Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT SECT
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UNITED STATES SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT SECTION 15(d) SECURITIES EXCHANGE 1934
year ended September 2000* Commission number: 000-24923
CONEXANT SYSTEMS, INC.
(Exact name registrant charter)
Delaware
(State incorporation)
25-1799439
(I.R.S. Employer No.)
4311 Jamboree Road, Newport Beach, California
(Address principal executive
92660-3095
(Zip code)
Registrant's telephone number, including area code: (949) 483-4600 Securities registered pursuant Section 12(b) Act: None Securities registered pursuant Section 12(g) Act: Common Stock, $1.00 Value Share (including associated Preferred Share Purchase Rights) Indicate check mark whether Registrant reports required Section 15(d) Securities Exchange 1934 during preceding months such shorter period that registrant required such reports), been subject such requirements past days. Indicate check mark disclosure delinquent pursuant Item Regulation contained herein, will contained, best Registrant's knowledge, proxy information statements incorporated reference Part this Form 10-K amendment this Form 10-K. aggregate market value Registrant's voting stock held Registrant (based closing price reported NASDAQ National Market November 2000) approximately $4.9 billion. Shares voting stock held each director each shareowner with director have been excluded from this calculation because such persons deemed This determination status necessarily conclusive determination other purposes. number outstanding shares Registrant's Common Stock November 2000 242,623,951. DOCUMENTS INCORPORATED REFERENCE Portions Registrant's Proxy Statement 2001 Annual Meeting Shareowners held February 2001, incorporated reference into Part this Form 10-K.
presentation purposes this Form 10-K, references made September 2000 period relate actual year ended September 2000.
CAUTIONARY STATEMENT This Annual Report Form 10-K contains statements relating future results Conexant Systems, Inc. (including certain projections business trends) that ""forward-looking statements'' within meaning Section Securities 1933, amended, Section Securities Exchange 1934, amended, subject ""safe harbor'' created those sections. Actual results materially from those projected result certain risks uncertainties. These risks uncertainties include, limited global economic market conditions, including cyclical nature semiconductor industry markets addressed Company's customers' products; demand market acceptance existing products; successful development products; timing product introductions; successful integration acquisitions; availability extent utilization manufacturing capacity materials; pricing pressures other competitive factors; changes product mix; manufacturing yields; product obsolescence; ability develop implement technologies obtain protection related intellectual property; announced Internet infrastructure business; labor relations Company, customers suppliers; Company's ability attract retain personnel; uncertainties litigation, well other risks uncertainties including those forth herein those detailed from time time Company with Securities Exchange Commission. These forward-looking statements made only date hereof, Company undertakes obligation update revise forward-looking statements, whether result information, future events otherwise. Access RunnerTM, AnyPortand K56Flexare trademarks Conexant Systems, Inc. Other brands, names trademarks contained this Annual Report property their respective owners.
PART Item Business General Conexant Systems, Inc. (""Conexant'' ""Company'') world's largest independent company focused exclusively providing semiconductor products system solutions wide variety communications electronics. With more than years experience developing communications products, Conexant draws upon expertise mixed-signal processing technology deliver semiconductor integrated circuit products system-level solutions broad range communications applications. These products facilitate communications worldwide through wireline voice data communications networks, cordless cellular wireless telephony systems, personal imaging devices equipment, emerging cable wireless broadband communications networks. Company operates business segments: Personal Networking business Internet Infrastructure business. December 1998, Conexant became independent, separately traded, publicly-held company when Rockwell International Corporation (""Rockwell'') spun wholly-owned subsidiary, Conexant, means distribution (the ""Distribution'') outstanding shares common stock Conexant shareholders Rockwell tax-free Prior Distribution, Conexant (formerly named Rockwell Semiconductor Systems, Inc.), together with certain other subsidiaries Rockwell, operated Rockwell's semiconductor systems business (""Semiconductor Systems''). part Distribution, Rockwell transferred Company assets liabilities Semiconductor Systems already owned Company, including stock certain subsidiaries, Conexant transferred Rockwell assets liabilities constituting part Semiconductor Systems, including assets liabilities Rockwell's electronic commerce business. Conexant incorporated Rockwell Semiconductor Systems, Inc. Delaware September 1996, changed name Conexant Systems, Inc., October 1998. references herein Conexant Company periods prior Distribution include Semiconductor Systems. September 2000, Conexant announced plan spin Internet Infrastructure business (""Spinco'') through two-step process. step will consist initial public common stock Spinco targeted January 2001. After completion initial public Conexant will continue majority Spinco's outstanding common stock majority voting power Spinco's outstanding common stock. second step, Conexant intends, within several months after Spinco's initial public subject satisfaction certain conditions, distribute shareholders shares Spinco's common stock that Conexant owns. However, there assurance that initial public will successfully completed. Personal Networking Business Personal Networking business designs, develops sells semiconductor products system solutions four general personal communications applications markets Personal Computing, Personal Imaging, Digital Infotainment Wireless Communications. Personal Computing products include telephony-based communications solutions personal computing terminals other communication devices such gaming consoles, browsers handheld devices. Personal Imaging products consist semiconductor software products that enable image capture, processing output machines, printers digital still video cameras. Digital Infotainment products include semiconductor solutions that perform communication media processing functions within variety information entertainment platforms. Wireless Communications products comprised components, subsystems system-level semiconductor solutions wireless voice data communication applications, including digital cellular handsets base stations, cordless telephones global positioning system (""GPS'') receivers.
Personal Computing Personal Computing products include telephony-based communications solutions personal computing terminals other communications devices such gaming consoles, browsers handheld devices. Company world's leading supplier V.90 dial-up modem chipsets modem subsystem manufacturers supply modems personal computer (""PC'') original equipment manufacturers (""OEMs'') retail modem markets. provide broader range modem products customers, Company supplying mixed-signal intensive, controllerless modem chipsets software modem solutions which take advantage increasing power central processors software perform functions traditionally enabled semiconductor components. addition, Company transitioned V.90 dial-up modem technology other end-user products leading supplier embedded modems host emerging Internet appliances. Further, Cisco Systems Conexant each contributed technologies toward V.92 modem V.92 standard provides number features including QuickConnectwhich improves quickly users connect with internet service providers (""ISPs'') modem-on-hold, which enables users suspend re-activate their dial-up connection either receive initiate call, without having implement entire dial-up sequence. V.92 standard also includes capability called pulse code modulation (""PCM'') upstream, which boosts upstream data rates from user reduce transfer times large e-mail attachments sent user. November 2000, Company endorsed International Telecommunications Union (""ITU'') favor V.92 modem Company also developed integrated audio/modem solutions which combine highly-integrated semiconductor hardware solutions with audio software products. Additionally, Personal Computing home networking products that enable personal communications devices share data, voice video utilizing existing telephone lines, coaxial cable, power line wireless links. Capitalizing core mixed-signal processing technologies digital subscriber line (""DSL'') technology, Company begun volume shipments full rate G.lite asymmetric (""ADSL'') modem chipsets permitting broadband digital transmission data, voice video over existing standard telephone lines speeds megabits second (""Mbps''). Personal Imaging Personal Imaging products consist semiconductor software products that enable image capture, processing output machines, printers digital still video cameras. market integrated image-communications systems rapidly emerging, driven increased demand color documents, print quality improvements, digital-video applications integration with Internet. Company provides system-level solutions support these applications. Company's modem products, which found three every four machines world, include industry's broadest portfolio highly integrated single-chip modems engines. Company expanded modem product line address multifunction peripheral systems (""MFPs'') combining fax, print, copy scan capabilities into highly-integrated chipset. This complete, scalable solution supports full range capture-to-copy functionality, including controller, modem printer interface application integrated circuit (""ASIC''), along with comprehensive reference designs full suite embedded software. Capitalizing core imaging technologies originally developed Rockwell's Science Center, Company family complementary metal oxide semiconductor (""CMOS'') image sensors, camera engines, software, reference designs teleconferencing digital still video cameras. 2000, Company acquired Sierra Imaging, Inc. (""Sierra'') accelerate participation CMOS imaging market. combination Sierra's ""back-end'' digital image processors image management software, together with Conexant's ""front-end'' CMOS image sensors, digital camera manufacturers industry's complete silicon-based digital camera solution. Company's solutions also provide
enabling technology imaging functionality personal communications platforms such personal digital assistants (""PDAs''), browsers cell phones, each which draws Company's broad portfolio core communications technologies. addition CMOS imaging sensors back-end processors, Personal Imaging investing next generation chipsets. Digital Infotainment Digital Infotainment products include semiconductor solutions that perform communication media processing functions within variety information entertainment platforms. Company variety silicon-based products including video encoders/decoders, MPEG processors single-chip cable modems, well satellite, cable wireless receiver tuners demodulators. Company leading supplier semiconductor system solutions that deliver television radio broadcasts mainstream PCs. Company's video encoder decoder portfolio enabled millions analog video television cards. More recent products turning into interactive platform true (""HDTV'') applications. January 2000, Company acquired wireless broadband business unit Technology, Inc. extend reach into digital terrestrial broadband communications arena. Additionally, Company provides portion electronics software contained set-top receivers that operate multiple interactive network environments. Company's set-top box-oriented portfolio includes tuners, demodulators, encoders, decoders back channel telephony solutions. Further, Company developed commenced volume shipment industry's North American Data Over Cable Service Interface (""DOCSIS'') single chip cable modem architecture supporting peripheral component interconnect (""PCI'') interface. Company's cable modem portfolio also supports universal serial (""USB'') Ethernet interfaces, well solutions European DOCSIS digital video broadcasting (""DVB'') applications. Company building comprehensive broadband portfolio range applications including interactive digital set-top boxes telephony over cable. Digital Infotainment positioned address these applications variety broadband access, delivery display technologies converge other consumer-electronics platforms. Wireless Communications Wireless Communications products comprised components, subsystems system-level semiconductor solutions wireless voice data communication applications, including digital cellular handsets base stations, cordless telephones receivers. Company's solutions span full range world's most widely adopted wireless protocols both multiband multimode including: Global System Mobile Communications (""GSM''); Code Division Multiple Access (""CDMA''); Time Division Multiple Access (""TDMA''). Within GSM, world's most prevalent cellular standard, Company power radio frequency subsystems complete antenna-to-microphone system solutions supporting both 1800 bands. Company's system solution combines power controller, radio frequency (""RF'') transceiver, power management integrated circuit (""IC''), signal converter baseband processor, single solution along with protocol stack software, applications programming interface, real-time operating system, complete man-machine interface device drivers. Additionally, Company provides components wireless infrastructure applications. CDMA TDMA protocols, Company provides full suite power subsystems industry leader supplying CDMA power Company's complete system chipset digital spread spectrum cordless phones been designed into handsets base stations leading cordless phone manufacturers. Company combined
