<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
----------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 3, 2000
CONEXANT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-24923 25-1799439
(STATE OR JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
4311 JAMBOREE ROAD
NEWPORT BEACH, CA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 483-4600
N/A
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<PAGE> 2
ITEM 5. OTHER EVENTS
On March 10, 2000, Conexant Systems, Inc. ("Conexant" or the "Company")
completed its previously-announced acquisition of Maker Communications, Inc.
("Maker"), a leading provider of programmable, high-performance network
processors, software solutions and development tools. Maker will operate as part
of Conexant's Network Access Division. Conexant will also use the Maker
facilities as the Company's base of operations in the eastern U.S. for its
network access business.
Conexant issued 0.66 of a share of its common stock, par value $1.00 per share,
in exchange for each share of Maker common stock, par value $0.01 per share. The
total value of the consideration for the acquisition of Maker is approximately
$979.6 million, based on the closing price of Conexant common stock on December
17, 1999 ($69.625). The transaction will be accounted for as a purchase.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Financial Statements of Maker Communications, Inc. are included at
pages F-1 through F-19 of this report.
(b) Pro forma financial information
Unaudited pro forma condensed combined financial information is
included at pages F-20 through F-25 of this report.
(c) Exhibits
23.1 Consent of Arthur Andersen LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONEXANT SYSTEMS, INC.
(Registrant)
Date: April 3, 2000 By /s/ BALAKRISHNAN S. IYER
-----------------------------------
Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
2
<PAGE> 3
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and 1999
Together with Auditors' Report
INDEX
Page
----
Report of Independent Public Accountants......................... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)........ F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-7
F-1
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Maker Communications, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of Maker
Communications, Inc. (a Delaware corporation) and subsidiary as of December 31,
1998 and 1999 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of Maker Communications, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide 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 Maker
Communications, Inc. and subsidiary as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 18, 2000
F-2
<PAGE> 5
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1999
(In thousands, except share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,615 $ 20,485
Marketable securities -- 24,640
Accounts receivable, net of reserve of $90 at
December 31, 1998 and 1999 932 2,359
Inventory 296 610
Prepaid expenses and other current assets 106 883
-------- --------
Total current assets 14,949 48,977
Marketable Securities, noncurrent -- 12,000
Property and Equipment, net 952 1,793
Other Assets 56 123
-------- --------
Total assets $ 15,957 $ 62,893
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of note payable to a bank $ 308 $ --
Accounts payable 412 733
Accrued expenses 1,820 2,416
Deferred revenue 181 324
-------- --------
Total current liabilities 2,721 3,473
Note Payable to a Bank, less current portion 642 --
Convertible Note Payable (Note 6) 500 --
Commitments and Contingencies (Note 9)
Redeemable Preferred Stock, at redemption value (Note 7) 23,440 --
Stockholders' Equity (Deficit) (Note 8):
Preferred stock, $0.01 par value-
Authorized--0 and 1,000,000 shares at December 31, 1998
and 1999, respectively
Issued and outstanding--No shares -- --
Junior convertible preferred stock, $0.01 par value--
Authorized--3,154,000 and 0 shares at December 31, 1998
and 1999, respectively
Issued and outstanding--3,154,000 and 0 shares at
December 31, 1998 and 1999, respectively 32 --
Common stock, $0.01 par value--
Authorized--17,174,670 and 100,000,000 shares at
December 31, 1998 and 1999, respectively
Issued and outstanding--5,882,490 and 18,888,641 shares
at December 31, 1998 and 1999, respectively 59 189
Additional paid-in capital 68 68,540
Accumulated deficit (11,505) (9,309)
-------- --------
Total stockholders' equity (deficit) (11,346) 59,420
-------- --------
Total liabilities, redeemable preferred stock
and stockholders' equity (deficit) $ 15,957 $ 62,893
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 6
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
Product $ 1,231 $ 6,309 $ 13,454
Software and maintenance 543 1,385 2,230
------- ------- --------
Total revenues 1,774 7,694 15,684
Cost of Revenues 1,031 3,238 5,099
------- ------- --------
Gross profit 743 4,456 10,585
Operating Expenses:
Research and development 2,727 4,171 5,936
Selling and marketing 883 2,078 2,732
General and administrative 751 1,299 1,557
Litigation 462 1,118 --
Acquisition costs -- -- 200
------- ------- --------
Total operating expenses 4,823 8,666 10,425
------- ------- --------
Income (loss) from operations (4,080) (4,210) 160
Interest Income 212 538 2,195
Other Expenses, net (33) (82) (68)
------- ------- --------
Income (loss) before income taxes (3,901) (3,754) 2,287
Provision for Income Taxes -- -- 91
------- ------- --------
Net income (loss) $(3,901) $(3,754) $ 2,196
======= ======= ========
Net Income (Loss) per Share:
Basic $ (0.72) $ (0.66) $ 0.16
======= ======= ========
Diluted $ (0.72) $ (0.66) $ 0.12
======= ======= ========
Weighted Average Common Shares Outstanding:
Basic 5,383 5,647 14,039
======= ======= ========
Diluted 5,383 5,647 19,083
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 7
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNIOR CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- TOTAL
$0.01 $0.01 ADDITIONAL STOCKHOLDERS'
NUMBER PAR NUMBER PAR PAID-IN ACCUMULATED EQUITY
OF SHARES VALUE OF SHARES VALUE CAPITAL DEFICIT (DEFICIT)
--------- ----- ---------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,154,000 $ 32 5,378,174 $ 54 $ 1 $ (3,758) $ (3,671)
Offering costs related to the issuance
of Class B redeemable convertible
preferred stock -- -- -- -- -- (62) (62)
Conversion of note payable into
common stock -- -- 20,866 -- -- -- --
Exercise of employee stock options -- -- 3,360 -- -- -- --
Net loss -- -- -- -- -- (3,901) (3,901)
---------- ---- ---------- ------- -------- -------- --------
Balance, December 31, 1997 3,154,000 32 5,402,400 54 1 (7,721) (7,634)
