<PAGE> 1
================================================================================
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): FEBRUARY 16, 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)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS
On December 18, 1999, Conexant Systems, Inc. ("Conexant" or the "Company"), a
Delaware corporation, Maker Communications, Inc. ("Maker"), a Delaware
corporation, and Merlot Acquisition Corporation ("Merger Sub"), a Delaware
corporation and wholly-owned subsidiary of Conexant, entered into an Agreement
and Plan of Merger, dated as of December 18, 1999 (the "Merger Agreement"),
pursuant to which, among other things, Merger Sub will merge with and into Maker
with Maker as the surviving corporation (the "Merger"). The value of the
consideration for the acquisition of Maker will be approximately $957.1 million,
based on the closing price of Conexant common stock on December 17, 1999
($69.625), to be paid in the form of 0.66 share of Conexant common stock, par
value of $1.00 per share, in exchange for each share of Maker common stock, par
value of $0.01 per share.
The transaction is subject to customary regulatory approvals and the approval of
Maker's shareholders. Holders of approximately 35% of Maker's outstanding common
stock have executed agreements to vote their shares in favor of the transaction.
ITEM 7. FINANCIAL STATEMENTS, PROFORMA 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
23.2 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: February 16, 2000 By /s/ DENNIS E. O'REILLY
-----------------------------------
Dennis E. O'Reilly
Senior Vice President,
General Counsel and Secretary
<PAGE> 3
INDEX TO MAKER COMMUNICATIONS, INC. AND SUBSIDIARY'S
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997, and 1998 and the nine months
ended September 30, 1998 and 1999 (unaudited)............. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997, and 1998 and
the nine months ended September 30, 1999 (unaudited)...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, and 1998 and the nine months
ended September 30, 1998 and 1999 (unaudited)............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 4
REPORT OF INDEPENDENT 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,
1997 and 1998, 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, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1999
F-2
<PAGE> 5
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,865 $13,615 $ 18,123
Marketable securities..................................... -- -- 23,487
Accounts receivable, net of reserve of $90, at December
31, 1998 and September 30, 1999........................ 330 932 1,776
Inventory................................................. 150 296 554
Prepaid expenses and other current assets................. 250 106 735
------- ------- ---------
Total current assets.............................. 11,595 14,949 44,675
Marketable securities, noncurrent........................... -- -- 14,235
Property and equipment, net................................. 703 952 1,739
Other assets................................................ 99 56 262
------- ------- ---------
Total assets...................................... $12,397 $15,957 $ 60,911
======= ======= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of note payable to a bank................. $ 145 $ 308 $ --
Accounts payable.......................................... 203 412 752
Accrued expenses.......................................... 544 1,820 1,999
Deferred revenue.......................................... 54 181 634
------- ------- ---------
Total current liabilities......................... 946 2,721 3,385
Note payable to a bank, less current portion................ 290 642 --
Convertible note payable (Note 6)........................... -- 500 --
Commitments and contingencies (Note 9)......................
