1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 21, 2000
-------------------------------
CROSSROADS SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State of Other Jurisdiction of Incorporation)
000-30362 74-2846643
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer
Identification No.)
8300 North MoPac Expressway, Austin, Texas 78759
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(512) 928-7000
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits set forth in Crossroads Systems, Inc.'s Form 8-K dated March
21, 2000 is hereby amended to read in its entirety as follows:
(a) Financial statements:
Financial statements of Polaris Communications, Inc. (`Polaris') for
the years ended December 31, 1997, 1998 and 1999. See "Index of
Financial Statements" on page F-1.
(b) Pro forma financial information:
Unaudited Pro Forma Consolidated Financial Statements for Crossroads
Systems, Inc. (`Crossroads' or the `Company'). See "Index to
Unaudited Pro Forma Consolidated Financial Statements" on page F-15.
(c) Exhibits
Number Description
2.1* Agreement and Plan of Merger and Reorganization, dated
February 3, 2000, by and among Crossroads Systems, Inc,
NorthStar Acquisition Corp. and Polaris Communications,
Inc.
99.1* Press Release of Crossroads dated March 21, 2000
(announcing the completion of the merger).
-----------------
* Previously filed as Exhibits to this Current Report on
Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
CROSSROADS SYSTEMS, INC.
Dated: May 31, 2000 By: /s/ Reagan Y. Sakai
--------------------------------
Reagan Y. Sakai
Vice President and Chief
Financial Officer
3
POLARIS COMMUNICATIONS, INC.
INDEX OF FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND FOR EACH
OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1999
PAGES
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Polaris Communications, Inc.:
We have audited the accompanying balance sheets of Polaris Communications, Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Communications, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Portland, Oregon
February 18, 2000
F-2
5
POLARIS COMMUNICATIONS, INC.
Balance Sheets
DECEMBER 31,
-------------------------
ASSETS 1999 1998
---------- ----------
Current assets:
Cash and cash equivalents $1,226,910 1,365,399
Accounts receivable, net 768,800 787,479
Inventories, net 400,400 361,573
Prepaids and other current assets 122,502 155,086
---------- ----------
Total current assets 2,518,612 2,669,537
Property and equipment, net 93,010 96,969
Deferred tax asset 33,900 55,000
Other long-term assets 7,381 10,323
---------- ----------
Total assets $2,652,903 2,831,829
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,255 45,054
Accrued expenses 231,263 180,463
---------- ----------
Total current liabilities 255,518 225,517
---------- ----------
Commitments
Stockholders' equity:
Common stock, no par value, 4,000 shares authorized,
1,905 and 2,005 issued and outstanding as of
December 31, 1999 and 1998, respectively 38,500 40,500
Stock subscription note receivable -- (1,500)
Retained earnings 2,358,885 2,567,312
---------- ----------
Total stockholders' equity 2,397,385 2,606,312
---------- ----------
Total liabilities and stockholders' equity $2,652,903 2,831,829
========== ==========
See accompanying notes to financial statements.
F-3
6
POLARIS COMMUNICATIONS, INC.
Statements of Operations
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Product sales $ 2,896,911 3,211,137 3,195,009
Services 174,061 111,175 113,374
------------ ------------ ------------
Total sales 3,070,972 3,322,312 3,308,383
Cost of goods and services sold 650,082 850,072 703,664
------------ ------------ ------------
Gross profit 2,420,890 2,472,240 2,604,719
------------ ------------ ------------
Operating expenses:
Research and development 674,806 528,108 359,314
Selling, general and administrative 1,870,492 1,949,347 1,929,836
------------ ------------ ------------
Total operating expenses 2,545,298 2,477,455 2,289,150
------------ ------------ ------------
(Loss) income from operations (124,408) (5,215) 315,569
Interest and dividend income 53,302 78,235 53,028
Other income (expense), net (33,563) 16,523 16,963
------------ ------------ ------------
Net (loss) income before provision
(benefit) for income taxes (104,669) 89,543 385,560
Provision (benefit) for income taxes (6,742) (31,904) 126,583
------------ ------------ ------------
Net (loss) income $ (97,927) 121,447 258,977
============ ============ ============
See accompanying notes to financial statements.
