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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 27, 2002
Commission file number 1-5560
SKYWORKS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2302115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 SYLVAN ROAD, WOBURN, MASSACHUSETTS 01801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 376-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12B-2).
[X] Yes [ ] No
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant (based on the closing price as reported on the
Nasdaq National Market on December 4, 2002) was approximately $1.4 billion.
Shares of voting stock held by each officer and director and by each shareowner
affiliated with a director have been excluded from this calculation because such
persons may be deemed to be affiliates. This determination of officer or
affiliate status is not necessarily a conclusive determination for other
purposes. The number of outstanding shares of the Registrant's Common Stock, par
value $0.25 per share, as of December 4, 2002 was 137,899,732.
The Exhibit Index is located on page 88.
Page 1 of 88 pages.
SKYWORKS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 27, 2002
TABLE OF CONTENTS
Part I Page No.
Item 1: Business 3
Item 2: Properties 9
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
Part II
Item 5: Market for the Registrant's Common Equity and Related Stockholder 10
Matters
Item 6: Selected Financial Data 11
Item 7: Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 36
Item 8: Financial Statements and Supplementary Data 37
Item 9: Changes in and Disagreements with Accountants on Accounting and 65
Financial Disclosure
Part III
Item 10: Directors and Executive Officers of the Registrant 66
Item 11: Executive Compensation 68
Item 12: Security Ownership of Certain Beneficial Owners and Management 73
and Related Stockholder Matters
Item 13: Certain Relationships and Related Transactions 75
Item 14: Controls and Procedures 77
Part IV
Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
Signatures 83
Certifications 85
Skyworks Solutions, Inc. and Subsidiaries
ITEM 1 BUSINESS
SUMMARY
Skyworks Solutions, Inc. ("Skyworks" or the "Company") is a leading wireless
semiconductor company focused exclusively on radio frequency (RF) and complete
cellular system solutions for mobile communications applications. We offer
front-end modules, RF subsystems and cellular systems to top wireless handset
and infrastructure customers.
From the radio to the baseband, we have developed one of the industry's broadest
product portfolio including leadership switches and power amplifier modules.
Additionally, we offer a highly integrated direct conversion transceiver and
have launched a comprehensive cellular system for next generation handsets.
With our extensive portfolio and significant systems-level expertise, Skyworks
is the ideal partner for both top-tier wireless manufacturers and new market
entrants who demand simplified architectures, faster development cycles and
fewer overall suppliers.
Skyworks was formed through the merger ("Merger") of the wireless communications
business of Conexant Systems, Inc. ("Conexant") and Alpha Industries, Inc.
("Alpha") on June 25, 2002. Following the Merger, Alpha changed its corporate
name to Skyworks Solutions, Inc. We are headquartered in Woburn, Massachusetts,
and have executive offices in Irvine, California. We have design, engineering,
manufacturing, marketing, sales and service facilities throughout North America,
Europe, and the Asia/Pacific region. Our Internet address is
www.skyworksinc.com. We make available on our Internet website free of charge
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports as soon as practicable after we
electronically file such material with the SEC. The information contained in our
website is not incorporated by reference in this Annual Report on Form 10-K.
RECENT DEVELOPMENTS
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant under a financing agreement entered into with Conexant
immediately following the Merger. The payments to Conexant retired $105 million
of the $150 million note relating to the purchase of Conexant's semiconductor
assembly, module manufacturing and test facility located in Mexicali, Mexico,
and certain related operations ("Mexicali Operations") and repaid the $65
million principal amount outstanding as of November 13, 2002 under the loan
facility, dissolving the $100 million facility and resulting in the release of
Conexant's security interest in the assets and properties of the Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance on the note was
exchanged for new 15% convertible debt securities with a maturity date of June
30, 2005. These notes can be converted into the Company's common stock at a
conversion rate based on the applicable conversion price, which is subject to
adjustment based on, among other things, the market price of the Company's
common stock. Based on this adjustable conversion price, the Company expects
that the maximum number of shares that could be issued under the note is
approximately 7.1 million shares, subject to adjustment for stock splits and
other similar dilutive occurrences.
In addition to the retirement of $170 million in principal amount of
indebtedness owing to Conexant, we also retained approximately $53 million of
net proceeds of the private placement to support our working capital needs.
INDUSTRY BACKGROUND
We believe that cellular services and personal communications services are
increasingly expanding to offer more than just traditional voice services, with
emerging mobile communications technologies offering consumers and businesses
wireless access to data and information across a wide range of applications.
High-speed mobile access has the potential to dramatically enhance use of the
Internet, thereby facilitating the growth of electronic commerce. At the center
of these developments are the continuing evolution of the mobile phone and the
corresponding growth of the wireless communications infrastructure.
The cellular handset market has grown considerably over the past five years with
unit sales of approximately 400 million units in 2001, according to Gartner
Dataquest, a market research firm, up 500% from 1996 levels. As additional
wireless cellular capacity became available, an intensely competitive pricing
environment for wireless services developed at the same time that lower-priced,
feature-rich mobile phones were being introduced, contributing substantially to
the growth of new subscribers. We expect this trend to continue, enabling
further wireless expansion and increased market penetration worldwide. Market
penetration measures the portion of users or subscribers within the entire
population of a specified geographic area. In the
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Skyworks Solutions, Inc. and Subsidiaries
United States, market research firm EMC forecasts a growth in wireless
penetration from approximately 46% in 2001 to almost 75% by 2005. On a worldwide
basis, market penetration of wireless phones was just 16% in 2001 and could
approach 30% by 2005, based on data from EMC. We believe that this anticipated
dramatic market growth will create significant demand for wireless handsets as
well as for wireless infrastructure equipment to meet future network capacity
requirements.
New mobile phones with improved battery life and expanded features are being
introduced at a rapid rate, made possible by significant technological advances
that render earlier models obsolete after only one or two years. According to
market research firm Strategy Analytics, roughly half of the 2001 worldwide
cellular handset sales were replacements of previous models. We expect this
replacement market to continue contributing to the growth of the digital
cellular handset industry, led by the transition to next generation services,
such as CDMA2000, GPRS and EDGE wireless standards, which support wireless data
capacity. We anticipate that transition to third-generation services, which will
enable even higher bandwidth applications, including streaming video, digital
audio and digital camera functionality, should further bolster the replacement
market. Additionally, in emerging markets where wireline infrastructure is
inadequate or limited, we believe that digital wireless networks are providing a
viable and economic alternative that can be rapidly deployed.
In response to this rapidly changing market, handset original equipment
manufacturers, or OEMs, are significantly shortening product development cycles,
seeking simplified architectures and streamlining manufacturing processes.
Traditional OEMs are shifting to low-cost suppliers around the world. In turn,
original design manufacturers and contract manufacturers, who lack RF and
systems-level expertise, are entering the high volume mobile phone market to
support OEMs as well as to develop handset platforms of their own. Original
design manufacturers and contract manufacturers can manage low-cost
manufacturing and assembly of handsets, freeing OEMs to focus on the higher
value marketing and distribution aspects of their business. Established handset
manufacturers and new market entrants alike are demanding complete semiconductor
system solutions that include the radio frequency system, all baseband
processing, protocol stack and user interface software, plus comprehensive
reference designs and development platforms. With these solutions, traditional
handset OEMs can accelerate time-to-market cycles with lower investments in
engineering and system design. These solutions also enable original design
manufacturers to enter the high volume handset market without the need to make
significant investments in RF and systems-level expertise.
Similarly, cellular and personal communications services network operators are
developing and deploying next generation services. These service providers are
incorporating packet-switching capability in their networks to deliver data
communications and Internet access to digital cellular and other wireless
devices. Over the long-term, service providers are seeking to establish a global
network that can be accessed by subscribers at any time, anywhere in the world
and that can provide subscribers with multimedia services. To meet this goal,
OEMs who supply wireless infrastructure base stations to network operators are
increasingly relying on mobile communications semiconductor suppliers who can
provide highly integrated radio frequency and mixed signal processing
functionality.
Additionally, as service providers migrate cellular subscribers to data
intensive next generation 2.5G and 3G applications, base stations that transmit
and receive signals in the backbone of cellular and personal communications
services systems will be under further capacity constraints. To meet the related
demand, OEMs will be challenged to increase base station transceiver performance
and functionality, while reducing size, power consumption and overall system
costs.
We believe that these market trends create a potentially significant opportunity
for a broad-based wireless semiconductor supplier with a comprehensive product
portfolio supported by specialized wireless manufacturing process technologies
and a full range of systems-level expertise.
BUSINESS OVERVIEW
Skyworks is a leading wireless semiconductor company focused exclusively on RF
and complete cellular system solutions for mobile communications applications.
We offer front-end modules, RF subsystems and cellular systems to top wireless
handset and infrastructure customers. Skyworks operates in one business segment,
which designs, develops, manufactures and markets proprietary semiconductor
products and system solutions for manufacturers of wireless communication
products.
Skyworks possesses a broad wireless technology capability and one of the most
complete wireless communications product portfolios, coupled with customer
relationships with virtually all major handset and infrastructure manufacturers.
Our product portfolio includes almost every key semiconductor found within a
digital cellular handset, including:
- switches and filters (components that switch signals and incorporate
filtering functionality);
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Skyworks Solutions, Inc. and Subsidiaries
- power amplifier (PA) modules (devices that amplify a signal to
provide sufficient energy for it to reach the base station);
- RF transceivers (devices that perform radio frequency transmit and
receive functions);
- synthesizers (devices used to tune to the correct channel to receive
the RF signal from the base station);
- mixed signal processors (devices that convert analog signals into
digital signals);
- digital signal processors (DSP) (digital devices that act as the
cellular handset's central processor);
- audio (components that enable voice communication);
- physical interface DSP firmware (channel coding and equalization
software);
- network access software (protocol stack supporting encoding and
decoding); and
- MMI/applications (user interface software).
The following diagram illustrates our products that are used in a digital
cellular handset:
[SEMICONDUCTOR GRAPHIC DIAGRAM]
HIGHLY INTEGRATED SEMICONDUCTORS
Filter Receiver Mixed Signal
Switch Synthesizer DSP
PA Module Transmitter Audio
Physical Interface Network Access MMI/
DSP Firmware Software Applications
COMPLETE SYSTEM SOFTWARE
Skyworks also offers a broad product portfolio addressing next generation
wireless infrastructure applications, including amplifier drivers, ceramic
resonators, couplers and detectors, filters, synthesizers and front-end
receivers. These components support a variety of radio frequency and mixed
signal processing functions within the wireless infrastructure.
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Skyworks Solutions, Inc. and Subsidiaries
We have a comprehensive radio frequency and mixed signal processing and
packaging portfolio, extensive circuit design libraries and a proven track
record in component and system design. We believe that these capabilities
position us to address the growing need of wireless infrastructure manufacturers
for base station products with increased transceiver performance and
functionality with reduced size, power consumption and overall system costs.
OUR STRATEGY
Skyworks' vision is to become the leading supplier of wireless semiconductor
solutions. Key elements in our strategy include:
LEVERAGING CORE TECHNOLOGIES
Skyworks deploys technology building blocks such as radio frequency integrated
circuits, analog/mixed-signal processing cores and digital baseband engines as
well as software across multiple product platforms. We believe that this
approach enables creation of economies of scale in research and development and
facilitates a reduction in the time-to-market for key products.
INCREASING INTEGRATION LEVELS
High levels of integration enhance the benefits of our products by reducing
production costs through fewer external components, reduced board space and
improved system assembly yields. By combining all of the necessary
communications functions for a complete system solution, Skyworks can deliver
additional semiconductor content, thereby offering existing and potential
customers more compelling and cost-effective solutions.
CAPTURING AN INCREASING AMOUNT OF SEMICONDUCTOR CONTENT
We enable our customers to start with individual components as necessary, and
then migrate up the product integration ladder. We believe that our highly
integrated solutions will enable these customers to speed time-to-market while
focusing their resources on product differentiation through a broader range of
more sophisticated, next-generation features.
DIVERSIFYING CUSTOMER BASE
Skyworks supports virtually every wireless handset OEM including Motorola, Inc.,
Nokia Corporation, Samsung Electronics Co. and Sony/Ericsson as well as emerging
original development manufacturers (ODMs) and contract manufacturers such as
BenQ, Compal, Flextronics and Quanta. With the industry's move towards
outsourcing, we believe that we are particularly well-positioned to address the
growing needs of new market entrants who seek RF and system-level integration
expertise.
DELIVERING OPERATIONAL EXCELLENCE
The Skyworks operations team leverages best-in-class manufacturing technologies
and enables highly integrated modules as well as system-level solutions. We are
focused on achieving the industry's shortest cycle times, highest yields and
ultimately the lowest cost structure.
BUILDING INDUSTRY PARTNERSHIPS
Skyworks will vertically integrate where it can differentiate or will otherwise
enter alliances and partnerships for leading-edge capabilities. These
partnerships and alliances are designed to ensure product leadership and
competitive advantage in the marketplace. For example, we recently licensed LSI
Logic's digital signal processor core to support future GSM/GPRS baseband
products. Additionally, we work with Advanced Wireless Semiconductor Company
(AWSC), Jazz Semiconductor, Inc. and United Microelectronics Corporation (UMC)
on a foundry basis.
MARKETING AND DISTRIBUTION
Our products are primarily sold through a direct Skyworks sales force. This team
is globally deployed across all major regions. In some markets we supplement our
direct sales effort with independent manufacturers' representatives, assuring
broader coverage of territories and customers. We also utilize distribution
partners, some of which are franchised globally with others specific to North
American markets.
We maintain an internal marketing organization that is responsible for
developing sales and advertising literature, print media such as product
announcements and catalogs, as well as a variety of web based content. Skyworks'
sales engagement begins at the earliest stages in a customer design. We strive
to provide close technical collaboration with our customers at the inception of
a new program. This partnership allows our team to facilitate customer-driven
solutions, which leverage the unique strength of our portfolio while providing
high value and greatly reduced time-to-market.
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Skyworks Solutions, Inc. and Subsidiaries
We believe that the technical and complex nature of our products and markets
demands an extraordinary commitment to close ongoing relationships with our
customers. As such, we strive to expand the scope of our customer relationship
to include design, engineering, manufacturing, purchasing and project management
staff. We also employ a collaborative approach in developing these partnerships
by combining the support of our design teams, applications engineers,
manufacturing personnel, sales and marketing staff and senior management.
We believe that maintaining frequent and interactive contact with our customers
is paramount to our continuous efforts to provide world-class sales and service
support. By listening and responding to feedback, we are able to mobilize
actions to raise the level of customer satisfaction, improve our ability to
anticipate future product needs, and enhance our understanding of key market
dynamics. We are confident that diligence in following this path will position
Skyworks to participate in numerous opportunities for growth in the future.
CUSTOMERS
During fiscal year 2002, Samsung Electronics Co. and Motorola, Inc. accounted
for 38% and 12%, respectively, of the Company's total net revenues from
customers other than Conexant. During fiscal year 2001, Samsung Electronics Co.
and Nokia Corporation accounted for 44% and 12%, respectively, of the Company's
total net revenues from customers other than Conexant. As of September 30, 2002
Samsung Electronics Co. accounted for approximately 27% of the Company's gross
accounts receivable. The foregoing percentages are based on sales representing
the Mexicali Operations' and the wireless business of Conexant's sales for the
full fiscal year during 2001 and the fiscal 2002 pre-Merger period through June
25, 2002, and sales of Skyworks, the combined company, for the post-Merger
period from June 26, 2002 through the end of the fiscal year.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We own or license numerous United States and foreign patents and patent
applications related to our products, our manufacturing operations and processes
and other activities. In addition, we own a number of trademarks and service
marks applicable to certain of our products and services. We believe that
intellectual property, including patents, patent applications and licenses,
trade secrets and trademarks are of material importance to our business. We rely
on patent, copyright, trademark, trade secret and other intellectual property
laws, as well as nondisclosure and confidentiality agreements and other methods,
to protect our proprietary technologies, devices, algorithms and processes. In
addition to protecting our proprietary technologies and processes, we strive to
strengthen our intellectual property portfolio to enhance our ability to obtain
cross-licenses of intellectual property from others, to obtain access to
intellectual property we do not possess and to more favorably resolve potential
intellectual property claims against us. We believe that our technological
position depends primarily on our ability to develop new innovative products
through the technical competence of our engineering personnel.
COMPETITIVE CONDITIONS
We compete on the basis of time-to-market; new product innovation: overall
product quality and performance; price; compliance with industry standards;
strategic relationships with customers: and protection of our intellectual
property. Certain competitors may be able to adapt more quickly than we can to
new or emerging technologies and changes in customer requirements, or may be
able to devote greater resources to the development, promotion and sale of their
products than we can.
Current and potential competitors also have established or may establish
financial or strategic relationships among themselves or with our customers,
resellers or other third parties. These relationships may affect our customers'
purchasing decisions. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire significant market
share. We cannot provide assurances that we will be able to compete successfully
against current and potential competitors.
RESEARCH AND DEVELOPMENT
Our products and markets are subject to continued technological advances.
Recognizing the importance of such technological advances, we maintain a high
level of research and development activities. We maintain close collaborative
relationships with many of our customers to help identify market demands and
target our development efforts to meet those demands. Our design centers are
strategically located around the world to be in close proximity to our customers
and to take advantage of key technical and engineering talent worldwide. We are
focusing our development efforts on new products, design tools and manufacturing
processes using our core technologies.
Our research and development expenditures for fiscal 2002, 2001 and 2000 were
$132.6 million, $111.1 million and $91.6 million, respectively.
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Skyworks Solutions, Inc. and Subsidiaries
RAW MATERIALS
Raw materials for our products and manufacturing processes are generally
available from several sources. It is our policy not to depend on a sole source
of supply. However, there are limited situations where we procure certain
components and services for our products from single or limited sources. We
purchase materials and services against long-term agreements or on individual
purchase orders. We do not carry significant inventories and do not have any
additional long-term supply contracts with our suppliers. We believe we have
adequate sources for the supply of raw materials and components for our
manufacturing needs with suppliers located around the world. Raw wafers and
other raw materials used in the production of our CMOS products are available
from several suppliers.
Under a supply agreement entered into with Conexant in connection with the
Merger, we will receive wafer fabrication, wafer probe and certain other
services from Jazz Semiconductor, Inc., a Newport Beach, California foundry
joint venture between Conexant and The Carlyle Group. Pursuant to our supply
agreement with Conexant, we are initially obligated to obtain certain minimum
volume levels from Jazz Semiconductor based on a contractual agreement between
Conexant and Jazz Semiconductor. Our expected minimum purchase obligations under
this supply agreement are anticipated to be approximately $64 million, $39
million and $13 million in fiscal 2003, 2004 and 2005. We estimate that our
minimum purchase obligation under this agreement will result in excess costs of
approximately $5.1 million and we have recorded this liability and charged cost
of sales in fiscal 2002.
BACKLOG
Our sales are made primarily pursuant to standard purchase orders for delivery
of products, with such purchase orders officially acknowledged by us according
to our own terms and conditions. Due to industry practice, which allows
customers to cancel orders with limited advance notice to us prior to shipment,
we believe that backlog as of any particular date is not a reliable indicator of
our future revenue levels.
ENVIRONMENTAL REGULATIONS
Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes, and other activities
affecting the environment have had, and will continue to have, an impact on our
manufacturing operations. Thus far, compliance with environmental requirements
and resolution of environmental claims have been accomplished without material
effect on our liquidity and capital resources, competitive position or financial
condition.
We believe that our expenditures for environmental capital investment and
remediation necessary to comply with present regulations governing environmental
protection and other expenditures for the resolution of environmental claims
will not have a material adverse effect on our liquidity and capital resources,
competitive position or financial condition. We cannot assess the possible
effect of compliance with future requirements.
CYCLICALITY; SEASONALITY
The semiconductor industry is highly cyclical and is characterized by constant
and rapid technological change. Product obsolescence, price erosion, evolving
technical standards, and shortened product life cycles may contribute to wide
fluctuations in product supply and demand. These and other factors, together
with changes in general economic conditions, may cause significant upturns and
downturns in the industry, and in our business. Periods of industry downturns --
as we experienced in fiscal 2001 -- have been characterized by diminished
product demand, production overcapacity, excess inventory levels and accelerated
erosion of average selling prices. These factors may cause substantial
fluctuations in our revenues and our operational performance. We have
experienced these cyclical fluctuations in our business in the past and may
experience cyclical fluctuations in the future.
Sales of our products are subject to seasonal fluctuation and periods of
increased demand in end-user consumer applications, such as mobile handsets.
This generally occurs in the last calendar quarter ending in December. Sales of
semiconductor products and system solutions used in these products generally
increase just prior to this quarter and continue at a higher level through the
end of the calendar year.
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Skyworks Solutions, Inc. and Subsidiaries
GEOGRAPHIC INFORMATION
Net revenues from customers other than Conexant by geographic area are presented
based upon the country of destination. Net revenues from customers other than
Conexant by geographic area are as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
------------------------------------
2002 2001 2000
-------- -------- --------
United States ..................... $ 32,760 $ 18,999 $ 32,726
Other Americas .................... 4,615 5,455 8,146
-------- -------- --------
Total Americas ............ 37,375 24,454 40,872
South Korea ........................ 237,681 142,459 167,269
Other Asia-Pacific ................. 114,974 23,898 46,255
-------- -------- --------
Total Asia-Pacific ........ 352,655 166,357 213,524
Europe, Middle East and Africa ..... 28,314 24,691 58,587
-------- -------- --------
$418,344 $215,502 $312,983
======== ======== ========
Although we sell the vast majority of our products into the Asia-Pacific region,
end products that our customers develop may ultimately be shipped worldwide. For
example, if we sell a power amplifier module to a customer in South Korea, we
record the sale within the South Korea account although that customer, in turn,
may integrate that module into a product sold to a service provider (its
customer) in Africa, China, Europe, the Middle East, the Americas or within
South Korea. Accordingly, our revenues by geography do not correlate to end
handset demand by region.
Long-lived assets principally consist of property, plant and equipment, goodwill
and intangible assets. Long-lived assets by geographic area are as follows (in
thousands):
SEPTEMBER 30,
--------------------------------
2002 2001
---------- ----------
Assets
United States .................... $1,063,163 $ 44,539
Mexico ........................... 52,730 126,730
Canada ........................... 387 58,373
Other ............................ 3,236 1,285
---------- ----------
$1,119,516 $ 230,927
========== ==========
EMPLOYEES
As of September 27, 2002, the Company employed approximately 4,000 persons.
Approximately 1,100 employees in Mexico are covered by collective bargaining
agreements. Management believes that its current relations with employees are
good.
We believe our future success will depend in large part upon our continued
ability to attract, motivate, develop and retain highly skilled and dedicated
employees.
ITEM 2 PROPERTIES
We own and lease manufacturing facilities and other real estate properties in
the United States and a number of foreign countries. We own and lease
approximately 865,000 square feet and 316,000 square feet of office and
manufacturing space, respectively. In addition, we lease approximately 142,000
square feet of sales office and design center space with approximately 43% of
this space located in foreign countries. We are headquartered in Woburn,
Massachusetts and have executive offices in Irvine, California. The following
table sets forth our principal facilities measuring 50,000 square feet or more:
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Skyworks Solutions, Inc. and Subsidiaries
LOCATION OWNED/LEASED FUNCTION
- -------- ------------ --------
Mexicali, Mexico Owned Assembly and test facility
Irvine, California Leased Office space
Woburn, Massachusetts Owned Corporate headquarters, manufacturing
Haverhill, Massachusetts Owned Design engineering, manufacturing, assembly and
testing, office space
Newport Beach, California Leased Office space
Newbury Park, California Leased Office space, manufacturing
Newbury Park, California Owned Manufacturing
Adamstown, Maryland Owned Manufacture electrical ceramic product components,
occupied by subsidiary
During the first quarter of fiscal 2003, we relocated our Haverhill,
Massachusetts operations to our Woburn, Massachusetts facility. Our facility in
Haverhill is currently on the market for sale. We also moved our operations from
our Newport Beach facilities to Irvine, California during the first quarter of
fiscal 2003. Both of these actions are part of our consolidation effort to
minimize costs. Based on this information, we believe that the above facilities
are in good repair, meet our existing needs adequately and operate at reasonable
levels of capacity.
Certain of our facilities, including our California and Mexicali, Mexico
facilities, are located near major earthquake fault lines. We maintain no
earthquake insurance with respect to these facilities.
ITEM 3 LEGAL PROCEEDINGS
From time to time various lawsuits, claims and proceedings have been, and may in
the future be, instituted or asserted against Skyworks, including those
pertaining to patent infringement, intellectual property, environmental, product
liability, safety and health, employment and contractual matters. In addition,
in connection with the Merger, Skyworks has assumed responsibility for all then
current and future litigation (including environmental and intellectual property
proceedings) against Conexant or its subsidiaries in respect of the operations
of Conexant's wireless business. The outcome of litigation cannot be predicted
with certainty and some lawsuits, claims or proceedings may be disposed of
unfavorably to Skyworks. Intellectual property disputes often have a risk of
injunctive relief which, if imposed against Skyworks, could materially and
adversely affect the financial condition or results of operations of Skyworks.
Additionally, the semiconductor industry is characterized by vigorous protection
and pursuit of intellectual property rights. From time to time, third parties
have asserted and may in the future assert patent, copyright, trademark and
other intellectual property rights to technologies that are important to our
business and have demanded and may in the future demand that we license their
technology.
On June 8, 2002 Skyworks Technologies, Inc. ("STI"), filed a complaint in the
United States District Court, in the Central District of California, Southern
Division, alleging trademark infringement, false designation of origin, unfair
competition, and false advertising by the Company. Without a material impact to
the financial statements, the Company reached an agreement on this matter with
STI, which includes a release of all pending claims and an arrangement for
mutual coexistence using the name Skyworks.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended September 27, 2002.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol SWKS.
The following table sets forth the range of high and low sale prices for our
common stock for the periods indicated. The merger of the wireless business of
Conexant with Alpha and the acquisition of the Mexicali Operations
("Washington/Mexicali") was completed on June 25, 2002. Market
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Skyworks Solutions, Inc. and Subsidiaries
price range information for periods on and after June 26, 2002 reflects sale
prices for the common stock of the combined company, and market price range
information for all periods on and prior to June 25, 2002 reflects prices for
the common stock of Alpha on the Nasdaq National Market under the symbol AHAA.
Washington/Mexicali was not publicly traded prior to the Merger. The number of
stockholders of record of Skyworks as of December 4, 2002 was approximately
48,381.
Neither Skyworks nor its corporate predecessor, Alpha, have paid cash dividends
on common stock since an Alpha dividend made in fiscal 1986, and Skyworks does
not anticipate paying cash dividends in the foreseeable future. Our expectation
is to retain all of our earnings to finance future growth.
HIGH LOW
==================================================================
FISCAL YEAR ENDED SEPTEMBER 27, 2002:
First quarter .......................... $30.05 $16.55
Second quarter ......................... 22.92 15.25
Third quarter, until June 25,
2002 ................................... 16.97 5.56
Third quarter, on and after June 26,
2002 ................................... 5.70 4.99
Fourth quarter ......................... 5.90 2.90
FISCAL YEAR ENDED SEPTEMBER 28, 2001:
First quarter .......................... $54.00 $24.75
Second quarter ......................... 35.94 13.94
Third quarter .......................... 29.70 13.56
Fourth quarter ......................... 40.36 18.72
==================================================================
ITEM 6 SELECTED FINANCIAL DATA
You should read the data set forth below in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. The Company's fiscal
year ends on the Friday closest to September 30. Fiscal years 2002, 2001 and
2000 each comprised 52 weeks and ended on September 27, September 28 and
September 29, respectively. For convenience, the consolidated financial
statements have been shown as ending on the last day of the calendar month. The
selected consolidated financial data set forth below as of September 30, 2002
and 2001 and for the fiscal years 2002, 2001 and 2000 have been derived from our
audited consolidated financial statements and are included elsewhere in this
Annual Report on Form 10-K. The selected combined financial data set forth below
as of September 30, 2000, 1999 and 1998 and for the fiscal years 1999 and 1998
have been derived from our combined financial statements that are not included
in this Annual Report on Form 10-K.
Because the Merger was accounted for as a reverse acquisition, a purchase of
Alpha by Washington/Mexicali, the historical financial statements of
Washington/Mexicali became the historical financial statements of Skyworks after
the Merger. The historical information provided below does not include the
historical financial results of Alpha for periods prior to June 25, 2002, the
date the Merger was consummated. The historical financial information may not be
indicative of the Company's future performance and does not reflect what the
results of operations and financial position prior to the Merger would have been
had Washington/Mexicali operated independently of Conexant during the periods
presented prior to the Merger or had the results of Alpha been combined with
those of Washington/Mexicali during the periods presented prior to the Merger.
11
Skyworks Solutions, Inc. and Subsidiaries
FISCAL YEAR
2002(1) 2001 2000 1999 1998
====================================================================================================================================
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Third parties ............................... $ 418,344 $ 215,502 $ 312,983 $ 176,015 $ 79,066
Conexant .................................... 39,425 44,949 65,433 40,400 33,205
----------- ----------- ----------- ----------- -----------
Total net revenues ....................... 457,769 260,451 378,416 216,415 112,271
----------- ----------- ----------- ----------- -----------
Cost of goods sold (2):
Third parties ............................... 294,149 268,749 207,450 96,699 44,503
Conexant .................................... 37,459 42,754 62,720 37,840 33,350
----------- ----------- ----------- ----------- -----------
Total cost of goods sold .............. 331,608 311,503 270,170 134,539 77,853
----------- ----------- ----------- ----------- -----------
Gross margin .................................... 126,161 (51,052) 108,246 81,876 34,418
Operating expenses:
Research and development .................... 132,603 111,053 91,616 66,457 56,748
Selling, general and administrative ......... 50,178 51,267 52,422 27,202 21,211
Amortization of intangible assets (4)........ 12,929 15,267 5,327 -- --
Purchased in process research and
development (5)............................ 65,500 -- 24,362 -- --
Special charges (3) ......................... 116,321 88,876 -- 1,432 220
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 377,531 266,463 173,727 95,091 78,179
----------- ----------- ----------- ----------- -----------
Operating loss .................................. (251,370) (317,515) (65,481) (13,215) (43,761)
Interest expense ................................ (4,227) -- -- -- --
Other income (expense), net ..................... (56) 210 142 (54) 1,559
----------- ----------- ----------- ----------- -----------
Loss before income taxes ........................ (255,653) (317,305) (65,339) (13,269) (42,202)
Provision (benefit) for income taxes ............ (19,589) 1,619 1,140 1,646 1,082
----------- ----------- ----------- ----------- -----------
Net loss ........................................ $ (236,064) $ (318,924) $ (66,479) $ (14,915) $ (43,284)
=============================================================================
BALANCE SHEET DATA:
Working capital ................................. $ 79,769 $ 60,540 $ 135,649 $ 55,374 $ 17,831
Total assets .................................... 1,346,912 314,287 501,553 291,909 203,313
Long-term liabilities ........................... 184,309 3,806 3,767 3,335 2,063
Shareholders' equity ............................ 1,014,976 287,661 466,416 275,568 187,196
- ----------
12
Skyworks Solutions, Inc. and Subsidiaries
(1) The Merger was completed on June 25, 2002. Financial statements for
periods prior to June 26, 2002 represent Washington/Mexicali's
combined results and financial condition. Financial statements for
periods after June 26, 2002 represent the consolidated results and
financial condition of Skyworks, the combined company.
(2) In fiscal 2001, the Company recorded $58.7 million of inventory
write-downs.
(3) In fiscal 2002, the Company recorded special charges of $116.3
million, principally related to the impairment of the assembly and
test machinery and equipment and the related facility in Mexicali,
Mexico, and the write-off of goodwill and other intangible assets
related to the fiscal 2000 acquisition of Philsar Semiconductor Inc.