cordless expertise with other wireless data technologies, such rapidly emerging BluetoothTM1 standard short-reach wireless connectivity help phone manufacturers shape home-based wireless communications. Additionally, Company continues build wireless technology leadership receiver solutions handheld receivers advanced emergency locator systems automotive marine applications, well cellular phone integration. 2000, Company acquired Philsar Semiconductor Inc. (""Philsar''), developer semiconductor solutions personal wireless connectivity, including emerging standards such Bluetoothand components third generation (""3G'') digital cellular handsets. Philsar's competencies, augmented Conexant's technology portfolio extensive design manufacturing resources position Wireless Communications address convergence voice data services next generation wireless terminals infrastructure systems. Internet Infrastructure Business Internet Infrastructure business designs, develops sells semiconductor products system solutions some highest growth segments broadband communications market including broadband access, multi-service access wide area network (""WAN'') transport. Company's broad product portfolio allows provide network infrastructure OEMs with system level semiconductor solutions including multi-service access high-speed products used variety network access platforms such remote access concentrators, voice gateways, digital loop carriers, access multiplexers integrated access devices. Company also provides network infrastructure OEMs with extensive family communication solutions that support aggregation, transmission switching data, video voice from edge network optical backbone, including carrier, asynchronous transfer mode (""ATM'') synchronous optical networking (""SONET'')/synchronous digital hierarchy (""SDH'') products network processors. These products used variety network equipment including high-speed routers, Aswitches, optical switches, add-drop multiplexers digital cross-connect systems. Company developed industry's broadest lines multi-megabit transceivers high bit-rate (""HDSL''), symmetric (""SDSL''), symmetric high bit-rate (""SHDSL''), ADSL connectivity commercial applications. Company's HDSL products facilitate deployment high-speed transmission lines eliminating need repeaters other line conditioning equipment. Company's family SDSL products provides incumbent competitive local exchange carriers ability deliver Internet access various rates support telecommuting branch functions. Additionally, Company developed low-power, multi-port product utilizing next generation standard called G.shdsl, which enables simultaneous voice data communications worldwide applications. This variable rate product compatible with pre-existing transport systems based prevailing 2B1Q modulation standard. ADSL modem device full-rate G.lite functionality with extended reach full compliance with industry standards. These products support downstream data rates Mbps (full-rate) Mbps (G.lite) upstream data rates Mbps (full-rate) kilobits second (""Kbps'') (G.lite). Company leading supplier multi-service access (""MSA'') processors which used variety access platforms, including remote access concentrators, voice gateways, private branch exchanges, digital loop carriers integrated access devices. Company's AnyPortMSA processors software implement variety services including dial-up dedicated Internet access, wholesale Internet access provisioned ISPs, voice-over-Internet Protocol, voice-over-ATM, voice-over-DSL, Internet fax, wireless multicast-based services. AnyPort architecture combines performance digital signal processors with Advanced RISC Machines' microcontrollers support Company's extensive suite proven modulations, echo cancellers, speech coders communications protocols.
Bluetoothtrademarks owned Telefonaktiebolaget Ericsson, Sweden, licensed Conexant Systems, Inc. Philsar Semiconductor Inc.
Company industry's broadest portfolios physical link layer communications products aggregate transport data, video voice from network access optical backbone, including T1/E1 T3/E3 carrier, Aand SONET/SDH products. Company's T1/E1 T3/E3 carrier solutions enable digital communications over twisted copper wire include dual, triple quad framers line interface units (""LIUs'') Mbps Mbps data transmission well multi-channel high-level data link channel (""HDLC'') protocol controllers. Company also provides broadband internetworking products, including Aphysical layer segmentation reassembly (""SAR'') devices supporting Mbps applications. Company's customers move toward greater levels product integration, Conexant's Atechnology being increasingly combined with carrier chipsets, HDLC devices, multi-service access processors products create complete systemlevel solutions. core, Company aggressively building broad portfolio end-to-end transmission products used network equipment. Company's portfolio optical networking physical layer solutions spans entire spectrum transceiver products, from Mbps (OC-3) gigabits second (""Gbps'') (OC-192) speeds, support SONET/SDH applications. Optical networking products include laser drivers, transimpedance post clock data recovery circuits, serializers deserializers, cross-point switches broadband access multiplexers. Company's physical link layer products complemented high performance network processors, which designed advanced switching routing capabilities normally performed complex ASICs. These software-programmable integrated circuits also designed combine real-time control management capabilities embedded processor support scalable system designs. advanced capabilities network processors include multi-protocol switching enable integrated local area network (""LAN'')/WAN systems, multi-layer programmable switching routing capabilities support policy-based management, programmable quality service prioritization across disparate networks. Company also comprehensive software subsystems that support next-generation, carrier-class network infrastructure equipment. These software subsystems span technologies Internet protocol (""IP''), ATM, multiprotocol label switching (""MPLS'') voice-over-ATM. addition protocol systems, Company also several software infrastructure modules that improve OEMs' timeto-market. Combined with extensive documentation software tooling, this suite software systems been deployed several OEMs number networks worldwide. During 2000, Company completed acquisitions with aggregate value $1.6 billion accelerate development technology gaps Internet Infrastructure product portfolio. January 2000, Company acquired Microcosm Communications Limited (""Microcosm''), technology leader optic communications. March 2000, Company acquired Maker Communications, Inc. (""Maker''), company that develops markets programmable network processors, software solutions development tools. June 2000, Company acquired HotRail, Inc. (""HotRail''), developer high-speed switching, interconnect scalable processing solutions networking systems. During 2000, Company also completed acquisitions Applied Telecom, Inc. (""Applied Telecom'') NetPlane Systems, Inc. (""NetPlane''), each engaged development communications software, Novanet Semiconductor Ltd. (""Novanet''), focused optical networking product development. Internet Infrastructure research development investment focused developing solutions support optical framing/mapping functions, edge core network processors, scalable switch fabrics, OC-768 Gbps transceivers, multi-port G.shdsl, next generation multi-service access processors that increased performance, higher density lower power consumption target platforms. Company Strategy Company's strategy provide highly-valued, products wireline voice data communications, cordless cellular wireless telephony systems emerging telephony, cable wireless broadband communications networks leveraging competencies signal conversion, signal processing,
communications algorithms protocols applications software. elements Company's strategy include: Core Technology Company believes that executing core technology strategy, which deploys technology building blocks such digital signal processors (""DSPs''), radio frequency integrated circuits (""RFICs''), mixed-signal processing cores software across multiple product platforms, fundamental growth objectives. This strategy enables creation economies scale research development facilitates reduction time-to-market products. Company intends extend technology portfolio and, parallel, seek alliances gain access critical intellectual property, thereby ensuring continued agility meet changing market technology requirements. Manufacturing Excellence Company intends maintain access leading edge, high-volume semiconductor design wafer manufacturing processes including CMOS, bipolar, bipolar CMOS (""BiCMOS''), CMOS, gallium arsenide (""GaAs'') silicon germanium (""SiGe'') that driving force behind today's smaller, more integrated, lower power lower cost devices. addition, Company will continue follow balanced manufacturing strategy internal wafer fabrication production augmented external foundries optimize capacity availability while seeking reduce capital operating infrastructure requirements. Time-to-Market Through integrated engineering manufacturing teams, Company pursues rapid design production semiconductor system solutions targeted markets. Company believes that combination design expertise wafer fabrication assembly capability allows Company develop prototypes shorter amount time relative competitors. System Solution Focus Company seeks capitalize design capabilities communications systems knowledge providing suppliers communications electronics products with complete semiconductor system solutions. High levels integration allow Company enhance products reducing production costs through fewer external components, reduced board space improved system assembly yields. combining necessary communication functions complete system solution, Company deliver additional semiconductor content, thereby existing potential customers more compelling solutions. Customer Intimacy Company believes business partnership approach yields maximum value customer through multi-level organizational engagement product roadmap alignment. Further, Company believes that strength relations with leading customers each markets competitive advantage that enables more target research development investments. Company established relationships with market leaders each addressed markets will seek build upon existing leadership market positions gain market share high-growth markets continuing work closely with industry leading system service providers. This strategy provides Company with rapid feedback from customers during design process increases likelihood that products will meet customers' cost performance requirements high-volume applications. Research Development Company research, development, engineering product design capabilities. September 2000, Company employed approximately 2,000 engineers working design centers worldwide. Company's design centers provide design engineering product application support well after-sales customer service. design centers strategically located around world close proximity Company's customers take advantage technical engineering talent worldwide. Company incurred research development expenses approximately $414.5 million, $310.0 million, $342.3 million 2000, 1999, 1998, respectively.