Redeemable preferred stock, at redemption value (Note 7).... 18,795 23,440 --
Stockholders' equity (deficit) (Note 8):
Junior convertible preferred stock, $.01 par value --
Authorized -- 3,154,000 shares at December 31, 1997 and
1998 and no shares at September 30, 1999
Issued and outstanding -- 3,154,000 shares at December
31, 1997 and 1998 and no shares at September 30,
1999................................................. 32 32 --
Common stock, $.01 par value --
Authorized -- 15,195,710, 17,174,670 and 100,000,000
shares at December 31, 1997 and 1998 and September
30, 1999, respectively
Issued and outstanding -- 5,402,400, 5,882,490 and
18,402,333 shares at December 31, 1997, 1998 and
September 30, 1999, respectively..................... 54 59 184
Additional paid-in capital................................ 1 68 67,529
Accumulated deficit....................................... (7,721) (11,505) (10,187)
------- ------- ---------
Total stockholders' equity (deficit).............. (7,634) (11,346) 57,526
------- ------- ---------
Total liabilities, redeemable preferred stock and
stockholder's equity (deficit).................. $12,397 $15,957 $ 60,911
======= ======= =========
</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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product......................................... $ 101 $ 1,231 $ 6,309 $ 3,935 $9,424
Software and maintenance........................ 241 543 1,385 975 1,389
------- ------- ------- ------- ------
Total revenues.......................... 342 1,774 7,694 4,910 10,813
Cost of revenues.................................. 329 1,031 3,238 2,277 3,532
------- ------- ------- ------- ------
Gross profit...................................... 13 743 4,456 2,633 7,281
------- ------- ------- ------- ------
Operating expenses:
Research and development........................ 1,198 2,727 4,171 2,802 4,220
Selling and marketing........................... 332 883 2,078 1,471 1,882
General and administrative...................... 373 751 1,299 946 1,137
Litigation...................................... -- 462 1,118 1,118 --
------- ------- ------- ------- ------
Total operating expenses................ 1,903 4,823 8,666 6,337 7,239
------- ------- ------- ------- ------
Income (loss) from operations..................... (1,890) (4,080) (4,210) (3,704) 42
Interest income................................... 51 212 538 407 1,389
Other expenses, net............................... (132) (33) (82) (54) (67)
------- ------- ------- ------- ------
Income (loss) before income taxes................. (1,971) (3,901) (3,754) (3,351) 1,364
Provision for income taxes........................ -- -- -- -- 46
------- ------- ------- ------- ------
Net income (loss)............................ $(1,971) $(3,901) $(3,754) $(3,351) $1,318
======= ======= ======= ======= ======
Net income (loss) per share:
Basic........................................... $ (1.30) $ (0.72) $ (0.66) $ (0.60) $ 0.11
------- ------- ------- ------- ------
Diluted......................................... $ (1.30) $ (0.72) $ (0.66) $ (0.60) $ 0.07
======= ======= ======= ======= ======
Weighted average common shares outstanding:
Basic........................................... 1,516 5,383 5,647 5,568 12,513
======= ======= ======= ======= ======
Diluted......................................... 1,516 5,383 5,647 5,568 18,541
======= ======= ======= ======= ======
</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)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNIOR CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------ ------------------ --------------
NUMBER $.01 NUMBER $.01 NUMBER NO ADDITIONAL
OF PAR OF PAR OF PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT
---------- ----- ---------- ----- ------ ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............ -- $ -- -- $ -- 1,000 $ 1 $ -- $ (1,017)
Delaware reincorporation, exchange
of no par value common stock for
$.01 par value common stock..... -- -- 4,019,654 40 (1,000) (1) -- (39)
Conversion of $.01 par value
common stock to junior
convertible preferred stock..... 4,019,654 40 (4,019,654) (40) -- -- -- --
Issuance of common stock.......... -- -- 5,359,134 54 -- -- -- --
Offering costs related to the
issuance of Class A redeemable
preferred stock................. -- -- -- -- -- -- -- (64)
Repurchase and retirement of
junior convertible preferred
stock........................... (865,654) (8) -- -- -- -- -- (667)
Exercise of employee stock
options......................... -- -- 19,040 -- -- -- 1 --
Net loss.......................... -- -- -- -- -- -- -- (1,971)
--------- ----- --------- ----- ------ ---- -------- --------
BALANCE, DECEMBER 31, 1996.......... 3,154,000 32 5,378,174 54 -- -- 1 (3,758)
Offering costs related to the
issuance of Class B redeemable
convertible preferred stock..... -- -- -- -- -- -- -- (62)
Conversion of note payable into
common stock.................... -- -- 20,866 -- -- -- -- --
Exercise of employee stock
options......................... -- -- 3,360 -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- (3,901)
--------- ----- --------- ----- ------ ---- -------- --------
BALANCE, DECEMBER 31, 1997.......... 3,154,000 32 5,402,400 54 -- -- 1 (7,721)
