-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FvrP/AMX7J4MxjNt3qxP/LUSSm1O67KZAqH7UoeVgK1wkacEF5TsQPFqNhO/S4vt lAx+Id+1KmD3ulGK6GWQGw== 0000891618-99-005395.txt : 19991123 0000891618-99-005395.hdr.sgml : 19991123 ACCESSION NUMBER: 0000891618-99-005395 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990910 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXTOR CORP CENTRAL INDEX KEY: 0000711039 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770123732 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-14016 FILM NUMBER: 99762246 BUSINESS ADDRESS: STREET 1: 510 COTTONWOOD DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084321700 8-K/A 1 AMENDMENT #1 TO FORM 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: (Date of Earliest Event Reported): September 10, 1999 Commission file Number: 0-14016 Maxtor Corporation (Exact name of registrant as specified in its charter) Delaware 77-0123732 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
510 Cottonwood Drive, Milpitas, CA 95035 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 432-1700 Item 2. Acquisition or Disposition of Assets Acquisition of Creative Design Solutions, Inc. This Form 8-K/A amends the Current Report on Form 8-K filed on September 24, 1999 to incorporate Item 7(a), the Financial Statements of Business Acquired. 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Business Acquired (included herein): (i) Report of Independent Accountants dated October 1, 1999 (ii) Balance Sheet as of April 30, 1999 (iii) Statement of Operations for the year ended April 30, 1999 (iv) Statement of Shareholders' Deficit for the year ended April 30, 1999 (v) Statement of Cash Flows for the year ended April 30, 1999 (vi) Notes to Financial Statements for the year ended April 30, 1999 (b) Unaudited Pro Forma Condensed Consolidated Financial Information (included herein): (i) Pro Forma Condensed Consolidated Statement of Operations for the nine months ended October 2, 1999 (ii) Pro Forma Condensed Consolidated Statement of Operations for the year ended December 26, 1998 (iii) Notes to Pro Forma Condensed Consolidated Financial Statements 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 hereunto duly authorized. MAXTOR CORPORATION By /s/ Glenn H. Stevens ------------------------------- Vice President, General Counsel and Secretary Date: November 19, 1999 3 MAXTOR CORPORATION UNAUDITED PRO FORMA FINANCIAL INFORMATION The unaudited pro forma condensed statements of operations are presented as if the merger with Creative Design Solutions, Inc. ("CDS") occurred on January 1, 1998. It is based on the historical consolidated financial statements of the Company (audited for the year ended December 26, 1998 and unaudited for the nine months ended October 2, 1999), as adjusted to reflect the combined results from recording the merger. The unaudited pro forma condensed balance sheet as of October 2, 1999, which reflects the merger, has been presented in the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999. The unaudited pro forma financial statements should be read in conjunction with the respective historical consolidated financial statements and related notes of Maxtor which have previously been filed with the Commission in the Company's Annual Report on Form 10-K for the year ended December 26, 1998 and the Quarterly Report on Form 10-Q for the quarter ended October 2, 1999, and the historical financial statements and related notes of CDS included elsewhere in this Current Report on Form 8-K/A. The following unaudited pro forma condensed financial information is not necessarily indicative of the actual results of operations that would have been reported if the merger described above had occurred as of the date indicated, nor does such information purport to indicate the results of the Company's future operations. In the opinion of management, all adjustments necessary to present fairly such pro forma financial statements have been made including: (1) adjustments to eliminate non-recurring costs directly associated with the merger transaction, and (2) adjustments necessary to reflect Maxtor's accounting bases in the assets acquired. The assumptions and adjustments upon which the pro forma financial statements are based are set forth in the accompanying notes. 4 MAXTOR CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED OCTOBER 2, 1999 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
