Lawyers for purchasers of Conexant Systems Inc. securities have filed a class action lawsuit against the company late last week, alleging the company misrepresented its true revenue outlook.

The suit was filed by law firm Milberg Weiss Bershad & Schulman LLP and is pending in the U.S. District Court for the District of New Jersey against the company, along with chairman Dwight W. Decker, former CEO Armando Geday and chief accounting officer J. Scott Blouin.

The suit was filed on behalf of investors who bought Conexant securities between March 1 and Nov. 4 of this year. The complaint alleges that representations during that time about the company’s operations made in Conexant press releases were false and misleading because they failed to disclose certain facts.

Specifically, the suit alleges that the company was stuffing its distribution channel with products, such that its revenues did not reflect the true, end-user demand for its products. The plaintiffs in the case content that the company’s ensuing inventory glut would lead to lowered revenues as distributors and retailers would need to exhaust existing inventory before purchasing new products from Conexant.

In the suit, Conexant is also accused of serious operating deficiencies, particularly in the wireless local area network (WLAN) division of Globespan that was not effectively integrated into the combined company’s operations, causing the company to lose its leadership position in the WLAN market.

Finally, contrary to Conexant’s express representations that the Globespan integration was “on schedule” and that “outstanding progress” was being made in that regard, the suit alleges the integration of the Globespan acquisition was mishandled. This caused such a massive drain on the company that, by the end of the class period, the outlook for the much larger combined company was worse than Conexant’s stand-alone prospects, the plaintiffs contend.

Then, on November 4, Conexant issued a press release announcing disappointing results for Q4, including a loss of $367.5 million, blamed on poor demand, inventory buildup and failed product launches. Later that day, the company held a conference call to discuss its Q4 results. Geday’s response to an analyst’s question revealed that the company’s inventory glut was not a recent phenomenon, but had been building for as long as five quarters.

In reaction to the company’s Q4 results, the price of Conexant securities dropped to $1.60 per share on November 5 from $1.76 on November 4. As detailed in the complaint, earlier announcements that only partially disclosed the facts about Conexant’s business had already taken a heavy toll on Conexant’s stock price, which traded as high as $7.77 per share during the period covered in the lawsuit, according to the law firm that filed it.

Conexant Bids an Expensive Goodbye to Geday

In other Conexant news, on December 22, the company announced its separation agreement with Geday that defined post-termination payments and benefits to which he is to receive.

Geday’s January 15 employment agreement was effective February 27 and initially provided that he would serve as CEO and as a director of the company. Under the separation agreement, following his resignation from those positions in early November, Conexant agreed to: continue to pay his base salary as a non-executive employee until June 30, 2005 in accordance with normal payroll practices; pay him a cash lump-sum equal to the sum of any unpaid base salary accrued through the date of his resignation as CEO, a pro rata share of his target bonus of $550,000 for fiscal 2004, two times his annual base salary of $550,000, two times his target bonus of $550,000 for fiscal 2004, and $510,000.

The agreement also provides certain benefits and perquisites until June 30, 2005 and pays him on or about June 30, 2005 a cash lump sum equal to the amount to cover the cost of his continued health benefits from June 30, 2005 to November 9, 2006. In addition, all of Geday’s options and shares of restricted stock will continue to vest during the thirty-five month period following his resignation as CEO, after which time all of his options are to expire.

Upon completion of the merger of the company with GlobespanVirata Inc., Geday received options to purchase 600,000 shares of Conexant stock, and retention options to purchase 450,000 shares of stock. Finally, the amended agreement restricts Geday from competing with the company until June 30, 2006.

By: DocMemory
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