Offering costs related to the
issuance of Class C redeemable
convertible preferred stock..... -- -- -- -- -- -- -- (30)
Exercise of employee stock
options......................... -- -- 480,090 5 -- -- 67 --
Net loss.......................... -- -- -- -- -- -- -- (3,754)
--------- ----- --------- ----- ------ ---- -------- --------
BALANCE, DECEMBER 31, 1998.......... 3,154,000 32 5,882,490 59 -- -- 68 (11,505)
Conversion of Class B redeemable
convertible preferred stock into
common stock (unaudited)........ -- -- 3,416,575 34 -- -- 10,215 --
Conversion of Class C redeemable
convertible preferred stock into
common stock (unaudited)........ -- -- 1,137,858 11 -- -- 4,995 --
Conversion of junior convertible
preferred stock into common
stock (unaudited)............... (3,154,000) (32) 3,154,000 32 -- -- -- --
Conversion of convertible note
payable into common stock
(unaudited)..................... -- -- 125,000 1 -- -- 499 --
Common stock issued during the
initial public offering and
concurrent private placement.... -- -- 4,352,500 44 -- -- 51,610 --
Exercise of employee stock options
(unaudited)..................... -- -- 333,910 3 -- -- 142 --
Net income (unaudited)............ -- -- -- -- -- -- -- 1,318
--------- ----- --------- ----- ------ ---- -------- --------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)....................... -- $ -- 18,402,333 $ 184 -- $ -- $ 67,529 $(10,187)
========= ===== ========== ===== ====== ==== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
BALANCE, JANUARY 1, 1996............ $(1,016)
Delaware reincorporation, exchange
of no par value common stock for
$.01 par value common stock..... --
Conversion of $.01 par value
common stock to junior
convertible preferred stock..... --
Issuance of common stock.......... 54
Offering costs related to the
issuance of Class A redeemable
preferred stock................. (64)
Repurchase and retirement of
junior convertible preferred
stock........................... (675)
Exercise of employee stock
options......................... 1
Net loss.......................... (1,971)
-------
BALANCE, DECEMBER 31, 1996.......... (3,671)
Offering costs related to the
issuance of Class B redeemable
convertible preferred stock..... (62)
Conversion of note payable into
common stock.................... --
Exercise of employee stock
options......................... --
Net loss.......................... (3,901)
-------
BALANCE, DECEMBER 31, 1997.......... (7,634)
Offering costs related to the
issuance of Class C redeemable
convertible preferred stock..... (30)
Exercise of employee stock
options......................... 72
Net loss.......................... (3,754)
-------
BALANCE, DECEMBER 31, 1998.......... (11,346)
Conversion of Class B redeemable
convertible preferred stock into
common stock (unaudited)........ 10,249
Conversion of Class C redeemable
convertible preferred stock into
common stock (unaudited)........ 5,006
Conversion of junior convertible
preferred stock into common
stock (unaudited)............... --
Conversion of convertible note
payable into common stock
(unaudited)..................... 500
Common stock issued during the
initial public offering and
concurrent private placement.... 51,654
Exercise of employee stock options
(unaudited)..................... 145
Net income (unaudited)............ 1,318
-------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)....................... $57,526
=======
</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
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,971) $(3,901) $(3,754) $(3,351) $ 1,318
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities --
Depreciation and amortization............................. 132 211 410 306 472
Issuance of convertible note payable in settlement of
litigation.............................................. -- -- 500 500 --
Changes in operating assets and liabilities --
Accounts receivables.................................... (205) (125) (602) (86) (844)
Inventory............................................... (54) (96) (146) 86 (258)
Prepaid expenses and other current assets............... (11) (229) 144 119 (629)
Accounts payable........................................ 58 119 209 81 340
Accrued expenses........................................ 5 445 1,276 558 179
Deferred revenue........................................ 58 (4) 127 41 453
------- ------- ------- ------- --------
Net cash (used in) provided by operating activities... (1,988) (3,580) (1,836) (1,746) 1,031
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities......................... -- -- -- -- (37,722)
Purchase of property and equipment........................ (206) (587) (659) (426) (1,259)
(Increase) decrease in other assets....................... -- (93) 43 46 (206)
------- ------- ------- ------- --------
Net cash used in investing activities................... (206) (680) (616) (380) (39,187)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable to a bank................... -- 436 689 689 450
Payments on note payable to a bank........................ -- -- (174) (130) (1,400)
Net proceeds from note payable to stockholders............ 1,600 -- -- -- --
Payment of note payable to stockholders................... (2,825) -- -- -- --