Offering costs related to the issuance
of Class C redeemable convertible
preferred stock -- -- -- -- -- (30) (30)
Exercise of employee stock options -- -- 480,090 5 67 -- 72
Net loss -- -- -- -- -- (3,754) (3,754)
---------- ---- ---------- ------- -------- -------- --------
Balance, December 31,1998 3,154,000 32 5,882,490 59 68 (11,505) (11,346)
Conversion of Class B redeemable
convertible preferred stock into
common stock -- -- 3,416,575 34 10,215 -- 10,249
Conversion of Class C redeemable
convertible preferred stock into
common stock -- -- 1,137,858 11 4,995 -- 5,006
Conversion of junior convertible
preferred stock into common stock (3,154,000) (32) 3,154,000 32 -- -- --
Conversion of convertible note payable
into common stock -- -- 125,000 1 499 -- 500
Common stock issued during initial
public offering and concurrent
private placement -- -- 4,352,500 44 51,610 -- 51,654
Exercise of employee stock options -- -- 828,618 8 1,153 -- 1,161
Repurchase and cancellation of
common stock -- -- (8,400) -- -- -- --
Net income -- -- -- -- -- 2,196 2,196
---------- ---- ---------- ---- -------- -------- --------
Balance, December 31, 1999 -- $ -- 18,888,641 $189 $ 68,540 $ (9,309) $ 59,420
========== ==== ========== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 8
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (3,901) $ (3,754) $ 2,196
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization 211 410 715
Issuance of convertible note payable in settlement of
litigation -- 500 --
Changes in operating assets and liabilities--
Accounts receivable (125) (602) (1,427)
Inventory (96) (146) (314)
Prepaid expenses and other current assets (229) 144 (777)
Accounts payable 119 209 321
Accrued expenses 445 1,276 596
Deferred revenue (4) 127 143
-------- -------- --------
Net cash provided by (used in) operating activities (3,580) (1,836) 1,453
Cash Flows from Investing Activities:
Purchase of marketable securities -- -- (61,327)
Proceeds from sale or maturity of marketable securities -- -- 24,687
Purchase of property and equipment (587) (659) (1,556)
Decrease (increase) in other assets (93) 43 (67)
-------- -------- --------
Net cash used in investing activities (680) (616) (38,263)
Cash Flows from Financing Activities:
Borrowings under note payable to a bank 436 689 450
Payments on note payable to a bank -- (174) (1,400)
Net proceeds from initial public offering and concurrent
private placement of common stock -- -- 51,654
Net proceeds from issuance of Class B redeemable convertible
preferred stock 10,098 89 --
Net proceeds from issuance of Class C redeemable convertible
preferred stock -- 4,526 450
Proceeds from exercise of stock options -- 72 1,161
Redemption of Class A redeemable preferred stock -- -- (8,635)
-------- -------- --------
Net cash provided by financing activities 10,534 5,202 43,680
-------- -------- --------
Net increase in cash and cash equivalents 6,274 2,750 6,870
Cash and Cash Equivalents, beginning of year 4,591 10,865 13,615
-------- -------- --------
Cash and Cash Equivalents, end of year $ 10,865 $ 13,615 $ 20,485
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 129 $ 65 $ 42
======== ======== ========
Cash paid during the year for income taxes $ -- $ 4 $ 72
======== ======== ========
Supplemental Disclosure of Noncash Financing Activities:
Conversion of note payable into common stock and Class A
redeemable preferred stock $ 34 $ -- $ --
======== ======== ========
Conversion of note payable into common stock $ -- $ -- $ 500
======== ======== ========
Conversion of junior convertible preferred stock into common
stock $ -- $ -- $ 32
======== ======== ========
Conversion of Class B redeemable convertible preferred stock
into common stock $ -- $ -- $ 10,249
======== ======== ========
Conversion of Class C redeemable convertible preferred stock
into common stock $ -- $ -- $ 5,006
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 9
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(1) NATURE OF OPERATIONS
Maker Communications, Inc. (Maker), a Delaware corporation, was founded
in 1994. Maker is a fabless semiconductor company that develops and
markets high-performance programmable communications processors,
development tools and application software for use in communications
systems equipment. Maker sells its products to telecommunications and
data networking vendors based primarily in North America.
In 1998, Maker established a wholly owned subsidiary, Maker
Communications Securities Corporation, which is a qualified Massachusetts
securities corporation.
On December 18, 1999, Maker entered into an Agreement and Plan of Merger
with Conexant Systems, Inc. (Conexant), whereby Maker will be merged with
and into Conexant. Holders of Maker common stock would receive 0.66 of a
share of Conexant common stock for each share of Maker common stock.
Consummation of the merger is subject to customary conditions to closing,
including the approval of the stockholders of Maker and certain
regulatory approvals. The merger will be accounted for as a "purchase"
transaction for accounting and financial reporting purposes and is
intended to qualify as a tax-free reorganization for federal income tax
purposes. The merger is expected to close in March 2000.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain significant accounting policies as described in
this note and elsewhere in the accompanying consolidated financial
statements and notes.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Maker and its wholly owned subsidiary. All significant
intercompany balances have been eliminated in consolidation.
(b) INITIAL PUBLIC OFFERING
Maker completed its initial public offering (the Offering) of
3,852,500 shares of its common stock in May 1999, including
502,500 shares issued in connection with the exercise of the
underwriters' over-allotment option on the Offering date. These
shares were offered to the public at $13 per share, which net of
Offering expenses and the $0.91 per share underwriting discount,
resulted in net proceeds of $45,609,000. In addition. Maker sold
500,000 shares of common stock in a concurrent private placement
that was not underwritten at a price of $12.09 per share,
resulting in net proceeds of $6,045,000. Concurrent with the
Offering, all of the Class A redeemable preferred stock was
redeemed, resulting in cash payments totaling $8,635,000, and all
Class B convertible preferred stock, Class C convertible preferred
stock and junior convertible preferred stock were all converted
into an aggregate of 7,708,433 shares of common stock on the date
of the Offering. Proceeds from the Offering were used to repay
bank debt of $1,243,000 in May 1999.