In fiscal 2001, the Company recorded special charges of $88.9
million, principally related to the impairment of certain wafer
fabrication assets and restructuring activities.
(4) In fiscal 2000, Philsar Semiconductor Inc. was acquired and as a
result of the acquisition, during fiscal 2002, 2001 and 2000, the
Company recorded $12.9 million, $15.3 million and $5.3 million,
respectively, in amortization of goodwill and other
acquisition-related intangible assets.
(5) In fiscal 2002 and fiscal 2000 the Company recorded purchased
in-process research and development charges of $65.5 million and
$24.4 million, respectively, related to the Merger and the
acquisition of Philsar Semiconductor Inc., respectively.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On December 16, 2001, Alpha, Conexant and Washington Sub, Inc. ("Washington"), a
wholly owned subsidiary of Conexant, entered into a definitive agreement
providing for the combination of Conexant's wireless business with Alpha. Under
the terms of the agreement, Conexant would spin off its wireless business into
Washington, including its gallium arsenide wafer fabrication facility located in
Newbury Park, California, but excluding certain assets and liabilities, to be
followed immediately by the Merger of this wireless business into Alpha with
Alpha as the surviving entity in the Merger. The Merger was completed on June
25, 2002. Following the Merger, Alpha changed its corporate name to Skyworks
Solutions, Inc.
Immediately following completion of the Merger, the Company purchased the
Mexicali Operations for $150 million. For financial accounting purposes, the
sale of the Mexicali Operations by Conexant to Skyworks was treated as if
Conexant had contributed the Mexicali Operations to Washington as part of the
spin-off, and the $150 million purchase price was treated as a return of capital
to Conexant. Accordingly, our consolidated financial results include the assets,
liabilities, operating results and cash flows of the Washington business and the
Mexicali Operations for all periods presented, and also include the results of
operations of Alpha from June 25, 2002, the date of acquisition. The Washington
business and the Mexicali Operations are collectively referred to as
Washington/Mexicali. References to the "Company" refer to Washington/Mexicali
for all periods prior to June 26, 2002 and to the combined company following the
Merger.
The Merger was accounted for as a reverse acquisition whereby Washington was
treated as the acquirer and Alpha as the acquiree, primarily because Conexant
shareholders owned a majority, approximately 67 percent, of the Company upon
completion of the Merger. Under a reverse acquisition, the purchase price of
Alpha was based upon the fair market value of Alpha common stock for a
reasonable period of time before and after the announcement date of the Merger
and the fair value of Alpha stock options. The purchase price of Alpha was
allocated to the assets acquired and liabilities assumed by Washington, as the
acquiring company for accounting purposes, based upon their estimated fair
market value at the acquisition date. Because the Merger was accounted for as a
purchase of Alpha, the historical financial statements of Washington/ Mexicali
became the historical financial statements of the Company after the Merger.
Because the historical financial statements of the Company after the Merger do
not include the historical financial results of Alpha for periods prior to June
26, 2002, the financial statements may not be indicative of future results of
operations or the historical results that would have resulted if the Merger had
occurred at the beginning of a historical financial period.
Skyworks' fiscal year ends on the Friday closest to September 30. Fiscal years
2002, 2001 and 2000 each comprised 52 weeks and ended on September 27, September
28 and September 29, respectively. For convenience, the consolidated financial
statements have been shown as ending on the last day of the calendar month.
Accordingly, references to September 30, 2002, 2001 and 2000 contained in this
discussion refer to the actual fiscal year-end of the Company.
13
Skyworks Solutions, Inc. and Subsidiaries
Skyworks is a leading wireless semiconductor company focused on providing
front-end modules, radio frequency subsystems and complete system solutions to
wireless handset and infrastructure customers worldwide. We offer a
comprehensive family of components and RF subsystems, and also provide complete
antenna-to-microphone semiconductor solutions that support advanced 2.5G and 3G
services.
We have entered into various agreements with Conexant providing for the supply
of gallium arsenide wafer fabrication and assembly and test services to
Conexant, initially at substantially the same volumes as historically obtained
by Conexant from Washington/Mexicali. We have also entered into agreements with
Conexant providing for the supply to us of transition services by Conexant and
silicon-based wafer fabrication services by Jazz Semiconductor, Inc., a Newport
Beach, California foundry joint venture between Conexant and The Carlyle Group
to which Conexant contributed its Newport Beach wafer fabrication facility.
Historically, Washington/Mexicali obtained a portion of its silicon-based
semiconductors from the Newport Beach wafer fabrication facility. Pursuant to
our supply agreement with Conexant, we are initially obligated to obtain certain
minimum volume levels from Jazz Semiconductor based on a contractual agreement
between Conexant and Jazz Semiconductor.
The wireless communications semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving standards, short product life cycles
and wide fluctuations in product supply and demand. Our operating results have
been, and our operating results may continue to be, negatively affected by
substantial quarterly and annual fluctuations and market downturns due to a
number of factors, such as changes in demand for end-user equipment, the timing
of the receipt, reduction or cancellation of significant customer orders, the
gain or loss of significant customers, market acceptance of our products and our
customers' products, our ability to develop, introduce and market new products
and technologies on a timely basis, availability and cost of products from
suppliers, new product and technology introductions by competitors, changes in
the mix of products produced and sold, intellectual property disputes, the
timing and extent of product development costs and general economic conditions.
In the past, average selling prices of established products have generally
declined over time and this trend is expected to continue in the future.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to allowances for doubtful accounts,
inventories, long-lived assets, income taxes, warranties, restructuring costs
and other contingencies. We regularly evaluate our estimates and assumptions
based upon historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. To the extent actual results differ
from those estimates, our future results operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition -- Revenues from product sales are recognized upon shipment
and transfer of title, in accordance with the shipping terms specified in the
arrangement with the customer. Revenue recognition is deferred in all instances
where the earnings process is incomplete. Certain product sales are made to
electronic component distributors under agreements allowing for price protection
and/or a right of return on unsold products. A reserve for sales returns and
allowances for non-distributor customers is recorded based on historical
experience or specific identification of an event necessitating a reserve.
Development revenue is recognized when services are performed and has not been
significant for any of the periods presented.
Inventories -- We assess the recoverability of inventories through an on-going
review of inventory levels in relation to sales backlog and forecasts, product
marketing plans and product life cycles. When the inventory on hand exceeds the
foreseeable demand, we write down the value of those excess inventories. We sell
our products to communications equipment OEMs that have designed our products
into equipment such as cellular handsets. These design wins are gained through a
lengthy sales cycle, which includes providing technical support to the OEM
customer. Moreover, once a customer has designed a particular supplier's
components into a cellular handset, substituting another supplier's components
requires substantial design changes which involve significant cost, time, effort
and risk. In the event of the loss of business from existing OEM customers, we
may be unable to secure new customers for our existing products without first
achieving new design wins. Consequently, when the quantities of inventory on
hand exceed forecasted demand from existing OEM customers into whose products
our products have been designed, we generally will be unable to sell our excess
inventories to others, and the net realizable value of such inventories is
generally estimated to be zero. The amount of the write-down is the excess of
historical cost over estimated realizable value (generally zero). Once
established, these write-downs are considered permanent adjustments to the cost
basis of the excess inventory. Demand for our products may fluctuate
significantly over time, and actual demand and market conditions may be more or
less favorable than those projected by management. In the event that actual
demand is lower than originally projected, additional inventory write-downs may
be required.
Impairment of long-lived assets -- Long-lived assets, including fixed assets,
goodwill and intangible assets, are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash flows expected to
result from the use of an asset and its eventual disposition. The estimate of
cash flows is based upon, among other
14
Skyworks Solutions, Inc. and Subsidiaries
things, certain assumptions about expected future operating performance. Our
estimates of undiscounted cash flows may differ from actual cash flows due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value, we
recognize an impairment loss, measured as the amount by which the carrying value
exceeds the fair value of the asset. Fair value is determined using discounted
cash flows.
Deferred income taxes -- We have provided a valuation allowance related to our
substantial United States deferred tax assets. If sufficient evidence of our
ability to generate sufficient future taxable income in certain tax
jurisdictions becomes apparent, we may be required to reduce our valuation
allowance, which may result in income tax benefits in our statement of
operations. Reduction of a portion of the valuation allowance may be applied to
reduce the carrying value of goodwill. The portion of the valuation allowance
for deferred tax assets for which subsequently recognized tax benefits may be
applied to reduce goodwill related to the purchase consideration of the Merger
is approximately $24 million. We evaluate the realizability of the deferred tax
assets and assess the need for a valuation allowance quarterly. In fiscal 2002,
the Company recorded a tax benefit of approximately $23 million related to the
impairment of our Mexicali assets. A valuation allowance has not been
established because the Company believes that the related deferred tax asset
will be recovered during the carry forward period.
Warranties -- Reserves for estimated product warranty costs are provided at the
time revenue is recognized. Although we engage in extensive product quality
programs and processes, our warranty obligation is affected by product failure
rates and costs incurred to rework or replace defective products. Should actual
product failure rates or costs differ from estimates, additional warranty
reserves could be required, which could reduce our gross margins.
Allowance for doubtful accounts -- We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, our actual losses may exceed our estimates, and additional
allowances would be required.
RESULTS OF OPERATIONS
GENERAL
In fiscal 2002, our revenues from product sales to third parties increased
approximately 94% from fiscal 2001, as a result of renewed demand for our
wireless product portfolio. The increased demand is partially due to reduction
in the level of excess channel inventories that had adversely affected the
digital cellular handset markets during fiscal 2001. Revenues attributable to
Alpha, post Merger, included in fiscal 2002 were approximately $36 million.
During 2002 the Company consolidated facilities, reduced its work force and
continued to implement cost saving initiatives. In addition, increased revenues
and improved utilization of our manufacturing facilities contributed to an
improvement in operating results in fiscal 2002. Cost of goods sold for fiscal
2002 was adversely affected by a charge of $5.1 million in connection with
expected losses for certain wafer fabrication commitments made under a supply
agreement with Conexant whereby we are initially obligated to obtain certain
minimum volume levels from Jazz Semiconductor, Inc. Cost of goods sold for
fiscal 2002 also reflects approximately $3.1 million of additional costs related
to the Merger.
15
Skyworks Solutions, Inc. and Subsidiaries
During fiscal 2001, we -- like many of our customers and competitors -- were
adversely impacted by a broad slowdown affecting the wireless communications
sector, including most of the end-markets for our products. Our net revenues for
fiscal 2001 reflected deterioration in the digital cellular handset market
resulting from excess channel inventories due to a slowdown in demand for mobile
phones and a slower transition to next-generation phones. The effect of weakened
end-customer demand was compounded by higher than normal levels of component
inventories among manufacturer, subcontractor and distributor customers. The
overall slowdown in the wireless communications markets also affected our gross
margins and operating income. Cost of goods sold for fiscal 2001 was adversely
affected by the significant underutilization of manufacturing capacity. Cost of
goods sold for fiscal 2001 also reflects $58.7 million of inventory write-downs
across our product portfolio resulting from the sharply reduced end-customer
demand for digital cellular handsets.
EXPENSE REDUCTION AND RESTRUCTURING INITIATIVES
During fiscal 2002, the Company reduced its workforce through involuntary
severance programs and recorded restructuring charges of approximately $3.0
million for costs related to the workforce reduction and the consolidation of
certain facilities. The charges were based upon estimates of the cost of
severance benefits for affected employees and lease cancellation, facility
sales, and other costs related to the consolidation of facilities. Substantially
all amounts accrued for these actions are expected to be paid within one year.
In fiscal 2001, we implemented a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the then-current
business environment. The cost reduction initiatives included workforce
reductions, temporary shutdowns of manufacturing facilities and significant
reductions in capital spending.
Through involuntary severance programs and attrition, we reduced our workforce
in fiscal 2001 by approximately 250 employees (principally in our manufacturing
operations). In addition, we periodically idled our Newbury Park, California
wafer fabrication facility and, for a portion of fiscal 2001, implemented a
reduced workweek at our Mexicali facility.
We recorded restructuring charges of $2.7 million in fiscal 2001 related to the
workforce reductions completed through September 30, 2001. The restructuring
initiatives and other expense reduction actions resulted in a quarterly
reduction of operating expenses of approximately $4.8 million for the fourth
quarter of fiscal 2001 as compared with the second quarter of fiscal 2001.
ASSET IMPAIRMENTS
During the third quarter of fiscal 2002, the Company recorded a $66.0 million
charge for the impairment of the assembly and test machinery and equipment and
related facility in Mexicali, Mexico. The impairment charge was based on a
recoverability analysis prepared by management as a result of a significant
downturn in the market for test and assembly services for non-wireless products
and the related impact on our current and projected outlook.
The Company experienced a severe decline in factory utilization at its Mexicali
facility for non-wireless products and projected decreasing revenues and new
order volume. Management believed these factors indicated that the carrying
value of the assembly and test machinery and equipment and related facility may
have been impaired and that an impairment analysis should be performed. In
performing the analysis for recoverability, management estimated the future cash
flows expected to result from the manufacturing activities at the Mexicali
facility over a ten-year period. The estimated future cash flows were based on a
gradual phase-out of services sold to Conexant and modest volume increases
consistent with management's view of the outlook for the business, partially
offset by declining average selling prices. The declines in average selling
prices were consistent with historical trends and management's decision to
reduce capital expenditures for future capacity expansion. Since the estimated
undiscounted cash flows were less than the carrying value (approximately $100
million based on historical cost) of the related assets, it was concluded that
an impairment loss should be recognized. The impairment charge was determined by
comparing the estimated fair value of the related assets to their carrying
value. The fair value of the assets was determined by computing the present
value of the estimated future cash flows using a discount rate of 24%, which
management believed was commensurate with the underlying risks associated with
the projected future cash flows. We believe the assumptions used in the
discounted cash flow model represented a reasonable estimate of the fair value
of the assets. The write down established a new cost basis for the impaired
assets.
During the third quarter of fiscal 2002, the Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our May 2000 acquisition of Philsar Semiconductor Inc. ("Philsar"). Philsar was
a developer
16
Skyworks Solutions, Inc. and Subsidiaries
of radio frequency semiconductor solutions for personal wireless connectivity,
including emerging standards such as Bluetooth, and radio frequency components
for third-generation (3G) digital cellular handsets. Management determined that
the Company would not support the technology associated with the Philsar
Bluetooth business. Accordingly, this product line has been discontinued and the
employees associated with the product line have either been severed or relocated
to other operations. As a result of the actions taken, management determined
that the remaining goodwill and other intangible assets associated with the
Philsar acquisition had been impaired.
Goodwill and intangible assets resulting from the Merger will be tested for
impairment following the guidelines established in SFAS 142,which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. We will adopt SFAS 142 in the beginning of our 2003 fiscal year, and are
required to perform a transitional impairment test for goodwill upon adoption.
We may be required to record a substantial transitional impairment charge as a
result of adopting SFAS 142. The carrying value of goodwill and intangible
assets, subject to the transitional impairment test, is approximately $907.5
million at September 30, 2002.
During the third quarter of fiscal 2001, the Company recorded an $86.2 million
charge for the impairment of the manufacturing facility and related wafer
fabrication machinery and equipment at the Company's Newbury Park, California
facility. This impairment charge was based on a recoverability analysis prepared
by management as a result of the dramatic downturn in the market for wireless
communications products and the related impact on the then-current and projected
business outlook of the Company. Through the third quarter of fiscal 2001, the
Company experienced a severe decline in factory utilization at the Newbury Park
wafer fabrication facility and decreasing revenues, backlog, and new order
volume. Management believed these factors, together with its decision to
significantly reduce future capital expenditures for advanced process
technologies and capacity beyond the then-current levels, indicated that the
value of the Newbury Park facility may have been impaired and that an impairment
analysis should be performed. In performing the analysis for recoverability,
management estimated the future cash flows expected to result from the
manufacturing activities at the Newbury Park facility over a ten-year period.
The estimated future cash flows were based on modest volume increases consistent
with management's view of the outlook for the industry, partially offset by
declining average selling prices. The declines in average selling prices were
consistent with historical trends and management's decision to focus on existing
products based on the current technology. Since the estimated undiscounted cash
flows were less than the carrying value (approximately $106 million based on
historical cost) of the related assets, it was concluded that an impairment loss
should be recognized. The impairment charge was determined by comparing the
estimated fair value of the related assets to their carrying value. The fair
value of the assets was determined by computing the present value of the
estimated future cash flows using a discount rate of 30%, which management
believed was commensurate with the underlying risks associated with the
projected cash flows. The Company believes the assumptions used in the
discounted cash flow model represented a reasonable estimate of the fair value
of the assets. The write-down established a new cost basis for the impaired
assets.
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
The following table sets forth the results of our operations expressed as a
percentage of net revenues for the fiscal years below:
2002 2001 2000
------ ------ ------
Net revenues ............................ 100.0% 100.0% 100.0%
Cost of goods sold ...................... 72.4 119.6 71.4
------ ------ ------
Gross margin ............................ 27.6 (19.6) 28.6
Operating expenses:
Research and development .............. 29.0 42.6 24.2
Selling, general and administrative ... 11.0 19.7 13.9
Amortization of intangible assets ..... 2.8 5.9 1.4
Purchased in-process research and
development ........................ 14.3 -- 6.4
Special charges ....................... 25.4 34.1 --
------ ------ ------
Total operating expenses ........... 82.5 102.3 45.9
------ ------ ------
Operating loss .......................... (54.9) (121.9) (17.3)
Other income (expense), net ............. (0.9) 0.1 --
------ ------ ------
Loss before income taxes ................ (55.8) (121.8) (17.3)
Provision (benefit) for income taxes .... (4.3) 0.7 0.3
------ ------ ------
Net loss ................................ (51.6)% (122.5)% (17.6)%
====== ------ ======
17
Skyworks Solutions, Inc. and Subsidiaries
NET REVENUES
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2002 CHANGE 2001 CHANGE 2000
--------- ------ --------- ------ ---------
(in thousands)
Net revenues:
Third parties . $ 418,344 94.1% $ 215,502 (31.1)% $ 312,983
Conexant ...... 39,425 (12.3)% 44,949 (31.3)% 65,433
--------- ---- --------- ---- ---------
$ 457,769 75.8% $ 260,451 (31.2)% $ 378,416
========= ==== ========= ==== =========
We market and sell our semiconductor products and system solutions to leading
OEMs of communication electronics products, third-party original design
manufacturers, or ODMs, and contract manufacturers and indirectly through
electronic components distributors. Samsung Electronics Co. accounted for 38%,
44% and 28% of net revenues from customers other than Conexant for the fiscal
years ended September 30, 2002, 2001 and 2000 respectively. Motorola, Inc.
accounted for 12% of net revenues from customers other than Conexant for the
fiscal year ended September 30, 2002. Revenues derived from customers other than
Conexant located in the Americas region decreased from 11% and 13% in 2001 and
2000, respectively, to 9% in fiscal 2002. Revenues derived from customers other
than Conexant located in the Asia-Pacific region increased from 77% and 68% in
2001 and 2000, respectively, to 84% in fiscal 2002. Revenues derived from
customers other than Conexant located in the Europe/Middle East/Africa region
decreased from 12% and 19% in 2001 and 2000, respectively, to 7% in fiscal 2002.
The foregoing percentages are based on sales representing Washington/Mexicali
sales for the full fiscal year during 2002, 2001 and 2000 and including sales of
Skyworks for the post-Merger period from June 26, 2002 through the end of the
fiscal year.
We recognize revenues from product sales directly to our customers and to
distributors upon shipment and transfer of title. Provision for sales returns is
made at the time of sale based on experience. An insignificant portion of
product sales are made to electronic component distributors under agreements
allowing for price protection and/or a right of return on unsold products.
Revenues from product sales to customers other than Conexant, which represented
91%, 83% and 83% of total net revenues for the fiscal years 2002, 2001 and 2000,
respectively, increased 94% in 2002 principally reflecting increased sales of
GSM products, including power amplifier modules and complete cellular systems.
We also experienced increased demand for our power amplifier modules for CDMA
and TDMA applications from a number of our key customers. Revenues attributable
to Alpha, post Merger, included in fiscal 2002 were approximately $36 million.
Revenues from product sales to customers other than Conexant decreased 31% when
comparing fiscal 2001 to fiscal 2000 principally resulting from the significant
decrease in demand throughout the industry during this period.
Revenues from wafer fabrication and semiconductor assembly and test services
provided to Conexant represented 9%, 17% and 17% of total revenues for fiscal
2002, 2001 and 2000, respectively. The decrease in 2002 when compared to the
prior years is primarily attributable to lower demand for assembly and test
services from Conexant's Mindspeed Technologies and broadband access businesses
due to the broad slowdown affecting most of the communications electronics
end-markets for Conexant's products.
GROSS MARGIN
YEARS ENDED SEPTEMBER 30,
-------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Gross margin:
Third parties ...................... $124,195 $(53,247) $105,533
% of net revenues from third parties 30% (25)% 34%
Conexant ........................... $ 1,966 $ 2,195 $ 2,713
% of net revenues from Conexant .... 5% 5% 4%
Gross margin represents net revenues less cost of goods sold. Cost of goods sold
consists primarily of purchased materials, labor and overhead (including
depreciation) associated with product manufacturing, royalty and other
intellectual property
18
Skyworks Solutions, Inc. and Subsidiaries
costs, warranties and sustaining engineering expenses pertaining to products
sold. Cost of goods sold also includes allocations from Conexant through June
25, 2002 of manufacturing cost variances, process engineering and other
manufacturing costs which are not included in our unit costs but are expensed as
incurred.
The improvement in gross margin from third party sales for fiscal 2002, compared
with fiscal 2001, reflects increased revenues, improved utilization of our
manufacturing facilities and a decrease in depreciation expense that resulted
from the write-down of the Newbury Park wafer fabrication assets in the third
quarter of fiscal 2001 and the Mexicali facility assets in the third quarter of
2002. The effect of the write-down of the Newbury Park wafer fabrication assets
and the Mexicali facility assets on fiscal 2002 gross margin was approximately
$10.5 million and $5.5 million, respectively. Although recent revenue growth has
increased the level of utilization of our manufacturing facilities, these
facilities continue to operate below optimal capacity and underutilization
continues to adversely affect our unit cost of goods sold and gross margin.
Gross margin for fiscal 2002 was also adversely impacted by additional warranty
costs of $14.0 million. The additional warranty costs were the result of an
agreement with a major customer for the reimbursement of costs the customer
incurred in connection with the failure of a product when used in a certain
adverse environment. Although we developed and sold the product to the customer
pursuant to mutually agreed-upon specifications, the product experienced unusual
failures when used in an environment in which the product had not been
previously tested. The product has since been modified and no additional costs
are expected to be incurred in connection with this issue. In addition, under a
wafer fabrication supply agreement with Conexant, we are initially obligated to
obtain certain minimum volume levels from Jazz Semiconductor, Inc. based on a
contractual agreement between Conexant and Jazz Semiconductor. We originally
estimated our obligation under this agreement would result in excess costs of
approximately $13.2 million when recorded as a liability and charged to cost of
sales in the third quarter of fiscal 2002. During the fourth quarter of fiscal
2002, we reevaluated this obligation and reduced our liability and cost of sales
by approximately $8.1 million in the quarter. Gross margin for the year ended
September 30, 2002 benefited by approximately $12.5 million as a result of the
sale of inventories having a historical cost of $12.5 million that were written
down to a zero cost basis during fiscal year 2001; such sales resulted from
sharply increased demand beginning in the fourth quarter of fiscal 2001 that was
not anticipated at the time of the write-downs. Gross margin for fiscal 2001 was
adversely affected by inventory write-downs of approximately $58.7 million,
partially offset by approximately $4.5 million of subsequent sales of
inventories written down to a zero cost basis.
The inventory write-downs recorded in fiscal 2001 resulted from the sharply
reduced end-customer demand we experienced, primarily associated with our radio
frequency components, as a result of the rapidly changing demand environment for
digital cellular handsets during that period. As a result of these market
conditions, we experienced a significant number of order cancellations and a
decline in the volume of new orders, beginning in the fiscal 2001 first quarter
and becoming more pronounced in the second quarter.
During fiscal 2002, we sold an additional $12.5 million of inventories
previously written down to a zero cost basis. As of September 30, 2002, we
continued to hold inventories with an original cost of approximately $5.4
million which were previously written down to a zero cost basis. We currently
intend to hold these remaining inventories and will sell these inventories if we
experience renewed demand for these products. While there can be no assurance
that we will be able to do so, if we are able to sell a portion of the
inventories that are carried at zero cost basis, our gross margins will be
favorably affected. To the extent that we do not experience renewed demand for
the remaining inventories, they will be scrapped as they become obsolete.
Approximately $1.8 million and $34.5 million of inventories that were carried at
zero cost basis were scrapped during fiscal 2002 and 2001, respectively.
19
Skyworks Solutions, Inc. and Subsidiaries
Under supply agreements entered into with Conexant in connection with the
Merger, we will receive wafer fabrication, wafer probe and certain other
services from Jazz Semiconductor's Newport Beach, California foundry, and we
will provide wafer fabrication, wafer probe, final test and other services to
Conexant at our Newbury Park facility, in each case, for a three-year period
after the Merger. We will also provide semiconductor assembly and test services
to Conexant at our Mexicali facility.
During the term of one of our supply agreements with Conexant, our unit cost of
goods supplied by Jazz Semiconductor Inc.'s Newport Beach foundry will continue
to be affected by the level of utilization of the Newport Beach foundry joint
venture's wafer fabrication facility and other factors outside our control.
Pursuant to the terms of this supply agreement with Conexant, we are committed
to obtain a minimum level of service from Jazz Semiconductor, Inc., a Newport
Beach, California foundry joint venture between Conexant and The Carlyle Group
to which Conexant contributed its Newport Beach wafer fabrication facility. We
estimate that our obligation under this agreement will result in excess costs of
approximately $5.1 million and we have recorded this liability in the current
period. In addition, our costs will be affected by the extent of our use of
outside foundries and the pricing we are able to obtain. During periods of high
industry demand for wafer fabrication capacity, we may have to pay higher prices
to secure wafer fabrication capacity.
RESEARCH AND DEVELOPMENT
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------
2002 CHANGE 2001 CHANGE 2000
-------- -------- -------- -------- --------
(in thousands)
Research and development $132,603 19% $111,053 21% $ 91,616
% of net revenues ...... 29% 43% 24%
Research and development expenses consist principally of direct personnel costs,
costs for pre-production evaluation and testing of new devices and design and
test tool costs. Research and development expenses also include allocated costs
for shared research and development services provided by Conexant through June
25, 2002, principally in the areas of advanced semiconductor process
development, design automation and advanced package development, for the benefit
of several of Conexant's businesses.
The increase in research and development expenses in fiscal 2002 compared to
fiscal 2001 primarily reflects the opening of a new design center in Le Mans,
France and higher headcount and personnel-related costs. Subsequent to the first
quarter of fiscal 2001, we expanded customer support engagements as well as
development efforts targeting semiconductor solutions using the CDMA2000, GSM,
General Packet Radio Services, or GPRS, and third-generation, or 3G, wireless
standards in both the digital cellular handset and infrastructure markets.
During fiscal 2001, the Company focused its research and development investment
principally on wireless communications applications such as next generation
power amplifiers, radio frequency subsystems and cellular systems. In
particular, the Company has focused a significant amount of research and
development resources in developing complete network protocol stacks and user
interface software in support of its cellular systems initiative. The increase
in research and development expenses for fiscal 2001 primarily reflects higher
headcount and personnel-related costs to support the Company's expanded
development efforts and the accelerated launch of new products. The higher
fiscal 2001 research and development expenses also include costs of
approximately $5.6 million resulting from the acquisition of Philsar in fiscal
2000.
Under transition services agreements with Conexant entered into in connection
with the Merger, Conexant will continue to perform various research and
development services for us at actual cost generally until December 31, 2002,
unless the parties otherwise agree. To the extent we use these services
subsequent to the expiration of the specified term, the pricing is subject to
negotiation.
SELLING, GENERAL AND ADMINISTRATIVE
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2002 CHANGE 2001 CHANGE 2000
------- ------- ------- ------- -------
(in thousands)
Selling, general and administrative $50,178 (2)% $51,267 (2)% $52,422
% of net revenues ................. 11% 20% 14%
Selling, general and administrative expenses include personnel costs, sales
representative commissions, advertising and other marketing costs. Selling,
general and administrative expenses also include allocated general and
administrative expenses from
20
Skyworks Solutions, Inc. and Subsidiaries
Conexant through June 25, 2002 for a variety of shared functions, including
legal, accounting, treasury, human resources, real estate, information systems,
customer service, sales, marketing, field application engineering and other
corporate services.
The decrease in selling, general and administrative expenses in fiscal 2002
compared to fiscal 2001 and in fiscal 2001 compared to fiscal 2000 primarily
reflects lower headcount and personnel-related costs resulting from the expense
reduction and restructuring actions initiated during fiscal 2001 and lower
provisions for uncollectible accounts receivable.
Under the transition services agreement, Conexant will continue to perform
various services for us at actual cost until December 31, 2002, unless the
parties otherwise agree. To the extent we use these services subsequent to the
expiration of the specified term, the pricing is subject to negotiation.
AMORTIZATION OF INTANGIBLE ASSETS
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2002 CHANGE 2001 CHANGE 2000
------- ------- ------- ------- -------
(in thousands)
Amortization of intangible assets $12,929 (15)% $15,267 nm $ 5,327
% of net revenues ............... 3% 6% 1%
nm = not meaningful
In 2002, the Company recorded $36.4 million of intangible assets related to the
Merger consisting of developed technology, customer relationships and a
trademark. These assets are being amortized over their estimated useful lives
(principally ten years).
We will adopt SFAS 142 in the beginning of our 2003 fiscal year, and are
required to perform a transitional impairment test for goodwill upon adoption.
We may be required to record a substantial transitional impairment charge as a
result of adopting SFAS 142. The carrying value of goodwill and intangible
assets, subject to the transitional impairment test, is approximately $907.5
million at September 30, 2002.
In connection with the fiscal 2000 acquisition of Philsar, we recorded an
aggregate of $78.2 million of identified intangible assets and goodwill. These
assets have been amortized over their estimated useful lives (principally five
years). During the third quarter of fiscal 2002, the Company recorded a $45.8
million charge for the write-off of goodwill and other intangible assets
associated with our acquisition of the Philsar Bluetooth business. Management
has determined that the Company will not support the technology associated with
the Philsar Bluetooth business. Accordingly, this product line has been
discontinued and the employees associated with the product line have either been
severed or relocated to other operations. As a result of the actions taken,
management determined that the remaining goodwill and other intangible assets
associated with the Philsar acquisition had been impaired. The Philsar write-off
resulted in a decrease in amortization expense in fiscal 2002.
The increase in amortization of intangible assets in fiscal 2001 compared to
fiscal 2000 is the result of the Philsar acquisition in 2000 and the associated
amortization of the recorded goodwill and intangible assets that were related to
this transaction.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Merger in the third quarter of fiscal 2002, $65.5 million
was allocated to purchased in-process research and development and expensed
immediately upon completion of the acquisition (as a charge not deductible for
tax purposes) because the technological feasibility of certain products under
development had not been established and no future alternative uses existed.
Prior to the Merger, Alpha was in the process of developing new technologies in
its semiconductor and ceramics segments. The objective of the in-process
research and development effort was to develop new semiconductor processes,
ceramic materials and related products to satisfy customer requirements in the
wireless and broadband markets. The following table summarizes the significant
assumptions underlying the valuations of the Alpha in-process research and
development (IPR&D) at the time of acquisition.
21
Skyworks Solutions, Inc. and Subsidiaries
Estimated costs to Discount rate
(in millions) Date Acquired IPRD complete projects applied to IPRD
------------- ----- ------------------ ---------------
Alpha June 25, 2002 $65.5 $10.3 30%
The semiconductor segment was involved in several projects that have been
aggregated into the following categories based on the respective technologies:
Power Amplifier
Power amplifiers are designed and manufactured for use in different
types of wireless handsets. The main performance attributes of these
amplifiers are efficiency, power output, operating voltage and
distortion. Current research and development is focused on expanding
the offering to all types of wireless standards, improving
performance by process and circuit improvements and offering a
higher level of integration.