F-4
7
POLARIS COMMUNICATIONS, INC.
Statements of Stockholders' Equity
STOCK
COMMON STOCK SUBSCRIPTION TOTAL
-------------------------- NOTE RETAINED STOCKHOLDERS'
SHARES AMOUNT RECEIVABLE EARNINGS EQUITY
---------- ---------- ------------ ---------- -------------
Balance at January 1, 1997 2,005 $ 40,500 (1,500) 2,186,888 2,225,888
Net income -- -- -- 258,977 258,977
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 2,005 40,500 (1,500) 2,445,865 2,484,865
Net income -- -- -- 121,447 121,447
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,005 40,500 (1,500) 2,567,312 2,606,312
Repurchase of common stock (100) (2,000) -- (110,500) (112,500)
Repayment of stock subscription
note receivable -- -- 1,500 -- 1,500
Net loss -- -- -- (97,927) (97,927)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 1,905 $ 38,500 -- 2,358,885 2,397,385
========== ========== ========== ========== ==========
See accompanying notes to financial statements.
F-5
8
POLARIS COMMUNICATIONS, INC.
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (97,927) 121,447 258,977
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 48,493 46,314 41,706
Deferred taxes 21,100 (25,000) --
Changes in assets and liabilities:
Accounts receivable, net 18,679 (141,166) (30,131)
Inventories, net (38,827) 193,325 (62,359)
Prepaids and other assets 35,526 (144,090) 135,254
Accounts payable and accrued expenses 30,001 (47,617) 39,975
------------ ------------ ------------
Net cash provided by operating activities 17,045 3,213 383,422
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (44,534) (15,804) (81,164)
Purchase of short-term investments -- -- (11,835)
Sale of short-term investments -- 322,498 --
------------ ------------ ------------
Net cash (used in) provided by
investing activities (44,534) 306,694 (92,999)
------------ ------------ ------------
Cash flows from financing activities:
Repurchase of common stock (112,500) -- --
Repayment of stock subscription note receivable 1,500 -- --
------------ ------------ ------------
Net cash used in financing activities (111,000) -- --
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents (138,489) 309,907 290,423
Cash and cash equivalents, beginning of year 1,365,399 1,055,492 765,069
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,226,910 1,365,399 1,055,492
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 34,290 133,407 72,600
See accompanying notes to financial statements.
F-6
9
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BACKGROUND
Polaris Communications, Inc., founded in 1988 and incorporated
in the State of Oregon, designs, develops and markets computer
communication interfaces and systems. The Company's primary
focus is on high-speed connectivity to IBM and plug-compatible
mainframe channels.
(b) 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 of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
(c) RISK AND UNCERTAINTIES
The Company's products are concentrated in the network storage
industry which is highly competitive and subject to rapid
technological change. The Company's products are manufactured
under contract by one supplier. The loss of a major customer,
interruption of product from the contract manufacturer or
significant technological change in the industry could affect
operating results adversely.
(d) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on
deposit. The Company considers highly liquid investments with
original maturities of three months or less to be cash
equivalents. At December 31, 1999 and 1998, cash equivalents
consisted of money market funds and mutual funds and were
deposited with one financial institution. While the Company's
cash and cash equivalents are on deposit with a high quality
FDIC insured financial institution, at times such deposits
exceed insured limits. The Company has not experienced any
losses in such accounts.
(e) ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful
accounts of $26,000 and $-0- at December 31, 1999 and 1998,
respectively.
(f) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method, net of an
allowance for old and obsolete items.
F-7
10
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(g) PROPERTY AND EQUIPMENT
The Company's property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three
to five years for equipment and computer software and seven years
for office furniture and fixtures. Expenditures that increase the
value or extend the life of the assets are capitalized, while the
cost of maintenance and repairs is expensed as incurred. Upon
retirement or disposition of assets, the cost and related
accumulated depreciation are removed from the accounts, and the
related gains or losses are reflected in operations.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses
approximate carrying value due to their short maturities.