HISTORICAL HISTORICAL PRO FORMA MAXTOR CDS ADJUSTMENTS CONSOLIDATED ----------------------------------------------------------- Total revenues $ 1,795,499 $ 522 $ -- $ 1,796,021 Total cost of revenue 1,678,849 3,686 -- 1,682,535 ------------- -------- ------- ------------- Gross profit 116,650 (3,164) -- 113,486 OPERATING EXPENSES Research and development 141,553 6,257 (230)(B) 147,580 Selling, general, and administrative 63,071 5,666 (370)(B) 67,317 (1,050)(C) Stock compensation expense 2,017 576 (433)(D) 2,160 Acquired in-process technology 7,028 -- (7,028)(E) -- Amortization of goodwill and other intangibles -- -- 7,570 (F) 7,570 ------------- -------- ------- ------------- Total operating expenses 213,669 12,499 (1,541) 224,627 ------------- -------- ------- ------------- Loss from operations (97,019) (15,663) 1,541 (111,141) ------------- -------- ------- ------------- Interest expense (9,970) (288) -- (10,258) Interest and other income 11,531 87 -- 11,618 Gain on sale of investment 44,120 -- -- 44,120 ------------- -------- ------- ------------- Loss before income taxes (51,338) (15,864) 1,541 (65,661) Provision for income taxes 1,632 -- -- 1,632 ------------- -------- ------- ------------- Net loss $ (52,970) $(15,864) $ 1,541 $ (67,293) ============= ======== ======= ============= Net loss per share basic and diluted $ (0.51) $ (0.59) Weighted number of shares outstanding - basic and diluted 104,747,676 113,236,851 (H)
5 MAXTOR CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 26, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
HISTORICAL HISTORICAL PRO FORMA MAXTOR CDS ADJUSTMENTS CONSOLIDATED -------------------------------------------------------- Total revenues $ 2,408,500 $ 594 $ -- $ 2,409,094 Total cost of revenue 2,108,100 1,413 -- 2,109,513 ----------- ------- --------- ----------- Gross profit 300,400 (819) -- 299,581 OPERATING EXPENSES Research and development 152,400 3,558 155,958 Selling, general, and administrative 75,800 4,101 79,901 Stock compensation expense 12,100 -- -- 12,100 Amortization of goodwill and other intangibles -- -- 10,083 (E) 10,083 ----------- ------- --------- ----------- Total operating expenses 240,300 7,659 10,083 258,042 ----------- ------- --------- ----------- Income (loss) from operations 60,100 (8,478) (10,083) 41,539 ----------- ------- --------- ----------- Interest expense (28,800) (23) -- (28,823) Interest and other income 7,400 43 -- 7,443 ----------- ------- --------- ----------- Income (loss) before income taxes 38,700 (8,458) (10,083) 20,159 Provision for income taxes 7,500 -- (3,600)(G) 3,900 Net income (loss) $ 31,200 $(8,458) $ (6,483) $ 16,259 =========== ======= ========= =========== Net income per share - basic $ 0.81 $ 0.35 Net income per share - diluted $ 0.47 $ 0.22 Weighted number of shares outstanding - basic 38,295,095 46,424,777 (H) Weighted number of shares outstanding - diluted 65,814,126 74,303,301 (H)
6 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. To record the merger in accordance with the purchase method of accounting based upon an assumed purchase price of $57,613,000. The purchase price was calculated utilizing the market value of Maxtor common stock of $6.474 per share. The options were valued by applying the Black-Scholes valuation model. The total purchase price was as follows:
Number of Value Per Total Shares/Options Share/Option ($000s) -------------- ------------ ------- Common Stock 8,129,682 $6.474 $52,632 Options Assumed 664,420 $6.267 4,164 Merger and other transaction costs 817 ------- Total $57,613 =======
The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values, as follows: 7
$000's Useful lives ------- ------------ Acquired in-process technology $7,028 -- Tangible assets acquired 2,670 1-3 years Liabilities assumed (10,416) -- Intangible assets: Goodwill 48,060 7 years Existing technology 8,625 1-3 years Other identifiable intangibles 1,646 6-7 years ------- Total $57,613 =======
Note: The historical costs of the assets and liabilities of CDS are estimated to be their fair market values. B. Represents the bonuses paid by CDS to its executives in September 1999 in connection with the merger. C. Represents the transaction costs incurred by CDS in connection with the merger. D. Represents the compensation charge recorded by CDS due to the accelerated vesting, as a result of the merger, of stock options issued to executives. E. Represents the purchase price allocated to the acquired in-process technology which was charged to operations by Maxtor subsequent to the merger. F. Represents amortization expense due to the intangible assets recorded as a result of the merger. G. Represents a reduction in the income tax provision as a result of the loss attributed to CDS. H. To increase the weighted average shares outstanding for the issuance of common stock to CDS stockholders and assumption of CDS' stock options, as if such shares and options had been outstanding during the entire periods presented.