Control Products
Control products consist of switches and switch filters that are
used in wireless applications for signal routing. Most applications
are in the handset market enabling multi-mode, multi-band handsets.
Current research and development is focused on performance
improvement and cost reduction by reducing chip size and increasing
functionality.
Broadband
The products in this grouping consist of radio frequency (RF) and
millimeter wave semiconductors and components designed and
manufactured specifically to address the needs of high-speed,
wireline and wireless network access. Current and long-term research
and development is focused on performance enhancement of speed and
bandwidth as well as cost reduction and integration.
Silicon Diode
These products use silicon processes to fabricate diodes for use in
a variety of RF and wireless applications. Current research and
development is focused on reducing the size of the device, improving
performance and reducing cost.
Ceramics
The ceramics segment was involved in projects that relate to the
design and manufacture of ceramic-based components such as
resonators and filters for the wireless infrastructure market.
Current research and development is focused on performance
enhancements through improved formulations and electronic designs.
The material risks associated with the successful completion of the in-process
technology are associated with the Company's ability to successfully finish the
creation of viable prototypes and successful design of the chips, masks and
manufacturing processes required. The Company expects to benefit from the
in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. The release dates for
each of the products within the product families are varied. The fair value of
the in-process research and development was determined using the income
approach. Under the income approach, the fair value reflects the present value
of the projected cash flows that are expected to be generated by the products
incorporating the in-process research and development, if successful.
The projected cash flows were discounted to approximate fair value. The discount
rate applicable to the cash flows of each project reflects the stage of
completion and other risks inherent in each project. The weighted average
discount rate used in the valuation of in-process research and development was
30 percent. The IPR&D projects were expected to commence generating cash flows
in fiscal 2003.
Special Charges
Asset Impairments
During the third quarter of fiscal 2002, the Company recorded a $66.0 million
charge for the impairment of the assembly and test machinery and equipment and
related facility in Mexicali, Mexico. The impairment charge was based on a
recoverability analysis prepared by management as a result of a significant
downturn in the market for test and assembly services for non-wireless products
and the related impact on the Company's current and projected outlook.
The Company has experienced a severe decline in factory utilization at its
Mexicali facility for non-wireless products and projected decreasing revenues
and new order volume. Management believes these factors indicated that the
carrying value of the assembly and test machinery and equipment and related
facility may have been impaired and that an impairment analysis should be
performed. In performing the analysis for recoverability, management estimated
the future cash flows expected to result from the manufacturing activities at
the Mexicali facility over a ten-year period. The estimated future cash flows
were based on a gradual phase-out of services sold to Conexant and modest volume
increases consistent with management's view of the outlook for the business,
partially offset by declining average selling prices. The declines in average
selling prices are consistent with historical trends and management's decision
to reduce capital expenditures for future capacity expansion. Since the
estimated undiscounted cash flows were less than the carrying value
(approximately $100 million based on historical cost) of the related assets, it
was concluded that an impairment loss should be recognized. The impairment
charge was determined by comparing the estimated fair value of the related
assets to their carrying value. The fair value of the assets was determined by
computing the present value of the estimated future cash flows using a discount
rate of 24%, which management believed was commensurate with the underlying
risks associated with the projected future cash flows. The Company believes the
assumptions used in the discounted cash flow model represented a reasonable
estimate of the fair value of the assets. The write down established a new cost
basis for the impaired assets.
During the third quarter of fiscal 2002, the Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our fiscal 2000 acquisition of the Philsar Bluetooth business. Management has
determined that the Company will not support the technology associated with the
Philsar Bluetooth business. Accordingly, this product line will be discontinued
and the employees associated with the product line have either been severed or
relocated to other operations. As a result of the actions taken, management
determined that the remaining goodwill and other intangible assets associated
with the Philsar acquisition had been impaired.
During the third quarter of fiscal 2001, the Company recorded an $86.2 million
charge for the impairment of the manufacturing facility and related wafer
fabrication machinery and equipment at the Company's Newbury Park, California
facility. This impairment charge was based on a recoverability analysis prepared
by management as a result of the dramatic downturn in the market for wireless
communications products and the related impact on the then-current and projected
business outlook of the Company. Through the third quarter of fiscal 2001, the
Company experienced a severe decline in factory utilization at the Newbury Park
wafer fabrication facility and decreasing revenues, backlog, and new order
volume. Management believed these factors, together with its decision to
significantly reduce future capital expenditures for advanced process
technologies and capacity beyond the then-current levels, indicated that the
value of the Newbury Park facility may have been impaired and that an impairment
analysis should be performed. In performing the analysis for recoverability,
management estimated the future cash flows expected to result from the
manufacturing activities at the Newbury Park facility over a ten-year period.
The estimated future cash flows were based on modest volume increases consistent
with management's view of the outlook for the industry, partially offset by
declining average selling prices. The declines in average selling prices are
consistent with historical trends and management's decision to focus on existing
products based on the current technology. Since the estimated undiscounted cash
flows were less than the carrying value (approximately $106 million based on
historical cost) of the related assets, it was concluded that an impairment loss
should be recognized. The impairment charge was determined by comparing the
estimated fair value of the related assets to their carrying value. The fair
value of the assets was determined by computing the present value of the
estimated future cash flows using a discount rate of 30%, which management
believed was commensurate with the underlying risks associated with the
projected cash flows. The Company believes the assumptions used in the
discounted cash flow model represented a reasonable estimate of the fair value
of the assets. The write-down established a new cost basis for the impaired
assets.
Restructuring Charges
During fiscal 2002, the Company reduced its workforce through involuntary
severance programs and recorded restructuring charges of approximately $3.0
million for costs related to the workforce reduction and the consolidation of
certain facilities. The charges were based upon estimates of the cost of
severance benefits for affected employees and lease cancellation, facility
sales, and other costs related to the consolidation of facilities. Substantially
all amounts accrued for these actions are expected to be paid within one year.
During fiscal 2001, Washington/Mexicali reduced its workforce by approximately
250 employees, including approximately 230 employees in manufacturing
operations. Restructuring charges of $2.7 million were recorded for such actions
and were based upon estimates of the cost of severance benefits for the affected
employees. Substantially all amounts accrued for these actions are expected to
be paid within one year.
Activity and liability balances related to the fiscal 2001 and fiscal 2002
restructuring actions are as follows (in thousands):
Fiscal 2002 Fiscal 2002
Fiscal 2001 workforce facility closings
actions reductions and other Total
------- ---------- --------- -----
Charged to costs and expenses................. $ 2,667
Cash payments................................. (1,943)
Restructuring balance, September 30, 2001..... 724 $ -- $ -- $ 724
Charged to costs and expenses................. 65 2,923 97 3,085
Cash payments................................. (789) (2,225) (13) (3,027)
--------- --------- ----------- ---------
Restructuring balance, September 30, 2002..... $ -- $ 698 $ 84 $ 782
========= ========= =========== =========
In addition, the Company assumed approximately $7.8 million of restructuring
reserves from Alpha in connection with the Merger. On September 27, 2002 this
balance was $6.7 million and substantially all amounts accrued are expected to
be paid within one year.
OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised primarily of interest expense, interest
income on invested cash balances, gains/losses on the sale of assets, foreign
exchange gains/losses and other non-operating income and expense items. The
decrease to $4.3 million of other expense, net in fiscal 2002 from $0.2 million
of other income, net in fiscal 2001 is principally the result of
22
Skyworks Solutions, Inc. and Subsidiaries
approximately $4.1 million of additional interest expense related to the
short-term note to Conexant for the Mexicali facility purchase.
PROVISION FOR INCOME TAXES
The net operating loss carryforwards and other tax benefits relating to the
historical operations of Washington/Mexicali were retained by Conexant in the
spin-off transaction, and will not be available to be utilized in our future
separate tax returns. As a result of our history of operating losses and the
expectation of future operating results, we determined that it is more likely
than not that historic and current year income tax benefits will not be realized
except for certain future deductions associated with Mexicali in the
post-spin-off period. Consequently, no United States income tax benefit has been
recognized relating to the U.S. operating losses. As of September 30, 2002, we
have established a valuation allowance against all of our net U.S. deferred tax
assets. Deferred tax assets have been recognized for foreign operations when
management believes they will be recovered during the carry forward period.
The provision (benefit) for income taxes for fiscal 2002, 2001 and 2000 consists
of foreign income taxes incurred by foreign operations. We do not expect to
recognize any income tax benefits relating to future operating losses generated
in the United States until management determines that such benefits are more
likely than not to be realized. In 2002, the Company recorded a tax benefit of
approximately $23 million related to the impairment of our Mexicali assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 2002, 2001 and 2000 totaled $53.4
million, $2.0 million and $4.2 million, respectively. Working capital at
September 30, 2002 was approximately $79.8 million compared to $60.5 million at
September 30, 2001. Annualized inventory turns were approximately 6.9 for the
fourth quarter of fiscal 2002. Additionally, days sales outstanding included in
accounts receivable for the fourth quarter of fiscal 2002 was approximately 57
days.
Cash used in operating activities was $99.1 million for fiscal 2002, reflecting
a net loss of $236.1 million, offset by non-cash charges (depreciation and
amortization, asset impairments and an in-process research and development
charge) of $216.6 million and a net increase in the non-cash components of
working capital of approximately $79.6 million. During 2002 the Company
consolidated facilities, reduced its work force and continued to implement cost
saving initiatives. In addition, increased revenues and improved utilization of
our manufacturing facilities contributed to improved operating results in fiscal
2002.
Cash provided by investing activities for fiscal 2002 consisted of capital
expenditures of $29.4 million and dividends to Conexant of $3.1 million offset
by cash received of $67.1 million as a result of the Merger and $35.4 million
from the sale of short-term investments acquired in the Merger. The capital
expenditures for fiscal 2002 reflect a significant reduction from annual capital
expenditures in fiscal 2001, a key component of the cost reduction initiatives
implemented in fiscal 2002.
Cash provided by financing activities for fiscal 2002 principally consisted of
net transfers from Conexant, pre-Merger, of $50.4 million and $30.0 million of
proceeds from borrowings against the revolving credit facility with Conexant.
On September 30, 2002, the Company had $150 million in short-term promissory
notes payable to Conexant pursuant to a financing agreement entered into in
connection with the purchase of the Mexicali Operations. The notes were secured
by the assets and properties of the Company. Unless paid earlier at the option
of the Company or pursuant to mandatory prepayment provisions contained in the
financing agreement with Conexant, fifty percent of the principal portion of the
short-term promissory notes was due on March 24, 2003, and the remaining fifty
percent of the notes was due on June 24, 2003. Interest on these notes was
payable quarterly at a rate of 10% per annum for the first ninety days following
June 25, 2002, 12% per annum for the next ninety days and 15% per annum
thereafter. Because the Company refinanced these notes, the principal amount was
classified on September 30, 2002 as a long-term note payable. In addition, on
September 30, 2002 the Company had available a short-term $100 million loan
facility from Conexant under the financing agreement to fund the Company's
working capital and other requirements. $75 million of this facility became
available on or after July 10, 2002, and the remaining $25 million balance of
the facility would have become available if the Company had more than $150
million of eligible domestic receivables. The entire principal of any amounts
borrowed under the facility was due on June 24, 2003. There were $30 million of
borrowings as of September 30, 2002 under this facility. Because the Company
refinanced the amounts borrowed under this loan facility, the principal amount
was classified on September 30, 2002 as a long-term note payable.
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant
23
Skyworks Solutions, Inc. and Subsidiaries
under the financing agreement. The payments to Conexant retired $105 million of
the $150 million note relating to the purchase of the Mexicali Operations and
repaid the $65 million principal amount outstanding as of November 13, 2002
under the loan facility, dissolving the $100 million facility and resulting in
the release of Conexant's security interest in all assets and properties of the
Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance of the note was
exchanged for new 15% convertible debt securities with a maturity date of June
30, 2005. These notes can be converted into the Company's common stock at a
conversion rate based on the applicable conversion price, which is subject to
adjustment based on, among other things, the market price of the Company's
common stock. Based on this adjustable conversion price, the Company expects
that the maximum number of shares that could be issued under the note is
approximately 7.1 million shares, subject to adjustment for stock splits and
other similar dilutive occurrences.
In addition to the retirement of $170 million in principal amount of
indebtedness owing to Conexant, Skyworks also retained approximately $53 million
of net proceeds of the private placement to support our working capital needs.
Cash used in operating activities was $89.4 million and $53.8 million for fiscal
2001 and 2000, respectively. Operating cash flows for fiscal 2001 and 2000
reflect net losses of $318.9 million and $66.5 million, respectively, offset by
non-cash charges (depreciation and amortization, asset impairments and an
in-process research and development charge) of $220.8 million and $98.1 million,
respectively, and a net decrease in the non-cash components of working capital
of approximately $8.7 million and a net increase of $85.4 million, respectively.
Cash used in investing activities for fiscal 2001 consisted of capital
expenditures of $51.1 million. The capital expenditures for fiscal 2002 reflect
a significant reduction from annual capital expenditures in fiscal 2001, a key
component of the cost reduction initiatives implemented in fiscal 2002. Cash
used in investing activities for fiscal 2000 consisted of capital expenditures
of $100.4 million partially offset by cash received of $7.7 million in the
acquisition of Philsar. The capital expenditures for fiscal 2001 reflect a
significant reduction from annual capital expenditures in fiscal 2000, a key
component of the cost reduction initiatives implemented in fiscal 2001.
Cash provided by financing activities consisted of net transfers from Conexant
of $138.3 million and $148.7 million for fiscal 2001 and 2000, respectively.
Historically, Conexant has managed cash on a centralized basis. Cash receipts
associated with Washington/Mexicali's business were generally collected by
Conexant, and Conexant generally made disbursements on behalf of
Washington/Mexicali.
During fiscal years 1998 through 2001, we made a series of capital investments
which increased the capacity of our Newbury Park gallium arsenide wafer
fabrication facility. We made these investments to support then-current and
anticipated future growth in sales of our wireless communications products, such
as power amplifiers, that use the gallium arsenide process. During the same
period, we made a series of capital investments at our Mexicali facility to
expand our integrated circuit assembly capacity, including the addition of
assembly lines using surface mount technology processes for the production of
multi-chip modules, which the Mexicali facility principally produces for us. The
capital investments also increased the Mexicali facility's test capacity,
including radio frequency capable equipment for testing wireless communications
products. We invested in the Mexicali facility to support then-current and
anticipated future growth in sales of our wireless communications products and
to support increasing demand for assembly and test services from Conexant.
Capital investments for the Newbury Park wafer fabrication facility totaled $0.7
million, $27.3 million and $35.5 million during fiscal 2002, fiscal 2001 and
fiscal 2000, respectively. A significant portion of the fiscal 2001 capital
investments were made to continue or complete capital investment programs that
we had initiated during fiscal 2000. During the second quarter of fiscal 2001,
in response to the broad slowdown affecting the wireless communications sector,
including us and Conexant, we sharply curtailed our capital expenditure
programs.
Although reduced capital expenditures are a key component of the cost reduction
initiatives, a focused program of capital expenditures will be required to
sustain our current manufacturing capabilities. We may also consider acquisition
opportunities to extend our technology portfolio and design expertise and to
expand our product offerings.
24
Skyworks Solutions, Inc. and Subsidiaries
Following is a summary of consolidated debt and lease obligations at September
30, 2002 (see Notes 5 and 9 of the consolidated financial statements), in
thousands:
OBLIGATION TOTAL 1-3 YEARS 4-5 YEARS THEREAFTER
-------- --------- --------- ----------
Debt ..................................... $180,168 $ 45,168 $135,000 $ --
Operating leases ......................... 40,215 19,350 9,212 11,653
-------- -------- -------- --------
Total debt and operating lease obligations $220,383 $ 64,518 $144,212 $ 11,653
======== ======== ======== ========
Under supply agreements entered into with Conexant in connection with the
Merger, the Company's expected minimum purchase obligations will be
approximately $64 million, $39 million and $13 million in fiscal 2003, 2004 and
2005, respectively. These agreements are related to wafer fabrication, wafer
probe and certain other services the Company will receive from Jazz
Semiconductor's Newport Beach, California foundry. With the exception of $5.1
million related to fiscal 2003 purchase obligations, which has been accrued in
fiscal 2002, we currently anticipate meeting each of the annual minimum purchase
obligations under the three-year supply agreement with Conexant.
Based on the closing of the private placement, the debt refinancing with
Conexant and current trends, the Company expects to generate sufficient
operating cash to meet our short-term and long-term cash requirements.
OTHER MATTERS
Inflation did not have a significant impact upon our results of operations
during the three-year period ended September 27, 2002.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements
No. 141, "Business Combinations" (SFAS No. 141), and No. 142, "Goodwill and
Other Intangibles" (SFAS No. 142). SFAS No. 141 requires the use of the purchase
method of accounting and eliminates the use of the pooling-of-interest method of
accounting for business combinations. SFAS No. 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. The Company has adopted the
provisions of SFAS No. 141. Upon adoption of SFAS No. 142, the Company is
required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS No. 141 for recognition separate from goodwill. The Company will be
required to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Impairment is measured as the
excess of carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle in
the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of October 1, 2002. The Company will then have up to six months from October
1, 2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations. We may
be required to record a substantial transitional impairment charge as a result
of adopting SFAS No. 142. Management is assessing the impact that adoption of
SFAS No. 142 will have on the Company's financial statements. The carrying value
of goodwill and intangible assets, subject to the transitional impairment test,
is approximately $907.5 million at September 30, 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
supersedes previous guidance on financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to be
disposed of. Adoption of SFAS No. 144 is required no later than the beginning of
fiscal 2003. Management does not expect the adoption of SFAS No. 144 to have a
significant impact on our financial position or results of operations. However,
future impairment reviews may result in charges against earnings to write-down
the value of long-lived assets.
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statement No.'s
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections",
effective for fiscal years beginning May 15, 2002 or later. It rescinds SFAS No.
4, "Reporting Gains and Losses From Extinguishments of Debt", SFAS No. 64,
"Extinguishments of Debt to Satisfy Sinking-Fund Requirements", and SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers". This Statement also amends
SFAS No. 13, "Accounting for Leases" to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. We do not
believe the impact of adopting SFAS No. 145 will have a material impact on our
financial statements.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated With
Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002. We
are assessing the impact that adoption of SFAS No. 146 will have on our
financial statements.
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Skyworks Solutions, Inc. and Subsidiaries
FORWARD-LOOKING STATEMENTS
This report and other documents we have filed with the SEC contain
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Some of the forward-looking
statements can be identified by the use of forward-looking terms such as
"believes," "expects," "may," "will," "should," "could," "seek," "intends,"
"plans," "estimates," "anticipates" or other comparable terms. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward-looking statements. We urge you to consider the risks and uncertainties
discussed below and elsewhere in this report and in the other documents filed
with the SEC in evaluating our forward-looking statements. We have no plans to
update our forward-looking statements to reflect events or circumstances after
the date of this report. We caution readers not to place undue reliance upon any
such forward-looking statements, which speak only as of the date made.
CERTAIN BUSINESS RISKS
WE HAVE RECENTLY INCURRED SUBSTANTIAL OPERATING LOSSES AND ANTICIPATE FUTURE
LOSSES.
Our operating results have been adversely affected by a global economic slowdown
and an abrupt decline in demand for many of the end-user products that
incorporate wireless communications semiconductor products and system solutions.
As a result, we incurred substantial operating losses during the twelve-month
period ended September 27, 2002. We expect that reduced end-customer demand,
underutilization of our manufacturing capacity, changes in our revenue mix and
other factors will continue to adversely affect our operating results in the
near term. In order to become profitable, we must achieve substantial revenue
growth and we will face an environment of uncertain demand in the markets for
our products. We cannot assure you as to whether or when we will become
profitable or whether we will be able to sustain such profitability, if
achieved.
WE OPERATE IN THE HIGHLY CYCLICAL WIRELESS COMMUNICATIONS SEMICONDUCTOR
INDUSTRY, WHICH IS SUBJECT TO SIGNIFICANT DOWNTURNS.
The wireless communications semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving technical standards, short product life
cycles and wide fluctuations in product supply and demand. From time to time
these and other factors, together with changes in general economic conditions,
cause significant upturns and downturns in the industry. Periods of industry
downturns, as we experienced through most of calendar year 2001, have been
characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. These
factors, and in particular the level of demand for digital cellular handsets,
may cause substantial fluctuations in our revenues and results of operations. We
have experienced these cyclical fluctuations in our business and may experience
cyclical fluctuations in the future. During the late 1990's and extending into
2000, the wireless communications semiconductor industry enjoyed unprecedented
growth, benefiting from the rapid expansion of wireless communication services
worldwide and increased demand for digital cellular handsets. During calendar
year 2001, we were adversely impacted by a global economic slowdown and an
abrupt decline in demand for many of the end-user products that incorporate our
respective wireless communications semiconductor products and system solutions,
particularly digital cellular handsets. The impact of weakened end-customer
demand was compounded by higher than normal levels of inventories among our
original equipment manufacturer, or OEM, subcontractor and distributor
customers. We expect that reduced end-customer demand, underutilization of our
manufacturing capacity, changes in revenue mix and other factors will continue
to adversely affect our operating results in the near term.
WE ARE SUBJECT TO INTENSE COMPETITION.
The wireless communications semiconductor industry in general and the markets in
which we compete in particular are intensely competitive. We compete with U.S.
and international semiconductor manufacturers that are both larger and smaller
than us in terms of resources and market share. We currently face significant
competition in our markets and expect that intense price and product competition
will continue. This competition has resulted and is expected to continue to
result in declining average selling prices for our products. We also anticipate
that additional competitors will enter our markets as a result of growth
opportunities in communications electronics, the trend toward global expansion
by foreign and domestic competitors and technological and public policy changes.
We believe that the principal competitive factors for semiconductor suppliers in
our market include, among others:
- time-to-market;
- new product innovation;
26
Skyworks Solutions, Inc. and Subsidiaries
- product quality, reliability and performance;
- price;
- compliance with industry standards;
- strategic relationships with customers; and
- protection of intellectual property.
We cannot assure you that we will be able to successfully address these factors.
Many of our competitors have advantages over us, including:
- longer presence in key markets;
- greater name recognition;
- ownership or control of key technology or intellectual property; and
- greater financial, sales and marketing, manufacturing, distribution,
technical or other resources.
As a result, certain competitors may be able to adapt more quickly than we can
to new or emerging technologies and changes in customer requirements or may be
able to devote greater resources to the development, promotion and sale of their
products than we can.
Current and potential competitors have established or may establish financial or
strategic relationships among themselves or with our customers, resellers or
other third parties. These relationships may affect customers' purchasing
decisions. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. We cannot
assure you that we will be able to compete successfully against current and
potential competitors.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO DEVELOP NEW PRODUCTS AND REDUCE COSTS IN
A TIMELY MANNER.
The markets into which we sell demand cutting-edge technologies and new and
innovative products. Our operating results depend largely on our ability to
continue to introduce new and enhanced products on a timely basis. Successful
product development and introduction depends on numerous factors, including:
- the ability to anticipate customer and market requirements and
changes in technology and industry standards;
- the ability to define new products that meet customer and market
requirements;
- the ability to complete development of new products and bring
products to market on a timely basis;
- the ability to differentiate our products from offerings of our
competitors; and
- overall market acceptance of our products.
We cannot assure you that we will have sufficient resources to make the
substantial investment in research and development in order to develop and bring
to market new and enhanced products in a timely manner. We will be required
continually to evaluate expenditures for planned product development and to
choose among alternative technologies based on our expectations of future market
growth. We cannot assure you that we will be able to develop and introduce new
or enhanced wireless communications semiconductor products in a timely and
cost-effective manner, that our products will satisfy customer requirements or
achieve market acceptance or that we will be able to anticipate new industry
standards and technological changes. We also cannot assure you that we will be
able to respond successfully to new product announcements and introductions by
competitors.
In addition, prices of established products may decline, sometimes
significantly, over time. We believe that to remain competitive we must continue
to reduce the cost of producing and delivering existing products at the same
time that we develop and introduce new or enhanced products. We cannot assure
you that we will be able to continue to reduce the cost of our products to
remain competitive.
WE MAY NOT BE ABLE TO KEEP ABREAST OF THE RAPID TECHNOLOGICAL CHANGES IN OUR
MARKETS.
The demand for our products can change quickly and in ways we may not
anticipate. Our markets generally exhibit the following characteristics:
- rapid technological developments;
- rapid changes in customer requirements;
27
Skyworks Solutions, Inc. and Subsidiaries
- frequent new product introductions and enhancements;
- short product life cycles with declining prices over the life cycle
of the product; and
- evolving industry standards.
Our products could become obsolete or less competitive sooner than anticipated
because of a faster than anticipated change in one or more of the technologies
related to our products or in market demand for products based on a particular
technology, particularly due to the introduction of new technology that
represents a substantial advance over current technology. Currently accepted
industry standards are also subject to change, which may contribute to the
obsolescence of our products.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL NECESSARY FOR THE
DESIGN, DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS. OUR SUCCESS COULD BE
NEGATIVELY AFFECTED IF KEY PERSONNEL LEAVE.
Our success depends on our ability to continue to attract, retain and motivate
qualified personnel, including executive officers and other key management and
technical personnel. As the source of our technological and product innovations,
our key technical personnel represent a significant asset. The competition for
management and technical personnel is intense in the semiconductor industry. We
cannot assure you that we will be able to attract and retain qualified
management and other personnel necessary for the design, development,
manufacture and sale of our products. We may have particular difficulty
attracting and retaining key personnel during periods of poor operating
performance, given, among other things, the use of equity-based compensation by
us and our competitors. The loss of the services of one or more of our key
employees or our inability to attract, retain and motivate qualified personnel,
could have a material adverse effect on our ability to operate our business.
IF OEMS OF COMMUNICATIONS ELECTRONICS PRODUCTS DO NOT DESIGN OUR PRODUCTS INTO
THEIR EQUIPMENT, WE WILL HAVE DIFFICULTY SELLING THOSE PRODUCTS. MOREOVER, A
"DESIGN WIN" FROM A CUSTOMER DOES NOT GUARANTEE FUTURE SALES TO THAT CUSTOMER.
Our products will not be sold directly to the end-user but will be components of
other products. As a result, we will rely on OEMs of wireless communications
electronics products to select our products from among alternative offerings to
be designed into their equipment. Without these "design wins" from OEMs, we
would have difficulty selling our products. Once an OEM designs another
supplier's product into one of its product platforms, it is more difficult for
us to achieve future design wins with that OEM product platform because changing
suppliers involves significant cost, time, effort and risk on the part of that
OEM. Also, achieving a design win with a customer does not ensure that we will
receive significant revenues from that customer. Even after a design win, the
customer is not obligated to purchase our products and can choose at any time to
reduce or cease use of our products, for example, if its own products are not
commercially successful, or for any other reason. We may be unable to achieve
design wins or to convert design wins into actual sales.
BECAUSE OF THE LENGTHY SALES CYCLES OF MANY OF OUR PRODUCTS, WE MAY INCUR
SIGNIFICANT EXPENSES BEFORE WE GENERATE ANY REVENUES RELATED TO THOSE PRODUCTS.
Our customers may need three to six months to test and evaluate our products and
an additional three to six months to begin volume production of equipment that
incorporates our products. The lengthy period of time required increases the
possibility that a customer may decide to cancel or change product plans, which
could reduce or eliminate our sales to that customer. As a result of this
lengthy sales cycle, we may incur significant research and development, and
selling, general and administrative expenses before we generate the related
revenues for these products, and we may never generate the anticipated revenues
if our customer cancels or changes its product plans.
UNCERTAINTIES INVOLVING THE ORDERING AND SHIPMENT OF OUR PRODUCTS COULD
ADVERSELY AFFECT OUR BUSINESS.
Our sales will typically be made pursuant to individual purchase orders and not
under long-term supply arrangements with our customers. Our customers may cancel
orders prior to shipment. Additionally, we will sell a portion of our products
through distributors, some of whom will have rights to return unsold products.
We may purchase and manufacture inventory based on estimates of customer demand
for our products, which is difficult to predict. This difficulty may be
compounded when we sell to OEMs indirectly through distributors or contract
manufacturers, or both, as our forecasts of demand will then be based on
estimates provided by multiple parties. In addition, our customers may change
their inventory practices on short notice for any reason. The cancellation or
deferral of product orders, the return of previously sold products, or
overproduction due to the failure of anticipated orders to materialize, could
result in us holding excess or obsolete inventory, which could result in
inventory write-downs.
28
Skyworks Solutions, Inc. and Subsidiaries
OUR RELIANCE ON A SMALL NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR SALES
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE RESULTS OF OUR OPERATIONS.
A significant portion of our sales are concentrated among a limited number of
customers. If we lost one or more of these major customers, or if one or more
major customers significantly decreased its orders of our products, our business
would be materially and adversely affected. Sales to Samsung Electronics Co. and
to Motorola, Inc. represented approximately 38% and 12%, respectively, of net
revenues from customers other Conexant during fiscal 2002 on a historical basis
(such sales representing Washington/Mexicali sales for the fiscal year through
June 25, 2002, and sales of Skyworks, the combined company, for the post-merger
period from June 26, 2002 through the end of the fiscal year). Our future
operating results will depend on the success of these customers and other
customers and our success in selling products to them.
WE FACE A RISK THAT CAPITAL NEEDED FOR OUR BUSINESS WILL NOT BE AVAILABLE WHEN
WE NEED IT.
We may need to obtain sources of financing in the future. After giving effect to
the net proceeds we received in our private placement of 4.75 percent
convertible subordinated notes due 2007 and our debt refinancing with Conexant,
we believe that our existing sources of liquidity, together with cash expected
to be generated from operations, will be sufficient to fund our research and
development, capital expenditure, working capital and other financing
requirements for at least the next twelve months.
However, we cannot assure you that the capital required to fund these expenses
will be available in the future. Conditions existing in the U.S. capital markets
when the Company seeks financing will affect our ability to raise capital, as
well as the terms of any financing. The Company may not be able to raise enough
capital to meet our capital needs on a timely basis or at all. Failure to obtain
capital when required would have a material adverse effect on the Company.
In addition, any strategic investments and acquisitions that we may make to help
us grow our business may require additional capital resources. We cannot assure
you that the capital required to fund these investments and acquisitions will be
available in the future.
OUR MANUFACTURING PROCESSES ARE EXTREMELY COMPLEX AND SPECIALIZED.
Our manufacturing operations are complex and subject to disruption due to causes
beyond our control. The fabrication of integrated circuits is an extremely
complex and precise process consisting of hundreds of separate steps. It
requires production in a highly controlled, clean environment. Minor impurities,
errors in any step of the fabrication process, defects in the masks used to
print circuits on a wafer or a number of other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer not to
function.
Our operating results are highly dependent upon our ability to produce
integrated circuits at acceptable manufacturing yields. Our operations may be
affected by lengthy or recurring disruptions of operations at any of our
production facilities or those of our subcontractors. These disruptions may
include electrical power outages, fire, earthquake, flooding or other natural
disasters. Disruptions of our manufacturing operations could cause significant
delays in shipments until we are able to shift the products from an affected
facility or subcontractor to another facility or subcontractor.
In the event of these types of delays, we cannot assure you that the required
alternative capacity, particularly wafer production capacity, would be available
on a timely basis or at all. Even if alternative wafer production capacity is
available, we may not be able to obtain it on favorable terms, which could
result in higher costs and/or a loss of customers. We may be unable to obtain
sufficient manufacturing capacity to meet demand, either at our own facilities
or through external manufacturing or similar arrangements with others.