Manufacturing Company operates manufacturing, assembly test facilities. These facilities include wafer fabrication facilities, assembly test facility module assembly test facility. Company also arrangements with third parties, including entities outside United States, production, assembly testing certain semiconductor products. Company's assembly test facility Mexicali, Mexico international subcontract manufacturing arrangements subject number risks operating abroad. Company's major manufacturing facilities include:
Facility Function
Newport Beach, California
Newbury Park, California
Mexicali, Mexico Paso, Texas
Wafer fabrication facility Class Class clean rooms 21,000 8-inch wafer starts month 0.18 micron CMOS Bipolar, BiCMOS, SiGe GaAs wafer fabrication facility 5,600 4-inch wafer starts month Heterojunction bipolar transistor (""HBT'') Metal-semiconductor transistor (""MESFET'') Assembly test facility High-volume/low-cost multichip modules Module design assembly facility
primary wafer fabrication facility, located Newport Beach, California, consists approximately 130,000 square feet. Company manufactures GaAs products wafer fabrication facility located Newbury Park, California. Company owns approximately 198,000 square foot assembly test facility Mexicali, Mexico, which been operation over years. Mexicali facility assembles semiconductor from Company's wafer fabrication facilities outside foundry sources into various types chipset packages tests packages using automatic test equipment with full range analog, digital radio frequency capability. This facility 9002 focuses high-volume, industry standard plastic packaging capability manufacture wide variety high- low-volume specialized packages using conventional proprietary assembly techniques. Company operates fully-integrated electronic module design assembly facility Paso, Texas, consisting approximately 133,000 square feet leased manufacturing space. This facility provides full turnkey design capabilities ability manufacture test standard custom products ranging from prototypes high-volume production. this facility, Company integrates semiconductor chipset devices into electronic modules, such internal cards digital infotainment equipment standard PCMCIA interface cards, well custom products complete, market-ready systems. This facility been 9002 since 1993. Item ""Properties''. Materials Supplies Company believes adequate sources supply materials components manufacturing needs with suppliers located around world. wafers other materials used production Company's CMOS products available from several suppliers. Company currently dependent suppliers epitaxial wafers used GaAs semiconductor manufacturing processes Newbury Park, California facility. Customers, Marketing Sales Company markets sells semiconductor products system solutions directly leading OEMs communication electronics products third-party electronic manufacturing service providers,
indirectly through electronic components distributors. Selected direct indirect customers include following: Personal Networking Acer Incorporated Apple Computer, Inc.* Askey Computer Corporation Technologies Inc. Best Data Products, Inc. Brother Industries, Ltd.* Canon Inc. CIDCO, Incorporated Inc. Compaq Computer Corporation* Daewoo Telecom Ltd. Dell Computer Corporation* DENSO Corporation Eastman Kodak Company* EchoStar Communications Corporation Internet Infrastructure 3Com Corporation Telecommunications, Inc. Alcatel Data Networks, S.A. CIENA Corporation Cisco Systems, Inc. Copper Mountain Networks, Inc.* Telecommunications Indirect customer Company worldwide sales organization comprised approximately employees September 2000, with domestic international sales complement direct sales customer support Company also sells products through approximately independent manufacturers' representatives approximately distributors dealers. addition, Company's design applications engineering actively involved with customers during phases design production provides customer support through Company's worldwide sales which generally close proximity customers' facilities. Company continues seek close technical collaboration with customers during design phase programs facilitate integration Company's products into such programs, improve Company's ability rapidly reach high manufacturing volumes, position Company primary supplier programs. Backlog Company's sales made primarily pursuant standard purchase orders delivery products, with such purchase orders acknowledged Company according terms conditions. industry practice, which allows customers cancel orders with limited advance notice Company prior shipment, Company believes that backlog particular date reliable indicator future revenue levels. Competition communications semiconductor industry general, markets which Company competes particular, intensely competitive. Company competes worldwide with number U.S. international suppliers that both larger smaller than Company terms resources Networks, Inc.* Ericsson Inc. Fujitsu Limited Uniphase Corporation Juniper Networks, Inc.* Lucent Technologies, Inc. Nokia Corporation Nortel Networks Corporation Redback Networks Inc.* Sonus Networks, Inc.* Sycamore Networks, Inc.* Tellabs, Inc.* Tellium, Inc.* Zhone Technologies, Inc.* Ericsson Inc. Nokia Corporation Fujitsu Limited Pace Micro Technology Gateway, Inc.* Palm, Inc.* Corporation Philips Electronics N.V. Hewlett-Packard Company Ricoh Company Ltd. Hughes Network Systems, Inc. Sagem S.A. Hyundai Corporation Samsung Electronics Co., Ltd. International Business Machines Sega Enterprises Ltd. Corporation Sharp Corporation Kyocera Corporation Sony Corporation L.G. International Corporation Terayon Communication Lexmark International, Inc. Systems, Inc. Matsushita Electric Industrial Ltd. Thomson Corporation Motorola, Inc. Toshiba Corporation* Corporation
market share. Company anticipates that additional competitors will enter markets expects intense product competition continue. bases which Company competes vary market. Company believes that principal competitive factors semiconductor suppliers each addressed markets are: time-to-market; product performance; level integration; price total system cost; compliance with industry standards; design engineering capabilities; strategic relationships with customers; customer support; product innovation quality. Company believes competes favorably with respect each these factors. Personal Networking business, Personal Computing applications, Company competes primarily with Centillium Communications, Inc., Lucent Technologies, Inc., Motorola, Inc., PC-Tel, Inc., Texas Instruments Incorporated Virata Corporation. Company's competitors Personal Imaging market include Agilent Technologies, Inc., OmniVision Technologies, Inc., Samsung Electronics Co., Ltd., Toshiba Corporation Zoran Corporation. Digital Infotainment market, competitors Company include Broadcom, Inc., C-Cube Microsystems, Logic Corporation, Microtune, Inc., Philips Electronics N.V., STMicroelectronics N.V., Texas Instruments Incorporated. Company's competitors Wireless Communications market include ANADIGICS, Inc., Analog Devices, Inc., Hitachi Ltd., Technologies A.G., Lucent Technologies, Inc., Motorola, Inc., Philips Electronics N.V., Micro Devices, Inc. Texas Instruments Incorporated. Internet Infrastructure business, Company's competitors include Analog Devices, Inc., Applied Micro Circuits Corporation, Centillium Communications, Inc., GlobeSpan, Inc., Microelectronics Division, Technologies A.G., Intel Corporation, Lucent (Microelectronics Group), Metalink Ltd., Motorola, Inc., PMC-Sierra, Inc., Texas Instruments Incorporated, TranSwitch Corporation, Vitesse Semiconductor Corporation. Intellectual Property Proprietary Rights Numerous United States foreign patents patent applications owned licensed Company related manufacturing operations other activities. Company federal international trademark applications seeking registered protections Conexant name logo. addition, Company owns number other trademarks applicable only certain products. Management believes that intellectual property, including patents, patent applications licenses, trademarks material importance Company. addition protection proprietary technologies processes, Company seeking strengthen intellectual property portfolio enhance ability obtain cross-licenses intellectual property from others, whether obtain access intellectual property Company does possess resolve potential intellectual property claims against Company, without need make payments. Various claims patent infringement have been made against Company. Management believes that none these claims will have material adverse consolidated statements Company. Pursuant Distribution, Conexant assumed liabilities respect intellectual property matters related current former operations Semiconductor Systems. Item ""Legal Proceedings''.
Environmental Regulation Federal, state local requirements relating discharge substances into environment, disposal hazardous wastes, other activities environment have will continue have impact Company's manufacturing operations. Thus far, compliance with environmental requirements resolution environmental claims have been accomplished without material Company's liquidity capital resources, competitive position statements. Company been designated potentially responsible party (""PRP'') Superfund site located former silicon wafer manufacturing facility steel fabrication plant Parker Ford, Pennsylvania formerly occupied Company. site also formerly occupied Recticon Corporation Allied Steel Products Corporation, each whom also been named each whom insolvent. remediation plan site includes installation public water supply line groundwater pump treatment system, well routine groundwater sampling. Management estimates remaining costs remediation this Superfund site approximately $2.1 million accrued these costs September 2000. addition, Company engaged other remediations groundwater contamination Newport Beach Newbury Park, California facilities. Management currently estimates remaining costs these remediations approximately $3.0 million accrued these costs September 2000. connection with Distribution, Company assumed liabilities respect environmental matters related then current former operations Conexant. Management Company believes that Company's expenditures environmental capital investment remediation necessary comply with present regulations governing environmental protection other expenditures resolution environmental claims will have material adverse Company's liquidity capital resources, competitive position statements. Management cannot assess possible compliance with future requirements. Cyclicality; Seasonality semiconductor industry highly cyclical. Sales Company's Personal Computing, Wireless Communications Personal Imaging products subject seasonal related increase sales products which include Company's products, such PCs, cordless cellular telephones machines, generally associated with holiday season December. Company's sales these products generally increase beginning August September continue higher level through calendar year. Employees September 2000, Company approximately 8,800 full-time employees, whom approximately 2,000 engineers. Approximately Conexant employees United States approximately 2,100 employees Mexico covered collective bargaining agreements. July 1998, following 50-day strike members International Brotherhood Electrical Workers (IBEW) Local 2295, Company entered into collective bargaining agreement with that union covering union employees Company's Newport Beach, California facility. agreement will expire 2003. other work stoppages have occurred past years. Company believes future success will depend large part upon ability continue attract, retain, train motivate highly skilled dedicated employees.
Certain Business Risks Company's business, condition operating results impacted number factors including, limited those forth below, which could cause Company's actual results vary materially from recent results from Company's anticipated future results. should carefully consider evaluate information this Report, including risk factors listed below. these risks could materially adversely business, condition results operations, which turn could materially adversely price common stock other securities. operate highly cyclical semiconductor industry, which subject downturns. semiconductor industry highly cyclical characterized constant rapid technological change, rapid product obsolescence price erosion, evolving standards, short product life cycles wide product supply demand. industry experienced downturns, often connection with, anticipation maturing product cycles both semiconductor companies' their customers' products) declines general economic conditions. These downturns have been characterized diminished product demand, production overcapacity, high inventory levels accelerated erosion average selling prices. have experienced these conditions business past experience such downturns future. future downturns this nature could have material adverse business, condition results operations. From time time semiconductor industry also experienced periods increased demand production capacity constraints. experience substantial changes future operating results general semiconductor industry conditions general economic conditions. subject intense competition could lose business competitors. semiconductor industry general markets which compete particular intensely competitive. compete worldwide with number United States international semiconductor manufacturers that both larger smaller than terms resources market share. currently face competition markets expect that intense price product competition will continue. This competition resulted expected continue result declining average selling prices products. also anticipate that additional competitors will enter markets result growth opportunities communications electronics, trend toward global expansion foreign domestic competitors, technological public policy changes relatively barriers entry certain markets industry. Moreover, with many companies semiconductor industry, customers certain products other products that compete with similar products believe that principal competitive factors semiconductor suppliers market are: time-to-market; product performance; level integration; price total system cost; compliance with industry standards; design engineering capabilities; strategic relationships with customers; customer support; product innovation; quality.