Nine months ended Twelve months ended 10/2/99 12/26/98 ----------------- ------------------- Basic 8,129,682 8,129,682 Dilutive 8,129,682 8,489,175
8 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholder of Creative Design Solutions, Inc.: In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of Creative Design Solutions, Inc. as of April 30, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP October 1, 1999 San Jose, California 9 CREATIVE DESIGN SOLUTIONS, INC. BALANCE SHEET AS OF APRIL 30, 1999 - -------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 625,000 Accounts receivable, net 905,000 Inventory, net 393,000 Prepaid expenses and other 169,000 ------------ Total current assets 2,092,000 Property and equipment, net 886,000 Other assets 344,000 ------------ $ 3,322,000 ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Accounts payable $ 1,764,000 Accrued expenses 1,336,000 Short-term loan 300,000 Deferred revenue 1,103,000 ------------ Total current liabilities 4,503,000 ------------ Commitments and contingencies (Note 9) Shareholders' deficit: Convertible Preferred Stock, no par value, 9,772,042 shares authorized; 9,226,040 shares issued and oustanding 15,392,000 Common Stock, no par value, 20,000,000 shares authorized; 7,524,344 shares issued and outstanding 2,491,000 Deferred stock compensation (593,000) Accumulated deficit (18,471,000) ------------ Total shareholders' deficit (1,181,000) ------------ $ 3,322,000 ============
The accompanying notes are an integral part of these financial statements. 10 CREATIVE DESIGN SOLUTIONS, INC. STATEMENT OF OPERATIONS YEAR ENDED APRIL 30, 1999 - -------------------------------------------------------------------------------- Revenue $ 691,000 Cost of sales (3,657,000) ------------ (2,966,000) ------------ Operating expenses: Research and development 5,996,000 General and administrative 658,000 Marketing and sales 4,482,000 ------------ 11,136,000 ------------ Loss from operations (14,102,000) Other income 16,000 Interest income 91,000 Interest expense (16,000) ------------ Net loss $(14,011,000) ============
The accompanying notes are an integral part of these financial statements. 11 CREATIVE DESIGN SOLUTIONS, INC. STATEMENT OF SHAREHOLDERS' DEFICIT - --------------------------------------------------------------------------------
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1998 3,000,000 $ 2,987,000 -- $ -- -- $ -- Issuance of Series B Preferred stock, net of issuance costs of $45,000 -- -- 4,166,666 6,955,000 -- -- Issuance of Series C Preferred Stock, net of issuance costs of $69,000 -- -- -- -- 2,059,374 5,450,000 Exercise of stock options granted to employees -- -- -- -- -- -- Issuance of warrants -- -- -- -- -- -- Deferred stock compensation -- -- -- -- -- -- Amortization of deferred stock compensation -- -- -- -- -- -- Options granted to non-employees for services -- -- -- -- -- -- Net loss for the year -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1999 3,000,000 $ 2,987,000 4,166,666 $ 6,955,000 2,059,374 $ 5,450,000 ============ ============ ============ ============ ============ ============
TOTAL COMMON STOCK DEFERRED ACCUMULATED SHAREHOLDERS' SHARES AMOUNT COMPENSATION DEFICIT DEFICIT ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1998 7,000,000 $ 1,210,000 $ -- $ (4,460,000) $ (263,000) Issuance of Series B Preferred stock, net of issuance costs of $45,000 -- -- -- -- 6,955,000 Issuance of Series C Preferred Stock, net of issuance costs of $69,000 -- -- -- -- 5,450,000 Exercise of stock options granted to employees 524,344 132,000 -- -- 132,000 Issuance of warrants -- 384,000 -- -- 384,000 Deferred stock compensation -- 685,000 (685,000) -- -- Amortization of deferred stock compensation -- -- 92,000 -- 92,000 Options granted to non-employees for services -- 80,000 -- -- 80,000 Net loss for the year -- -- -- (14,011,000) (14,011,000) ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1999 7,524,344 $ 2,491,000 $ (593,000) $(18,471,000) $ (1,181,000) ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 12 CREATIVE DESIGN SOLUTIONS, INC. STATEMENT OF CASH FLOWS YEAR ENDED APRIL 30, 1999 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(14,011,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 389,000 Provision for doubtful accounts and returns 247,000 Provision for inventory valuation 1,092,000 Amortization of deferred compensation 92,000 Charge for stock options issued in exchange for services 80,000 Changes in assets and liabilities: Accounts receivable (938,000) Inventory (1,107,000) Prepaid expenses and other