Due to the highly specialized nature of the gallium arsenide integrated circuit
manufacturing process, in the event of a disruption at the Newbury Park,
California or Woburn, Massachusetts semiconductor wafer fabrication facilities,
alternative gallium arsenide production capacity would not be immediately
available from third-party sources. These disruptions could have a material
adverse effect on our business, financial condition and results of operations.
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Skyworks Solutions, Inc. and Subsidiaries
WE MAY NOT BE ABLE TO ACHIEVE MANUFACTURING YIELDS THAT CONTRIBUTE POSITIVELY TO
OUR GROSS MARGIN AND PROFITABILITY.
Minor deviations or perturbations in the manufacturing process can cause
substantial manufacturing yield loss, and in some cases, cause production to be
suspended. Manufacturing yields for new products initially tend to be lower as
we complete product development and commence volume manufacturing, and typically
increase as we bring the product to full production. Our forward product pricing
includes this assumption of improving manufacturing yields and, as a result,
material variances between projected and actual manufacturing yields will have a
direct effect on our gross margin and profitability. The difficulty of
forecasting manufacturing yields accurately and maintaining cost competitiveness
through improving manufacturing yields will continue to be magnified by the
increasing process complexity of manufacturing semiconductor products. Our
manufacturing operations will also face pressures arising from the compression
of product life cycles, which will require us to manufacture new products faster
and for shorter periods while maintaining acceptable manufacturing yields and
quality without, in many cases, reaching the longer-term, high-volume
manufacturing conducive to higher manufacturing yields and declining costs.
WE ARE DEPENDENT UPON THIRD PARTIES FOR THE MANUFACTURE, ASSEMBLY AND TEST OF
OUR PRODUCTS.
We rely upon independent wafer fabrication facilities, called foundries, to
provide silicon-based products and to supplement our gallium arsenide wafer
manufacturing capacity. There are significant risks associated with reliance on
third-party foundries, including:
- the lack of ensured wafer supply, potential wafer shortages and
higher wafer prices;
- limited control over delivery schedules, manufacturing yields,
production costs and product quality; and
- the inaccessibility of, or delays in obtaining access to, key
process technologies.
Although we have long-term supply arrangements to obtain additional external
manufacturing capacity, the third-party foundries we use may allocate their
limited capacity to the production requirements of other customers. If we choose
to use a new foundry, it will typically take an extended period of time to
complete the qualification process before we can begin shipping products from
the new foundry. The foundries may experience financial difficulties, be unable
to deliver products to us in a timely manner or suffer damage or destruction to
their facilities, particularly since some of them are located in earthquake
zones. If any disruption of manufacturing capacity occurs, we may not have
alternative manufacturing sources immediately available. We may therefore
experience difficulties or delays in securing an adequate supply of our
products, which could impair our ability to meet our customers' needs and have a
material adverse effect on our operating results.
We also intend to utilize subcontractors to package, assemble and test a portion
of our products. Because we rely on others to package, assemble or test our
products, we are subject to many of the same risks as are described above with
respect to foundries.
WE ARE DEPENDENT UPON THIRD PARTIES FOR THE SUPPLY OF RAW MATERIALS AND
COMPONENTS.
We believe we have adequate sources for the supply of raw materials and
components for our manufacturing needs with suppliers located around the world.
However, we are currently dependent on two suppliers for epitaxial wafers used
in the gallium arsenide semiconductor manufacturing processes at our
manufacturing facilities. Nevertheless, while we historically have not
experienced any significant difficulties in obtaining an adequate supply of raw
materials, including epitaxial wafers, and components necessary for our
manufacturing operations, we cannot assure you that we will not lose a
significant supplier or that a supplier will be able to meet performance and
quality specifications or delivery schedules.
Under a supply agreement entered into with Conexant in connection with the
Merger, we receive wafer fabrication, wafer probe and certain other services
from Jazz Semiconductor, Inc., a Newport Beach, California foundry joint venture
between Conexant and The Carlyle Group. Pursuant to our supply agreement with
Conexant, we are initially obligated to obtain certain minimum volume levels
from Jazz Semiconductor based on a contractual agreement between Conexant and
Jazz Semiconductor. Our expected minimum purchase obligations under this supply
agreement are anticipated to be approximately $64 million, $39 million and $13
million in fiscal 2003, 2004 and 2005. We estimate that our minimum purchase
obligation under this agreement will result in excess costs of approximately
$5.1 million and we have recorded this liability and charged cost of sales in
fiscal 2002.
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Skyworks Solutions, Inc. and Subsidiaries
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY.
Historically, a substantial majority of the Company's net revenues from
customers other than Conexant were derived from customers located outside the
United States, primarily countries located in the Asia-Pacific region and
Europe. In addition, we have suppliers located outside the United States and
third-party packaging, assembly and test facilities and foundries located in the
Asia-Pacific region. Our international sales and operations are subject to a
number of risks inherent in selling and operating abroad. These include, but are
not limited to, risks regarding:
- currency exchange rate fluctuations;
- local economic and political conditions;
- disruptions of capital and trading markets;
- restrictive governmental actions (such as restrictions on transfer
of funds and trade protection measures, including export duties and
quotas and customs duties and tariffs);
- changes in legal or regulatory requirements;
- limitations on the repatriation of funds;
- difficulty in obtaining distribution and support;
- the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or export
licensing requirements;
- tax laws; and
- limitations on our ability under local laws to protect our
intellectual property.
Because our international sales are denominated in U.S. dollars our products
could become less competitive in international markets if the value of the U.S.
dollar increases relative to foreign currencies. Moreover, we may be
competitively disadvantaged relative to our competitors located outside the
United States who may benefit from a devaluation of their local currency. We
cannot assure you that the factors described above will not have a material
adverse effect on our ability to increase or maintain our international sales.
OUR OPERATING RESULTS MAY BE NEGATIVELY AFFECTED BY SUBSTANTIAL QUARTERLY AND
ANNUAL FLUCTUATIONS AND MARKET DOWNTURNS.
Our revenues, earnings and other operating results have fluctuated in the past
and our revenues, earnings and other operating results may fluctuate in the
future. These fluctuations are due to a number of factors, many of which are
beyond our control. These factors include, among others:
- changes in end-user demand for the products (principally digital
cellular handsets) manufactured and sold by our customers;
- the effects of competitive pricing pressures, including decreases in
average selling prices of our products;
- production capacity levels and fluctuations in manufacturing yields;
- availability and cost of products from our suppliers;
- the gain or loss of significant customers;
- our ability to develop, introduce and market new products and
technologies on a timely basis;
- new product and technology introductions by competitors;
- changes in the mix of products produced and sold;
- market acceptance of our products and our customers;
- intellectual property disputes;
- seasonal customer demand;
- the timing of receipt, reduction or cancellation of significant
orders by customers; and
- the timing and extent of product development costs.
The foregoing factors are difficult to forecast, and these, as well as other
factors, could materially adversely affect our quarterly or annual operating
results. If our operating results fail to meet the expectations of analysts or
investors, it could materially and adversely affect the price of our common
stock.
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Skyworks Solutions, Inc. and Subsidiaries
OUR GALLIUM ARSENIDE SEMICONDUCTORS MAY NOT CONTINUE TO BE COMPETITIVE WITH
SILICON ALTERNATIVES.
We manufacture and sell gallium arsenide semiconductor devices and components,
principally power amplifiers and switches. The production of gallium arsenide
integrated circuits is more costly than the production of silicon circuits. As a
result, we must offer gallium arsenide products that provide superior
performance to that of silicon for specific applications to be competitive with
their respective silicon products. If we do not continue to offer products that
provide sufficiently superior performance to justify the cost differential, our
operating results may be materially and adversely affected. It is expected that
the costs of producing gallium arsenide integrated circuits will continue to
exceed the costs associated with the production of silicon circuits. The costs
differ because of higher costs of raw materials for gallium arsenide and higher
unit costs associated with smaller sized wafers and lower production volumes.
Silicon semiconductor technologies are widely-used process technologies for
certain integrated circuits and these technologies continue to improve in
performance. We cannot assure you that we will continue to identify products and
markets that require performance superior to that offered by silicon solutions.
WE MAY BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL PROPERTY
RIGHTS OR DEMANDS THAT WE LICENSE THIRD-PARTY TECHNOLOGY, WHICH COULD RESULT IN
SIGNIFICANT EXPENSE AND PREVENT US FROM USING OUR TECHNOLOGY.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, third parties have asserted
and may in the future assert patent, copyright, trademark and other intellectual
property rights to technologies that are important to our business and have
demanded and may in the future demand that we license their technology. At the
present time, we are in discussions with a third party who claims we are
infringing certain of their intellectual property rights. The third party has
filed a complaint in this matter but has not yet served Skyworks with the
complaint. Although we believe that these claims are without merit, we are in
discussions with this party to avoid litigation. The third party has indicated
its willingness to resolve these claims without litigation if this third party
were to proceed with litigation, we are prepared to vigorously defend against
these claims. Moreover, we believe that the patent infringement claims that were
asserted would impact only a limited number of our RF IC product line which
presently accounts for less than 5% of our annualized revenues.
Any litigation to determine the validity of claims that our products infringe or
may infringe these rights, including claims arising from our contractual
indemnification of our customers, regardless of their merit or resolution, could
be costly and divert the efforts and attention of our management and technical
personnel. Regardless of the merits of any specific claim, we cannot assure you
that we would prevail in litigation because of the complex technical issues and
inherent uncertainties in intellectual property litigation. If litigation were
to result in an adverse ruling, we could be required to:
- pay substantial damages;
- cease the manufacture, import, use, sale or offer for sale of
infringing products or processes;
- discontinue the use of infringing technology;
- expend significant resources to develop non-infringing technology;
and
- license technology from the third party claiming infringement, which
license may not be available on commercially reasonable terms.
IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, IT MAY
HARM OUR ABILITY TO COMPETE.
We rely on patent, copyright, trademark, trade secret and other intellectual
property laws, as well as nondisclosure and confidentiality agreements and other
methods, to protect our proprietary technologies, devices, algorithms and
processes. In addition, we often incorporate the intellectual property of our
customers, suppliers or other third parties into our designs, and we have
obligations with respect to the non-use and non-disclosure of such third-party
intellectual property. In the future, it may be necessary to engage in
litigation or like activities to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of proprietary
rights of others, including our customers. This could require us to expend
significant resources and to divert the efforts and attention of our management
and technical personnel from our business operations. We cannot assure you that:
- the steps we take to prevent misappropriation, infringement,
dilution or other violation of our intellectual property or the
intellectual property of our customers, suppliers or other third
parties will be successful;
- any existing or future patents, copyrights, trademarks, trade
secrets or other intellectual property rights will not be
challenged, invalidated or circumvented; or
- any of the measures described above would provide meaningful
protection.
32
Skyworks Solutions, Inc. and Subsidiaries
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization, develop similar
technology independently or design around our patents. If any of our patents
fails to protect our technology, it would make it easier for our competitors to
offer similar products, potentially resulting in loss of market share and price
erosion. In addition, effective patent, copyright, trademark and trade secret
protection may be unavailable or limited for certain technologies and in certain
foreign countries.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO EFFECT SUITABLE INVESTMENTS,
ALLIANCES AND ACQUISITIONS, AND WE MAY HAVE DIFFICULTY INTEGRATING COMPANIES WE
ACQUIRE. SKYWORKS' MERGER WITH THE WIRELESS BUSINESS OF CONEXANT PRESENTS SUCH
RISKS.
Although we intend to invest significant resources in internal research and
development activities, the complexity and rapidity of technological changes and
the significant expense of internal research and development make it impractical
for us to pursue development of all technological solutions on our own. On an
ongoing basis, we intend to review investment, alliance and acquisition
prospects that would complement our product offerings, augment our market
coverage or enhance our technological capabilities. However, we cannot assure
you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future. Moreover, if we consummate
such transactions, they could result in:
- issuances of equity securities dilutive to our stockholders;
- large one-time write-offs;
- the incurrence of substantial debt and assumption of unknown
liabilities;
- the potential loss of key employees from the acquired company;
- amortization expenses related to intangible assets; and
- the diversion of management's attention from other business
concerns.
Additionally, in periods following an acquisition, we will be required to
evaluate goodwill and acquisition-related intangible assets for impairment. When
such assets are found to be impaired, they will be written down to estimated
fair value, with a charge against earnings.
Integrating acquired organizations and their products and services may be
difficult, expensive, time-consuming and a strain on our resources and our
relationship with employees and customers and ultimately may not be successful.
WE MAY BE RESPONSIBLE FOR PAYMENT OF A SUBSTANTIAL AMOUNT OF U.S. FEDERAL INCOME
AND OTHER TAXES UPON CERTAIN EVENTS.
In connection with Conexant's spin-off of its wireless business prior to the
Merger, Conexant sought and received a ruling from the Internal Revenue Service
to the effect that certain transactions related to and including the spin-off
qualified as a reorganization and as tax-free for U.S. federal income tax
purposes. While the tax ruling generally is binding on the Internal Revenue
Service, the continuing validity of the ruling is subject to certain factual
representations and assumptions. In connection with the Merger we entered into a
tax allocation agreement with Conexant that generally provides, among other
things, that we will be responsible for certain taxes imposed on various persons
(including Conexant) as a result of either:
- the failure of certain spin-off transactions to qualify as a
reorganization for U.S. federal income tax purposes, or
- the failure of certain spin-off transactions to qualify as tax-free
to Conexant for certain U.S. federal income tax purposes,
if such failure is attributable to certain actions or transactions by or in
respect of Skyworks (including our subsidiaries) or our stockholders, such as
the acquisition of stock of Skyworks by a third party at a time and in a manner
that would cause such failure. In addition, the tax allocation agreement
provides that we will be responsible for various other tax obligations and for
compliance with various representations, statements, and conditions made in the
course of obtaining the tax ruling referenced above and in connection with the
tax allocation agreement. Our obligations under the tax allocation agreement
have been limited by a letter agreement dated November 6, 2002 entered into in
connection with our debt refinancing with Conexant. Nevertheless, if we do not
carefully monitor our compliance with the requirements imposed as a result of
the spin-off and related transactions and our responsibilities under the tax
allocation agreement, we might inadvertently trigger an obligation to
33
Skyworks Solutions, Inc. and Subsidiaries
indemnify certain persons (including Conexant) pursuant to the tax allocation
agreement or other obligations under such agreement. In addition, our indemnity
obligations could discourage or prevent a third party from making a proposal to
acquire Skyworks.
If we were required to pay any of the taxes described above, the payment could
be very substantial and have a material adverse effect on our business,
financial condition, results of operations and cash flow.
In addition, it is expected that the interest payments we are required to make
on the $45 million principal amount of 15% convertible senior subordinated notes
due June 30, 2005 issued to Conexant will not be deductible for U.S. federal
income tax purposes. Our inability to offset our interest expense from these
obligations against other income may increase our tax liability currently and in
future years.
Further, the terms of the 15% convertible senior subordinated notes due June 30,
2005 issued to Conexant require us to pay the principal due at the maturity date
or upon certain acceleration events in a number of shares of our common stock
equal to the principal due at such time divided by the applicable conversion
price on such date. If the fair market value of our common stock on such date is
less than the applicable conversion price of such notes, we may recognize
cancellation of indebtedness income for federal income tax purposes equal to the
excess of the principal amount of such notes due at such time over the fair
market value of the common stock issued by us to satisfy our obligations under
the notes.
CERTAIN PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR SOMEONE TO ACQUIRE CONTROL OF US.
We have certain anti-takeover measures that may affect our common stock. Our
certificate of incorporation, our by-laws and the Delaware General Corporation
Law contain several provisions that would make more difficult an acquisition of
control of us in a transaction not approved by our board of directors. Our
certificate of incorporation and by-laws include provisions such as:
- the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;
- the ability of our board of directors to issue shares of preferred
stock in one or more series without further authorization of
stockholders;
- a prohibition on stockholder action by written consent;
- elimination of the right of stockholders to call a special meeting
of stockholders;
- a requirement that stockholders provide advance notice of any
stockholder nominations of directors or any proposal of new business
to be considered at any meeting of stockholders;
- a requirement that the affirmative vote of at least 66 2/3% of our
shares be obtained to amend or repeal any provision of our by-laws
or the provision of our certificate of incorporation relating to
amendments to our by-laws;
- a requirement that the affirmative vote of at least 80% of our
shares be obtained to amend or repeal the provisions of our
certificate of incorporation relating to the election and removal of
directors, the classified board or the right to act by written
consent;
- a requirement that the affirmative vote of at least 80% of our
shares be obtained for business combinations unless approved by a
majority of the members of the board of directors and, in the event
that the other party to the business combination is the beneficial
owner of 5% or more of our shares, a majority of the members of
board of directors in office prior to the time such other party
became the beneficial owner of 5% or more of our shares;
- a fair price provision; and
- a requirement that the affirmative vote of at least 90% of our
shares be obtained to amend or repeal the fair price provision.
In addition to the provisions in our certificate of incorporation and by-laws,
Section 203 of the Delaware General Corporation Law generally provides that a
corporation shall not engage in any business combination with any interested
stockholder during the three-year period following the time that such
stockholder becomes an interested stockholder, unless a majority of the
directors then in office approves either the business combination or the
transaction that results in the stockholder becoming an interested stockholder
or specified stockholder approval requirements are met.
WE MAY BE LIABLE FOR PENALTIES UNDER ENVIRONMENTAL LAWS, RULES AND REGULATIONS,
WHICH COULD ADVERSELY IMPACT OUR BUSINESS.
We have used, and will continue to use, a variety of chemicals and compounds in
manufacturing operations and have been and will continue to be subject to a wide
range of environmental protection regulations in the United States. While we
have not experienced any material adverse effect on our operations as a result
of such regulations, we cannot assure you that current or future regulations
would not have a material adverse effect on our business, financial condition
and results of operations. Environmental regulations often require parties to
fund remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. We cannot assure you that the amount of expense and capital
expenditures that might be required to satisfy environmental liabilities, to
complete remedial actions and to continue to comply with applicable
environmental laws will not have a material adverse effect on our business,
financial condition and results of operations.
34
Skyworks Solutions, Inc. and Subsidiaries
WE WILL ADOPT NEW ACCOUNTING POLICIES IN FISCAL 2003 THAT COULD NEGATIVELY
IMPACT OUR EARNINGS FOR THAT YEAR.
In our fiscal year 2003, which began on September 28, 2002, we must adopt SFAS
No. 142 "Goodwill and Other Intangible Assets." This policy will require us to
evaluate the goodwill and intangible assets with indefinite lives that we report
on our balance sheet for potential impairment using a fair value method. If we
determine that our goodwill and other intangible assets with indefinite lives
are impaired, we will be required to report non-cash charges to our earnings in
fiscal year 2003 in the amount of such impairment. At September 27, 2002, we
reported goodwill and intangible assets of $940,686,000. As a result, the
adoption of SFAS No. 142 may result in asset write-downs on our balance sheet
and significant non-cash charges to earnings in fiscal 2003. Management is
assessing the impact that adoption of SFAS 142 will have on our financial
statements.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
The trading price of our common stock may fluctuate significantly. This price
may be influenced by many factors, including:
- our performance and prospects;
- the performance and prospects of our major customers;
- the depth and liquidity of the market for our common stock;
- investor perception of us and the industry in which we operate;
- changes in earnings estimates or buy/sell recommendations by
analysts;
- general financial and other market conditions; and
- domestic and international economic conditions.
Public stock markets have experienced, and are currently experiencing, extreme
price and trading volume volatility, particularly in the technology sectors of
the market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to or
disproportionately impacted by the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of our
common stock.
In addition, fluctuations in our stock price and our price-to-earnings multiple
may have made our stock attractive to momentum, hedge or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction particularly when viewed on a quarterly basis.
OUR DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW.
For so long as the 4.75 percent convertible subordinated notes we issued in a
private placement in November 2002 remain outstanding, we will have debt service
obligations on the notes of approximately $10,925,000 per year in interest
payments. In addition, we have extended the maturity of certain outstanding debt
under a financing agreement with Conexant, as amended, which bears interest at a
rate of 15% per year. If we issue other debt securities in the future, our debt
service obligations will increase. If we are unable to generate sufficient cash
to meet these obligations and must instead use our existing cash or investments,
we may have to reduce or curtail other activities of our business.
We intend to fulfill our debt service obligations from cash generated by our
operations, if any, and from our existing cash and investments. If necessary,
among other alternatives, we may add lease lines of credit to finance capital
expenditures and we may obtain other long-term debt, lines of credit and other
financing.
Our indebtedness could have significant negative consequences, including:
- increasing our vulnerability to general adverse economic and
industry conditions;
- limiting our ability to obtain additional financing;
- requiring the dedication of a substantial portion of any cash flow
from operations to service our indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital
expenditures;
35
Skyworks Solutions, Inc. and Subsidiaries
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete; and
- placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital
resources.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, short-term debt and
long-term debt. Our main investment objective is the preservation of investment
capital. Consequently, we invest with only high-credit-quality issuers and we
limit the amount of our credit exposure to any one issuer. We do not use
derivative instruments for speculative or investment purposes.
Our cash and cash equivalents are not subject to significant interest rate risk
due to the short maturities of these instruments. As of September 27, 2002, the
carrying value of our cash and cash equivalents approximates fair value.
Our long-term debt consists of a ten-year $960,000 loan from the State of
Maryland under the Community Development Block Grant program. Quarterly payments
are due through December 2003 and represent principal plus interest at 5% of the
unamortized balance. Our short-term debt on September 27, 2002 consists of the
current portion of this loan. In addition, because we refinanced the note
payable to Conexant for the acquisition of the Mexicali Operations and our loan
facility with Conexant, the principal amount of $180 million was classified as
long-term debt on September 27, 2002. We do not believe that we have significant
cash flow exposure on our short-term or long-term debt.
36
Skyworks Solutions, Inc. and Subsidiaries
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the
fiscal year ended September 30, 2002 are included herewith:
(1) Independent Auditors' Reports............................... Pages 38 through 39
(2) Consolidated Balance Sheets at September 30, 2002,
2001 and 2000............................................... Page 40
(3) Consolidated Statement of Operations for the Years
Ended September 30, 2002, 2001 and 2000..................... Page 41
(4) Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 2002, 2001 and 2000............... Page 42
(5) Consolidated Statements of Cash Flows for the Years
Ended September 30, 2002, 2001 and 2000..................... Page 43
(6) Notes to Consolidated Financial Statements.................. Pages 44 through 65
37
Skyworks Solutions, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Skyworks
Solutions, Inc. and subsidiaries as of September 30, 2002 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the financial statement schedule for
the year ended September 30, 2002. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Skyworks Solutions,
Inc. and subsidiaries at September 30, 2002, and the results of their operations
and their cash flows for the year ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule for the year ended
September 30, 2002, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
November 15, 2002
38
Skyworks Solutions, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Skyworks
Solutions, Inc. and subsidiaries (formerly the combined balance sheet of the
Washington Business and the Mexicali Operations of Conexant Systems, Inc.) as of
September 30, 2001, and the related consolidated statements of operations,
stockholders' equity (formerly Conexant's net investment and comprehensive
income), and cash flows for the years ended September 30, 2000 and 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 15 for the years ended September 30, 2000 and 2001. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statements schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes addressing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Skyworks Solutions, Inc. and
subsidiaries (formerly the Washington Business and the Mexicali Operations of
Conexant Systems, Inc.) at September 30, 2001, and the results of their
operations and their cash flows for the years ended September 30, 2000 and
2001, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 14, 2002
39
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
SEPTEMBER 30,
ASSETS 2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 53,358 $ 1,998
Receivables, net of allowance for doubtful accounts of
$1,324 and $3,206 .......................................................... 94,425 40,754
Inventories ................................................................... 55,643 37,383
Other current assets .......................................................... 23,970 3,225
----------- -----------
Total current assets .................................................. 227,396 83,360
Property, plant and equipment, less accumulated depreciation and amortization
of $305,709 and $284,879 ..................................................... 143,773 169,547
Goodwill and intangible assets, less accumulated amortization of $915 and $20,594 940,686 57,606
Deferred tax asset .............................................................. 22,487 --
Other assets .................................................................... 12,570 3,774
----------- -----------
Total assets .......................................................... $ 1,346,912 $ 314,287
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 129 $ --
Accounts payable .............................................................. 45,350 2,653
Accrued compensation and benefits ............................................. 17,585 12,363
Other current liabilities ..................................................... 84,563 7,804
----------- -----------
Total current liabilities ............................................. 147,627 22,820
Long-term debt, less current maturities ......................................... 180,039 --
Long-term liabilities ........................................................... 4,270 3,806
----------- -----------
Total liabilities ..................................................... 331,936 26,626
Commitments and contingencies ................................................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 25,000 authorized; no shares issued .............. -- --
Common stock, $0.25 par value: 525,000 shares authorized; 137,589 shares issued
and outstanding at September 30, 2002......................................... 34,397 --
Additional paid-in capital ...................................................... 1,150,856 --
Accumulated deficit ............................................................. (170,193) --
Unearned compensation, net of accumulated amortization of $53 ................... (84) --
Conexant's net investment ....................................................... -- 287,661
----------- -----------
Total stockholders' equity ............................................ 1,014,976 287,661
----------- -----------
Total liabilities and stockholders' equity ............................ $ 1,346,912 $ 314,287
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
40
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
--------- --------- ---------
Net revenues:
Third parties ....................................... $ 418,344 $ 215,502 $ 312,983
Conexant ............................................ 39,425 44,949 65,433
--------- --------- ---------
Total net revenues .......................... 457,769 260,451 378,416
--------- --------- ---------
Cost of goods sold:
Third parties ....................................... 294,149 268,749 207,450
Conexant ............................................ 37,459 42,754 62,720
--------- --------- ---------
Total cost of goods sold .................... 331,608 311,503 270,170
--------- --------- ---------
Gross margin .......................................... 126,161 (51,052) 108,246
Operating expenses:
Research and development ............................ 132,603 111,053 91,616
Selling, general and administrative ................. 50,178 51,267 52,422
Amortization of intangible assets ................... 12,929 15,267 5,327
Purchased in-process research and development ....... 65,500 -- 24,362
Special charges ..................................... 116,321 88,876 --
--------- --------- ---------
Total operating expenses .................... 377,531 266,463 173,727
--------- --------- ---------
Operating loss ........................................ (251,370) (317,515) (65,481)
Interest expense ...................................... (4,227) -- --
Other income (expense), net ........................... (56) 210 142
--------- --------- ---------
Loss before income taxes .............................. (255,653) (317,305) (65,339)
Provision (benefit) for income taxes .................. (19,589) 1,619 1,140
--------- --------- ---------
Net loss .............................................. $(236,064) $(318,924) $ (66,479)
========= ========= =========
Pro forma net loss per share, basic and diluted
(unaudited) (1) ....................................... $ (1.72)
=========
Pro forma number of weighted-average shares used in per
share computation (unaudited) (1) ..................... 137,416
=========
(1) See Note 2 to the consolidated financial statements
The accompanying notes are an integral part of these consolidated financial
statements.
41
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL CONEXANT'S COMPREHENSIVE
PAID-IN NET INCOME ACCUMULATED UNEARNED
SHARES PAR VALUE CAPITAL INVESTMENT (LOSS) DEFICIT COMPENSATION
------ --------- ------- ---------- ------ -------- ------------
Balance at September 30, 1999 -- -- -- 275,746 (178) -- --
Net loss -- -- -- (66,479) -- -- --
Foreign currency translation
adjustment -- -- -- -- 126 -- --
Contribution of business acquired by
Conexant -- -- -- 108,495 -- -- --
Net transfers from Conexant -- -- -- 148,706 -- -- --
------- ------- ----------- -------- -------- --------- -----
Balance at September 30, 2000 -- -- -- 466,468 (52) -- --
Net loss -- -- -- (318,924) -- -- --
Foreign currency translation
adjustment -- -- -- -- (232) -- --
Contribution of additional assets
related to business acquired -- -- -- 2,058 -- -- --
Net transfers from Conexant -- -- -- 138,343 -- -- --
------- ------- ----------- -------- -------- --------- -----
Balance at September 30, 2001 -- -- -- 287,945 (284) -- --
Net loss -- -- -- (66,280) -- (170,193) --
Foreign currency translation
adjustment -- -- -- -- 409 -- --
Net transfers from Conexant -- -- -- 50,404 -- -- --
Dividend (1) -- -- -- (204,716) -- -- --
Recapitalization as a result of
purchase accounting under a reverse
acquisition 137,368 34,342 1,149,965 (67,353) (125) -- (137)
Issuance of common shares to
401(k) plan 129 31 513 -- -- -- --
Exercise of stock options 26 7 35 -- -- -- --
Employee stock purchase plan 66 17 313 -- -- -- --
Amortization of unearned compensation -- -- -- -- -- -- 53
Compensation expense -- -- 30 -- -- -- --
------- ------- ----------- -------- -------- --------- -----
Balance at September 30, 2002 137,589 $34,397 $ 1,150,856 $ -- $ -- $(170,193) $ (84)
======= ======= =========== ======== ======== ========= =====
(1) The dividend to Conexant represents the payment for the Mexicali
operations ($150 million), the net assets retained by Conexant in
connection with the spin-off, primarily accounts receivable net of
accounts payable, and the assumption of certain Conexant liabilities by
the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
42
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (236,064) $ (318,924) $ (66,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .......................................... 47,695 58,708 61,710
Amortization of intangible assets ..................... 12,878 15,267 5,327
Amortization of deferred compensation ................. 53 -- --
Contribution of common shares to Savings and
Retirement Plan ...................................... 874 -- --
Compensation expense .................................. 30 -- --
Deferred income taxes ................................. (23,117) -- --
Provision for (recoveries of) losses on accounts
Receivable ........................................... (1,178) (468) 3,538
In-process research and development charge ............ 65,500 -- 24,362
Inventory provisions .................................. 2,704 60,978 3,132
Asset impairments ..................................... 111,817 86,209 --
Loss on sale of assets ................................ 209 80 4
Changes in assets and liabilities net of acquisition:
Receivables ........................................... (84,924) 27,276 (39,846)
Inventories ........................................... (4,413) (8,378) (65,150)
Accounts payable ...................................... 36,635 (2,547) 1,961
Accrued expenses and other current liabilities ........ (19,471) (6,003) 14,210
Other ................................................. (8,322) (1,604) 3,401
----------- ----------- -----------
Net cash used in operating activities ............... (99,094) (89,406) (53,830)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (29,412) (51,118) (100,424)
Cash and cash equivalents of acquired business ............. 67,102 -- 7,655
Sale of short-term investments ............................. 35,422 -- --
Dividend to Conexant ....................................... (3,070) -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities . 70,042 (51,118) (92,769)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers from Conexant ................................ 50,404 138,343 148,706
Short-term note to Conexant ................................ 30,000 -- --
Payments on notes payable .................................. (34) -- --
Exercise of stock options .................................. 42 -- --
----------- ----------- -----------
Net cash provided by financing activities ............ 80,412 138,343 148,706
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ....... 51,360 (2,181) 2,107
Cash and cash equivalents at beginning of period ........... 1,998 4,179 2,072
----------- ----------- -----------
Cash and cash equivalents at end of period ................. $ 53,358 $ 1,998 $ 4,179
=========== =========== ===========
Supplemental disclosure of non-cash activities:
Acquisition of Alpha Industries, Inc. ...................... $ 1,183,105 $ -- $ --
=========== =========== ===========
Dividend to Conexant ....................................... $ 201,646 $ -- $ --
=========== =========== ===========
Supplemental cash flow disclosures:
Taxes paid ................................................. $ 832 $ -- $ --
=========== =========== ===========
Interest paid .............................................. $ 323 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
43
Skyworks Solutions, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On December 16, 2001, Alpha Industries, Inc. ("Alpha"), Conexant Systems,
Inc. ("Conexant") and Washington Sub, Inc. ("Washington"), a wholly owned
subsidiary of Conexant, entered into a definitive agreement providing for
the combination of Conexant's wireless business with Alpha. Under the
terms of the agreement, Conexant would spin off its wireless business into
Washington, including its gallium arsenide wafer fabrication facility
located in Newbury Park, California, but excluding certain assets and
liabilities, to be followed immediately by a merger (the "Merger") of this
wireless business into Alpha with Alpha as the surviving entity in the
merger. This merger was completed on June 25, 2002. Following the merger,
Alpha changed its corporate name to Skyworks Solutions, Inc (the
"Company", "Skyworks").