Net proceeds from initial public offering of common
stock................................................... -- -- -- -- 45,609
Net proceeds from private placement of common stock....... -- -- -- -- 6,045
Proceeds from issuance of common stock.................... 54 -- -- -- --
Repurchase of Junior convertible preferred stock.......... (675) -- -- -- --
Net proceeds from issuance of Class A redeemable preferred
stock................................................... 8,537 -- -- -- --
Net proceeds from issuance of Class B redeemable
convertible preferred stock............................. -- 10,098 89 89 --
Net proceeds from issuance of Class C redeemable
convertible preferred stock............................. -- -- 4,526 -- 450
Proceeds from exercise of stock options................... 1 -- 72 59 145
Redemption of Class A redeemable preferred Stock.......... -- -- -- -- (8,635)
------- ------- ------- ------- --------
Net cash provided by financing activities............. 6,692 10,534 5,202 707 42,664
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 4,498 6,274 2,750 (1,419) 4,508
Cash and cash equivalents, beginning of period.............. 93 4,591 10,865 10,865 13,615
------- ------- ------- ------- --------
Cash and cash equivalents, end of period.................... $ 4,591 $10,865 $13,615 $ 9,446 $ 18,123
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 176 $ 129 $ 65 $ 49 $ 42
======= ======= ======= ======= ========
Cash paid during the year for income taxes................ $ -- $ -- $ 2 $ 2 $ 72
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
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 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
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying 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) Interim Financial Statements
The accompanying consolidated balance sheet as of September 30, 1999, and
the statements of operations and cash flows for the nine months ended September
30, 1998 and 1999, and the statement of stockholders' equity (deficit) for the
nine months ended September 30, 1999 are unaudited, but in the opinion of
management, include all adjustments, consisting normal recurring adjustments,
necessary for a fair presentation of results for these interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted, although Maker believes that the disclosures included are adequate to
make the information presented not misleading. The results of operations for the
nine months ended September 30, 1999, are not necessarily indicative of the
results to be expected for the entire fiscal year.
(c) 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
F-7
<PAGE> 10
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 the Junior Convertible Preferred Stock, Class B
Convertible Preferred Stock, and Class C Convertible Preferred Stock were all
converted into 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.
(d) 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.
(e) Income (Loss) Per Share
Basic income (loss) per share is calculated using the weighted average
number of common shares outstanding. Diluted 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 income (loss) per share,
including a reconciliation of basic and diluted weighted average shares
outstanding (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net income (loss)................................. $(1,971) $(3,901) $(3,754) $(3,351) $1,318
======= ======= ======= ======= ======
Basic weighted average common shares
outstanding..................................... 1,516 5,383 5,647 5,568 12,513
Effect of dilutive securities:
Stock options................................ -- -- -- -- 2,311
Convertible note............................. -- -- -- -- 54
Convertible preferred stock.................. -- -- -- -- 3,663
------- ------- ------- ------- ------
Diluted weighted average common shares
outstanding..................................... 1,516 5,383 5,647 5,568 18,541
======= ======= ======= ======= ======
Basic net income (loss) per share................. $ (1.30) $ (0.72) $ (0.66) $ (0.60) $ 0.11
======= ======= ======= ======= ======
Diluted net income (loss) per share............... $ (1.30) $ (0.72) $ (0.66) $ (0.60) $ 0.07
======= ======= ======= ======= ======
</TABLE>
Options to purchase a weighted total of 72,000, 492,000, 1,503,000, and
1,391,000 common shares have been excluded from the computation of diluted
weighted average shares outstanding for the years
F-8
<PAGE> 11
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
ended December 31, 1996, 1997 and 1998 and the nine months ended September 30,
1998 respectively since their effect is antidilutive as Maker has recorded a net
loss for those periods. For the nine month period ended September 30, 1999,
options to purchase 18,564 weighted shares of common stock were excluded from
the computation of diluted net income per share 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. In accordance with the SEC Staff
Accounting Bulletin No. 98, Earnings Per Share in an Initial Public Offering,
Maker determined that there were no nominal issuances of Maker's common stock
prior to Maker's initial public offering.