assets (79,000) Accounts payable 1,542,000 Accrued liabilities and other payables 1,096,000 Deferred revenue 1,103,000 ------------ Net cash used in operating activities (10,494,000) ------------ CASH FLOWS USED IN PURCHASE OF PROPERTY AND EQUIPMENT (890,000) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes to shareholders 660,000 Payments of notes to shareholders, net (1,673,000) Proceeds from issuance of Common Stock 132,000 Proceeds from issuance of Preferred Stock, net 12,405,000 Proceeds from short-term borrowings, net 300,000 ------------ Net cash provided by financing activities 11,824,000 ------------ Net increase in cash and cash equivalents 440,000 Cash and cash equivalents at beginning of year 185,000 ------------ Cash and cash equivalents at end of year $ 625,000 ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 25,000 ============
The accompanying notes are an integral part of these financial statements. 13 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Creative Design Solutions, Inc. (the "Company") was incorporated in California on August 26, 1996. The Company designs and markets software and hardware for network engines and applications that enable its original equipment manufacturer ("OEM") and reseller customers to create network attached storage solutions for the Windows 95/Windows NT and Unix network environments. Through April 30, 1998, the Company was considered to be in the development stage and was principally engaged in research and development, raising capital and developing markets for its planned products and services. During the year ended April 30, 1999, the Company was actively selling its principal products and therefore ceased to be in the development stage. At April 30, 1999 the Company had an accumulated deficit of $18,471,000 and was dependent upon external sources of capital to support its operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates. Significant estimates include: the allowance for doubtful accounts and returns, depreciable lives for property and equipment and inventory valuation and obsolescence reserves. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist principally of money-market deposit accounts that are stated at cost, which approximates fair value. INVENTORY Inventory is stated at the lower of cost or market, cost being determined by using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are amortized over the lesser of the remaining lives of the leases or their estimated useful lives using the straight line method. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment of products provided that no significant vendor obligations remain and collection is considered probable. When significant post delivery obligations exist, revenue is deferred until such obligations are fulfilled. The Company accrues for warranty costs of sales returns and other allowances at the time of shipment and subsequently adjusts as deemed appropriate. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. 14 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- INCOME TAXES The Company accounts for income taxes under the liability method whereby the expected future tax consequences of timing differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. A valuation allowance is established for any deferred tax assets for which realization is uncertain. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations thereof. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the stock option exercise price. In addition, the Company complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company accounts for stock issued to non-employees in accordance with the provisions of Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." COMPREHENSIVE INCOME In May 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components. The Company had no items of other comprehensive income during the year ended April 30, 1999. 15 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 2. BALANCE SHEET COMPONENTS ACCOUNTS RECEIVABLE, NET: Accounts receivable $ 1,152,000 Less: allowance for doubtful accounts and returns (247,000) ----------- $ 905,000 =========== INVENTORY, NET: Raw materials $ 716,000 Work-in-process 79,000 Finished goods 690,000 ----------- 1,485,000 Less: provision for inventory valuation (1,092,000) ----------- $ 393,000 =========== PROPERTY AND EQUIPMENT, NET: Purchased software $ 100,000 Computer and equipment 840,000 Furniture and fixtures 127,000 Leasehold improvements 272,000 ----------- 1,339,000 Less: accumulated depreciation and amortization (453,000) ----------- $ 886,000 =========== ACCRUED EXPENSES: Warranty $ 300,000 Salaries and benefits 525,000 Other 511,000 ----------- $ 1,336,000 ===========