bases which compete vary market. cannot assure that will able successfully address these factors. Many current potential competitors have certain advantages over including: longer operating histories presence markets; greater name recognition; access larger customer bases; greater sales marketing, manufacturing, distribution, technical other resources. result, these competitors able adapt more quickly emerging technologies changes customer requirements able devote greater resources development, promotion sale their products than can. Current potential competitors also have established establish strategic relationships among themselves with existing potential customers, resellers other third parties. These relationships customers' purchasing decisions. Accordingly, possible that competitors alliances among competitors could emerge rapidly acquire market share. cannot assure that will able compete successfully against current potential competitors. also cannot assure that competition will have material adverse business, condition results operations. Many competitors have combined with each other consolidated their businesses, including consolidation competitors with customers. This attributable number factors, including high-growth nature communications electronic industry time-to-market pressures suppliers decrease time required product conception, research development, sampling production launch before product reaches market. This consolidation trend expected continue, since investments, alliances acquisitions enable semiconductor suppliers, including competitors, augment technical capabilities achieve faster time-to-market their products than would possible solely through internal development. Consolidations industry participants, including some cases, acquisitions certain customers competitors, creating entities with increased market share, customer base, technology marketing expertise markets which compete. These developments adversely current markets, markets seeking serve ability compete successfully those markets. success dependent upon ability timely develop products reduce costs. operating results will depend largely ability continue introduce enhanced semiconductor products timely basis. Successful product development introduction depends numerous factors, including, among others: ability anticipate customer market requirements changes technology industry standards; ability accurately products; ability timely complete development products bring products market timely basis; ability products from competitors; market acceptance products. Furthermore, required continually evaluate expenditures planned product development choose among alternative technologies based expectations future market growth. cannot
assure that will able develop introduce enhanced products timely manner, that products will satisfy customer requirements achieve market acceptance, that will able anticipate industry standards technological changes. also cannot assure that will able respond successfully product announcements introductions competitors. addition, prices established products decline, sometimes over time. believe that order remain competitive must continue reduce cost producing delivering existing products same time that develop introduce enhanced products. cannot assure that will able continue reduce cost products remain competitive. must incur substantial research development expenses. semiconductor industry requires substantial investment research development. order remain competitive, must continue make substantial investments research development develop enhanced products. cannot assure that will have resources develop enhanced technologies competitive products. failure continue make investments research development programs could have material adverse business, condition results operations. able keep abreast rapid technological changes markets. demand products change quickly ways anticipate because markets generally exhibit following characteristics: rapid technological developments; evolving industry standards; changes customer requirements; frequent product introductions enhancements; short product life cycles with declining prices over life cycle product. products could become obsolete sooner than anticipated because faster than anticipated change more technologies related products market demand products based particular technology, particularly introduction technology that represents substantial advance over current technology. Currently accepted industry standards also subject change, which contribute obsolescence products. unable keep abreast these developments, these events could have material adverse business, condition results operations. able attract retain personnel necessary design, development, manufacture sale products. success could negatively personnel leave. future success depends ability continue attract, retain motivate personnel, including executive other management technical personnel. source technological product innovations, technical personnel represent asset. competition such personnel intense semiconductor industry. cannot assure that will able continue attract retain management other personnel necessary design, development, manufacture sale products. have particular attracting retaining personnel during periods poor operating performance, given equity-based compensation competitors loss services more employees, including Dwight Decker, Chairman Chief Executive certain design technical personnel, inability attract, retain motivate personnel could have material adverse ability operate business condition results operations.
OEMs communications electronics products design products into their equipment, will have selling those products. Moreover, design from customer does guarantee future sales that customer. products sold directly end-user components other products. result, rely OEMs communications electronics products select products from among alternative designed into their equipment. Without these ""design wins'' from OEMs, would have selling products. Once designs another supplier's semiconductors into products, will more achieve future design wins with that OEM's product platform because changing suppliers involves cost, time, risk. Achieving design with customer does ensure that will receive revenues from that customer. Even after design win, customer obligated purchase products choose time stop using products, example, products commercially successful other reason. inability achieve design wins convert design wins into actual sales could have material adverse business, condition results operations. Because lengthy sales cycles many products, incur expenses before generate revenues related those products. customers need months longer test evaluate products additional months more begin volume production equipment that incorporates products. lengthy period time required also increases possibility that customer decide cancel change product plans, which could reduce eliminate sales that customer. result this lengthy sales cycle, incur research development, selling, general administrative expenses before generate related revenues these products, never generate anticipated revenues customer cancels changes product plans. Uncertainties involving ordering shipment products could adversely business. sales typically made pursuant individual purchase orders generally have longterm supply arrangements with customers. Generally, customers cancel orders until days prior shipment. addition, sell portion products through distributors, some whom have rights return unsold products Sales distributors accounted approximately 2000 revenues. Moreover, routinely purchase inventory based estimates customer demand their products, which predict. This compounded when sell OEMs indirectly through distributors contract manufacturers, both, forecasts demand then based estimates provided multiple parties. addition, customers change their inventory practices short notice reason. cancellation deferral product orders, return previously sold products overproduction failure anticipated orders materialize could result holding excess obsolete inventory, which could result write-downs inventory that would have material adverse operating results. manufacturing process extremely complex specialized. manufacturing operations complex subject disruption causes beyond control. fabrication integrated circuits extremely complex precise process consisting hundreds separate steps. requires production highly controlled, clean environment. Minute impurities, errors step fabrication process, defects masks used print circuits wafer number other factors cause substantial percentage wafers rejected numerous each wafer function. operating results highly dependent upon ability produce large volumes integrated circuits acceptable manufacturing yields. operations lengthy recurring disruptions operations production facilities those subcontractors. These disruptions include labor strikes, work stoppages, earthquake, other natural disasters. These disruptions could
cause delays shipments until could shift products from facility subcontractor another facility subcontractor. event these types delays, cannot assure that required alternate capacity, particularly wafer production capacity, would available timely basis all. Even alternate wafer production capacity available, able obtain favorable terms, which could result loss customers. inability obtain manufacturing capacities meet demand, either facilities through foundry similar arrangements with others, could have material adverse business, condition results operations. Certain manufacturing facilities located near major earthquake fault lines, including California Mexico facilities. maintain only minimal earthquake insurance coverage these facilities. highly specialized nature gallium arsenide semiconductor manufacturing process, event disruption Newbury Park, California wafer fabrication facility, alternate gallium arsenide production capacity would readily available from third-party sources. Although recently entered into multi-year agreement with foundry that guarantees access additional gallium arsenide wafer production capacity beginning fourth quarter calendar year 2000, disruption operations Newbury Park wafer fabrication facility interruption supply epitaxial wafers used gallium arsenide process could have material adverse business, condition results operations, particularly with respect Wireless Communications products. ability sustain revenue growth also dependent ability secure adequate additional manufacturing capacity, including wafer production capacity. have recently entered into agreements with outside foundries secure additional wafer manufacturing capacity, including additional gallium arsenide wafer production capacity. addition, continue explore wafer manufacturing alternatives, which include increased outside foundries, entering into expanded business relationships with respect wafer manufacturing other actions related wafer manufacturing facilities. cannot assure that will successful securing adequate additional manufacturing capacity. inability could result delays customer shipments possible loss customers. able achieve manufacturing yields maintain Minor deviations manufacturing process cause substantial manufacturing yield loss, some cases, cause production suspended. Manufacturing yields products initially tend lower complete product development commence volume manufacturing, will typically increase ramp full production. forward product pricing includes this assumption improving manufacturing yields and, result, material variances between projected actual manufacturing yields have direct gross margin forecasting manufacturing yields accurately maintaining cost competitiveness through improving manufacturing yields will continue ever-increasing process complexity manufacturing semiconductor products. manufacturing operations also face pressures arising from compression product life cycles which requires bring products line faster shorter periods while maintaining acceptable manufacturing yields quality without, many cases, reaching longer-term, high-volume manufacturing conducive higher manufacturing yields declining costs. dependent upon third parties supply materials components. believe have adequate sources supply materials components manufacturing needs with suppliers located around world. Although currently purchase wafers used production CMOS products from major supplier, such wafers available from several other suppliers. currently dependent suppliers epitaxial wafers used gallium arsenide semiconductor manufacturing processes Newbury Park, California facility process arranging another supplier epitaxial wafers. number alternative suppliers wafers limited process qualifying wafer supplier could require substantial lead-time. Although historically have experienced obtaining adequate supply materials
components necessary manufacturing operations, loss supplier inability supplier meet performance quality delivery schedules could have material adverse business, condition results operations. must incur capital expenditures manufacturing technology equipment remain competitive. semiconductor industry highly capital intensive. Semiconductor manufacturing requires constant upgrading process technology remain competitive, enhanced semiconductor processes developed which permit smaller, more more powerful semiconductor devices. maintain manufacturing, assembly test facilities, which have required will continue require investments manufacturing technology equipment. have made substantial capital expenditures installed production capacity support technologies increased demand products. made capital expenditures during 2000 approximately $315 million, compared approximately $214 million during 1999. expect capital expenditures 2001 will exceed $350 million. There assurance that will have capital resources make necessary investments manufacturing technology equipment. success depends ability suitable investments, alliances acquisitions. Although invest resources research development activities, complexity rapidity technological changes make impractical pursue development technological solutions own. part goal provide advanced semiconductor product systems, have will continue review ongoing basis investment, alliance acquisition prospects that would complement existing product augment market coverage enhance technological capabilities. However, cannot assure that will able identify consummate suitable investment, alliance acquisition transactions future. Moreover, consummate such transactions, they could result issuances equity securities dilutive existing shareholders; large one-time incurrence substantial debt assumption unknown liabilities; potential loss employees from acquired company; amortization expenses related goodwill other intangible assets; diversion management's attention from other business concerns. these events could have material adverse business, condition results operations price common stock other securities. 2000, incurred loss $190.9 million, primarily charges $215.7 million purchased in-process research development amortization expenses $160.2 million acquisitionrelated intangible assets, principally related acquisitions completed 2000. addition, result these acquisitions, expect record amortization expense related goodwill intangible assets excess $320 million annually years.