(f) 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.
(g) Cash Equivalents and Marketable Securities
Maker classifies short-term, highly liquid investments with original
maturity dates of ninety days or less as cash equivalents and all investments
with original maturity dates greater than ninety 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 September 30, 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 WEIGHTED
DECEMBER 31, AVERAGE DECEMBER 31, AVERAGE SEPTEMBER 30, AVERAGE
1997 MATURITY 1998 MATURITY 1999 MATURITY
------------ -------- ------------ -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents............. $10,758 -- $9,051 -- $13,935 --
Marketable securities
current...................... -- -- -- -- 23,487 4 months
Marketable securities
non-current................ -- -- -- -- 14,235 21 months
------- ------ -------
Total held-to-maturity
securities............ $10,758 $9,051 $51,657
======= ====== =======
</TABLE>
(h) Inventory
Inventory, which consists of finished goods, is stated at the lower of cost
(first-in, first-out) or market.
F-9
<PAGE> 12
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(i) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and 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:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Computer equipment.......................................... 3 years
Computer software........................................... 3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Life of lease
</TABLE>
Property and equipment at December 31, 1997 and 1998 and September 30, 1999
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Computer equipment....................................... $ 634 $1,236 $1,922
Computer software........................................ 372 422 868
Furniture and fixtures................................... 51 53 96
Leasehold improvements................................... 43 48 132
------ ------ -------
1,100 1,759 3,018
Less-accumulated depreciation and amortization........... (397) (807) (1,279)
------ ------ -------
$ 703 $ 952 $ 1,739
====== ====== =======
</TABLE>
(j) 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.
(k) 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 carry forwards to the extent they are realizable. A
deferred tax
F-10
<PAGE> 13
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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.
(l) 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.
(m) 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. Maker has $90,000 in allowances for estimated
losses at December 31, 1998 and September 30, 1999.
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.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF ACCOUNTS
CUSTOMERS RECEIVABLE
--------- ----------------
<S> <C> <C>
December 31, 1997........................................... 5 77%
December 31, 1998........................................... 3 58%
September 30, 1999.......................................... 3 56%
</TABLE>
(n) 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
F-11
<PAGE> 14
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Principles Board Opinion (APB) No. 25, Accounting For Stock Issued to Employees,
and elect the disclosure-only alternative under SFAS No. 123.
(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 except its reported net loss.
(3) ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 and September 30, 1999
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
Payroll and related costs................................. $204 $ 520 $ 753
Production costs.......................................... -- 231 245
Warranty.................................................. 16 140 162
Other..................................................... 324 929 838
---- ------ ------
$544 $1,820 $1,999
==== ====== ======
</TABLE>
(4) INCOME TAXES
As of December 31, 1998, Maker has net operating loss carryforwards of
approximately $8,710,000 available to reduce future federal and state income
taxes, if any. Maker also has available federal tax credits of approximately
$330,000 expiring through 2010. If not utilized, these carryforwards expire at
various dates through 2018. 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 which 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 2,002 $ 3,507
Nondeductible expenses and reserves......................... 300 550
------- -------
2,302 4,057
Valuation allowance......................................... (2,302) (4,057)
------- -------
$ -- $ --
======= =======
</TABLE>
F-12
<PAGE> 15
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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, 1997 and
1998. Maker recorded a provision for income taxes in the amount of $46,000 for
the nine month period ended September 30, 1999 for minimum federal and state tax
liabilities.
(5) NOTES PAYABLE TO A BANK
(a) Working Capital Line of Credit
On February 18, 1997, Maker entered into a working capital line of credit
of $1,000,000 with a bank. On May 12, 1998 and on February 3, 1999, Maker
entered into loan modification agreements with the bank whereby the working
capital line of credit was increased to $2,000,000 and $2,500,000, respectively.