F-7
<PAGE> 10
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(c) REVENUE RECOGNITION
Revenue derived from the sale of processors is recognized upon
shipment. Provisions are made at that time for any applicable
warranty costs expected to be incurred. Revenue from software
license agreements is recognized upon execution of a license
agreement and delivery of the software, provided that the fee is
fixed or determinable and deemed collectible by management.
Revenue from software maintenance agreements is recognized ratably
over the term of the maintenance period, which is typically one
year. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue.
Maker recognizes software revenue in accordance with the
provisions of Statement of Position (SOP) No. 97-2, Software
Revenue Recognition.
(d) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated using the weighted
average number of common shares outstanding. Diluted net income
(loss) per share is computed on the basis of the weighted average
number of common shares outstanding and the effect of dilutive
securities using the Treasury stock method. The following table
sets forth the computation of basic and diluted net income (loss)
per share, including a reconciliation of basic and diluted
weighted average shares outstanding (in thousands, except per
share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss) $(3,901) $(3,754) $ 2,196
======= ======= =======
Basic weighted average
common shares outstanding 5,383 5,647 14,039
Effect of dilutive securities:
Stock options -- -- 2,265
Convertible note -- -- 40
Convertible preferred
stock -- -- 2,739
------- ------- -------
Diluted weighted average
common shares outstanding 5,383 5,647 19,083
======= ======= =======
Basic net income (loss) per
share $ (0.72) $ (0.66) $ 0.16
======= ======= =======
Diluted net income (loss)
per share $ (0.72) $ (0.66) $ 0.12
======= ======= =======
</TABLE>
Options to purchase a weighted total of 492,000 and 1,503,000
common shares have been excluded from the computation of diluted
weighted average shares outstanding for the years ended December
31, 1997 and 1998, respectively, since their effect is
antidilutive, as Maker has recorded a net loss for those periods.
For the year ended December 31, 1999, options to purchase a
weighted
F-8
<PAGE> 11
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
total of 66,000 common shares were excluded from the computation
of diluted weighted average shares outstanding because the
exercise prices of such options were greater than the average fair
market value of Maker's common stock and, therefore, would be
antidilutive.
(e) COST OF REVENUES
Cost of revenues includes the cost of purchasing fully assembled,
tested and packaged communications processors from Maker's
independent foundries, production related expenses, warranty, and
quality assurance for those products, as well as costs of
personnel associated with supporting Maker's customers. Cost of
revenues also includes software costs, consisting of the cost of
media on which it is delivered, which amounts are not significant.
(f) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Maker classifies short-term, highly liquid investments with
original maturity dates of 90 days or less as cash equivalents and
all investments with original maturity dates greater than 90 days
as marketable securities. Marketable securities with remaining
maturities of less than one year as of the balance sheet date are
classified as current.
At December 31, 1999, all of Maker's cash equivalents and
marketable securities were in commercial paper, corporate bonds
and government securities and were classified as held-to-maturity.
Held-to-maturity securities represent those securities for which
Maker has the intent and ability to hold to maturity and are
stated at cost, adjusted for amortization of premiums and
discounts.
A summary of held-to-maturity securities at amortized cost, which
approximates market value, by balance sheet caption is as follows
(in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
DECEMBER 31, AVERAGE DECEMBER 31, AVERAGE
1998 MATURITY 1999 MATURITY
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Cash equivalents $9,051 -- $14,452 --
Marketable securities,
current -- -- 24,640 3 months
Marketable securities,
noncurrent -- -- 12,000 18 months
------ -------
Total held-to-maturity
securities $9,051 $51,092
====== =======
</TABLE>
(g) INVENTORY
Inventory, which consists of finished goods, is stated at the
lower of cost (first-in, first-out) or market.
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and
F-9
<PAGE> 12
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
amortization. Maker provides for depreciation and amortization
using the straight-line method to allocate the cost of property
and equipment over their estimated useful lives, as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
Computer equipment 3 years
Computer software 3 years
Leasehold improvements Life of lease
Furniture and fixtures 5 years
Property and equipment at December 31, 1998 and 1999 consisted of
the following (in thousands):
1998 1999
------ ------
Computer equipment $1,236 $2,207
Computer software 422 873
Leasehold improvements 48 139
Furniture and fixtures 53 96
------ ------
1,759 3,315
Less--Accumulated depreciation
and amortization 807 1,522
------ ------
$ 952 $1,793
====== ======
(i) SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed, Maker has evaluated the
establishment of technological feasibility of its various products
during the development phase. Due to the dynamic changes in the
market, Maker has concluded that it cannot determine technological
feasibility until the development phase of the project is nearly
complete. The time period during which costs could be capitalized
from the point of reaching technological feasibility until the
time of general product release is very short and, consequently,
the amounts that could be capitalized are not material to Maker's
financial position or results of operations. Therefore, Maker
charges all research and development expenses to operations in the
period incurred.
(j) INCOME TAXES
Maker accounts for income taxes in accordance with the provisions
of SFAS No. 109, Accounting for Income Taxes. This statement
requires Maker to recognize a current tax asset or liability for
current taxes payable or refundable and to record a deferred tax
asset or liability for the estimated future tax effects of
temporary differences and carryforwards to the extent that they
are realizable. A deferred tax provision or benefit results from
the net change in deferred tax assets and liabilities during the
year. A deferred tax valuation allowance is required if it is more
likely than not that all or a portion of the recorded deferred tax
assets will not be realized.
F-10
<PAGE> 13
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and use 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
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(l) CONCENTRATION OF CREDIT RISK
Maker has no significant off-balance-sheet concentrations of
credit risk, such as foreign exchange contracts, option contracts
or other foreign hedging arrangements. Financial instruments that
potentially subject Maker to concentrations of credit risk are
principally cash equivalents, marketable securities, accounts
receivable, accounts payable, notes payable and redeemable
preferred stock. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom Maker
makes substantial sales. Maker performs periodic credit
evaluations of its customers and generally does not require
collateral. At December 31, 1998 and 1999, Maker had $90,000 in
allowances for estimated losses.
The following table summarizes the number of customers that
individually comprise greater than 10% of the total accounts
receivable and their aggregate percentage of Maker's total
accounts receivable.