have integrating companies acquire. completed acquisitions 2000. evaluate acquisitions ongoing basis make additional acquisitions future. Integrating acquired organizations their products services expensive, time-consuming strain resources. could face several challenges integrating current future acquisitions, including: integrating acquired technology into product impairment relationships with employees customers; coordinating integrating overall business strategies worldwide operations; potential disruption ongoing business distraction management; inability maintain brand recognition acquired businesses; inability maintain corporate controls, procedures policies; failure acquired features, functions, products services achieve market acceptance; potential unknown liabilities associated with acquired businesses. inability address these challenges successfully could have material adverse business, condition results operations. face risk that capital needed business will available when need believe that cash from operations, existing cash reserves, available borrowings under $475 million revolving credit facility will satisfy future research development, capital expenditure, working capital other requirements. However, cannot assure that this will case that will have access alternative sources capital favorable terms all. addition, have will continue review, ongoing basis, strategic investments acquisitions, which will help grow business. These investments acquisitions require additional capital resources. cannot assure that capital required fund these investments acquisitions will available future. credit facility restrict operating have $475 million revolving credit facility which expires 2003. This credit facility includes covenants that restrict operating future. credit facility includes restrictions capital expenditures, indebtedness, acquisitions, mergers, asset sales liens assets that apply subsidiaries. also must meet certain tests maintain certain ratios. Although believe that will able comply with these requirements, compliance with these requirements restrict operating cannot assure that will fact able satisfy requirements credit facility. satisfy ratios comply with other covenants included credit facility, lenders under credit facility could declare amounts owed them payable proceed against their collateral. Such foreclosure collateral could have material adverse business, condition results operations. credit facility secured pledge stock subsidiaries that term credit facility), subject certain exceptions stock foreign subsidiaries, pledge certain intercompany indebtedness owed subsidiary other subsidiary. there downgrading ratings long-term, unsecured indebtedness Standard Poor's Rating Services Group less rating Moody's Investor Service less event rating Moody's), will required secure credit facility pledging substantially assets assets domestic subsidiaries stock subsidiaries, subject certain exceptions. obligations under credit facility must guaranteed domestic subsidiary.
subject risks doing business internationally. 2000, approximately percent revenues were from customers located outside United States, primarily European countries. addition, have facilities suppliers located outside United States, including assembly test facility Mexicali, Mexico third-party foundries located region. international sales operations subject number risks inherent selling operating abroad. These include, limited risks regarding: currency exchange rate local economic political conditions; disruptions capital trading markets; restrictive governmental actions (such restrictions transfer funds trade protection measures, including export duties quotas customs duties changes legal regulatory requirements; limitations repatriation funds; obtaining distribution support; laws policies United States other countries trade, foreign investment loans, import export licensing requirements; laws; limitations ability under local laws protect intellectual property. Because most international sales, other than sales Japan (which denominated principally Japanese yen), currently denominated U.S. dollars, products could become less competitive international markets value U.S. dollar increases relative foreign currencies. Moreover, competitively disadvantaged relative competitors located outside United States from devaluation their local currency. cannot assure that factors described above will have material adverse ability increase maintain foreign sales business, condition results operations. past operating performance been impacted adverse economic conditions region, which have increased uncertainty with respect long-term viability certain customers suppliers region. Sales customers Japan other countries region, principally Taiwan, South Korea Hong Kong, represented approximately percent revenues 2000. enter into foreign currency forward exchange contracts, principally Japanese yen, minimize risk loss from currency exchange rate foreign currency commitments entered into ordinary course business. have experienced anticipate material adverse results operations condition related these foreign currency forward exchange contracts. have entered into foreign currency forward exchange contracts other purposes condition results operations could (negatively positively) currency operating results negatively substantial quarterly annual market downturns. revenues, earnings other operating results have past future. These number factors, many which beyond control. These factors include, among others: competitive pricing pressures, including decreases average selling prices products;
production capacity levels manufacturing yields; availability cost products from suppliers; gain loss customers; ability develop, introduce market products technologies timely basis; product technology introductions competitors; changes products produced sold; market acceptance products customers' products; intellectual property disputes; seasonal customer demand; timing receipt, reduction cancellation orders customers; timing extent product development costs. foregoing factors forecast, these, well other factors, could materially adversely quarterly annual operating results. operating results fail meet expectations analysts investors, could materially adversely price common stock other securities. value common stock adversely market volatility. trading price common stock Since common stock began trading publicly, reported sale price common stock NASDAQ National Market been high $1321/2 $627/32 share. This price many factors, including: performance prospects; depth liquidity market common stock; investor perception Conexant industry which operate; changes earnings estimates buy/sell recommendations analysts; general other market conditions; domestic international economic conditions. addition, public stock markets have experienced, currently experiencing, extreme price trading volume volatility, particularly high technology sectors market. This volatility market prices securities many technology companies reasons frequently unrelated disproportionately impacted operating performance these companies. These broad market adversely market price common stock.
subject claims infringement third-party intellectual property rights demands that license third-party technology, which could result expense loss intellectual property rights. semiconductor industry characterized vigorous protection pursuit intellectual property rights. From time time, third parties assert patent, copyright, trademark other intellectual property rights technologies that important business demand that license their technology. litigation determine validity claims that products infringe infringe these rights, including claims arising through contractual customers, regardless their merit resolution, could costly divert attention management technical personnel. cannot assure that would prevail litigation given complex technical issues inherent uncertainties intellectual property litigation. litigation results adverse ruling could required substantial damages; cease manufacture, sale infringing products; discontinue infringing technology; expend resources develop non-infringing technology; license technology from third party claiming infringement, which license available commercially reasonable terms, all. foregoing results could have material adverse business, condition results operations. successful protecting intellectual property rights, harm ability compete. rely primarily patent, copyright, trademark trade secret laws, well nondisclosure agreements other methods, protect proprietary technologies processes. addition, often incorporate intellectual property customers into designs, have obligations with respect non-use non-disclosure their intellectual property. past, have found necessary engage litigation enforce intellectual property rights, protect trade secrets determine validity scope proprietary rights others, including customers. expect future litigation similar grounds, which require expend resources divert attention management from business operations. cannot assure that: steps take prevent misappropriation infringement intellectual property intellectual property customers will successful; existing future patents will challenged, invalidated circumvented; measures described above would provide meaningful protection. Despite these precautions, possible third party copy otherwise obtain technology without authorization, develop similar technology independently design around patents. patents fails protect technology would make easier competitors similar products. addition, copyright, trademark trade secret protection unavailable limited certain countries. liable penalties under environmental laws, rules regulations, which could adversely impact business. variety chemicals manufacturing operations subject wide range environmental protection regulations United States, Mexico Canada. While have experienced material adverse operations result such regulations, cannot assure that current future regulations would have material adverse business, condition results operations.
United States, environmental regulations often require parties fund remedial action regardless fault. Consequently, often estimate future impact environmental matters, including potential liabilities. cannot assure that amount expense capital expenditures that might required complete remedial actions continue comply with applicable environmental laws will have material adverse business, condition results operations. have been designated potentially responsible party Superfund site located former silicon wafer manufacturing facility steel fabrication plant Parker Ford, Pennsylvania formerly occupied Semiconductor Systems. site also formerly occupied Recticon Corporation Allied Steel Products Corporation, each whom also been named potentially responsible party each whom insolvent. have accrued approximately $2.1 million September 2000 cost groundwater remediation, including installation public water supply line groundwater pump treatment system, well routine groundwater sampling. addition, engaged other remediations groundwater contamination Newport Beach Newbury Park, California facilities which have accrued approximately $3.0 million costs remediation September 2000. Pursuant agreement with Rockwell, have assumed liabilities respect environmental matters related current former operations Conexant. management team subject variety demands attention. management currently faces variety challenges. These include implementing ongoing expansion strategy continuing expand infrastructure systems necessary operate independent public company integrate recent acquisitions. While believe that have management resources execute each these initiatives, cannot assure that will have these resources that initiatives will successfully implemented. Failure implement these initiatives successfully could have material adverse business, condition results operations. Certain provisions organizational documents rights agreement Delaware make someone acquire control Conexant. have established certain anti-takeover measures that common stock convertible notes. restated incorporation, by-laws, rights agreement with ChaseMellon Shareholder Services, L.L.C., rights agent, dated November 1998, amended, Delaware General Corporation contain several provisions that would make more acquisition control Conexant transaction approved board directors. restated incorporation by-laws include provisions such ability board directors issue shares preferred stock more series without further authorization shareowners; fair price provision; prohibition shareowner action written consent; requirement that shareowners provide advance notice shareowner nominations directors proposal business considered meeting shareowners; requirement that supermajority vote obtained remove director cause amend repeal certain provisions restated incorporation by-laws; elimination right shareowners call special meeting shareowners; division board directors into three classes elected staggered basis, class each year. also have rights agreement which gives shareowners certain rights that would substantially increase cost acquiring transaction approved board directors.
