<PAGE> 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)
<TABLE>
<S> <C>
Delaware 77-0123732
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
</TABLE>
<TABLE>
<S> <C>
510 Cottonwood Drive, Milpitas, CA 95035
(Address of principal executive offices) (Zip Code)
</TABLE>
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.
<PAGE> 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
<PAGE> 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.
<PAGE> 4
MAXTOR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 2, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
MAXTOR CDS ADJUSTMENTS CONSOLIDATED
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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)
</TABLE>
<PAGE> 5
MAXTOR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 26, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
MAXTOR CDS ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------
<S> <C> <C> <C> <C>
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)
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
Number of Value Per Total
Shares/Options Share/Option ($000s)
-------------- ------------ -------
<S> <C> <C> <C>
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
=======
</TABLE>
The cost of the acquisition was allocated to the assets acquired and liabilities
assumed based on their estimated fair values, as follows:
<PAGE> 7
<TABLE>
<CAPTION>
$000's Useful lives
------- ------------
<S> <C> <C>
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
=======
</TABLE>
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.
<TABLE>
<CAPTION>
Nine months ended Twelve months ended
10/2/99 12/26/98
----------------- -------------------
<S> <C> <C>
Basic 8,129,682 8,129,682
Dilutive 8,129,682 8,489,175
</TABLE>
<PAGE> 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
<PAGE> 9
CREATIVE DESIGN SOLUTIONS, INC.
BALANCE SHEET
AS OF APRIL 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 10
CREATIVE DESIGN SOLUTIONS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 11
CREATIVE DESIGN SOLUTIONS, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 12
CREATIVE DESIGN SOLUTIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 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.
<PAGE> 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.
<PAGE> 15
CREATIVE DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. BALANCE SHEET COMPONENTS
<TABLE>
<S> <C>
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
===========
</TABLE>
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.
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ----------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
-------- ----------- --------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 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
========= =========
</TABLE>
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:
<TABLE>
<S> <C>
Expected life 4 years
Risk-free interest rate 5.5%
Volatility 70%
Dividend yield 0%
</TABLE>
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.
<PAGE> 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:
<TABLE>
<S> <C>
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)
-----------
$ --
===========
</TABLE>
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.
<PAGE> 20
CREATIVE DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Future commitments under the non-cancelable lease are as follows:
<TABLE>
<CAPTION>
Year Ending April 30,
---------------------
<S> <C>
2000 $445,000
2001 31,000
--------
$476,000
========
</TABLE>
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.
<PAGE> 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.