PERCENT OF
NUMBER OF TOTAL ACCOUNTS
CUSTOMERS RECEIVABLE
--------- --------------
December 31, 1998 3 58%
December 31, 1999 4 52%
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable, accounts
payable, notes payable and redeemable preferred stock. The
estimated fair value of these instruments approximates their
carrying value.
(o) STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, requires
the measurement of the fair value of stock options or warrants to
be included in the consolidated statement of operations or
disclosed in the notes to consolidated financial statements. Maker
has determined that it will account for stock-based compensation
for employees under the intrinsic-value-based method of Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees, and elect the disclosure-only alternative under SFAS
No. 123.
F-11
<PAGE> 14
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(p) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, Reporting Comprehensive Income. Maker does
not have any components of comprehensive income besides its
reported net income (loss).
(3) ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consisted of the following
(in thousands):
DECEMBER 31,
------------------------
1998 1999
------ ------
Payroll and related costs $ 520 $ 937
Professional fees 156 345
Production costs 231 128
Other 913 1,006
------ ------
$1,820 $2,416
====== ======
(4) INCOME TAXES
As of December 31, 1999, Maker has net operating loss carryforwards of
approximately $5,947,000 available to reduce future federal and state
income taxes, if any. Maker also has available federal tax credits of
approximately $492,000 expiring through 2011. If not utilized, these
carryforwards expire at various dates through 2019. If substantial
changes in Maker's ownership should occur, as defined by Section 382 of
the Internal Revenue Code (the Code), there could be annual limitations
on the amount of carryforwards that can be realized in future periods.
Maker has completed several financings since its inception and has
incurred an ownership change as defined under the Code. Maker does not
believe that this change in ownership will have a material impact on its
ability to utilize its net operating loss and tax credit carryforwards.
Net deferred tax assets consist of the following (in thousands):
DECEMBER 31,
-----------------------
1998 1999
------ ------
Net operating loss carryforwards $3,507 $2,395
Nondeductible expenses and reserves 550 743
------ ------
4,057 3,138
Less--Valuation allowance 4,057 3,138
------ ------
$ -- $ --
====== ======
Due to the uncertainty surrounding Maker's ability to utilize its net
operating loss carryforwards, Maker has provided a full valuation
allowance against its otherwise recognizable deferred tax asset at
December 31, 1998 and 1999. For the year ended December 31, 1999, Maker
recorded a provision for income taxes currently payable in the amount of
$91,000 for minimum federal and state tax liabilities.
F-12
<PAGE> 15
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(5) NOTES PAYABLE TO A BANK
(a) WORKING CAPITAL LINE OF CREDIT
Maker has a working capital line of credit with a bank, whereby it
can borrow up to $2,500,000. Borrowings bear interest at the
bank's prime rate (8.5% at December 31, 1999) plus 0.25%. The line
of credit is collateralized by substantially all assets of Maker.
The line of credit expires in February 2000. Maker had no
borrowings under the working capital line of credit as of December
31, 1998 and 1999.
(b) CAPITAL EXPENDITURE LINE OF CREDIT
Maker had borrowings under a modified equipment line-of-credit
facility with the same bank. Borrowings were payable over a 30- to
39-month period and bore interest at the bank's prime rate (8.5%
at December 31, 1999) plus 0.25% to prime plus 1.0%. In 1999,
Maker borrowed an additional $450,000 under its existing equipment
line-of-credit facility. On February 3, 1999, Maker entered into a
loan modification agreement with the bank that provided Maker with
an additional $1,000,000 of borrowing availability under its
capital expenditure line of credit. As of December 31, 1999, Maker
had $1,000,000 available under the modified equipment line of
credit. All borrowings under the equipment line of credit were
collateralized by substantially all assets of Maker. Under these
agreements, Maker is required to comply with certain restrictive
covenants. As of December 31, 1998 and 1999, Maker was in
compliance with all such covenants. In connection with Maker's
initial public offering in May 1999, all outstanding amounts under
its capital expenditure line of credit were repaid and Maker had
no borrowings under this line as of December 31, 1999.
(6) CONVERTIBLE NOTE PAYABLE
In July 1998, Maker issued a $500,000 convertible note payable to LSI
Logic Corporation (LSI), which accrued interest at an annual rate of
6.5%. All principal and interest was due on June 30, 2001. Upon the
occurrence of certain events, LSI had the ability to convert the
principal of the note into fully paid and nonassessable shares of common
stock of Maker at the lesser of $4.00 per share, subject to certain
dilutive events, as defined, or the subsequent sale price per share of
common stock issued by Maker in which the aggregate gross proceeds
received by Maker is at least $1,000,000. In April 1999, LSI notified
Maker of its intention to convert the note to 125,000 shares of Maker's
common stock, which occurred prior to the closing of Maker's initial
public offering.
(7) REDEEMABLE PREFERRED STOCK
(a) CLASS A REDEEMABLE PREFERRED STOCK
In September 1996, Maker authorized the issuance of up to
5,380,000 shares of Class A redeemable preferred stock, $0.01 par
value and issued 5,359,134 shares at $1.605 per share resulting in
net proceeds of approximately $8,537,000. In October 1997, Maker
issued an additional 20,866 shares of Class A redeemable preferred
stock at $1.605 per share in exchange for the
F-13
<PAGE> 16
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
conversion of a note payable to a stockholder in the amount of
approximately $34,000. These shares were nonvoting, nonconvertible
and had dividend rights superior to junior convertible preferred
stock, Class B redeemable convertible preferred stock, Class C
redeemable convertible preferred stock and common stock. The Class
A redeemable preferred stock had a liquidation preference of
$1.605 per share plus all declared but unpaid dividends. In May
1999, in connection with Maker's initial public offering, the
Class A redeemable preferred stock was redeemed for approximately
$8,635,000.