addition rights agreement provisions restated incorporation by-laws, Section Delaware General Corporation provides that, subject certain exceptions, corporation shall engage business combination with interested shareowner during three-year period following time that such shareowner becomes interested shareowner. restrictions Section Delaware General Corporation Law, certain circumstances, make more person would interested shareowner various business combinations with corporation during this three-year period. provisions Section Delaware General Corporation provide that shareowner approval requirement avoided majority directors then approved either business combination transaction that resulted shareowner becoming interested shareowner. responsible certain federal income liabilities that relate from Rockwell. connection with from Rockwell, Internal Revenue Service issued ruling Rockwell stating that would qualify tax-free reorganization within meaning Section 368(a)(1)(D) Internal Revenue Code 1986, amended. While ruling generally binding Internal Revenue Service, continuing validity ruling subject certain factual representations assumptions. aware facts circumstances that would cause such representations assumptions untrue. Allocation Agreement dated December 1998 between Conexant Rockwell provides that will responsible taxes imposed Rockwell, Conexant Rockwell shareowners result either: failure from Rockwell qualify tax-free reorganization within meaning Section 368(a)(1)(D) Internal Revenue Code subsequent from Rockwell tax-free transaction Rockwell under Section 361(c)(2) Internal Revenue Code, failure attributable certain actions respect Conexant (including subsidiaries) shareowners, such acquisition third party time manner that would cause such failure Allocation Agreement also provides, among other things, that neither Rockwell Conexant take action inconsistent with, fail take action required request ruling ruling unless: required law; other party given prior written consent; certain circumstances, supplemental ruling permitting such action obtained. Rockwell Conexant have each other liability resulting from each entity's failure comply with these provisions. addition, certain tax-free intragroup result Rockwell's Meritor Automotive, Inc. (now ArvinMeritor, Inc.) September 1997. Allocation Agreement provides that will responsible taxes imposed Rockwell, Conexant Rockwell shareowners respect those intragroup such taxes attributable certain actions taken after from Rockwell respect Conexant (including subsidiaries) shareowners, such acquisition third party time manner that would cause taxes incurred. were required taxes described above, such payment could have material adverse position, results operations cash
Executive Company's executive are:
Name Position
Dwight Decker Moiz Beguwala Lewis Brewster Terry Raouf Halim Balakrishnan Daniel Marotta Dennis O'Reilly Kerry Petry Ashwin Matthew Rhodes James Spoto Thomas Stites Kevin Strong Steven Thomson Paul Walker Bradley Yates
Chairman Board Directors Chief Executive Senior Vice President General Manager, Wireless Communications Senior Vice President, Worldwide Sales Senior Vice President, Operations Senior Vice President General Manager, Network Access Senior Vice President Chief Financial Senior Vice President, Quality Supply Chain Management Senior Vice President General Manager, Digital Infotainment Senior Vice President, General Counsel Secretary Vice President Treasurer Senior Vice President Chief Information Senior Vice President General Manager, Personal Computing Senior Vice President, Platform Technologies Senior Vice President, Communications Senior Vice President General Manager, Personal Imaging Vice President Controller Senior Vice President, Leadership Team Development Senior Vice President, Human Resources
Messrs. Halim, Iyer, Petry, Stites Yates have been, expected named executive Spinco expected cease service executive Company upon completion initial public shares Spinco. There family relationships among directors executive Company. forth below name, position held with Company principal occupations employment during past years each executive Company. Dwight Decker Chairman Board Chief Executive Decker served Senior Vice President Rockwell International Corporation (electronic controls communications) President, Rockwell Semiconductor Systems from July 1998 December 1998; Senior Vice President Rockwell President, Rockwell Semiconductor Systems Electronic Commerce from March 1997 July 1998; President, Rockwell Semiconductor Systems from October 1995 March 1997; President, Telecommunications Rockwell prior thereto. Decker received Ph.D. applied mathematics from California Institute Technology B.Sc. mathematics physics from McGill University. Moiz Beguwala Senior Vice President General Manager, Wireless Communications. Beguwala served Vice President General Manager, Wireless Communications Division Rockwell Semiconductor Systems from October 1998 December 1998; Vice President General Manager, Personal Computing Division Rockwell Semiconductor Systems from January 1998 October 1998; Vice President, Worldwide Sales Rockwell Semiconductor Systems from October 1995 January 1998; Vice President Worldwide Sales Rockwell's Telecommunications Division prior thereto. Beguwala received M.B.A. B.S. engineering from University California Angeles M.S. Ph.D. electrical engineering from University Southern California. Lewis Brewster Senior Vice President, Worldwide Sales. Brewster served Vice President, Worldwide Sales Rockwell Semiconductor Systems from January 1998 December 1998; Executive Director, Americas Sales Rockwell Semiconductor Systems from June 1997 January 1998; Director,
Americas Sales Rockwell Semiconductor Systems from June 1996 June 1997; Director, Strategic Sales Operations Rockwell Semiconductor Systems from October 1995 June 1996; Director, Strategic Sales Operations, Digital Communications Division Rockwell's Telecommunications Division prior thereto. Brewster received M.B.A. from Stanford University B.S. electrical engineering biomedical engineering from Duke University. Terry Ellis Senior Vice President, Operations. Ellis served Vice President Operations Rockwell Semiconductor Systems from September 1998 December 1998; Executive Director, Semiconductor Manufacturing Rockwell Semiconductor Systems from August 1997 August 1998; Director, Manufacturing Rockwell Semiconductor Systems from October 1995 August 1997; Director, Manufacturing Rockwell's Telecommunications Division prior thereto. Ellis received B.S. electrical engineering from University Texas. Raouf Halim Senior Vice President General Manger, Network Access. Halim served Vice President General Manager, Network Access Division Rockwell Semiconductor Systems from February 1997 December 1998; Vice President VLSI Engineering Rockwell Semiconductor Systems from October 1995 February 1997; Vice President VLSI Engineering Rockwell's Telecommunications Division from September 1995 October 1995; Division Director, VLSI Engineering, Digital Communications Rockwell's Telecommunications Division prior thereto. Halim received M.S. electrical engineering from Georgia Institute Technology B.Sc. electrical engineering from Alexandria University. Balakrishnan Iyer Senior Vice President Chief Financial Iyer served Senior Vice President Chief Financial Rockwell Semiconductor Systems from October 1998 December 1998; Senior Vice President Chief Financial VLSI Technology, Inc. (semiconductors) from January 1997 October 1998; Vice President Corporate Controller VLSI Technology, Inc. prior thereto. Iyer received M.B.A. from Wharton School University Pennsylvania, M.S. industrial engineering from University California, Berkeley B.S. mechanical engineering from Indian Institute Technology. Senior Vice President, Quality Supply Chain Management. served Divisional Vice President General Manager, Semiconductor Packaging AlliedSignal, Inc. (semiconductors) from January 1999 January 2000; Divisional Vice President General Manager, Commercial Spares Total Logistics Services AlliedSignal, Inc. from January 1996 January 1999; Vice President, Operations AlliedSignal Aerospace Marketing, Sales, Services, Inc. prior thereto. received Ph.D. operations research from Harvard University, M.S. electrical engineering computer sciences from University Illinois B.S. electrical engineering from Huazhong University Sciences Technologies People's Republic China. Daniel Marotta Senior Vice President General Manager, Digital Infotainment. Marotta served Vice President General Manager, Digital Infotainment from March 1999 January 2000; Vice President Engineering from January 1999 March 1999; Director Engineering from August 1998 January 1999; Integrated Circuit Designer Graphic/Imaging Sub-Business Unit Conexant's Brooktree subsidiary prior thereto. Marotta received B.S. electrical engineering from State University York Dennis O'Reilly Senior Vice President, General Counsel Secretary. O'Reilly served Director Business Development Intel Corporation's Mobile Handheld Products Group (semiconductors) from September 1997 December 1998; Group Counsel Intel Corporation prior thereto. O'Reilly received J.D. from Boston University School B.A. from State University York Binghamton. Kerry Petry Vice President Treasurer. Petry served Vice President Treasurer Rockwell Semiconductor Systems from October 1998 December 1998; Assistant Treasurer Director Domestic Treasury Operations Rockwell prior thereto. Petry received M.B.A. from Virginia Polytechnic Institute State University B.S. accounting from West Virginia University.
Ashwin Rangan Senior Vice President Chief Information Rangan served Senior Vice President Chief Information Rockwell Semiconductor Systems from October 1998 December 1998; Executive Director, Business Process Re-engineering Information Technology Rockwell Semiconductor Systems from December 1996 October 1998; Director, Business Process Re-engineering Information Technology Rockwell Semiconductor Systems prior thereto. Rangan received M.S. industrial engineering management with emphasis operations management information systems from National Institute Industrial Engineering Bombay, India, Engr. mechanical engineering A.A. from Bangalore University. Matthew Rhodes Senior Vice President General Manager, Personal Computing. Rhodes served Vice President General Manager, Personal Computing Division Rockwell Semiconductor Systems from October 1998 December 1998; Director, Software Products Marketing Rockwell Semiconductor Systems from January 1997 October 1998; Director, VLSI Technology Communications Sciences Inc. (communications system design) prior thereto. Rhodes received M.B.A. from Anderson Graduate School Management University California, Angeles, M.S. electrical engineering from Lehigh University B.S. physics from Pennsylvania State University. James Spoto Senior Vice President, Platform Technologies. Spoto served Vice President, Platform Technologies Rockwell Semiconductor Systems from October 1997 December 1998; Vice President, Business Development Cadence Design Systems, Inc. (software) from March 1996 July 1997; Vice President, Engineering Mixed-Signal Physical Design Cadence Design Systems, Inc. prior thereto. Spoto received M.S. B.S. electrical engineering from University Florida. Thomas Stites Senior Vice President, Communications. Stites served Vice President, Communications Advanced Micro Devices (semiconductors) from 1992 December 1998. Stites received B.A. journalism from University Colorado. Kevin Strong Senior Vice President General Manager, Personal Imaging. Strong served Vice President General Manager, Personal Imaging Division Rockwell Semiconductor Systems from September 1998 December 1998; Division Director, Digital Communications Products, Personal Computing Division Rockwell Semiconductor Systems from June 1998 September 1998; Division Director, Technology Planning, Personal Computing Division Rockwell Semiconductor Systems from June 1997 June 1998; Business Director, Personal Computing Products, Multimedia Communications Division Rockwell Semiconductor Systems from August 1996 June 1997; Director Technology Planning Media Processing, Multimedia Communications Division Rockwell Semiconductor Systems from January 1996 August 1996; Manager Business Development, Multimedia Communications Division Rockwell Semiconductor Systems prior thereto. Strong received B.S. electronic engineering from Southampton University. Steven Thomson Vice President Controller. Thomson served Vice President Controller Rockwell Semiconductor Systems from October 1998 December 1998; Director Financial Planning Control Rockwell Semiconductor Systems from October 1995 October 1998; Director, Financial Planning Control Rockwell's Telecommunications Division prior thereto. Thomson received M.S. management from West Coast University B.A. accounting from California State University, Fullerton. Paul Walker Senior Vice President, Leadership Team Development. Walker served Senior Vice President Managing Principal Senn-Delaney Leadership Consulting Group (consulting) from October 1984 1999. Walker received B.A. from Northern Michigan University. Bradley Yates Senior Vice President, Human Resources. Yates served Vice President, Human Resources Siebel Systems, Inc. (software) from September 1999 December 1999; Vice President, Human Resources AT&T Wireless Services' Angeles Cellular partnership with Bell South Corporation from September 1996 September 1999; Vice President, Human Resources AT&T Global Information Solutions' Americas Region prior thereto. Yates received M.S. strategic human