Borrowings bear interest at the bank's prime rate (7.75% at December 31, 1998)
plus .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 September
30, 1999.
(b) Capital Expenditure Line of Credit
Maker has borrowings under a modified equipment line of credit facility
with the same bank. Borrowings are payable over a 30 to 39 month period and bear
interest at the bank's prime rate (7.75% at December 31, 1998) plus .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 September 30, 1999, Maker had $1,000,000 available under
the modified equipment line of credit. All borrowings under the equipment line
of credit are 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 September 30, 1999, Maker was in compliance with all
such covenants. In connection with Maker's initial public offering in May 1999,
all outstanding amounts under Maker's capital expenditure line of credit were
repaid and Maker has no borrowings under this line as of September 30, 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. The conversion occurred prior to the closing of the Maker's initial
public offering.
F-13
<PAGE> 16
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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, $.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 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. As of December 31, 1998, the preference in
liquidation and redemption value was approximately $8,635,000. 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, $.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 29,900 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. 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. 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. As of December 31, 1998, the
preference in liquidation and redemption value was approximately $10,249,000.
(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. 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. 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. As of December 31, 1998, the
preference in liquidation and redemption value was approximately $4,556,000.
F-14
<PAGE> 17
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
In 1999, Maker increased the authorized shares of common stock to
100,000,000.
(b) Junior Convertible Preferred Stock
In 1996, Maker authorized 4,019,654 shares of junior convertible preferred
stock, $0.01 par value. In September 1996, each outstanding share of $.01 par
value common stock, totaling 4,019,654 shares, was exchanged for one share of
junior convertible preferred stock. In October 1996, Maker repurchased and
retired 865,654 shares of 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 in regard to
liquidation. Junior 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.
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. 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.
(c) 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 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 twelve 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 successful 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
F-15
<PAGE> 18
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 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 twelve 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 non-employee director will automatically be granted an option
to purchase 20,000 shares on the date which such person first becomes a
non-employee director. In addition, each non-employee 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 in the Director Plan, 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 proposed 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. 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
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following table summarizes option activity under the stock plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Granted......................................... 831,990 $ .05-$.16 $ .08
Exercised....................................... (19,040) .05 .05
--------- ----------- ------
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......................................... 484,250 4.40-29.25 11.34
Exercised....................................... (333,910) .05-4.40 .43
Canceled........................................ (188,700) .16-3.75 1.31
--------- ----------- ------
Outstanding, September 30, 1999................. 2,579,890 $ .05-29.25 $ 3.41
========= =========== ======
Exercisable, September 30, 1999................. 531,594 $ .05-8.50 $ 1.69
========= =========== ======
</TABLE>
The following table summarizes information relating to currently
outstanding and exercisable options as of September 30, 1999.
<TABLE>
<CAPTION>
OUTSTANDING
-----------------------------------------
WEIGHTED EXERCISABLE
AVERAGE --------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.05.................. 255,090 7.04 $0.05 125,020 $0.05
0.16.................. 205,550 7.63 0.16 41,513 0.16
0.30.................. 363,750 8.45 0.30 68,586 0.30
0.75.................. 255,000 8.73 0.75 67,500 0.75
$ 2.00- 2.75.................. 818,000 8.96 2.74 163,600 2.74
3.75- 4.40.................. 313,250 9.11 3.95 45,000 4.33
8.50- 9.50.................. 244,000 5.84 8.95 20,375 8.50
13.00.................. 30,000 5.61 13.00 --
21.00-29.25.................. 95,250 5.86 25.32 --
--------- -------
2,579,890 531,594
========= =======
</TABLE>
F-17
<PAGE> 20
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
For purposes of the pro forma disclosures required by SFAS No. 123, the
fair value of each option grant was 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, 1996, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rates............................ 6.09% 5.89-6.46% 4.47-5.49%
Expected dividend yield............................. -- -- --
Expected life....................................... 4 years 4 years 4 years
Expected volatility................................. 60% 60% 60%
Weighted average fair value of options granted...... $.04 $.09 $1.02
Weighted-average remaining contractual life of
options outstanding............................... 9.81 years 9.27 years 9.13 years
</TABLE>
Had compensation expense from Maker's stock option plan been determined
consistent with SFAS No. 123, net loss and net loss per share would have been
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss:
As reported............................................. $(1,971) $(3,901) $(3,754)
Pro forma............................................... (1,974) (3,929) (3,967)
Basic and diluted net loss per share:
As reported............................................. $ (1.30) $ (0.72) $ (0.66)
Pro forma............................................... (1.30) (0.73) (0.70)
</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 which, in management's
opinion, would have a material adverse effect on its business, operating results
or financial condition.