(i) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of goods to its
customers for product sales. Service revenue is recognized upon
certain milestones being met or upon the completion of the
contract.
(j) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(k) INCOME TAXES
The Company accounts for income taxes in accordance with the asset
and liability method. Under the asset and liability method,
deferred tax assets and liabilities are recorded for the expected
future tax consequences of temporary differences between the
financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to
be realized.
(l) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of trade accounts
receivable. The Company extends credit to its customers based upon
an evaluation of the customer's financial condition and credit
history and generally does not require collateral. The Company has
historically incurred minimal credit losses.
The Company had one significant customer in 1999, 1998 and 1997
that accounted for greater than 10% of the Company's revenues.
F-8
11
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(m) ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising
expenses were $70,181, $95,540, and $29,245 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(n) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the
Financial Accounting Standard Board's Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation. This statement permits a company to
choose either a fair-value-based method of accounting for its
stock-based compensation arrangements with employees or to
comply with the Accounting Principles Board Opinion 25 (APB
Opinion 25) intrinsic-value-based method adding pro forma
disclosures of net (loss) income computed as if the
fair-value-based method had been applied in the financial
statements. The Company applies SFAS No. 123 by retaining the
APB Opinion 25 method of accounting for stock-based
compensation for employees with annual pro forma disclosures
of net (loss) income. Stock-based compensation for
non-employees is accounted for using the fair-value-based
method.
(o) COMPREHENSIVE LOSS
The Company did not have any significant components of other
comprehensive loss for the years ended December 31, 1999, 1998
and 1997.
(p) SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information (SFAS 131). Based on
definitions contained within SFAS 131, the Company has
determined that it operates in one segment.
(q) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS No. 133
establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and
does not engage in hedging activities, the Company expects
that the adoption of SFAS 133 will not have a material impact
on its financial position, results of operations or cash
flows. The Company will be required to adopt SFAS 133 for the
year ended December 31, 2001 in accordance with FASB SFAS No.
137, which delayed implementation of SFAS 133.
F-9
12
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(2) INVENTORIES
Inventories consist of the following: DECEMBER 31,
--------------------------
1999 1998
---------- ----------
Raw materials $ 297,060 385,053
Finished goods 150,340 53,520
---------- ----------
447,400 438,573
Less inventory reserve (47,000) (77,000)
---------- ----------
$ 400,400 361,573
========== ==========
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
Equipment $ 219,096 177,833
Office furniture and fixtures 25,028 21,758
Computer software 53,202 53,200
Other fixed assets 13,767 13,768
---------- ----------
311,093 266,559
Less accumulated depreciation (218,083) (169,590)
---------- ----------
$ 93,010 96,969
========== ==========
(4) COMMITMENTS
The Company leases office space under a long-term operating lease
agreement which expires on December 31, 2001. Rental expense under this
agreement was approximately $116,487, $98,172 and $98,172 for the years
ended December 31, 1999, 1998 and 1997. The minimum annual future rentals
under terms of the lease is as follows:
Fiscal year:
2000 $120,509
2001 125,412
--------
$245,921
========
F-10
13
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(5) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Current:
Federal $(27,852) (6,914) 109,776
State 10 10 16,807
-------- -------- --------
Total current (27,842) (6,904) 126,583
-------- -------- --------
Deferred:
Federal 26,425 (16,300) --
State (5,325) (8,700) --
-------- -------- --------
Total deferred 21,100 (25,000) --
-------- -------- --------
Provision (benefit) for
income taxes $ (6,742) (31,904) 126,583
======== ======== ========
The benefit (provision) for income taxes differs from the amounts
computed by applying the federal statutory rate to income before income
taxes:
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
-------- -------- --------
Tax computed at federal statutory rate (34.4)% 34.0 34.0
State income tax, net of federal effect 2.0 4.0 1.9
Nondeductible expenses 4.1 3.2 .9
Increase (decrease) in valuation
allowance 81.2 5.3 4.7
Research credits (40.9) (65.3) (8.9)
Graduated rates (13.5) (12.6) --
Other (4.9) (4.2) .2
-------- -------- --------
Effective tax rate (6.4)% (35.6) 32.8
======== ======== ========
F-11
14
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are approximately as
follows:
1999 1998
---------- ----------
Deferred tax assets:
State operating loss and contribution carryforwards $ 5,000 --
Research and experimentation credits 85,400 25,000
Inventory reserve 18,000 29,500
Allowance for doubtful accounts 10,000 --
Fixed assets 1,000 --
Other -- 500
---------- ----------
Total deferred tax assets 119,400 55,000
Less valuation allowance (85,500) --
---------- ----------
Net deferred tax assets $ 33,900 55,000
========== ==========
The total valuation allowance for deferred tax assets as of January 1,
1999 and 1998 was $-0-. The net change in the total valuation allowance
for the years ended December 31, 1999, 1998 and 1997 was an increase of
$85,500, $-0- and $-0-, respectively.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the change of
ownership discussed in note 9, management does not believe it is more
likely than not the Company will realize all the benefits of all
deductible differences. Consequently, a valuation allowance has been
established in an amount equal to the deferred tax asset for research and
experimentation credit carryforwards.