resource management from University Dayton B.S. business administration from Diego State University. Item Properties September 2000, Company operated three manufacturing facilities United States facility Mexico. also design centers sales These facilities aggregate space approximately million square feet, approximately which were owned approximately which were leased. opinion management, Company's properties have been well maintained, sound operating condition contain equipment facilities necessary operate present levels. summary space Company's facilities September 2000 follows thousands square feet):
Type Facility Owned Facilities Leased Facilities Total
Manufacturing General Total
1,109
1,369
1,078 1,400 2,478
Company's headquarters primary wafer fabrication facility located Newport Beach, California, consisting approximately 633,000 square feet owned approximately 520,000 square feet leased space. This location includes approximately 130,000 square foot wafer fabrication facility. Company manufactures GaAs products wafer fabrication facility located Newbury Park, California. Certain Company's facilities, including California Mexico facilities located near major earthquake fault lines. Company maintains only minimal earthquake insurance with respect these facilities. portion Mexico facility seismically isolated Company substantially completed million program seismically isolate certain portions California facilities. Part Item ""Business Manufacturing''. Item Legal Proceedings October 1997, Brent Townshend (""Townshend'') suit against Rockwell Conexant Superior Court California Mateo County seeking injunction halt sale products containing Conexant's K56Flexchipsets requesting damages, claiming that Conexant engaged unfair competition, misappropriation trade secrets, breach contract breach using technical information allegedly disclosed Townshend accelerate development Kbps modem technology. January 1999, Townshend dismissed State Court action same claims three claims patent infringement U.S. District Court Northern District California. Federal action, Townshend alleged that each patents (the ""Townshend Patents'') covers certain aspects V.90 standard that infringed Conexant's Kbps products. October 2000, Townshend Conexant entered into written understanding settlement outstanding litigation. Under settlement, Conexant will cash, certain circumstances non-cash, consideration, outstanding litigation will dismissed with prejudice, Townshend will grant Conexant certain future entities Conexant non-exclusive license Townshend Patents other voiceband modem technology. settlement calls certain contingent cash obligations Conexant, which have been accrued September 2000. July 1991, Shumpei Yamazaki suit against Japanese subsidiary Rockwell Tokyo District Court, Twenty-ninth Civil Division patent infringement relating Conexant's facsimile modem chipsets seeking million (approximately $6.2 million based exchange rate November 2000) court costs. October 1998, District Court rendered decision dismissing suit against Conexant, from which decision Yamazaki appealed. April 1999, Yamazaki presented position, well additional causes action portion appellate hearing. Tokyo High Court rejected Yamazaki's additional claims calendar appellate hearings, last which
scheduled December 2000, with disposition expected calendar quarter 2001. Conexant believes meritorious defenses these claims vigorously defending this action. 1997, Klaus Holtz suit against Rockwell U.S. District Court Northern District California patent infringement relating Conexant's modem products utilizing V.42bis standard data compression. September 1998, Court barred alleged damages arising before 1997. December 1998, Court issued order construing claims patent. Conexant motion Summary Judgment Non-Infringement February 1999. hearing held thereon June 1999. October 1999, Court found favor Conexant case dismissed. July 2000 District Court granted Conexant's motion declare case exceptional case under U.S.C. 285, awarded Conexant $250,000. Holtz notice appeal court appeals Federal Circuit, challenging District Court's claim construction, non-infringement laches. Conexant began collection approximately $275,000 owed Conexant Holtz result litigation far. August 2000, Holtz bankruptcy protection under Chapter bankruptcy laws State California. Federal Circuit appeals were placed under control trustee bankruptcy, were stayed pending resolution bankruptcy. Conexant able reach agreement with bankruptcy trustee, wherein Holtz' appeals against Conexant will dismissed Conexant will receive license under Holtz' patents. This agreement subject approval Bankruptcy Court. Various other lawsuits, claims proceedings have been instituted asserted against Rockwell Conexant their respective subsidiaries, including those pertaining product liability, intellectual property, environmental, safety health, employment matters. connection with Distribution, Conexant assumed responsibility current future litigation (including environmental intellectual property proceedings) against Rockwell subsidiaries respect Semiconductor Systems. outcome litigation cannot predicted with certainty some lawsuits, claims proceedings disposed unfavorably Company. Many intellectual property disputes have risk injunctive relief there assurance that license will granted. Injunctive relief could have material adverse condition results operations Company. Based evaluation matters which pending asserted taking into account Company's reserves such matters, management believes disposition such matters will have material adverse Company's condition results operations. Item Submission Matters Vote Security Holders matters were submitted vote Company's shareholders during quarter ended September 2000.
PART Item Market Registrant's Common Equity Related Stockholder Matters Conexant Systems, Inc. common stock began trading NASDAQ National Market under symbol ""CNXT'' January 1999. following table lists high share sale prices Company's common stock reported NASDAQ National Market periods indicated. These share sales prices 2-for-1 stock split form stock dividend October 1999.
High
Fiscal year ended September 1999: Second quarter Third quarter Fourth quarter Fiscal year ended September 2000: First quarter Second quarter Third quarter Fourth quarter
1327/32 3115/16 4117/32 763/16 571/16
627/32 133/16
November 2000, there were 49,963 holders record Company's common stock. Company never paid cash dividends capital stock. Company currently intends retain earnings business, does anticipate paying cash dividends foreseeable future.
Item Selected Financial Data following selected data derived from consolidated statements Conexant subsidiaries predecessor Rockwell Semiconductor Systems, Inc., representing semiconductor systems business Rockwell International Corporation subsidiaries. data years ended September 2000 1999 derived from audited consolidated statements Conexant. data years ended September 1998, 1997 1996 have been derived from audited statements Semiconductor Systems part Rockwell. 1999 selected data includes operating results Conexant while part Rockwell prior January 1999. selected data periods prior January 1999 necessarily indicative what position results operations would have been Conexant been independent public company during those periods. selected data should read conjunction with Management's Discussion Analysis Financial Condition Results Operations consolidated statements notes thereto appearing elsewhere this Annual Report Form 10-K.
2000(1) Years Ended September 1999 1998 1997(1) thousands, except share amounts) 1996(1)
Statement Operations Data Cost goods sold Gross margin Operating Expenses: Research development Selling, general administrative Amortization intangible assets Purchased in-process research development Special Total operating expenses Operating income (loss) Special charges litigation Other income, Income (loss) before provision income taxes Provision income taxes income (loss) income (loss) share(3): Basic Diluted Balance Sheet Data Working capital Total assets Long-term obligations Shareholders' Other Financial Data(4) Adjusted operating income (loss) Adjusted income (loss) Adjusted income (loss) share: Basic Diluted
$2,103,599 1,133,647 969,952 414,471 289,411 160,154 215,710 1,079,746 (109,794) (35,000) 6,471
$1,444,114 863,252 580,862 310,042 227,729 8,364 37,906 584,041 (3,179) 5,935
$1,200,231 844,851 355,380 342,349 251,863 11,020 147,306 752,538 (397,158) (43,000) 9,830
$1,412,325 733,848 678,477 279,752 190,858 9,178 29,900 509,688 168,789 10,973
$1,470,455 848,994 621,461 155,414 150,458 121,000 427,360 194,101 3,060 197,161 113,633 83,528 0.38 0.38
(138,323) 2,756 (430,328) 179,762 52,604 (10,173) (168,112) 53,938 (190,927) 12,929 (262,216) 125,824 (0.90) (0.90) 0.07 0.06 (1.32) (1.32) 0.59 0.59
$1,319,134 4,416,197 999,997 2,906,759 272,829 195,517 0.92 0.84
604,453 1,841,950 350,000 1,035,153 43,091 41,414 0.22 0.20
256,689 1,418,530 1,009,375
221,747 1,485,759 1,106,558
230,071 1,383,055 899,216 315,589 204,827 0.94 0.93
(238,832) 207,867 (138,159) 149,896 (0.70) (0.70) 0.70 0.69
September 1996, Conexant acquired Brooktree Corporation 1997 Conexant acquired Hi-Media broadband communication chipset business ComStream Corporation. 2000, Conexant completed following acquisitions: Microcosm Communications Limited wireless broadband business unit Technology, Inc. January, Maker Communications, Inc. March, Applied Telecom, Inc. April, Philsar Semiconductor Inc. May, HotRail, Inc. June, Novanet Semiconductor Ltd. NetPlane Systems, Inc. September. result these acquisitions, during 2000 Company recorded $160.2 million amortization goodwill other acquisitionrelated intangible assets 2000, 1997 1996 Company recorded charges $215.7 million, $29.9 million, $121.0 million, respectively, related purchased in-process research development. 1998, Company recorded special charges approximately $147.3 million related decision close dispose wafer fabrication facilities Colorado Springs, Colorado, worldwide workforce reduction certain other actions. 1999, Company recorded additional special charges approximately $37.9 million related restructuring actions initiated 1998. income (loss) share periods Company's October 1999 2-for-1 stock split. Because Conexant independent company during years 1996-1999, income (loss) share those years calculated Conexant from Rockwell occurred October 1995. Adjusted operating income (loss), adjusted income (loss) adjusted income (loss) share exclude amortization intangible assets, purchased in-process research development, special charges and, 2000, $6.8 million charge value compensatory stock options granted employees. Adjusted income (loss) also excludes income above items, using Company's marginal rate periods presented. These measures earnings accordance with, alternative for, generally accepted accounting principles consistent with measures used other companies. However, Company believes these measures earnings provide investors additional insight underlying operating results Company uses these measures internally evaluate operating performance. ""Management's Discussion Analysis Financial Condition Results Operations Results Operations Adjusted Earnings''.