(b) CLASS B REDEEMABLE CONVERTIBLE PREFERRED STOCK
In October 1997, Maker authorized the issuance of up to 3,416,670
shares of Class B redeemable convertible preferred stock, $0.01
par value, and issued 3,386,675 shares at $3.00 per share,
resulting in net proceeds of approximately $10,098,000. In July
1998, Maker issued an additional 29,000 shares, resulting in net
proceeds of approximately $89,000. These shares were convertible
into common stock at the rate of one share of common stock for
each share of preferred stock, adjustable for certain dilutive
events. These shares had dividend rights superior to junior
convertible preferred stock and common stock and similar to the
Class C redeemable convertible preferred stock. The Class B
redeemable convertible preferred stock had a liquidation
preference of $3.00 per share plus all declared but unpaid
dividends. Conversion was automatic upon the closing of Maker's
initial public offering of common stock, which occurred in May
1999. All outstanding shares of Class B redeemable convertible
preferred stock were converted into 3,416,575 shares of common
stock.
(c) CLASS C REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1998, Maker authorized the issuance of up to 1,138,000
shares of Class C redeemable convertible preferred stock and
issued 1,035,586 shares at $4.40 per share resulting in net
proceeds of approximately $4,526,000. In January 1999, Maker sold
an additional 102,272 shares of Class C redeemable convertible
preferred stock at $4.40 per share, resulting in net proceeds to
Maker of approximately $450,000. These shares were convertible
into common stock at the rate of one share of common stock for
each share of preferred stock, adjustable for certain dilutive
events. These shares had dividend rights superior to junior
convertible preferred stock and common stock and similar to Class
B redeemable convertible preferred stock. The Class C redeemable
convertible preferred stock had a liquidation preference of $4.40
per share plus all declared but unpaid dividends. Conversion was
automatic upon the closing of Maker's initial public offering of
common stock in May 1999. All outstanding shares of Class C
redeemable convertible preferred stock were converted into
1,137,858 shares of common stock.
(8) STOCKHOLDERS' EQUITY (DEFICIT)
(a) JUNIOR CONVERTIBLE PREFERRED STOCK
The junior convertible preferred stock was subordinate to Class A
redeemable preferred stock and Class B convertible preferred stock
and Class C convertible preferred stock and superior to common
stock with regard to liquidation. Junior
F-14
<PAGE> 17
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
convertible preferred stock was optionally redeemable by Maker at
a price of $0.005 per share subsequent to the redemption of the
Class A redeemable preferred stock. Each share of junior
convertible preferred stock could, at the option of the holder, be
converted to one share of common stock, as adjusted for certain
events. Voting rights were provided to junior convertible
preferred stock in proportion to the number of shares of common
stock that would be received upon conversion.
Conversion occurred automatically upon the completion of Maker's
initial public offering. All outstanding shares of junior
convertible preferred stock were converted into 3,154,000 shares
of common stock.
(b) STOCK PLANS
1996 OPTION PLAN
During 1996, the board of directors approved the 1996 Stock
Option Plan (the 1996 Plan). The board of directors has
reserved 3,876,000 shares of common stock for issuance under
the 1996 Plan. Options issued under the 1996 Plan may be either
incentive stock options or nonqualified stock options at the
discretion of the board of directors. Options may be granted to
key employees, officers, consultants and advisers of Maker.
Options expire up to 10 years from the date of grant or as
determined by the board of directors. Options vest over a term
to be established by the board of directors at the date of
grant. Under the 1996 Plan, at the option of the board of
directors, certain option grants may be immediately exercisable
but are subject to a right to repurchase at cost at the option
of the board of directors, pursuant to the vesting schedule of
such grant. In addition, upon a change in control of Maker, as
defined, the exercisability of options due to vest during the
following 12-month period are automatically accelerated. Upon
the effectiveness of Maker's 1999 Incentive Stock Plan, no
further options were granted under the 1996 Plan.
1999 INCENTIVE STOCK PLAN
In April 1999, the board of directors approved the 1999
Incentive Stock Plan (1999 Plan) permitting the grant of stock
options, which may be either incentive stock or nonqualified
options and stock awards. This plan became effective upon the
closing of Maker's initial public offering in May 1999. The
maximum number of shares of Maker's common stock available for
stock options and stock awards granted under the 1999 Plan is
2,600,000 plus annual cumulative increases on each January 1,
beginning in 2000 equal to (a) 5% of Maker's issued and
outstanding common stock calculated on a fully diluted basis or
(b) a lesser amount, as determined by the board of directors.
Options designated as incentive stock options may be granted
only to employees of Maker. Non-qualified options may be
granted to any officer, employee, consultant or director of
Maker. No option designated as an incentive stock option shall
be granted to any employee of Maker or any subsidiary if such
employee owns, immediately prior to the grant of an option,
stock representing more than 10% of the combined voting power
of all
F-15
<PAGE> 18
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
classes of stock of Maker, unless the purchase price for the
stock under such option is at least 110% of its fair market
value at the time the option is granted and the option, by its
terms, is not exercisable more than five years from the date it
is granted.
The maximum number of shares of Maker's common stock with
respect to which an option or options may be granted to any
employee in any calendar year shall not exceed 500,000 shares,
taking into account shares subject to options granted and
terminated, or repriced, during such calendar year. Options
granted under the 1999 Incentive Plan will vest as determined
by the board of directors. Upon a change in control of Maker,
the exercisability of options due to vest during the 12-month
period following the change in control are automatically
accelerated.
1999 NON-EMPLOYEE DIRECTOR PLAN
In January 1999, the board of directors adopted a Director
Option Plan (Director Plan) pursuant to which 125,000 shares of
common stock have been reserved for future issuance, plus
annual increases such that the total number of shares subject
to issuance shall be (i) 125,000 on January 1 of each year or
(ii) a lesser amount determined by the board of directors. The
Director Plan provides that each nonemployee director will
automatically be granted an option to purchase 20,000 shares on
the date which such person first becomes a nonemployee
director. In addition, each nonemployee director will
automatically be granted an option to purchase 15,000 shares on
the date two days after Maker announces its fiscal year-end
earnings of each year, if on such date that director will have
served on the board of directors for at least the preceding six
months. Each option has a term of up to 10 years and vests over
a term determined by the board of directors at the time of
grant. In addition, upon a change in control of Maker, as
defined, all unvested options shall vest immediately.