3. BORROWINGS The Company has a line of credit arrangement with a bank which allows for borrowings up to $750,000. This line of credit bears interest at the bank's prime rate plus 1% (8.75% at April 30, 1999) and matures on December 30, 1999. The line of credit is collateralized by certain assets of the Company. 4. RELATED PARTY TRANSACTIONS In March 1998 and April 1998, the Company borrowed a total of $1,013,000 from a shareholder who is also the Company's Chairman. This amount was repaid by the Company during the year ended April 30, 1999. 16 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- In May 1998 and June 1998, the Company borrowed $660,000 from certain preferred shareholders. The notes payable were collateralized by certain assets of the Company and bore interest at approximately 10%. These notes payable were repaid by the Company during the year ended April 30, 1999. In September 1998, the Company guaranteed a loan of $134,000 under its loan and security agreement (see Note 3) to an officer of the Company. The loan and related interest were repaid by the officer in August 1999. During the year ended April 30, 1999, the Company purchased equipment of approximately $220,000 from an affiliate of a preferred stockholder. 5. CONVERTIBLE PREFERRED STOCK A total of 9,772,042 shares of Convertible Preferred Stock have been authorized for issuance, 3,000,000 of which have been designated as Series A Preferred Stock, 4,166,666 as Series B Preferred Stock and 2,605,376 as Series C Preferred Stock. During the year ended April 30, 1999, the Company issued 4,166,666 shares of Series B Convertible Preferred Stock and 2,059,374 shares of Series C Convertible Preferred Stock at $1.68 and $2.68 per share, respectively, and received gross proceeds of $7,000,000 and $5,519,000, respectively. The rights, preferences and privileges with respect to the Convertible Preferred Stock are as follows: CONVERSION Each share of Series A, Series B and Series C Preferred Stock is convertible at the option of the holder into one share of Common Stock, subject to adjustments for events of dilution. Such conversion is automatic upon the effective date of a public offering of common stock with a per share price of at least $8.40 and for which the aggregate proceeds equal at least $15,000,000. LIQUIDATION In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series C Preferred Stock retain liquidation preference over Series A and Series B Preferred Stock and common stock, equal to the original issuance price ($2.68 per share) plus declared but unpaid dividends. After the payment of the full liquidation preference of the Series C Preferred Stock, the holders of the Series B Preferred Stock retain liquidation preference over Series A Preferred Stock and common stock, equal to the original issuance price ($1.68 per share) plus declared but unpaid dividends. After the payment of the full liquidation preference of the Series C Preferred Stock and Series B Preferred Stock, the holders of the Series A Preferred Stock retain liquidation preference over common stock, equal to the original issuance price ($1.00 per share) plus declared but unpaid dividends. If there are any available funds and assets remaining after payments or distributions are made to the holders of Series A, Series B and Series C Preferred Stock of their full preferential amounts, then all remaining funds and assets will be distributed pro rata among the holders of the then-outstanding common stock. VOTING Holders of Series A, Series B and Series C Preferred Stock have voting rights equal to holders of common stock on an as-if converted basis. 17 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- DIVIDENDS Holders of Series A, Series B and Series C Preferred Stock are entitled to receive noncumulative dividends at an annual rate of $0.05, $0.084 and $0.268 per share, respectively, when and as declared by the Board of Directors. Such dividends are payable in preference to any dividends for common stock. No dividends were declared through April 30, 1999. 