Immediately following completion of the Merger, the Company purchased
Conexant's semiconductor assembly, module manufacturing and test facility
located in Mexicali, Mexico, and certain related operations ("Mexicali
Operations") for $150 million. For financial accounting purposes, the sale
of the Mexicali Operations by Conexant to Skyworks Solutions was treated
as if Conexant had contributed the Mexicali Operations to Washington as
part of the spin-off, and the $150 million purchase price was treated as a
return of capital to Conexant. The accompanying consolidated financial
statements include the assets, liabilities, operating results and cash
flows of the Washington business and the Mexicali Operations for all
periods presented, and the results of operations of Alpha from June 25,
2002, the date of acquisition. For purposes of these combined financial
statements, the Washington business and the Mexicali Operations are
collectively referred to as Washington/Mexicali.
The Merger has been accounted for as a reverse acquisition whereby
Washington was treated as the acquirer and Alpha as the acquiree,
primarily because Conexant shareholders owned a majority, approximately 67
percent, of the Company upon completion of the merger. Under a reverse
acquisition, the purchase price of Alpha was based upon the fair market
value of Alpha common stock for a reasonable period of time before and
after the announcement date of the Merger and the fair value of Alpha
stock options. The purchase price of Alpha was allocated to the assets
acquired and liabilities assumed by Washington, as the acquiring company
for accounting purposes, based upon their estimated fair market value at
the acquisition date. Because the Merger was accounted for as a purchase
of Alpha, the historical financial statements of Washington/ Mexicali
became the historical financial statements of the Company after the
Merger. Since the historical financial statements of the Company after the
Merger do not include the historical financial results of Alpha for
periods prior to June 25, 2002, the financial statements may not be
indicative of future results of operations or the historical results that
would have resulted if the Merger had occurred at the beginning of a
historical financial period.
The Company is a leading wireless semiconductor company focused on
providing front-end modules, radio frequency (RF) subsystems,
semiconductor components and complete system solutions to wireless handset
and infrastructure customers worldwide. The Company offers a comprehensive
family of components and RF subsystems, and also provides complete
antenna-to-microphone semiconductor solutions that support advanced 2.5G
and 3G services.
Basis of Presentation:
The combined financial statements prior to the Merger were prepared using
Conexant's historical basis in the assets and liabilities and the
historical operating results of Washington/Mexicali during each respective
period. The Company believes the assumptions underlying the financial
statements are reasonable. However, we cannot assure you that the
financial information included herein reflects the combined assets,
liabilities, operating results and cash flows of the Company in the future
or what they would have been had Washington/Mexicali been a separate
stand-alone entity and independent of Conexant during the periods
presented.
Under purchase accounting, the operating results of the acquirer
(Washington/Mexicali) are included for all periods being presented,
whereas the operating results of the acquiree (Alpha) are included only
after the date of acquisition (June 25, 2002) through the end of the
period. Therefore, the historical financial information included herein
does not necessarily reflect the combined assets, liabilities, operating
results and cash flows of the Company in the future.
Conexant used a centralized approach to cash management and the financing
of its operations. Cash deposits from Washington/Mexicali were transferred
to Conexant on a regular basis and were netted against Conexant's net
44
Skyworks Solutions, Inc. and Subsidiaries
investment. As a result, none of Conexant's cash, cash equivalents,
marketable securities or debt was allocated to Washington/Mexicali in the
financial statements. Cash and cash equivalents in the financial
statements, prior to the acquisition, represented amounts held by certain
foreign operations of Washington/Mexicali. Changes in equity represented
funding from Conexant for working capital and capital expenditure
requirements after giving effect to Washington/ Mexicali's transfers to
and from Conexant for its cash flows from operations through June 25,
2002.
Historically, Conexant provided financing for Washington/Mexicali and
incurred debt at the parent level. The financial statements of
Washington/Mexicali did not include an allocation of Conexant's debt or
the related interest expense. Therefore, the financial statements do not
necessarily reflect the financial position and results of operations of
Washington/ Mexicali had it been an independent company as of the dates,
and for the periods, presented.
The financial statements also include allocations of certain Conexant
operating expenses for research and development, legal, accounting,
treasury, human resources, real estate, information systems, distribution,
customer service, sales, marketing, engineering and other corporate
services provided by Conexant, including executive salaries and other
costs. The operating expense allocations have been determined on bases
that management considered to be reasonable reflections of the utilization
of services provided to, or the benefit received by, Washington/Mexicali.
Management believes that the expenses allocated to Washington/Mexicali are
representative of the operating expenses that would have been incurred had
Washington/Mexicali operated as an independent company.
After the spin-off and the Merger, the Company is performing these
functions using its own resources or purchased services, including
services obtained from Conexant pursuant to a transition services
agreement which expires on December 31, 2002 unless extended by mutual
agreement.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year:
The Company's fiscal year ends on the Friday closest to September 30.
Fiscal years 2002, 2001 and 2000 each comprised 52 weeks and ended on
September 27, September 28 and September 29, respectively. For
convenience, the consolidated financial statements have been shown as
ending on the last day of the calendar month.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amounts reported in the combined financial statements and accompanying
notes. Among the significant estimates affecting the financial statements
are those related to inventories, long-lived assets and income taxes. On
an ongoing basis, management reviews its estimates based upon currently
available information. Actual results could differ materially from those
estimates.
The combined financial statements have been prepared using Conexant's
historical basis in the assets and liabilities and the historical
operating results of Washington/Mexicali during each respective period.
The Company believes the assumptions underlying the financial statements
are reasonable. However, we cannot assure you that the financial
information included herein reflects the combined assets, liabilities,
operating results and cash flows of the Company in the future or what they
would have been had Washington/Mexicali been a separate stand-alone entity
and independent of Conexant during the periods presented.
Revenue Recognition:
Revenues from product sales are recognized upon shipment and transfer of
title, in accordance with the shipping terms specified in the arrangement
with the customer. Revenue recognition is deferred in all instances where
the earnings process is incomplete. Certain product sales are made to
electronic component distributors under agreements allowing for price
protection and/or a right of return on unsold products. A reserve for
sales returns and allowances for non-distributor customers is recorded
based on historical experience or specific identification of an event
necessitating a reserve. Development revenue is recognized when services
are performed and was not significant for any of the periods presented.
45
Skyworks Solutions, Inc. and Subsidiaries
Research and Development Expenditures:
Research and development costs are expensed as incurred.
Cash and Cash Equivalents:
Cash and cash equivalents include cash deposited in demand deposits at
banks and highly liquid investments with original maturities of 90 days or
less.
Bad Debt:
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make future
payments, additional allowances may be required.
Inventories:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. The Company provides for estimated
obsolescence or unmarketable inventory based upon assumptions about future
demand and market conditions. The recoverability of inventories is
assessed through an on-going review of inventory levels in relation to
sales backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable demand
(generally over six months), the value of such inventory that is not
expected to be sold at the time of the review is written down. The amount
of the write-down is the excess of historical cost over estimated
realizable value (generally zero). Once established, these write-downs are
considered permanent adjustments to the cost basis of the excess
inventory. If actual demand and market conditions are less favorable than
those projected by management, additional inventory write downs may be
required.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is
calculated using the straight-line method for financial reporting and
accelerated methods for tax purposes. Significant renewals and betterments
are capitalized and replaced units are written off. Maintenance and
repairs, as well as renewals of a minor amount, are expensed as incurred.
Estimated useful lives used for depreciation purposes are 5 to 30 years
for buildings and improvements and 3 to 10 years for machinery and
equipment. Leasehold improvements are depreciated over the life of the
associated lease.
Goodwill and Intangible Assets:
Goodwill and intangible assets are principally the result of the Merger
with Washington/Mexicali completed on June 25, 2002 and a business
acquisition completed in fiscal 2000. The Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations as of July 1, 2001. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142,
Goodwill and Other Intangible Assets, is adopted in full, are not
amortized. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized.
Business acquisitions are accounted for by assigning the purchase price to
tangible and intangible assets and liabilities, including purchased
in-process research and development (IPRD) projects, which have not yet
reached technological feasibility and have no alternative future use.
Assets acquired and liabilities assumed are recorded at their estimated
fair values; the excess of the purchase price over the net assets acquired
is recorded as goodwill. The value of IPRD is immediately charged to
expense upon completion of the acquisition. Developed technology, customer
relationships and other intangibles are amortized on a straight-line basis
over their estimated useful lives (principally 10 years).
Income Taxes:
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
This method also requires the recognition of future tax benefits such as
net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date.
The carrying value of the Company's net deferred tax assets assumes that
the Company will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions. If these
estimates and related assumptions change in the future, the Company may be
required to record additional valuation allowances against its deferred
tax assets resulting in additional income tax expense in the Company's
consolidated statement of operations. Management evaluates the
realizability of the deferred tax assets and assesses the adequacy of the
valuation allowance quarterly. Likewise, in the event that the Company was
to determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income or decrease the carrying value
of goodwill in the period such determination was made.
Concentrations:
46
Skyworks Solutions, Inc. and Subsidiaries
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of trade accounts
receivable. Trade receivables are primarily derived from sales to
manufacturers of communications and consumer products. Ongoing credit
evaluations of customers' financial condition are performed and
collateral, such as letters of credit and bank guarantees, are required
whenever deemed necessary. The following customers accounted for 10% or
more of trade receivables from customers other than Conexant:
SEPTEMBER 30,
2002 2001
------ ------
Samsung Electronics Co....... 27% 63%
Motorola, Inc................ -- 13%
The following customers accounted for 10% or more of net revenues from customers
other than Conexant:
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
------ ------ ------
Samsung Electronics Co....... 38% 44% 28%
Motorola, Inc................ 12% --
Nokia Corporation............ -- 12%
Ericsson..................... -- -- 18%
LG Electronics............... -- 10%
The foregoing percentages are based on sales representing Washington/Mexicali
sales for the full fiscal year during 2002, 2001 and 2000 and including sales of
Skyworks for the post-Merger period from June 26, 2002 through the end of the
fiscal year.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:
The Company accounts for impairment of long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." This statement requires that
long-lived assets, goodwill and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to undiscounted future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Product Warranties:
Warranties are offered on the sale of certain products and an accrual is
recorded for estimated claims at the time of the sale. Such accruals are
based on historical experience and management's estimate of future claims.
Foreign Currency Translation and Remeasurement:
The foreign operations of the Company are subject to exchange rate
fluctuations and foreign currency transaction costs. The functional
currency for our foreign operations is the U.S. dollar. Inventories,
property, plant and equipment; goodwill and intangible assets; costs of
goods sold; and depreciation and amortization are remeasured from the
foreign currency into U.S. dollars at historical exchange rates; other
accounts are translated at current exchange rates. Gains and losses
resulting from these remeasurements are included in income. Gains and
losses resulting from foreign currency transactions are recognized
currently in income.
Stock Option Plans:
The Company accounts for its stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations and provides disclosure
related to its stock-based compensation under the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."
Earnings Per Share:
47
Skyworks Solutions, Inc. and Subsidiaries
Prior to the Merger with Alpha Industries, Inc., Conexant's wireless
business had no separate capitalization, therefore a calculation cannot
be performed for weighted average shares outstanding to then calculate
earnings per share. Pro forma basic earnings per share is calculated by
dividing net income (loss) by the assumed pro forma weighted average
number of common shares outstanding in fiscal 2002. Pro forma weighted
average number of shares outstanding is calculated assuming the Merger
had been consummated at the beginning of fiscal 2002. Pro forma diluted
earnings per share includes the dilutive effect of stock options, if
their effect is dilutive, using the treasury stock method. Options to
purchase approximately 31.3 million shares were outstanding but not
included in the computation of diluted earnings per share as the net loss
for the fiscal year ended September 30, 2002 would have made their effect
anti-dilutive.
Comprehensive (Loss) Income:
The Company accounts for comprehensive (loss) income in accordance with
the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is a financial statement presentation standard, which requires the
Company to disclose non-owner changes included in equity but not included
in net income or loss. Comprehensive loss presented in the combined
financial statements of Conexant's net investment consists of
Washington/Mexicali's net loss and foreign currency translation
adjustments prior to the Merger. The foreign currency translation
adjustments are not recorded net of any tax effect, as management does not
expect to incur any tax liability or benefit related thereto. Accumulated
other comprehensive loss, prior to the Merger, is included in Conexant's
net investment in the combined balance sheets.
Supplemental Cash Flow Information:
Conexant made all income tax payments, prior to the Merger, on behalf of
the Washington/Mexicali business.
Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements No. 141, "Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 141 requires the
use of the purchase method of accounting and eliminates the use of the
pooling-of-interest method of accounting for business combinations. SFAS
No. 141 also requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets meet certain
criteria. SFAS No. 141 applies to all business combinations initiated
after June 30, 2001 and for purchase business combinations completed on or
after July 1, 2001. The Company has adopted the provisions of SFAS No.
141. Upon adoption of SFAS No. 142, the Company is required to evaluate
its existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Impairment
is measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of October 1, 2002. The Company will
then have up to six months from October 1, 2002 to determine the fair
value of each reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, an indication exists that
the reporting unit goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. In the second step, the Company must compare the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations. The Company may be
required to record a substantial transitional impairment charge as a
result of adopting SFAS No. 142. The carrying value of goodwill and
intangible assets, subject to the transitional impairment test, is
approximately $907.5 million at September 30, 2002. Management is
assessing the impact that adoption of SFAS No. 142 will have on our
financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supersedes previous guidance on financial accounting and reporting
for the impairment or disposal of long-lived assets and for segments of a
business to be disposed of. Adoption of SFAS 144 is required no later than
the beginning of fiscal 2003. Management does not expect the adoption of
SFAS 144 to have a significant impact on our financial position or results
of operations. However, future impairment reviews may result in charges
against earnings to write down the value of long-lived assets.
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statement
No.'s 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections", effective for fiscal years beginning May 15, 2002 or later.
It rescinds SFAS No. 4, "Reporting Gains and Losses From Extinguishments
of Debt", SFAS No. 64, "Extinguishments of Debt to Satisfy Sinking-Fund
Requirements", and SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This Statement also amends SFAS No. 13, "Accounting for Leases"
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions.
The Company does not believe the impact of adopting SFAS No. 145 will have
a material impact on its financial statements.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. This statement is effective for exit or disposal
48
Skyworks Solutions, Inc. and Subsidiaries
activities initiated after December 31, 2002. We are assessing the impact
that adoption of SFAS No. 146 will have on our financial statements.
NOTE 3 BUSINESS COMBINATIONS
MERGER WITH CONEXANT SYSTEMS, INC.'S WIRELESS BUSINESS
On December 16, 2001, Alpha, Conexant and Washington, a wholly owned
subsidiary of Conexant, entered into a definitive agreement providing for
the combination of Conexant's wireless business with Alpha. Under the
terms of the agreement, Conexant would spin off its wireless business into
Washington, including its gallium arsenide wafer fabrication facility
located in Newbury Park, California, but excluding certain assets and
liabilities, to be followed immediately by the Merger of this wireless
business into Alpha with Alpha as the surviving entity in the Merger. The
Merger was completed on June 25, 2002. Following the Merger, Alpha changed
its corporate name to Skyworks Solutions, Inc.
Immediately following completion of the Merger, the Company purchased the
Mexicali Operations for $150 million. For financial accounting purposes,
the sale of the Mexicali Operations by Conexant to Skyworks Solutions was
treated as if Conexant had contributed the Mexicali Operations to
Washington as part of the spin-off, and the $150 million purchase price
was treated as a return of capital to Conexant.
The Merger has been accounted for as a reverse acquisition whereby
Washington was treated as the acquirer and Alpha as the acquiree,
primarily because Conexant shareholders owned a majority, approximately 67
percent, of the Company upon completion of the Merger. Under a reverse
acquisition, the purchase price of Alpha was based upon the fair market
value of Alpha common stock for a reasonable period of time before and
after the announcement date of the merger and the fair value of Alpha
stock options. The purchase price of Alpha was allocated to the assets
acquired and liabilities assumed by Washington, as the acquiring company
for accounting purposes, based upon their estimated fair market value at
the acquisition date. Because the Merger was accounted for as a purchase
of Alpha, the historical financial statements of Washington/Mexicali
became the historical financial statements of the Company after the
merger. Since the historical financial statements of the Company after the
Merger do not include the historical financial results of Alpha for
periods prior to June 25, 2002, the financial statements may not be
indicative of future results of operations or the historical results that
would have resulted if the Merger had occurred at the beginning of a
historical financial period.
In connection with the Merger, the Company identified duplicate facilities
resulting in a write-down of fixed assets with historical carrying values
of $92.4 million to $20.2 million, a reduction in workforce of
approximately 210 employees at a cost of $4.8 million and facility exit or
closing costs of $3.1 million. The effects of these actions are reflected
in the purchase price allocation below.
49
Skyworks Solutions, Inc. and Subsidiaries
The total purchase price was valued at approximately $1.2 billion and is
summarized as follows:
(IN THOUSANDS)
Fair market value of Alpha common stock .......... $1,054,111
Fair value of Alpha stock options ................ 95,388
Estimated transaction costs of acquirer .......... 33,606
----------
Total ....................................... $1,183,105
==========
The purchase price was allocated as follows:
(IN THOUSANDS)
Working capital ............................... $ 119,478
Property, plant and equipment ................. 58,700
Amortized intangible assets ................... 34,082
Unamortized intangible assets ................. 2,300
Goodwill ...................................... 905,219
In-process research and development ........... 65,500
Long-term debt ................................ (73)
Other long-term liabilities ................... (2,236)
Deferred compensation ......................... 135
-----------
Total .................................... $ 1,183,105
===========
The allocation of the purchase price is subject to revision, which is not
expected to be material, based on the final valuation of plant, property
and equipment acquired.
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the June 25, 2002 Merger had
occurred as of the beginning of the periods presented. This information
gives effect to certain adjustments including increased amortization of
intangibles and increased interest expense related to debt issued in
conjunction with the Merger. In-process research and development of $65.5
million and other Merger-related expenses of $28.8 million have been
excluded from the pro forma results as they are non-recurring and not
indicative of normal operating results. This information is provided for
illustrative purposes only, and is not necessarily indicative of the
operating results that would have occurred had the Merger been consummated
at the beginnings of the periods presented, nor is it necessarily
indicative of any future operating results.
(in thousands, except per share data) YEARS ENDED SEPTEMBER 30,
2002 2001
--------- ---------
Net revenue .......................... $ 543,091 $ 458,352
Net loss ............................. $(301,684) $(328,981)
Net loss per share (basic and diluted) $ (2.20)
=========
In connection with the Merger in the third quarter of fiscal
2002, $65.5 million was allocated to purchased in-process
research and development and expensed immediately upon
completion of the acquisition (as a charge not deductible for
tax purposes) because the technological feasibility of certain
products under development had not been established and no
future alternative uses existed.
Prior to the Merger, Alpha was in the process of developing
new technologies in its semiconductor and ceramics segments.
The objective of the in-process research and development
effort was to develop new semiconductor processes, ceramic
materials and related products to satisfy customer
requirements in the wireless and broadband markets. The
following table summarizes the significant assumptions
underlying the valuations of the Alpha in-process research and
development (IPR&D) at the time of acquisition.
Estimated costs to Discount rate
(in millions) Date Acquired IPRD complete projects applied to IPRD
------------- ---- ----------------- ---------------
Alpha June 25, 2002 $65.5 $10.3 30%
The semiconductor segment was involved in several projects
that have been aggregated into the following categories based
on the respective technologies:
Power Amplifier
Power amplifiers are designed and manufactured for use in
different types of wireless handsets. The main performance
attributes of these amplifiers are efficiency, power output,
operating voltage and distortion. Current research and
development is focused on expanding the offering to all types
of wireless standards, improving performance by process and
circuit improvements and offering a higher level of
integration.
Control Products
Control products consist of switches and switch filters that
are used in wireless applications for signal routing. Most
applications are in the handset market enabling multi-mode,
multi-band handsets. Current research and development is
focused on performance improvement and cost reduction by
reducing chip size and increasing functionality.
Broadband
The products in this grouping consist of radio frequency (RF)
and millimeter wave semiconductors and components designed and
manufactured specifically to address the needs of high-speed,
wireline and wireless network access. Current and long-term
research and development is focused on performance enhancement
of speed and bandwidth as well as cost reduction and
integration.
Silicon Diode
These products use silicon processes to fabricate diodes for
use in a variety of RF and wireless applications. Current
research and development is focused on reducing the size of
the device, improving performance and reducing cost.
Ceramics
The ceramics segment was involved in projects that relate to
the design and manufacture of ceramic-based components such as
resonators and filters for the wireless infrastructure market.
Current research and development is focused on performance
enhancements through improved formulations and electronic
designs.
The material risks associated with the successful completion of the
in-process technology are associated with the Company's ability to
successfully finish the creation of viable prototypes and successful
design of the chips, masks and manufacturing processes required. The
Company expects to benefit from the in-process projects as the individual
products that contain the in-process technology are put into production
and sold to end-users. The release dates for each of the products within
the product families are varied. The fair value of the in-process research
and development was determined using the income approach. Under the income
approach, the fair value reflects the present value of the projected cash
flows that are expected to be generated by the products incorporating the
in-process research and development, if successful.
The projected cash flows were discounted to approximate fair value. The
discount rate applicable to the cash flows of each project reflects the
stage of completion and other risks inherent in each project. The weighted
average discount rate used in the valuation of in-process research and
development was 30 percent. The IPR&D projects were expected to commence
generating cash flows in fiscal 2003.
CONEXANT'S ACQUISITION OF PHILSAR SEMICONDUCTOR INC.
In May 2000, Conexant acquired Philsar Semiconductor Inc. ("Philsar"),
which became a part of Conexant's wireless communications business. This
acquisition has been accounted for as a contribution to the wireless
business by Conexant and such contribution has been recorded in Conexant's
net investment in the combined financial statements. Philsar was a
developer of radio frequency semiconductor solutions for personal wireless
connectivity, including emerging standards such as Bluetooth, and radio
frequency components for third-generation (3G) digital cellular handsets.
To effect the acquisition of Philsar, all of the then-outstanding capital
stock of Philsar was exchanged for Philsar securities exchangeable at the
option of the holders into an aggregate of approximately 2.5 million
shares of Conexant common stock (including 248,000 exchangeable shares
issued in fiscal 2001 upon the expiration of an indemnification period).
The outstanding Philsar stock options were converted into options to
purchase an additional 525,000 shares of Conexant common stock.
50
Skyworks Solutions, Inc. and Subsidiaries
The total value of the consideration for the Philsar acquisition was
$110.0 million. The value of the consideration paid was based on market
prices of Conexant common stock at the time of announcement of the
acquisition or, in the case of the additional consideration, at the time
of resolution of the contingency. The value of the options converted (an
average fair value of $36.12 per share) was determined using the
Black-Scholes option pricing model, based upon their various exercise
prices (which ranged from $5.47 to $9.41) and remaining contractual lives
(ranging from 1.4 to 9.8 years) and the following additional assumptions:
estimated volatility of 60%, risk-free interest rate of 5.9% and no
dividend yield). The value of the consideration has been allocated among
the assets and liabilities acquired, including identified intangible
assets and IPRD, based upon estimated fair values. The excess of the value
of the consideration over the net assets acquired was allocated to
goodwill. The tangible assets acquired totaled $8.0 million, net of
liabilities of $2.2 million, and included $7.7 million in cash. The total
goodwill associated with this acquisition was $71.4 million and such
amount is not deductible for tax purposes.
In connection with the acquisition of Philsar, $24.4 million was allocated
to IPRD and expensed immediately upon completion of the acquisition (as a
charge not deductible for tax purposes) because the technological
feasibility of products under development had not been established and no
future alternative uses existed. The fair value of the IPRD was determined
using the income approach. Under the income approach, expected future
after-tax cash flows from each of the projects or product families
(projects) under development are estimated and discounted to their net
present value at an appropriate risk-adjusted rate of return. Each project
was analyzed to determine the technological innovations included in the
project; the existence and utilization of core technology; the complexity,
cost and time to complete the remaining development efforts; the existence
of any alternative future use or current technological feasibility; and
the stage of completion in development.
Future cash flows for each project used in the income approach were
estimated based on forecasted revenues and costs, taking into account the
expected life cycles of the products and the underlying technology,
relevant market sizes and industry trends. The projected revenues used in
the income approach were the revenues expected to be generated upon
completion of the IPRD projects and the beginning of commercial sales, as
estimated by management. The projections assume that the projects will be
successful and that the products' development and commercialization meet
management's estimated time schedule. The projected gross margins and
operating expenses reflect the costs expected to be incurred for
production, marketing, and ongoing development of the product families as
estimated by management. The IPRD projects were expected to commence
generating net cash inflows in fiscal 2001.
The projects were then classified as developed technology, IPRD or future
development. The estimated future cash flows for each were discounted to
approximate fair value. Discount rates of 30% for IPRD and 25% for
developed technology were derived from a weighted-average cost of capital
analysis, adjusted upward to reflect additional risks inherent in the
development process, including the probability of achieving technological
success and market acceptance. The IPRD charge includes the fair value of
the portion of IPRD completed as of the date of acquisition. The fair
values assigned to IPRD to-be-completed and future development are
included in goodwill. Management is responsible for the amounts determined
for IPRD, as well as developed technology, and believes the amounts are
representative of fair values and do not exceed the amounts an independent
party would pay for these projects.
The results of operations of Philsar are included in the combined
financial statements from the date of acquisition. The pro forma combined
statement of operations data for fiscal 2000 below assumes that the
acquisition of Philsar had been completed as of the beginning of the
fiscal year and includes amortization of goodwill and identified
intangible assets from that date. However, the impact of the charge for
IPRD has been excluded. This pro forma data is presented for informational
purposes only, and is not necessarily indicative of the results of future
operations nor of the results that would have been achieved had the
acquisition of Philsar taken place at the beginning of fiscal 2000.
(Unaudited, in thousands) 2000
---------
Net revenues .............................. $ 379,161
Net loss .................................. $ (62,326)
During the third quarter of fiscal 2002, the Company recorded a $45.8
million charge for the write-off of goodwill and other intangible assets
associated with our fiscal 2000 acquisition of the Philsar Bluetooth
business. Management has determined that the Company will not support the
technology associated with the Philsar Bluetooth business.
51
Skyworks Solutions, Inc. and Subsidiaries
Accordingly, this product line will be discontinued and the employees
associated with the product line have either been severed or relocated to
other operations. As a result of the actions taken, management determined
that the remaining goodwill and other intangible assets associated with
the Philsar acquisition had been impaired.
NOTE 4 SUPPLEMENTAL FINANCIAL STATEMENT DATA
Inventories consisted of the following (in thousands):
SEPTEMBER 30,
2002 2001
------- -------
Raw materials .................. $ 9,377 $ 3,626
Work-in-process ................ 32,639 19,164
Finished goods ................. 13,627 14,593
------- -------
$55,643 $37,383
======= =======
Cost of goods sold for fiscal 2001 includes inventory write-downs of $58.7
million. These write-downs resulted from the sharply reduced end-customer
demand experienced for digital cellular handsets in fiscal 2001. As a
result of these market conditions, the Company experienced a significant
number of order cancellations and a decline in the volume of new orders
during fiscal 2001. The inventories written down during fiscal 2001
principally consisted of power amplifiers and radio frequency subsystem
components which, in many cases, had been purchased or manufactured to
satisfy expected customer demand.
The assessment of the recoverability of inventories, and the amounts of
any write-downs, is based on currently available information and
assumptions about future demand and the market conditions. Demand for
products may fluctuate significantly over time, and actual demand and
market conditions may be more or less favorable than those projected by
management. In the event that actual demand is lower than originally
projected, additional inventory write-downs may be required.
Some or all of the inventories which have been written down may be
retained and made available for sale. In the event that actual demand is
higher than originally projected, a portion of these inventories may be
able to be sold in the future. Inventories which have been written-down
and are identified as obsolete are generally scrapped.
Property, plant and equipment consist of the following (in thousands):
SEPTEMBER 30,
2002 2001
--------- ---------
Land .................................... $ 11,578 $ 8,336
Land and leasehold improvements ......... 6,583 11,730
Buildings ............................... 72,457 18,285
Machinery and equipment ................. 341,702 396,268
Construction in progress ................ 17,162 19,807
--------- ---------
449,482 454,426
Accumulated depreciation and amortization (305,709) (284,879)
--------- ---------
$ 143,773 $ 169,547
========= =========
52
Skyworks Solutions, Inc. and Subsidiaries
Goodwill and intangible assets consist of the following (in thousands):
SEPTEMBER 30,
2002 2001
--------- ---------
Goodwill ......................... $ 905,219 $ 71,412
Developed technology ............. 21,260 5,995
Customer relationships ........... 12,700 --
Trademark ........................ 2,300 --
Other ............................ 122 793
--------- ---------
941,601 78,200
Accumulated depreciation and amortization (915) (20,594)
--------- ---------
$ 940,686 $ 57,606
========= =========
Other current assets consist of the following (in thousands):
SEPTEMBER 30,
2002 2001
------- -------
Prepaid expenses ............... $17,050 $ --
Other .......................... 6,920 3,225
------- -------
$23,970 $ 3,225
======= =======
Other current liabilities consist of the following (in thousands):
SEPTEMBER 30,
2002 2001
------- -------
Accrued merger expenses .................. $42,764 $ --
Product warranty accrual ................. 13,372 3,414
Restructuring charges and exit costs ..... 7,436 --
Accrued take or pay obligations .......... 5,143 --
Other .................................... 15,848 4,390
------- -------
$84,563 $ 7,804
======= =======
NOTE 5 BORROWING ARRANGEMENTS AND COMMITMENTS
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
SEPTEMBER 30,
2002 2001
-------- ------
Conexant Mexicali note ............................. $150,000 $ --
Conexant revolving credit line used ................ 30,000 --
CDBG Grant ......................................... 168 --
-------- ------
180,168 --
Less - current maturities ...................... 129 --
-------- ------
$180,039 $ --
======== ======
On September 30, 2002, the Company had $150 million in short-term promissory
notes payable to Conexant pursuant to a financing agreement entered into in
connection with the purchase of the Mexicali Operations. The notes were secured
by the assets and properties of the Company. Unless paid earlier at the option
of the Company or pursuant to mandatory prepayment provisions contained in the
financing agreement with Conexant, fifty percent of the principal portion of the
short-term promissory notes was due on March 24, 2003, and the remaining fifty
percent of the notes was due on June 24, 2003. Interest on these notes was
payable quarterly at a rate of 10% per annum for the first ninety days following
June 25, 2002, 12% per annum for the next ninety days and 15% per annum
thereafter. Because the Company refinanced these notes, the principal amount was
classified on September 30, 2002 as a long-term note payable. In addition, on
September 30, 2002 the Company had available a short-term $100 million loan
facility from Conexant under the financing agreement to fund the
53
Skyworks Solutions, Inc. and Subsidiaries
Company's working capital and other requirements. $75 million of this facility
became available on or after July 10, 2002, and the remaining $25 million
balance of the facility would have become available if the Company had more than
$150 million of eligible domestic receivables. The entire principal of any
amounts borrowed under the facility was due on June 24, 2003. There were $30
million of borrowings as of September 30, 2002 under this facility. Because the
Company refinanced the amounts borrowed under this loan facility, the principal
amount was classified on September 30, 2002 as a long-term note payable.