At December 31, 1999 and 1998, the Company has state net operating loss
and contribution carryforwards of approximately $103,000 and $-0-,
respectively, and research and experimentation credit carryforwards of
$93,000 and $27,500, respectively. These carryforwards will expire
between 2003 and 2019.
A provision of the Internal Revenue Code requires the utilization of net
operating losses and research and experimentation credits be limited when
there is a change of more than 50% in ownership of the Company. The net
operating losses and research and experimentation credit carryforwards
will be subject to limitations due to the subsequent ownership change as
discussed in note 9.
F-12
15
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
(6) RETIREMENT PLAN
The Company sponsors a Simplified Employee Pension Plan (SEP). At the
discretion of management, contributions are made to the SEP Plan on
behalf of employees. All contributions are fully vested. The Company's
contributions to the SEP Plan for the years ended December 31, 1999,
1998 and 1997 were $200,308, $167,930 and $161,885, respectively.
(7) STOCK REPURCHASE
In March 1999, the Company repurchased 100 shares from one of the
Company's founders for $112,500.
(8) STOCK INCENTIVE PLAN
Effective March 1999, the Company adopted the 1999 Stock Incentive Plan
(the Plan) which provides for the granting of stock options to
employees, directors and consultants. Under the terms of the Plan,
eligible employees may receive statutory and nonstatutory stock
options, stock bonuses and stock appreciation rights for purchase of
shares of the Company's common stock at prices, vesting, exercisability
and such other terms as determined by the board of directors. Cancelled
options are available for future grant. The Company has reserved 95
shares of its common stock for issuance under the Plan.
The Company has computed, for pro forma disclosure purposes, the value
of all options granted during the year ended December 31, 1999 using
the minimum value method using the following weighted average
assumptions for grants for the year ended December 31, 1999:
Divided yield $ --
Risk-free interest rate 5.1%
Expected life 7 years
The Company applies Accounting Principle Bulletin Opinion No. 25 in
accounting for stock options issued to employees and directors under
the Plan and, accordingly, no compensation expense has been recognized
for these stock options in the financial statements. Had the Company
determined compensation expense based on the fair value at the grant
date for its stock options under Statement of Financial Accounting
Standards (SFAS) No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
1999
---------
Net loss:
As reported $ (97,927)
Pro forma (113,809)
F-13
16
POLARIS COMMUNICATIONS, INC.
Notes to Financial Statements
A summary of the status of the Company's Plan at December 31, 1999 and
changes during the year then ended is presented in the following table:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- ----------
Outstanding, March 2, 1999 (date
of Plan adoption) -- $ --
Granted 95 1,125
Exercised -- --
Canceled -- --
---------- ----------
Outstanding, December 31, 1999 95 $ 1,125
========== ==========
The outstanding stock options have an exercise price of $1,125 and a
weighted average remaining contractual life of nine years. At December
31, 1999, a total of 22 options were vested at a weighted average
exercise price of $1,125 per share and with a weighted average remaining
contractual life of nine years.
