5. Supplemental Financial Information

Inventories

Inventories consist of the following (in thousands):


	Successor		Predecessor
	July 1,		October 1,
	2011		2010
Work-in-process	$	14,154	$	4,840
Finished goods		5,513		3,907

Total inventories	$	19,667	$	8,747

Net inventory as of July 1, 2011 includes $9.7 million step-up to fair value recorded in connection with the Merger, $8.5 million and $1.2 million recorded in work-in-process and finished goods, respectively.

Goodwill and Purchased Intangible Assets

Intangible assets consist of the following (in thousands):


	Successor									Predecessor
	July 1, 2011									October 1, 2010
	Weighted		Gross							Weighted		Gross
	Average		Carrying		Accumulated			Book		Average		Carrying		Accumulated			Book
	Life (yrs)		Amount		Amortization			Value		Life (yrs)		Amount		Amortization			Value
Intangible assets subject to amortization:
Customer relationships		7.0	$	50,300	$	(2,084	)	$	48,216		5.0	$	4,300	$	(3,121	)	$	1,179
Backlog		0.5		4,200		(2,652	)		1,548		—		—		—			—
Patents		8.3		2,900		(70	)		2,830		7.5		3,900		(1,333	)		2,567
Software licenses		—		—		—			—		5.0		1,000		(438	)		562
Non-compete agreement		1.0		100		(20	)		80		5.0		30		(30	)		—

			$	57,500	$	(4,826	)	$	52,674			$	9,230	$	(4,922	)	$	4,308


Intangible assets not subject to amortization:
In-process research and development				46,000
Trade name and trademarks				15,100

			$	61,100

Intangible assets are amortized over their estimated useful lives either on a straight-line or accelerated basis that reflects the pattern in which the economic benefits of the intangible assets are expected to be realized, which range from approximately six months to eight years, with no residual value. During the period from April 20, 2011 through July 1, 2011, the Company recognized intangible amortization expense of $4.8 million. During the period from April 2, 2011 through April 19, 2011, and the period from October 2, 2010 through April 19, 2011, the Company recognized intangible amortization expense of $0.1 million and $0.6 million, respectively. During the fiscal quarter and nine fiscal months ended July 2, 2010, the Company recognized intangible amortization expense of $0.3 million and $1.0 million, respectively.

Intangible assets are amortized over a weighted-average remaining period of approximately 6.7 years. Annual amortization expense is expected to be as follows (in thousands):


	Fiscal Year Ending
	2011		2012		2013		2014		2015		Thereafter
Amortization expense	$	4,259	$	11,713	$	9,630	$	7,954	$	6,585	$	12,533

Acquired IPR&D intangible assets consist of projects in the Company’s audio, imaging and video product lines. All of the projects were in the development phase and were incomplete at the Merger date. If the IPR&D projects reach technological feasibility they will be amortized over their remaining estimated useful lives or, if they do not reach technological feasibility their cost will be charged to expense. Cash flows from IPR&D intangible assets in fiscal 2011 consist of project expenses. Revenues and gross margin contribution are not expected from IPR&D intangible assets until fiscal 2012.

The changes in the carrying amount of goodwill for the periods ended July 1, 2011 and October 1, 2010, are as follows (in thousands):


	Fiscal Period Ended

	Successor			Predecessor
	July 1,			April 19,		October 1,
	2011			2011		2010
Goodwill at beginning of period	$	109,908		$	109,908	$	109,908
Predecessor goodwill eliminated in purchase accounting	$	(109,908	)	$	—	$	—
Excess purchase price atttributed to goodwill acquired		222,661			—		—

Goodwill at end of period	$	222,661		$	109,908	$	109,908

Mindspeed Warrant

The Company has a warrant to purchase approximately 6.1 million shares of Mindspeed common stock at an exercise price of $16.74 per share through June 2013. At July 1, 2011 and October 1, 2010, the market value of Mindspeed common stock was $8.04 and $7.73 per share, respectively. The Company accounts for the Mindspeed warrant as a derivative instrument, and changes in the fair value of the warrant are included in other expense (income), net for each period. At July 1, 2011 and October 1, 2010, the aggregate fair value of the Mindspeed warrant included on the accompanying consolidated balance sheets was $7.5 million and $20.7 million, respectively. At July 1, 2011, the warrant was valued using the Black-Scholes-Merton model with an expected term of 2 years, expected volatility of 65%, a risk-free interest rate of approximately 0.5% and no dividend yield. The aggregate fair value of the warrant is reflected as a long-term asset on the accompanying consolidated balance sheets because the Company does not intend to liquidate any portion of the warrant in the next twelve months.