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant under the financing agreement. The payments to Conexant retired
$105 million of the $150 million note relating to the purchase of the Mexicali
Operations and repaid the $65 million principal amount outstanding as of
November 13, 2002 under the loan facility, dissolving the $100 million facility
and resulting in the release of Conexant's security interest in all assets and
properties of the Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance was exchanged for a new
15% convertible debt security with a maturity date of June 30, 2005. These
notes can be converted into the Company's common stock at a conversion rate
based on the applicable conversion price, which is subject to adjustment based
on, among other things, the market price of the Company's common stock. Based
on this adjustable conversion price, the Company expects that the maximum
number of shares that could be issued under the note is approximately 7.1
million shares, subject to adjustment for stock splits and other similar
dilutive occurrences.
The Company obtained a ten-year $960,000 loan from the State of Maryland under
the Community Development Block Grant program. Quarterly payments are due
through December 2003 and represent principal plus interest at 5% of the
unamortized balance.
Aggregate annual maturities of long-term debt are as follows (in thousands):
FISCAL YEAR
-----------
2003 ...................................... $ 129
2004 ...................................... 39
2005 ...................................... 45,000
2006 ...................................... --
2007 ...................................... 135,000
--------
$180,168
========
NOTE 6 INCOME TAXES
Loss before income taxes consisted of the following components (in thousands):
YEARS ENDED SEPTEMBER 30,
---------------------------------------
2002 2001 2000
--------- --------- ---------
United States .... $(151,214) $(323,642) $ (67,995)
Foreign .......... (104,439) 6,337 2,656
--------- --------- ---------
$(255,653) $(317,305) $ (65,339)
========= ========= =========
54
Skyworks Solutions, Inc. and Subsidiaries
The provision for income taxes from continuing operations consists of the
following (in thousands):
YEARS ENDED SEPTEMBER 30,
-----------------------------------
2002 2001 2000
-------- -------- --------
Current tax expense
Federal ........................ $ -- $ -- $ --
Foreign ........................ 3,506 1,619 1,140
State .......................... -- -- --
-------- -------- --------
3,506 1,619 1,140
Deferred tax expense (benefit)
Federal ........................ -- -- --
Foreign ........................ (23,095) -- --
State .......................... -- -- --
-------- -------- --------
(23,095) -- --
Net income tax expense (benefit) $(19,589) $ 1,619 $ 1,140
======== ======== ========
The actual income tax expenses (benefits) reported from operations are
different than those which would have been computed by applying the
federal statutory tax rate to income (loss) before income tax expenses
(benefits). A reconciliation of income tax expense (benefit) as computed
at the U.S. Federal statutory income tax rate to the provision for income
tax expense (benefit) as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
---------------------------------------
2002 2001 2000
--------- --------- ---------
Tax (benefit) expense at U.S. statutory rate .... $ (89,479) $(111,057) $ (22,869)
Foreign tax rate difference ..................... 3,529 (599) 210
Nondeductible amortization of intangible assets . 16,151 5,099 1,752
Nondeductible in-process research and development 22,925 -- 8,527
Pre-distribution loss not available to Skyworks . 21,968 -- --
Research and development credits ................ (711) (4,921) (3,937)
State income taxes, net of federal benefit ...... -- (11,672) (3,283)
Change in valuation allowance ................... 5,947 123,466 19,870
Other, net ...................................... 81 1,303 870
--------- --------- ---------
$ (19,589) $ 1,619 $ 1,140
========= ========= =========
55
Skyworks Solutions, Inc. and Subsidiaries
Deferred income tax assets and liabilities consist of the tax effects of
temporary differences related to the following (in thousands):
SEPTEMBER 30,
2002 2001
--------- ---------
Current:
Inventories .................................... $ 14,352 $ 31,836
Deferred revenue ............................... 258 2,779
Accrued compensation and benefits .............. 1,914 1,872
Product returns, allowances and warranty ....... 8,097 3,686
Restructuring .................................. 5,475 --
Deferred state taxes ........................... -- (1,822)
Other - net .................................... 523 1,470
--------- ---------
Current deferred income taxes ............. 30,619 39,821
--------- ---------
Long-term:
Property, plant and equipment .................. 25,712 30,876
Intangible assets .............................. (13,029) (2,337)
Retirement benefits and deferred compensation .. 931 1,299
Net operating loss carryforwards ............... 27,003 125,456
Federal tax credits ............................ 3,904 16,918
State investment credits ....................... 2,672 4,801
Restructuring .................................. 28,297 --
Deferred state taxes ........................... -- (10,071)
Other - net .................................... (416) 531
--------- ---------
Long-term deferred income taxes ........... 75,074 167,473
--------- ---------
Total deferred income taxes ............. 105,693 207,294
--------- ---------
Valuation allowance ..................... (83,206) (207,294)
--------- ---------
Net deferred tax assets ................. $ 22,487 $ --
========= =========
Based upon a history of significant operating losses, management has determined
that it is more likely than not that historic and current year income tax
benefits will not be realized except for certain future deductions associated
with the Mexicali Operations in the post-Merger period. Consequently, no United
States income tax benefit has been recognized relating to the U.S. operating
losses. As of September 30, 2002, we have established a valuation allowance
against all of our net U.S. deferred tax assets. The net change in the valuation
allowance is principally due to Conexant retaining certain tax attributes, i.e.
federal and state net operating loss and credit carryovers. Reduction of a
portion of the valuation allowance may be applied to reduce the carrying value
of goodwill. The portion of the valuation allowance for deferred tax assets for
which subsequently recognized tax benefits will be applied to reduce goodwill
related to the purchase consideration of the Merger with Alpha is approximately
$24 million. Deferred tax assets have been recognized for foreign operations
when management believes they will be recovered during the carry forward period.
We do not expect to recognize any income tax benefits relating to future
operating losses generated in the United States until management determines that
such benefits are more likely than not to be realized. In 2002, the Company
recorded a tax benefit of approximately $23 million related to the impairment of
our Mexicali assets. A valuation allowance has not been established because the
Company believes that the related deferred tax asset will be recovered during
the carry forward period.
To the extent that Washington/Mexicali had filed separate tax returns as of
September 30, 2001, the U.S. federal net operating loss carryforwards would have
been approximately $316.3 million, which would expire at various dates through
2021, and aggregate state net operating loss carryforwards would have been
approximately $295.3 million, which would expire at various dates through 2011.
Washington/Mexicali would also have had U.S. Federal and state research and
development tax credit carryforwards of approximately $11.5 million and $5.4
million, respectively. The U.S. Federal tax credits would expire at various
dates through 2021, while the state credits would have no expiration date.
California Manufacturers' Investment Credits of approximately $4.8 million would
expire at various dates through 2009. These tax attributes include certain
amounts that were retained by Conexant and are not available to be utilized in
the separate tax returns of the combined company subsequent to the Merger and
the combined company's purchase of the Mexicali Operations.
The research and development credits and the net operating losses shown above
that relate to periods prior to the Merger are calculated as if
Washington/Mexicali had filed separate tax returns. These tax attributes include
certain amounts that were retained by Conexant and are not available to be
utilized in the separate tax returns of the combined company subsequent to the
Merger and the combined company's purchase of the Mexicali Operations.
56
Skyworks Solutions, Inc. and Subsidiaries
As of September 30, 2002, the Company has U.S. federal net operating loss
carryforwards of approximately $71.1 million which will expire at various dates
through 2022 and aggregate state net operating loss carryforwards of
approximately $33.4 million which will expire at various dates through 2007. The
Company also has U.S. federal and state income tax credit carryforwards of
approximately $5.7 million. The U.S. federal tax credits expire at various dates
through 2022. The use of the pre-Merger net operating loss and tax credit
carryovers from Alpha will be limited due to statutory tax restrictions
resulting from the Merger and related changes in ownership. The annual limit on
the utilization of pre-merger net operating losses has been estimated at $14
million. Pre-Merger credits would also be subject to the tax equivalent of the
annual net operating loss limitation.
As part of the spin-off and the Merger, Washington, Conexant and Alpha entered
into a tax allocation agreement which provides, among other things, for the
allocation between Conexant and the combined company of certain tax liabilities
relating to the Washington Business. In general, Conexant assumed and is
responsible for tax liabilities of the Washington Business and Washington for
periods prior to the Merger and the combined company has assumed and is
responsible for tax liabilities of the Washington Business for periods after the
Merger. Skyworks' obligations under the tax allocation agreement have been
limited by the letter agreement dated November 6, 2002 entered into as part of
the debt refinancing with Conexant.
NOTE 7 STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue (1) 525,000,000 shares of common stock, par
value $0.25 per share, and (2) 25,000,000 shares of preferred stock, without par
value.
Holders of the Company's common stock are entitled to such dividends as may be
declared by the Company's board of directors out of funds legally available for
such purpose. Dividends may not be paid on common stock unless all accrued
dividends on preferred stock, if any, have been paid or declared and set aside.
In the event of the Company's liquidation, dissolution or winding up, the
holders of common stock will be entitled to share pro rata in the assets
remaining after payment to creditors and after payment of the liquidation
preference plus any unpaid dividends to holders of any outstanding preferred
stock.
Each holder of the Company's common stock is entitled to one vote for each such
share outstanding in the holder's name. No holder of common stock is entitled to
cumulate votes in voting for directors. The Company's second amended and
restated certificate of incorporation provides that, unless otherwise determined
by the Company's board of directors, no holder of common stock has any
preemptive right to purchase or subscribe for any stock of any class which the
Company may issue or sell.
At September 30, 2002 the Company had 137,589,146 shares of common stock issued
and outstanding.
PREFERRED STOCK
The Company's second amended and restated certificate of incorporation permits
the Company to issue up to 25,000,000 shares of preferred stock in one or more
series and with rights and preferences that may be fixed or designated by the
Company's board of directors without any further action by the Company's
stockholders. The designation, powers, preferences, rights and qualifications,
limitations and restrictions of the preferred stock of each series will be fixed
by the certificate of designation relating to such series, which will specify
the terms of the preferred stock.
At September 30, 2002 the Company had no shares of preferred stock issued and
outstanding.
STOCK OPTIONS
The Company has stock option plans under which employees may be granted options
to purchase common stock. Options are generally granted with exercise prices at
not less than the fair market value on the grant date, generally vest over four
years and expire ten years after the grant date. As of September 27, 2002, a
total of 24.1 million shares are authorized for grant under the Company's
long-term incentive plans. The number of common shares reserved for granting of
future awards was 15.9 million at September 30, 2002.
In connection with Conexant's spin-off of Washington, options to purchase shares
of Conexant common stock were adjusted so that immediately following the
spin-off, option holders held options to purchase shares of Conexant common
stock and options to purchase Washington common stock. In connection with the
Merger, those options to purchase shares of Washington common stock were
converted into options to purchase the Company's common stock, par value $0.25
per share. The terms of options to purchase the Company's common stock will be
governed by the Washington Sub, Inc. 2002 Stock Option Plan, which was assumed
by Skyworks in the Merger and which provides that such options will generally
have the same terms and conditions applicable to the original Conexant options.
These options are included in the following schedules and options related to
non-employees are disclosed separately below.
57
Skyworks Solutions, Inc. and Subsidiaries
A summary of stock option transactions follows (shares in thousands):
WEIGHTED AVERAGE
EXERCISE PRICE OF
SHARES SHARES UNDER PLAN
------ -----------------
Balance outstanding prior to the close
of the Merger -- $ --
-------
Recapitalization as a result of the Merger:
Alpha options assumed 8,277 18.97
Conexant options assumed 23,188 20.80
Balance outstanding at June 25, 2002 31,465 $ 20.32
-------
Granted 998 4.69
Exercised (20) 2.08
Cancelled (1,111) 23.35
-------
Balance outstanding at September 30, 2002 31,332 $ 19.73
=======
Options exercisable at the end of each fiscal year (shares in thousands):
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
2002 ................................................. 16,080 $19.86
The following table summarizes information concerning currently outstanding and
exercisable options as of September 30, 2002 (shares in thousands):
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL OUTSTANDING OPTIONS AVERAGE EXERCISE
PRICES OUTSTANDING LIFE (YEARS) OPTION PRICE EXERCISABLE PRICE
------ ----------- ------------ ------------ ----------- -----
$ 0.00 - $9.99 4,056 6.5 $ 6.15 1,529 $ 5.18
$10.00 - $19.99 13,157 5.7 $15.82 7,671 $16.03
$20.00 - $29.99 10,333 6.7 $21.97 5,025 $21.83
$30.00 - $39.99 2,431 5.9 $36.20 1,197 $36.69
$40.00 - $59.99 1,111 7.1 $45.05 525 $45.11
$60.00 - $210.35 244 4.6 $82.41 133 $83.39
------ ------ ------ ------ ------
31,332 6.1 $19.73 16,080 $19.86
====== ====== ====== ====== ======
58
Skyworks Solutions, Inc. and Subsidiaries
RESTRICTED STOCK AWARDS
The Company's long-term incentive plans provide for awards of restricted shares
of common stock and other stock-based incentive awards to officers and other
employees and certain non-employees. Restricted stock awards are subject to
forfeiture if employment terminates during the prescribed retention period
(generally within two years of the date of award) or, in certain cases, if
prescribed performance criteria are not met. The fair value of restricted stock
awards is charged to expense over the vesting period. There were not any
restricted stock grants in fiscal 2002.
STOCK OPTION PLANS FOR DIRECTORS AND OTHER
DIRECTORS
The Company has three stock option plans for non-employee directors -- the 1994
Non-Qualified Stock Option Plan, the 1997 Non-Qualified Stock Option Plan and
the Directors' 2001 Stock Option Plan. Under the three plans, a total of 826,000
shares have been authorized for option grants. The three plans have
substantially similar terms and conditions and are structured to provide options
to non-employee directors as follows: a new director receives a total of 45,000
options upon becoming a member of the Board; and continuing directors receive
15,000 options after each Annual Meeting of Shareholders. Under these plans, the
option price is the fair market value at the time the option is granted.
Beginning in fiscal 2001, all options granted become exercisable 25% per year
beginning one year from the date of grant. Options granted prior to fiscal 2001
become exercisable at a rate of 20% per year beginning one year from the date of
grant. During fiscal 2002, 180,000 options were granted under these plans at a
weighted average price $6.31. At September 30, 2002, a total of 522,000 options,
net of cancellations, have been granted under these three plans. During fiscal
2002, no options were exercised under these plans. At September 30, 2002,
522,000 shares were outstanding and 256,500 shares were exercisable.
Non-employee directors of the Company are also eligible to receive option grants
under the Company's 1996 Long-Term Incentive Plan.
NON-EMPLOYEES RELATED TO THE MERGER
In connection with the Merger, as of September 30, 2002 non-employees, excluding
directors, held 18,184,701 options at a weighted average price of $20.49.
Effective June 25, 2002, a significant portion of Conexant's options outstanding
were converted to Skyworks' options of equivalent value. The conversion of
Conexant options into Skyworks' options was done in such a manner that (1) the
aggregate intrinsic value of the options immediately before and after the
exchange is the same, (2) the ratio of the exercise price per option to the
market value per option is not reduced, and (3) the vesting provisions and
options period of the replacement Skyworks' options are the same as the original
vesting terms and option period of the Conexant options.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains a domestic and an international employee stock purchase
plan. Under these plans, eligible employees may purchase common stock through
payroll deductions of up to 10% of compensation. The price per share is the
lower of 85% of the market price at the beginning or end of each six-month
offering period. The plans provide for purchases by employees of up to an
aggregate of 900,000 shares through December 31, 2006. The Company dissolved its
employee stock purchase plan during the fourth quarter of fiscal 2002 and
implemented a plan with substantially similar terms. Shares of 65,668 were
purchased under this plan in fiscal 2002.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option and employee stock purchase plans. Had compensation cost for the
Company's stock option and stock purchase plans been determined based upon the
fair value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-based
Compensation," the Company's net (loss) income would have been as follows:
Pro forma information regarding net loss is required by SFAS No. 123. This
information is required to be determined as if stock-based awards to employees
had been accounted for under the fair value method of that Statement. Had
compensation cost for stock option awards to employees of the Company been
determined based on the fair value at the grant date for awards in
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Skyworks Solutions, Inc. and Subsidiaries
fiscal 2002 the pro forma net loss would have been approximately $236.6 million.
For purposes of pro forma disclosures under SFAS No. 123, the estimated fair
value of the options is assumed to be amortized to expense over the options'
vesting period. The fair value of the options granted has been estimated at the
date of the grant using the Black-Scholes option pricing model with the
following assumptions:
2002
--------
Expected volatility .......................... 70%
Risk free interest rate ...................... 2.2%
Dividend yield ............................... --
Expected option life (years) ................. 4.5
Weighted average fair value of options granted 1.87
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require input of highly
subjective assumptions, including the expected stock price volatility. Because
options held by employees and directors have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reasonable
measure of the fair value of these options.
STOCK WARRANTS
In connection with the Merger, the Company issued to Jazz Semiconductor, Inc. a
warrant to purchase 1,017,900 shares of Skyworks common stock at a price of
$24.02 per share. This warrant becomes exercisable in increments of 25% as of
June 25, 2002, March 11, 2003, September 11, 2003 and March 11, 2004. The
Company applied the Black-Scholes model to determine the fair value estimate and
approximately $0.2 million was included in fiscal 2002 selling, general and
administrative expenses related to this item. The warrant expires on January 20,
2005.
NOTE 8 EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan covering substantially all of its employees.
All of the Company's employees who are at least 21 years old are eligible to
receive a Company contribution. Discretionary Company contributions are
determined by the Board of Directors and may be in the form of cash or the
Company's stock. The Company contributes a match of 100% of the first 4%. For
fiscal 2002, the Company contributed 128,836 shares of the Company's common
stock valued at $0.6 million to fund the Company's obligation under the 401(k)
plan in fiscal 2002.
Conexant sponsors various benefit plans for its eligible employees, including a
401(k) retirement savings plan, a retirement medical plan and a pension plan.
Expenses allocated from Conexant under these employee benefit plans for
Washington/Mexicali participants prior to the Merger were $1.0 million for
fiscal 2002 and $1.3 million for both fiscal 2000 and 2001, respectively.
NOTE 9 COMMITMENTS
The Company has various operating leases primarily for computer equipment and
buildings. Rent expense amounted to $7.1 million, $4.9 million and $3.7 million
in fiscal 2002, 2001 2000, respectively. Purchase options may be exercised at
various times for some of these leases. Future minimum payments under these
noncancelable leases are as follows (in thousands):
FISCAL YEAR
-----------
2003 ........................................................ $ 6,927
2004 ........................................................ 6,799
2005 ........................................................ 5,624
2006 ........................................................ 4,755
2007 ........................................................ 4,457
Thereafter.................................................... 11,653
----------
$ 40,215
==========
Under supply agreements entered into with Conexant in connection with the
Merger, we will receive wafer fabrication, wafer probe and certain other
services from Jazz Semiconductor's Newport Beach, California foundry, and we
will provide wafer
60
Skyworks Solutions, Inc. and Subsidiaries
fabrication, wafer probe, final test and other services to Conexant at our
Newbury Park facility, in each case, for a three-year period after the Merger.
We will also provide semiconductor assembly and test services to Conexant at our
Mexicali facility.
During the term of one of our supply agreements with Conexant, our unit cost of
goods supplied by Jazz Semiconductor Inc.'s Newport Beach foundry will continue
to be affected by the level of utilization of the Newport Beach foundry joint
venture's wafer fabrication facility and other factors outside our control.
Pursuant to the terms of this supply agreement with Conexant, we are committed
to obtain a minimum level of service from Jazz Semiconductor, Inc., a Newport
Beach, California foundry joint venture between Conexant and The Carlyle Group
to which Conexant contributed its Newport Beach wafer fabrication facility. The
Company's expected minimum purchase obligations under the supply agreement will
be approximately $64 million, $39 million and $13 million in fiscal 2003, 2004
and 2005, respectively. The Company estimated its obligation under this
agreement would result in excess costs of approximately $13.2 million, which was
recorded as a liability and charged to cost of sales in the third quarter of
Fiscal 2002. During the fourth quarter of fiscal 2002, the Company reevaluated
this obligation and reduced its liability and cost of sales by approximately
$8.1 million in the quarter. With the exception of $5.1 million related to
fiscal 2003 purchase obligations, which has been accrued in fiscal 2002, the
Company currently anticipates meeting each of the annual minimum purchase
obligations under the supply agreement with Conexant.
NOTE 10 CONTINGENCIES
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company including those pertaining to product liability,
intellectual property, environmental, safety and health, and employment matters.
Management believes these are adequately provided for or will result in no
significant additional liability to the Company.
On June 8, 2002 Skyworks Technologies, Inc. ("STI"), filed a complaint in the
United States District Court, in the Central District of California, Southern
Division, alleging trademark infringement, false designation of origin, unfair
competition, and false advertising by the Company. Without a material impact to
the financial statements, the Company reached an agreement on this matter with
STI, which includes a release of all pending claims and an arrangement for
mutual coexistence using the name Skyworks.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, third parties have asserted
and may in the future assert patent, copyright, trademark and other intellectual
property rights to technologies that are important to our business and have
demanded and may in the future demand that we license their technology.
The Company has assumed responsibility for all then current and future
litigation (including environmental and intellectual property proceedings)
against Conexant or its subsidiaries in respect of the operations of Conexant's
wireless business in connection with the Merger.
The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could materially
and adversely affect the financial condition or results of operations of the
Company. Based on its evaluation of matters which are pending or asserted, and
taking into account any reserves for such matters, management believes the
disposition of such matters will not have a material adverse effect on the
financial condition or results of operations of the Company.
NOTE 11 SPECIAL CHARGES
ASSET IMPAIRMENTS
During the third quarter of fiscal 2002, the Company recorded a $66.0 million
charge for the impairment of the assembly and test machinery and equipment and
related facility in Mexicali, Mexico. The impairment charge was based on a
recoverability analysis prepared by management as a result of a significant
downturn in the market for test and assembly services for non-wireless products
and the related impact on the Company's current and projected outlook.
The Company has experienced a severe decline in factory utilization at its
Mexicali facility for non-wireless products and projected decreasing revenues
and new order volume. Management believes these factors indicated that the
carrying value of the assembly and test machinery and equipment and related
facility may have been impaired and that an impairment analysis should be
performed. In performing the analysis for recoverability, management estimated
the future cash flows expected to result from the manufacturing activities at
the Mexicali facility over a ten-year period. The estimated future cash flows
were based on a gradual phase-out of services sold to Conexant and modest volume
increases consistent with management's view of the outlook for the business,
partially offset by declining average selling prices. The declines in average
selling prices are consistent with historical trends and management's decision
to reduce capital expenditures for future capacity expansion. Since the
estimated undiscounted cash flows were less than the carrying value
(approximately $100 million based on historical cost) of the related assets, it
was concluded that an impairment loss should be recognized. The impairment
charge was determined by comparing the estimated fair value of the related
assets to their carrying value. The fair value of the assets was determined by
computing the present value of the estimated future cash flows using a discount
rate of 24%, which
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Skyworks Solutions, Inc. and Subsidiaries
management believed was commensurate with the underlying risks associated with
the projected future cash flows. The Company believes the assumptions used in
the discounted cash flow model represented a reasonable estimate of the fair
value of the assets. The write down established a new cost basis for the
impaired assets.
During the third quarter of fiscal 2002, the Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our fiscal 2000 acquisition of the Philsar Bluetooth business. Management has
determined that the Company will not support the technology associated with the
Philsar Bluetooth business. Accordingly, this product line will be discontinued
and the employees associated with the product line have either been severed or
relocated to other operations. As a result of the actions taken, management
determined that the remaining goodwill and other intangible assets associated
with the Philsar acquisition had been impaired.
During the third quarter of fiscal 2001, the Company recorded an $86.2 million
charge for the impairment of the manufacturing facility and related wafer
fabrication machinery and equipment at the Company's Newbury Park, California
facility. This impairment charge was based on a recoverability analysis prepared
by management as a result of the dramatic downturn in the market for wireless
communications products and the related impact on the then-current and projected
business outlook of the Company. Through the third quarter of fiscal 2001, the
Company experienced a severe decline in factory utilization at the Newbury Park
wafer fabrication facility and decreasing revenues, backlog, and new order
volume. Management believed these factors, together with its decision to
significantly reduce future capital expenditures for advanced process
technologies and capacity beyond the then-current levels, indicated that the
value of the Newbury Park facility may have been impaired and that an impairment
analysis should be performed. In performing the analysis for recoverability,
management estimated the future cash flows expected to result from the
manufacturing activities at the Newbury Park facility over a ten-year period.
The estimated future cash flows were based on modest volume increases consistent
with management's view of the outlook for the industry, partially offset by
declining average selling prices. The declines in average selling prices are
consistent with historical trends and management's decision to focus on existing
products based on the current technology. Since the estimated undiscounted cash
flows were less than the carrying value (approximately $106 million based on
historical cost) of the related assets, it was concluded that an impairment loss
should be recognized. The impairment charge was determined by comparing the
estimated fair value of the related assets to their carrying value. The fair
value of the assets was determined by computing the present value of the
estimated future cash flows using a discount rate of 30%, which management
believed was commensurate with the underlying risks associated with the
projected cash flows. The Company believes the assumptions used in the
discounted cash flow model represented a reasonable estimate of the fair value
of the assets. The write-down established a new cost basis for the impaired
assets.
RESTRUCTURING CHARGES
During fiscal 2002, the Company reduced its workforce through involuntary
severance programs and recorded restructuring charges of approximately $3.0
million for costs related to the workforce reduction and the consolidation of
certain facilities. The charges were based upon estimates of the cost of
severance benefits for affected employees and lease cancellation, facility
sales, and other costs related to the consolidation of facilities. Substantially
all amounts accrued for these actions are expected to be paid within one year.
During fiscal 2001, Washington/Mexicali reduced its workforce by approximately
250 employees, including approximately 230 employees in manufacturing
operations. Restructuring charges of $2.7 million were recorded for such actions
and were based upon estimates of the cost of severance benefits for the affected
employees. Substantially all amounts accrued for these actions are expected to
be paid within one year.
Activity and liability balances related to the fiscal 2001 and fiscal 2002
restructuring actions are as follows (in thousands):
Fiscal 2002 Fiscal 2002
Fiscal 2001 workforce facility closings
actions reductions and other Total
------- ---------- --------- -----
Charged to costs and expenses................. $ 2,667
Cash payments................................. (1,943)
Restructuring balance, September 30, 2001..... 724 $ --- $ --- $ 724
Charged to costs and expenses................. 65 2,923 97 3,085
Cash payments................................. (789) (2,225) (13) (3,027)
---------- ---------- ------------ ----------
Restructuring balance, September 30, 2002..... $ --- $ 698 $ 84 $ 782
========= ========= =========== =========
In addition, the Company assumed approximately $7.8 million of restructuring
reserves from Alpha in connection with the Merger. On September 27, 2002 this
balance was $6.7 million and substantially all amounts accrued are expected to
be paid within one year.
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Skyworks Solutions, Inc. and Subsidiaries
NOTE 12 RELATED PARTY TRANSACTIONS
Historically, a significant portion of Conexant's semiconductor product assembly
and test function has been performed by the Mexicali Operations. In addition,
Conexant has purchased certain semiconductor products from the Newbury Park
wafer fabrication facility included in Conexant's wireless business. Revenues
and related costs of goods sold for products manufactured in the Newbury Park
wafer fabrication facility and assembled and tested by the Mexicali Operations
for Conexant have been separately presented in the combined statements of
operations.
The Company has entered into various agreements with Conexant providing for the
supply of gallium arsenide wafer fabrication and assembly and test services to
Conexant, initially at substantially the same volumes as historically obtained
by Conexant from Washington/Mexicali. The Company has also entered into
agreements with Conexant providing for the supply to the Company of transition
services by Conexant and silicon-based wafer fabrication services by Jazz
Semiconductor, Inc., the Newport Beach, California foundry joint venture between
Conexant and The Carlyle Group to which Conexant contributed its Newport Beach
wafer fabrication facility. Historically, Washington/Mexicali has obtained a
portion of its silicon-based semiconductors from the Newport Beach wafer
fabrication facility. Pursuant to the supply agreement with Conexant, the
Company is initially obligated to obtain certain minimum volume levels from Jazz
Semiconductor based on a contractual agreement between Conexant and Jazz
Semiconductor. Our expected minimum purchase obligations under this supply
agreement are anticipated to be approximately $64 million, $39 million and $13
million in fiscal 2003, 2004 and 2005, respectively. The Company estimates that
its minimum purchase obligation under this agreement will result in excess costs
of approximately $5.1 million and has recorded this liability and charged to
cost of sales in fiscal 2002.
Under transition services agreements with Conexant entered into in connection
with the Merger, Conexant will continue to perform various research and
development services for the Company at actual cost generally until December 31,
2002, unless the parties otherwise agree. To the extent the Company uses these
services subsequent to the expiration of the specified term, the pricing is
subject to negotiation.
NOTE 13 SEGMENT INFORMATION
The Company operates in one business segment, which designs, develops,
manufactures and markets proprietary semiconductor products and system solutions
for manufacturers of wireless communication products.
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and in interim reports to shareholders. The method
for determining what information to report is based on the way that management
organizes the segments within the Company for making operating decisions and
assessing financial performance. In evaluating financial performance, management
uses sales and operating profit as the measure of the segments' profit or loss.
Based on the guidance in SFAS No. 131, the Company has one operating segment for
financial reporting purposes.
Geographic Information
Net revenues from customers other than Conexant by geographic area are presented
based upon the country of destination. Net revenues from customers other than
Conexant by geographic area are as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
------------------------------------
2002 2001 2000
-------- -------- --------
United States ..................... $ 32,760 $ 18,999 $ 32,726
Other Americas .................... 4,615 5,455 8,146
-------- -------- --------
Total Americas ............ 37,375 24,454 40,872
South Korea ........................ 237,681 142,459 167,269
Other Asia-Pacific ................. 114,974 23,898 46,255
-------- -------- --------
Total Asia-Pacific ........ 352,655 166,357 213,524
Europe, Middle East and Africa ..... 28,314 24,691 58,587
-------- -------- --------
$418,344 $215,502 $312,983
======== ======== ========
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Skyworks Solutions, Inc. and Subsidiaries
Long-lived assets principally consist of property, plant and equipment, goodwill
and intangible assets. Long-lived assets by geographic area are as follows (in
thousands):
SEPTEMBER 30,
--------------------------------
2002 2001
---------- ----------
Assets
United States .................... $1,063,163 $ 44,539
Mexico ........................... 52,730 126,730
Canada ........................... 387 58,373
Other ............................ 3,236 1,285
---------- ----------
$1,119,516 $ 230,927
========== ==========
NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
=========================================================================================================
FISCAL 2002
Sales ................ $ 93,760 $ 100,356 $ 112,980 $ 150,673 $ 457,769
Gross profit ......... 15,954 29,433 20,063 60,711 126,161
Net loss ............. (34,297) (18,339) (181,945) (1,483) (236,064)
Per share data (1)
Net loss basic ... -- -- (1.33) (0.01) (1.72)
Net loss diluted . -- -- (1.33) (0.01) (1.72)
FISCAL 2001
Sales ................ $ 85,496 $ 57,503 $ 51,045 $ 66,407 $ 260,451
Gross profit ......... (7,020) (46,426) (12,414) 14,808 (51,052)
Net loss ............. (53,964) (100,160) (142,425) (22,375) (318,924)
=========================================================================================================
(1) Earnings per share calculations for each of the quarters are based
on the weighted average number of shares outstanding and included
common stock equivalents in each period. Prior to the Merger with
Alpha Industries, Inc., Conexant's wireless business had no separate
capitalization, therefore a calculation cannot be performed for
weighted average shares outstanding to then calculate earnings per
share.