The per share average fair value of options granted during the year ended
December 31, 1999 was $338. The total fair value of options granted
during the year ended December 31, 1999 was $32,085, which would be
amortized on a straight-line basis over the vesting period of the
options.
(9) SUBSEQUENT EVENTS
The Company entered into a definitive purchase agreement as of February
3, 2000 with Crossroads Systems, a developer and manufacturer of fibre
channel storage routers. The transaction will be accounted for as a
purchase and is expected to close in March.
F-14
17
CROSSROADS SYSTEMS, INC.
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pages
Overview of the Unaudited Pro Forma Consolidated Financial
Statements F-16
Unaudited Pro Forma Consolidated Balance Sheet as of
January 31, 2000 F-17
Unaudited Pro Forma Consolidated Statement of Operations for the
Three-months ended January 31, 2000 F-18
Unaudited Pro Forma Consolidated Statement of Operations for the
Year ended October 31, 1999 F-19
Notes to Unaudited Pro Forma Consolidated Financial Statements F-20
F-15
18
CROSSROADS SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position or results of operations for future periods or
the results that actually would have been realized had Polaris and Crossroads
been a combined company during the specified periods. The pro forma consolidated
financial statements, including the notes thereto, are qualified in their
entirety by reference to, and should be read in conjunction with, the Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its Quarterly Report on Form 10-Q for the three-months
ended January 31, 2000 and in its Annual Report on Form 10-K for the year ended
October 31, 1999, and the audited financial statements of Polaris as of and for
the three years ended December 31, 1999, which are included within this filing.
The pro forma consolidated financial statements give effect to the acquisition
of Polaris using the purchase method of accounting. The pro forma consolidated
financial statements are based on the historical audited and unaudited financial
statements of Polaris and Crossroads. Polaris' 1999 fiscal year ended December
31, 1999. Crossroads' 1999 fiscal year ended October 31, 1999. The acquired
assets and liabilities of Polaris are stated at values representing the
allocation of the purchase price based upon the estimated fair market values at
the date of acquisition. The unaudited pro forma financial statements also
reflect the amortization of goodwill and other intangibles resulting from the
acquisition.
The pro forma consolidated balance sheet assumes that the business combination
took place January 31, 2000 and combines Polaris' audited December 31, 1999
balance sheet with Crossroads' unaudited January 31, 2000 balance sheet. The pro
forma consolidated statements of operations assume the business combination took
place as of November 1, 1998 and combines Polaris' and Crossroads' unaudited
statements of operations for the three months ended December 31, 1999 and
January 31, 2000, respectively, and Polaris' and Crossroads' audited statements
of operations for the years ended December 31, 1999 and October 31, 1999,
respectively.
F-16
19
CROSSROADS SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JANUARY 31, 2000
(IN THOUSANDS)
HISTORICAL HISTORICAL
CROSSROADS POLARIS PRO FORMA PRO FORMA
JANUARY 31, 2000 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
---------------- ----------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 60,072 $ 1,227 $ (207)(a) $ 61,092
Short-term investments ............................ 14,091 -- -- 14,091
Accounts receivable, net .......................... 6,549 769 -- 7,318
Inventories ....................................... 2,779 400 -- 3,179
Prepaids and other current assets ................. 1,315 123 -- 1,438
------------ ------------ ------------ ------------
Total current assets .......................... 84,806 2,519 (207) 87,118
Notes receivable from related party, net .............. 150 -- -- 150
Property and equipment, net ........................... 3,575 93 -- 3,668
Intangibles, net ...................................... -- -- 41,047 (a) 44,217
3,170 (a)
Deferred tax asset .................................... -- 34 (34)(a) --
Other assets .......................................... 479 7 -- 486
------------ ------------ ------------ ------------
Total assets .................................. $ 89,010 $ 2,653 $ 43,976 $ 135,639
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 2,710 $ 24 $ -- $ 2,734
Accrued liabilities ............................... 1,129 232 -- 1,361
Accrued warranty costs ............................ 408 -- -- 408
Deferred revenue .................................. 171 -- -- 171
------------ ------------ ------------ ------------
Total current liabilities ..................... 4,418 256 -- 4,674
Stockholders' equity:
Common stock ...................................... 27 39 (39)(c) 28
1 (a)
Additional paid-in capital ........................ 102,409 -- 46,372 (a) 148,781
Deferred stock-based compensation ................. (3,030) -- -- (3,030)
Notes receivable from stockholders ................ (469) -- -- (469)
Accumulated deficit ............................... (14,343) 2,358 (2,358)(c) (14,343)
Treasury stock at cost ............................ (2) -- -- (2)
------------ ------------ ------------ ------------
Total stockholders' equity .................... 84,592 2,397 43,976 130,965