1999 EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the board of directors approved the Maker 1999
Employee Stock Purchase Plan (the Stock Purchase Plan). This
plan became effective upon the closing of Maker's initial
public offering. The Stock Purchase Plan is intended to provide
a means whereby eligible employees may purchase, on a quarterly
basis, common stock of Maker through payroll deductions. Such
payroll deductions cannot amount to less than 1% nor more than
10% of the participant's regular compensation and cannot exceed
$25,000 or 3,000 shares per year. The purchase price of shares
of Maker common stock under the Stock Purchase Plan is the
lower of 85% of the fair market value of a share of common
stock for the first business day of the relevant purchase
period or 85% of such value for the relevant exercise date.
400,000 shares of Maker common stock have been reserved for
issuance under the Stock Purchase Plan. During 1999, no shares
were issued under Maker's Stock Purchase Plan. Maker will
account for the Stock Purchase Plan in accordance with APB No.
25 and, accordingly, no compensation cost will be recognized
under the Stock Purchase Plan. Maker will elect the "disclosure
only" alternative under SFAS No. 123.
F-16
<PAGE> 19
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The following table summarizes option activity under the stock plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE
SHARES PRICE PRICE
--------- ---------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1996 812,950 $.05-$.16 $ .08
Granted 1,163,100 .16- .30 .17
Exercised (3,360) .05 .05
Canceled (44,620) .05- .16 .09
---------- --------- ------
Outstanding, December 31, 1997 1,928,070 .05- .30 .13
Granted 1,782,250 .30-3.75 2.03
Exercised (480,090) .05-1.00 .15
Canceled (611,980) .05- .30 .16
---------- --------- ------
Outstanding, December 31, 1998 2,618,250 .05- 3.75 1.42
Granted 1,060,250 4.40-29.25 16.82
Exercised (828,618) .05- 8.50 1.40
Canceled (188,700) .16- 3.75 1.31
---------- ---------- ------
Outstanding, December 31, 1999 2,661,182 $.05-$29.25 $ 7.57
========== ============ ======
Exercisable, December 31, 1999 379,255 $.05-$8.50 $ 1.33
========== ============ ======
Exercisable, December 31, 1998 263,530 $.05-$3.75 $ 0.16
========== ============ ======
Exercisable, December 31, 1997 264,530 $.05-$.16 $ .07
========== ============ ======
</TABLE>
The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 1999.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 223,240 6.79 $ 0.05 117,360 $0.05
0.16 133,092 7.30 0.16 43,592 0.16
0.30 347,925 8.20 0.30 73,765 0.30
0.75 235,000 8.47 0.75 60,000 0.75
2.00-2.75 471,300 8.71 2.73 11,800 2.51
3.75-4.40 305,750 8.94 3.95 52,550 4.24
8.50-9.50 243,625 5.59 8.95 20,188 8.50
13.00-18.31 55,000 5.56 15.41 -- --
19.72-29.25 646,250 6.27 22.12 -- --
--------- -------
2,661,182 379,255
========= =======
</TABLE>
For purposes of the pro forma disclosures required by SFAS No.
123, the fair value of each option grant under Maker's stock
option plans and the fair value of employee purchase rights under
Maker's Stock Purchase Plan were estimated on the date of grant
using the Black-Scholes option pricing model. The assumptions used
and the weighted average information for the years ended December
31, 1997, 1998 and 1999 are as follows:
F-17
<PAGE> 20
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
STOCK
STOCK OPTION PLANS PURCHASE
----------------------------------------- PLAN
1997 1998 1999 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Risk-free interest rates 5.89-6.46% 4.47-5.49% 4.90-6.04% 6.02%
Expected dividend yield -- -- -- --
Expected life 4 years 4 years 4 years .25 years
Expected volatility 60% 60% 60% 60%
Weighted average fair value of
options granted $.09 $1.02 $8.71 $6.05
Weighted-average remaining
contractual life of options
outstanding 9.27 years 9.13 years 7.47 years --
</TABLE>
Had compensation expense from Maker's stock option plans and Stock
Purchase Plan been determined consistent with SFAS No. 123, net
income (loss) and net income (loss) per share would have been
approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1998 1999
------- ------- ------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss):
As reported $(3,901) $(3,754) $2,196
Pro forma (3,929) (3,967) 672
Net income (loss) per share:
Basic-
As reported $(0.72) $(0.66) $0.16
Pro forma (0.73) (0.70) 0.05
Diluted-
As reported $(0.72) $(0.66) $0.12
Pro forma (0.73) (0.70) 0.04
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
In February 1997, LSI filed a lawsuit against Maker. During July
1998, Maker and LSI reached a settlement agreement under which
Maker paid LSI a lump sum of $200,000 and issued a $500,000
convertible note, as discussed in Note 6. Maker has included in a
separate line item in its consolidated statement of operations the
legal and settlement costs associated which the LSI litigation.
Maker is not currently involved in any litigation that, in
management's opinion, would have a material adverse effect on its
business, operating results or financial condition.
(b) LEASES
Maker has operating leases for various facilities and equipment
expiring at various dates through February 2005. In November 1999,
Maker entered into a new facilities lease, whereby it issued to
the lessor a letter of credit in the
F-18
<PAGE> 21
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
amount of $267,000 as a security deposit. Future minimum lease
payments under the operating leases at December 31, 1999 are as
follows (in thousands):
2000 $ 871
2001 856
2002 870
2003 888
2004 888
2005 148
------
$4,521
======
Rent expense under operating leases totaled approximately
$200,000, $278,000, and $381,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
(10) EMPLOYEE BENEFIT PLAN
Maker has a 401(k) savings and profit-sharing plan (the Plan). All
employees are immediately eligible to participate upon the attainment of
age 21. The Plan is intended to qualify as a defined contribution plan in
accordance with Section 401(k) of the Internal Revenue Code. Participants
may defer up to 15% of their compensation under the Plan. Maker may make
discretionary profit-sharing contributions to the Plan. Participants vest
in Maker's contributions ratably over five years. No discretionary
contributions were made in 1997, 1998 or 1999.
(11) SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
Maker operates in one industry segment, communications processors, and
derives substantially all of its revenues from U.S. customers. Maker had
a total of three customers whose revenue represented a significant
percentage of total revenue in certain or all years, as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---- ---- ----
Customer A 32% 29% 30%
Customer B 23 16 14
Customer C -- 13 --
Customer D -- -- 10
Maker currently outsources substantially all manufacturing, assembly and
test of communications processors to one outside foundry.
