-laws include
provisions such as:  
    
    the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;  
    
    the ability of our board of directors to issue shares of our
preferred stock in one or more series without further authorization of
our shareholders;  
    
    a prohibition on shareholder action by written consent;  
    
    a requirement that shareholders provide advance notice of any
shareholder nominations of directors or any proposal of new business to
be considered at any meeting of shareholders;  
    
    a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of our
restated certificate of incorporation or by-laws;  
    
    elimination of the right of shareholders to call a special meeting of shareholders; and  
    
    a fair price provision. Our rights agreement gives our shareholders certain rights that would
substantially increase the cost of acquiring us in a transaction not approved
by our board of directors. In addition to the rights agreement and the provisions in our restated
certificate of incorporation and by-laws, Section 203 of the Delaware General
Corporation Law generally provides that a corporation shall not engage in any
business combination with any interested shareholder during the three-year
period following the time that such shareholder becomes an interested
shareholder, unless a majority of the directors then in office approves either
the business combination or the transaction that results in the shareholder
becoming an interested shareholder or specified shareholder approval
requirements are met. 43




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our financial instruments include cash and cash equivalents, marketable debt
securities, the Mindspeed warrant, equity securities and our long-term debt.
Our main investment objectives are the preservation of investment capital and
the maximization of after-tax returns on our investment portfolio.
Consequently, we invest with only high-credit-quality issuers and we limit the
amount of our credit exposure to any one issuer. Our cash and cash equivalents, and short-term marketable securities are not
subject to significant interest rate risk due to the short maturities of these
instruments. As of June 30, 2004, the carrying value of our cash and cash
equivalents and short-term marketable securities approximates fair value. Our
long-term marketable securities (consisting of commercial paper, corporate
bonds and government securities) principally have remaining terms of 1 to 3
years. Such securities are subject to interest rate risk.At June 30, 2004, a
10% adverse change in interest rates would result in an $18.8 million decrease
in the value of our long-term marketable securities. Marketable equity securities are subject to equity price risk. For most of our
equity security holdings, there are risks associated with the overall state of
the stock market, having available buyers for shares we sell, and ultimately
being able to liquidate the securities at a favorable price. As of June 30,
2004, a 10% adverse change in equity prices would result in a $12.8 million
decrease in the value of our marketable equity securities. We classify all of our marketable debt and equity securities as
available-for-sale securities. As of June 30, 2004, the carrying value of these
securities included net unrealized gain of $69.5 million. We hold a warrant to purchase 30 million shares of common stock of Mindspeed.
For financial accounting purposes, this is a derivative instrument and the fair
value of the warrant is subject to significant risk related to changes in the
market price of Mindspeeds common stock. As of June 30, 2004, a 10% decrease
in the market price of Mindspeeds common stock would decrease the fair value
of this warrant by approximately $10.8 million. At June 30, 2004, the market
price of Mindspeeds common stock was $4.46 per share. For the quarter ended
June 30, 2004, the market price of Mindspeeds common stock ranged from a low
of $4.45 per share to a high of $7.63 per share. Our long-term debt consists of convertible subordinated notes with interest at
fixed rates. Consequently, we do not have significant cash flow exposure on our
long-term debt. However, the fair value of our convertible subordinated notes
is subject to significant fluctuation due to their convertibility into shares
of our common stock. The following table shows the fair values of our financial instruments as of
June 30, 2004: (in millions)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    78.5
    
    
    $
    78.5Marketable debt securities
    
    
    31.6
    
    
    
    31.6Marketable government securities
    
    
    186.8
    
    
    
    186.8Marketable equity securities
    
    
    128.0
    
    
    
    128.0Mindspeed warrant
    
    
    80.9
    
    
    
    80.9Long-term debt
    
    
    711.8
    
    
    
    686.3
 We transact business in various foreign currencies, and we have established a
foreign currency hedging program utilizing foreign currency forward exchange
contracts to hedge certain foreign currency transaction exposures. Under this
program, we seek to offset foreign currency transaction gains and losses with
gains and losses on the forward contracts, so as to mitigate our overall risk
of foreign transaction gains and losses. We do not enter into forward contracts
for speculative or trading purposes. At June 30, 2004, we held no foreign
currency forward exchange contracts. Based on our overall currency rate
exposure at June 30, 2004, a 10% change in the currency rates would not have a
material effect on our consolidated financial position, results of operations
or cash flows. 44




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ITEM 4. CONTROLS AND PROCEDURES An evaluation as of the end of the period covered by this report was carried
out under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and its Senior Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures, which are
defined under Securities and Exchange Commission rules as controls and other
procedures of a company that are designed to ensure that information required
to be disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within required time
periods. Based upon that evaluation, the Companys Chief Executive Officer and
its Senior Vice President and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective. There were no changes in the Companys internal control over financial
reporting during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting. 45




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PART II. OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES In connection with the acquisition on June 29, 2004 of all of the outstanding
capital stock of Amphion Semiconductor Limited by the Company, the Company
delivered 600,000 shares of common stock to former Amphion shareholders. The
issuance of the shares was pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended. The holders of such
shares have been granted certain registration rights. The shares are currently
held in escrow and are subject to reduction for any indemnity claims that may
be made by the Company in connection with the acquisition. The Company
received no cash from the issuance of these securities. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:  31.1
    
    Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. (b) Reports on Form 8-K Current Report on Form 8-K dated April 26, 2004, furnishing the Companys press
release dated April 26, 2004, announcing its financial results for the second
quarter ended March 31, 2004. (Item 12) Amended Current Report on Form 8-K/A dated May 26, 2004, amending the Companys
Current Report on Form 8-K dated March 12, 2004 to update the pro forma
financial statements relating to the GlobespanVirata merger. (Item 7) Current Report on Form 8-K dated July 9, 2004, furnishing the Companys press
release dated July 6, 2004, announcing its revised outlook for its third fiscal
quarter of 2004. (Item 12) Current Report on Form 8-K dated July 29, 2004, furnishing the Companys press
release dated July 29, 2004, announcing its financial results for the third
quarter ended June 30, 2004. (Item 12) Current Report on Form 8-K
dated August 12, 2004, furnishing the Companys press release
dated August 12, 2004, announcing its appointment of a new chief
financial officer. (Items 5 and 7) 46




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CONEXANT SYSTEMS, INC.(Registrant)Date: August 16, 2004
    
    By
    
    /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President andChief Financial Officer(principal financial officer)
 47




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EXHIBIT INDEX  31.1
    
    Certification of the Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    Certification of the Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350. 48