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity .... $ 89,010 $ 2,653 $ 43,976 $ 135,639
============ ============ ============ ============
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
F-17
20
CROSSROADS SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTHS ENDED JANUARY 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL HISTORICAL
CROSSROADS POLARIS
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED PRO FORMA PRO FORMA
JANUARY 31, 2000 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
---------------- ----------------- ------------ ------------
Revenue:
Product revenue ....................... $ 8,692 $ 1,073 $ -- $ 9,765
Other revenue ......................... 101 36 -- 137
------------ ------------ ------------ ------------
Total revenue .................... 8,793 1,109 -- 9,902
Cost of revenue ............................. 4,638 231 35 (f) 4,904
------------ ------------ ------------ ------------
Gross profit ................................ 4,155 878 (35) 4,998
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ................... 2,212 -- 135 (f) 2,347
Research and development .............. 1,984 644 (327)(f) 2,301
General and administrative ............ 1,317 343 118 (f) 1,778
Amortization of intangibles ........... -- -- 3,578 (b) 3,578
Amortization of stock-based
compensation ..................... 688 -- -- 688
------------ ------------ ------------ ------------
Total operating expenses ......... 6,201 987 3,504 10,692
------------ ------------ ------------ ------------
Loss from operations ........................ (2,046) (109) (3,539) (5,694)
Other income (expense):
Interest and dividend income .......... 1,161 (6) -- 1,155
Interest expense ...................... (29) -- -- (29)
Other income (expense) ................ (9) 6 (1)(f) (4)
------------ ------------ ------------ ------------
Other income, net ................ 1,123 -- (1) 1,122
------------ ------------ ------------ ------------
Net loss before benefit for income taxes .... (923) (109) (3,540) (4,572)
Benefit for income taxes .................... -- 7 -- 7
------------ ------------ ------------ ------------
Net loss .................................... $ (923) $ (102) $ (3,540) $ (4,565)
============ ============ ============ ============
Basic and diluted net loss per share ........ $ (0.04) $ -- $ -- $ (0.18)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share ............ 25,629,217 -- 428,625 (e) 26,057,842
============ ============ ============ ============
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
F-18
21
CROSSROADS SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL HISTORICAL
CROSSROADS POLARIS
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
OCTOBER 31, 1999 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
---------------- ----------------- ------------ ------------
Revenue:
Product revenue ....................... $ 18,859 $ 2,897 $ -- $ 21,756
Other revenue ......................... 65 174 -- 239
------------ ------------ ------------ ------------
Total revenue .................... 18,924 3,071 -- 21,995
Cost of revenue ............................. 10,946 650 156 (f) 11,752
------------ ------------ ------------ ------------
Gross profit ................................ 7,978 2,421 (156) 10,243
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ................... 4,409 -- 812 (f) 5,221
Research and development .............. 5,271 675 253 (f) 6,199
General and administrative ............ 2,597 1,870 (1,238)(f) 3,229
Amortization of intangibles ........... -- -- 14,314 (b) 14,314
Amortization of stock-based
compensation ..................... 1,205 -- -- 1,205
------------ ------------ ------------ ------------
Total operating expenses ......... 13,482 2,545 14,141 30,168
------------ ------------ ------------ ------------
Loss from operations ........................ (5,504) (124) (14,297) (19,925)
Other income (expense):
Interest and dividend income .......... 433 53 -- 486
Interest expense ...................... (122) -- -- (122)
Other income (expense) ................ 8 (34) (1)(f) (27)
------------ ------------ ------------ ------------
Other income, net ................ 319 19 (1) 337
------------ ------------ ------------ ------------
Net loss before benefit for income taxes .... (5,185) (105) (14,298) (19,588)
Benefit for income taxes .................... -- 7 -- 7
------------ ------------ ------------ ------------
Net loss .................................... (5,185) (98) (14,298) (19,581)
Accretion on redeemable convertible
preferred stock ....................... (247) -- -- (247)
------------ ------------ ------------ ------------
Net loss attributable to common stock ....... $ (5,432) $ (98) $ (14,298)(e) $ (19,828)
============ ============ ============ ============
Basic and diluted net loss per share ........ $ (0.74) $ -- $ -- $ (2.53)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share ............ 7,377,984 -- 428,625 (e) 7,806,609
============ ============ ============ ============
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
F-19
22
CROSSROADS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following notes identify the pro forma adjustments made to the historical
amounts in the unaudited pro forma consolidated financial statements:
(a) The adjustments to the unaudited pro forma consolidated balance sheet give
effect to the Company's allocation of the Polaris purchase price to the tangible
and intangible assets acquired, based on an independent third-party appraisal.