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Skyworks Solutions, Inc. and Subsidiaries
NOTE 15 SUBSEQUENT EVENT
On November 13, 2002, the Company successfully closed a private placement of
$230 million of 4.75 percent convertible subordinated notes due 2007. These
notes can be converted into 110.4911 shares of common stock per $1,000 principal
balance, which is the equivalent of a conversion price of approximately $9.05
per share. The net proceeds from the note offering were principally used to
prepay debt owed to Conexant under a financing agreement entered into with
Conexant immediately following the Merger. The payments to Conexant retired $105
million of the $150 million note relating to the purchase of the Mexicali
Operations and repaid the $65 million principal amount outstanding as of
November 13, 2002 under the loan facility, dissolving the $100 million facility
and resulting in the release of Conexant's security interest in all assets and
properties of the Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance on the note was
exchanged for new 15% convertible debt securities with a maturity date of June
30, 2005. These notes can be converted into the Company's common stock at a
conversion rate based on the applicable conversion price, which is subject to
adjustment based on, among other things, the market price of the Company's
common stock. Based on this adjustable conversion price, the Company expects
that the maximum number of shares that could be issued under the note is
approximately 7.1 million shares, subject to adjustment for stock splits and
other similar dilutive occurrences.
In addition to the retirement of $170 million in principal amount of
indebtedness owing to Conexant, the Company also retained approximately $53
million of net proceeds of the private placement to support its working capital
needs.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Alpha's independent accountant was KPMG LLP ("KPMG") and Washington/Mexicali's
independent accountant was Deloitte & Touche LLP ("Deloitte & Touche"). KPMG has
continued to serve as the Company's independent accountant after consummation of
the Merger. Because the Merger is being accounted for as a reverse acquisition,
the financial statements of Washington/Mexicali constitute the financial
statements of the Company as of the consummation of the Merger. Therefore, upon
the consummation of the Merger on June 25, 2002, there was a change in the
independent accountant for the Company's financial statements from Deloitte &
Touche to KPMG, and accordingly, Deloitte & Touche was dismissed as the
Company's independent accountant.
The reports of Deloitte & Touche on Washington/Mexicali's financial statements
for the fiscal years ended September 30, 2000 and 2001 did not contain an
adverse opinion or a disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change accountants was approved by the Board of Directors.
During Washington/Mexicali's fiscal years ended September 30, 2000 and September
30, 2001 and through the subsequent interim period to June 25, 2002,
Washington/Mexicali did not have any disagreement with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure that, if not resolved to Deloitte & Touche's
satisfaction, would have caused Deloitte & Touche to make reference to the
subject matter of the disagreement in connection with its report. During that
time, there were no "reportable events" as set forth in Item 304(a)(1)(v)(A)-(D)
of Regulation S-K ("Regulation S-K") adopted by the SEC.
KPMG (or its predecessors) has been the Alpha's independent accountant since
1975 and Alpha has regularly consulted KPMG (or its predecessors) since that
time. Washington/Mexicali, as the continuing reporting entity for accounting
purposes, has not consulted KPMG during Washington/Mexicali's last two fiscal
years and through the interim period to June 25, 2002 regarding any of the
matters specified in Item 304(a)(2) of Regulation S-K.
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Skyworks Solutions, Inc. and Subsidiaries
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our directors
and executive officers during fiscal 2002:
Dwight W. Decker (3) 52 Chairman of the Board
David J. Aldrich (3) 45 President, Chief Executive Officer and Director
Paul E. Vincent 55 Vice President, Treasurer, Secretary and Chief Financial Officer
Kevin D. Barber 42 Senior Vice President, Operations
Liam K. Griffin 36 Vice President, Sales and Marketing
George M. LeVan 56 Vice President, Human Resources
Donald R. Beall (2) 63 Director
Moiz M. Beguwala (2) 56 Director
Timothy R. Furey (2) 44 Director
Balakrishnan S. Iyer (1) 46 Director
Thomas C. Leonard (1) 68 Director
David J. McLachlan (3) 64 Director
(1) Class I Director whose term expires at the 2002 Annual Meeting of our
Stockholders
(2) Class II Director whose term expires at the 2003 Annual Meeting of our
Stockholders
(3) Class III Director whose term expires at the 2004 Annual Meeting of our
Stockholders
DWIGHT W. DECKER, age 52, has been Chairman of the Board since June 2002. Mr.
Decker has also served as chairman of the board and Chief Executive Officer of
Conexant since November 1998. He served as senior vice president of Rockwell
International Corporation (electronic controls and communications) and
president, Rockwell Semiconductor Systems from July 1998 to December 1998;
Senior Vice President of Rockwell and president, Rockwell Semiconductor Systems
(now Conexant) and Electronic Commerce from March 1997 to July 1998; and
President, Rockwell Semiconductor Systems from October 1995 to March 1997. Mr.
Decker has been a director of Conexant since its incorporation in 1996.
DAVID J. ALDRICH, age 45, has served as Chief Executive Officer, President and
Director since April 2000. From September 1999 to April 2000, Mr. Aldrich served
as President and Chief Operating Officer. From May 1996 to May 1999, when he was
appointed Executive Vice President, Mr. Aldrich served as Vice President and
General Manager of the semiconductor products segment. Mr. Aldrich joined us in
1995 as our Vice President, Chief Financial Officer and Treasurer. From 1989 to
1995, Mr. Aldrich held senior management positions at M/A-COM, Inc., a developer
and manufacturer of radio frequency and microwave semiconductors, components and
IP networking solutions, including Manager Integrated Circuits Active Products,
Corporate Vice President Strategic Planning, Director of Finance and
Administration and Director of Strategic Initiatives with the Microelectronics
Division.
PAUL E. VINCENT, age 55, joined us as Controller in 1979 and has been Vice
President and Chief Financial Officer since January 1997. Mr. Vincent was
elected Secretary in September 1999. Prior to joining us, Mr. Vincent worked at
Applicon Incorporated and, prior to that, Arthur Andersen & Co. Mr. Vincent is a
CPA.
KEVIN D. BARBER, age 42, has served as Senior Vice President, Operations since
June 2002. Mr. Barber served as Senior Vice President, Operations of Conexant
from February 2001 to June 2002; Vice President, Internal Manufacturing from
August 2000 to February 2001; Vice President, Device Manufacturing from March
1999 to August 2000; Vice President, Strategic
66
Skyworks Solutions, Inc. and Subsidiaries
Sourcing from November 1998 to March 1999; and Director, Material Sourcing of
Rockwell Semiconductor Systems (now Conexant) from May 1997 to November 1998.
LIAM K. GRIFFIN, age 36, has served as Vice President, Sales and Marketing since
August 2001. Previously, Mr. Griffin was employed by Vectron International, a
division of Dover Corp., as Vice President of Worldwide Sales from 1997 to 2001,
and as Vice President of North American sales from 1995 to 1997. His prior
experience included positions as a marketing manager at AT&T Microelectronics,
Inc. and product and process engineer at AT&T Network Systems.
GEORGE M. LEVAN, age 56, has served as Vice President, Human Resources since
June 2002. Previously, Mr. LeVan served as Director, Human Resources, from 1991
to 2002 and has managed our human resource department since joining us in 1982.
Prior to 1982, he held human resource positions at Data Terminal Systems, Inc.,
W.R. Grace & Co., Compo Industries, Inc. and RCA.
DONALD R. BEALL, age 63, has been a Director since June 2002. He served as a
director of Rockwell International Corporation from February 1978 to February
2001. He was Chairman of the Board of Rockwell from February 1988 to February
1998 and Chief Executive Officer of Rockwell from February 1988 to September
1997. Mr. Beall has also been a director of Conexant since 1998 and of Rockwell
Collins, Inc., an avionics and communications company since June 2001. In
addition to being a director of Rockwell Collins and Conexant, Mr. Beall is a
director of The Procter & Gamble Company and a former director of Amoco
Corporation, ArvinMeritor, Inc., Rockwell and The Times Mirror Company. He is a
trustee of California Institute of Technology, a member of the Foundation Board
of Trustees at the University of California, Irvine and an overseer of the
Hoover Institution. He is also a member of The Business Council and numerous
professional, civic and entrepreneurial organizations.
MOIZ M. BEGUWALA, age 56, has been a Director since June 2002. He is an
executive employee of Conexant. He served as Senior Vice President and General
Manager Wireless Communications of Conexant from January 1999 to June 2002.
Prior to Conexant's spin-off from Rockwell International Corporation, Mr.
Beguwala served as Vice President and General Manager Wireless Communications
Division, Rockwell Semiconductor Systems, Inc. from October 1998 to December
1998; Vice President and General Manager Personal Computing Division, Rockwell
Semiconductor Systems, Inc. from January 1998 to October 1998; and Vice
President, Worldwide Sales, Rockwell Semiconductor Systems, Inc. from October
1995 to January 1998.
TIMOTHY R. FUREY, age 44, has been a Director since 1998. He also serves as
chief executive officer of MarketBridge, a privately-owned sales and marketing
strategy and technology professional services firm, since 1991. Prior to 1991,
Mr. Furey held a variety of consulting positions with Boston Consulting Group,
Strategic Planning Associates, Kaiser Associates and the Marketing Science
Institute.
BALAKRISHNAN S. IYER, age 46, has been a Director since June 2002. He also has
served as Senior Vice President and Chief Financial Officer of Conexant since
December 1998 and as a director of Conexant since February 2002. Prior to
joining Conexant, Mr. Iyer served as senior vice president and chief financial
officer of VLSI Technology Inc. Prior to that, he was corporate controller for
Cypress Semiconductor Corp. and Director of Finance for Advanced Micro Devices.
THOMAS C. LEONARD, age 68, has been a Director since August 1996. From April
2000 until June 2002 he served as Chairman of the Board. From September 1999 to
April 2000, he served as Chief Executive Officer. From July 1996 to September
1999, he served as President and Chief Executive Officer. Mr. Leonard joined us
in 1992 as a Division General Manager and was elected a Vice President in 1994.
Mr. Leonard has over thirty years' experience in the microwave industry, having
held a variety of executive and senior level management and marketing positions
at M/A-COM, Inc., Varian Associates, Inc. and Sylvania. Mr. Leonard is a
director of the Massachusetts Telecommunications Council.
DAVID J. MCLACHLAN, age 64, has been a Director since 2000. He also was the
Executive Vice President and Chief Financial Officer of Genzyme Corporation, a
biotechnology company, from 1989 to 1999. Mr. McLachlan is currently a senior
adviser to Genzyme's chairman and chief executive officer. Prior to joining
Genzyme, Mr. McLachlan served as Vice President, Finance of Adams-Russell
Company, an electronic component supplier and cable television franchise owner.
Mr. McLachlan also serves on the boards of directors of Dyax Corporation, a
biotechnology company, and HEARx, Ltd., a hearing care services company.
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Skyworks Solutions, Inc. and Subsidiaries
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers to file reports of holdings and
transactions of securities of the Company with the SEC. Based on Company
records, and other information, the Company believes that all SEC filing
requirements applicable to its directors and executive officers with respect to
the Company's fiscal year ended September 27, 2002 were met, except that (i)
George M. LeVan, upon his appointment as an executive officer of the Company,
failed to timely file one Form 3, and (ii) Dwight W. Decker, the Chairman of the
Board, filed an amended Form 3 to disclose ownership of certain options to
purchase shares of the Company's common stock that were not reflected on his
original Form 3.
ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents information about total compensation received
during the last three completed fiscal years by the Chief Executive Officer and
the four next most highly compensated persons serving as executive officers for
the periods indicated, except as noted in the footnotes below (the "Named
Executives").
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL STOCK UNDERLYING ALL OTHER
POSITION YEAR (1) SALARY BONUS AWARDS (#) OPTION (#) COMPENSATION (2)
-------- ------ ----- ---------- ---------- ----------------
David J. Aldrich .................... 2002-S $174,462 $ -- -- 475,000
President and Chief Executive Officer 2002 $351,154 $ -- -- 160,000 $ 8,922
2001 $336,615 $ -- -- 150,000 $ 8,550
2000 $278,269 $284,800 -- 120,000 $ 6,839
Kevin D. Barber ..................... 2002(3) $253,846 $ -- -- 84,552 $ 7,685
Senior Vice President, Operations ... 2001(3) $232,766 $ 74,850 -- 14,304 $ 26,711(4)
2000(3) $185,099 $ -- -- 12,280 $ 6,345
Liam K. Griffin ..................... 2002-S $115,885 $ -- -- 100,000
Vice President, Sales and Marketing . 2002 $130,039 $ 25,000 (5) -- 100,000 $ 1,062
Richard Langman ..................... 2002-S $118,728 $ -- -- 60,000
Vice President, Ceramic Products and 2002 $244,731 $ -- -- 45,000 $ 7,369
President of Trans-Tech, Inc. ....... 2001 $223,846 -- 42,000 $ 5,169
2000 $223,269 $ 173,000 -- 20,000 $ 63,620(6)
Paul E. Vincent ..................... 2002-S $112,431 $ -- -- 90,000
Vice President and .................. 2002 $226,385 $ -- -- 50,000 $ 8,956
Chief Financial Officer ............. 2001 $217,462 $ -- -- 60,000 $ 9,681
2000 $190,192 $186,400 -- 50,000 $ 8,571
(1) References to 2002-S refer to the period beginning March 29, 2002 and
ending September 27, 2002. References to the Company's 2002, 2001 and 2000
fiscal years refer to the fiscal years of Alpha ended March 31, 2002,
April 1, 2001 and April 2, respectively. In connection with the Merger on
June 25, 2002, the Company changed its fiscal year-end from the Sunday
closest to March 31 to the Friday closest to September 30.
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Skyworks Solutions, Inc. and Subsidiaries
(2) "All Other Compensation" includes service awards and the Company's
contributions to the executive officer's 401(k) plan account (including
contributions for the fourth quarter of each fiscal year, which were
included in the year of accrual but not distributed until the subsequent
fiscal year).
(3) Mr. Barber joined the Company as an executive officer in connection with
the Merger on June 25, 2002. Prior to June 25, 2002, Mr. Barber was an
executive officer of Washington/Mexicali. References to the fiscal year
for Mr. Barber refer to the fiscal year of Skyworks ending September 27,
2002 and the prior fiscal years of Washington/Mexicali ended September
2001, and September 2000.
(4) Includes Washington/Mexicali's and Skyworks' contributions to the
executive officer's 401(k), and a $21,154 cashout of accrued vacation.
(5) In connection with his joining the Company in July 2001, Mr. Griffin
received a sign-on bonus and a grant of Company stock options.
(6) Includes $42,384 for relocation expenses paid to Mr. Langman during 2000.
The following tables provide information about stock options granted and
exercised by each of the Named Executives in fiscal 2002 and the value of
options held by each at September 27, 2002:
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Potential Realizable
Securities Total Value at Assumed
Underlying Options Exercise Annual Rates of Stock
Options Granted to or Base Price Appreciation for
Granted Employees in Price Expiration Option Term
Name (#) Fiscal Year ($ / Share) Date 5% 10%
- ---- --- ----------- ----------- ---- -- ---
David J. Aldrich 175,000 5.13 $12.65 4/25/2012 $1,392,215 $3,528,147
300,000 8.80 $ 4.99 6/26/2012 $ 941,455 $2,385,832
Kevin D. Barber 75,000 2.20 $ 4.99 6/26/2012 $ 235,364 $ 596,458
Liam K. Griffin 50,000 1.47 $12.65 4/25/2012 $ 397,776 $1,008,042
50,000 1.47 $ 4.99 6/26/2012 $ 156,909 $ 397,639
Richard Langman 45,000 1.32 $12.65 4/25/2012 $ 357,998 $ 907,238
15,000 0.44 $ 4.99 6/26/2012 $ 47,073 $ 119,292
Paul E. Vincent 50,000 1.47 $12.65 4/25/2012 $ 397,776 $1,008,042
40,000 1.17 $ 4.99 6/26/2012 $ 125,527 $ 318,111
The options vest at a rate of 25% per year commencing one year after the date of
grant, provided the holder of the option remains employed by the Company.
Options may not be exercised beyond three months after the holder ceases to be
employed by the Company, except in the event of termination by reason of death,
retirement or permanent disability, in which event the option may be exercised
for specific periods not exceeding one year following termination. The assumed
annual rates of stock price appreciation stated in the table are dictated by
regulations of the Securities and Exchange Commission, and are compounded
annually for the full term of the options; actual outcomes may differ.
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Skyworks Solutions, Inc. and Subsidiaries
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Number of Securities Value of Unexercised
Shares Underlying In-The-Money
Acquired On Value Unexercised Options at Options at
Exercise Realized September 27, 2002 (#) September 27, 2002 ($)
--------------------------- ----------------------------
(#) ($) Exercisable Unexercisable Exercisable Unexercisable
--- --- ----------- ------------- ----------- -------------
David J. Aldrich -- $ -- 256,000 733,000 $ 116,736 $ 14,670
Kevin D. Barber -- $ -- 44,694 126,609 $ -- $ --
Liam K. Griffin -- $ -- 25,000 175,000 $ -- $ --
Richard Langman -- $ -- 156,250 122,750 $ 272,000 $ --
Paul E. Vincent -- $ -- 88,500 189,500 $ 52,704 $ 11,736
The values of unexercised options in the foregoing table are based on the
difference between the $4.77 closing price of Skywork's common stock at
September 27, 2002, the end of the 2002 fiscal year, on the Nasdaq National
Market, and the respective option exercise price.
EXECUTIVE COMPENSATION
Our executives are eligible for awards of nonqualified stock options, incentive
stock options and restricted stock awards under our applicable stock option
plans. These stock options plans are administered by the Compensation Committee
of the Board of Directors. Generally, the exercise price at which an executive
may purchase Skyworks' common stock pursuant to a stock option is the fair
market value of Skyworks' common stock on the date of grant. Stock options are
granted subject to restrictions on vesting, with equal portions of the total
grant generally vesting over a period of four years. Our stock options are
subject to forfeiture (after certain grace periods) upon termination of
employment, retirement, disability or death. Restricted stock awards involve the
issuance of shares of common stock which may not be transferred or otherwise
encumbered, subject to certain exceptions, for varying amounts of time, and
which will be forfeited, in whole or in part, if the executive terminates his or
her employment with Skyworks. No restricted stock awards were made in fiscal
2002; stock option grants to the Named Executives during the fiscal year are
discussed above under the caption "Option Grants in Last Fiscal Year".
Senior executives of the Company are also eligible to receive target incentive
compensation under which a percentage of each executive's total cash
compensation is tied to the accomplishment of specific financial objectives
during the 2002 fiscal year. As a result of a challenging economic and business
environment during the fiscal year, the Company did not achieve the annual
performance targets set by the Board of Directors, and no incentive bonuses were
paid to senior executives with respect to fiscal 2002. Senior executives also
may participate in the Company's Executive Compensation Plan (the "Executive
Compensation Plan"), an unfunded, non-qualified deferred compensation plan,
under which participants may defer a portion of their compensation. Deferred
amounts are held in a trust. Participants defer recognizing taxable income on
the amount held for their benefit until the amounts are paid. The Company, in
its sole discretion, may make additional contributions to the accounts of
participants. Participants normally receive the deferred amounts upon
retirement. Special rules are provided for distributions in the case of a
participant's death or disability, a change in control of the Company, early
retirement, and unforeseen emergencies. The Named Executives each participated
in the Executive Compensation Plan during the 2002 fiscal year. The Company did
not make any discretionary contributions to their accounts during fiscal 2002.
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Skyworks Solutions, Inc. and Subsidiaries
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
developing and making recommendations with respect to executive compensation.
The Compensation Committee determines the compensation to be paid to the Chief
Executive Officer of Skyworks and each of the Company's executives who report
directly to him (the "Senior Executives").
The objective of the Compensation Committee in determining the type and amount
of executive compensation is to provide a level of compensation that allows
Skyworks to attract and retain superior talent, to achieve its business
objectives, and to align the financial interests of the Senior Executives with
the stockholders of Skyworks. The elements of compensation for the Senior
Executives are base salary, short-term cash incentives, long-term stock-based
incentives and retirement plans.
Compensation for Skyworks' Chief Executive Officer and the other Senior
Executives, including salary and short- and long-term incentives, is established
at levels competitive with the compensation of comparable executives in similar
companies. The Compensation Committee periodically utilizes studies from
independent compensation experts on executive compensation in comparable high
technology and semiconductor companies. Based on these studies, the Compensation
Committee establishes base salaries, and target incentive bonuses and stock
option compensation, so as to set the combined value near the median of the
range indicated by the studies. In establishing individual compensation, the
Compensation Committee considers the individual experience and performance of
the executive, as well as the performance of Skyworks. The Compensation
Committee also considers the recommendations of the Chief Executive Officer
regarding the salaries of the other Senior Executives.
Short-term incentive compensation for each Senior Executive is established
annually by the Compensation Committee, by tying a portion of each Senior
Executive's total cash compensation to the accomplishment of specific financial
objectives. The Compensation Committee established aggressive forward-looking
incentive targets for Skyworks' Senior Executives for fiscal 2002. As a result
of a challenging business environment in that time period, the Company did not
achieve these targets. Taking this and other factors into account, no short-term
incentive compensation was awarded to Skyworks' Senior Executives for fiscal
2002.
Long-term, stock-based compensation has been provided to Senior Executives under
Skyworks' long-term incentive plan ("the LTIP"). Under the LTIP, the
Compensation Committee has, in the past, awarded nonqualified stock options, and
incentive stock options. It also has the ability to offer restricted stock
awards. Restricted stock awards involve the issuance of shares of common stock
that may not be transferred or otherwise encumbered, subject to certain
exceptions, for varying amounts of time, and which will be forfeited, in whole
or in part, if the employee terminates his or her employment with Skyworks.
These programs are intended to tie the value of the Senior Executive's
compensation to the long-term value of Skyworks' common stock.
Skyworks also permits executives and other employees to purchase Skyworks common
stock at a discount through the Company's Employee Stock Purchase Plan.
Skyworks' executives may also participate in the Company's 401(k) Plan, under
which Skyworks' employer contribution has in recent years been made in the form
of Skyworks common stock.
The stock ownership afforded under the LTIP, the Employee Stock Purchase Plan
and the 401(k) Plan encourages Skyworks' executives to acquire, long-term stock
ownership positions, and helps to align the executives' interests with
stockholders' interests.
A final component of executive compensation provides executives with a means to
defer recognition of income. Executives designated by the Compensation Committee
may participate in the Skyworks Executive Compensation Plan, which is discussed
under "Executive Compensation Plan" in the Proxy Statement.
The Compensation Committee established the compensation of Mr. Aldrich,
President and Chief Executive Officer, under the same criteria used to determine
the compensation of the other Senior Executives, as described above. Mr.
Aldrich's compensation was linked to Skyworks' performance during the fiscal
year by structuring a substantial portion of his compensation in the form of
stock options and a target incentive bonus based on the accomplishment of
specific financial objectives. Mr. Aldrich's total compensation plan for fiscal
2002 was in the middle range of those for chief executive officers of similar
companies, according to studies prepared by independent compensation
consultants. During fiscal 2002, Mr. Aldrich received a salary of $360,000 and
options to purchase 475,000 shares of common stock at the fair market value of
Skyworks common stock on the dates of the option grants. As a result of the
challenging business environment that persisted during the fiscal year, Skyworks
did not exceed the performance targets that the Board had established in Mr.
Aldrich's compensation plan, and no incentive bonus was awarded to Mr. Aldrich
for fiscal 2002.
Section 162(m) of the Internal Revenue Code limits the tax deductibility by a
publicly held corporation of compensation in excess of $1 million paid to
certain of its executive officers. However, this deduction limitation does not
apply to certain "qualified performance-based compensation" within the meaning
of the Internal Revenue Code and the regulations promulgated thereunder. The
Compensation Committee has considered the limitations on deductions imposed by
Section 162(m), and it is The Compensation Committee's intention to structure
executive compensation to minimize the application of the deduction limitations
of Section 162(m) insofar as consistent with the Compensation Committee's
overall compensation objectives.
Based on the recommendations of the Compensation Committee, Skyworks has entered
into severance agreements with certain Senior Executives. Such agreements do not
guarantee salary, position or benefits, but provide salary continuation and
other benefits in the event of a termination after a change in control or
certain other terminations, as described under the heading "Employment and
Severance Agreements" in this Form 10-K.
THE COMPENSATION COMMITTEE
Donald R. Beall, Chairman
Timothy Furey
COMPENSATION OF DIRECTORS
Directors who are not employees of Skyworks are paid a quarterly retainer of
$7,500 plus an additional $1,000 for each Board meeting attended in person or
$500 for each Board meeting attended by telephone. Directors who serve as
chairman of a committee of the Board of Directors receive an additional
quarterly retainer of $625, and those who serve on a committee but are not
chairman receive an additional quarterly retainer of $312.50. In addition, each
new non-employee director receives an option to purchase 45,000 shares of common
stock immediately following the earlier of Skyworks' Annual Meeting of
Stockholders at which the director is first elected by the stockholders or
following his initial appointment by the Board of Directors. In addition,
following each Annual Meeting of Stockholders each director who is continuing in
office or re-elected receives an option to purchase 15,000 shares of common
stock. The exercise price of stock options granted to directors is the fair
market value on the day of grant. During fiscal 2001 and prior years, option
grants to directors were made from the 1994 and 1997 Non-Qualified Stock Option
Plans for Non-Employee Directors. Stock option grants to directors for fiscal
2002 were made under the 2001 Directors' Stock Option Plan. Non-employee
directors of the Company are also eligible to receive option grants under the
Company's 1996 Long-Term Incentive Plan.
In connection with the Merger and their appointment to the Board of Directors,
each of Messrs. Beall, Beguwala, Decker and Iyer were granted an option to
purchase 45,000 shares of common stock on June 25, 2002 at the fair market value
thereof under our Directors' 2001 Stock Option Plan.
In connection with the Merger and their continued service on the Board of
Directors, each of Messrs. Furey, Leonard and McLachlan were granted an option
to purchase 45,000 shares of common stock on August 1, 2002 at the fair market
value thereof under our 1996 Long-Term Incentive Plan. Messrs. Furey, Leonard
and McLachlan were not granted any options to purchase shares of common stock
under our Directors' 2001 Stock Option Plan during the fiscal year ended
September 27, 2002.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company does not have any employment agreements with any of the Named
Executives. The Company has severance agreements with the Messrs. Aldrich,
Langman and Vincent under which each is entitled to receive various benefits in
the event that his employment is terminated within two years after a change in
control of Alpha, or if his employment is terminated by Alpha at any time
without good cause. In these cases, the officer will receive two years of salary
continuation, and all of the officer's stock options will vest immediately. Mr.
Aldrich's severance agreement provides that he is also entitled to various
benefits in the event he voluntarily terminates his employment for certain
reasons. The term of these agreements is indefinite.
STOCK PERFORMANCE GRAPH
The following graph shows the change in Skyworks' cumulative total stockholder
return for the last five fiscal years, based upon the market price of Skyworks'
common stock, compared with: (i) the cumulative total return on the Standard &
Poor's 500 Index and (ii) the Standard & Poor's 500 Semiconductor Index. The
graph assumes a total initial investment of $100 as of September 27, 1997, and
shows a "Total Return" that assumes reinvestment of dividends, if any, and is
based on market capitalization at the beginning of each period.
[TOTAL SHAREHOLDER RETURNS LINE GRAPH]
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Skyworks Solutions, Inc. and Subsidiaries
ANNUAL RETURN PERCENTAGE TABLE
Years Ended September 30,
Company/Index 1998 1999 2000 2001 2002
------------- ---- ---- ---- ---- ----
Skyworks Solutions, Inc. (38.5) 643.8 20.8 (43.1) (76.6)
S&P 500 Index (9.1) 27.8 13.3 (26.6) (20.5)
S&P 500 Semiconductors (13.3) 93.5 31.3 (60.1) (36.4)
INDEXED RETURNS TABLE
Years Ended September 30,
Company/Index Base Period
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Skyworks Solutions, Inc. 100 61.5 457.4 552.4 314.1 73.5
S&P 500 Index 100 109.1 139.4 157.9 115.9 92.1
S&P 500 Semiconductors 100 86.7 167.8 220.2 86.5 55.0
The stock price information shown on the above stock performance graph, annual
return percentage table and indexed returns table are not necessarily indicative
of future price performance. Information used on the graph and in the tables was
obtained from Standard & Poor's, a source believed to be reliable, but the
Company is not responsible for any errors or omissions in such information.
Skyworks' common stock is traded on the Nasdaq National Market under the symbol
"SWKS". Prior to June 25, 2002 Skyworks' common stock was traded on the Nasdaq
National Market under the symbol "AHAA".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Mr. Beall and
Mr. Furey, each of whom are outside directors. No member of this committee was
at any time during the past fiscal year an officer or employee of the Company,
was formerly an officer of the Company or any of its subsidiaries, or had any
employment relationship with the Company. During the last fiscal year, none of
the Company's executive officers served as:
- a member of the compensation committee (or other committee of the
board of directors performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served on the
Compensation Committee of the Company;
- a director of another entity one of whose executive officers served
on the Compensation Committee of the Company; or
- a member of the compensation committee (or other committee of the
board of directors performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served as a director
of the Company.
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Skyworks Solutions, Inc. and Subsidiaries
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of the Company's common
stock as of December 04, 2002 by the following individuals or entities: (i) each
person who beneficially owns 5% or more of the outstanding shares of the
Company's common stock as of December 4, 2002; (ii) the Named Executives; (iii)
each director and nominee for director; and (iv) all current executive officers
and directors of the Company, as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. As
of December 4, 2002, there were 137,899,732 shares of Skyworks common stock
issued and outstanding.
In computing the number of shares of Company common stock beneficially owned by
a person and the percentage ownership of that person, shares of Company common
stock that will be subject to options held by that person that are currently
exercisable or that are exercisable within 60 days of January 10, 2002 are
deemed outstanding. These shares are not, however, deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Number of Shares
Names and Addresses of Beneficial Owners (1) Beneficially Owned (2) Percent of Class
- ----------------------------------------- ---------------------- ----------------
David J. Aldrich 311,224(3) (*)
Kevin D. Barber 63,888(3)(4) (*)
Donald R. Beall 469,682(4)(5) (*)
Moiz M. Beguwala 328,388(4) (*)
Dwight W. Decker 1,186,578(4) (*)
Timothy R. Furey 77,250 (*)
Liam K. Griffin 26,954(3) (*)
Balakrishnan Iyer 300,801(4) (*)
Richard Langman 169,555 (*)
Thomas C. Leonard 100,951(3) (*)
George M. LeVan 53,228(3) (*)
David J. McLachlan 28,850(2) (*)
Paul E. Vincent 162,563(3) (*)
All directors and executive officers as a group 3,279,912(3)(4)(5) 2.38%
*Less than 1%
(1) Each person's address is the address of the Company. Unless
otherwise noted, shareholders have sole voting and investment power
with respect to shares, except to the extent such power may be
shared by a spouse or otherwise subject to applicable community
property laws.
(2) Includes the number of shares of Company common stock that will be
subject to options held by that person that are currently
exercisable or exercisable within 60 days of January 10, 2002 (the
"Current Options"), as follows: Aldrich - 256,000 shares under
Current Options; Barber - 60,440 shares under Current Options; Beall
- 246,231 shares under Current Options; Beguwala - 316,348 shares
under Current Options; Decker - 1,140,218 shares under Current
Options; Furey - 77,250 shares under Current Options; Griffin -
25,000 shares under Current Options; Iyer - 295,314 shares under
Current Options; Leonard - 37,500 shares under Current Options;
LeVan - 44,384 shares under Current Options; McLachlan - 26,250
shares under Current Options; Vincent - 88,500 shares under Current
Options; all directors and executive officers as a group - 2,613,434
shares under Current Options.
(3) Includes shares held in the Company's 401(k) savings plan.
(4) Includes shares held in savings plan(s) of Conexant Systems, Inc.,
and/or Rockwell Automation, Inc., which arose out of the
distribution in the Merger of Skyworks' shares for shares of
Conexant Systems, Inc. held in those plans.
(5) Excludes 101,151 shares held in trust for Mr. Beall's adult son not
living in his household for which Mr. Beall disclaims beneficial
ownership.