F-19
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Financial
Information for Conexant gives effect to the merger with Maker. The historical
financial information set forth below has been derived from, and is qualified by
reference to, the consolidated financial statements of Conexant included in
Conexant's Annual Report on Form 10-K for the year ended September 30, 1999 and
Conexant's Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1999, and the consolidated financial statements of Maker included herein,
and should be read in conjunction with those financial statements and the notes
thereto. The Unaudited Pro Forma Condensed Combined Statements of Operations for
the fiscal year ended September 30, 1999 and for the three months ended December
31, 1999 give effect to the merger as if it had occurred on October 1, 1998. The
Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 1999
gives effect to the merger as if it had occurred on December 31, 1999.
The merger will be accounted for under the purchase method of
accounting. Under the terms of the merger, each share of Maker was exchanged for
0.66 shares of Conexant common stock. Accordingly, the value of the Conexant
shares issued as consideration for the acquisition will be allocated to the
assets acquired and the liabilities assumed based on their estimated fair
values. The excess of the value of such consideration over the estimated fair
value of such assets and liabilities has been preliminarily allocated to certain
identifiable intangible assets, in process research and development, and
goodwill. Based upon the market price of Conexant's common stock on December 17,
1999, the total value of the merger consideration is approximately $979.6
million. The purchase price allocation, including the amount of the charge for
purchased in-process research and development, is preliminary and will be
adjusted upon completion of the final valuation of the assets and liabilities
acquired. The Unaudited Pro Forma Condensed Combined Financial Statements do not
give effect to any synergies which may be realized as a result of the merger.
Additionally, except as indicated in the notes hereto, the Unaudited Pro Forma
Condensed Combined Statements of Operations do not reflect any nonrecurring
charges that may be incurred as a result of the merger with Maker.
The Unaudited Pro Forma Condensed Combined Financial Statements are
provided for informational purposes only and do not purport to present the
combined financial position or results of operations of Conexant and Maker had
the merger assumed therein occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be expected in the
future.
F-20
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
CONEXANT(1) MAKER(1) ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 277,516 $20,485 $(11,600)(2) $ 286,401
Marketable securities................. -- 24,640 -- 24,640
Receivables, net...................... 286,508 2,359 -- 288,867
Inventories, net...................... 222,712 610 -- 223,322
Deferred income taxes................. 81,860 -- -- 81,860
Other current assets.................. 63,866 883 -- 64,749
---------- ------- -------- ----------
Total current assets............. 932,462 48,977 (11,600) 969,839
Marketable securities, noncurrent........ -- 12,000 (12,000)(3) --
Property, plant and equipment, net....... 759,166 1,793 -- 760,959
Intangible assets, net................... 51,437 -- 879,192 (2) 930,629
Other assets............................. 244,479 123 12,000 (3) 258,873
2,271 (4)
---------- ------- -------- ----------
Total assets..................... $1,987,544 $62,893 $869,863 $2,920,300
========== ======= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 224,509 $ 733 $ -- $ 225,242
Deferred revenue...................... 29,170 324 -- 29,494
Accrued compensation and benefits..... 70,808 937 -- 71,745
Other current liabilities............. 30,176 1,479 -- 31,655
---------- ------- -------- ----------
Total current liabilities........ 354,663 3,473 -- 358,136
Convertible subordinated notes........... 350,000 -- -- 350,000
Other long-term liabilities.............. 99,371 -- 68,192 (4) 167,563
---------- ------- -------- ----------
Total liabilities................ 804,034 3,473 68,192 875,699
Commitments and contingencies............ -- -- -- --
Shareholders' equity:
Preferred and junior preferred stock.. -- -- -- --
Common stock.......................... 198,128 189 (189)(5) 210,779
12,651 (5)
Additional paid-in-capital............ 836,820 68,540 (68,540)(5) 1,803,760
966,940 (5)
Retained earnings (deficit)........... 121,883 (9,309) 9,309 (5) 3,383
(118,500)(2)
Accumulated other comprehensive income 29,468 -- -- 29,468
Treasury stock, at cost............... (528) -- -- (528)
Unearned compensation................. (2,261) -- -- (2,261)
---------- ------- -------- ----------
Total shareholders' equity....... 1,183,510 59,420 801,671 2,044,601
---------- ------- -------- ----------
Total liabilities and
shareholders' equity........... $1,987,544 $62,893 $869,863 $2,920,300
========== ======= ======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information.
F-21
<PAGE> 24
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
CONEXANT(1) MAKER(1) ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues........................ $1,444,114 $15,684 $ -- $1,459,798
Cost of goods sold.................. 863,252 5,099 -- 868,351
---------- ------- --------- ----------
Gross margin........................ 580,862 10,585 -- 591,447
Operating expenses:
Research and development............ 310,042 5,936 -- 315,978
Selling, general and
administrative.................... 227,729 4,489 1,870 (6) 234,088
Amortization of intangibles......... 8,364 -- 175,838 (2)(7) 184,202
Special charges -- Rockwell retained
assets............................ 20,000 -- -- 20,000
Special charges -- Other............ 17,906 -- -- 17,906
---------- ------- --------- ----------
Total operating
expenses................ 584,041 10,425 177,708 772,174
---------- ------- --------- ----------
Operating income (loss)............. (3,179) 160 (177,708) (180,727)
Other income, net................... 5,935 2,127 -- 8,062
---------- ------- --------- ----------
Income (loss) before (benefit)
provision for Income taxes........ 2,756 2,287 (177,708) (172,665)
(Benefit) provision for income
taxes............................. (10,173) 91 (714)(8) (10,796)
---------- ------- --------- ----------
Net income (loss)................... $ 12,929 $ 2,196 $(176,994) $ (161,869)
========== ======= ========= ==========
Net income (loss) per share(9):
Basic............................. $ 0.07 $ 0.16 $ (0.79)(10)
Diluted........................... $ 0.06 $ 0.12 $ (0.79)(10)
Number of shares used in per share
computation(9):
Basic............................. 192,551 14,039 205,202 (10)
Diluted........................... 203,484 19,083 205,202 (10)
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information.