6. STOCK OPTION PLAN In January 1997, the Company adopted a Stock Option Plan (the "Stock Option Plan") under which 3,000,000 shares of common stock have been reserved for issuance to eligible employees, directors and consultants upon exercise of the stock options. Options are granted at prices determined by the Board of Directors and may not be less than 100% and 85%, respectively, of the fair market value of the common stock, as determined by the Board of Directors, on the date of grant for incentive stock options and nonstatutory stocks options. Options granted to any shareholder who owns more than 10% of the Company's equity shall not be granted at a price less than 110% of the fair market value of the common stock, as determined by the Board of Directors, on the date of grant. Options granted under the Stock Option Plan are for periods not to exceed ten years, and are generally vested one-fourth one year after the date of grant with the remaining three-fourths vested evenly over the three years thereafter. A summary of the Company's stock option activities for the year ended April 30, 1999 is presented below:
WEIGHTED SHARES AVERAGE AVAILABLE OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE ---------- ----------- ---------- Outstanding at April 30, 1998 113,500 3,394,500 $ 0.25 Authorized -- -- $ -- Granted (998,000) 998,000 $ 0.60 Exercised -- (524,344) $ 0.49 Canceled 928,194 (928,194) $ 0.28 ---------- ---------- Outstanding at April 30, 1999 43,694 2,939,962 $ 0.36 ========== ==========
18 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The options outstanding and currently exercisable by exercise price at April 30, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------- ------------------------------ WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE PRICE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE -------- ----------- --------- -------------- ------------- ------------ $ 0.25 2,038,462 $ 0.25 6.10 915,589 $ 0.25 $ 0.50 536,000 $ 0.50 9.50 1,875 $ 0.50 $ 0.75 365,500 $ 0.75 9.83 -- $ 0.75 --------- --------- 2,939,962 917,464 ========= =========
At April 30, 1999, 2,939,962 options, with a weighted average remaining contractual life of 7.19 years and a weighted average exercise price of $0.36 per share, were outstanding of which 917,464 options, with a weighted average remaining contractual life of 6.11 years and a weighted average exercise price of $0.25 per share were exercisable as of April 30, 1999. FAIR VALUE DISCLOSURE Pro forma net loss for the year ended April 30, 1999 calculated based on the fair value of options at grant date as determined in accordance with SFAS 123, would have been $14,102,000. The weighted average value per share under SFAS 123 of options granted during the year ended 1999 was $0.43. The fair values of option grants are estimated on the date of grant using the Black-Scholes fair value model with the following assumptions: Expected life 4 years Risk-free interest rate 5.5% Volatility 70% Dividend yield 0%
DEFERRED STOCK COMPENSATION In the year ended April 30, 1999, the Company recorded deferred stock compensation charges of approximately $685,000 related to the issuance of stock options at prices subsequently determined to be below fair market value. These charges are generally being amortized over a period of four years from the date of option issuance. Amortization of $92,000 has been recognized as stock compensation expense for the year ended April 30, 1999. 7. INCOME TAXES On September 1, 1997, the shareholders of the Company approved a change in the Company's tax status from an S-Corporation to a C-Corporation. The change to a C-Corporation resulted in the Company being subject to federal income tax as taxable income or losses are no longer passed directly to the shareholders. 19 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- No provision for income taxes was recorded for the year ended April 30, 1999 because the Company incurred net losses. The components of deferred tax assets at April 30, 1999 are as follows: Net operating loss carryforward $ 4,937,000 Provision for doubtful accounts 88,000 Deferred revenue 672,000 Inventory reserve 435,000 Accrued expenses and other 304,000 Research and development credit 447,000 ----------- 6,883,000 Less: Valuation allowance (6,883,000) ----------- $ -- ===========