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Skyworks Solutions, Inc. and Subsidiaries
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains nine equity compensation plans under which our equity
securities are authorized for issuance to our employees and/or directors:
- - the 1986 Long-Term Incentive Plan;
- - the 1994 Non-Qualified Stock Option Plan;
- - the 1996 Long-Term Incentive Plan;
- - the 1997 Non-Qualified Stock Option Plan;
- - the 1999 Employee Long-Term Incentive Plan;
- - the Directors' 2001 Stock Option Plan;
- - the Non-Qualified Employee Stock Purchase Plan;
- - the 2002 Employee Stock Purchase Plan; and
- - the Washington Sub, Inc. 2002 Stock Option Plan.
Except for the Non-Qualified Employee Stock Purchase Plan, the 2002 Employee
Stock Purchase Plan, the 1999 Employee Long-Term Incentive Plan and the
Washington Sub, Inc. 2002 Stock Option Plan, each of the foregoing equity
compensation plans was approved by our stockholders. The following table
presents information about these plans as of September 27, 2002.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS, AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
------------- -------------------- ------------------- -----------
(A) (B) (C)
--- --- ---
Equity compensation
plans approved by
security holders........ 10,433,271 $16.90 1,655,616(1)
Equity compensation
plans not approved by
security holders........ 20,898,564 $21.13 14,274,082(2)
Total........ 31,331,835 $19.73 15,929,698
(1) No further grants will be made under the 1986 Long-Term Incentive Plan, the
1994 Non-Qualified Stock Option Plan and the 1997 Non-Qualified Stock Option
Plan.
(2) No further grants may be made under the Washington Sub Inc. 2002 Stock
Option Plan.
1999 EMPLOYEE LONG-TERM INCENTIVE PLAN
The purposes of the Company's 1999 Employee Long-term Incentive Plan (the "1999
Employee Plan") are (i) to provide long-term incentives and rewards to those
employees of the Company and its subsidiaries, other than officers and
non-employee directors, who are in a position to contribute to the long-term
success and growth of the Company and its subsidiaries, (ii) to assist the
Company in retaining and attracting employees with requisite experience and
ability, and (iii) to associate more closely the interests of such employees
with those of the Company's stockholders. The 1999 Employee Plan provides for
the grant of non-qualified stock options to purchase shares of the Company's
common stock. The term of these options may not exceed ten years. The 1999
Employee Plan contains provisions which permit restrictions on vesting or
transferability, as well as continued exercisability upon a participant's
termination of employment with the Company, of options granted thereunder. The
1999 Employee Plan provides for full acceleration of the vesting of options
granted thereunder upon a "change in control" of the Company, as defined in the
1999 Employee Plan. The Board of Directors generally may amend, suspend or
terminate the 1999 Employee Plan in whole or in part at any time; provided that
any amendment which affects outstanding options be consented to by the holder of
the options.
WASHINGTON SUB, INC. 2002 STOCK OPTION PLAN
The Washington Sub, Inc. 2002 Stock Option Plan (the "Washington Sub Plan")
became effective on June 25, 2002 in connection with the Merger. At the time of
the spin-off of Conexant's wireless business, outstanding Conexant options
granted pursuant to certain Conexant stock incentive plans were adjusted so that
following the spin-off and Merger each holder of a Conexant option held (i)
options to purchase shares of Conexant common stock and (ii) options to purchase
shares of Skyworks common stock. The purpose of the Washington Sub Plan is to
provide a means for the Company to perform its obligations with respect to these
adjusted stock options. The only participants in the Washington Sub Plan are
those persons who, at the time of the Merger, held outstanding options granted
pursuant to certain Conexant stock option plans. No further options to purchase
shares of Skyworks common stock will be granted under the Washington Sub Plan.
The Washington Sub Plan contains a number of sub-plans, which contain terms and
conditions that are applicable to certain portions of the options subject to the
Washington Sub Plan, depending upon the Conexant stock option plan from which
the Skyworks options granted under the Washington Sub Plan were derived. The
outstanding options under the Washington Sub Plan generally have the same terms
and conditions as the original Conexant options from which they are derived.
Most of the sub-plans of the Washington Sub Plan contain provisions related to
the effect of a participant's termination of employment with the Company, if
any, and/or with Conexant on options granted pursuant to such sub-plan. Several
of the sub-plans under the Washington Sub Plan contain specific provisions
related to a change in control of the Company.
NON-QUALIFIED ESPP & 2002 ESPP
The Company also maintains a Non-Qualified Employee Stock Purchase Plan and a
2002 Employee Stock Purchase Plan to provide employees of the Company and
participating subsidiaries with an opportunity to acquire a proprietary interest
in the Company through the purchase, by means of payroll deductions, of shares
of the Company's common stock at a discount from the market price of the common
stock at the time of purchase. The Non-Qualified Employee Stock Purchase Plan is
intended for use primarily by employees of the Company located outside the
United States. Under the plans, eligible employees may purchase common stock
through payroll deductions of up to 10% of compensation. The price per share is
the lower of 85% of the market price at the beginning or end of each six-month
offering period. The Company intends to seek approval for its 2002 Employee
Stock Purchase Plan at its next Annual Meeting of Stockholders.
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Skyworks Solutions, Inc. and Subsidiaries
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Skyworks was formed through the Merger of the wireless communications business
of Conexant, which it spun-off immediately prior to the Merger, with Alpha. The
Merger was completed on June 25, 2002. Immediately following the Merger,
Skyworks purchased the Mexicali Operations from Conexant for an aggregate
purchase price of $150 million. Following the Merger, Alpha changed its
corporate name to Skyworks Solutions, Inc.
In connection with the Merger, Skyworks and Conexant have engaged in various
transactions, including, without limitation, the transactions referred to
elsewhere in this annual report and in the consolidated financial statements and
related notes thereto of Skyworks contained herein. Skyworks also has
established ongoing arrangements and agreements with Conexant, the more
significant of which are described below.
FINANCING ARRANGEMENTS AND SENIOR NOTES
In connection with our acquisition from Conexant of the Mexicali Operations, we
and certain of our subsidiaries entered into a financing agreement, dated as of
June 25, 2002, with Conexant. Pursuant to the terms of the financing agreement,
in payment for the Mexicali Operations, we and certain of our subsidiaries,
issued short-term promissory notes to Conexant in the aggregate principal amount
of $150 million. In addition, Conexant made a short-term $100 million loan
facility available to us under the financing agreement to fund working capital
and other requirements. $75 million of this facility became available on or
after July 10, 2002, and the remaining $25 million balance of the facility would
have become available if we had more than $150 million of eligible domestic
receivables. Interest on the short-term promissory notes and the loan facility
was payable at a rate of 10% per annum for the first ninety days following June
25, 2002, 12% per annum for the next ninety days and 15% per annum thereafter.
Unless paid earlier at the option of the Company or pursuant to mandatory
prepayment provisions contained in the financing agreement with Conexant, fifty
percent of the principal of the short-term promissory notes would become due on
March 24, 2003 and the remaining fifty percent, as well as the entire principal
amount of any amounts borrowed under the loan facility, would become due on June
24, 2003. There were $30 million of borrowings as of September 27, 2002 under
this facility. The promissory notes and the loan facility were secured by our
assets and properties.
Pursuant to our private placement of $230 million aggregate principal amount of
4.75% convertible subordinated notes due in 2007, which closed on November 12,
2002, we and Conexant entered into a refinancing agreement, and we, certain of
our subsidiaries and Conexant executed an amendment to the original financing
agreement with Conexant, each dated as of November 6, 2002. Pursuant to the
refinancing agreement and the amended financing agreement, of the net cash
proceeds received from the private placement, we paid Conexant (i) $105 million
to prepay, in part, the short-term promissory notes issued to Conexant, leaving
a principal balance of $45 million due on such notes, and (ii) $65 million to
prepay in full and retire the loan facility. Upon retiring the loan facility,
all security interests, liens and mortgages presently held by Conexant on our
assets and properties were released, and the financing agreement with Conexant,
as amended, was terminated.
The remaining $45 million principal amount of the short-term promissory notes
was exchanged for an interim 15% convertible debt security with a maturity date
of June 30, 2005. This debt security was then promptly exchanged for an equal
principle amount of 15% convertible senior subordinated notes due June 30, 2005,
issued under an indenture entered into by us and Wachovia Bank, National
Association, as trustee (the "Senior Notes"). We may redeem the Senior Notes in
whole or in part, at any time after May 12, 2004, subject to a redemption
premium of 3% of the then outstanding principal amount thereof. Under the terms
of the Senior Notes, Conexant has the right to convert the outstanding principal
amount thereof (or any portion thereof) into a number of shares of our common
stock equal to the principal amount of the Senior Notes to be so converted,
divided by the applicable conversion price, as determined pursuant to the terms
of the Senior Notes. Upon maturity, the Senior Notes are payable in shares of
our common stock based on the applicable conversion price as of the maturity
date, although interest on the Senior Notes, as well as the outstanding
principal if certain events of default occur, is payable by us in cash. The
initial conversion price of the Senior Notes is $7.87 per share, subject to
adjustment as follows. In the event that the market price of our common stock is
generally below the applicable conversion price, the holders of the Senior Notes
would be entitled to receive upon conversion of the Senior Notes shares of our
common stock in an amount equal to the principal amount of the Senior Notes
being converted divided by the market price of our common stock, provided that
in no event will the number of shares issued exceed 125% of the number of shares
that the holders would have received at the conversation price. The conversion
price is also subject to adjustment pursuant to anti-dilution provisions.
We also entered into a registration rights agreement with Conexant, which will
provide for the registration under the Securities Act of 1933, as amended, of
the resale by Conexant (or any transferee thereof) of the Senior Notes and the
shares of our common stock underlying the Senior Notes. We have agreed to
maintain the registration statement contemplated by the registration rights
agreement effective and available for use until December 31, 2005, subject to
certain limitations.
TAX ALLOCATION AGREEMENT
At the time of the Merger, we entered into a tax allocation agreement with
Conexant, which provides for the allocation of all responsibilities, liabilities
and benefits relating to or affecting all forms of taxation between us and our
affiliates and Conexant and its affiliates. In general, Conexant assumed and is
responsible for tax liabilities of the wireless business for periods prior to
the Merger and we assumed and are responsible for tax liabilities of the
wireless business for periods after the Merger. Subsequent to the execution of
the tax allocation agreement, and in connection with the refinancing agreement
and amended financing agreement with Conexant, we entered into a letter
agreement on November 6, 2002 with Conexant that amends the tax allocation
agreement to limit our indemnification obligations under the tax allocation
agreement to a reduced set of circumstances that could trigger such
indemnification. However, the tax allocation agreement continues to provide that
we will be responsible for various other tax obligations and for compliance with
various representations and covenants made under the tax allocation agreement.
TRANSITION SERVICES AGREEMENT
In connection with the Merger, we entered into a transition services agreement
with Conexant on June 25, 2002 under which we and Conexant will provide to the
other certain specified services, most of which run through December 31, 2002,
subject to extension by mutual agreement. The services provided by Conexant
under the agreement include:
- accounting and payroll;
- finance and treasury;
- engineering and design services;
- platform technology and other support for our Newbury Park facility;
- human resources;
- information technology;
75
Skyworks Solutions, Inc. and Subsidiaries
- sales;
- other support services, including global trade, shipping, storage
and logistics services;
- manufacturing quality and reliability;
- facilities; and
- material management and printed wire board assembly services.
In addition, we will provide certain services to Conexant, including services
related to:
- engineering and design services for Conexant's broadband access
products;
- human resources;
- product testing and package qualification consulting; and
- facilities, including environmental consulting services.
The price to be paid by us and Conexant for these services is generally based on
the actual cost of providing such services, including out of pocket expenses.
INFORMATION TECHNOLOGY SERVICES AGREEMENT
On June 25, 2002, in connection with the Merger, we entered into an information
technology service agreement with Conexant under which Conexant provides to us a
variety of information technology services that Conexant previously provided to
its wireless communications division. These services generally are to be
provided in six month increments until either party elects to terminate the
agreement or certain specific services are provided thereunder. Payments to
Conexant for the services rendered under the agreement generally consist of a
base fee per month, plus an additional monthly service fee depending on the
particular services rendered by Conexant. We and Conexant have agreed to review
the fee structure each year during the term of the agreement.
The services provided by Conexant under the agreement include:
- data center operations management;
- remote-site support;
- information technology infrastructure services;
- programming services; and
- applications support.
MEXICALI TRANSITION SERVICES AGREEMENT
Under a mexicali transition services agreement dated as of June 25, 2002 with
Conexant, we and Conexant will provide certain transition services to each other
with respect to the Mexicali Operations. These services generally will be
provided until December 31, 2002, unless otherwise mutually agreed. The price
for the services will be the actual cost, including out-of pocket expenses, of
providing the services. The services covered under the agreement include:
- general accounting support;
- metrology services and test equipment support;
- thermal mechanical analysis and measurement of packages;
- electrical analysis and measurement for packages; and
- electromagnetic impulse measurement and certification services.
NEWPORT BEACH SUPPLY AGREEMENT
Under our Newport Beach wafer supply and services agreement entered into with
Conexant on June 25, 2002, we will obtain through Conexant silicon-based
semiconductor products supplied by Jazz Semiconductor, Inc., a Newport Beach,
California foundry joint venture between Conexant and The Carlyle Group to which
Conexant contributed its Newport Beach wafer fabrication facility. These
services will be provided for a three-year period. Pursuant to the terms of this
supply agreement with Conexant, we are committed to obtain a minimum level of
service from Jazz Semiconductor, Inc., based on a contractual agreement between
Conexant and Jazz Semiconductor. The volume for wafers during these three years
has been pre-calculated based on our anticipated wafer fabrication needs. The
pricing under the agreement is established at Conexant's cost for the first
year, at the median of Conexant's cost and market price for the second year, and
at market price for the third year. Our expected minimum purchase obligations
under this supply agreement are anticipated to be approximately $64 million, $39
million and $13 million in fiscal 2003, 2004 and 2005, respectively. We estimate
that our obligation under this agreement will result in excess costs of
approximately $5.1 million and we have recorded this liability in the current
period.
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Skyworks Solutions, Inc. and Subsidiaries
NEWBURY PARK SUPPLY AGREEMENT
Under a Newbury Park wafer supply and services agreement entered into with
Conexant on June 25, 2002, we will provide services to Conexant for both
production and prototypes of semiconductor products at our Newbury Park,
California wafer fabrication facility, including services related to:
- semiconductor wafer fabrication;
- semiconductor wafer probe;
- final test; and
- die processing.
These services generally will be provided for a term of three years with
additional one-year renewal terms as may be mutually agreed. The pricing for
wafers has been fixed for the three years based on our mutual agreement, and is
based on cost plus 50% markup.
MEXICALI SUPPLY AGREEMENT
Under a Mexicali device supply and services agreement entered into with Conexant
on June 25, 2002, we will provide Conexant with certain semiconductor
processing, packaging and testing services, including:
- assembly services;
- final testing;
- post-test processing; and
- shipping.
During the term of the agreement, Conexant will have the right to purchase
products manufactured through the use of technologies developed and qualified
for full-scale production at the Mexicali facility at the time of the agreement
and, upon mutual agreement, products manufactured through the use of any new
technologies in development at the Mexicali facility at the time of the
agreement, but not yet qualified for full scale production. These services will
be performed at our Mexicali, Mexico facility and, upon mutual agreement, at
other facilities approved by Skyworks. These services generally will be provided
for a term of three years with additional one-year renewal terms as may be
mutually agreed. The pricing for the first year has been fixed based generally
on the yielded assembly cost of the particular materials. The pricing for the
second year will either be a result of: (i) a 5% reduction from year one, or
(ii) the actual cost at the end of year one. Pricing for the third year will be
negotiated between the parties.
RELATED PARTY TRANSACTIONS OF THE COMPANY
As part of the terms of the Merger, four designees of Conexant - Messrs. Beall,
Beguwala, Decker and Iyer - were appointed to the Skyworks Board of Directors,
joining four members who had been serving on the Board having been previously
elected by the stockholders of Alpha. Each of the four Conexant designees to the
Board continues to have a business relationship with Conexant. Mr. Decker
currently serves as the chief executive officer, as well as the chairman of the
board, of Conexant. Mr. Iyer serves as senior vice president and chief financial
officer of Conexant. Mr. Beguwala is a current employee, as well as a former
executive officer, of Conexant. Mr. Beall is a non-employee director of
Conexant.
Information concerning severance agreements with the Named Executives and
certain option grants made to directors of the Company is described at Item 11,
above. There are no other relationships or transactions reportable under the
regulations of the Securities and Exchange Commission.
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
our President and Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective in timely alerting them to
the
77
Skyworks Solutions, Inc. and Subsidiaries
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of our evaluation.
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The financial statements filed as part of this report are listed on
the index appearing on page 37.
2. Index to Financial Statement Schedules
The following financial statement schedule is filed as part of this
report (page reference is to this report):
Schedule II Valuation and Qualifying Accounts...............Page 87
All other required schedule information is included in the Notes to
Consolidated Financial Statements or is omitted because it is either
not required or not applicable.
3. Exhibits
No. Description
--- -----------
2.a Agreement and Plan of Reorganization, dated as of
December 16, 2001, as amended as of April 12, 2002, by
and among the Company, Washington Sub, Inc. and Conexant
Systems, Inc. (15)
2.b Contribution and Distribution Agreement, dated as of
December 16, 2001, as amended as of June 25, 2002, by
and between Washington Sub, Inc. and Conexant Systems,
Inc. (14)
2.c Mexican Stock Purchase Agreement, dated as of June 25,
2002, by and between the Company and Conexant Systems,
Inc. (14)
2.d Amended and Restated Mexican Asset Purchase Agreement,
dated as of June 25, 2002, by and between the Company
and Conexant Systems, Inc. (14)
2.e U.S. Asset Purchase Agreement, dated as of December 16,
2001, by and between the Company and Conexant Systems,
Inc. (14)
3.a Amended and Restated Certificate of Incorporation **
3.b Second Amended and Restated By-laws **
4.a Specimen Certificate of Common Stock (1)
4.b Loan and Security Agreement, dated December 15, 1993, by
and between Trans-Tech, Inc. and County Commissioners of
Frederick County (10)
4.c Indenture, dated as of November 12, 2002, by and between
the Company and State Street Bank and Trust Company (as
Trustee)**
4.d Form of 4.75% Convertible Subordinated Note of the
Company **
78
Skyworks Solutions, Inc. and Subsidiaries
4.e Indenture, dated as of November 20, 2002, by and between
the Company and Wachovia Bank, National Association (as
Trustee)**
4.f Form of 15% Senior Convertible Note of the Company **
10.a Skyworks Solutions, Inc., 1986 Long-Term Incentive Plan
as amended (2)*
10.b Skyworks Solutions, Inc., Long-Term Compensation Plan
dated September 24, 1990 (3); amended March 28, 1991
(4); and as further amended October 27, 1994 (5)*
10.c Severance Agreement, dated April 1, 2001, between the
Company and David J. Aldrich (6)*
10.d Severance Agreement, dated January 14, 1997, between the
Company and Richard Langman (18)*
10.e Consulting Agreement, dated August 13, 1992, between the
Company and Sidney Topol (7)*
10.f Skyworks Solutions, Inc. 1994 Non-Qualified Stock Option
Plan for Non-Employee Directors (2)*
10.g Skyworks Solutions, Inc. Executive Compensation Plan
dated January 1, 1995 and Trust for the Skyworks
Solutions, Inc. Executive Compensation Plan dated
January 3, 1995 (5)*
10.h Severance Agreement, dated September 4, 1998, between
the Company and Paul E. Vincent (8)*
10.i Skyworks Solutions, Inc. 1997 Non-Qualified Stock Option
Plan for Non-Employee Directors (9)*
10.j Skyworks Solutions, Inc. 1996 Long-Term Incentive Plan
(11)*
10.k Skyworks Solutions, Inc. Directors' 2001 Stock Option
Plan (12)*
10.l Skyworks Solutions, Inc. 1999 Employee Long-Term
Incentive Plan, as amended September 25, 2002 **
10.m Washington Sub Inc., 2002 Stock Option Plan (16)*
10.n Skyworks Solutions, Inc. Non-Qualified Employee Stock
Purchase Plan **
10.o Form of Stockholders Agreement, dated as of December 16,
2001, entered into between each of the directors and
certain executive officers of the Company as of the date
thereof and Conexant Systems, Inc. (19)
10.p Warrant, dated as of June 25, 2002, issued to Jazz
Semiconductor, Inc. (17)
10.q Newport Beach Wafer Supply and Services Agreement, dated
as of June 25, 2002, by and between the Company and
Conexant Systems, Inc. **
10.r Information Technology Service Agreement, dated as of
June 25, 2002, by and between the Company and Conexant
Systems, Inc. **
10.s Financing Agreement, dated as of June 25, 2002, by and
among the Company, certain of its subsidiaries and
Conexant Systems, Inc. (14)
10.t Tax Allocation Agreement, dated as of June 25, 2002, by
and among the Company, Conexant Systems, Inc. and
Washington Sub, Inc. (14)
10.u Employee Matters Agreement, dated as of June 25, 2002,
by and among the Company, Conexant Systems, Inc. and
Washington Sub, Inc. (14)
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Skyworks Solutions, Inc. and Subsidiaries
10.v Mexicali Device Supply and Services Agreement, dated as
of June 25, 2002, by and between the Company and
Conexant Systems, Inc. +**
10.w Newbury Park Wafer Supply and Services Agreement, dated
as of June 25, 2002, by and between the Company and
Conexant Systems, Inc. +**
10.x Refinancing Agreement, dated as of November 6, 2002, by
and among the Company, certain of its subsidiaries and
Conexant Systems, Inc. (13)
10.y First Amendment of Financing Agreement, dated as of
November 6, 2002, by and among the Company, certain of
its subsidiaries and Conexant Systems, Inc. (13)
10.z Letter Agreement, dated as of November 6, 2002, by and
between the Company and Conexant Systems, Inc. (13)
10.aa Registration Rights Agreement, dated as of November 12,
2002, by and among the Company and Credit Suisse First
Boston (as representative for the several purchasers) **
10.bb Registration Rights Agreement, dated as of November 12,
2002, by and between the Company and Conexant Systems,
Inc. **
10.cc Skyworks Solutions, Inc. 2002 Employee Stock Purchase
Plan * **
11 Statement regarding computation of per share earnings.
(See Note 1 to the Consolidated Financial Statements)
21 Subsidiaries of the Company
23.a Consent of KPMG LLP
23.b Consent of Deloitte & Touche LLP
99 Certification pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Management contract or compensatory plan
** Filed herewith
+ Confidential Treatment requested for certain portions of this Agreement which
have been omitted and filed separately with the Securities and Exchange
Commission.
(1) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-3 filed on July 15, 2002 (File No. 333-92394).
(2) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended October 2, 1994.
(3) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended March 29, 1992.
(4) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 27, 1993.
(5) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 2, 1995.
(6) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1, 2001.
(7) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 3, 1994.
(8) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 27, 1998.
(9) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended March 29, 1998.
(10) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 3,1994.
(11) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 1, 2001.
(12) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2001.
(13) Incorporated by reference to the exhibits filed with our Current
Report on Form 8-K dated November 6, 2002.
(14) Incorporated by reference to the exhibits filed with our Current Report on
Form 8-K dated June 25, 2002.
(15) Incorporated by reference to Annex A filed with our Registration Statement
on Form S-4, as amended, filed on May 10, 2002 (File No. 333-83768).
(16) Incorporated by reference to exhibit filed with our Registration Statement
on Form S-3 filed on July 15, 2002 (File No. 333-92394).
(17) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-3 filed on August 30, 2002 (File No. 333-99015).
(18) Incorporated by reference to the exhibit filed with our Annual Report on
Form 10-K for the fiscal year ended March 30, 1997.
(19) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-4, as amended, filed on May 3, 2002 (File No.
333-83768)
(b) Reports on Form 8-K
On June 28, 2002, a Form 8-K was filed which served to announce (i)
the completion of our merger with the wireless communications
division of Conexant Systems, Inc., (ii) the change in our
independent auditors, and (iii) the execution of a financing
arrangement with Conexant Systems, Inc.
On August 15, 2002, a Form 8-K/A was filed which served to amend the
previous filing on June 28, 2002 that announced the completion of
our merger with the wireless communications division of Conexant
Systems, Inc. and which served to announce a change in our fiscal
year.
On November 6, 2002, a Form 8-K was filed which served to
incorporate by reference the Company's press releases dated November
5, 2002 and November 6, 2002 relating to a private placement of
convertible subordinated notes of the Company. The notes are
convertible at the option of the holders into common stock of the
Company at a conversion price of $9.05, subject to adjustment.
On November 8, 2002, a Form 8-K was filed which served to provide
details relating to the Company's private placement of convertible
subordinated notes.
On November 8, 2002, a Form 8-K was filed which served to provide
pro forma consolidated financial information for the nine months
ended June 30, 2002 as if the Merger and the subsequent acquisition
by Skyworks of the Mexicali operation had occurred on October 1,
2001.
On November 12, 2002, a Form 8-K/A was filed which served to amend
the previous filing on November 8, 2002 that provided pro forma
financial information.
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Skyworks Solutions, Inc. and Subsidiaries
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed
herewith and incorporated by reference herein. The response to this
portion of Item 15 is submitted under Item 15 (a) (3).
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Skyworks Solutions, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SKYWORKS SOLUTIONS, INC.
BY: /S/ DAVID J. ALDRICH
----------------------------------
DAVID J. ALDRICH, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: December 20, 2002
BY: /S/ PAUL E. VINCENT
----------------------------------
PAUL E. VINCENT, CHIEF FINANCIAL
OFFICER, TREASURER AND SECRETARY
Date: December 20, 2002
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Skyworks Solutions, Inc. and Subsidiaries
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Skyworks Solutions, Inc.,
hereby severally constitute and appoint David J. Aldrich and Paul E. Vincent,
and each of them singly, our true and lawful attorneys, with full power to them
and each of them singly, to sign for us and in our names in the capacities
indicated below, any amendments to this Annual Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities to
enable Skyworks Solutions, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on December 20, 2002.
Signature and Title Signature and Title
------------------- -------------------
/s/ DWIGHT W. DECKER /s/ DONALD R. BEALL
- -------------------------------- -----------------------------
Dwight W. Decker Donald R. Beall
Chairman of the Board Director
/s/ DAVID J. ALDRICH /s/ MOIZ M. BEGUWALA
- -------------------------------- -----------------------------
David J. Aldrich Moiz M. Beguwala
Chief Executive Officer Director
President and Director
/s/ PAUL E. VINCENT /s/ TIMOTHY R. FUREY
- -------------------------------- -----------------------------
Paul E. Vincent Timothy R. Furey
Chief Financial Officer Director
Treasurer
Principal Accounting Officer
Secretary /s/ BALAKRISHNAN S. IYER
-----------------------------
Balakrishnan S. Iyer
Director
/s/ THOMAS C. LEONARD
-----------------------------
Thomas C. Leonard
Director
/s/ DAVID J. MCLACHLAN
-----------------------------
David J. McLachlan
Director
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Skyworks Solutions, Inc. and Subsidiaries
CERTIFICATIONS
I, David J. Aldrich, President and Chief Executive Officer of Skyworks
Solutions, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 20, 2002
By: /s/ David J. Aldrich
----------------------------------------
David J. Aldrich
President and Chief Executive Officer
85
Skyworks Solutions, Inc. and Subsidiaries
CERTIFICATIONS
I, Paul E. Vincent, Chief Financial Officer, Treasurer and Secretary of Skyworks
Solutions, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
e) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
f) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
c) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 20, 2002
By: /s/ Paul E. Vincent
----------------------------------------
Paul E. Vincent
Chief Financial Officer, Treasurer and Secretary
86
Skyworks Solutions, Inc. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
CHARGED
TO COSTS
BEGINNING AND ENDING
DESCRIPTION BALANCE EXPENSES (1) DEDUCTIONS OTHER(3) BALANCE
=========================================================================================================================
Year Ended September 30, 2000
Allowance for doubtful accounts ............. $ 406 $ 3,538 $ (152) $ -- $ 3,792
Reserve for sales returns ................... $ 1,125 $ 55 $ (646) $ -- $ 534
Allowance for excess and obsolete inventories $ 5,967 $ 3,132 $ -- $ -- $ 9,099
Year Ended September 30, 2001
Allowance for doubtful accounts ............. $ 3,792 $ (468) $ (118) $ -- $ 3,206
Reserve for sales returns ................... $ 534 $ 4,055 $ -- $ -- $ 4,589
Allowance for excess and obsolete inventories $ 9,099 $ 2,286(2) $ -- $ -- $11,385
Year Ended September 30, 2002
Allowance for doubtful accounts ............. $ 3,206 $ (512) $ (575) $ (795) $ 1,324
Reserve for sales returns ................... $ 4,589 $ 7,616 $(7,199) $3,510 $ 8,516
Allowance for excess and obsolete inventories $11,385 $ 6,225 $(3,092) $6,100 $20,618
(1) Additions charged to costs and expenses in the allowance for
doubtful accounts reflect credit balances recorded in fiscal 2001,
resulting from reductions in the allowance account associated with
overall collections experience more favorable than previously
estimated. Deductions in the allowance for doubtful accounts reflect
amounts written off.
(2) Amount excludes inventory write-downs of $58.7 million charged to
cost of goods sold relating to inventory that was written down to a
zero cost basis.
(3) Amounts include Alpha's allowance for doubtful accounts, reserve for
sales returns and allowances for excess and absolute inventories
balances of $1.2 million, $3.5 million and $6.1 million,
respectively, which were assumed on June 25, 2002 in connection with
the Merger. In addition, Conexant retained Washington/Mexicali's
accounts receivable and allowance for doubtful accounts balances as
of June 25, 2002. Washington/Mexicali's allowance for doubtful
accounts balance at June 25, 2002 was $2.0 million.
87
EXHIBIT INDEX
No. Description
--- -----------
3.a Amended and Restated Certificate of Incorporation **
3.b Second Amended and Restated By-laws **
4.c Indenture, dated as of November 12, 2002, by and between
the Company and State Street Bank and Trust Company (as
Trustee)**
4.d Form of 4.75% Convertible Subordinated Note of the
Company **
4.e Indenture, dated as of November 20, 2002, by and between
the Company and Wachovia Bank, National Association (as
Trustee)**
4.f Form of 15% Senior Convertible Note of the Company **
10.l Skyworks Solutions, Inc. 1999 Employee Long-Term
Incentive Plan, as amended September 25, 2002 **
10.n Skyworks Solutions, Inc. Non-Qualified Employee Stock
Purchase Plan **
10.q Newport Beach Wafer Supply and Services Agreement, dated
as of June 25, 2002, by and between the Company and
Conexant Systems, Inc. **
10.r Information Technology Service Agreement, dated as of
June 25, 2002, by and between the Company and Conexant
Systems, Inc. **
10.v Mexicali Device Supply and Services Agreement, dated as
of June 25, 2002, by and between the Company and
Conexant Systems, Inc. +**
10.w Newbury Park Wafer Supply and Services Agreement, dated
as of June 25, 2002, by and between the Company and
Conexant Systems, Inc. +**
10.aa Registration Rights Agreement, dated as of November 12,
2002, by and among the Company and Credit Suisse First
Boston (as representative for the several purchasers) **
10.bb Registration Rights Agreement, dated as of November 12,
2002, by and between the Company and Conexant Systems,
Inc. **
10.cc Skyworks Solutions, Inc. 2002 Employee Stock Purchase
Plan **
11 Statement regarding computation of per share earnings.
(See Note 1 to the Consolidated Financial Statements)
21 Subsidiaries of the Company
23.a Consent of KPMG LLP
23.b Consent of Deloitte & Touche LLP
99 Certification pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Management contract or compensatory plan
** Filed herewith
+ Confidential Treatment requested for certain portions of this Agreement which
have been omitted and filed separately with the Securities and Exchange
Commission.