The purchase price of $46.6 million was based on $44.5 million in Crossroads'
common stock, $1.9 million in Crossroads' stock options exchanged for Polaris'
stock options and other direct acquisition costs estimated to be approximately
$0.2 million. The value of the 428,625 shares of Crossroads' common stock
issued, par value $0.001 per share, is based on the share value of approximately
$103.78 calculated as the average market price of Crossroads common stock during
the five business days immediately preceding and subsequent to the date of the
merger agreement. The value of the Crossroads stock options exchanged for the
Polaris stock options (21,375 equivalent shares) was determined by using the
Black-Scholes valuation model. Any adjustment from the acquisition cost
estimates to actual costs will be recorded later in fiscal 2000 as an adjustment
to goodwill.
The Company's preliminary allocation of the Polaris purchase price of $46.6
million is as follows:
Proven research and development - $1.0 million;
Assembled workforce - $1.8 million;
Customer base - $0.4 million;
Fair value of other tangible assets acquired - $2.4 million; and
Goodwill - $41.0 million.
(b) These adjustments reflect the amortization expense resulting from the
allocation of the purchase price including intangible assets recorded at their
estimated fair market value and the recording of goodwill associated with the
acquisition.
Assigned lives for intangible assets are as follows:
Proven research and development - 3 to 7 years;
Assembled workforce - 4 years;
Customer base - 15 years; and
Goodwill - 3 years.
Assigned lives for property and equipment are as follows:
Machinery and Equipment - 1 to 3 years; and
Furniture and Fixtures - 3 to 5 years;
(c) This adjustment reflects the net effect of the elimination of the historical
capital structure of Polaris from the unaudited pro forma consolidated balance
sheet.
F-20
23
CROSSROADS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(d) The net deferred tax liability resulting from the temporary differences,
which has arisen out of the Company's purchase business combination with Polaris
(primarily related to the exchange of Crossroads' stock options for Polaris'
stock options and the recording of identifiable intangible assets), has been
offset against the Company's existing valuation allowance for net deferred tax
asset in connection with the purchase accounting for the acquisition.
(e) Since the Pro Forma Statement of Operations results in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share are computed by dividing the loss from continuing
operations available to common stockholders' by the weighted average number of
common shares outstanding. The calculation of the weighted average number of
common shares outstanding assumes that the 428,625 shares of the Company's
common stock issued in the acquisition of the Polaris were outstanding at the
beginning of the respective periods.
(f) These adjustments reflect the pro forma adjustments required to conform to
the Company's accounting policies as if the acquisition occurred at the
beginning of the period, such as a consistent allocation of overhead,
depreciation and classification of sales commissions and license fees.
F-21
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1* Agreement and Plan of Merger and Reorganization, dated February 3,
2000, by and among Crossroads Systems, Inc, NorthStar
Acquisition Corp. and Polaris Communications, Inc.
99.1* Press Release of Crossroads dated March 21, 2000 (announcing the
completion of the merger).
- -----------------
* Previously filed as Exhibits to this Current Report on Form 8-K.