At April 30, 1999, the Company had net operating loss carryforwards of approximately $12,387,000 and $12,425,000 available to offset future income for federal and California income tax purposes, respectively. At April 30, 1999, the Company had research and development credit carryforwards of approximately $308,000 and $211,000 available to offset future income tax liability for federal and California income tax purposes, respectively. These carryforwards expire in varying amounts in the years 2004 through 2019. The income tax benefit from utilization of net operating loss and research and development credit carryforwards may be limited in certain circumstances, including, but not limited to, cumulative stock ownership changes of more than 50% over a three year period. The Company provided a full valuation allowance against the deferred tax assets at April 30, 1999 because of the uncertainty regarding the realization of the deferred tax assets. 8. CONCENTRATION OF CREDIT RISK Two customers represented 45% and 19% of revenues for the year ended April 30, 1999. Two customers represented 47% and 10% of the accounts receivable balance at April 30, 1999. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with a financial institution evaluated as highly credit-worthy. Ongoing credit evaluations are performed on the Company's customers and reserves for potential credit losses are maintained. 9. COMMITMENTS AND CONTINGENCIES The Company leases office space under noncancelable operating lease agreements which expire in 2000 and 2001. Total rent expense was $427,000 for the year ended April 30, 1999. The Company subleases part of its office space under an agreement which expires in March 2000. Rental income was $97,200 for the year ended April 30, 1999. 20 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Future commitments under the non-cancelable lease are as follows:
Year Ending April 30, --------------------- 2000 $445,000 2001 31,000 -------- $476,000 ========
In the ordinary course of business, certain claims arise against the Company. Management believes such claims are without merit and will vigorously defend its position. In the opinion of management, based on the information currently available, the ultimate resolution of these claims will not have a material adverse affect on the Company's financial position or the results of its operations. 10. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) defined contribution plan covering all employees. Contributions made by the Company are determined annually by the Board of Directors. There have been no Company contributions to this plan since inception. 11. WARRANTS On December 1, 1998, the Company entered into a four year distribution agreement with a customer to develop and manufacture product to the customer's specifications. In connection with this agreement and the customer's investment in the Company's Series C Preferred Stock, the Company issued warrants to the customer to purchase 546,000 shares of Series C Preferred Stock at an exercise price of $2.68 per share. Using the Black-Scholes fair value model, the Company estimated that the fair value of the warrants was $384,000 at the date of grant. The fair value has been recorded in other assets and is being amortized over the term of the distribution agreement. The Company recognized selling and marketing expense of $40,000 related to the distribution agreement during the year ended April 30, 1999. In August 1999, as a result of the acquisition of the Company (see Note 12), the customer waived its right to exercise the warrants. 12. SUBSEQUENT EVENTS FINANCING TRANSACTIONS In May 1999, the Company repaid the $300,000 in borrowings under the loan and security agreement with a bank which was outstanding as of April 30, 1999. On June 9, 1999, the Company entered into a loan agreement with a venture capital firm and received $2,000,000. The loan is repayable on November 30, 1999 and bears interest at 12% per annum. The lender received warrants to purchase 200,000 shares of Series C Preferred Stock at an exercise price of $2.68 per share. In August 1999, the Company paid the lender $150,000 to waive its right to exercise the warrants. 21 CREATIVE DESIGN SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- In July 1999, the Company obtained a bridge loan from various Series C Preferred Stock investors and received approximately $2,700,000. The loan is repayable on December 3, 1999. The loan bears interest at 10% per annum and in the form of warrants to purchase shares of Series C Preferred Stock at an exercise price of $2.68 per share. The warrants to be issued are determined at a monthly interest rate of 6% of the outstanding principal balance of the loan, divided by $2.68 per share. The warrants expired upon the consummation of the acquisition. LETTER OF CREDIT On July 1999, the Company issued a $75,000 letter of credit to a contract manufacturer. The letter of credit is secured by a certificate of deposit held at a major financial institution. ACQUISITION On August 23, 1999, the Company entered into a merger agreement with Maxtor Corporation ("Maxtor"); the transaction was consummated on September 10, 1999. -----END PRIVACY-ENHANCED MESSAGE-----