F-18
<PAGE> 21
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(b) Leases
Maker has operating leases for various facilities and equipment expiring at
various dates through August 2001. Future minimum lease payments at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $359
2000........................................................ 166
2001........................................................ 5
----
$530
====
</TABLE>
Rent expense under operating leases totaled approximately $92,000,
$200,000, $278,000, $206,000 and $286,000 for the years ended December 31, 1996,
1997 and 1998 and nine months ended September 30, 1998 and 1999, respectively.
On November 4, 1999, Maker entered into a new lease agreement whereby Maker
would occupy approximately 41,000 square feet. The lease is an operating lease
and has a term of five years from the commencement date, which is scheduled to
be during the first quarter of 2000. Future minimum lease payments escalate
annually over the life of the lease and range from approximately $820,000 to
$890,000, annually.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, Maker adopted 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 1996, 1997 or 1998 or the nine months
ended September 30, 1999.
(11) SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
Maker operates in one industry segment, communications processors, and
derives substantially all of its revenues from US customers. Maker had a total
of three customers whose revenue represented a significant percentage of total
revenue in certain or all years or periods as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
Customer A............................................. 32% 29% 21% 33%
Customer B............................................. 23 16 21 16
Customer C............................................. -- 13 11 12
</TABLE>
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 Statement of Operations for the
fiscal year ended September 30, 1999 gives effect to the merger as if it had
occurred on October 1, 1998. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the three months ended December 31, 1999 gives
effect to the merger as if it had occurred on October 1, 1999. 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 will be 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 $957.1 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 $18,123 $(11,600)(2) $ 284,039
Marketable securities.................... -- 23,487 -- 23,487
Receivables, net......................... 286,508 1,776 -- 288,284
Inventories, net......................... 222,712 554 -- 223,266
Deferred income taxes.................... 81,860 -- -- 81,860
Other current assets..................... 63,866 735 -- 64,601
---------- ------- -------- ----------
Total current assets................ 932,462 44,675 (11,600) 965,537
Marketable securities, noncurrent........... -- 14,235 (14,235)(3) --
Property, plant and equipment, net.......... 759,166 1,739 -- 760,905
Intangible assets, net...................... 51,437 -- 907,645 (2) 959,082
Other assets................................ 244,479 262 14,235 (3) 261,258
2,282 (4)
---------- ------- -------- ----------
Total assets........................ $1,987,544 $60,911 $898,327 $2,946,782
========== ======= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 224,509 $ 752 $ -- $ 225,261
Deferred revenue......................... 29,170 634 -- 29,804
Accrued compensation and benefits........ 70,808 753 -- 71,561
Other current liabilities................ 30,176 1,246 -- 31,422
---------- ------- -------- ----------
Total current liabilities........... 354,663 3,385 -- 358,048
Convertible subordinated notes.............. 350,000 -- -- 350,000
Other long-term liabilities................. 99,371 -- 29,712 (4) 129,083
---------- ------- -------- ----------
Total liabilities................... 804,034 3,385 29,712 837,131
Commitments and contingencies............... -- -- -- --
Shareholders' equity:
Preferred and junior preferred stock..... -- -- -- --
Common stock............................. 198,128 184 (184)(5) 210,324
12,196 (5)
Additional paid-in-capital............... 836,820 67,529 (67,529)(5) 1,781,765
944,945 (5)
Retained earnings (deficit).............. 121,883 (10,187) 10,187 (5) 90,883
(31,000)(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 57,526 868,615 2,109,651
---------- ------- -------- ----------
Total liabilities and shareholders'
equity............................ $1,987,544 $60,911 $898,327 $2,946,782
========== ======= ======== ==========