The valuation of this derivative instrument is subjective, and option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Changes in these assumptions can materially affect the fair value estimate. The Company could, at any point in time, ultimately realize amounts significantly different than the carrying value.

Debt

Debt consists of the following (in thousands):


	Successor		Predecessor
	July 1,		October 1,
	2011		2010
Short-term debt:
4.00% convertible subordinated notes due March 2026, net of debt discount of $240	$	—	$	10,978

Long-term debt:
11.25% senior secured notes due March 2015, net of premium (discount) of $19,249 and $(1,457)	$	194,249	$	173,543

11.25% senior secured notes due 2015 — In March 2010, the Company issued $175.0 million aggregate principal amount of senior secured notes due 2015 (“senior notes”) that mature on March 15, 2015. The senior notes were sold at 99.06% of the principal amount, resulting in gross proceeds of approximately $173.4 million. Deferred debt offering expenses were approximately $4.9 million. The unamortized balance of $3.8 million was eliminated as of the Merger date. The senior notes have not been registered under the Securities Act of 1933, as amended, and may not be sold in the United States absent registration or an applicable exemption from registration requirements. The senior notes accrue interest at a rate of 11.25% per annum payable semiannually on March 15 and September 15 of each year, commencing on September 15, 2010. The obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by all of the Company’s domestic subsidiaries (except for Conexant CF, LLC, the Company’s receivables financing subsidiary). In addition, the senior notes and the note guarantees are secured by liens on substantially all of the Company’s and the guarantors’ tangible and intangible property, subject to certain exceptions and permitted liens. On or after March 15, 2013, the Company may redeem all or a part of the senior notes at a price of 105.625% of the principal amount of the senior notes during the remainder of 2013 and 100.00% of the principal amount of the senior notes thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date. In addition, at any time prior to March 15, 2013, the Company may, on one or more occasions, redeem all or a part of the senior notes at any time at a redemption price equal to 100% of the principal amount of the senior notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest, if any, to the applicable redemption date. On or after January 1, 2011 until March 15, 2013, the Company may also redeem up to 35% of the original aggregate principal amount of the senior notes, using the proceeds of certain qualified equity offerings, at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest, if any, to the applicable redemption date. In addition, certain asset dispositions will be triggering events that may require the Company to use the proceeds from those sales to make an offer to repurchase the senior notes at a repurchase price equal to 100% of the principal amount of the senior notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date if such proceeds are not otherwise invested in the Company’s business within a specific period of time. The senior notes and the note guarantees rank senior to all of the Company’s and the guarantors’ existing and future subordinated indebtedness, including the convertible notes, but they are structurally subordinated to all existing and future indebtedness and other liabilities (including non-trade payables) of the Company’s non-guarantor subsidiaries.

If a change of control occurs, the Company must offer to repurchase the senior notes at a repurchase price equal to 101% of the principal amount of the senior notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date. In connection with the Merger, the Company commenced a change of control offer (the “Offer”) on May 27, 2011 to purchase any and all of its senior notes. The Company currently has outstanding $175.0 million in principal amount of the senior notes. If all holders of the senior notes accepted the Offer, the Company would have been obligated to repurchase the senior notes for an aggregate of $176.75 million plus accrued and unpaid interest. The Offer expired on June 29, 2011 and was not extended by the Company. No senior notes were tendered by their holders under the offer. At the date of the Merger, the senior notes were valued at 111.50% of par or $195.1 million resulting in a premium of $20.1 million. Amortization of the premium in the period from April 20, 2011 through July 1, 2011 was $0.9 million.

4.00% convertible subordinated notes due March 2026 — In March 2006, the Company issued $200.0 million principal amount of convertible notes and, in May 2006, the initial purchaser of the convertible notes exercised its option to purchase an additional $50.0 million principal amount of the convertible notes. Total proceeds to the Company from these issuances, net of issuance costs, were $243.6 million. The convertible notes were general unsecured obligations of the Company. Interest on the convertible notes was payable in arrears semiannually on each March 1 and September 1, beginning on September 1, 2006. The convertible notes were convertible, at the option of the holder upon satisfaction of certain conditions, into shares of the Company’s common stock at a conversion price of $49.20 per share, subject to adjustment for certain events. Upon conversion, the Company had the right to deliver, in lieu of common stock, cash or a combination of cash and common stock. Beginning on March 1, 2011, the convertible notes could be redeemed at the Company’s option at a price equal to 100% of the principal amount, plus any accrued and unpaid interest. Holders could require the Company to repurchase, for cash, all or part of their convertible notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest. The Company redeemed the remaining $l1.2 million of convertible notes on March 1, 2011.

Accounts Receivable Financing Facility — Effective on the date of the Merger, the Company’s credit facility with a bank was terminated. No amounts were due under the facility at the termination date.