F-22
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
CONEXANT(1) MAKER(1) ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues........................ $509,963 $4,871 $ -- $514,834
Cost of goods sold.................. 277,446 1,567 -- 279,013
-------- ------ -------- --------
Gross margin........................ 232,517 3,304 -- 235,821
Operating expenses:
Research and development............ 88,477 1,716 -- 90,193
Selling, general and
administrative.................... 68,168 1,470 -- 69,638
Amortization of intangibles......... 2,405 -- 43,960(2)(7) 46,365
-------- ------ -------- --------
Total operating
expenses................ 159,050 3,186 43,960 206,196
-------- ------ -------- --------
Operating income.................... 73,467 118 (43,960) 29,625
Other income, net................... 578 805 -- 1,383
-------- ------ -------- --------
Income before provision for income
taxes............................. 74,045 923 (43,960) 31,008
Provision for income taxes.......... 22,214 45 -- 22,259
-------- ------ -------- --------
Net income ......................... $ 51,831 $ 878 $(43,960) $ 8,749
======== ====== ======== ========
Net income per share:
Basic............................. $ 0.26 $ 0.05 $ 0.04(10)
Diluted........................... $ 0.24 $ 0.04 $ 0.04(10)
Number of shares used in per share
computation:
Basic............................. 196,715 18,565 209,366(10)
Diluted........................... 228,974 20,749 241,625(10)
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information.
F-23
<PAGE> 26
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Pro forma adjustments for the unaudited pro forma condensed combined balance
sheet as of December 31, 1999 and the unaudited pro forma condensed combined
statements of operations for the year ended September 30, 1999 and for the three
months ended December 31, 1999 are as follows:
(1) Conexant reports its financial information on the basis of a September 30
fiscal year. Maker currently reports its financial information on the basis
of a December 31 fiscal year. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the fiscal year ended September 30, 1999
includes Conexant's historical results of operations for the fiscal year
ended September 30, 1999 and Maker's historical results of operations for
the year ended December 31, 1999. The Unaudited Pro Forma Condensed
Combined Statement of Operations for the three months ended December 31,
1999 includes Conexant's and Maker's historical results of operations for
the three months ended December 31, 1999. The Unaudited Pro Forma Condensed
Combined Balance Sheet combines the historical balance sheets of Conexant
and Maker as of December 31, 1999.
(2) Reflects the preliminary allocation of the purchase price based upon an
estimated total value of the merger consideration of $979.6 million. The
total value of the consideration is based upon the closing market price of
Conexant common stock on December 17, 1999 of $69.625. In addition, the
total cost of the merger includes estimated transaction costs of
approximately $11.6 million. The preliminary allocation includes purchased
in-process research and development of $118.5 million, identifiable
intangible assets of $178.6 million and goodwill of $700.6 million. Upon
completion of the merger, Conexant will record a non-recurring charge for
the amount of the purchased in-process research and development; the other
intangibles will be amortized over an average period of five years. Due to
the nature of the non-recurring charge and the rules governing the pro
forma financial information, the charge for purchased in-process research
and development has been reflected as a reduction of shareholders' equity
and is excluded from the unaudited pro forma condensed combined statement
of operations. The total consideration for the Maker acquisition has been
allocated on a preliminary basis to the tangible and intangible assets and
liabilities acquired based on management's best estimates of their fair
value, with the excess of cost over the net assets acquired allocated to
goodwill as discussed above. This allocation is subject to change, pending
receipt of a final valuation of the assets acquired and liabilities
assumed.
(3) Pro forma reclassifications are made to conform the Maker presentation to
the Conexant presentation.
(4) A deferred tax asset is recorded for the tax benefit which Conexant expects
to realize from the net operating loss carryforwards of Maker. A deferred
tax liability arises from the difference in the book and tax bases of
certain identifiable intangible assets acquired in the merger.
(5) Reflects the conversion of all of the outstanding stock of Maker into
approximately 12,651,000 shares of Conexant (based upon the conversion
ratio of 0.66 as provided for in the merger agreement) and the elimination
of Maker's deficit. In addition, the value of the merger consideration
includes the fair value of Conexant stock options which will be granted to
replace outstanding Maker stock options, estimated using the Black-Scholes
option pricing model.
(6) Reflects retention bonuses earned by officers of Maker in the twelve month
period subsequent to the closing of the merger.
(7) Reflects the amortization of identifiable intangible assets and goodwill
associated with the merger over an average period of five years.
(8) Reflects the estimated tax effects of the pro forma adjustments, based upon
Conexant's estimated incremental tax rate of approximately 38.2%. The pro
forma adjustment for the amortization of identifiable intangibles and
goodwill are excluded from such computation as Conexant does not expect to
realize any tax benefit from these items.
F-24
<PAGE> 27
(9) On November 4, 1998, the board of directors of Rockwell approved the
distribution to its shareowners of all the outstanding shares of the common
stock of its wholly-owned subsidiary, Conexant, by means of a tax-free
spin-off. The distribution occurred at the close of business on December
31, 1998. The fiscal 1999 financial statements include the operating
results of Conexant while it was part of Rockwell prior to the
distribution. Because Conexant was not an independent company during all of
its fiscal year ended September 30, 1999, the Conexant historical net
income per share represents a pro forma net income per share presented as
if the distribution had occurred as of October 1, 1998.
(10) Pro forma net income (loss) reflects the impact of the adjustments above.
Pro forma basic and diluted net income (loss) per share is computed using
the weighted-average number of shares of common stock outstanding after the
issuance of an estimated 12,651,000 shares of Conexant common stock to
acquire the outstanding shares of Maker common stock. For the year ended
September 30, 1999, pro forma diluted net income (loss) per share does not
include the effect of potentially dilutive options or convertible debt
securities as such securities are antidilutive.
F-25
<PAGE> 28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 18, 2000 included in this Form 8-K into the Company's
previously filed Registration Statements File Nos. 333-70085, 333-69385,
333-68755, 333-84187, 333-91347, 333-82399, 333-92437, 333-96033, 333-30596,
333-32468, and 333-32448.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 3, 2000