</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 $13,597 $ -- $1,457,711
Cost of goods sold.................. 863,252 4,493 -- 867,745
---------- ------- --------- ----------
Gross margin........................ 580,862 9,104 -- 589,966
Operating expenses:
Research and development............ 310,042 5,589 -- 315,631
Selling, general and
administrative.................... 227,729 3,979 1,870 (6) 233,578
Amortization of intangibles......... 8,364 -- 181,529 (2)(7) 189,893
Special charges -- Rockwell retained
assets............................ 20,000 -- -- 20,000
Special charges -- Other............ 17,906 -- -- 17,906
---------- ------- --------- ----------
Total operating
expenses................ 584,041 9,568 183,399 777,008
---------- ------- --------- ----------
Operating loss...................... (3,179) (464) (183,399) (187,042)
Other income, net................... 5,935 1,425 -- 7,360
---------- ------- --------- ----------
Income (loss) before (benefit)
provision for Income taxes........ 2,756 961 (183,399) (179,682)
(Benefit) provision for income
taxes............................. (10,173) 46 (714)(8) (10,841)
---------- ------- --------- ----------
Net income (loss)................... $ 12,929 $ 915 $(182,685) $ (168,841)
========== ======= ========= ==========
Net income (loss) per share(9):
Basic............................. $ 0.07 $ 0.08 $ (0.82)(10)
Diluted........................... $ 0.06 $ 0.05 $ (0.82)(10)
Number of shares used in per share
computation(9):
Basic............................. 192,551 10,842 204,747 (10)
Diluted........................... 203,484 17,576 204,747 (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 $4,062 $ -- $514,025
Cost of goods sold.................. 277,446 1,321 -- 278,767
-------- ------ -------- --------
Gross margin........................ 232,517 2,741 -- 235,258
Operating expenses:
Research and development............ 88,477 1,511 -- 89,988
Selling, general and
administrative.................... 68,168 714 468 (6) 69,350
Amortization of intangibles......... 2,405 398 45,382 (2)(7) 48,185
-------- ------ -------- --------
Total operating
expenses................ 159,050 2,623 45,850 207,523
-------- ------ -------- --------
Operating income.................... 73,467 118 (45,850) 27,735
Other income, net................... 578 738 -- 1,316
-------- ------ -------- --------
Income before provision for income
taxes............................. 74,045 856 (45,850) 29,051
Provision for income taxes.......... 22,214 26 (179)(8) 22,061
-------- ------ -------- --------
Net income ......................... $ 51,831 $ 830 $(45,671) $ 6,990
======== ====== ======== ========
Net income (loss) per share:
Basic............................. $ 0.26 $ 0.05 $ 0.03(10)
Diluted........................... $ 0.24 $ 0.04 $ 0.03(10)
Number of shares used in per share
computation:
Basic............................. 196,715 18,395 208,911(10)
Diluted........................... 228,974 20,777 241,170(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 twelve month period ended September 30, 1999. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the
three months ended December 31, 1999 includes Conexant's historical results
of operations for the three months ended December 31, 1999 and Maker's
historical results of operations for the three months ended September 30,
1999. The Unaudited Pro Forma Condensed Combined Balance Sheet combines the
historical balance sheet of Conexant as of December 31, 1999 with the
historical balance sheet of Maker as of September 30, 1999.
(2) Reflects the preliminary allocation of the purchase price based
upon an estimated total value of the merger consideration of $957.1
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 $31.0 million,
identifiable intangible assets of $77.8 million and goodwill of $829.8
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 12,196,000 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.
F-24
<PAGE> 27
(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.
(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 12,196,000 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
23.2 Consent of Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 10, 1999 on the consolidated financial statements of Maker
Communications, Inc. (and to all references to our Firm) included in or made a
part of this current report on Form 8-K.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 10, 1999 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 and 333-96033.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 2000