Item Management's Discussion Analysis Financial Condition Results Operations Overview Conexant world's largest independent company focused exclusively providing semiconductor products system solutions wide variety communications electronics. Company's products facilitate communications worldwide through wireline voice data communications networks, cordless cellular wireless telephony systems, personal imaging devices equipment, emerging cable wireless broadband communications networks. Company operates business segments: Personal Networking business Internet Infrastructure business. Personal Networking business designs, develops sells semiconductor products system solutions four general personal communications applications markets Personal Computing, Personal Imaging, Digital Infotainment Wireless Communications. Personal Computing products include telephony-based communications solutions personal computing terminals other communication devices such gaming consoles, browsers handheld devices. Personal Imaging products consist semiconductor software products that enable image capture, processing output machines, printers digital still video cameras. Digital Infotainment products include semiconductor solutions that perform communication media processing functions within variety information entertainment platforms. Wireless Communications products comprised components, subsystems systemlevel semiconductor solutions wireless voice data communication applications, including digital cellular handsets base stations, cordless telephones receivers. Internet Infrastructure business designs, develops sells semiconductor products system solutions some highest-growth areas broadband communications markets including broadband access, multi-service access transport. Company's broad product portfolio allows provide network infrastructure OEM's with system level semiconductor solutions including multi-service access high-speed products used variety network access platforms such remote access concentrators, voice gateways, digital loop carriers, access multiplexers integrated access devices. Company also provides network infrastructure OEM's with extensive family communication solutions that support aggregation, transmission switching data, video voice from edge network optical backbone, including carrier, Aand SONET/SDH products network processors. These products used variety network equipment including high-speed routers, Aswitches, optical switches, add-drop multiplexers digital cross-connect systems. Company markets sells semiconductor products system solutions directly leading OEMs communication electronics products third-party electronic manufacturing service providers, indirectly through electronic components distributors. Sales distributors accounted approximately 2000 revenues. customer accounted more than revenues 2000. Company's customers accounted approximately 2000 revenues. Revenues derived from customers located Americas, Europe, Japan, region were 32%, 11%, 47%, respectively, Company's revenues 2000. semiconductor industry highly cyclical characterized constant rapid technological change, rapid product obsolescence price erosion, evolving standards, short product life cycles wide product supply demand. addition, Company's operating results negatively substantial quarterly annual market downturns number factors, such changes demand end-user equipment, timing receipt, reduction cancellation customer orders, gain loss customers, market acceptance Company's products customer's products, Company's ability develop, introduce market products technologies timely basis, availability cost products from Company's suppliers, product technology introductions competitors, changes products produced sold, intellectual property disputes, timing extent product development costs general economic conditions. past, average selling prices established products have generally declined over time Company expects this trend continue future.
Company believes strategic acquisitions important element maintaining competitive technological position leading provider semiconductor products system solutions communications OEMs. During 2000, Company completed acquisitions, with aggregate value $1.8 billion, accelerate development technology gaps product portfolio. January 2000, Company acquired Microcosm, technology leader optic communications Technology's wireless broadband unit, supplier demodulator/decoder solutions, primarily digital applications. March 2000, Company acquired Maker, company that develops markets programmable network processors, software solutions development tools. 2000, Company completed acquisition Philsar, leading developer semiconductor solutions personal wireless connectivity applications including Bluetoothand third generation digital cellular handsets. June 2000, Company acquired HotRail, developer high-speed switching, interconnect scalable processing solutions networking systems Sierra, pioneer development ""back-end'' digital image processor solutions digital still camera market. Fiscal 2000 acquisitions also included Applied Telecom NetPlane, each engaged development communications software. Finally, Company acquired Novanet, focused optical networking product development, Istari Design, Inc., provider contract engineering services communications system design implementation. Each these acquisitions treated purchase accounting purposes Company's results operations operations these businesses after dates acquisition. Company evaluates opportunities other strategic acquisitions from time time, make additional acquisitions future. September 2000, Company announced plan spin Internet Infrastructure business through two-step process. step will consist initial public common stock Spinco targeted January 2001. After completion initial public Conexant will continue majority Spinco's outstanding common stock majority voting power Spinco's outstanding common stock. second step, Conexant intends, within several months after Spinco's initial public subject satisfaction certain conditions, distribute shareholders shares Spinco's common stock that Conexant owns. However, there assurance that initial public will successfully completed. Results Operations Revenues Company generally recognizes revenues from product sales directly customers certain distributors upon shipment transfer title. Company provides warranty costs, sales returns, rebates other pricing adjustments time shipment based prior experience. Some products sold electronic component distributors under agreements allowing price protection and/or right return unsold products. Recognition revenue deferred sales these distributors until products sold distributors. following table summarizes Company's revenues business segment:
2000 Years Ended September Change 1999 Change millions) 1998
revenues: Personal Networking Internet percentage Conexant's total revenues: Personal Networking Internet
$1,524.4 579.2 $2,103.6
109%
$1,166.5 277.6 $1,444.1
$1,056.9 143.3 $1,200.2
100%
100%
100%
revenues 2000 include aggregate approximately $31.7 million generated businesses acquired during year. Personal Networking following table summarizes revenues Personal Networking segment product:
2000 Years Ended September Change 1999 Change millions) 1998
revenues: Personal Computing Personal Imaging Digital Infotainment Wireless Communications percentage Conexant's total revenues: Personal Computing Personal Imaging Digital Infotainment Wireless Communications
722.9 119.8 290.8 390.9 $1,524.4
626.5 89.9 183.5 266.6 $1,166.5
(2)% (12)%
639.9 102.0 144.6 170.4 $1,056.9
Personal Computing product revenues 2000 grew year-over-year continued solid demand V.90 dial-up modem solutions personal computing applications. business also achieved strong growth sales embedded modems, which enable communications variety personal communications devices such gaming consoles, browsers, handheld devices. Revenues 2000 also included initial production shipments client ADSL chipset solutions supporting delivery broadband communication services residential applications. recent weakening worldwide demand consumer expected negatively Personal Computing product revenues near term. revenues Personal Computing products decreased during 1999 compared 1998 primarily shift toward lower-priced modem products. Revenues from Personal Imaging products 2000 increased compared 1999, driven strong demand modems increased penetration expanding multifunction peripheral market. Fiscal 2000 revenues also increased shipments CMOS imagers system solutions emerging camera digital still camera applications. revenues Personal Imaging products decreased during 1999 compared 1998 result lingering economic recession that impacted performance during latter part 1998. Digital Infotainment products, increase revenues 2000, compared 1999, strong demand experienced throughout year video processing solutions used personal computing applications well increased shipments tuners, demodulators, encoders, backchannel telephony solutions, primarily satellite set-top applications. Fiscal 2000 results also included initial volume shipments cable modem products European digital video broadcast North American DOCSIS applications. revenues Digital Infotainment products increased during 1999 compared 1998 solid demand tuners demodulators, video encoders back channel telephony solutions. Wireless Communications product revenues 2000 grew over 1999, driven strong overall demand digital cellular wireless components, subsystems system solutions. particular, revenue growth derived from accelerating unit shipments power radio frequency subsystems full system solutions. However, revenues derived from CDMA product portfolio declined during second half year result Korean government's decision impose
Korean service providers subsidizing digital cellular handsets. subsidy curtailed domestic demand CDMA digital cellular handset production attendant semiconductor component supply. Korean government's action, coupled with recent deceleration overall demand digital cellular handsets, likely continue Wireless Communications product revenues near term. revenues Wireless Communications products increased during 1999 compared 1998 strong demand CDMA digital cellular handsets worldwide. Internet Infrastructure 2000, Internet Infrastructure segment revenues increased 109% from 1999 levels demand networking semiconductor products system solutions increased need network infrastructure OEMs support ongoing build-out upgrade both public private communications networks. Demand increased optical networking, ATM, network processor carrier products, used network infrastructure equipment metropolitan optical backbone networks. Company also experienced greater demand high-speed products, used network infrastructure OEMs access multiplexers, integrated access devices other products delivery SDSL services, well increased demand from network infrastructure OEMs AnyPortfamily multiservice access processors. Increased demand Company's AnyPortfamily multi-service access processors major contributor revenue growth achieved 1999. Revenue growth 1999 also resulted from higher demand from OEMs high-speed products response rapid expansion SDSL services provided competitive incumbent local exchange carriers. Revenue growth during 1999 also continued expansion high-speed optical networking, with transition from lower speed OC3/12 higher speed OC48/192, which created greater demand Company's semiconductor system solutions used optical networking equipment. Gross Margin
2000 Years Ended September Change 1999 Change millions) 1998
Gross Percent revenues
$970.0
$580.9
$355.4
Cost goods sold consists predominantly purchased materials, labor overhead (including depreciation) associated with product manufacturing, royalty other intellectual property costs, warranties sustaining engineering expenses pertaining products sold. gross margin improvement 2000 principally continued shift Company's product toward higher margin products. gross margin improvement also higher factory utilization Company's wafer fabrication facilities that resulted from increased unit sales volume. Gross margin 1999 adversely unusually high inventory costs which resulted from manufacturing capacity utilization during last four months 1998. improvement gross margin percentage revenues during 1999 mainly increased unit sales volume, which allowed costs allocated over higher number semiconductor products produced. Gross margin improvement also resulted from continued transition higher-margin product mix, favorable market environment purchasing processed wafers, successful implementation cost reduction initiatives fourth quarter 1998, including headcount reductions. Gross margin 1998 adversely impacted million inventory million expenses related underutilization manufacturing capacity.
Research Development
2000 Years Ended September Change 1999 Change millions) 1998
Research development Percent revenues
$414.5
$310.0
(9)%
$342.3
Company's research development (""R&D'') expenses consist principally direct personnel costs, costs pre-production evaluation testing devices design test tool costs. expenses also include costs advanced semiconductor process development, design automation advanced package development each Company's businesses. increase expenses 2000 compared 1999 primarily higher headcount personnel-related costs Company expanded areas Internet infrastructure, wireless communications broadband access. Subsequent September 1999, Company's recruiting programs have increased engineering team over engineers, including approximately engineers joining Company through acquisition businesses. product development were targeted client multiport ADSL G.shdsl products, home networking solutions, cable modems, CMOS imager solutions, subsystems system solutions, broadband optical networking products. Company expects 2001 expenses increase from 2000 amounts continues invest semiconductor system solutions products high-growth market opportunities. decrease expenses during 1999 compared 1998 mainly cost reduction actions initiated fourth quarter 1998 reduce Company's overall cost structure. These actions included headcount reductions, design center closures, project cancellations. Selling, General Administrative
2000 Years Ended September Change 1999 Change millions) 1998
Selling, general administrative Percent revenues
$289.4
$227.7
(10)%
$251.9
Company's selling, general administrative (""SG&A'') expenses include personnel costs, sales representative commissions, advertising other marketing costs. SG&A expenses also include costs corporate functions including legal, accounting, treasury, human resources, real estate, information systems, customer service, sales, marketing, application engineering other services. increase SG&A expenses 2000 compared 1999 resulted from Company's continued development sales, marketing business su
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